The Reconstruction Law introduced a temporary VAT (IVA, for its initials in Spanish) exemption, included under the section titled “Other provisions and transitional rules”, applicable to certain sales of new residential properties with the purpose of endorsing the recovery of the real estate market. The measure also includes a refund mechanism for certain transactions carried out before the provision takes effect and is liable to VAT. 

Further on, the commercial impact this measure may have on the market, its execution also raises a number of tax and operational considerations that real estate developers and construction companies will need to take into account when reviewing its application. 

VAT exemption for residential properties: what does it involve? 

The law allows taxpayers to benefit from a VAT exemption on certain sales of residential real estate that would otherwise be subject to VAT, during a one-year period starting on the first business day of the month following the publication of the law. 

The law also establishes a special mechanism for transactions carried out between the date the bill was introduced and the date on which the exemption entered into force. Under this mechanism, taxpayers may recover the VAT paid on those sales, subject to compliance with the legal requirements and any instructions to be released by the Chilean Internal Revenue Service (SII, for its initials in Spanish). 

Requirements companies must verify 

Before applying to the benefit, companies should confirm that the relevant transactions meet the requirements established by law, including: 

• The property must qualify as a housing. 

• The sale must constitute the first transfer of ownership of that residence. 

• From the date of publication of the law, the housing must have obtained a final occupancy permit, whether total or partial, issued by the Municipal Works Department (Dirección de Obras Municipales, in Spanish). 

• The sale and purchase agreement must be carried out within the timeframes established by the legislation. In the case of the VAT refund mechanism, the title must have been granted between April 22nd and the first business day of the month following the publication of the law. 

Key tax considerations 

One of the most significant aspects of this measure is that the exemption does not get rid of the seller’s right to claim as an input tax credit the VAT sustained in the construction of properties covered by the benefit. The law also establishes special rules regarding the treatment of those tax credits and any excess credits associated with such transactions. 

In addition, sales qualifying for this exemption are excluded from the proportional input tax credit calculation provided for under the VAT Law. 

As a result, companies will need to evaluate the impact of these transactions on their tax records, the determination of input tax credits, and the documentation supporting their right to such credits. 

When does the exemption come into effect? 

The VAT exemption will become effective in the month following the month after the publication of the Reconstruction Law. Assuming the law is published during September, the exemption would come into effect in November. 

In the meantime, between the filing of the bill and the effective date of the exemption, the VAT refund mechanism will apply. The SII will be responsible for setting up the corresponding operational procedures. 

How will the buyer receive their refund? 

For VAT-taxable sales carried out before the law enters into force, the refund will be handled by the real estate developer, which must reimburse those amounts to the buyers. 

The real estate developer may request reimbursement of those amounts from the SII through the platform that the tax authority will make available for this purpose, in line with the instructions it is expected to issue soon. 

Final considerations 

The temporary VAT exemption for residential properties represents a measure that may create significant opportunities for the real estate industry. However, its practical application will depend, in part, on the instructions issued by the SII to regulate the operation of the refund mechanism and on how companies choose to take advantage of this regime. 

In this context, companies are advised to prepare in advance by reviewing whether their residential development projects may qualify for the exemption during the period in which the law is in force, evaluating its impact on sale prices, and analyzing how they may utilize their input tax credits so that the exemption results in a genuine economic benefit. 

For questions or advice regarding this matter or other tax-related issues, please contact our Tax team.