Servicio de Impuestos Internos
Subdirección Normativa
Depto. Tributación Internacional
THE CHILEAN INCOME TAX SYSTEM
I.
1.
INTRODUCTION
General principle
Persons resident or domiciled in Chile are subject to income tax on their
world-wide income.
However an individual taking up domicile or residency in Chile is taxed only on
Chilean source income for the first 3 years, on application this may be
extended.
Persons without domicile nor residency in Chile are taxed on their Chilean
source income.
A person is deemed to be domiciled or resident in Chile if:
· It may be assumed from the activities that he/she wishes to stay in the
country on a permanent basis (domicile).
· If he/she spends more than six months in the country in a given calendar
year or over a period of two years (resident).
Chilean source income is defined as income arising out of:
· Goods or assets located within Chilean territory
· Activities performed in Chilean territory
2. Time limits
The Tax Administration ("Servicio de Impuestos Internos" in future "SII") has a
three year time limit to revise, amend or rectify any tax return filed by a tax
payer. The time limit is calculated from the time the taxpayer filed the return.
For taxes that need to be declared or included in a filing of a return, the time
limit mentioned above is six years if the declaration was not presented or if it
was maliciously false.
The same time limits are applicable for the collection of taxes, interest or any
other payments for which the taxpayer is responsible. The Administration in
charge of the collection and payments is the "Tesorería General de la
República" the General Treasury of the Republic, which is an independent
administration from the "SII".
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3. Payments
Income taxes are paid annually at the time of submitting the tax return. In
some cases estimated partial payments must be paid monthly. The excess
payments, if any, over the final tax liability is reimbursed normally within the
month subsequent to the filing of income tax returns.
4. The Chilean income tax system affects:
· Business income ("Impuesto de Primer Categoría" - First Category Tax
FCT)
· Salaries and remuneration ("Impuesto Unico de Segunda Categoría"
Second Category Tax - SCT)
· Other personal income ("Impuesto Global Complementario"
Complementary Global Tax - CGT)
· Income obtained by non residents ("Impuesto Adicional" - Additional tax
AT)
-
II. FIRST CATEGORY TAX - FCT
1. Rate and tax base
The FCT's rate is 15%. It is applied on an annual basis, January 1 to
December 31 (calendar year).
Income is assessed on a received or accruals basis. A special ledger known
as FUT -"Fondo Utilidad Tributario" is required to keep track of retained
earnings and their corresponding tax situation.
The tax base is arrived at by adjusting financial accounts in accordance with
regulations in the Income Tax Act. Loss carry back and forward is not limited in
time.
The Income Tax Act "Ley de la Renta" establishes, for example, what
constitutes deductible expenses or how the accelerated depreciation works.
Tangible assets may be depreciated over their useful life as established by the
"SII". However an accelerated depreciation is available at the option of the
taxpayer for new or imported assets which useful life is equal or more than 5
years. In this case the depreciation is calculated over 1/3 of their normal useful
life. Exploration costs and other preparatory costs may at the option of the
taxpayer be deducted in the first tax year or amortised over a period of the first
6 years of the project.
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Servicio de Impuestos Internos
Subdirección Normativa
Depto. Tributación Internacional
Royalty payments to persons non-resident or non-domiciled in Chile are
deductible expenses but no more than the 4% of the total income from sales
and services in that year. This limit is will not applicable if:
a) the taxpayer can demonstrate before the "SII" that there is or was no
capital, control or management relationship, either directly or indirectly,
between the taxpayer and the beneficiary of the payments, or
b) if the State of residence of the beneficiary apply a tax rate over this kind of
income of 30% or more.
For some activities the tax base may at the option of the taxpayer be based on
deemed income (small scale farming/agriculture, small scale mining and land
transportation).
2. Internal Credits
FCT is creditable against both CGT or AT, as the case may be. Even if the
enterprise responsible for paying the FCT to the Tax administration fails to pay
the tax the shareholder/owner is never liable to pay the FCT.
Inter-company dividends or profits are not taxed in the receiving company.
The tax credit of 15% follow the distribution and will be available as a credit
when it is finally distributed to an individual resident in Chile subject to
personal tax or to a non-resident subject to the Additional tax.
See below Examples 1 and 2 in part IV Complementary Global Tax.
3. Branches and permanent establishments
Branches and permanent establishments of foreign entities or persons are
subject to FCT (15% on an accrued income) as a Chilean entity.
Any distribution or remittance of earnings is subject to tax (see part V
Additional Tax).
III. SECOND CATEGORY TAX (SCT)
The SCT is a progressive tax with rates ranging from 0% to 45%. It is
calculated on gross salary and work compensations less social security
payments. The tax is withheld by the employer.
An employee that do not obtain any other income in a tax year, is not required
to submit a tax return.
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IV. COMPLEMENTARY GLOBAL TAX ( CGT)
1. Rates
The CGT is a progressive tax with rates ranging from 0% to 45%.
2. Tax base and calculation
The CGT is applied on an annual basis and income of all sources is included
in the calculation of the tax base.
Income corresponding to dividends or withdrawals of profits are added and
computed according to the following general rules:
· Dividends or withdrawals of profits must first be attributed to taxable profits,
so that exempt income can be distributed only after retained taxable income
has been exhausted;
· Distributions of profits must begin by the oldest retained earnings (FIFO);
· FCT corresponding to the taxable profits is added to the taxable basis
(grossed up) and then deducted as a credit from the determined GCT. It
should be mentioned that the rate of FCT has differed over time. In 1989
the FCT was 0 in which case, when profits related to that year is distributed
there is no gross up and no credit. In a case where profits from 1997 is
distributed it works as follows:
Example 1
Gross income
FCT (15%)
1.000
(150)
850
Dividend received
FCT to be added back
Personal tax basis
Tax rate 45% (maximum)
FCT credit
CGT
payable
850
150
1.000
450
(150)
300
· A typical managerial monthly salary in 2000 of US$ 4800 would pay US$
342 in social security and US$ 541 in tax.
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Servicio de Impuestos Internos
Subdirección Normativa
Depto. Tributación Internacional
V. ADDITIONAL TAX (AT)
1. Main features
Additional tax applies to remittances or payments of income abroad or, in
general, when money is made available from Chile to a non-resident or
non-domiciled person. The tax is withheld by the payer and paid over to the tax
authority. This withholding is final and the non-resident recipient is not
obliged to file a tax return.
2. Rates
The Additional tax is withheld at source at the rate of 35%. In some specific
cases the rates are as follows:
· Interest payments is 35%, but if the debt is registered with the Central Bank,
it is 4%;
· Employment income would be taxed at 35% on gross earnings except when
the work may be characterised as engineering services or technical
assistance when it will be taxed at 20%;
· Any payment for services rendered abroad 35%. However some payments
are exempt such as transport services completed totally abroad.
Foreign entities that engage in maritime transport and related services to
and from Chile are subject to a 5% withholding, in many cases this tax is
exempt due to reciprocal treatment;
· Lease and rent leasing of assets qualifying for accelerated depreciation,
1,75%;
· Payments to insurance companies not established in Chile for insuring
equipment or other goods in Chile or for life or medical insurance of persons
resident or domiciled in Chile, 22% and 2% for reinsurance;
· Remittances of profits and dividends 35%;
· Royalty payments 30%, if the payment refers to a film to be used in
television or cinema the withholding is reduced to 20% and if the payment
refers to copyright of any literary work the withholding is reduced to 15%.
3. Calculation
Dividends or withdrawals of profits must be first attributed to taxable profits,
so that exempt income can be distributed only after retained taxable income
has been exhausted.
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Distributions of profits (and credits) must be accounted for by beginning with
the oldest retained earnings - FIFO method.
FCT corresponding to the taxable profits is added to the taxable basis
(grossed up) and then deducted as credit from the determined Additional tax,
in the same way as if the recipient of the income is a Chilean resident and
subject to personal tax in Chile. The calculation for a 1997 distribution is as
follows:
Example 2
Taxable profits in Chile
FCT (15%)
Distributed profits
Dividend received by non-resident
FCT to be added back
Additional tax basis
Additional tax (35%)
FCT credit
Tax to be paid on distribution
1.000
(150)
850
850
150
1.000
350
(150)
200
4. Branches and permanent establishments
Income from the business activities of the branch and any other Chilean
source income is subject to AT when remitted abroad. The branch is entitled to
the FCT credit against AT, which is equivalent to the rate of the FCT for the
year from which it is distributed. It is calculated in the same way as showed
before (see above example 2).
VI. FOREIGN TAX CREDIT
Foreign taxes may be credited against domestic taxes or treated as a
deductible cost. Unilateral tax credits up to 15% are allowed on some foreign
source income. With a tax treaty a credit of up to 30% is allowed. Excess
credits may be carried forward.
See the following examples of a credit calculation with and without tax treaty:
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Servicio de Impuestos Internos
Subdirección Normativa
Depto. Tributación Internacional
Example 3
Foreign enterprise
Profit before tax
Corporate tax (30%)
1.000
(300)
To be remitted
700
Remittance tax (10%)
(70)
Net dividend
630
Chilean enterprise
Net dividend
Gross-up of foreign tax
First Cat. Tax base
First Category tax (15%)
Foreign tax credit
To pay
No tax treaty
With tax treaty
630
1111
741
(111)
111
630
2702
900
(135)
135
0
0
Income to be distributed
to an individual
630
630
Residual foreign tax credit
First Category tax credit
Personal tax base
Personal tax (35% marginal)
Residual foreign tax credit
First Category tax credit
To pay
0
111
741
(259)
0
111
135
135
900
(315)
135
135
(148)
Income to be received
1
630 / 0.85 = 741 (Law recognises a 15% credit)
741 x 15% = 111
2
630 / 0.7 = 900 (Law recognises a 30% credit)
900 x 30% = 270
482
(45)
585
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VII.
CAPITAL GAINS
As a general rule, capital gains are considered normal income and the gain is
subject to FCT and CGT or AT as the case may be, but only when it has been
realised, i.e. a sale or disposition of an asset. Some exceptions to this rule
apply, most important of which are commented below:
Capital gains on transfer or sale of shares of Chilean corporations may be
subject to a flat tax of 15% (set at the same level as FCT) if:
a) the shares have been held for more than one year,
b) the seller is not recurrent in the trade of shares, and
c) the buyer is not a related party to the seller.
Capital gains on the sale or transfer of real estate by persons (not subject to
full accounting to determine their income tax) is tax free if:
a) the property has been held for more than one year,
b) the seller is not recurrent in the business of buying and selling real estate
properties, and
c) the buyer is not a related party to the seller.
If the property does not fall within any of the above mentioned exceptions the
gains are taxed as any other business profits.
VIII. SPECIAL REGIMES
1. Foreign Investment Statute
Under the Foreign Investment Statute (DL 600), the foreign investor may
choose to pay a higher tax of 42% instead of the AT of 35%. The rate is fixed
for a period of 10 years, which may in certain circumstances be extended to a
maximum period of 20 years. The investor may opt out of the special regime
and thereby pay the AT, but once opted out may no go back.
Example 4
Taxable profits
FCT (15%)
Distributable profits
Tax on remittance (27%)3
To be remitted
3
1.000
(150)
--------850
(270)
580
Calculation of % is as follows 42% - 15% = 27% and tax base is 1000 (850 + 150)
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Servicio de Impuestos Internos
Subdirección Normativa
Depto. Tributación Internacional
2. Foreign Capital Investment Fund
Under the Investment Fund legislation the foreign investor may also be eligible
for a special reduced tax, notably the requisite for this benefit is an obligation
to maintain the investment in Chile for at least 5 years. The fund is taxed at a
flat rate of 10% on its remittances, however any initial capital remitted is not
subject to any tax.
Example 5
Taxable profits
FCT (15%)
1,000
(150)
---------
Dividend received by investment fund
Tax on remittance (10%)
To be remitted
850
(85)
765
3. Other special regimes for certain regions
· The Easter Island has a special tax regime which exempts any property or
income from tax as long as the taxpayer is a resident of the island.
· The towns of Iquique and Punta Arenas have a tax free zone. In these
zones the FCT is not payable, however any Additional tax or personal tax
applicable is not exempt and as FCT has not been paid there is no credit for
FCT when profits or dividends are remitted.
· The Navarino area, at the far end of the continent and the Porvenir and
Primavera county also have a special tax regime in that FCT is not payable
but is available as a credit for any Additional or personal tax as the case
may be.
· The provinces of Arica and Parinacota, in the north of Chile, have a special
deduction available in that 20% of qualifying investment are credited against
any FCT liability.
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IX. OTHER ISSUES
· The Income Tax Act has established a comprehensive system of monetary
adjustments to offset the effects of inflation (Corrección Monetaria) in
accordance with a method that restates the historical balance sheet items at
units of constant purchasing power with offsetting debits or credits to
income.
· Enterprises must keep their accounting records in Chilean currency, but if all
or most of the capital contributed or the business is performed in a foreign
currency, it may be authorised by the "SII" to maintain accounting records in
the foreign currency.
· Alimony payments do not constitute income for the recipient if the payer is
obliged to pay them by law. For the payer, the payments are not a
deductible expense.
· Directors' fees or participation derived by directors or members of a CLS´s
board are subject to CGT or AT as the case may be.
. Deductions of royalty payments:
Payments of royalties made to beneficiaries of other countries are
deductible as expenses with a limit of 4% of the income from sales and
services of the business.
The limit does not apply if :
- Between the taxpayer and the beneficial owner of the payment there is
no direct or indirect capital control or management relationship; or
- The beneficial owner is taxed with a rate of 30% or more.
July 2000
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