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Professional Services VAT Exemption [Guide 2023].

Services-exempt-iva-chile

Table of Contents

As of January 1, 2023, all services will be subject to the Sales and Services Tax ("VAT"), except for those Services Exempt of VAT and the possibility of using Professional Partnerships and other legal structures.

The new VAT law admits a possibility to restructure companies to issue documents similar to an exempt invoice.

In this guide, we show you what to consider. For more information visit our tax service page.

Letter a) of No. 2 of Article 6 of the Law extended the exemption contained in No. 8 of letter E of Article 12 of the LIVS, extending it to the income generated by the professional partnerships referred to in the third paragraph of No. 2 of Article 42 of the LIR, even when they have chosen to declare their income in accordance with the rules of the first category. 

Therefore, regardless of the services or professional advice provided by this type of company, in the terms of the third paragraph of No. 2 of Article 42 of the LIR, and the taxation that affects them (first category tax or the corresponding final tax), their services will be exempt from VAT. 

How not to pay VAT on Professional Services - Professional Partnerships Exemption

  1. Verify the business model and activities

  2. Review the current applicable tax regime

  3. Apply Exemption to Professional Partnerships

  4. Taxable under the First or Second Category of the Income Tax Law as a Professional Partnership.

  5. Maintain a business model by issuing tax-exempt documents for services rendered in Chile.

Requirements for VAT Exempt Services: Professional Partnership

1. Must be partnerships

The only option are partnerships where the partners' professional practice is a priority, and not where capital takes precedence over work.

All members of the first company must have the title that qualifies them to exercise the service or activity. 

Therefore, typical corporate types often do not apply.

Types of companies that do NOT meet these requirements ❌.

  • Public Limited Company
  • Joint Stock Company (SpA)
  • EIRL
  • Individual entrepreneurs

Type of Company admitted: Personalized Limited Liability Company ✅

This type of company in Chile is the best vehicle to do business as a partnership, required by law and the SII Circulars to qualify as a professional partnership.

Since the exercise of a profession is an attribute only of individuals, in order for a company to be classified as a professional company, the taxpayer must be a partnership of individuals. 

This prevents a capital company, such as, for example, a corporation, joint stock company or limited partnership, from qualifying as a professional partnership. 

Neither do sole proprietorships nor sole proprietorships with limited liability qualify as such, according to the law, since they are not companies. 

In this respect, it should be borne in mind that professional partnerships are classified in the second category as long as they carry out work in which labor prevails over capital, notwithstanding that, in accordance with the third paragraph of No. 2 of Article 42 of the LIR, they may choose to declare their income in accordance with the rules of the first category, subject to its provisions for all purposes of the LIR. 

On the other hand, Circular No. 21 of 1991 admits that a professional partnership may be composed of individuals and/or legal entities, provided that the latter are, in turn, professional partnerships that comply with the same requirements as the legal entities of which they are members, one of them being that the professional services are rendered through all their partners. 

Consequently, the professional partnership that is a partner of another such partnership must also provide services to the clients of the latter (as well as the natural person partners of the latter) through its partners and/or collaborators. 

These services must be provided through all its partners, associates or collaborators. 

All partners must practice the same profession for the partnership or a similar, related or complementary profession. 

The SII understands that the similar, related or complementary nature of the professions held by the partners must be assessed considering the activities carried out by the company, not being possible that one or more of them only contribute capital, because this distorts the purpose of the company and the consideration to the person with whom this type of companies are born. 

On the other hand, the employees who assist in the rendering of professional services in the line of business of the company must perform identical, similar, related or complementary work to that of the partners, without the need for them to be professionals. 

In the case of partnerships that are partners of another partnership of the same nature, the former must have as their exclusive purpose the rendering of identical, similar, related or complementary professional services, which they will render through all their partners, informing this line of business to the Service. 

2. Its exclusive purpose must be the provision of professional services or advice 

For these purposes, both the economic activities that have been reported to the SII and those actually carried out by the company must be exclusively related to professional services and consulting, notwithstanding that the company may have declared other activities in its articles of incorporation and subsequent amendments. 

Therefore, if this type of company develops or reports other activities than those expressly authorized in this paragraph, it will cease to be a professional company. 

However, the exclusive business of rendering professional services is not undermined if the company, in order to preserve its cash flows and avoid devaluation, makes occasional investments, such as time deposits, mutual funds or other short-term instruments. The purpose of these investments may be reviewed at the audit stage, considering the amounts involved, the type of instrument, the terms agreed and any other background information that allows to determine whether it is an investment for profit or merely to safeguard cash flows. 

Neither does the fact of reporting more than one professional activity, as well as acquiring fixed assets for the development of their work, detract from the exclusive line of business of rendering professional services, provided that, in such development, work prevails over capital. 

3. These services must be provided through its partners, associates or collaborators. 

4. All its partners (whether natural persons or other professional partnerships) must practice their professions for the partnership. 

5. The professions of the partners may be identical, similar, related or complementary. 

Tax Documents to be issued

Form of Acceptance

Which professional services pay VAT?

Which services are exempt from VAT?

When is a service subject to VAT?

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