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Chile Update: Government Launches New Economic Stimulus

We have previously wrote that the Chilean Government was considering an economic stimulus. As of September 2nd,  the Chilean government published Law No. 21.256 in which it approved and launched the new economic tax measures to inject liquidity into the markets, aiming to assist companies through the COVID-19 pandemic.

Some of the main points of the stimulus are:

THE FIRST CATEGORY TAX FOR SME´S IS REDUCED FOR THE YEARS 2020, 2021, & 2022.

The new stimulus measures introduced by Law No. 21.256, temporarily decreases the First Category Tax (corporate tax) for the companies under the Pro-SME Regime from 25% to 10% for the income obtained during the commercial years 2020, 2021 and 2022. For taxpayers benefiting from this rule, the rate of monthly provisional payments (PPM) of the First Category Tax that they must pay will also be reduced by half, with respect to fiscal years 2020, 2021 and 2022.

As a reminder, all companies that meet the following requirements may opt for the SMEs regime:

  • Their gross income for the previous 3 years must not overcome 75,000 UF (approximately USD $2,787,000), being able to exceed that amount only once but in no case beyond 85,000 UF (approximately USD $3,159,000). For such purpose, said average earnings includes the incomes of its related entities.
  • At the time of starting up its activities, the company’s capital must not exceed 85,000 UF (approximately USD $3,159,000).

Currently, those companies available to opt for the SME regime can request the Chilean tax office to join this regime until September 30th, 2020.

REFUND OF ACCUMULATED VAT TAX CREDIT FOR SME´s.

Law No.21256 established a refund of the tax credit VAT borne by SME´s in the acquisition of goods or use of services between July and September 2020. Six cumulative requirements must necessarily be met: 

  • To maintain an accumulated VAT credit balance as of June 2020; 
  • The SME’s income must have decreased as a result of the crisis that the country is going through, by a percentage equal to or greater than 30% of its sales.
  • The SME must have kept compliance with certain tax regulations, mainly concerning crimes or administrative offenses, and keeping minimum facilities for the development of the company’s business.
  • The SME must have submitted its VAT affidavits in the previous 36 monthly periods.
  • The operations related to the tax credit must have been properly registered within the Company’s Purchase and Sales Registry.
  • The SME must not have a tax debt unless they are complying with a payment agreement before the Chilean Treasury.

This benefit can be requested only once by applying before the tax office. If it is approved, the refund will be made within 10 days.

EXTENDED VAT PAYMENT POSTPONEMENT FOR SME´s.

Law No. 21.256 allows SME’s to postpone the monthly VAT payment, up to three months from the original payment date, to the extent that the company complies with the following requirements: 

  • The SME must be enrolled to the IRS’s electronic notice system, unless the company develops its business in geographic locations that lack internet coverage or telecommunications. 
  • The SME must not have a VAT or Income Tax debt, unless they are complying with a payment agreement before the Chilean Treasury. For this purpose, it will be considered as tax default if the company owes at least three months of VAT within the previous 36 months, or if owes an entire year of income tax within the same timeframe.
  • The SME must have submitted its VAT affidavits for the previous 36 monthly periods. It also must have submitted its annual Income tax affidavits for the previous 3 tax years.

It must be noted that this benefit is independent of a similar benefit, in which companies were allowed to pay the VAT in 6 or 12 monthly installments. Our previous blog entries explain in detail such tax measures.

EXTENSION OF INSTANTANEOUS DEPRECIATION OF 100% UNTIL DECEMBER 31, 2022.

For those companies subject to the General Tax Regime, a temporary benefit of 50% instantaneous depreciation was incorporated for investment in fixed assets for new investment projects, whether new or imported, between October 1st, 2019, and May 31st, 2020. The remaining 50%, can be depreciated in accordance with the general rules of depreciation. In addition, a 100% instantaneous depreciation was also incorporated for investments made in fixed assets in the Araucanía Region.

For those companies subject to the General Tax Regime, it was established a temporary benefit of instantaneous depreciation to 100% for all investments in new or imported fixed assets (not related to new investment projects), made throughout the country, and until December 31st, 2022. This will allow taxpayers to reduce, for tax purposes, the total value of the assets in the same year in which they are acquired. 

Finally, it is considered a regime of instantaneous amortization in respect of certain intangible assets that are protected under the industrial property law (such as acquisition of licenses on industrial equipment, hardware, models, etc.), copyright (such as software, data bases, etc.) and new plant varieties, thus recognizing the various forms of investment and technological development that account for an increasingly digitalized Chilean economy. 

TAX RESOURCES WILL BE ALLOCATED FOR THE REGIONAL CONTRIBUTION OF 1% FOR PROJECTS INITIATED UNTIL 2021.

With the purpose of reactivating large projects, tax resources will be allocated to pay the 1% regional contribution accrued with respect to projects that are subject to the Environmental Impact Assessment until December 31, 2021, provided that the execution of the works is started within a period not exceeding 3 years from the date of obtaining a favourable environmental qualification resolution.

These projects will thus be free of the 1% regional contribution, which will be financed with treasury resources. A transitory change is generated with respect to the person obliged to pay this contribution, who in accordance with the previous Law No. 21,210 on tax modernization had established that this contribution was to be paid by the taxpayer who submitted an investment project to the Environmental Assessment Service.

POSTPONEMENT OF THE ELECTRONIC RECEIPTS

It is extended the term for the mandatory implementation of sales and services receipts in electronic format, up to January 1st, 2021.

CONCLUSION:

The above said changes to the tax laws will be extremely beneficial for companies who have faced a difficult year.

The reduction of the corporate tax (first category tax), the VAT Refund, and postponement will benefit a wide range of companies. The goal is to free up cash for companies to invest, hire workers, and stay afloat through this difficult period. It will also reduce the amount of tax prepaid each month (PPM) which will again help free up cash for companies to spend in other areas.

The 100% instant depreciation and non-payment of regional contributions will encourage large investments. These benefits will be highly regarded and useful for companies. It will encourage investments to be made now rather than being put off for future years for those companies that take advantage of these changes.

To better understand how or if these measures can be beneficial to your business, please contact Cody McFarlane at cmm@hgomezgroup.com

Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. We also have legal teams in Mexico, Peru, Ecuador, Brazil, and Argentina. Over the last 19 years, our team of English speaking Lawyers and Attorneys have been supporting foreign companies with their growth in Latin America. Many of our clients are technology companies, service providers and engineering companies that focus on the mining, energy and infrastructure markets.