The pink and orange Moon Valley in Chile.
Tax regimes vary greatly throughout Latin America. While some countries are investor friendly, others are not so open. There are several benefits (i.e. retirement programmes, tax discounts) but also some tax obligations. In this section we provide an analysis of the different tax structure in each country where January First Real Estate lists properties. This information may be very important for you to choose you retirement destination or where to invest. Keep in mind that there are related visa and residence issues which are discussed in Visa/Residence Requirements. Real estate assets are, without doubts, one of the most secure and profitable ways of investment. There are two main reasons for this: One, properties always tend to increase their value in the long term. They generate an income for their exploitation (rental/yields). And two, international real estate is set to be the biggest and best investment market of the next several years.
Rental Income
All Chilean taxes are national, with no significant local taxes. The tax authority is the Chilean Internal Revenue Service (Servicio de Impuestos Internos or SII). Income from real estate is subject to general tax rules.
Income Tax
Based on the complex Income Tax Act or Ley de la Renta. Non-residents are taxed on their Chilean-sourced income. Income taxes, both corporate and individual, are divided into:
Category Taxes: payable on specific types of income.
Global Taxes: payable on all income, using the place of residence to differentiate tax rates.
The Category Tax on Non-Employment Sourced Income for Non-residents
First Category Tax, FCT or (Impuesto de Primera Categoria)
Rental income derived from from real estate, industry, commerce, mining and other activities involving capital is subject to ‘First Category Tax’ (FCT) or Impuesto de Primera Categoria at a flat 17% rate.
Depreciation
Deductible expenses include the depreciation of tangible assets as established by SII. Accelerated depreciation is an option, calculated over 1/3 of the normal useful life of the assets, if this exceeds 5 years, as determined by a public list. FCT can deduct accelerated depreciation as a necessary expense to generate income and is allowable credit against Additional Tax for non-residents.
The Global Tax for Non-residents
Income obtained by non-residents is subject to Additional Tax (AT) or Impuesto Adicional, which is withheld at source at a rate of 35%.
The taxpayer can deduct First Category Tax and property taxes from taxable income. The total tax burden is therefore 35%, payable on net rental income, after deductions.
Non-Agricultural Real Estate
Income Tax Law treats non-agricultural and agricultural real estate differently. The assumed income of taxpayers with simplified accounting records is equivalent to 7% of the fiscal assessment of the property. If the effective income from the property exceeds 11% of the fiscal assessment then the owners are assessed on their full income.
DFL-2 Properties
A special law, Decreto con Fuerza de Ley 2 (DFL-2) was established in 1959 to encourage the construction of affordable housing (viviendas economicas) of less than 140 sq. m. Income generated from the rental of DFL-2 properties is exempt from income tax and global tax. Originally intended to encourage new construction, DFL2 now extends to luxurious properties in the best neighborhoods, beaches, and resorts, which may cost US$250,000, but such high-end properties do not produce the best yields. Foreigners wishing to buy and rent larger apartments not covered by DFL2 need to understand Chilean income tax law.
Originally intended to encourage new construction, DFL2 now extends generally to apartments and houses of less than 140 sq. m. Within this category, there are luxurious properties in the best neighborhoods, beaches, and resorts, which can easily cost US$250,000. Though, such high-end properties don’t produce the best yields.
Larger apartments not covered by DFL2. Those wishing to buy larger apartments not covered by DFL2 will, if they intend to rent them, need to understand something of Chilean income tax law.
Lake Pehoe is refreshing and cool.
Special Regimes for Investors
1. Foreign Investment Statute
Under the Foreign Investment Statute (Decreto de Ley 600), the foreign investor may choose to pay a higher tax of 42% instead of the Additional Tax of 35%. The rate is fixed for a period of 10 years, which may in certain circumstances be extended to a maximum period of 20 years. The investor may opt out of the special regime and thereby pay the AT, but once opted out, he may not go back into the regime.
2. Foreign Capital Investment Fund
Under the Investment Fund legislation, the foreign investor may also be eligible for a special reduced tax. Notably, the requisite for this benefit is an obligation to maintain the investment in Chile for at least 5 years. The fund is taxed at a flat rate of 10% on its remittances; any initial capital remitted is not subject to any tax. Other special regimes exist for certain regions, e.g. the exemption of any property and income tax in the Easter Islands, the towns of Iquique and Punta Arenas, the Navarino area in the north of Chile.
Real Estate Tax (Impuesto teritorial)
Real Estate Tax is levied on the fiscal valuation of property as assessed by the authorities, and is increased annually according to the Consumer Price Index. The tax rate is 1.2% of the fiscal valuation plus 0.025%. Real Estate Tax is due in four installments, in April, June, September, and November, calculated on the valuation in force at the time of payment.
DFL-2 and Real Property Tax
DFL-2 properties are subject to Real Estate Tax. Property owners pay only 50% of the tax for:
10 years if the property area is between 140 sq. m. and 100 sq. m.
15 years, if the property area is between 70 sq. m. And 100 sq. m.
20 years if it is less than 70 sq. m.
Value Added Tax (Impuesto al Valor Agregado)
Chile imposes 18% VAT on most goods and services. As a general rule, the sale of real estate is excempt from VAT but, the leasing of real estate is subject to VAT.
Capital Gains Tax
Capital gains on the sale or transfer of real estate are not taxable if the seller is not recurrent in the business of buying and selling properties. Selling an apartment or flat owned for less than four years, and selling other immovable property within one year of acquisition, is considered habitual transactions. The gains are taxed as any other profit at the standard FCT rate of 17%. The taxable capital gain is computed by deducting the acquisition costs from the selling price. The acquisition cost is adjusted for inflation based on the consumer price index.
Living There
Residents are taxed on their worldwide income.
Foreigners considered as Chilean residents are liable to tax on their Chilean-source income only for their first 3 years of stay. After that period, they are subject to tax on their worldwide income. The said provision may be extended after the initial 3 year period.
Income Tax
It is based on the Income Tax Act or the “Ley de la Renta.” Persons who are non-residents are taxed on their Chilean-sourced income. Income taxes, both corporate and individual, are divided into:
a) ‘Category Taxes’, which are payable on specific types of income, and
b) ‘Global Taxes’, payable on all income, which utilize the place of residence to differentiate tax rates.
Category Taxes
First Category Tax, FCT (Impuesto de Primera Categoria)
This tax is levied on business income, investment income, and any unearned income by the residents. The FCT is imposed at a single rate of 17% as of 2004.
Second Category Tax, SCT (Impuesto Unico de Segunda Categoria)
This is a progressive tax on salaries, fees, wages, and other forms of remuneration paid for personal services. It is calculated on gross salary as an employee and work compensations less social security payments. The tax rates range from 0% to 45% and is withheld by the employer.
Global Taxes
Complementary Global Tax, CGT (Surtax or Impuesto Global Complementario)
This is a progressive tax assessed on individuals resident in Chile with respect to their worldwide income. Professional income is subject to this tax as a single tax.
Both the Second Category Tax and Surtax are calculated on the basis of a regulated Monthly Tax Unit (MTU). As of July 2006, the MTU is CLP31.855 (US$). The rates range from 5 to 40%. Income up to 13.5 Monthly Tax Units is exempted.
Realtors’ and Lawyers’ Fees in Chile and Other Property Purchase Costs
Transaction Costs
Fee/ % / Who Pays?
Lawyer’s Fees / 1% – 2.5% / buyer
Stamp Duty / 0.2% – 0.3% / buyer
Transfer Tax / 0.1% / buyer
Agents Fees / 2% / buyer & 2% / seller
Costs paid by buyer: 3.3% – 4.9%
Costs paid by seller: 2%
Roundtrip transaction Costs: 5.3% – 6.9%
Property Purchase Process in Chile
Any individual or corporate body may acquire and possess real estate in Chile whether or not they are residents. However, there are some restrictions regarding land located near the boundaries of the country. Chile has strong legal protection for property rights, including secured investments in real property. All sale agreements should be notarized before registration. Failure to register a property transfer makes the contract void. The whole process of registering a property can be completed in around 31 days. A lawyer is contracted usually to conduct due diligence of the property’s legal history. He is also responsible for obtaining copies of the property titles, the Certificado de Vigencia and the Encumbrance certificate (Certificado de Hipotecas y Gravámanes y de Interdicciones y Prohibiciones de Enajar). After which, he obtains an evidence of complete payment of land tax from the Treasury (Servicios de Tesorerías) from the Servicio de Impuestos Internos. The signing of the public deed is done after the payment of 0.1% of the property price. The registration of the public deed at the Real Estate office is completed upon payment of 0.2% or 0.3% of the property value as Stamp Taxes. The bigger cities of Santiago, Valparaiso and Viña el Mar charge 0.2% while the other cities require 0.3% stamp tax payments. The sale of real estate is not subject to VAT, with the exception of the first sale of homes built by a construction company, which is subject to VAT at 18%.
Water catches in the crater of a Chilean mountainside.
Inheritance
Inheritance, gifts and donations taxes (Impuesto a las Herencias, Asignaciones y Donaciones) are payable by the heirs and beneficiaries. The tax rates vary according to the degree of relationship and the value of the inheritance.
Heirs and beneficiaries are classified into the following categories:
Category I: spouse, direct descendants, direct ascendants, adoptive descendants, adoptive ascendants
Category II: siblings, nephews and nieces, aunts and uncles, first cousins
Category III: any other person
The taxable inheritance is the net value of each heir’s inheritance Annual Taxable Units (ATU) are used as the basis for valuation. Taxable Units are adjusted monthly according to the variation of the cost-of-living index. The Annual Taxable Unit (ATU) as of July 2006 is CLP382.260 (US$).
Inheritance Tax
Inheritance Value Tax Rate on Different Categories
(ATUs) / I / II / III
Up to 80 / 1% / 1.2% / 1.4%
80 – 160 / 2.5% / 3% 3.5%
160 – 320 / 5% / 6% 7%
320 – 480 / 7.5% /9% 10%
480 – 640 / 10% / 12% / 14%
640 – 800 / 15% / 18% / 21%
800– 1,200 / 20% / 24% / 28%
Over 1,200 / 25% / 30% / 35%
When an inventory is made, all assets located abroad are included. This rule does not apply to foreigners, unless the assets abroad were acquired with domestic-source income. Estate taxes paid abroad on such assets are credited against the total amount of Chilean inheritance and gift taxes. Estates pass either through will, or by operation of law. Property escheats to the State upon intestacy and lack of heirs. Spouses, legitimate ancestors, natural or adoptive parents, legitimate children and legitimate descendants can receive 50 Annual Taxable units (ATU) tax-exempt. In case of siblings, half-siblings, and other relatives up to the fourth degree, the tax-exempt amount is fixed at 5 ATU, and a 20% surcharge is applied. Non-related parties do not receive any tax exemption and pay a 40% surcharge. In addition, DFL-2 properties are exempted from this tax.
