Written by Camila Weinstein, Tax Specialist
In Chile, businesses operating within the legal framework are required to pay a business license tax to their respective municipalities, calculated based on the company’s net worth as declared annually. This semi-annual tax, crucial for legal operation within a commune, offers a little-known yet significant advantage: the investment reduction. This tax benefit allows businesses to deduct investments in rights or shares of other companies from their net worth, thus lowering their taxable base and the corresponding tax liability. Understanding and accessing this benefit can lead to substantial tax savings, making it a critical consideration for any business engaged in or planning strategic investments. This blog post will explore the nuances of the business license and investment reduction, providing insights into how businesses can leverage this opportunity to optimise their tax obligations in Chile.
Business License and Investment Reduction
The Business License is a tax collected by municipalities in Chile (Municipal Tax) from individuals who perform a profession or engage in commercial or industrial activities. This tax applies to companies and commercial establishments, which must pay it to operate legally within a commune (district).
The payment of the business license is made semi-annually, on the last business day of January and July, in the commune where the company’s registered address is located. The rate is calculated based on the company’s net worth (equity), which is reported annually in the Income Tax Return, and is set by each municipality, ranging from a minimum of 0.25% to a maximum of 0.5%, with a cap of 8,000 Monthly Tax Units (“UTM”) (approximately 563,000 USD).
On the other hand, the investment reduction is a tax benefit established in the Municipal Revenue Law that allows for the reduction of the business license amount. This benefit only applies when companies have investments in rights or shares in other companies and pay said tax, as they can deduct from their net worth the part invested in other companies, thus reducing the annual amount payable for this tax.
Since the business license is calculated based on the net worth (a calculation of the company’s net assets), the investment in another company is deducted from this capital, which reduces the taxable base and, consequently, the amount payable.
Access to the Benefit
All natural or legal persons who make investments or are recipients of investments can apply for this benefit. Additionally, they must have the commercial business license registered in communes that allow for the reduction. This means they can be individuals or companies with investments within or outside the said commune (district).
Requirements to Apply for the Investment Reduction in the Business License
To apply for the investment reduction in the business license, the following requirements must be met:
- The taxpayer must have part of their capital invested in other businesses or companies subject to the payment of the business license.
- This business license must be registered in communes (districts) that allow for the investment reduction.
- The taxpayer must submit all necessary documentation, either online or in person as appropriate, during the month of May each year to the municipality.
- According to the criteria established by each municipality, the requested reduction will be applied, and the taxpayer will receive a certificate to that effect.
- The taxpayer must collect the investment certificate in person and present it to the corresponding municipality.
Although this tax benefit is not new, as it is regulated by law, many people are unaware of it. This is especially important for companies that could access this benefit by submitting the corresponding documentation, which could mean an optimisation of their tax burden regarding the payment of this tax.
Conclusion
Understanding and utilising the investment reduction for the business license tax in Chile can significantly impact a company’s financial health. This tax benefit, designed to encourage investment and economic activity within municipalities, offers a practical way for businesses to reduce their tax liabilities by leveraging their investment activities. By meeting the specific requirements and timely submitting the necessary documentation, businesses can take advantage of this reduction to optimise their tax burden. As many companies remain unaware of this potential saving, it is crucial for business owners and financial advisors to stay informed about these benefits and ensure they are fully utilised. This proactive approach not only supports compliance with local tax laws but also strategically enhances a company’s profitability and growth prospects in the competitive Chilean market.
