Tax Efficiency: The Return That Matters Is Not What an Investment Generates, but What Remains After Taxes
Many investors keep their liquidity in term deposits or money market funds, focusing primarily on the interest rate. However, tax treatment can significantly affect the final return. In Chile, investments with the same gross return can produce very different outcomes depending on how they are taxed—an especially relevant consideration given the regulatory changes currently under review.
WHERE YOU HOLD YOUR LIQUIDITY MATTERS: THE ROLE OF STOCK MARKET PRESENCE AND ARTICLE 107 IN NET RETURNS
The Blind Spot: Looking at the Rate and Forgetting About Taxes
When deciding where to hold liquidity, investors often focus solely on the interest rate. However, term deposits and money market funds generate interest income that is subject to taxation, which can significantly reduce the net return.
Stock Market Presence and Article 107
Article 107 provides preferential tax treatment for capital gains on certain instruments that meet the requirements for stock market presence, including shares, ETFs, and fund units. Tax efficiency depends on the specific instrument and whether it meets these conditions.
Same Return, Different Outcome
A 6% gross return on CLP 100 million can produce very different outcomes depending on its tax treatment. With a term deposit, assuming a 35% marginal tax rate, the investor would retain CLP 3.9 million net. Under the tax treatment provided by Article 107, the net result could be closer to CLP 5.4 million. The difference can become even greater at higher marginal tax rates and over longer investment horizons.
A Changing Regime
The tax treatment has not remained static. Until 2022, capital gains on instruments with stock market presence were treated as non-taxable income and were therefore exempt. From that year onward, they became subject to a reduced single tax rate. More recently, the legislative proposal under discussion to modify this regime and restore the exemption has been approved. The key takeaway is that tax considerations are dynamic, and the structure of a portfolio should be reviewed in light of the rules in force at any given time.
At Nautic Invest, we evaluate each alternative based on its expected return, tax efficiency, liquidity, and role within the broader portfolio. This Buy-Side approach allows us to look beyond the headline rate and make decisions focused on protecting and growing wealth over the long term.