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Chilean Tax Memo – Hurry Up And Choose Your Tax System!

Author:Mr Cody Mcfarlane
Profession:Harris Gomez Group

Recently, the Chilean Tax Office has sent several letters reminding taxpayers that starting in 2017, two general tax systems will come into force instead of one, as we know today.

The Old System

The Chilean tax system that is currently in force until the end of year 2016 is based on the integration of the corporate taxation with the final taxation on shareholders' of these companies.

The corporate tax is triggered on an accrual basis, and then, once profit is withdrawn or paid to partners or shareholders, either in Chile or abroad, income is taxed on a second level equivalent to personal taxation either with Withholding Tax (WHT) for non residents or Global Complementary Tax (supplementary tax or surtax) for Chilean residents. The corporate tax is used as credit against this final tax resulting in the final taxpayer only paying the difference.

Therefore, the income that has being accrued but has not actually been paid, either as dividends or withdrawals to the shareholders of companies, both in Chile or abroad, is taxable only for the corporate tax (First Category Tax) at a current rate of 24% for the tax year 2016.

The purpose of the current system is to incentives reinvesting profits or income back into the company so that the owners do not cash out profit. As long as they do not distribute dividends, they do not pay the final taxation or in the case of non-residents, which may be legal entities or persons a WHT (Withholding Tax) of 35%.

The New System

The tax reform has two new general tax systems that will come into force starting January 1st of 2017.

1) System A, also known as "Attributed Tax Regime": Companies will be taxed with a 25% corporate tax rate for all taxable income accrued, which will be immediately and automatically allocated or "attributed" to their owners/shareholders, with a final taxation of 35% on the top threshold bracket, Chilean residents or not. Non-residents will pay a total tax of 25% no matter if they have a Treaty to Avoid Double Taxation (DTA) or not.

The major difference is that unlike today, final taxpayers will pay final taxation whether they cash out dividends or not as they pay on accrued (attributed) or cash basis, what ever occurs first, so, if they are non-residents they will pay the 35% on withholding tax (WHT) every year even if no dividends were actually received in cash.

2) System B, also known as "Partially Integrated Regime": Companies will be taxed with a 27% corporate tax rate for all taxable income accrued...

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