Puente Sur’s tax partner Ignacio Gepp was interviewed by Tax Notes International for the article “Fate of Leftist President-Elect’s Chilean Tax Plans Unclear”, published on Jan. 3, 2022.
We invite you to read this overview of what might be expected from Chile’s president elect on tax matters.
I am an expat. Do I have to deal with the Chilean Social Security System?
The possibility of a career in a country full of wine and cornered by the Pacific Ocean and the Andes mountain range certainly sounds appealing.
Schools are decent, private healthcare is among the best in the region, and there are no hurricanes or deadly animals to be worried about.
So with all that, why is my move there still keeping me awake at night? It is likely because I will have to deal with new taxes and social security in a country that is not even mine. So what should I know about it?
There are three basic social security deductions that will hurt my new Chilean paycheck:
While the above sounds scary, the deductions are based on income capped at roughly USD 3,000 for health insurance and pension contribution, whereas for unemployment insurance it will based on income capped around USD 4,500. In other words, if make USD 10,000 a month my mandatory contributions will still be USD 210 for health insurance, USD 300 for my pension and USD 27 for unemployment.
Having said this and despite the charms of this southern nation, it is likely I would rather keep my own health and pension system in my home country. How do I get out of making these contributions in Chile then?
Can I also opt out of unemployment insurance? Unfortunately, no.
So the good news is that there is a way to opt out. But, what happens if I didn’t know about this during my time in Chile? Can I recover my pension contribution paid to the pension fund manager? Yes!
Easy. Right? If not, then we would be happy to have a chat with you and go through the process based on your specific situation.
#Chile #Socialsecurity #18.156 #Expats #Expat
“General overview of the legal representative and the associated liabilities”.
In practice, all companies operating in Chile are required by law to appoint one or more legal representatives. Each one must be an individual with residency in the country. The legal representative will be the company’s only point of contact for government authorities and the one with the ultimate signature authority over all official acts the company might undertake.
According to article 1448 of the Chilean Civil Code, what is executed by one person on behalf of another person or company, assuming the correct authorizations are in place, shall have the same legal effect on the party being represented as if that party acted by himself or itself. Therefore, a diligent and responsible legal representative in situ is of extreme importance, as his/her actions legally bind the represented company.
On the other hand, article 44 of the same legal text, requires that the legal representative carries out the commission with the same diligence he would apply to his own business, making him liable for any actions taken outside the powers granted. The law holds legal representatives to a higher standard of care and competence than other personnel.
It is no coincidence that legal representation in Chile is regulated by the rules of the Mandate, which is considered an agreement based on trust (intuito personae) and in specific consideration of the person invested with representation powers. A PoA will stand in effect until it is expressly revoked by the represented party.
The Legal Representative and the Chilean Internal Tax Revenue Service (SII)
In accordance with the general legislation, the SII requires that all foreign investors register a valid legal representative, responsible for all interactions, including maintaining the company’s information up to date, presenting all tax forms (tax statements, affidavits), and being notified in case of an audit. The legal representative will also be considered as the counterpart in a tax court procedure.
Considering the foregoing, the legal representative activities are not restricted to the initial registration of the company’s data. According to the SII Ruling Nº17 from 1995, the taxpayer, via its legal representative, is obliged to inform the tax authority all of the following actions:
a)Change of the company’s name
b)Change of domicile
c)Change of declared business activity
d)Opening or closure of a branch
e)Change of address (notifications)
f)Change of ownership (company rights transference)
g)Capital increase or decrease
h)Change of legal representative
i)Company transformation from individual to corporation
j)Company merger
k)Company divisions
l)Other company transformations
All of the above must be informed to the SII within two months after any change has been made, otherwise the company will be fined according to article 109 of the Chilean Tax Code.
Legal Liability of Legal Representatives
A legal representative also assumes certain personal legal liabilities. For example, if a company fails to pay taxes in Chile, the SII may bring criminal or civil penalties against a legal representative directly. In a civil law suit brought against a company, it is the legal representative who is served to appear in court.
The Chilean Tax Code establishes the eventual responsibility of the legal representative in its articles 98 and 99, as follows:
Article 98: The taxpayer and all of the legally obliged will respond to the application of financial penalties.
Article 99: Fines and other legal forms of pressure, will be applied to those obliged to comply, and for the case of corporations, will be applied to the managers, administrators and those in that position, and also, to the partners responsible for compliance.
It is worth noting that, even though these responsibilities will not be automatically assigned to the legal representative, as Chilean law recognizes the right to a due process, it is in fact a contingency assumed by anyone who holds the legal representation of a third party.
The Legal Representative and other Institutions
With the legal representative acting as the company’s “face” for all of Chilean authorities, liabilities are not only related to tax issues. Legally, it is the legal representative who will be held responsible for labor and social security matters, and for the compliance of municipal obligations such as the business license.
Conclusion
From all of the above, it can be said that legal representation is a two-way street. While the actions of the legal representative bind the represented company, the legal representative takes the risk of being held responsible for the company’s wrongful acts of administration. Therefore, the appointment of a legal representative shall be conducted under the bases of trust, diligence and communication. Thus, for all concerned, it is not a duty to be taken lightly.
Brief Overview of the Chilean Tax System
1. Corporate taxation
Chilean corporate taxpayers are subject to taxation on their worldwide income.
The rate at which this income will be taxed will vary depending on the corporate tax system elected by the taxpayer, subject to some eligibility requirements. In a nutshell, the two main systems are the following:
a)Preferential corporate tax system for small and medium companies: taxable income (on a cash basis) will be subject to corporate income tax (“CIT”) at a 25%
For a foreign investor the shareholder’s tax on distributed dividends is a Withholding Tax (“WHT”) set at a 35% rate, against which 100% of the CIT paid by the entity that has paid the dividend will be creditable. The outcome is that on the taxable profit generated by the corporate taxpayer, the overall tax burden (considering both the tax of the corporate taxpayer and of the investor/shareholder) will be capped at 35%.
b)General corporate tax system: taxable income (either on an accrued or cash basis) will be subject to CIT at a 27%Upon the corporate taxpayer effectively distributing a dividend abroad, WHT will be triggered.
This WHT is set at a 35% rate. However, under this system only 65% of the CIT paid by the entity that has distributed the dividend will be creditable against the WHT to be paid upon a distribution taking place. The outcome is that on the taxable profit generated by the corporate taxpayer, the overall tax burden will increase to 44.45%.
An exception to this rule is applicable when the shareholder is a resident of the US or of one of the more than 30 jurisdictions with which Chile has a tax treaty. In this scenario, even if the corporate entity opts for the General corporate (or semi integrated) tax system, the shareholder will be entitled to effectively credit 100% of the CIT paid by the entity distributing the dividend against the WHT on the dividend, thus resulting in an overall tax burden of 35%.
Note that WHT is to be withheld, paid and declared by the Chilean corporate taxpayer, on behalf of the foreign shareholder.
2. Funding of a legal entity
A legal entity can be commonly funded either through equity or debt.
Equity repayments are not subject to taxation. However, Chilean law mandatorily establishes that for tax purposes an equity repayment can only take place upon the corporate taxpayer having exhausted its tax and financial profits. In other words, if an entity has an equity of USD 100 and USD 10 of profits, upon the shareholder attempting a capital repayment of USD 20, the law will force the taxpayer to impute USD 10 as profit (thus triggering taxation as if it had distributed a dividend) and USD 10 as equity (tax free).
Debt, in turn, has the benefit of flexibility. The Chilean entity can repay the principal amount of a shareholder loan at any time without triggering taxation. In addition, the following should be considered:
a) Stamp duty will apply at a capped rate of 0.8% for loans with a maturity date exceeding 12 months, or 0.332% upon the loan being payable on demand. The tax is imposed at the aforementioned rates on the principal amount.
b) Interest payments paid to non-resident lenders will be subject to a 35% WHT, unless one of the following circumstances takes place:
i) The lender is a foreign bank, insurance company or foreign financial institution, in which case the WHT on the interest will be reduced to 4%.
ii) The lender is a resident of a treaty country, in which case the WHT on the interest will be reduced to either 10% or 15% depending on the treaty country.
Note that for the reduced rates to apply when the lender is a related party, Chilean thin cap rules are to be considered. In short, these rules require the Chilean resident borrower to maintain a 3-to-1 debt-to-equity ratio. If this ratio is breached, then the interest attributed to the excess of indebtedness paid to a related party abroad will be subject to a 35% WHT.
Bear in mind that WHT on interest is to be withheld, paid and declared by the Chilean debtor, on behalf of the foreign lender.
3. Cross-border services
It is common for intercompany cross-border services to be rendered. There is no limit on the deduction of the payments made by a Chilean corporate taxpayer for services rendered by a related party abroad.
That said, for the payment to be tax deductible the following should be considered:
If a payment fails to meet the deductibility requirements established by Chilean law, its deduction from the corporate tax base won’t be allowed.
Further, a 40% penalty tax will be imposed if the payment is deemed to have benefited a related party. Finally, if the payment is benefiting a foreign shareholder of the Chilean corporate taxpayer, the penalty tax will increase to 45%.
4. WHT on services
Paying the WHT associated to a service rendered by a related party abroad is a requirement in order to deduct the expense.
Generally speaking, WHT on services is 35% unless the nature of the service is technical, in which case a 15% rate is to be considered.
An exception to this rule takes place when the provider of the technical service is a resident of one of the 148 jurisdiction or territories that Chile deems as “tax havens”, circumstance under which a payment for technical services will be subject to a 20% WHT.
Finally, it should be considered that most of the tax treaties signed by Chile (with a few exceptions) characterize service payments as business profits, thus not subject to WHT in Chile.
5. Indirect taxes
Chile has a number of indirect taxes such as VAT, tax on tobacco (e.g. 52.6% on cigars), tax on alcohol (e.g. 31.5% on wine), green taxes (USD 5 per ton of CO2), etc.
VAT is by far the most relevant tax and is set at a flat rate of 19%.
VAT is applicable on the sale of goods and (as of January 1, 2023) the provision services, exception being made on health, education and transport services.
For VAT taxpayers (e.g. such as a wholesaler), input VAT (e.g. VAT paid to vendors) is creditable against output VAT (e.g. VAT charged to clients). Alternatively, when output VAT is insufficient to exhaust the pool of input VAT, a taxpayer may wish to request a VAT refund from the Chilean tax authority. This request can be made if:
(i) the VAT being claimed is associated to fixed assets; and
(ii) the VAT taxpayer has accumulated this input VAT for 2 months or more.
6. Depreciation of assets
Fixed assets can be depreciated at different rates depending on the type of assets. A list of the categories and depreciation time is in the following link.
For example, a building would typically depreciate in 50 years. That said, newly acquired or imported assets with a useful life exceeding three years can be depreciated in a third of the regular time established by the authority.
If a given asset is not in the list sent above, then the taxpayer can depreciate it based on the useful life provided by the manufacturer.
7. Transfer pricing
All intercompany cross-border transactions between related parties are subject to Chilean transfer pricing regulation. Chilean regulation primarily follows the OECD model yet it does not formally treat it as guidance.
Pursuant to this regulation, cross-border transactions are to be priced at arm’s length. Should the authority challenge whether a given transaction complies with the arm’s length principle, it can dispute it and impose a transfer pricing adjustment. On the adjustment, the authority can apply a penalty tax ranging from 40% to 45%.
Interest on loans is also subject to transfer pricing regulation. If the loan bears no interest then the Chilean debtor will not be required to justify the use of a given pricing methodology. On the contrary, should the loan bear interest then the Chilean debtor will be required to disclose the transfer pricing methodology used to set the interest rate, for which the Chilean debtor will require to at least have a benchmark study.
An annual transfer pricing affidavit must be filed for companies that meet certain requirements.
8. Personal taxes
Remunerations of employees that render services in Chile and that are domiciled or resident in the country are subject to a monthly employment tax or “second category” income tax, calculated using a progressive scale from 0% to 40%, and deducted and paid by the employer. As a general rule, foreigners neither domiciled nor residing in Chile and working in Chile are subject to a flat 35% additional income tax to be deducted by the company that employs them in Chile upon payment of the salary or fee. This rate is lowered to 15% for employment income for professional/technical services.
In the case of foreigners, during their first three years of residence in Chile they must pay taxes as indicated above only on their Chilean source income and this three-year term may be extended by the tax authorities in qualified cases. After the three-year term or its extension is over, the Chilean-resident foreigner must pay taxes on worldwide income.
For other types of income earned by individuals with Chilean tax residency, the surtax or “complementary global” tax is a progressive tax with rates ranging from 0% to 40%. It is applied on an annual basis and income of all sources is included in the calculation of the tax base, with the corresponding credits applied when applicable.
Hiring staff in Chile can be tricky if you don’t know your way around some practices.
First and foremost, the Chilean employment tax system relies on the employer taking care of everything. For that purpose, your candidates will unlikely be familiar with income taxes, thus making their liability your problem.
The outcome is that they will negotiate salaries in net terms (after taxes), thus putting on you the responsibility to calculate employment tax, social security contributions, unemployment insurance and health insurance.
Let’s say that your shiny candidate wants to make about CLP 1,000,000 a month net. To get to that number you will have to consider:
While the above sounds scary, the deductions are based on income capped at roughly CLP 2,250,000 for health insurance and pension contribution, whereas for unemployment insurance, the calculation base is capped at around CLP 3,375,000.
Bottom line? To get to that CLP 1,000,000 your candidate wants you will at least have to consider a cost of CLP 1,450,000. Don’t break a sweat about this; we will help.
In addition, if you are recruiting a high maintenance executive he or she may want a car and/or housing. All of this is possible provided they are deemed as part of the taxable compensation of the employee.
Regularly speaking though, most employees would expect a small amount for commuting and lunch, which is tax free, provided it is reasonable (i.e. eating at the Ritz every day does not count).
Further and as you may be aware, in Chile we are big fans of holidays and long weekends. For that reason, your hardworking employees will expect to receive a taxable bonus (“aguinaldo”) twice a year, at least: one for the National Holidays on September 18th and one for Christmas and New Years. It does not have to be a big chunk of money, but enough to fire up the grill and welcome friends and family over.
Finally, it is worth noting that the work week in Chile is being reduced from 45 to 40 hours, unless the employee agrees to waive this limitation which is typical for professionals.
Now let’s talk about the sour aspect of employment… parting from your employee.
Letting someone go is not only a difficult emotional process, but one that has a number of legal consequences to be considered:
Should your employee quit, then a good handshake and compensation for accrued vacation will do.
