Taxes that affect foreigners

Additional Tax: the additional tax applies to individuals or corporations that are not domiciled in Chile, at a rate of 35%. The taxable amount is based on the earnings that are transferred abroad from a source in Chile. This tax is accrued annually. The payers of this tax have the right to deduct the payments of First Category Tax paid for earnings transferred abroad.

Foreign Institutional Investors

The Chilean tax system includes an exemption from the Income Tax Law that may affect institutional investors, such as mutual funds and pension funds, for the earnings obtained due to the transfer of corporate stock that is publicly traded, or bonds or other publicly offered securities representing debt issued by the Central Bank of Chile, the Chilean government or by companies incorporated in Chile. The transfer of said assets must be effected on the Chilean Stock Exchange through a public offer of acquisition, according to the Chilean Stock Exchange Law No. 18,045, or through any other system authorized by the Superintendency of Securities and Insurance. In order to enjoy this exemption, foreign institutional investors must comply with the following requirements while operating in Chile:

To be established abroad and not be domiciled in Chile. To prove that the entity is a foreign institutional investor, according to requirements in the Income Tax Law Article 18 bis letters a) through f). To participate neither directly nor indirectly in the control of the companies whose issues the investor holds, nor to own directly or indirectly 10% or more of the capital or earnings of said entities. To hold a written contract with a bank or stock brokerage firm incorporated in Chile stating that the bank or brokerage firm will be responsible as intermediary for executing buy and sell orders, for verifying at the moment of the transaction that the earnings are exempt from the Income Tax Law, or, if the earnings are subject to this law, that the proper retentions are effected on behalf of the tax payers by the entities that pay or distribute the earnings. To be registered with the Internal Revenue Service, according to instructions in the Exemption Resolution No. 56 of 2001.

Taxation
General aspects of the Chilean tax system
Chiles tax structure includes indirect, direct and special taxes. The value-added tax (VAT) is the only indirect tax relevant to nonresident portfolio investors. It is assessed at a rate of 19% on the sale of goods and services, as well as on imports. At present,

both resident and non-resident investors pay VAT for financial services rendered in Chile (such as brokerage services by brokerage firms or participation in investment or mutual funds). However, there are some VAT exemptions, such as services rendered by lawyers or individual brokers. The government is also working on a new regulation which is expected to enter into force soon, which will exempt VAT payment for taxes on financial services rendered from Chile to non-resident investors. Direct taxes include business income tax and personal income tax. Non-resident persons or businesses are subject to income tax only on income earned in Chile. Income is considered Chileanearned when it arises from assets located in the country or activities performed in Chile. Chilean income tax is built around these basic principles: Individuals are the ones who are ultimately taxed. Taxes paid by an enterprise are only paid on account of the taxes that the owners of the enterprise will ultimately pay. Resident and non-resident business owners only pay taxes on the profits withdrawn from the enterprise. As a result, if profits remain in the enterprise, personal taxation is postponed. Business income is taxed annually under the so-called first-category tax at a rate of 17%. Taxable income corresponds to income as shown in the financial statements, adjusted in accordance with the income tax law. The first-category tax paid by a business entity may be credited against the tax assessed on dividends or profit distributions to equity holders, owners in the case of individual business entities, or the main office of local branches or permanent establishments of foreign companies. Locally domiciled individuals are subject to a personal progressive tax on gross income with a rate of up to 40%. Although, technically speaking, the progressive tax on wages and salaries is different from the progressive personal tax on other income sources; the effective tax burden is similar regardless of the source of income. Non-domiciled and non-resident individuals and entities are subject to an additional tax (AT), a withholding tax that applies to Chilean earned income and to certain specific payments defined in the law. To calculate the AT with respect to profit distributions, an amount equivalent to the first-category tax paid on the corresponding profits, distributed or remitted, should be included in the tax base and the income is thus grossed up. The amount of first-category tax paid may be deducted from the AT due. The AT is assessed at a general rate of 35%. There are, however, other rates for different types of income, like for instance a reduced rate of 4% applicable to interest paid to non-domiciled creditors of specific types of debt, including Government securities. Therefore, interest payments made by Chilean debt issuers to a foreign debt holder will be subject to a Chilean interest withholding tax assessed at a rate of 4%. Chilean issuers and intermediaries are deemed to be collection agents, therefore the foreign resident

holder receives an after-tax net amount. Recently, the reduced rate of 4% has been extended from banks and other financial institutions to include other types of non-domiciled creditors, such as insurance companies and pension funds. Foreign investors that engage in direct investment projects under the provisions of the foreign investment statute (known as Decreto Ley 600, DL600) may choose to be taxed for a time period of 10 years (for investment projects exceeding US$50 million, this period is extended to 20 years) at an overall tax rate of 42% that remains invariable regardless of changes to Chilean tax laws. Foreign investors may invest under the DL600, where the foreign investor may choose to pay a higher tax of 42% instead of the AT 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 after opting out s/he may not go back. A stamp duty applies to documents containing a credit agreement, such as bills of exchange or promissory notes. This tax was suspended for the year 2009 only and will be applied with a 50% discount for credit documents signed between January 1 and June 30, 2010. From that date forward, the tax rate will vary depending on the period of the loan, from 0.1% of the par value of the document for each month of the loans term, up to a maximum of 1.2%. Since December 2006 credit renegotiations do not pay the stamp tax. FICEs and FICERs mentioned above may also be eligible for a special reduced tax. The most notable 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, though any initial capital remitted is not subject to any tax.

Capital gains
Generally, capital gains are considered normal income. As a result, unless a tax exemption is applicable, capital gains realized on the sale or other disposition by a foreign holder of Chilean securities will be subject to Chilean income taxes but only when the corresponding assets are effectively disposed of or sold. Also, any premium payable on redemption of the securities will be treated as interest and subject to the Chilean interest withholding tax, as described above. There are some exceptions to this rule, the most important of which are described in the two following sections. i) Tax benefits Capital gains originating from the sale or transfer of shares in publicly-traded corporations limited by shares (sociedad annima abierta) may be subject to a flat tax of 17% if (a) the shares have been held for more than one year; (b) the operation is not part of the sellers habitual business or activities and (c) the buyer

is not related to the seller. Chile provides a credit of 30% for the foreign tax paid on dividends and remittance of profits or, when this is less, for the amount of tax paid abroad. This credit may be deducted from the firstcategory tax. Any unrelieved credits may be applied against the complementary global tax or the AT. When a tax convention is applicable there is also credit for other types of income.