Tax Guide for US Expats Living and Working in Chile
Who Is Liable For Income Taxes In Chile
All individuals domiciled or resident in Chile are subject to personal income tax on their worldwide income. However, during their first three years of residence, foreign nationals are subject to tax on Chilean-source income only. Nonresidents are taxed on Chilean-source income only.
Income earned for services rendered in Chile or for activities performed in the country is considered to be Chilean-source income, regardless of where it is paid.
A person present in Chile for longer than six months in one calendar year or for longer than a total of six months within two consecutive assessment years is considered a resident of Chile.
Domicile is defined as residence in a particular place with the intention of staying there. The intention is proved through facts and circumstances, including employment within the country or moving one’s family into the country.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Taxable employment income includes any kind of remuneration received under an employment contract, including entertainment expenses. However, board and lodging provided to workers for the employer’s convenience are tax exempt. Legal family allowance payments, social security benefits established by law and severance payments within certain limitations are not included in taxable income.
Scholarships provided by employers to their employees or their employees’ children are not taxable.
Self-employment income. Personal income tax, which is imposed at progressive rates ranging from 0% to 40%, must be paid on income withdrawn from business enterprises. The business enterprises are subject to the First Category Tax. The rates of this tax are 20% for 2011, 18.5% for 2012 and 17% for 2013 and future years. However, individuals who are subject to personal income tax at progressive rates ranging from 0% to 40% receive a credit equal to the amount of the First Category Tax paid on the income by the enterprise. Income earned by professionals and independent workers, minus deductions for actual or deemed expenses, is also subject to personal income tax, which is imposed annually at progressive rates ranging from 0% to 40%.
Income and expenses are subject to a monetary correction based on the change in the Consumer Price Index (inflation index) between the month prior to the collection or disbursement and the month preceding the financial year-end.
Individuals and small partnerships engaged in agriculture, mining, land transportation and certain other activities are entitled to special tax benefits for small taxpayers, which includes paying tax on deemed income if gross income does not exceed a specified amount.
Investment income. Shareholders receiving dividends from Chilean corporations are entitled to a credit equal to the First Category Tax paid by the corporation. The dividends are then aggregated with other non-compensation income and taxed as personal income, along with interest derived from the following sources:
- Demand deposits or time deposits in cash
- Bonds, debentures or other debt instruments, unless otherwise provided by international agreement.
Income derived from rentals and royalties is included in taxable income and is subject to personal income tax.
Directors’ fees. Directors’ fees are taxed in the same manner as professional income, without deduction of actual or deemed expenses.
Taxation of employer-provided stock options. Chilean tax laws do not specifically address the taxation of employer-provided stock options. Employees are taxed on stock options at the time of exercise if the spread is financed in whole or in part by the employer, whether Chilean or foreign. The spread is taxed as compensation income. In addition, a gain derived from the sale of shares of a foreign corporation is subject to regular income tax, while a gain derived from the sale of shares of a Chilean corporation may be subject to the First Category Tax as a final tax. However, if the transaction occurs one year or less after the acquisition date of the shares, the sale may be nontaxable.
Capital gains. Capital gains derived from sales of personal property, including automobiles and household furniture, not used in connection with a trade or business, are exempt from tax. Gains derived from sales of real estate not used in connection with a trade or business are also exempt, unless the transactions are considered habitual or the property is held for less than one year before its transfer. Gains derived from transfers of personal property and real property used in a trade or business are treated as ordinary income and are subject to tax at the regular rates.
Capital gains derived from sales of shares and other investments are subject to the First Category Tax as a final tax if the transactions are not habitual and not between related parties.
Deductions
Personal deductions and allowances. Individuals may deduct from taxable income social security contributions paid, up to certain limits. In addition, the amount invested during the year in certain financial instruments may be partially credited against the final tax. Subject to certain limitations, amounts invested in pension or insurance funds may be fully deductible from taxable income. Mortgage interest paid may be deducted from the tax base, subject to certain limitations.
Business deductions. Deductible expenses consist of expenses necessary to produce taxable income. Instead of accounting for actual expenses, individual professionals and independent workers may take a standard deduction equivalent to 30% of gross income, limited to 15 Annual Tax Units.
Relief for losses. Business losses of a self-employed person must first be carried back. To the extent the loss exceeds profits from prior years, the unused portion of the loss may be carried forward indefinitely. Individuals who are not self-employed or engaged in their own business may offset investment losses against investment profits in the same year.
B. Estate and gift tax
Estate and gift tax is a unified tax, assessed in accordance with rates and brackets expressed in ATUs (see Section A). Residents are subject to estate and gift tax on worldwide assets. Nonresidents are subject to estate and gift tax on assets located in Chile only.
Estate tax paid abroad may be credited against Chilean tax. A zero rate applies to the first 50 ATUs transferred from an estate to close relatives, including a spouse or children. Only five ATUs are subject to the zero rate if assets are transferred to other beneficiaries.
C. Social security
Employers pay a basic contribution of 0.95% and an additional contribution ranging from 0% to 3.9% on payroll to cover accident insurance for employment activities considered risky. These contributions are paid on salaries up to a maximum of U.F. 66 for 2011 (for details regarding the U.F., see below). This amount is adjusted on a yearly basis.
Social security contributions covering healthcare institutions and pension funds are paid by employees at a basic rate of 20% (7% for healthcare institutions and approximately 13% for pension funds) on salaries up to a maximum of U.F. 66 for 2011. However, under a recent modification of the law, approximately 1.42% of this contribution, corresponding to disability and survival insurance, is borne by the employer instead of the employee. For companies with over 100 employees, this change took effect on 1 July 2009. For other companies, it will be effective from 1 July 2011. A recent modification to the law established an annual adjustment mechanism for the applicable wage ceiling. For 2011, the wage ceiling is fixed at U.F. 66 (approximately US$2,560). The U.F. is an inflation-indexed unit expressed in Chilean pesos that varies according to the consumer price index.
The contributions described above are withheld and remitted by employers on a monthly basis. In addition, employees may contribute voluntarily in excess of the ceiling to individual pension funds or health insurance. Voluntary contributions are entitled to the same tax benefits as required contributions, up to certain limits.
Another mandatory social security contribution relates to unemployment insurance, which is financed by employers, employees and the government. For employees hired indefinitely, the contribution rates are 2.4% for employers and 0.6% for employees, with a salary ceiling of U.F. 99 for 2011 (approximately US$3,840) per month. This amount is also adjusted on an annual basis. For fixed-term employees, the contribution is 3%, which is borne entirely by the employer.
To provide relief from paying double social security contributions and to assure benefit coverage, Chile exempts foreign nationals from paying social security contributions in Chile if they are technical or professional employees covered under a similar social security system in their home country. However, this exemption does not apply to unemployment insurance and accident insurance. Recently passed legislation introduced an obligation to make social security contributions for independent workers. However, this measure is not yet in effect. Under prior law, social security contributions had been mandatory for dependent employees only.
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We have been preparing US income tax returns for US Citizens and permanent residents living in Chile for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Chile and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US 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 Chile tax fiscal year for US tax purposes). You must 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 forms 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.
There are certain times you may wish to make elections with respect to your Chile Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in Chile, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Chile.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email