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Chile – Tax Reform Modifies Top Marginal Rates, Tax Residence Definition

Chile – Tax Reform Modifies Top Marginal Rates, Tax Res

Chilean tax reforms have brought changes to the top marginal income tax rate of the Second Category Tax and the top marginal income tax rate of the Complementary Global Tax. In addition, a new tax has been created for individual taxpayers who own real estate property located in Chile, and the definition of tax residence has been modified. The tax reform has already entered into force for certain matters starting January 1, 2020.

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Chilean tax reforms have brought changes to the top marginal income tax rate of the Second Category Tax and the top marginal income tax rate of the Complementary Global Tax.  In addition, a new tax has been created for individual taxpayers who own real estate property located in Chile, and the definition of tax residence has been modified.

Following the Chilean legislature’s ratification of the tax reform project (Law 21,210),1 it  was published in the Chilean Official Gazette on February 24, 2020. 

Below we summarize the main changes applicable to the taxation of individual taxpayers in Chile that may have an impact on Chilean and foreign employees.

WHY THIS MATTERS

The new marginal tax rates may increase the tax burden on assignees who are subject to Chilean tax law and augment employers’ tax-related costs for assignments to/from Chile.  However, the impact of these changes on taxpayers should be determined considering their particular facts and circumstances.

International assignment cost projections and budgeting for assignees being sent to Chile and for assignees outside Chile but still subject to Chilean taxation should take into account the changes described in this newsletter.  Moreover, employers should take note of the changes and address their payroll requirements and update, where appropriate, hypothetical tax calculations for tax-equalized assignees.

Main Measures Affecting Individuals

As follows, we highlight the modifications introduced in Law 21,210 relating to individual income tax:

  • Increase of the top marginal income tax rate of the Second Category Tax (Employment Withholding Tax applicable for tax residents in Chile) to 40 percent.  This is an increase from the previous top marginal income tax of 35 percent which was in effect until February 29.  This increase in the top income tax rate is applicable to compensation paid from March 1, 2020 on, and it applies to monthly income higher than approximately CLP 15,500,000 (approx. USD 18,700).
  • Increase in the top marginal income tax rate of the Complementary Global Tax (Annual Income Tax applicable for tax residents in Chile on the annual income tax return) to 40 percent.  This change is effective for calendar year 2020. The top income tax rate of 40 percent tax rate is applicable to annual income higher than approximately CLP 186,000,000 (approx. USD 225,000).
  • The definition of tax residence has been modified. Under the revised definition, any person who remains in Chile, consecutively or not, for a period or periods that in total exceed 183 days, within any 12-month period, will be considered as resident for tax purposes.  Until December 31, 2019, the Chilean Tax Code established that tax residence was acquired when an individual remained in Chile for more than six consecutive months in a calendar year or more than six months in total within two consecutive tax years.  The purpose of this change is to match the OECD tax residence definition and thereby foster consistency when determining tax residence between different countries.
  • A new tax is created for individual taxpayers (regardless of Chilean tax residency) who own real estate property located in Chile exceeding CLP 400,000,000 (approx. USD 485,000).  For purposes of the threshold, the value of the property is based on the tax-assessed value determined by the Chilean Internal Revenue Service (Servicio de Impuestos Internos or “IRS”).  The tax will be applied based on three tax brackets that vary from:
    • 0.075 percent for those real estate properties with a tax assessed value between CLP 400 million to CLP 700 million (approx. USD 485,000 to USD 846,000);
    • 0.15 percent for real estate property with a tax assessed value between CLP 700 million and CLP 900 million (approx. USD 846,000 to USD 1,088,000); and
    • a final tax bracket of 0.275 percent for those real estate properties with a tax assessed value over CLP 900 million (approx. USD 1,088,000).

This tax will be added to the ordinary real estate tax that is payable on a quarterly basis and applies from January 1, 2020 on.

  • The Chilean IRS has eliminated the option to paper file with banks the monthly income tax return (Form 50).  As such, the only option now available to file said Form 50 would be electronically through the taxpayer’s personal Chilean IRS website.  Based on Chilean law, this revision would take effect starting with the month after the regulation has been published in the Chilean Official Gazette, which has not yet occurred.  

KPMG NOTE

Filing Form 50 with Banks

As this change may affect some of our taxpayers, the KPMG International member firm in Chile is in the process of obtaining further information from the Chilean IRS regarding this revision.

Tax Reforms’ Entry into Force and Next Steps

Finally, we want to emphasize that this tax reform has already entered into force for certain matters starting January 1, 2020; therefore, in the case of the new top marginal income tax rate of the Second Category Tax this change is retroactive to January 2020.  Furthermore, it is understood that any short-fall in tax due as a result of the application of the new top marginal income tax rate will be paid through the 2020 Chilean Annual Income Tax Return which will be filed in April 2021.

FOOTNOTE

1  Ley Núm. 21.210 (Ley de Modernización Tributaria) published in the Diario Oficial Núm. 42.587 (24 de Febrero de 2020).

 

CLP 1 = USD 0.0012

CLP 1 = EUR 0.00108

CLP 1 = GBP 0.00096

CLP 1 = ARS 0.0753  

The information contained in this newsletter was submitted by the KPMG International member firm in Chile.

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