Moving forward with the US – Chile Tax Treaty
On June 1st 2023, the United States Senate’s Foreign Relations Committee approved the US-Chile Tax Treaty to be voted in full chamber. Voting can take place by the end of June. The Tax Treaty was signed by both countries on 2010, and was ratified by Chilean Congress in 2015.
This will be third Treaty in Latin America, after Mexico and Venezuela, the Treaty is good news for ongoing business, and for new deals, opportunities, and investments between the US and Chile. The Treaty’s main provisions will result in avoidance of double taxation and reduction of key Withholding (WHT) tax rates. If the US Senate approves the Treaty this year, the document itself enters into force on January 1st 2024. However, benefits of reduced WHT rates will be in force on the first day of the following month after ratification.
A summary of the Treaty key points are:
Business Profits: If an enterprise or services provider obtain profits or provide services, the income is only taxable in the country where the Taxpayer resides, unless there is a qualification as Permanent Establishment (i.e., fixed place of business). Currently there is no limitation of taxation in the other country.
Dividends: If a company distributes a dividend to its parent company in the other country, a reduced WHT of 5% (instead of current 30%) will apply if the parent company owns at least 10% of the voting stock of the payor company. The WHT is 10% in all other cases. A special Chilean provision applies (because of it’s tax credit integrated system) saying that the effective rate of a dividend is 8%.
Interest: Interest will be subject to a general WHT rate of 15% (instead of 30%). This rate will be reduced to 10% after 5 years from treaty ratification. A special 4% applies if the payor is a qualified bank or financial institution. US portfolio debt rules exemption also applies.
Royalties: Royalty payments from one country to another are subject to a general WHT rate of 10%. However, a 2% may apply if the royalty consists of payments in consideration for the use or the right to use industrial, commercial or scientific equipment. A special Chilean legislation exemption may apply for standardized computer’s software.
Capital gains: If a Chilean resident realizes capital gains on the sale US property, no taxation is levied upon that income, unless that gain comes from US real property interest (FIRPTA is not altered). If an American resident realizes gains in Chile it will be subject to the normal WHT 35% rate in Chile, unless treaty reduction of 16% (on shares) or 0% in certain transactions of institutionalized investors.
Other Income: Other kinds of income not specifically described in the treaty will be only taxable in the country where the Taxpayer is resident.
Branch Profit tax: Reduced from 30% to 5% (i.e., same rates for dividends).
Double Tax Elimination: The Treaty offers specifics mechanisms of tax credits to ensure no double taxation is applied to the same income.
Limitation of Benefit rules (LoB): In order to have access to the Treaty benefits, the person, individual, entity or organization must be a qualified person according to the rules of the treaty. This mean that certain level of substance is required.
In order to obtain additional information about the Treaty rules please contact Andrés Hernández at ahernandez@barbosalegal.com.