Starting January 1, 2023, all providers of any type of service will begin paying VAT, with the only exemptions being educational, transportation, and outpatient healthcare services. However, the law created a space to maintain this exemption: professional companies will also be exempt from paying this tax. The problem? The narrow scope of the requirements that those wishing to change their corporate structure must meet.
Read the full article in La Tercera-Pulso.
A year ago, the discussion to implement the Universal Guaranteed Pension (PGU) led to the search for new permanent funding sources during the legislative process, making use of reducing or eliminating tax exemptions, thereby achieving higher revenues.
One of these tax exemptions applied to various types of services, by not paying VAT. But starting next January 1, this will change, and all service providers will be subject to this tax, except those explicitly exempted by law: educational, transportation, and outpatient healthcare services. All others must now pay VAT. In any case, this modification will not apply to services included in government tenders and public procurement awarded or contracted before January 1, 2023.
Thus, among the services that were previously not subject to VAT but will be starting next year are consultancy services provided by companies (engineering, accounting, legal, and others), collection services, management and administration services, design services, software development services, audiovisual services, virtual office services, management services (for companies within a holding or to third parties), technical adaptation services, software design and development, maintenance and remote support, dog daycare services, audiovisual creation and filming, travel assistance services, among others.
However, the law left a door open for these types of services to remain exempt under a certain structure. According to the Internal Revenue Service (SII), professional companies will be exempt from this tax.
What requirements must be met? The SII specifies that they must be composed only of natural persons, meaning they cannot be companies, although they may associate with other professional companies. Partners must exclusively provide professional services and must not engage in commercial activities.
Additionally, all partners must practice the same profession for the company or a similar, related, or complementary profession. Partners who only contribute capital are not accepted. If all requirements are met but the company is not registered with the SII as a Professional Company, it can follow the simplified procedure available from January 1 to June 30, 2023, at the service. In the case of companies registered in the Ministry of Economy’s Companies Registry, the SII explains that the change can be made through the company and partnership registration platform, and then register as a Professional Company with the SII.
In response to this change, a series of modifications have already been generated among service-providing companies, and tax experts and professional associations have raised criticisms, as they consider it a mistake to create this new exemption, since it causes a distortion between two companies providing the same service: one will be subject to VAT, and the other will not.
As illustrated by the Tax Consulting partner at CCL Auditores Consultores, Javier Jaque: “Everyone is currently trying to configure themselves as a professional company to stay in the market, because if they do not, their service will become more expensive.” For Jaque, the main problem is maintaining some exemptions. “If VAT is to be charged, it should apply to everyone and avoid the distortions created by the professional company structure,” he argues.