Chile Confirms VAT Exemption for Sales by Charitable Institutions

Chile has reinforced the value‑added tax (VAT) exemption applicable to sales carried out by charitable and non‑profit institutions, clarifying the scope of the exemption amid broader efforts to tighten VAT rules and reduce avoidance. The measure, formalized as part of Law No. 21.806 and aligned with existing principles in the Chilean VAT framework, seeks to preserve the preferential tax treatment historically granted to charities while preventing their unintended classification as habitual VAT taxpayers. [fycom.cl], [reformatri…a.carey.cl]

VAT Treatment of Sales in Chile: General Rule

Chile levies VAT at a standard rate of 19% on the sale of goods and the provision of services. While the sale of real estate is generally exempt, VAT may apply when transactions are carried out by sellers deemed to be acting on a habitual or commercial basis, including entities that regularly engage in sales activities. Over the past decade, legislative and administrative reforms have broadened the tax authority’s ability to characterize transactions as taxable by focusing on economic substance rather than legal form. [reformatri…a.carey.cl], [globalprop…yguide.com]

For non‑profit organizations, this trend has created uncertainty, particularly where asset disposals—such as the sale of donated property or surplus real estate—could be interpreted as taxable supplies.

Charitable Institutions and the VAT Exemption

Legal Basis

Under Chilean VAT law and related interpretative guidance, charitable and non‑profit institutions benefit from VAT exemptions when their activities are non‑commercial in nature and directly linked to their statutory social, educational, religious, or humanitarian purposes. The exemption is grounded in the principle that such entities do not participate in the market as profit‑seeking operators and therefore should not bear indirect tax burdens that would reduce resources available for public‑interest activities. [reformatri…a.carey.cl]

Clarification Under Law No. 21.806

Law No. 21.806 reinforces this approach by confirming that sales carried out by charitable institutions remain exempt from VAT, provided specific conditions are met. While the law does not create a wholly new exemption, it responds to growing concerns that recent anti‑avoidance reforms could inadvertently capture non‑profit transactions. [fycom.cl]

Conditions for Applying the VAT Exemption

Based on the law, existing VAT rules, and administrative practice, the VAT exemption for charitable institutions applies when all of the following conditions are satisfied:

1. Recognized Non‑Profit Status
   The seller must be a legally recognized charitable or non‑profit institution under Chilean law (e.g., foundations, corporations, or religious entities duly registered with competent authorities). [reformatri…a.carey.cl]
2. Purpose‑Driven Sale
   The sale must be directly connected to the institution’s statutory objectives, such as fundraising, asset rationalization, or reinvestment in social programs, rather than commercial exploitation. [reformatri…a.carey.cl]
3. Absence of Habituality
   The transaction must not constitute habitual or regular sales activity. Chilean VAT law presumes habituality when sales are frequent, systematic, or resemble commercial trading. Occasional or exceptional disposals of assets by charities generally fall outside this definition. [reformatri…a.carey.cl], [globalprop…yguide.com]
4. No Commercial Intermediation
   If the sale is structured through entities or mechanisms that introduce a commercial character—such as development activities or resale schemes—the exemption may be denied, and VAT could apply. [reformatri…a.carey.cl]

Interaction with Recent VAT Anti‑Avoidance Reforms

Chile’s recent tax reforms have strengthened VAT anti‑avoidance rules, particularly in relation to recharacterization of transactions and the concept of “habitual seller.” These reforms were primarily designed to address aggressive structuring in the real estate and digital economy sectors, but they raised concerns for the non‑profit sector about over‑extension of VAT rules. [ey.com], [reformatri…a.carey.cl]

By reaffirming the VAT exemption for charitable institutions, lawmakers sought to ensure that anti‑avoidance measures do not undermine legitimate non‑profit activities or impose compliance costs disproportionate to the entities’ social role.

Practical Implications for Charitable Institutions

• Greater Legal Certainty: Charities can dispose of assets with reduced risk of VAT assessments, provided transactions remain non‑habitual and purpose‑driven.
• Documentation and Governance: Institutions are expected to maintain clear documentation demonstrating the link between asset sales and their charitable objectives, in case of tax authority review.
• Limits Remain: The exemption is not absolute—charities engaging in repeated or structured sales resembling commercial activity may still be subject to VAT. [reformatri…a.carey.cl], [globalprop…yguide.com]

Conclusion

Chile’s confirmation of the VAT exemption for sales by charitable institutions under Law No. 21.806 represents a targeted response to concerns arising from broader VAT enforcement reforms. While reinforcing the traditional tax‑favored status of non‑profit entities, the framework maintains safeguards to prevent misuse through commercialized structures. For charitable organizations, the key challenge going forward will be ensuring that asset sales remain clearly aligned with their social purposes and outside the scope of habitual taxable activity. [fycom.cl], [reformatri…a.carey.cl]