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Compared to other South American countries, Chile has an clever and simple tax system that is investor-friendly.
At just 20%, Chile has one of the lowest and most user-friendly corporate tax rates in Latin America. And Chile’s tax structure recognizes several benefits and advantages for foreign investors.
The Chilean corporate tax rate has been increased temporarily to 20% from 17% to fund reconstruction following the February 2010 earthquake. Under current law, the tax rate will return to 17% in 2013 (18.5% in 2012), but it is likely the 20% rate will be maintained for a more years.
“Our tax system considers a low corporate tax rate of 20% as long as the profits are not distributed to Chilean individual residents or non-resident individual or corporate owners,” explains Francisco Lyon, Lead Tax and Legal Partner at KPMG Chile.
If profits are distributed to non-resident entities or individuals the final taxation applicable to those distributions will be the withholding tax (called Impuesto Adicional) with a general tax rate of 35%, but using the corporate tax paid as a credit.
“Our tax system allows unlimited carry-back and carry-forward of tax losses,” Lyon explains. “Together with the tax-free distributions of profits or dividends between Chilean entities, this allows a sort of tax consolidation when structuring a group of companies properly, given the possibility of recovering the corporate tax paid in previous years on the undistributed profits absorbed by current or future losses, and to stop paying taxes until the tax result of the company is reverted to a net operating tax profit in the future.”
Chile offers several tax advantages to foreign investors. For example, foreign investors who are planning to invest more than $5 million in the country can enter into an agreement with the Chilean government under the Decree Law 600. This guarantees nondiscrimination for the foreign investor and the right to repatriate the amount of capital originally invested at least one year after the investment was made and to repatriate profits at any time.
The foreign investor also can elect for income tax stability for a ten-year period, although with an aggregate 42% rate of income tax instead of the normal 35% rate. In any case, at any time the foreign investor can forfeit their income tax stability and become subject to the income tax in effect at that time.
Decree Law 600 also provides tax stability with respect to VAT and customs duties applicable to the import of machinery and equipment not manufactured in the country. It also provides tax stability for mining investments of $50 million or more and an alternative method for calculating capital gains subject to tax in Chile when the investment is sold.
Foreign investors who establish their business center in Chile to invest in other countries can use special investment vehicles called Investment Platforms. These are considered as a foreign legal entity for tax purposes and so are subject to taxation in Chile only on their Chilean source income, not on investments made outside Chile.
Investment platforms are not very popular because more significant advantages can be achieved using a regularly taxed company to invest outside of Chile, including access to the largest tax treaty network in the region and the inexistence of anti-deferral or CFCtype legislation.
Chile has one of the most extensive tax treaty networks in the region. As of October 2011, there were 24 double taxation treaties. Treaties with the US, Russia and Australia have been signed but are not yet in force.
Other tax advantages are offered for investments made in extreme regions of the country and to promote R&D. Chile offers a credit against the corporate income tax equal to 35% of the payments made under R&D contracts signed with an eligible external R&D centre with certain caps.
Chile also has a flat 6% customs duty and free trade agreements with 58 countries. Regardless of the country of origin, capital assets meeting certain requirements may be imported into Chile with no customs duties.
Investors at the door
Many factors account for the recent growth in foreign direct investment.
Chile is experiencing a dramatic rise in foreign direct investment. Inbound FDI into Chile amounted to nearly $13 billion in 2009, illustrating the country’s ability to pull beyond its weight. Brazil, a country almost 10 times Chile’s size in terms of GDP, attracts only about twice the FDI amount annually.
“There are several growth factors,” explains Liliana Machiavello, head of Cinver, the Chilean investment agency. “Joining the OECD is one factor since this sends a signal of stability, financial transparency, and orientation toward the global economies.”
Chile’s tax advantages have also contributed to the growth in FDI, but according to Juan Cornejo of KPMG the key success factor for foreign investors in Chile is good returns on investment.
“Repeat investors account for a large portion of investment,” Cornejo says. “Once a company has had a taste of Chile, it wants more. The good returns can be explained by our stability, our good workforce and the overall growth in Chile.”
FDI growth also stems from the 2010 earthquake which created strong demand for infrastructure projects to replace residential and commercial real estate, transport infrastructure and the like.
Another factor is mining which is attracting significant foreign investment. “For the 2009-2017 period we expect investments of roughly $45.4 billion, and much of this is from international mining giants,” says Danilo Torres of Sonami, the Chliean mining association.