International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Chile: A closer look at tax reforms and the future tax scene

Sponsored by

EGB Abogados

Jorge Espinosa of EGB Abogados describes how tax reforms are shaping the Chilean tax landscape.

Chile has experienced several tax reforms, especially, but not exclusively, the Income Tax Law (ITL). These reforms have substantially changed the tax scene in Chile and are the result of different perspectives that previous governments have had about the role of a tax system in the Chilean economy.

Reforms of President Bachelet

The two periods in which President Bachelet was president (2006–2010 and 2014–2018) privileged a rise in the tax collection with the objective of financing a major role in health and education. Consequently, the rates in corporate tax, the ‘first category tax’ (or FCT) rose from 17% to 27%.

A first and important change was to eliminate the concept of a taxable profit fund (TPF), as a base of income tax for companies, their owners, partners, or shareholders.

Before the reform, companies taxed on their income obtained on the base of the ‘taxable profit’ (TPF), and it was determined by the financial result of a company, with the additions and deductions of the ITL to establish the profit.

Once the company paid the FCT, these amounts were registered in a special ledger called TPF and that was used as a base to establish the amount of the withdrawals, distributions or remittances that were subject to the final tax (FT) (global complementary tax, ‘GCT’, or withholding tax, ‘WHT’) by the owners, partners or shareholders.

The FT levied the profits distributed by the companies to its owners, with a cap of TPF. If there was a difference between the financial profit of a company and its TPF, it was only levied with GCT or WHT until the amount of the TPF. The difference between the amounts was not taxed at that time but pending for future periods when the company produced a new TPF.

This created differences between the financial results and the taxable profit of the company, that many times were not taxed on time and therefore pending endlessly.

The reform eliminated the TPF and as a consequence any amount distributed by the company, whether it paid FCT or not, can be levied with GCT or WHT, exceeding the TPF of the company or not and as long as there is a rise in the taxable equity of it.

This reform hoped to eliminate the effect of the companies accumulating amounts that never paid income tax because it was not part of the TPF of the company, allowing to capture this income that never paid taxes before.

Before the second reform by President Bachelet, the income tax system in Chile was totally integrated. This meant that the FCT paid by the company could be credited by the owner, partner, or shareholder against its GCT and WHT. At the end of the day, the FCT is an advance of the individual tax of the owner, partner, or shareholder.

The reform in some cases limited the credit of the FCT against the GCT or the WHT. In the case of WHT, it affects the remittances of profits abroad and has a rate of 35% only to companies that are not corporations and not residents that come from a country with which Chile has a double taxation treaty (DTT) in force.

For the shareholders of corporations and for non-residents that come from countries without DTT, said credit is of more than 65% of FCT against GCT or WHT of the non-residents, which creates a final tax burden of 44.45%.

The government of President Bachelet incorporated other changes to the tax law. Among them, the reform incorporated to the Tax Code a general anti-elusive rule that includes simulation behaviours or abuse of the legal ways, establishing auditing and prosecution procedures by the tax administration, and penalties for taxpayers that violated those rules, and for tax advisors that recommended or designed them.

Reforms of President Piñera

Subsequently, the current government of President Piñera (2010–2014 and 2018–2022) conducted a tax reform that modified some changes that his predecessor incorporated. This was meant to simplify and reorganise the Chilean tax system.

The main reform to the ITL was to change the old system to create regimes of FCT that are different depending on the type of company. A new general regime was established to large companies, independently of its legal structure, with a 27% rate. The owners, partners or shareholders can credit the FCT only on a 65% against the GCT or WHT, generating a major tax burden to the higher income, with a marginal effective rate of 44.45%.

However, to the owners, partners or shareholders that reside in a country that has a DTT currently in force with Chile, the effective rate is 35%. In this case, they can credit 100% of FCT paid by the company that distributes profits against WHT of 35%.

New categories were created with different tax treatment for companies, distinguishing medium-sized businesses, small and micro businesses, or entrepreneurs. For small and medium-sized businesses, the general FCT of 25% applies, and the owners, partners or shareholders can credit 100% of the FCT against GCT for owners, partners and shareholders that are residents, obtaining an affective burden of up to 40%. The marginal rate of GCT rose to 40%, which was lowered to a 35% before by President Bachelet.

“The future of the Chilean tax system will depend on the economic result of the fiscal budget, already wounded by COVID-19”.

For owners, partners or shareholders that are not resident in this category of companies, the rate of WHT for the remittance of profits or dividends is 35%, and it is possible to credit 100% of the FCT previously paid by the company that distributes those profits.

A special regime was created as an option for the smallest companies, that allows to pay simultaneously FCT or GCT, but only on the difference of income received and the expenses paid in a year. It is possible to credit against the latter 100% of the FCT, allowing as an alternative as well to pay only GCT, and being exempt of FCT.

Other reforms incorporated by President Piñera are those related to the improvement of the rights of the taxpayers before the tax authorities, reinforcing their rights and restricting the faculties that these authorities must audit taxes, warranting a balance between both parties.

An autonomous and independent agency was created as advocate of the taxpayers, whose goal is to protect the interest of small taxpayers before the tax authorities while exercising its different faculties, such as auditor, and with its studies and suggestions of administrative reforms and even legislative reforms that improve the rights of taxpayers. The advocate will help to improve the rights of the taxpayers and therefore improve the relationship with the tax authority.

After the reforms, the obligation to issue receipts of purchases by electronic media was incorporated. This means more efficiency in controlling and auditing VAT, and helps rising the collection of tax income, while replacing handmade receipts.

Some provisional reforms were incorporated due to COVID-19. Specially, these reforms aim to help small and medium-sized businesses by easing temporarily their tax burdens. The most relevant of them is that for three years the FCT was lowered from 25% to 10%.

The last relevant reform on tax law is the one that levies with VAT the digital services, with the general rate of 19%. The services levied are:

  • The intermediation of services of any nature rendered in Chile, or sales made in Chile or abroad, if they cause an import;

  • The supply of the digital entertainment content, such as videos, music, games, or other analogous content, by means of downloading, streaming or other technology, including texts, magazines, newspapers, and books;

  • The supply of software, storage, computing platforms or infrastructure; and

  • Advertising, regardless of the format or medium through which it is delivered, materialised, or executed.

Future reforms

Many countries and governments have been pressured by COVID-19 and they had to allocate considerable amounts of money to support individuals and companies affected by the lack of income. This protection measures were necessary because of the pandemic, and especially due to the standstill of numerous economic activities and the loss of jobs.

Additionally, Chile had a social outbreak that was not seen in the last 30 years. This implied protests and social agitations and ultimately the need to change the constitution of 1980 as proposed by the National Congress. This was approved in a plebiscite by 78% of the citizens and ended up with the creation of a constitutional convention that will write and propose the voters a new constitutional draft.

Both circumstances have created and will create an increase on the public expense, that will have to be paid with new tax income. Because of the pandemic, a tax debt acquired to help individuals and companies will have to be paid. On the other hand, it is expected that a new constitution will change the subsidiary role of the state to another with a major social protection in health, education, employment, retirement pensions, among other.

Inevitably the aforementioned will require the discussion of a tax reform that rises the tax collection, rising the tax pressure of Chile that currently is around 20% of the GDP, to a higher percentage and approaching European levels.

It is yet premature to know which taxes or fees could be created or rise. Below is a list of the ones that have been on the public scope and that could be useful to portray a future tax setting in Chile:

  • A profound review of the current tax expense. This means that the combination of exemptions, subsidies, franchises and special or preferential tax treatments, tending to move towards a more neutral and fair tax system. This measure implies rising the collection of several GDP points for the state;

  • A review of FCT to large companies, that could rise from 27% to 28% or 30%;

  • A possible dissolution of the current income tax system, eliminating the mechanism in which the FCT is a credit against GCT or WHT when the income is paid, distributed, remitted or at the disposal of the owners, partners, or shareholders;

  • A review of the moment in which the GCT or WHT has to be paid by the income of the companies with regard to its owners, partners or shareholders, from a cash basis to an accrued basis;

  • A review of the special tax on operational income of large mining. This means that the base on which the tax is calculated and the applicable rates of the operational income or “mining royalty” could be reviewed;

  • The creation of more green taxes that protect the environment and discourage the economic activities that pollute and harm nature and wildlife;

  • The creation of taxes to big fortunes through an efficient system that at the same time have a broad base, and are easy to manage;

  • The revision of VAT to establish distinguishable rates to certain sales or services, or even the creation of exemptions for essential products; and

  • The revision of fuel taxes and other specific taxes on the sales of certain products like cigarettes and alcohol.

In any case, the future of the Chilean tax system will depend on the economic result of the fiscal budget, already wounded by COVID-19, and the design of the new constitution of the country and the protective role assigned to the state.

Click here to read all the chapters from ITR's Latin America Special Focus

Jorge Espinosa



EGB Abogados

T: +56 982 941 030


Jorge Espinosa is a founding partner at EGB Abogados. He has more than 35 years’ experience in tax law.

Prior to establishing EGB Abogados, Jorge led the tax practice of Ernst & Young Chile for six years. He also worked for the Chilean government as head of the cabinet and as a legal advisor at the labour ministry. He was nominated as one of the final candidates for the Director of the Internal Revenue Service of Chile position and he is a professor of the Universidad Católica de Chile’s law faculty.

Jorge is a founder and former member of the board of IFA Chile, a former member of the board of the Chilean Institute of Tax Law and current member of Lataxnet and WTS Global. Jorge is studying for a PhD at UCL Louvain, he also studied the international tax programme at Harvard Law School and he has a master’s degree in tax law from the Universidad de Chile.

more across site & bottom lb ros

More from across our site

Richard Murphy and Andrew Baker make the case for tax transparency as a public good and how key principles should lead to a better tax system.
‘Go on leave, effective immediately’, PwC has told nine partners in the latest development in the firm’s ongoing tax scandal.
The forum heard that VAT professionals are struggling under new pressures to validate transactions and catch fraud, responsibilities that they say should lie with governments.
The working paper suggested a new framework for boosting effective carbon rates and reducing the inconsistency of climate policy.
UAE firm Virtuzone launches ‘TaxGPT’, claiming it is the first AI-powered tax tool, while the Australian police faces claims of a conflict of interest over its PwC audit contract.
The US technology company is defending its past Irish tax arrangements at the CJEU in a final showdown that could have major political repercussions.
ITR’s Indirect Tax Forum heard that Italy’s VAT investigation into Meta has the potential to set new and expensive tax principles that would likely be adopted around the world
Police are now investigating the leak of confidential tax information by a former PwC partner at the request of the Australian government.
A VAT policy officer at the European Commission told the forum that the initial deadline set for EU convergence of domestic digital VAT reporting is likely to be extended.
The UK government shows little sign of cutting corporate tax, while a growing number of businesses report a decline in investment as a result of the higher tax burden.