First Category Tax
Repatriation of Profits
Payments Abroad
Capital Gains


The income of corporations, limited liability partnerships and permanent establishments of foreign corporations, is taxed in two stages: first, when income is accrued; then, when profits are distributed to shareholders or partners, and in the case of a branch when they are withdrawn or remitted abroad. This corporate tax structure aims to promote private savings and investment, as the rate of taxation on accrued but undistributed income is only 15%.

Chile has tax treaties with Argentina, Canada and Mexico. Treaties signed with the governments of Ecuador and Poland are awaiting congressional approval. Except for the treaty with Argentina, all the double taxation treaties executed by Chile follow the provisions of the Model Convention of the OECD (Organization for Economic Cooperation and Development).

The following is a general description of the tax regime based on the assumption that the partners or shareholders of the local entity are not domiciled in Chile.

First Category Tax

Business income, calculated on the accrued accounting method, is subject to a 15% first category tax. In general corporate income is taxable again only when distributed to individuals resident in Chile or non-domiciled persons. First category tax may be credited against both personal tax and additional tax (see below).

Financial statements must be prepared to December 31 each year (except for the final year of existence). Financial statements may not cover a period exceeding twelve months. Income tax returns must be filed during April of the following year. Monthly income tax provisional payments are required. The amount to be paid is determined by applying a percentage to the taxpayer's monthly gross revenue. VAT (value added tax), payroll tax and withholding tax must also be reported and paid on a monthly basis.

The tax basis of first category tax is generally calculated based on the accrual method of accounting with a few exceptions as defined by the Income Tax Law (eg, rejected expenses and accelerated depreciation). However, some activities under qualified circumstances may be taxed based on deemed income (eg, agriculture, mining, and transportation).

The most important aspects regarding the calculation of the taxable basis of first category tax include the following:

  • The calculation of taxable basis (eg, assets, liabilities, equity) is normally adjusted by domestic inflation (based on the consumers price index);

  • Income is generally assessed on an accrued basis;

  • Loss carry-forward and carry-back is not limited;

  • Imported or new fixed tangible assets may be depreciated by one-third of their normal useful life (as defined by the Internal Revenue Service);

  • Inter-company dividend or profit withdrawals between local entities are tax free;

  • A credit against domestic taxes is granted for foreign taxes on some foreign source income, under limited circumstances; and

  • Branches and permanent establishments of foreign entities or persons are subject to corporate tax as local entities.

A special ledger, known as the FUT (Fondo de Utilidades Tributables), must be kept. This keeps track of retained earnings and their corresponding tax situation. Among other things, the ledger contains information on:

  • the amount of retained earnings,

  • whether they are taxable or not;

  • the year in which they were obtained; and

  • the tax credit associated with them.

This information is used to apply taxes upon the distribution of profits to owners, whether the owner is domiciled in Chile or abroad.

Repatriation of Profits

General regime
When withdrawn, distributed or remitted abroad, business income is subject to a 35% additional withholding tax. A taxpayer who is subject to the additional withholding tax is entitled to a tax credit equivalent to the first category tax rate paid on the income withdrawn, distributed or remitted abroad. This credit must be added when computing the taxable basis of the additional withholding tax.

The following example may clarify the way in which Chilean taxes are calculated under the general regime. It is assumed that a local entity earns $100 and decides to distribute all the net profits after first category tax to a foreign owner:


    Taxes paid
Local entity taxable income $100  
First category tax (15% rate) ($15) $15
Net for distribution $85  
Distribution to foreign owner $85  
Additional witholding tax taxable basis    
Net distribution $85  
Plus first category tax paid $15  
Additional witholding tax (35%) ($35)  
Less first category tax paid $15  
Additional witholding tax payable $20 $20
Net distribution after Chilean taxes $65 Total $35

Foreign Investment Law special regime
Foreign investors who enter into a foreign investment contract with the government are subject to the Foreign Investment Statute. As such, they are entitled to agree to a fixed overall income tax rate of 42% for a term of 10 years beginning with the commencement of activities, (instead of the normal tax rates described above). This term may be extended to 20 years for manufacturing and extraction projects valued at over $50 million.

Out of the overall 42% rate, 15% first category tax is paid annually by the company on the same basis as the general regime (ie, on the accrued taxable income).

In turn, foreign investors who are partners or shareholders of the company, and who have agreed on the overall income tax rate of 42%, must pay a 27% additional withholding tax on dividends or distributed profits. By the same token, a branch must pay the same rate on profits withdrawn or remitted to its head office. In these cases, there is no credit against the additional withholding tax.

Foreign investors may waive this right at any time and become subject to the general tax regime, in which case they will be subject to changes in the general tax legislation with the same rights, options and obligations as local investors. The waiver of the fixed rate is irrevocable. Therefore, once made, the taxpayer may not return to fixed rate in the future.

The same example used to explain the general regime is used here to clarify the special regime:


    Taxes Paid
Local entity taxable income $100  
First category tax (15% rate) ($15)  
Net for distribution $85  
Distribution to foreign owner $85  
Additional witholding tax taxable basis    
Net distribution $85  
Plus first category tax paid $15  
Additional witholding tax (27%) ($27) $27
Net distribution after Chilean taxes $58 Total $42

Payments Abroad

While domiciled taxpayers are generally subject to income tax on their worldwide income, non-domiciled individuals or entities are taxed only on their Chilean source income.

According to the Income Tax Law, a person is deemed to be domiciled or resident in Chile if: (i) it may be assumed from his activities that he wishes to permanently stay in the country, or (ii) he spends more than six months in the country in a given year or in two consecutive years.

Although the Income Tax Law does not 'define permanent establishment' with regard to foreign entities, double taxation conventions and the rulings of the Chilean Internal Revenue Service provide some guidelines that are in line with the provisions of the OECD Model Convention.

'Chilean source income' is defined as income arising out of (i) goods or assets located within Chilean territory or (ii) activities performed within Chilean territory.

Payment of Chilean source income to non-domiciled individuals or entities is subject to additional witholding tax. This tax also applies on other remittances or payments from Chile to other countries. Taxes are payable upon payment, remittance or, in general, when money is made available to non-domiciled parties. The obligation to withhold the tax is generally on the person who pays.

The additional withholding tax general rate is 35%, although other tax rates apply in some cases such as the following:

  • interest payments on qualified creditors, with prior authorization of the Central Bank - 4%;

  • technical services - 20%;

  • lease or rent of qualified capital assets - 1.75%;

  • insurance fees, in certain cases - 20%; and

  • reinsurance fees - 2%.

Double taxation conventions executed by Chile contain reductions to or exemptions from these rates.

Capital Gains

As general rule, capital gains arising from assets situated within Chilean territory are considered Chilean source income. They are therefore subject to normal taxation (ie, first category tax and additional withholding tax).

Capital gains arising from the transfer of shares or quotas in a Chilean company are taxable regardless of the domicile of the seller. Capital gains are calculated as the difference between the transfer price and the tax cost of the shares or quotas.

Regarding capital gains arising from the sale of participation in a limited liability company (or other entities other than a stock corporation), the tax basis is equal to the book value of the quotas (except when the transfer is made to a related party). The gains are subject to normal taxation.

In the case of capital gains arising from the transfer of shares in a stock corporation, the tax basis is calculated as the acquisition cost adjusted by the domestic inflation rate. Capital gains calculated in this manner are usually subject to normal taxation. However, when all the following conditions are met, only first category tax (15%) is applicable:

  • The transfer is made between unrelated parties;

  • It is a non-recurrent activity for the seller; and

  • At least one year has elapsed between the acquisition and the sale.

According to a temporary amendment to the Income Tax Law (applicable until 2001), individuals or entities obtaining capital gains in the sale of shares of publicly held Chilean companies may choose to be subject only to corporate tax instead of normal tax, even if the transaction does not meet the second and third element above.

Also, capital gains arising from the disposal of shares acquired prior to 1984 are not subject to taxation if the transfer meets the first and second conditions.

Finally, since 1996 and according to an Internal Revenue Service ruling, tax-free reorganization rules apply to certain transfers of shares that are part of a corporate reorganization. However, among other requirements, the value of the contribution must be equal to the tax basis of the shares.

For further information on this topic please contact Ricardo Escobar or Héctor Lehuedé at Carey y Cía by telephone (+56 2 365 7216) or by fax (+56 2 633 1980) or by e-mail ([email protected] or [email protected]).

The materials contained on this web site are for general information purposes only and are subject to the disclaimer.