In 2020, GDP contracted by 6%, due to the negative impact of adverse weather conditions on mining, the US-China trade war, continuing social unrest and the coronavirus pandemic.
Copper exports and prices have started to rise again, and private consumption is expected to grow by more than 8%, supported by pension withdrawal receipts. Meanwhile, real fixed investments will increase by around 8.5%. Inflation remains within the Central Bank’s target range of 2% -4%.
The Chilean economy is still heavily dependent on copper exports (accounting for more than 40% of export earnings and 10% of GDP) and subsequent demand from China, which accounts for more than 30% of Chilean exports. However, due to tax reforms, the dependence of government revenues on copper earnings has declined, from more than 25% to 10% over the past decade. In addition, diversified export destinations across a vast network of foreign trade agreements somewhat mitigate the trade risk. Meanwhile, the service sector accounts for more than 60% of GDP. While Chile is highly integrated in global financial markets, the high stock of portfolio investment by non-residents (more than 250% of official reserves) makes it vulnerable to changes in market sentiment.
To mitigate the economic impact of the pandemic, the Central Bank cut its benchmark interest rate by 125 basis points to an all-time low of 0.5% and took steps to support credit lines for consumers and businesses alike. beginning of 2020.
Fiscal measures to support the economy amounted to around 8.5% of GDP. Thus, the fiscal deficit has increased to 7.4% of GDP in 2020 and will remain high in 2022 (at around 6% of GDP and 4.5% of GDP respectively), as extended public spending will continue. The government has established a so-called “Paso a Paso: Chile se Recupera” (Chile recovers step by step) an investment plan worth 12 billion dollars, mainly for social spending, job creation and infrastructure investments.
Chile has a strong medium-term fiscal position, which allows it to implement the substantial fiscal stimulus. While public debt will increase to 40% of GDP in 2021, this is still low compared to countries in South America. The public debt structure remains low-risk, as most are denominated in weight (77%) and held nationally (72%; i.e. pension funds) with long maturities, mitigating exchange and refinancing risks. Additionally, two sovereign wealth funds (SWFs) that amount to nearly 8% of GDP, coupled with Chile’s position as a net external creditor, mitigate sovereign risk.
Main sectors of industry
The food industry is the second largest economic sector in Chile (18% of the national GDP). The agricultural sector contributed 3.83% of GDP in 2018, recording record figures in the export of fruit and vegetables. The country is a world leader in the export of blueberries, cherries, grapes, plums and dried apples but also among the top producers of wine, raspberries and inulin.
Information and communication technologies
The ICT sector is increasingly competitive and internationalized, Chile has launched the “Agenda Digital Imagina Chile 2020” program to promote technological development and maintain leadership at the regional level.
Within the sector, Chile stands out for the development of software mainly used in the mining, trade and health sectors. E-commerce is growing strongly, with very positive notes as regards retail, tourism and pharmaceuticals
The textile sector is in progressive evolution with a culture increasingly linked to entrepreneurship even if it remains highly dependent on imports, producing 93% outside Chile, in the countries of Southeast Asia, in China and in neighboring South American countries. .
Chile is the first country in the region and the third globally to join the vast network of plastics agreements. The country has committed itself on two fronts: the signing of a public-private alliance which, in the long term, aims to make at least 25% of plastic containers and packaging with recycled material and promoting, through internal legislation, reuse and recycling through direct producer responsibility.
The energy sector is another strategic sector for the Chilean market, third in terms of investment size. Chile ranks as the second best country in the world in which to invest in clean energy thanks to the great opportunities related to renewable energy (hydroelectric, solar, wind, geothermal and biomass). Currently 46% of the electricity produced is generated from renewable sources and the goal is to reach production of around 70% by 2030.
Taxation for businesses in Chile
In general terms, individuals domiciled or resident in Chile and legal entities incorporated in Chile are subject to income tax wherever they are produced. Conversely, non-residents and non-domiciled people are subject to taxation only on income produced in Chile.
Taxpayers domiciled or resident in Chile are subject to taxation depending on the nature of the income obtained. The income from employment obtained through the exercise of a freelance profession is subject to a “second category tax”, with a rate ranging from 0 to 35% (progressive rate) per month.
On the contrary, any income other than that of work that an individual receives will be subject to “global aggregate tax”, with a rate equal to that provided for income from work, but annually.
Taxpayers not domiciled or non-resident in Chile are subject to an additional tax or withholding tax on Chilean source income, with a general rate of 35%.
This rate can be deducted (or sometimes exempted) depending on the type of income or the circumstances of the case, such as in the presence of a double taxation treaty.
Taxation of companies
In general, the net taxable income of a company is calculated annually, deducting from the gross annual income all the expenses necessary for the realization of such income, not recognized as costs.
The 2014 tax reform introduced two main and distinct regimes for companies to determine corporate income tax (first category tax – FCT): Attributed Regime and Partially Integrated Regime.
Under this regime, the income produced by a company is attributable annually to the shareholders or partners, without considering the possible distribution of dividends or profits.
In general terms, the taxable income produced by a legal entity will be subject to a 25% FCT (first category tax) levy. The gross taxable income will then be charged to the shareholders or partners, whether they are Chilean or foreign entities or companies, regardless of any distribution of cash flow to such entities.
At the time of distribution, the shareholders or partners will be subject to an additional tax or the global aggregate tax, and will be entitled to use all FCT paid to the company as a credit. As a result, Chilean natural persons will have to be subject to a maximum total tax of 35% and foreign taxpayers will instead be subject to a fixed tax of 35%.
Partially Integrated Regime
According to the provisions of this regime, shareholders or partners are taxed only on the effective distribution of dividends or profits made by the company.
The FCT rate for this scheme is 27%. In addition, the shareholders or partners will be able to use only 65% of the FCT paid by the legal entity as a credit against the additional tax or the global aggregate tax. Final taxpayers will have to repay 35% of the available FCT credit. This involves a limitation of the credit deriving from FCT to 65% of the FCT tax paid at the corporate level.
As a result, taxpayers subject to this regime are subject to an overall maximum taxation of 44.45% on distributed income.
An exception to the refund of the 35% credit applies to foreign shareholders or partners who are domiciled in a state that has entered into a double taxation treaty with Chile, bringing the total taxation back to 35%.
Investing in Chile
A small country, but with a solid economy and an attractive market: Chile is an important trading partner for Italy, offering unique investment opportunities in the agri-food, clean energy and infrastructure sectors.
In 2020, according to InvestChile data, exports reached 74 billion dollars against 54 billion in imports. In addition to copper, the country exports fruit and agri-food products (it is the world’s leading exporter of salmon and table grapes).
The main partners are China, with a 33.9% share of total exchanges, followed by the United States, Japan and the European Union.
The EU mainly imports food and live animals, while it exports machinery, chemicals and manufactured goods.
Chile is not a big market, but it can be a solid base from which to explore the entire South American market. In fact, it is one of the most prosperous economies in the region and enjoys a peaceful political situation.
According to the World Economic Forum, Chile is the most competitive country in Latin America and an attractive destination for foreign investment. It ranks 33rd in the world ranking, among the best countries in which to do business. It is a real regional power.
To ensure that Chile can be considered so positively today, there are several factors. First, it is a pro-business environment, with a simple tax structure that facilitates the formation of new companies. Furthermore, there is equal treatment and foreign companies enjoy the same rights and obligations as Chilean companies in the country. Finally, the free flow of capital and profits is allowed, with the possibility of repatriating one’s profits at no cost. It is thanks to these factors that the country can afford to implement policies to attract foreign capital.