Bill that reduces or eliminates tax exemptions

Yesterday, January 26th, 2022, the Chamber of Deputies unanimously approved the bills that create the Universal Guaranteed Pension (PGU) and the one that seeks its financing through the reduction or elimination of tax exemptions (the ” Project”), thus leaving the initiative ready to become law.

Although several of the indications proposed by the Executive were incorporated, the Project finally approved by the Chamber of Deputies contemplates the following:

1. Single Tax of 10% on capital gains in instruments with a stock market presence – Article 107 of the Income Law (“LIR”)

Capital gains arising from the transfer of instruments with a high stock market presence will be taxed with a single tax rate of 10%.

To determine the highest value, taxpayers with domicile or residence in Chile may consider as acquisition and/or contribution value, at their choice: (i) the official closing price of the securities as of December 31st of the year of their acquisition, starting with the oldest, and without contemplating any type of readjustment, (ii) the acquisition value in accordance with the general rules of the LIR, or (iii) the official closing price of the security as of December 31st, 2021.

Taxpayers without domicile or residence in Chile may only use as cost the acquisition value according to the general rules and the single tax will be withheld by the purchaser, stockbroker or securities agent acting on behalf of the seller at the time the sale price is paid. If the withholding agent does not have sufficient information to determine the tax, he must withhold 1% of the sale price.

2. Inheritance tax for life insurance

The sums that the beneficiaries of life insurance are entitled to receive on the occasion of the death of the insured will be affected by the Inheritance Tax. This will apply to life insurance contracts concluded since the publication of the Project in the Official Gazette.

However, the disability and survival insurance established in Decree Law No. 3,500 of 1980 will continue to be exempt from Inheritance Tax.

3. Increase in the marginal rate of the highest section of the territorial tax surcharge

Law No. 21,210 on Tax Modernization incorporated a territorial tax surcharge, which applies to taxpayers who have properties whose fiscal appraisals, in total, exceed 670 UTA (approximately 400 million pesos). As of January 1st, 2023, the marginal rate, which applies to the highest tax bracket, is increased from 0.275% to 0.425%.

4. Elimination of benefits of DFL 2 dwellings acquired before the year 2010

Properties acquired by natural and legal persons prior to 2010 were not subject to the limit of two properties that could benefit from DFL 2. However, as of January 1st, 2023, the tax benefits for all legal persons are eliminated and for natural persons regarding the third home onwards, regardless of its date of acquisition.

5. Reduction and subsequent elimination of the special VAT credit for construction companies.

The benefit that construction companies have of deducting from the amount of their PPM (i) 65% of the VAT debit that they must determine on the sale of homes, whose value does not exceed UF 2,000 (with a limit of UF 225 per home) is eliminated, and (ii) 12.35% of the value of sales of VAT-exempt homes acquired by beneficiaries of housing subsidies.

This applies to real estate construction contracts entered into and sales made as of January 1st, 2025. During the years 2023 and 2024, the benefits will remain in force, but with rates of 32.5% and 6.175% of the sale value, respectively.

6. Affectation with VAT to the provision of services

As of January 1st, 2023, as a general rule, all services will be subject to VAT, unless they are expressly exempt such as education, health, transportation services, those taxpayers who issue fee tickets and professional societies. With this modification, professional services, technical advice and consultancies will be taxed with VAT.

7. Elimination of the credit for investments in fixed assets for large companies established in article 33 bis of the LIR

Article 33 bis of the LIR grants a credit against the first category tax of 6% to 4% of the value of fixed assets acquired new, completed or leased with a purchase option during the year. As of January 1st, 2023, the credit for taxpayers whose average annual sales of the last three years exceed 100,000 UF is eliminated.

8. Approval of the tax treatment of financial leasing contracts to their accounting financial treatment

The tax treatment of financial leasing (until now treated as a lease with purchase option) is equal to its accounting financial treatment (financing for the acquisition of an asset). This seeks to prevent the application of depreciation rules by leasing companies and at the same time that the lessee can deduct the respective rental fee as an expense.

This rule will apply to financial leasing contracts entered into as of January 1st, 2023.

9. Tax on luxury goods

A new annual tax rate of 2% is incorporated on the market value of certain goods, located in national territory, such as helicopters and planes for private use, yachts and automobiles with an appraisal value greater than 62 UTA (approximately 40 million pesos).

Assets owned by a company that carry out productive activities will not be affected by this tax (provided that they are effectively allocated and are essential for the development of said activities).

10. Modernization of the mining concession system

In Chile, mining concessions are protected by patents, and the right to explore and/or exploit is granted based on an annual payment. Regarding this, the main changes are:

  • For exploration patents: The term is increased to 4 years, but the possibility of renewal is eliminated. Additionally, the amount of the patent is increased from 1/50 UTM per hectare to 3/50 UTM per hectare.
  • For exploitation patents: The value of patents already granted is maintained only for those that demonstrate work, but the value of the non-metallic patent is increased to the level of the metallic one (1/10 UTM). Likewise, a progressive scale is created according to the passing of the years for concessions that do not show works, without metallic and non-metallic distinction.
  • Concessions in the process of obtaining an Environmental Qualification Resolution: The amount of the patent will be the equivalent of 3/10 UTM for each hectare.

Although the Project did not finally include the creation of a Wealth Tax, its discussion during the processing of this project sheds light on the presentation of a future bill of initiative of the Executive, considering that it is within the government program of the president elected, Gabriel Boric.

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