The Chilean Tax Administration (Servicio de Impuestos Internos, SII) has issued Ruling No. 1447-20251, providing guidance on the tax treatment of severance payments (indemnizaciones por años de servicio) to individuals who are both former employees and shareholders of the paying entity. Severance payments are exempt from income tax if the recipient satisfies the subordination and dependency criteria under labor law, regardless of shareholder status.
WHY THIS MATTERS
This clarification is important for organizations with shareholder-employees on an international assignment, as it delineates the precise conditions under which severance payments are tax-exempt and deductible.
Entities must make sure that employment relationships meet the subordination and dependency criteria to benefit from favorable tax treatment. Failure to comply may result in additional tax liabilities and loss of deductibility for severance expenses. The ruling can affect financial planning, tax compliance, and documentation practices, particularly for companies where employees may acquire shareholder status.
Organizations, global mobility program managers, and individuals subject to Chilean tax law should review employment contracts and severance arrangements so that they are in alignment with the guidance’s requirements, which could help to mitigate tax exposure and support proper reporting.
Context and More Details
Payments from Collective Agreements -- Payments originating from collective agreements are fully exempt from income tax, while those from individual contracts or voluntary arrangements are tax-free up to a statutory limit, with the excess subject to second category income tax.
Deductibility for Employers -- For employers, such severance payments are deductible expenses if the recipient qualifies as a worker. Conversely, payments to individuals not recognized as employees under labor legislation would be taxable and not deductible, as would occur with the shareholder that works effectively and permanently in the company.
Shareholders and Employment Relationship -- The ruling further clarifies that being a shareholder does not automatically negate the existence of an employment relationship, provided the individual does not control or manage the company. The status of the individual upon employment contract termination is decisive in determining both the tax exemption and deductibility of severance payments.
Severance payments to shareholder-employees are tax-exempt if the individual is classified as an employee under labor law.
Shareholders lacking subordination and dependency (matters that must be assessed by the Labor authority) are not considered employees and cannot benefit from the exemption, since statutory labor rules would not apply to them.2
Status at Contract Termination -- The individual's status as a worker at the time of termination determines both tax exemption and deductibility.
Statutory Limit -- Tax-free severance is capped at one month's remuneration per year of service, as per Article 17 paragraph 13 of the “Income Tax Law“ (Ley Sobre Impuesto a la Renta).
KPMG INSIGHTS
Steps to Consider
Organizations may wish to review and update employment contracts, particularly where employees become shareholders. It is advisable to maintain thorough documentation of employment relationships and severance agreements, so that proper compliance with subordination and dependency criteria can be achieved.
Entities may wish to assess the way they structure severance payments in light of statutory tax-free limits and adjust, accordingly, for proper tax withholding where required.
Consideration should be given to further analysis from a labor perspective.
What’s Next?
If program managers have any questions or concerns about the new guidance, its application and potential impacts on their processes/policies and/or their employment/international assignment costs, and appropriate next steps, they should consult with their qualified tax professional or a member of the GMS tax team with KPMG in Chile (see the Contacts section).
FOOTNOTES:
1 Servicio de Impuestos Internos, Oficio N° 1447, de 30.07.2025 (Ruling No. 1447-2025, published on July 30, 2025) (in Spanish).
2 In case of dispute, the competent authority that would determine the existence of subordination and dependency corresponds to the labor authority.
Contacts
Disclaimer
The information contained in this newsletter was submitted by the KPMG International member firm in Chile.
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