Chile's government presented the Tax Modernisation Bill
(Proyecto de Modernización Tributaria) on
August 23, 2018. The bill introduces a series of modifications,
seeking to simplify the Chilean income tax system and
incorporate new tax regulations.
In order for the Tax Bill to be passed, Chilean law requires
that it be approved by Parliament (Chamber of Representatives
and Senate) and published in the Chilean Official Gazette.
The Tax Bill is set to enter into force, in general, on
January 1 2019, but provides several specific entry into force
rules. However, it is expected that this effective date date
will be revisited with further legislative discussion.
Although there is no clear term in which the Tax Bill will
be approved, it will mostly depend on the discussions held
between the government and opposing parties, which were resumed
on March 6. Bearing in mind that there is no common
understanding on key points yet, it is expected that this will
be a tangled process. The key tenants of the bill as it stands
are discussed below.
Integration of the income tax regime
Previous tax reforms in Chile (Laws 20,780 and 20,899) had
established two income tax regimes, with one attributed and the
other partially integrated, to be applied by entities that are
domiciled or resident in Chile, and their respective quota or
The different tax regimes mostly impact:
- The rate of first category tax (i.e.
corporate tax) that should be applied
- The moment when the income must be
recognised by the quota or shareholders; and
- The corporate tax credit available for
quota or shareholders (fully integrated vs partially
This will amend rules under the income tax system that can
impose a 44.45% effective tax rate (ETR) for quota or
shareholders with no residence in Chile or residing in a
country with which Chile has no double tax treaty in force, or
The Tax Bill seeks to redesign the income tax regime and
fully integrate it, creating a single tax system for all
taxpayers subject to corporate income tax. Under the new
regime, companies will annually pay taxes over their net
taxable income at a rate of 27%. Final taxes will only apply
for quota or shareholders when the distributions are paid, and
the corporate tax paid by the company will be fully creditable
against final taxes.
Finally, the different registries that companies must keep
are simplified in order to make tax compliance easier.
As of today, individuals without domicile or residence in
the country that obtains capital gains derived from the
alienation or transfer of shares or quota rights of Chilean
companies are subject to anadditional tax (i.e. Chilean
withholding tax) at a rate of 35%, which is calculated over an
accrued or perceived basis at the taxpayer election.
The Tax Bill seeks to establish a 20% sole tax over capital
gains obtained by individuals without residence or domicile in
the country, triggered over a perceived basis.
|Companies need to reorganise
their tax compliance toolkits ahead of the Chilean Tax
Modernisation Bill entering into force
Deductibility of expenses
The Tax Bill seeks to update the regime established for
deducting the expenses incurred by Chilean entities, and would
modify the current requirements in order to incorporate the
economic realities of businesses within the expense
The Chilean Income Tax Law requires , among other rules,
that expenses are directly linked to income generated, to be
deductible. Payments that do not comply with such requirements
could be considered as rejected expenses and be subject to a
sole penalty tax, even if they are mandatory for the company
(for example, payments for contractual fines or non-compete
The latter is a consequence of a formal and strict
application of the Chilean Income Tax Law provisions on
expenses by Chile's Internal Revenue Service (IRS).
The government's proposal re-defines the above concept and
lists the requirements in the Chilean Income Tax Law,
establishing that expenses can be deducted as long as they are
directly or indirectly related to the company's business, which
can be ordinary, extraordinary, common, exceptional, voluntary
or mandatory, provided the amount is deemed reasonable.
Deductibility of royalty payments to related parties
Chilean Income Tax law also states that royalty payments
made to related parties abroad can be deducted from the net
taxable income, but capped at 4% of the gross revenue for sales
and services in the relevant calendar year. The government's
proposal seeks to eliminate such a limit.
Chilean Income Tax law does not provide a permanent
establishment (PE) definition. In order to determine if a
foreign entity has a PE, taxpayers must apply the guidelines
provided by Chile's IRS on this matter.
The Tax Bill would incorporate a provision in line with the
OECD guidelines which would consider a PE to exist in
situations where a location is utilised to perform permanently
or habitually all or part of a business or activity of an
individual or entity without residence or domicile in
Also, a PE would be deemed to exist when a foreign
individual or entity performs its activity in the country
through a representative who habitually closes agreements
related to the business of the foreigner, or has a key role in
the closing of the agreements, or negotiates key parts of the
agreements which is not modified by the foreigner.
Credits for taxes paid abroad
The Tax Bill would reorganise the provisions regarding
credits for taxes paid abroad, simplifying its wording and
ordering the scattered legislation in only one provision. This
includes a detailed list of income which foreign taxes can be
credited against in Chile, as follows:
- Income for the utilisation of intangible
- Income for the provision of professional
or technical services:
- Income related to a PE of a Chilean
- Income derived from a controlled foreign
- Income originated in a country with which
Chile has a double tax treaty.
Furthermore, the maximum credit available for treaty and
non-treaty countries is matched at 35% (today it is 32% in the
case of non-treaty countries).
Withholding rate on interest
The Tax Bill seeks to introduce the concept of "final
beneficiary", limiting the application of the 4% reduced
additional tax rate on interest payments to foreign banks,
insurance companies, foreign pension funds, or foreign
financial institutions in case the final beneficiary of the
interest is not one of those entities, as in the case of a
Thin cap rules
If a loan is guaranteed by a third party, the interest paid
is deemed as a payment to a related party, unless the loan is
guaranteed by a third party that charges a market price fee for
such a service. However, the Tax Bill would change this
The new provisions set forth that an interest payment is
considered to be made to a related party when the financing is
granted with a direct or indirect guarantee provided by a
related party of the debtor, as long as the related-party
guarantor is domiciled or a resident abroad, and is the final
beneficiary of the interest.
Fixed asset VAT refunds
Chilean VAT law allows taxpayers to request a cash refund
for VAT credits accumulated for six or more months that were
originated due to the acquisition of fixed assets. This request
must be filed before Chile's IRS, which has a 60-day term to
The Tax Bill seeks to lower the above-mentioned term in
order to make it faster for the taxpayers to obtain the VAT
refund. As such, VAT credits only have to be accumulated for
two months, and Chile's IRS would have only five days to issue
a decision, unless it informs the taxpayer that an audit
process will be started.
Also, it would be expressly recognised by law that fixed
assets under construction entitle the taxpayer to request a VAT
refund, a matter that has only been resolved in an
administrative arena to date.
Chilean VAT law notes that payments subject to additional
tax will be exempt of VAT, as long as they are not provided in
Chile and are not exempt from additional tax due to a domestic
law or a double tax treaty.
The above exemption benefits standardised software as
Chile's IRS has understood that it is utilised in Chile, but
provided abroad, which means that it is exempted from
additional tax and VAT.
The Tax Bill seeks to modify this VAT exemption so that
taxpayers wanting to benefit from it must be providing foreign
services exclusively, thus services must not be rendered nor
utilised within the country.
The latter will directly affect standardised software that
would be subject to a 19% VAT rate. Business profits under a
double tax treaty could also be affected by this
Digital services tax
The Tax Bill seeks to introduce a digital services tax (DST)
that will be applied as a specific, indirect and sole tax to
digital services offered by foreign entities or individuals to
Chilean individual users.
The DST will be applied at a 10% rate over the gross amount
paid by the user. The Tax Bill defines digital services as:
- Remunerated digital intermediation
- Remunerated digital entertainment
- Foreign marketing services;
- Use and subscription on platforms of
internet-based technological services; and
- Data storage services.
Under the proposed Tax Bill, even though the foreign entity
or individual will be considered as the taxpayer, the
withholding agent in this case will be the electronic payment
Where services are paid in cash, the foreign entity will be
obliged to inform its operations to Chile's IRS, and declare
and pay the relevant tax. A registry of digital service
providers will be created for the withholding agents to rely
Tel: +56-2 29400155
Sandra has a Bachelor's degree in law from the
Universidad de Chile, and holds a Master's degree in
Law and a Certificate on International Taxation (ITP)
from Harvard University.
Sandra joined PwC Chile in 2005 and is currently a
partner of the Firm. Previously, Sandra worked in the
Chilean Internal Revenue Service at the International
Taxation Department, and was involved in the
negotiation of several double tax conventions.
Sandra has developed her career on tax consulting
with a strong practice in international taxation.
Sandra has provided tax consulting services to a broad
range of foreign and domestic clients, including cross
border restructuring projects, intercompany operations,
day to day tax advisory, due diligence and
sale/acquisition of target structures, among
Furthermore, she is currently president of the
Chilean Branch of the International Fiscal Association.
She also gives lecture at different post graduate
Gregorio Martínez Galarza
Tel: +56 2 29400633
Gregorio is a law graduate from the Universidad
Católica de Chile, and has a LLM degree in tax
from the Universidad de Chile.
He joined PwC in March 2013 and is currently a
manager of the Tax & Legal Department, where he is
involved in several tax and legal projects focusing on
multinational corporations and foreign investors.
Gregorio also collaborates with the transfer pricing
team of the firm, participating in the major APAs, MAPs
and Corresponding Adjustment processes with the local
He also advises local clients directly in new
business organisations, the incorporation of companies,
and drafting of legal documents and agreements.