KNOWLEDGE BASE

INTERNATIONAL INVESTMENT

Investing in South America: Chile

Overview Tax Treaties Salient Features Case Studies

OVERVIEW

Dividends paid by Chilean companies are subject to tax at a rate of 35%. However, on distribution, a 17% tax credit for "first category tax" paid by the company may be credited against taxes paid on dividends.

Loans granted by related parties are limited to a 3:1 debt-to-equity ratio and a 4% withholding tax is applied on payments to related parties within the ratio limits. Interest paid in excess of the ratio is subject to a 35% withholding tax rate.

Payment of royalties is subject to a 30% withholding tax (20% for technical assistance). Deduction of such payments is limited to 4%of the business’s sales. If no relation exists between the beneficiary and the payer, the limit of deduction is not applied.

Despite the fact that the final tax burden on payment of dividends for treaty countries is the same as for non-treaty countries, consequences of foreign tax relief of such income in recipient’s country may be different.

In practice, even if dividends paid to treaty countries are subject to a higher withholding tax rate it is possible to obtain efficient foreign tax relief in the recipient’s country.

TAX TREATIES

Chile has concluded double tax treaties with the following countries:

Dividends % Interest % Royalties %
Argentina 35 35/4 30
Brazil 35 15 15
Canada 35 15 15
Ecuador 35 15 10/15
Korea 35 10/15 5/15
Mexico 35 15 15
Norway 35 15 5/15
Peru 35 15 15
Poland 35 15 15/5
Spain 35 5/15 5/10
Non Treaty Countries 18 35 30

In addition to the double taxation treaties concluded above, Chile has also signed agreements with Croatia, Denmark and the United Kingdom, which are awaiting ratification by the Chilean Congress. Negotiations to sign tax treaties with France, Malaysia and New Zealand have concluded, while negotiations with Cuba, the Czech Republic, Finland, Hungary, Italy, the Netherlands Paraguay, Sweden, Switzerland, the United States and Venezuela are in progress. All of these treaties, which are based on the Organisation for Economic Cooperation and Development (OECD) model convention, provide special rules for the taxation of dividends do not apply to the Chilean withholding tax if the 17% corporate tax can be fully credited against the withholding tax.

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SALIENT FEATURES

Corporate Income Tax Chile has two-tier corporate tax system pursuant to which taxable profits are subject to 17% entity-level income tax (First Category Tax) and a 35% withholding tax (additional tax). In other terms, profits retained at the entity level are only subject to 17% corporate income tax. Distributed profits are subject to 35% additional tax, against which the first corporate tax may be credited (that is generally yielding an 18% effective withholding tax).
Dividends Effective withholding tax rate for dividends is 18% (see “Corporate Income Tax”).
Interest Interest paid to non-treaty related parties is generally subject to a 35% withholding tax.
Royalties Royalties are taxable at the withholding tax rate of 30%.
Loss Relief Chilean tax law allows a carry-forward and carry-back of losses on an unlimited basis. But first, losses must be carried back to set against undistributed profits.
Thin-capitalisation Chilean tax law provides debt-to-equity rules (3:1).

CASE STUDIES

Offshore Investing into Chile
EU Company Investing into Chile
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