BDO Indirect Tax News

Chile - VAT exemption for professional partnerships

Since 1 January 2023, all services rendered or used in Chile—even if the beneficiary is not domiciled or resident in the country—are subject to VAT unless the service is specifically exempted under the Sales and Services Tax Law (VAT law). This change was brought about by Law No. 21,420 published in Chile’s official gazette in February 2022, which broadened the scope of application of the VAT treatment of services that were not previously considered.

Notwithstanding the above, Law No. 21,420 maintained the exemptions that existed for individuals who issue invoices for professional fees and for other already exempted services and extended the VAT exemption to income generated by professional partnerships (i.e., partnerships that provide advice or consultation, etc., such as lawyers, accountants and engineers), regardless of the services or professional advice provided.

The VAT exemption for professional partnerships is controversial because the VAT law does not contain a definition of a professional partnership for these purposes and, administratively, the IRS has taken a restrictive approach, establishing requirements that are not found in the VAT law. According to IRS instructions in a 2022 circular, the following requirements must be met to qualify as a professional partnership:
  • It must be a partnership. According to the IRS, corporate-type entities such as corporations (Sociedad anónima), stock companies (Sociedad por acciones), individual limited corporations (Empresa individual de responsabilidad limitada) and sole proprietorships (Empresarios individuales) do not qualify for the exemption, a decision that has not been without controversy.
  • The exclusive purpose of the partnership must be the rendering of professional services or advice.
  • The services must be rendered through the partners, associates or with the collaboration of persons who assist in the provision of the professional services.
  • All partners (whether individuals or other professional partnerships) must practice their professions for the partnership, and it is not acceptable that one or more of them only contribute capital.
  • The partners’ professions must be identical, similar, related or complementary.

With respect to taxation, although professional partnerships are naturally second category taxpayers as they perform work in which labour prevails over capital, they may elect to be taxed as corporate taxpayers. Such an election must be exercised within two months following the commencement of activities or within the first three months of the business year in which the partnership wishes to be taxed as such. In any case, professional partnerships are required to keep full accounting records for the purpose of determining their taxable income.

Following the introduction of Law No. 21,420, many companies were restructured to comply with the IRS requirements to qualify as a professional partnership. Companies that engaged in such restructuring generally will not be challenged because the 2022 circular states that restructuring in and of itself will not constitute evasion, although the IRS will review the facts and circumstances to determine if any abuse or simulation was present.


Francisca Contreras
BDO in Chile