This content is from: Chile

Chile: Voluntary income tax payment opportunity

Rodrigo WinterLoreto Pelegri

Chile has an integrated tax system under which corporate income tax is fully creditable against final taxes such as surtax and additional withholding tax when a dividend or profit distribution occurs.

In order to maintain a record of the underlying corporate tax credit, a special registry was created to allocate the corresponding tax credit to a dividend or profit distribution. In this sense, distributions were assigned with its corresponding tax credit on a 'first in and first out' basis.

From January 1 2017 onwards this record of the corporate taxes paid will be amended and replaced by an average rate. Also, the corporate income tax on those companies subject to the partially integrated tax system will be limited only to 65% of the corporate tax paid by the company which may imply an effective 44.45% rate in certain cases.

Since the purpose of the reform package applicable from January 1 2017 is to eliminate the tax credit registry and replace it with a new registry, there was an incentive to apply for a voluntary income tax payment at a preferred rate. The rate corresponds to an average rate of the shareholders' final taxes in case of Chilean companies formed only by Chilean individuals. In case of Chilean companies formed by other companies or foreigners the rate is 32%.

Please bear in mind that this tax is payable by the company and corporate income tax paid can be used as a credit and the further distribution of the amounts is not subject to further taxes at the shareholder level.

Law N° 20.780 published in the Official Gazette on September 29 2014 provided that this opportunity could be exercised until December 31 2015. However, not that many taxpayers have exercised this option, while other restrictions also apply. The Law mentioned that the amount eligible was only the excess over the average of dividend distributions within the last three years. Also, the Law provided that in case option is exercised, dividends can be distributed free of further taxes, following the normal allocation order. Thus, in case the company had other taxable profits, they must be distributed before the tax free distribution.

On February 8 2016, Law 20.899 was published in the Official Gazette; the law extends the exercise of this option until April 2017 and also eliminates most of its restrictions. In fact, if this tax is paid, these amounts can be distributed free of final taxes and with preference over any other amounts. Also, the exercise of the option is not limited to the amounts exceeding the average of the last three years' dividend distributions.

In summary, this option is much more attractive than the former one and it seems to be a good alternative for those companies remitting dividends to either Chilean individuals or foreign companies since it may imply savings in terms of the final tax burden and also presents the opportunity for taxpayers to clean prior year registries before subjecting themselves to the new applicable regime.

Rodrigo Winter ( and Loreto Pelegri (

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