Pursuant to Article 3 of the Chilean Income Tax Law (ITL), Chilean taxpayers are taxed on their worldwide income, thus for their Chilean and foreign source income. The foregoing produces a problem of international double taxation in case of a Chilean resident earning foreign-sourced income subject to taxation abroad.
To tackle such a problem, the legislation has set forth a unilateral (applicable in case Chile has not entered into a double taxation agreement) and bilateral tax credit (applicable in case Chile entered into a double taxation agreement). Please bear in mind that in accordance with bilateral remedies the total available foreign tax credit is capped at 35%, but for unilateral remedies the cap is limited to 32%.
Regarding the bilateral credit, it covers all the types of incomes that are included in the tax treaty. On the other hand, a unilateral remedy only applies over certain types of income which were, prior to Law No. 20.956 of 2016 (Productivity Law) the following:
- Dividends and profits sharing;
- Permanent establishment and CFC; and
- Trademarks, patents, formulas, technical assistance and other similar services rendered abroad.
However, the Productivity Law, published in the Official Gazette on October 26 2016, introduced two new types of income that will be entitled to unilateral tax credit: exportation services and income from employment and independent personal services. These new tax credit provisions have been in force since February 1 2017.
These new provisions will allow, for instance, that Chilean employees that were sent abroad and have to pay taxes in Chile and abroad, will be entitled to credit in Chile a part of the tax that was withheld in the foreign country.
The goal of the Productivity Law, pursuant to the bill sent by the government, is to deepen the financial system and to promote the exportation services. In this sense, exportation services during the past 10 years have grown significantly, representing around 13% of the total exportation and more than 4% of the GDP. Moreover, among the exportations, professional services, consulting, technical services and IT services that represented $1 billion in 2004 in 2014 were nearly $3 billion.
In this order of things, new tax credits and the other measures of the Productivity Law are in line with the strategy of Chile to allocate it in the global networks of value and enhance a knowledge economy, by making the exportations more competitive.
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