Chile's tax authority has ruled that foreign professionals cannot claim VAT exemptions on services rendered in Chile if their income is protected from taxation under international double taxation treaties, even though the exemption is designed for labour-based income, creating an unintended consequence in which treaty benefits may increase overall tax liability.
Chile’s tax authority (SII) issued Ruling No. 360-2026 on 11 February 2026, clarifying that foreign professionals providing services in Chile can only claim the VAT exemption under article 12(E)(8) of the VAT Law if their employment or professional income is actually taxed in Chile under article 42 or 48 of the Income Tax Law.
Article 12(E)(8) of the VAT Law exempts employment or professional income that is subject to second category tax or global complementary tax under articles 42 and 48 of the Income Tax Law.
Specifically, it examines whether the Chilean Value Added Tax exemption applies when income is already shielded from withholding tax by international double taxation treaties. The ruling determines that if a treaty prevents a service from being taxed under the standard Income Tax Law categories, it cannot qualify for the corresponding VAT relief.
Consequently, these international agreements may inadvertently disqualify a taxpayer from specific local tax benefits intended for labour-based income. Ultimately, the authority concludes that tax exemptions are strictly tied to the legal classification of the income within the domestic framework.
The key points regarding this tax treatment are as follows:
Classification of income: The Chilean Income Tax Law (LIR) distinguishes between Category 1 income (from capital) and Category 2 income (from labour/professional services). The VAT exemption specifically applies to income classified under Articles 42 and 48 of the LIR, which are labour-related.
Requirement for the exemption: For the VAT exemption to apply, the taxpayer must be taxed under the rules of Article 42. This includes professional income subject to the Second Category Tax, the Global Complementary Tax, or the Additional Tax (which replaces the Second Category Tax for non-residents).
The impact of double taxation treaties: If a Double Taxation Treaty is in place and it prevents Chile from applying the Additional Tax on the professional’s income, a specific conflict arises. The tax authority has determined that, if income is not taxable in Chile under such a treaty, it cannot be considered taxable under Article 42 of the LIR.
Conclusion on VAT: Because the income is not effectively taxed under Article 42 (due to the treaty’s protection), the VAT exemption is not applicable. Consequently, services that are exempt from income tax via a treaty do not automatically qualify for the VAT exemption that relies on the Article 42 classification.
