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Chile: Tax credit regarding Chilean sourced income subject to withholding tax in a foreign jurisdiction



Loreto Pelegrí

Ignacio Burrull

On September 29 2014, Law No. 20.780 was published in the Chilean Official Gazette ("the Tax Reform"), which introduced several modifications to the Chilean taxation system. Among other modifications, and as a useful complement of a previous reform made which entered into force on January 1 2014, which increased the amount of credit that could be used for taxes paid abroad, either from treaty or non-treaty countries, and also established that the credit balances could be carried forward until its full extinction (while the previous regulation did not allow its use in case of tax losses), the Tax Reform introduced a subtle yet relevant modification to articles 41 A and 41 C of the Chilean Income Tax Law (Chilean ITL), which contains various provisions that aim to avoid international double taxation.

In fact, before the Tax Reform, said articles established that Chilean resident or Chilean domiciled taxpayers who obtained incomes from abroad were allowed to use a foreign tax credit. A contrario sensu, the Chilean IRS, interpreted in several rulings that a Chilean entity receiving Chilean-sourced income subject to withholding taxes in a foreign jurisdiction (for example, remuneration for services rendered in Chile to a non-domiciled entity) was not allowed to use a foreign tax credit.

The Tax Reform modified the heading of said articles, eliminating the phrase 'from abroad' from its content. The purpose of this elimination is to widen the scope of application of the provisions that seek to avoid the double taxation of incomes, since, before this elimination; the aforementioned provisions were only applicable to foreign-sourced income that had been taxed abroad as well.

In such a situation, if a Chilean resident or Chilean domiciled taxpayer had to render a service to a non-resident or non-domiciled taxpayer, it was more convenient to travel abroad and render it outside Chile, so that the income received was considered as foreign income, hence not subject, as a general rule, to Chilean taxes.

Accordingly, as per the new heading of articles 41 A and 41 C, the provisions that aim to avoid the international double taxation are now, also, applicable to incomes that fulfill the following cumulative conditions:

  • Obtained in Chile or abroad; and

  • Have been taxed abroad.

Therefore, with this new provision, the Chilean resident or Chilean domiciled taxpayer, in the example above, will be able to use, with certain limits, as a credit against the corporate income tax (CIT) levied in Chile, the taxes paid abroad for the income received for the rendering of its services, even if they are performed within Chilean territory (Chilean-sourced income).

As per the modification explained above, the Tax Reform, which was vastly criticised by many sectors of the Chilean economy, envisaged a change that is actually beneficial for taxpayers, allowing, and promoting, an easier and more transparent way to continue or expand its operations abroad.

Loreto Pelegrí ( and Ignacio Burrull (



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