Taxation in Chile

INTERNATIONAL EXECUTIVE SERVICES

Thinking Beyond BordersChile

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IntroductionAs a general rule, any person domiciled or resident in Chile is subject to income taxes on a worldwide basis. Individuals who are neither resident nor domiciled in Chile pay taxes only on their Chilean-sourced income.

ContactAntonieta RodriguezKPMG in Chile Director T: +56 2 7981435 E: [email protected]

Catalina DroguettKPMG in Chile Senior T: +56 2 7981415 E: [email protected]

Cristián PosaKPMG in Chile Senior T: +56 2 7981415 E: [email protected]

Chile

Key messagesForeigners with residence or domicile in Chile only pay taxes on their Chilean-sourced income for the first three years of domicile after which taxes are levied on worldwide income.

THINKING BEYOND BORDERS: MANAGEMENT OF EXTENDED BUSINESS TRAVELERS

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.

Income tax for individualsAs a general rule, any person domiciled or resident in Chile is subject to income taxes on a worldwide basis. Individuals who are neither resident nor domiciled in Chile pay taxes only on their Chilean-sourced income.

Foreigners with residence or domicile in Chile will pay taxes only on their Chilean-sourced income for the first three years after their arrival in Chile. After this period has elapsed, foreigners will be subject to income taxes on their worldwide income. Chilean legislation establishes that this period might be extended in certain circumstances, but in practice, this extension is unusual.

Further, according to Chilean income tax law, Chilean-sourced income is defined as the income derived from activities performed or goods located in Chile. Thus, compensation received for employment activities carried out within the country should be considered as Chilean-sourced income, and therefore be subject to taxes in Chile, regardless of the nationality or residence status of the individual, and the place of payment.

For tax purposes, resident status is acquired once an individual has been in Chile for more than six consecutive months in one calendar year, or six months – consecutive or not – within two consecutive fiscal years. According to Article 49 of the Chilean Civil Code the accounting of a fact (time spent in Chile) must be analyzed ‘within’ a certain period, it will be accomplished if it is met by midnight of the day before.

Chilean income tax law does not provide for a domicile definition, but according to Article 59 of the Chilean Civil Code, domicile requires residency in a property and the intention to remain there. In accordance, Chilean IRS has understood that an individual may acquire tax domicile in Chile, for example, when he/she has moved to Chile with their family, the person has purchased or rented a house in Chile; their children attend a school in Chile; and the person came to the country under a Chilean employment contract.

Accordingly, a person will acquire Chilean domicile once the aforementioned requirements (residency and intention to remain in it) are met.

On the other hand, if domicile is not acquired as the person enters the country, the residency test should be analyzed to determine the tax treatment in Chile.

Applicable taxationBusiness travelers that are considered nonresident and not domiciled in Chile for tax purposes will be subject to nonresidents income tax (Additional Tax), which is levied at a flat rate of 15 percent on the gross employment income, if the activities can be qualified as technical or engineering work or professional services that an individual renders through a report, advice or plan development, rendered in Chile or abroad.

After seven months in Chile, the individual will be taxable according to resident Chilean income taxes, and subject to Second Category Tax (employment income tax), which has progressive rates ranging from 0 to 40 percent on the net salary. Current tax rates are shown in the chart below and amounts are listed in Chilean pesos (CLP). Please note that the exact figures are updated on a monthly basis.

Second Category Tax (CLP) August 2012

Taxable baseTax rate Discount

From To

CLP0 CLP534,195.00 0% –

CLP534,195.01 CLP1,187,100.00 5% CLP26,709.75

CLP1,187,100.01 CLP1,978,500.00 10% CLP86,064.75

CLP1,978,500.01 CLP2,769,900.00 15% CLP184,989.75

CLP2,769,900.01 CLP3,561,300.00 25% CLP461,979.75

CLP3,561,300.01 CLP4,748,400.00 32% CLP711,270.75

CLP4,748,400.01 CLP5,935,500.00 37% CLP948,690.75

CLP5,935,500.01 and more 40% CLP1,126,755.75



For these purposes, accommodation, cost-of living allowance, and most other fringe benefits are generally also considered as taxable income for employment tax purposes. However, in the computation of the net salary, the foreign individual can deduct social security contributions paid in Chile or abroad, and all non-taxable items.

It should be mentioned that social security contributions paid abroad are deductible in Chile with a cap of 60 Development Units (hereinafter UF) equivalent to CLP1.353.569 at August 2012.

Social security mandatory in ChileForeign individuals exempt from contributing to the Chilean social security systemLegislation (Law No. 18.156) in Chile allows foreign individuals and the companies that bring them to Chile, to be exempt from making social security contributions in Chile and to keep their affiliation to a foreign social security system,when certain requisites are met.

In order to be exempt from contributing to the Chilean social security system under Law 18.156, it is necessary to meet the following requirements:

• The foreign individuals must be affiliated to a foreign social security system which provides benefits at least equal to those minimum benefits provided by the Chilean social security system, which covers for illness, disability, retirement and death.

• The foreign individual must declare their intention to keep their affiliation to the foreign social security system for the duration of their Chilean employment contract.

• The foreign individual must have a technical or professional degree, and this fact must be backed up with the corresponding documentation.

The documentation required to support such an exemption, according to instructions issued by the Pension Fund Administration Commission, is a certificate from the corresponding social security institution duly legalized, officially translated, and registered with a Chilean Notary, where it states clearly the obligations of that institution to grant insurance for the four contingences (illness, disability, retirement and death).

Finally, it is important to bear in mind that if the individual does not fulfill the requisites to be exempt, and does not contribute to the Chilean social security system, a penalty of 5 Annual Tax Units (approximately CLP2,374,200) can be imposed, which can be doubled if the individual commits more than one infraction in a period of two years.

Please note that this exemption does not apply to the payments made towards insurance related to labor accidents and professional illness, nor to the contributions to be made to the unemployment insurance.

Foreign social security contributions paid abroad receive a similar treatment as those paid towards the Chilean social security contributions, and therefore, they may be deducted from the gross salary in Chile with a cap of 60 UF (approximately CLP1,353,569) for the calculation of the individual’s Chilean resident employment tax.

Foreign individuals who should contribute to the Chilean social security systemIn the case that the individual does not meet the requisites of Law 18.156, they will have to contribute to the Chilean social security system. As a general rule, employees working in Chile are subject to the payment of social security contributions, which are deducted from their gross salary with certain caps. These contributions must be withheld by the employer and are paid as follows:

• 10 percent to the pension fund administrator

• 7 percent to the health institution

These figures are calculated over the gross salary with a cap of 67.4 UF per month (approximately CLP1,520,509). This cap is adjusted annually, with consideration placed on the variation of the real wage rate, determined by the National Institute of Statistics.

In certain circumstances, a foreign individual who decides to leave the country may seek reimbursement of funds provided to the pension fund administrator, except the commission, which must be analyzed on a case-by-case basis.

It should also be noted that private pension funds (AFP) may request the respective new or different backgrounds (i.e. any kind of information that the Private Pension Fund Administrator may require, such as contributions of social security abroad) in order to comply with Law No. 18,156, authorizing the waiver or refund of the funds provided.

Finally, it is important to consider that the return of the compulsory contributions and agreed deposits is subject to the Second Category Tax (under Article 42 No.1 and Article 43 No. 1 of the Income Tax Law), and the return of the Voluntary Pension Funds Savings Account B is subject to taxation under Article 42 of the Income Tax Law, meaning that the AFP must withhold the corresponding withholding income taxes.

Unemployment insurance and occupational accidentsAccording to Law No. 19.728 on unemployment insurance, employers and employees will be obliged to make contributions for unemployment insurance, even when qualifying for the exemption under the Act discussed above (18.156).



The aforementioned unemployment insurance is calculated as follows:

• 0.6 percent of taxable wages of the employee, paid by the employee (with a cap of 101.1 UF, approximately CLP2,280,763 as of August of the current year)

• 2.4 percent of taxable wages (with a cap of 101.1 UF) whicis a cost for the employer

• contribution of the State, whose amount is determined according to the rules established by law.

The funds corresponding to the contributions of employees and employers should be paid to the management company within the first 10 days of the following month in which wages are paid.

When the contract is over, and to the extent that certain requirements are met, the individual may be entitled to withdraw contributions made to the unemployment insurance.

It should be mentioned that a foreign individual who uses this insurance while outside of the country will be charged in the same way as a Chilean resident.

Finally, the employer must pay certain amounts for insurance of occupational accidents and occupational diseases, which corresponds to 0.95 percent calculated on the monthly salary of the individual with a cap of 67.4 UF per month (approximately CLP1,520,509). Additionally, the employer must contribute 1.49 percent for insurance and disability to the worker’s AFP, which is also calculated upon the same cap of 67.4 UF.

Compliance obligationsShould the individual receive all or a portion of their remuneration from a foreign country, the individual must report and pay the corresponding taxes by completing Form 50 of Monthly Declaration and Simultaneous Payment, within the first 15 days of the following month after the month h of payment, in the case of Second Category Tax, or within the first 12 days in the case of Additional Tax (income tax applicable to nonresidents or those domiciled in Chile).

If the individual receives compensation paid from a Chilean employing entity, the employer will be responsible for withholding, declaring and remitting the Chilean income tax to the Chilean treasury.

Other issuesBelow is a list of the countries with whom Chile has conducted double taxation treaties.

Double Taxation Treaties with Chile: List of Countries

Argentina (only valid until Ecuador Paraguay31 December 2012)

Belgium Spain Peru

Brazil France Poland

Canada Ireland Russia

Colombia Malaysia United Kingdom

Korea Mexico Sweden

Croatia Norway Thailand

Denmark New Zealand Switzerland



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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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Designed by Evalueserve. Publication name: Thinking Beyond Borders – ChilePublication number: 121073 Publication date: November 2012

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Taxation in Chile

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