Businesses that are incorporated in Chile (including subsidiaries of foreign companies), branches of foreign companies (incorporated abroad but registered in Chile as branches), and un-incorporated partnerships or sole proprietorships operating in Chile must pay a variety of taxes to the SII. Foreign companies selling services or intellectual property to Chilean companies from abroad must pay the SII in the form of withholding tax (retencion).
The same taxes pertain, at the same rates, to all company types – whether SA, SRL, SPA, un-incorporated partnership, etc. In other words, if you are doing any kind of business in Chile, you must pay the taxes laid out below, when applicable.
Importantly, however, the structure of your company, and its relationship to other companies, may have significant effects on your tax rates. This, too, will be explained below.
Business owners must pay income tax in 2 stages. First, they must pay a tax of 20% on their business’s income. Second, they must pay a separate tax on their personal income from their business activity. For Chilean citizens and residents, the rate of the second tax is progressive, from 0% to 40%; for foreign residents, the second tax rate is 35%. In all cases, a credit is awarded for the tax already paid in the first stage.
Chile-based businesses must pay the first-category tax on all global income, with a tax credit on foreign-source income that has already been taxed abroad. Foreign companies must pay the first-category only on their Chile-source income. Chile-source income is defined as any income deriving from an asset located or used in Chile or any event or activity occurring in Chile that produces an economic benefit.
(We elaborate on the second-category tax in the following chapter, “Taxes on Individuals.”)
An extremely important provision of the income tax law is that holding companies – companies that own other companies – do not pay the second-category tax. That is, if your company is owned by another company, the first company will pay its 20% first category tax, but when proceeds are transferred to the owner company, no second-category tax will have to be paid. This is true only when both companies are domiciled in Chile.
Losses can be carried over year-to-year indefinitely, while in most countries there is usually a limit. Indeed, for years it was common practices for businesses to acquire other businesses with substantial losses and use those acquired losses to reduce their tax burden. Under new law, however, losses can only be carried over by the business that created them, or by the same owners when doing other business.
Differences in Income Tax Regime for SAs and SRLs
One of the important differences between the SA (sociedad anonima) and the SRL (sociedad de responsibilidad limitada) – the two most common and important company types in Chile – is that SA revenues go to shareholders strictly in proportion to the percentage of shares they own, while for SRLs, revenues can be shared in any way, according to what’s agreed on in the company’s bylaws.
A second important difference is that SRL shareholders can reinvest their revenue from one company into a second company and thereby avoid paying a personal tax, while SA shareholders do not have this option.
Dividends are not taxed when distributed between Chilean companies. When individuals receive income, it is treated as income and subject to the global complementary tax of 0-40% for residents or the additional tax of 35% for non-residents. For dividends distributed to foreign entities, there is a 35% withholding tax. The same rate applies for the withholding tax on branch remittances sent abroad. In both cases, a credit is awarded for the first category tax that the company has already paid.
Capital gains are usually treated as income.
In addition to income tax, businesses may be liable for the following taxes:
- Tax on interest payments to foreign beneficiaries: Interest payments abroad are subject to a 35% withholding tax except in the case of interest payments to foreign banks, for which the rate is 4%. Additionally, when sending capital back to foreign lenders, SII approval is needed. Because of the low tax rate for interest payments to banks, and the ability to send such payments without SII approval, it is generally recommended that, if possible, companies take out bank loans instead of receiving capital or debt in other forms from abroad. Bear in mind, however, that your debt-to-capital ratio should not exceed 4-to-1; if it does, you may be forced to pay the full 35% tax on loan interest.
- Tax on Royalty Payments to Foreign Beneficiaries: There is a 35% tax on royalties paid to foreign beneficiaries (beneficiarios del exterior) for the use of trademarked, patented, or copyrighted material, and a 20% tax on fees paid to foreign providers of technical assistance, including consulting and engineering. (There are exceptions to these rates.)
- Social Security Contribution: Employers must withhold 7% of employee salaries for healthcare contributions plus a commission to Isapre and 10% for retirement fund contributions plus a commission to AFP.
- Municipal Tax: Incorporated companies must pay a municipal tax in the form of a capital duty to the municipal government where they are incorporated. The rate is between 0.25% and 0.5%, depending on the company’s amount of capital. There is a minimum payment of 1 UTM per year.
- Additional duties for select industries: Companies in the mining, agricultural, and transport sectors must pay duties to the federal government based on the value of their property, regardless of profits. Agriculture and mining companies must pay according to the value of their land; transport companies according to the value of their vehicles.
- Real estate tax: Owners of real estate must pay a contribution. The rates are 1.4% on urban property and 1% on rural property. Dwellings are taxed at 1.2% up to US$75,000 in value and at 1.4% to the extent that they exceed US$75,000. Interestingly, for residential properties that are less than 140 square, there is lower tax for the first 20 years of the house’s existence, regardless of the value of the house.
- Stamp tax: A stamp tax must be paid for all foreign loans, including credit card transactions. The stamp tax has been going down in recent years; as of early 2013, it stands at 0.4%.
Value-Added Tax (IVA)
The SII charges a value-added tax, or impuesto al valor agregado (IVA) on the sale of goods in Chile, the provision of services in Chile, and importation of goods or services into Chile.
The IVA is generally of 19% of the value added to a given good or service, though it does not apply to all goods and services. An important exception is that there is no IVA on real estate sales after the first transfer of property.
IVA is paid at each point of transference in the value chain of a good or service: each business that sells a good up the value chain must add a tax of 19% for the value they added to that good.
IVA is paid on a monthly basis and can be paid online. It works according to a credit system. With the help of their accountants, companies will balance the sum of IVA in the invoices they paid against the sum of IVA in the invoices they issued during a given month. This way, they offset the IVA paid (to their suppliers) against the IVA received (from their clients).
The one who pays the IVA at the end of the value chain is the final consumer, who cannot offset the IVA she paid against anything else. The final consumer will receive a boleta (bill) with the purchase, showing a price that contains the IVA within it. Only companies receive facturas showing the IVA explicitly.
IVA is not levied on exported goods, so exporters and tourists may be reimbursed by the SII for any IVA they have paid on items purchased in Chile; exporters must go to the SII and request reimbursement, while tourists can request reimbursement at any major port of departure from the country.
If you are importing into Chile, you must pay IVA on the cost of the good you are importing – i.e., the cost that appears on the invoice. Though it may be tempting, we recommend not altering the invoice to show an artificially low cost, as the SII has ways of determining the real cost, and will charge you the required IVA plus a fine.
In order to obtain IVA credit, you need one of two special, SII-sanctioned invoices that state the IVA separately, either Factura 29 or Factura 50. These facturas can be obtained from any printing house (impresa) in Santiago. Importantly, however, the facturas must be stamped by the SII with a unique watermark in order for you to issue them (this process is called timbraje, literally “stamping.”) There is also a software program that you can purchase that allows you to emit your own unique IVA facturas.