INVESTING IN CHILE - Crowe Horwath International

Within the framework of Chilean law, business entities can choose, among
various legal forms. The selection of one of one of them entails different
legal, tax and other consequences. Accordingly, the decision requires the
analysis of all elements involved.
In broad terms, business may be carried out in Chile through the participation
of the foreign investor either in a Chilean limited liability company or in a
corporation or a branch. A brief description of these basic legal forms is
provided below.
It should be borne in mind that, pursuant to Chilean law, limited liability
companies, as well as corporations, are legal entities separate and distinct
from their owners, and they are capable or acting independently in matters
relating to the purposes of the association a specified in the corresponding
Is should by noted that, with very few exceptions, no limitations exist as to
the type of business which may be carried out by foreign investors, and there
are no restrictions regarding the ownership of local companies.
(Sociedad de Responsabilidad Limitada)
A limited liability company is created by a contract (public deed) executed by
the partners. The by-laws are part of the contract. An abstract of the
contract must be published in the Official Gazette and registered at the local
Registry of Commerce.
The company must have a minimum of two partners and a maximum of fifty
and it may be established, approximately, within fifteen days.
There are certain activities, such as banking and insurance, which may not
be carried out by a limited liability company.
(Sociedad de Responsabilidad Limitada)
A limited liability company is not subject to specific control by any
governmental agency.
Members are not liable in excess of their capital contribution, unless a higher
liability is specified in the contract.
(Sociedad de Responsabilidad Limitada)
The law does not require a minimum amount of capital. The time when
capital must by paid it should be stipulated in the contract.
Increases in capital
Increases in capital, through capitalization of retained earnings or other
reserves, or thorough additional capital contributions in cash or in Kind, may
be freely agreed upon by all the partners.
(Sociedad de Responsabilidad Limitada)
Capital reductions
Decreases in capital may also be freely agreed upon prior authorization of
the internal Revenue Service.
Management is carried on by the partner or partners appointed in the
contract. If no mention is made therein, each partner is vested with the
capacity to manage, either directly or through a representative. Unless
stated otherwise in the by-laws, the capacity to manage may be delegated.
The limited Liability company may also be managed by third persons
appointed by the partners or by a Board of Directors.
(Sociedad de Responsabilidad Limitada)
Profit withdrawal
Profit withdrawal is only subject to those limitations or procedures stipulated
in the contract.
Financial Statements
Limited liability companies have no legal obligation to issue, file or publish
financial statements. Nevertheless, for tax purposes they must provide
minimum information, which is treated as confidential. The Commercial
Code, requires that individuals or companies engaging in activities qualified
as acts of commerce must keep accounting records.
(Sociedad de Responsabilidad Limitada)
Changes in membership
As limited liability companies are based on personal consideration rather
than on capital, a change in membership requires an amendment of the bylaws to which al partners must agree.
(Sociedad Anónima)
Two basic corporate types
Corporations are classified in two basic categories, namely open
corporations and closed corporations.
Open corporations are defined as those whose stock is traded in the Stock
Market, or in which the number of shareholder amounts to five hundred or
more, or those in which at least 10% of the stock belongs to a minimum of
one hundred shareholders, excluding those who individually exceed this
(Sociedad Anónima)
Closed corporations are those which do not satisfy the above mentioned
conditions. If agreed upon in the by-laws, closed corporations may be ruled
by the same legislation as open ones.
The general purpose of the law is to subject open corporations to a much
stricter regulation and control than closed corporations.
(Sociedad Anónima)
As a general rule, corporations are crated by a contract contained in a public
deed, an abstract of which must be published in the official Gazette and
registered at the local Registry of Commercial Affairs. The public deed
contains both the articles of in corporation and the by-laws.
In certain cases, such as insurance, banking and other special activities
indicated by a Government Agency is also required. The certificate of
authorization must be published and registered together with an abstract of
the contract.
(Sociedad Anónima)
Open corporations are subject to the control of a Government Agency, the
“Superintendencia de Valores y Seguros” (SVS). Those dealing in banking
and other special activities are subject to control by special agencies.
Shareholders limit their liability up to their stockholding.
(Sociedad Anónima)
At least one third of the stipulated capital must be paid in at the time the
articles of incorporation are enacted. The remnant must be paid in within
three years, and if this is not done in said term the capital of the corporation
is automatically reduced to the amounts effectively paid.
The by-laws must establish the number and shares and whether they do or
do not have a statutory par value.
Preferred stock can be issued, although certain limitations exist in connection
with the nature of the preferences and their duration..
(Sociedad Anónima)
Business is conducted by a Board of Directors elected at a Meeting of
Shareholders. The Board is composed of a minimum of three in the case of
closed corporations, and five in the case of open ones. The Board, as a
whole, can be removed at a Meeting of Shareholders. The decisions of the
Board are adopted by means of discussion and vote.
The law does not require that directors be shareholders. However, the bylaws may contain such requirement.
There is no restriction on the nationality of directors.
The Board must appoint a chief executive officer with the title of Manager
(Gerente) who is in charge of carrying out the decisions of the Board and is
the legal representative of the corporation. In open corporations, the
Manager may not be a director.
(Sociedad Anónima)
Distribution of profits
Open corporations must distribute dividends in cash amounting to al least
30% of the net income of each period, unless it is unanimously agreed to
proceed otherwise at the Annual General Meeting of Shareholders. Closed
corporations may freely include in their by-laws any provisions that are
deemed convenient in connection with dividend distributions.
Provided there are no accumulated losses, the Board may distribute
provisional or interim dividends during the year out of the profits of the
period. Should these distributions exceed the annual profits, the directors
are personally liable for the distribution of provisional or interim dividends.
(Sociedad Anónima)
Increases in capital
Capital is automatically restated according to annual inflation, upon approval
of the financial statements at the Annual General Meeting od Shareholders.
If applicable, the par value of shares is accordingly restated.
Capital may also be increased through a modification of the by-laws. An
abstract of the deed containing it must be registered al the Registry of
Commerce and published in the Official Gazette. In this case, the increase
in capital may be a consequence of one or several of the following causes:
• Capitalization of retained earnings. This may result in the distribution of
stock dividends or in an increase of the par value of the shares. Stock
dividends and increases in par value are not taxable.
• Capitalization of debts.
• Capital contributions in cash or kind.
(Sociedad Anónima)
In the case of closed corporations, all retained earnings and reserves must
be capitalized before the capital is increased through capitalization of debts
or capital contributions.
A first option to subscribe and pay newly issued shares must be given to
existing shareholders, who may, however, transfer or waive their rights to
first option.
The new shares must be offered at the price agreed at a Meeting of
(Sociedad Anónima)
Capital reductions
Decreases in capital must be approved at a meeting of Shareholders with a
majority vote of two thirds of the issued shares. Prior authorization by the
Internal Revenue service is also required. The corresponding modification of
the by-laws must be registered in the Registry of Commerce and published in
the Official Gazette.
Financial statements
Open corporations must issue financial statements on an annual basis.
The financial statements of open corporations must be audited by
independent auditors. Furthermore, open corporations must publish in a
local newspaper whatever existing information relevant to their audited
financial statements is required by the SVS (Superintendence). Additionally,
the financial statements must be filed with the SVS.
(Sociedad Anónima)
Transfer of stock
Corporations may not interfere with the transfer of their stock.
In the case of open corporations, the by-laws may not restrict the referred
transfer. However, agreements among shareholders on this matter are
acceptable, provided they are registered with the company.
There is no mandatory legal time limit for the existence of a corporation.
However, if a limit is established in the by-laws, the corporation dissolves
when it expires. This term may be extended or reduced be an agreement of
the Meeting of shareholder. Since Chilean corporations require at least two
shareholders, the corporation is also automatically dissolved if its stock
becomes the property of a single shareholder.
Establishment in Chile
The establishment of a branch of a foreign corporation in Chile requires
registration with a Notary Public of a Spanish version of the by-laws of the
corporation, the power of attorney of the agent and the other documents
which certify the existence of the corporation.
Additionally, the agent, duly empowered, must state by public deed certain
basic information about the branch and declare, among others, that
corporate assets are subject to Chilean law for the purpose of backing up the
obligations of the branch in Chile and that the corporation will keep in Chile,
for this some purpose, easily realizable assets. He must also state the
amount, dates and form in which the capital will be brought into the country.
An abstract of the above mentioned documents must be registered al the
Registry of Commerce and published in the Official Gazette.
Foreign corporations are fully liable for the activities of their branches in
Chile. Therefore, their liability may not be limited to the capital allocated to
the branch.
There is no minimum as to the amount of capital required.
Management is carried on by the agent of the foreign corporation in Chile.
There is no limit to profit withdrawals, provided the corresponding income
taxes are duly paid.
Financial statements
The financial statements of the branch must be annually publishes in a local
Foreign investors are guaranteed the same treatment under the law that is
given to Chilean nationals and their companies. In general, there are no
foreign ownership restrictions, though some foreign exchange controls on the
repatriation of capital and profits remain and these need be examined.
Foreign Investment and Exchange Control Policy
The Central Bank, in the exercise of its regulatory powers, has requested
that foreign investment in Chile, as well as remittances of foreign currency
abroad on account of foreign loan, distribution, license and technical services
agreements, be previously approved by and registered with the Central
Only by obtaining Central Bank approval and registering such foreign
investments or agreements giving rise to foreign currency payments, will
foreign investors, debtors, distributors, licensees, and technical services
beneficiaries, be granted access to the formal foreign exchange market to
purchase foreign currency and make such payments.
Despite the fact that investors may freely engage in foreign exchange
transactions, the Central Bank may issue regulations from time to time
determining that a foreign exchange transaction be carried out exclusively in
the formal foreign exchange market, and in respect such transaction, if any
additional requirements must be met.
In the event that a foreign investment or loan providing for foreign currency
payments abroad is not previously registered with the Central Bank, the
foreign investor or debtor will be prevented not only from purchasing the
necessary foreign currency in the formal foreign exchange market, but also
from doing so in the informal foreign exchange market, and from using its
own freely convertible foreign currency reserves.
Distribution, license, and technical services agreements are treated
1. The Constitutional Law of the Central Bank of Chile and the Foreign
Investment Statute
Regardless of the investment vehicle utilized, if foreign investment are
brought into Chile in excess of US$ 10,000 or its equivalent in another
foreign currency, they must be registered under the process set forth in the
Constitutional Law of the Central Bank (the "LOC").
If foreign investment brought into Chile, exceeds US$ 1,000,000 or its
equivalent in another foreign currency, or are US$ 25,000 investments in
tangible assets or technology, an alternative registration process is available
under Chile's Foreign Investment Statute ("Decree Law 600").
Regardless of the registration system used, capital invested may not be
repatriated earlier than one year from the time the investment is made.
Profits, however, may be freely remitted abroad at any time. Should profits
be applied to a capital increase, such capital increase will not be subject to
the referred one-year term. As per quantitative limitations to the repatriation
of capital or profits, there are no such limitations.
Under either system foreign investors are granted access to the formal
foreign exchange market to purchase foreign currency to repatriate capital
and profits.
Whereas foreign investments under the LOC require approval by the Central
Bank, foreign investments under Decree Law 600 must be approved either
by the Foreign Investment Committee (the "FIC") or by its Executive VicePresident, depending on the type of investment. The Central Bank's approval
is also needed if foreign loans are to be associated to foreign investments
under Decree Law 600.
The approval process under the LOC typically takes 3 to 4 days, while
approval under Decree Law 600 generally takes one month; however,
bringing foreign currency into Chile under Decree Law 600 may be
authorized immediately after the filing of the foreign investment application.
Investments made under Decree Law 600 may consist in freely convertible
foreign currency, tangible assets, technology, associated loans, capitalization
of foreign loans registered with the Central Bank, and capitalization of profits.
Investments under the LOC must be made in freely convertible foreign
With respect to the use of foreign loans as a source of financing, Decree Law
600 requires that 50% of any investment be made in freely convertible
currency, consequently investment projects that are presented to the FIC for
approval must have a maximum component of associated loans equivalent
to 50%.
As required by both the FIC and the Central Bank, capitalization of foreign
loans may only be made in the debtor company itself, while profits entitled to
be remitted abroad may be capitalized either in the company that actually
generated those profits or elsewhere.
The FIC as a whole must approve the following investment: (a) those in
excess of US$ 5,000,000 or its equivalent in other currencies; (b)
investments in areas of the economy that are usually performed by the State
and those carried out by public utility companies; (c) investments made in
mass media; and (d) investment made by foreign states or foreign corporate
bodies chartered under public law.
The FIC's Executive Vice-President, with the prior approval of the FIC's
Chairman, is authorized to approve all other investment projects, unless the
latter deems it advisable to submit an investment project for the approval of
the FIC.
It can be argued that Decree Law 600 affords sound legal protection to
foreign investors in Chile, as the rights of foreign investors are secured by an
investment contract entered into with the Republic of Chile. Foreign
Investment contracts are governed by Chilean law, are subject to the
jurisdiction of Chilean courts and may not be unilaterally modified by the
Republic of Chile.
Approval based on the LOC alternative has traditionally entailed issuance of
an administrative resolution by the Central Bank, which is apt to place an
investor in a more vulnerable position.
Furthermore, Decree Law 600 grants foreign investors additional protection
against discriminatory treatment vis-a-vis domestic investors by stating that
foreign investors and local companies receiving foreign investments are
subject to the general provision of law applicable to domestic investors and
that no discrimination, direct or indirect, may be made against them.
Nevertheless, Decree Law 600 provides that regulations may be enacted to
limit foreign investor access to local financing. In practice, however, no
general regulations are in effect in this regard.
Decree Law 600 also grants to foreign investors special devices particularly
designed for project financing. Such devices are mainly applicable to US$
50,000,000 or more industrial or extractive projects, including mining
projects, and typically entail the following benefits: obtaining an extension of
up to 20 years on the application of the invariable income tax regime
contemplated by Decree Law 600, and operating off-shore accounts in which
to deposit the proceeds obtained from exports of goods or services to cover
expenses incurred abroad.
The funds that are deposited to such off-shore accounts need not be
returned to Chile and converted into local currency in the formal foreign
exchange market; may be used to repay foreign loans authorized by the
Central Bank and to make import payments; and may be made subject to
liens in favor of lenders and other creditors.
2.2 Foreign Capital Investment Funds
Foreign capital investment funds approved by the Superintendency of
Securities and Insurance (the "SVS") and foreign institutional investors that
bring freely convertible funds into Chile under Decree Law 600 or the LOC
for the purpose of investing such funds in the local securities' markets are
entitled to the benefits and privileges conferred by Law 18,657 (the Foreign
Capital Investment Funds Act, the "Foreign Funds Act"). For these purposes,
foreign institutional investors include companies with presence in the
international market place such as pension funds, mutual funds, insurance
companies and the like.
Foreign funds that comply with the eligibility requirements contemplated in
the Foreign Funds Act and whose investment policies conform to the
investments permitted thereunder, should invest in Chile through Decree
Law 600 and under the provisions of the Foreign Funds Act.
The Foreign Funds Act defines a foreign capital investment fund as a fund
raised with contributions made abroad by individuals or institutions or, in
general, collective organizations, for the investment of its resources in
publicly offered Chilean securities. The foreign fund's shareholders may not
redeem their shares prior to its expiration.
The minimum capital amount invested by any given fund shall be of US$
1,000,000 and must be brought into Chile in freely convertible currency
within one year from the date when the foreign fund's application was
approved. If the foreign fund has entered into a foreign investment contract
under Decree Law 600, the one-year term will run from the date of the
relevant foreign investment contract under Decree Law 600, the one-year
term will run from the date of the relevant foreign investment contract, but in
this case the foreign fund may take advantage of the three-year term granted
by Decree Law 600 to materialize the investment. However, should a foreign
fund be willing to make more investments after such three-year period, it may
enter into a new foreign investment contract.
Capital amounts brought into Chile under the Foreign Funds Act may only be
remitted abroad after five years from the date when they were brought.
However, profits such as dividends interest income and net realized capital
gains may be repatriated at any time.
Foreign capital investment funds looking to invest in Chile must file
applications with the SVS and the Foreign Investment Committee. The
approval process takes approximately eight weeks.
Under the Foreign Funds Act, the capability of foreign funds to invest their
assets in Chile is subject to certain diversification and other investment and
borrowing restrictions. Foreign funds under the Foreign Funds Act's special
regime principally invest in shares of stock of public or listed corporations in
Chile. There are no restrictions on the method of acquisition of any of the
shares of stock, securities and other instruments or documents in which
investments may be made.
Foreign funds operating in Chile under the Foreign Funds Act can not, in the
aggregate, hold more than 25% of the issued shares of stock of any one
company. If a foreign fund causes this limit to be exceeded, it shall be
subject to a mandatory reduction.
Non-compliance by a foreign fund of the above-referred diversification and
other investment restrictions, may result in the loss of the favorable income
tax regime provided for by the Foreign Funds Act.
The Foreign Funds Act provides that foreign funds wishing to invest in Chile
shall appoint a Chilean corporation whose specific purpose is that of
administering the fund's assets in Chile. Only a corporation approved by the
SVS, with a certain fixed minimum paid in capital, and invested with ample
powers to represent the foreign fund before the authorities and third parties,
may serve as local administrator.
Foreign institutional investors are not required to appoint such local
administrator, but they must appoint a local representative.
Once a foreign fund's application has been approved by the SVS and the
Foreign Investment Committee, it may enter into an exchange agreement
with the Central Bank regulating the process to be followed when making
remittances of capital and profits abroad. This agreement will also entitle the
fund to purchase foreign currency in the formal foreign exchange market to
make payment of some expenses incurred abroad. This exchange
agreement is typically entered into with the Central Bank.
The Foreign Funds Act contemplates a special income tax treatment for
foreign funds and institutional investors according to which all amounts
earned by them within three years after the date of the foreign investment
contract, including dividends, interest income, and net realized capital gains
on capital invested in Chile that exceed such capital, is subject to a 10%
withholding income tax at the time of their remittance abroad, to be withheld
by the local administrator or representative. No taxes are levied on the
repatriation of capital from Chile.
This special income tax regime is recognized in the relevant foreign
investment contract and shall remain in effect during the entire period in
which the relevant foreign fund or institutional investor carries on business in
3. Restrictions on Foreign Investment
Chilean law grants freedom to all persons, national and foreign, to enter into
any contract or engage in any business activity provided it is not contrary to
morale, fair practices and the public order.
Accordingly, foreign individuals and corporations are generally at liberty to
acquire all of the shares or assets of local companies. Nonetheless,
restrictions apply in connection with certain businesses.
Foreigners may only participate in Chilean companies owning newspapers
and other media-related businesses provided that their ownership interest
does not exceed 15% of such companies' equity capital or 15% of the equity
capital of other companies owning the same.
In the case of concessions over television broadcasting services, such
concessions may only be granted to companies that are organized and
domiciled in Chile and whose officials, including their chairman and directors,
are Chilean nationals.
Other laws prevent the nationals of bordering countries and their companies
from owning real estate located near the country's borders.
The following description deals only with tax matters of interest to the foreign
investor. Taxes are levied, with minor exceptions, by the State of Chile.
There are practically no provincial, county or municipal taxes.
Principal taxes
Income taxes.
Value Added Tax (VAT).
Stamp Tax.
Real Estate Tax.
Gifts and Inheritance Tax.
Special Sales Taxes.
Internal Revenue Service
The Internal Revenue Service (IRS) enforces compliance with the tax laws
and regulations and is empowered to issue rulings and instructions on these
If a disagreement arises between the taxpayer and the IRS in connection
with a tax review a tax hearing follows in which an IRS Official acts as a
judge. His decision may be appealed before the Courts of Appeals and
thereafter, through special procedures, before the Supreme Court.
As a general rule, the statute of limitations for tax purposes is three years,
counted as from the date on which the respective tax return should have
been filed. In special cases this period is extended to six years.
Tax Payments
Except for the final period of existence of a company, financial statements for
income tax purposes must be prepared each year as of December 31.
financial statements may not cover a period exceeding twelve months.
Income tax returns must be filed during April of the following year.
Monthly income tax provisional payments are required. The amount to be
paid is determined by applying a percentage to the monthly gross revenue of
the taxpayer.
VAT, payroll taxes and withholding taxes must be reported and paid on a
monthly basis.
Income Taxes on Business
The income generated by corporations, limited liability companies and
branches of foreign corporations, is taxed in two stages. First, when income
is accrued; thereafter, when profits are distributed to shareholders or
partners, and in the case of a branch when they are withdrawn or remitted a
This overall structure of business income taxation has been conceived as a
tool to promote private saving and investment, in the sense that the rate of
taxation on accrued but undistributed income is only 16.5%.
We provide below a general description of the tax regime applicable to
limited liability companies and corporations, as well as to branches of foreign
We assume, throughout, that the partners or shareholders are not domiciled
in Chile.
General Regime
Business income is subject to a 16.5% First Category tax rate, applicable on
accrued taxable income computed according to the provisions of the Income
Tax Law.
When withdrawn, distributed or remitted abroad, business income is subject
to a 35% additional tax rate. The taxpayer subject to the additional tax is
entitled to a tax credit equivalent to the First Category tax rate paid on the
income withdrawn, distributed or remitted abroad. This credit must be added
back in order to compute the taxable basis of the additional tax.
Foreign investor who enter into a foreign investment contract with the
Republic of Chile, and therefore subject to the Foreign Investment Statute,
are entitled to agree in their respective contracts to a fixed overall income tax
rate of 42% for a period of 10 years beginning with the commencement of
activities, instead of the normal tax rates described above for each type of
business entity. This term can be extended up to 20 years for those
manufacturing or extractive projects over US$ 50.000.000.
Out of the overall rate, 16.5% First Category Tax is paid annually by the
company on the some basis as in the general regime described above, that
is, on accrued taxable income.
Foreign investors who are partners or shareholders of the company must pay
a 27% Additional Tax on dividends or distributed profits, without being
entitled to the credit for the First Category Tax paid on those earnings. By
the same token, the branch must pay the same rate on profits withdrawn or
remitted to the head office.
The foreign investor may waive the rights granted by the Foreign Investment
Statute any time and become subject to the general tax regime, in which
case he may be subject to changes in the general tax legislation, with the
same rights, options and obligations pertaining to national investor. The
waiver of the fixed rates is irrevocable and once effected, the taxpayer may
not return to fixed rates in the futures.
Locally Based Partners or Shareholders
In some cases, foreign investment is carried out through a chain of related
companies. Furthermore, the business entity receiving foreign investment
may also have local partner or shareholders. Thus, a reference to locally
based partner or shareholders may be of interest.
Limited liability company
If the partner is a legal entity domiciled in Chile, no taxes are applicable on
his participation in the profits of a limited liability company, as this income is
taxed only at the level of the company distributing it to taxpayers of additional
or personal progressive tax.
If the partner is a resident or domiciled individual, he must add to his
Personal Progressive Income Tax (Global Complementario) withdrawals of
profits on undistributed taxable earnings at company level.
Distributions to no domiciled legal entities or individuals are subject to the
35% Additional Tax on the some basis. In both cases a credit of a
percentage equal to the tax rate paid on said profits at company level many
be applied against personal tax.
In case the shareholder is a domiciled legal entity, no tax is levied on
dividends distributed by a corporation.
Dividends paid to domiciled or resident individuals are computed in order to
calculate the Personal Progressive Tax basis. Dividends received by
nondomiciled or nonredident individuals or legal entities are taxed with the
35% Additional Tax. In both cases the shareholder is entitled to credit,
provided taxes have been paid at the corporate level.
Distribution of profits or withdrawals
Taxes and credits
• Partners and shareholders are taxed on profits distributed in Chile no tax is
assessed, as it is deferred until Personal Progressive or Additional
taxpayer receive the distributed profits.
• Branches are subject to the 35% Additional Tax when profits are withdrawn
or remitted abroad. The 16.5% credit is also applicable.
Distribution in excess of taxable income
Because of differences between profits, as shown in financial statements,
and taxable income, the possibility exists that profits in excess of taxable
income be distributed as dividends or withdrawn from the company.
This situation in corporations differs from the one in limited liability
companies, branches and other non corporate entities, as follows:
• Up to the amount of undistributed taxable income, dividends are taxed
with Additional or Personal Progressive Taxes. In excess of this,
shareholders are tax exempt if dividends may be imputed to accumulated
earnings exempt from Personal Progressive or Additional Taxes or to
items not deemed as taxable income. Dividends in excess of the
foregoing are taxed and no credit is granted because no tax has been paid
at the corporate level.
• Withdrawals from branches or companies other than corporations are only
taxed up to the amount of retained or undistributed taxable income
existing at the end of the corresponding fiscal year. Withdrawals in excess
of undistributed taxable income of any given year will be taxed with
Personal Progressive or Additional Taxes in the year when the branch or
company shows a positive taxable income.
Alternative Simplified Tax Regime
Small businesses may choose a simplified tax system in which the First
Category Tax of the business entity, as well as the Additional or progressive
Personal Tax, are assessed on any cash flow distributed to its owners.
If this system is chosen there is no need to keep records of accumulated
taxable income, inventories, nor to make depreciations, price-level
restatements and balance sheets.
When businesses under this regime come to an end, outstanding First
Category, Additional or Personal Progressive taxes must be paid on the
difference existing between initial equity, plus or minus increases or
decreases in equity, and equity at the time of termination of the business.
If this alternative is chosen, it must stand for at least three years.
The change to the normal regime triggers the payment of taxes on the basis
described above.
Treatment of non deductible expenses
Low taxation on retained earnings may lead to distribution of profits
disguised as expenses.
In order to minimize this possibility, the law contains certain safeguards,
which may be summarized as follows:
• In the case of non corporate companies and business, non deductible
expenses are deemed to be profit withdrawal be partners or owners in the
year of disbursement of disbursement, thus being charged with the
corresponding taxes in proportion to their participation in profits.
This tax is applied even if the company or business does not show taxable
income, or if this is lower than the referred disbursements.
• Loans to partners or owners who are individuals are also considered as
profits withdrawn by tem, up to the amount of accumulated taxable income
at the year-end. The repayment of the loans does not eliminate the tax
• Amounts which qualify as non deductible expenses incurred by
corporations and branches are taxed at a flat rate of 35% in the year of
disbursement. The tax is due even if these amounts exceed accumulated
taxable income or if the company shows losses. The rate is 42% in the
case of companies subject to the special regime of the Foreign Investment
• Income Taxes and Real Estate Taxes, interest on taxes due, fines for the
breach of tax laws and duties paid to keep title on mining property which
are not deductible in order to asses taxable income, are not subject to the
provisions described above.
Certin topics related to foreign companies
Branches and other permanent establishments of foreign entities are taxed
only on income arising in Chile.
The Income Tax law empowers the IRS to assess the taxable income of a
branch or permanent establishment of a foreign corporation doing business
in Chile if the accounting records are not adequate for assessing the taxable
income. In such case, the IRS may assess the taxable income on the basis
of gross receipts, assets, capital invested, sales, or percentage of exports
and imports.
The 35% withholding tax levied on certain payments to non domiciled
persons or entities, is not applicable to imports, provided prices are
reasonable in terms of current market values. Amounts paid in excess of
reasonable prices are taxable.
Debt – equity ratio
There is no limit to the debt-equity ratio for tax purposes. Nevertheless, the
Foreign Investment Committee may require that the ratio doses not exceed
reasonable limits. As of 1995 the required ratio is that a minimum of 30% of
the authorized investment must be brought in as capital contribution and a
maximum of 70% may be brought in as credits associated to the authorized
Interest payment
Interest on loans obtained abroad is normally subject to a 35% withholding
tax rate. Exceptionally, interest paid to foreign banks or financial institutions
authorized by the Central Bank, is taxed at a 4% rate.
Royalties, patents and technical assistance
In general the payment of royalties, patents and fees for technical assistance
effected to nondomiciled entities is subject to a 35% withholding tax. In the
case of technical assistance or engineering services, be them rendered in
Chile or abroad, the rate is only 20%.
All these payments are tax deductible, provided they are necessary to
generate income.
Related party transactions
In the case of transactions between related parties, the tax deductibility or
certain charges may be rejected by the IRS, if said transactions are not mad
in accordance to market prices. Such is the case of the transfer of assets at
prices below cost, debt cancellation, excessively high interest rates, and
other similar transactions.
Intercompany charges
Reimbursement of specific expenses incurred by foreign company in
connection with the activities of a Chilean branch, are tax deductible by the
General unspecified charges are not acceptable.
Provisional monthly payments
Monthly payments must be made as an advance on annual First Category
Income Tax. These estimate taxes are credited with price-level restatement
adjustments when the annual tax return is filed. The referred payments,
called Provisional Monthly Payments (PPM), are subject to the following
• The amount of PPM to be paid every month is determined as a
percentage of gross receipts accrued during the given month.
During the firs fiscal period of the entity and throughout the first tree
months of the following period, the percentage applied is 1%.
• The percentage to be applied in any subsequent year, is defined in terms
of the average PPM percentages used in the previous year, adjusted
according to the relation between the amount of First Category Tax and
the amount of losses, the PPM rate in the following year is 1%.
• Should the company incur into losses in a given year, the PPM may be
suspended during the following quarter. Thereafter, if in the following
quarter of the next year the losses continue, the suspension of the PPM
may be maintained.
Witholding taxes
Taxation on payments made to mondomiciled individuals or entities
In accordance with the general rules indicated below, payments made to a
non domiciled individual or entity are subject to withholding tax.
This withholding tax is levied at a 35% rate on the following payments:
• Payments for the use of trade marks, patents, formulae assistance and
other similar services.
• Interest on loans, except when pad to international or foreign banks or
financial institutions in which case the rate is 4%. In order to benefit from
this reduction, financial institutions must be included in a list approved by
the Central Bank.
• Payments for services rendered abroad, with the exception of payments
for freight, shipping and clearance expenses, weighing, sampling and
analysis of products, insurance other than those expressly taxed,
international telecommunications, smelting, refining and application of
other special processing of Chilean products.
The tax rate is lower in the following cases:
• Payments for engineering services or technical assistance rendered in
Chile or abroad are subject to the same tax at a 20% rate.
• Remunerations paid to non domiciled individuals or entities for maritime
transportation from and to Chilean ports, commissions and participation
thereon, as well as income derived from services to vessels and freight in
Chilean or foreign ports, are subject to a 5% withholding tax. This tax may
be waived on the basis of a reciprocal arrangement if a similar charge
does not exist, or is not applied, to Chilean vessels in the country where
the vessel is registered and in the country of the operator, if different from
the one of registration.
• Payments for the rental, lease, carter or any other contract which provides
the use of foreign vessels for coastal trade are subject to the tax at a 20%
rate. The same is applied when the corresponding contact allows or does
not prohibit coastal trade.
• Payments for the rental of imported capital goods eligible for the system of
deferral of customs duties are taxed at a 1.75% rate.
Taxes on personal remunerations
Salaries and other remunerations
Employees are subject to a Personal Progressive Income Tax which must be
withheld and paid monthly the employer. This tax is levied on remunerations
paid, after deducting the social security contribution of the employee. The
tax brackets are indicated in Exhibit I. (Page 66)
No other tax is levied on the income of the employee, unless the employee
receives revenues other than his salary. In such case, the annual Personal
Progressive Tax (Global Complementario) is also applicable, both on
salaries and other revenues, but a tax credit is granted for the withheld.
Non resident or non domicilied individuals
For the first six months of residence in Chile, nonresident or individuals. Are
subject only to a 20% tax rate on their fees or salaries, for scientific,
technical, cultural or sport activities. The rate of this tax for any other type of
service is 35%.
Thereafter, they are subject to the personal progressive tax in the same way
as nationals.
Income of foreign source
For the first three years of residence in Chile, domiciled or resident
foreigners are not taxed on income from foreign source.
General description of the VAT system
Tax rate and transactions subject to VAT
A 19% Value Added Tax (VAT) rate is levied, in broad terms, on the price of
the following:
• Sales and other contracts whereby the property of movable goods is
transferred, provided such transactions are undertaken on a recurrent
• Recurrence is presumed in connection with sales belonging to a line of
business of an entity.
• Services rendered which may be deemed commercial, industrial, financial,
or pertaining to mining, construction, insurance, advertising, data
processing, and other business activities.
• Imports, recurrent or not.
Tax liability
As a general rule, the seller of goods or services is liable for payment of the
tax. The amount of the tax is however added to the price of the goods or
services. Consequently, it is actually the buyer who bears the tax.
Exceptionally, when the seller is not domiciled in Chile or when for other
reasons it is difficult for the IRS to control, the buyer is liable for withholding
and paying VAT. Such exceptions to the general rule are established by law
or may be determined by the IRS.
The tax is payable monthly, except for special situations such as imports, on
which we comment below.
Credit and debid system
VAT charged by a company on sales or services is called a “VAT debit”.
VAT borne by a company on purchases of goods or services is called a “VAT
credit”. The tax borne on the acquisition of related fixed assets, including
building and constructions, may also be creditable.
In general, an entity deducts its VAT credit from its VAT debit each month
and files a tax return paying the difference, if any is outstanding.
If in given month the credit exceeds the debit, the difference may be carried
forward and added to the credit of the following month.