Simple Tax Guide for Americans in Chile
US Expat Taxes - Chile
At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and green card holders working in Chile for over 6 years. Our clients hail from all parts of the country - Santiago and Greater Valparaiso, Greater ConcepciÃ³n and Greater La Serena.
As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country.
We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS.
The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.
We have many clients living in Chile and know how to integrate your U.S. taxes into the local income taxes you pay. Any Chilean income tax you already pay can be claimed as against the tax liability on your U.S. return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in Chile for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.
Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax; we look forward to working with you.
Below we include information on the Chilean Tax System for the American Expatriates.
Chile tax rate is progressive from 0% to 40%. This tax rate depends on monthly units of levy (the value of a unit in CLP is revalued each month):
|Taxable Unit||Tax Rate|
|Lower than 13,5 units||0%|
|13,5 - 30 units||10%|
|50 - 70 units||15%|
|70 - 90 units||25%|
|90 - 120 units||32%|
|120 - 150 units||37%|
|Beyond 150 units||40%|
All individuals, domiciled or resident in Chile, are subject to taxes on income whatever its source. Non-domiciled or non-resident individuals in Chile are subject to taxes on their Chilean-source income. For tax purposes, a person is deemed to be nonresident when staying in Chile less than six months in two consecutive tax years.
During the first three years of residence in the country, foreigners who establish domicile or residence in Chile pay income taxes only on their Chilean-source income.
This term may be extended by the tax authorities for an additional three years after which they are taxed on their worldwide income.
All remuneration for personal services as well as income derived from other services is included in gross income. All forms of remuneration are included in taxable salary. The only deduction is for social security contributions.
Such items as reimbursement of travel expenses, housing provided for the sole interest of the employer, moving expenses, and reasonable relocation allowances are considered non taxable income and are excluded from the tax calculation. Such items as cost of living allowance, area allowance, car allowance, vacation travel, and utilities are taxable.
Capital gains of individuals are treated as any normal income, subject to First Category tax and complementary tax. However, certain capital gains, when they do not represent customary operations, or, in other terms, when they are occasional, and provided that the goods or rights have been held at least one-year, are exempt from all taxes up to the restated acquisition price. As an example, if shares were acquired at 100 and, between the acquisition date and the date of selling, there has been a 60% inflation, up to 160 there is no tax whatsoever. Nevertheless, any excess over the restated acquisition price is taxed with the 17% First Category tax as a sole tax. No complementary tax or additional tax is applicable in this case.
Necessary business expenses incurred on behalf of others are reimbursable and exempt from taxes, provided that they are duly proven. Professionals can deduct their effective expenses or standard deduction.
The only deductible non-business expenses are social security contributions, on a voluntary basis where maximum amounts are determined in the same way as it is applicable to employees. (Employees must pay a variable percentage for pension plans of around 12% and 7% for health insurance, applicable on a maximum of up to 60 Development Units (US $ 2,500). On a voluntary basis, employees are allowed to make additional contributions to the pension fund of up to 50 Development Units (US $2,100), also deductible from salaries for tax purposes.)
Tax computation for individuals varies depending on the type of income. Basically, the following categories exist:
(1) Professionals â€“ working as independent consultants must compute all their yearly income less the expenses necessary to produce such income or presumed expense of up to 30% of the annual gross income with a top limit equivalent to 15 yearly tax units (US $ 12,000). They can also deduct the social security contributions with equal caps applicable to employees.
(2) Employees â€“ taxable income is the salary minus social security contributions either mandatory or voluntary (see 'H. Personal tax' above). No other deductions from taxable income are allowed. The tax applicable is the Sole Second Category income tax, mandatorily withheld by the employer on a monthly basis.
(3) Combined income â€“ income received by individuals such as dividends, profits in partnerships or derived from personal business is subject to complementary tax. In the case of dividends and profits distributed by a First Category taxpayer, the individual has a 17% credit originated in the payment of the First Category tax. In the case of employment income, the individual has a credit for the payment of the sole second category income tax.
(4) Professionals and employees domiciled or resident in Chile subject to Sole Second Category tax or Complementary Tax have a credit equivalent to foreign tax levied on their income they have made from countries that have a double taxation treaty with Chile as professionals or employees. There is a cap of 30% on the gross income.
Basis â€“ Residents are taxed on their worldwide income, while nonresidents are taxed only on Chilean-source income. Persons not domiciled or resident in Chile are subject to income tax on services rendered abroad and paid from Chile. Foreigners are taxed on Chilean-source income only during their first 3 years in Chile (although a 3-year extension is permitted). Thereafter, they are subject to taxation on a worldwide basis.
Residence â€“ An individual is resident if he/she remains in Chile for 6 consecutive months in a calendar year or more than 6 months in 2 consecutive tax years. Depending on the circumstances, domicile can be obtained from the first day in the country.
Filing status â€“ Joint filing is generally not permitted; however, spouses married under a community property system must file a joint annual tax return.
Taxable income â€“ Employment income is subject to second category tax, while investment income and profits earned from a business are subject to the global complementary income tax. The first category tax, discussed above, is creditable against the global complementary tax.
Capital gains â€“ Capital gains are generally taxed as ordinary income. Capital gains on the disposal of various assets may be exempt or subject to reduced rates if certain requirements are met.
Tax Deductions and allowances â€“ Individuals may deduct interest paid on a mortgage for the construction or acquisition of a dwelling and pension contributions.
Tax Rates â€“ The individual income tax is charged at progressive rates up to 40% (global category tax).
Other taxes on individuals:
Capital duty â€“ No tax is payable by individuals on their total wealth or value or on certain assets, except for the real estate tax based on the value of property.
Stamp duty â€“ See under "Other taxes on corporations".
Capital acquisitions tax â€“ No
Real property tax â€“ See under "Other taxes on corporations".
Inheritance/estate tax â€“ An inheritance tax is levied on the net value of assets transferred at death.
Net wealth/net worth tax â€“ No
Social security â€“ Employees generally are required to make social security contributions equal to 20% of their monthly remuneration, capped at approximately USD 2,450.
Additionally, compulsory unemployment insurance of 0.6% is payable, subject to a monthly cap of USD 3,670.
Administration and compliance:
Tax year â€“ Calendar year
Filing and payment â€“ An annual income tax return must be filed in April of the year following the close of the tax year, along with the payment of any outstanding tax liability.
Penalties â€“ Penalties apply for late filing, failure to file, underpayment of tax and tax evasion.
Chile Corporate TaxChile corporate tax rates are progressive between 0-40%. There are different tax categories for business income, which are: First category tax, second category tax, complementary tax, additional tax, special tax of Article 21Â° of the income tax law, and specific tax on operational mining income.
The income tax legislation of Chile provides for a scheduler system as follows:
First Category Tax: First Category tax is due on income derived from commercial, industrial and agricultural activities in Chile; mining, fishing and other extractive activities; investment; and real estate. All income not specifically taxed under another category and not tax exempt is included. The tax rate is 17% and affects all taxpayers which carry out these activities. Capital gains are included in gross income subject to First Category tax with certain exceptions which include:
(a) gain on the sale of shares in corporations, provided that the shares have been held at least one year, unless the sales represent customary operations of the taxpayer
(b) sale of mining rights up to the amount represented by the variation in the cost of living index between the date of purchase and that of sale, provided that such transactions do not form part of the taxpayers' normal activities
(c) sale of real estate other than that included in the assets of a taxpayer subject to First Category tax.
Second Category Tax: Second Category gross taxable income refers to that arising from wages, salaries, overtime payments, bonuses, fees, gratuities, profit sharing and any other form of remuneration. It is a progressive tax, the highest of which is 40%, applicable on a monthly basis to the excess of 150 monthly tax units (US$9,950).
Complementary Tax (Impuesto global complementario): This is a progressive tax assessed on individuals resident or domiciled in Chile with respect to income received or withdrawn in the preceding year. Its highest rate is 40%, applicable to the excess of 150 yearly tax units (US$119,400).
Additional Tax (Impuesto adicional): This tax affects, among others, the Chilean-source income withdrawn or remitted abroad to nonresidents or non-domiciled individuals and of companies or juridical entities organised abroad with or without a permanent establishment in Chile in the form of branches, offices, agents or representatives. This tax also affects foreign payments such as royalties, technical assistance and others at different rates.
Special Tax of Article 21Â° of the Income Tax Law: This special tax affects corporations and permanent establishments of non-resident entities. It is applied with a 35% rate on all the amounts that are disallowed as an expense, when they represent disallowed actual disbursements or withdrawals of assets, regardless of the way in which they may have been accounted for.
Specific Tax on Operational Mining Income: From 2006, there will be a specific tax on the operational income of the mining activity obtained by a mining operator. This progressive tax rate ranges from 0.5%, if the value of the annual sales exceeds the amount equivalent of over 12,000 metric tons of fine copper, up to a 5% sole fixed rate if the annual sales exceed the value of 50,000 metric tons. The operational taxable income on which this tax is applied is determined in a special way. Certain expenses such as losses from past periods, accelerated depreciation of fixed assets, etc are not allowed for this purpose.
Residence â€“ A corporation is resident if it is incorporated in Chile.
Basis â€“ Companies resident in Chile pay Chilean tax on a worldwide basis.
Nonresidents pay tax on their Chilean-source income. Remuneration paid to nonresidents for services rendered abroad also are subject to Chilean income tax.
Taxable income â€“ Taxable income is defined as gross income from worldwide sources and is calculated by deducting the direct costs of goods and services and necessary expenses incurred in earning income.
Taxation of dividends â€“ Distributions of profits between Chilean entities are not subject to income tax. Profits distributed to Chilean individual residents are subject to a global complementary tax of 0%-40%, against which the corporate level tax may be used as a credit.
Capital gains â€“ Capital gains are generally taxed as ordinary income. Capital gains on the disposal of certain assets may be exempt from tax or subject to reduced rates if certain requirements are met.
Losses â€“ Tax losses may be carried forward and back indefinitely. Tax losses are nontransferable and may be used only by the taxpayer that incurred the losses.
Tax Rate â€“ Corporate income tax is imposed at a rate of 17% (first category tax).
Surtax â€“ In addition to the 17% corporate tax, an entity must pay a tax (either the global complementary tax for individual residents or the additional withholding tax for nonresident entities and individuals) upon the distribution of profits.
Alternative minimum tax â€“ No
Foreign tax credit â€“ Income taxes paid on dividends received from abroad by a Chilean entity may be credited against Chilean income taxes capped at 30% (17% cap when profits are received from a branch abroad).
Participation exemption â€“ A special regime exists for Chilean publicly traded stock corporations and closely held stock corporations that voluntarily submit to the supervision of the Chilean SEC and that meet the requirements stated by law. Such entities are deemed not to be Chilean resident for all income tax purposes and, therefore, are exempt from tax on any foreign income received. Dividends paid to shareholders that are not resident or domiciled in Chile are exempt from withholding tax.
Holding company regime â€“ See under "Participation exemption".
Incentives â€“ Preferential tax regimes are available for businesses operating in specific regions and/or carrying out specific activities.
Dividends â€“ Profits repatriated to a parent company abroad are subject to a 35% "additional" tax against which the 17% first category tax paid at the corporate level may be used as a credit.
Interest â€“ Interest is subject to a 35% withholding tax on the gross amount. A 4% reduced tax rate applies, inter alia, to interest on loans granted by foreign banks and financial institutions, provided the lender and borrower are unrelated; thin capitalisation rules must be observed if the parties are related.
Royalties â€“ Royalty payments for the use, enjoyment and exploitation of trademarks, patents, formulas and other similar services are subject to a 30% withholding tax.
Payments for the use, enjoyment or exploitation of invention patents, useful models, industrial designs and drawings, blueprints or topography of integrated circuits, and of new vegetable varieties, are subject to a 15% withholding tax. The 15% rate also applies to payments for the use, enjoyment and exploitation of computer programs. The rate increases to 30% if the parties are related and/or if the beneficiary is resident in a tax haven jurisdiction, as provided on a list issued by the Chilean Treasury Ministry.
Branch remittance tax â€“ A 35% additional withholding tax applies to a remittance of profits (the 17% first category tax paid at the branch level may be used as a credit).
Other taxes on corporations:
Capital duty â€“ While there is no taxable event upon the incorporation of a company, business entities must pay an annual municipal license fee. The fee ranges from 0.25% to 0.5% on tax equity, up to a maximum of approximately USD 462,000.
Payroll tax â€“ No
Real property tax â€“ Real estate tax is imposed at an annual rate of 1.4% on urban property, 1% on rural property and 1.2% on the cadastral value of a dwelling.
Social security â€“ Employers must make the following contributions for social security: (1) a monthly 0.95% premium on remuneration (capped at a floating amount) for labourrelated accident insurance; (2) additional contributions that vary according to the risk of the employment activity at rates up to a maximum of 3.4%; (3) a 2.4% compulsory unemployment insurance, subject to a monthly cap of approximately USD 3,670; and (4) a 1.87% premium for survival and disability insurance. As from July 2008, (4) applies only for employers that have more than 100 employees but will be mandatory for all employers as from July 2011.
Stamp duty â€“ Foreign loans are subject to a stamp tax, regardless of documentation. The rate is 0.1% for each month or fraction thereof, between disbursement and maturity, capped at 1.2%. Additionally, loans payable on demand or without maturity are subject to a 0.5% tax. For 2009, the stamp tax rates were reduced to "0%," and, for the first half of 2010, the rate is 50% of the normal rate.
Transfer tax â€“ No
Other â€“ A tax on nondeductible expenses is applicable at a rate of 35% in the case of corporations. Disallowed expenses in limited liability partnerships are considered profit withdrawals.
Transfer pricing â€“ The tax authorities may challenge and reassess transfer prices between related parties where the terms and conditions of transactions are not conducted at arm's length. Advance rulings may not be obtained and transfer pricing studies are not mandatory.
Thin capitalisation â€“ Thin capitalisation rules apply to related party loans that are entitled to the reduced 4% tax rate on interest paid abroad.
Controlled foreign companies â€“ No
Other â€“ No
Disclosure requirements â€“ No
Administration and compliance:
Tax year â€“ Calendar year
Consolidated returns â€“ Chilean entities may not file consolidated returns, although some de facto consolidation methods exist.
Tax Filing requirements â€“ Under Chile's selfassessment procedure, a tax return must be filed by April of the year following the tax year.
Tax Penalties â€“ Penalties apply for late filing, failure to file, underpayment of tax and tax evasion.
Rulings â€“ Guidance may be obtained from the tax authorities on the tax consequences of a planned transaction.
Chile VAT rates (Value Added Tax)Standard rate of VAT in Chile is 19%.
Reduced VAT rates: Reduced VAT rates are exempted of VAT exports, certain financial services, insurance, news services, technical services, consultancy and transport.
For imports, the taxable basis is the customs value or CIF value, including customs duties. Certain capital goods forming part of capital contributions may be exempt from tax. Import of raw materials used in the production, processing or manufacturing of goods for export may be exempt from VAT, subject to approval by the Internal Revenue Service.
The value of services rendered plus finance charges, etc are generally subject to VAT.
Exports of all products are exempt for purposes of VAT. VAT paid on imports and on local sales and services may be deducted from VAT surcharged on sales or services rendered.
VAT paid on importation and on acquisition or services received, when accessory to operations exempt from VAT (unless they are exports) or not related directly to the activities of the seller, is not recoverable.