Chile: Proposed changes to profit sharing for workers

Employer Action Code: Monitor

In Chile, for-profit companies of any size must annually distribute a portion of net taxable profits (with some adjustments) to employees with at least one year of service based on a prescribed formula, or instead pay some type of guaranteed annual bonus to such employees equal to at least 25% of their monthly base pay, with the guaranteed annual bonus capped at 4.75 times the monthly minimum wage. The Senate has approved legislation that would significantly modify the prescribed formula and increase the cap on the alternative annual bonus.

Key details

• Profit sharing
• The start point of the calculation would change the “pot” from the current flat 30% of net taxable company profits (adjusted) to a percentage that depends on the company’s annual revenue: 8% if revenue is between 2,400 Unidades de Fomento (UF) and 24,999 UF, 10% if revenue is between 25,000 UF and 99,999 UF, and 15% if revenue is 100,000 UF or more. Also, the current requirement for profit sharing that net taxable profits be reduced by 10% of the company’s net equity would be abolished. Note: The UF is an accounting unit whose daily value is determined by Chile’s Central Bank based on the change in consumer prices in the previous month. As of March 1, 2022, the value of a single UF is 31,552.64 Chilean pesos (CLP) (about US$40).
• The resulting pot would be allocated to individual employees by dividing it by the total payroll of only those employees eligible for profit sharing, and then multiplying the result by the pay of the individual eligible employees. Currently, the pot is divided by the total payroll of all employees, including those ineligible for profit sharing (e.g., because they receive a guaranteed annual bonus instead).
• A cap on individual payments would be introduced, equal to 20 times the monthly minimum wage (CLP 350,000 for workers age 18 to 65). Managerial employees would be exempt from the cap.
• The cap on the alternative guaranteed annual bonus amount would be increased to six times the monthly minimum wage. Workers with less than one year of service would be entitled to a fixed bonus payment, pro rata to length of service.

Employer implications

The bill (originally introduced in 2019) has progressed slowly, but some version of the bill recently approved by the Senate and now being reviewed by the lower House is expected to become law. Among companies surveyed by WTW, 73% provide some type of guaranteed bonus to employees (as opposed to using the 30% of net profits formula) according to statutory requirements. Employers should monitor the progress of the legislation and consider how the changes would affect their profit sharing or bonus payouts.

Also, the current requirement for profit sharing that net taxable profits be reduced by 10% of the company’s net equity would be abolished.