Tax Measures in the Chilean Emergency Plan for COVID-19

In the midst of the health and economic crisis that Chile and the world are facing due to the COVID-19 virus, on June 14 the Ministry of Finance and the Finance Commission of the Chilean Parliament – made up of parliamentarians from the opposition and the ruling party, reached an agreement denominated “Framework of Understanding for the Emergency Plan for the Protection of Family Income and Economic and Employment Reactivation”, which establishes three main lines of action: to set the Fiscal Framework for 24 months and ex-post fiscal consolidation, to identify measures for the protection of family income and to propose a plan for economic and employment recovery in Chile.
With regard to the last of the axes, the Government and the opposition incorporated the following tax measures into the Framework of Understanding to boost the economy and employment:

· Establish a new tax credit for each new dependent employee hired. Although not specified, it is understood that it will be a credit against the Corporate Tax, which would be equivalent to 23% of the value of the remuneration of each new employee.
· For taxpayers subject to the SME’s regime: i) a 50% reduction of the Corporate Tax rate for fiscal years 2020, 2021 and 2022, i.e., a rate of 12.5% would be applied; and, ii) a refund of the remaining VAT tax credit, for those of good tax compliance.
· Extend the suspension of provisional monthly payments for 3 more months (currently until June 2020 and extended to September 2020).
· Extend until December 31, 2022 the instantaneous depreciation scheme proposed in the “Tax Modernization” (which is currently until December 2021).
· Release investment projects from the 1% regional contribution during 2021.

Tax Modernization and a new concept of Necessary Expenses

The Chilean Internal Revenue Service published on its website the draft of the document which will regulate the new concept of expenses deductible from the taxable liquid income, incorporated by Tax Modernization Bill, in force since January 2020.

As already anticipated when the Chilean IRS analyzed the tax treatment of expenses related to the COVID-19, the new concept of necessary expense is more adjusted to the business reality, since it recognizes that the necessity of the expense does not imply a direct link to produce income taxed with Corporate Tax, but with the fact that these have the potential/aptitude to generate such income and are incurred in the interest, for the development or maintenance of the line of business.

The Chilean IRS refers to some expenses that, in accordance with the general concept established in the law, may be considered necessary, such as: i) business projects (e.g. customer loyalty and increasing market share); ii) maintenance of the activity and/or business (e.g. legal defense); iii) arises from the business risk (e.g. employees’ strikes, payments for causes not attributable to fraud or gross negligence); and iv) maintenance of a good working environment.
Additionally, it regulates specially accepted expenses, highlighting new alternatives for deduct as an expense uncollectibles debts, expenses derived from environmental obligations and disbursements whose origin is criminal clauses or fines.

Finally, in relation to rejected expenses, all those expenses not accepted that the taxpayer has actually incurred, provided that they are not for the benefit of the partners, shareholders, owners, etc., will not be subject to the 40% penalty tax, but must be added to the taxable liquid income for the determination of the Corporate Tax.


Mario Gorziglia

Leonidas Prieto

Cristián Bay-Schmith