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THE CHILEAN INCOME TAX SYSTEM
1. 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:
Chilean source income is defined as income arising out of:
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".
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:
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.
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.
IV. COMPLEMENTARY GLOBAL TAX ( CGT)
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:
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.
The Additional tax is withheld at source at the rate of 35%. In some specific cases the rates are as follows:
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.
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:
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:
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.
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.
3. Other special regimes for certain regions
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.