Chilean Withholding Taxes - Plan Ahead, Save Money, and Mitigate Risks

In a dynamic, internationally oriented economy, it is common for local companies to engage in commercial transactions with foreign third parties. Commercial relationships with clients, providers, related entities, and international organizations will occur constantly, and thus there is an imperative need to anticipate and address any and all taxation risks that may arise.

It is no surprise that Chile is an extremely open country when it comes to Trade and Commerce; specifically, Chile has signed and implemented 30+ Free Trade Agreements with more than 60 countries worldwide. These are exceptionally good numbers for any country, let alone a South American one.

In addition, Chile has entered into more than 30 Double Taxation Treaties, further solidifying its status as a hub for international business and commercial integration.

The latter paints a clear picture; most companies in Chile – both locally and foreign-owned – will want to take advantage of this favorable, internationally friendly framework and ecosystem and thus, in all likelihood, will find themselves constantly engaging commercially with third parties located in other countries.

Sadly, many international companies entering Chile completely underestimate the importance of analyzing and mitigating tax-related risks before engaging in commercial activities with foreign companies.

All locally based companies in Chile must withhold and pay a default 35% withholding tax when making payments to foreign companies. The Tax, known in Spanish as “Impuesto Adicional,” must be paid by filing FORM 50 before the 12th of the next month following the retention.

The latter is the general by default rule; however, there are a couple of ways by virtue of which one can end up paying less or even not paying withholding tax at all:

• Using Preferential or reduced rates as stated in article 59 of the Chilean Income Tax Law for specific business transactions such as professional services

• Activating and taking advantage of preferential and/or reduced rates set forth in the + 30 Double Taxation Treaties signed by Chile.

It is crucial to identify, with extreme specificity, the nature of the business transaction and the country in which it is being taken advantage of / being rendered. Once this has been done, one needs to analyze if either of the (2) aforementioned points or exceptions are applicable.

What most foreign companies in Chile get wrong is failing to acknowledge that if the conclusion is that a certain transaction / payment is legally completely exempt from withholding tax, one then needs to analyze whether VAT is applicable. This is simply because local legislation requires that, in cases where no withholding tax is triggered, VAT be triggered instead, and thus a new legal taxation analysis needs to take place.

We have seen it countless times: a foreign company funds its Chile-based subsidiary, and then the latter starts repaying the debt and/or is tasked with paying foreign providers of the parent company without any withholding strategy or prior legal tax analysis. The risk is significant, given the potential for sanctions and audits by local Tax Authorities.

In Summary, International companies operating in Chile need to follow these simple steps to ensure complete tax compliance when making cross-border payments for services that constitute income for individuals or companies without a local domicile or residence.

• Clearly identify the country where the company providing the service is based. The bank account where the funds are received may be located in a third country, but it is the country of origin of the foreign individual or company that matters.

  
  

• Precisely identify the nature and type of service being provided by the foreign taxpayer.

  
  

• Carefully study and analyze local Chilean legislation to determine whether the service is subject to a preferential rate rather than the 35% default rate.

  
  

• Review whether Chile has a Double Taxation Treaty with the country in question.

  
  

• Legally analyze the Double Taxation Treaty to determine whether a preferential or even zero rate could apply under the Treaty's specific guidelines and wording.

  
  

• If it is determined that the payment/transaction is exempt from withholding taxes, collect the pertinent documentation to support this in the event of eventual audits by local Tax Authorities: Residence Certificates and sworn affidavits from each foreign supplier.

  
  

• If, after all these steps, it is concluded that the payment/transaction is exempt from withholding tax, legally analyze whether VAT is alternatively triggered.

Importing goods is subject to VAT by law, eliminating the requirement to assess or pay Chilean Withholding Taxes.