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Taxation Of Royalties In Chile – How To Get It Right?

Author:Mr Miguel Guerrero Fuentealba
Profession:Harris Gomez Group
 
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We often find that there is no clear understanding of the definition and extension of the term royalty. 
 Generally speaking, a royalty is any payment made due to the use of any kind of intellectual property.

Chilean Income Law does not define what a royalty is, however, it gives examples or describes the burden of withholding tax for each case, distinguishing different tax rates, as follows:

Royalty payments for the use, enjoyment and exploitation of trademarks, patents, formulas, and other similar services are subject to, without any deductions allowed, up to a 30% WHT. Payments for the use, enjoyment or exploitation of patents, utility models, industrial designs and drawings, blueprints or topography of integrated circuits, and of new vegetable varieties, in accordance to the definitions and specifications indicated in our Industrial Property Law and in the statute which regulates the rights to new vegetable varieties, as the case may be, are subject to, without any deductions allowed, up to a 15% WHT. Payments for the use, enjoyment and exploitation of computer programs, are subject to, without any deductions allowed, up to a 15% WHT. However, licenses for standard software are exempt of WHT. In addition, and considering the privileged tax rate for royalties (usually the WHT has a 35% tax rate), Chilean legislation has imposed a limit on the amount of accepted expenses due to royalty payments.

This cap is up to 4% of the payer's gross revenues when payments are made to a non- resident party deemed related. Nevertheless, the 4% limit does not apply if the royalty paid to the related party is subject to a tax rate equal or greater than 30% in the country of residence of said party.

The definition of "royalty", for tax purposes, broadens the legal concept of a royalty substantially to ensure more withholding tax income for the source country; this is the country in which such royalties are used in opposition to the country where the IP was created.

Generally, the definition of royalties for taxation purposes contains ''all cross border payments" under whatever name and in whatever form, for:

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