HGG Chile: Taxation on Payments Made Abroad for Technology and Technical Services
Technology and technical know-how is considered an essential precondition for improving productivity, attaining industrial development and promoting export growth. Therefore, technology transfer is seen as a key element for enabling developing countries to integrate into and compete in the global economy as well as to meet their development goals.
Harris Gomez Group works with a range of foreign clients that are looking or have already expanded into Latin America. In many cases, the competitive advantage they bring from their home countries is the technology they have developed. This is a win-win situation because often times new technology can have great benefits for the industries it is applied to such as improving productivity or improving safety.
The majority of our clients come from the Mining, Energy, Water or Infrastructure sectors. From Engineering companies to technology providers, there is a range of taxation issues that arise from doing business in a foreign country. Our team works closely with our clients to ensure that their intellectual property is not only protected but that the company is structured properly and compliant with local laws.
Taxation on Payments Made Abroad
Payments to taxpayers that are not domiciled or not resident in Chile are subject to the Withholding tax (AWIT) at the following rates, depending on the nature of the services:
A) Royalty payments made abroad for the use of trademarks, patents, formulas, know-how are subject to a 30% Withholding tax, no deductions allowed.
It should be noted that countries with Double Taxation Agreements with Chile in some cases could have slightly lower rates depending on the agreement.
However, royalty payments for the use and exploitation of patents, industrial models, industrial designs and drawings, integrated circuit designs and routings, new variety of vegetables and computer programs are subject to a reduced 15% Withholding tax, no deductions allowed. Notwithstanding, when the beneficiary of the royalty payments resides, is domiciled or is incorporated in a tax haven, or when is related to the Chilean payer, a 30% Withholding taxapplies, no deductions allowed. No VAT applies.
B) Payment for engineering and technical work and/or for professional and technical services rendered by an individual or entity with knowledge on a given science or technique through an advice, report or drawing, whether rendered in Chile or abroad, are subject to a 15% Withholding tax. Nevertheless, when the beneficiary of the payments resides, is domiciled or incorporated in a tax heaven or is a related to the Chilean payer the tax rate rises up to 20%.
C) Services rendered abroad that do not fall within the definition of technical or engineering work or professional or technical service, are subject to a 35% Withholding tax, no deduction allowed. The following services are exempt from this tax: commissions, international communications. No VAT applies.
Payments made abroad for services rendered in Chile by taxpayers not domiciled or resident in Chile different from technical or engineering work or professional or technical, that do not have a permanent establishment in Chile are subject to a 20% income tax and 35% overall Withholding tax, against which the 20% income tax is a creditable. In this regard, bear in mind the tax reform modifications in regard to the hike of the income tax up to 25% or 27% and the fact that depending on the chosen system only the 65% of the credit may be offset against the 35∞ Withholding tax. No VAT applies.
With respect to letters a) and b) please bear in mind the following:
- A party is considered related when the beneficiary of the royalty payments holds or has interest of 10% or more of the capital or profits of the Chilean payer; or when both beneficiary and payer are under a common partner or shareholder that, directly or indirectly, holds or has interest of 10% or more of the capital or profits of either of them.
- Tax heavens are listed in Decree Supreme N° 628 of the Ministry of Finance published in the Official Gazette on December 3, 2003. Please note that the current tax reform intends to change what is understood as a tax heaven and the concept will be addressed in an open list. Nevertheless, this conception has been again narrowed by the “Protocol” but the details of this modification have not been yet established.
Harris Gomez Group has been helping companies that originate from Common Law Countries to successfully grow their business in the Latin American Region for over 10 years. Our offices have a combination of Common Law and local lawyers to ensure that we take a holistic approach to our clients business. Our clients count on us because we are able to bridge the gaps that tend to arise when doing business between the two Regions.
Please feel free to call or email our office if you would like to coordinate a meeting to discuss your specific circumstances.
Miguel Guerrero Fuentealba is a Senior Associate with the Harris Gómez Group, an international and multidisciplinary firm, specialising in cross border transactions between Common Law Countries and Latin America.
Miguel worked for Deloitte Chile within their international tax division. He has an extensive amount of experience advising multinational clients on tax related matters related to domestic legal compliance, tax planning, repatriation of capital as well as completing due diligence reports on tax and legal compliance. Miguel also advises clients on legal structures, labour law and other commercial matters.