Tax Benefits for Chilean Residents under Articles 7 and 14 of the U.S.-Chile Tax Treaty
The U.S.-Chile Tax Treaty, which is currently in force, introduces significant tax benefits for Chilean residents conducting business in the United States. Among its most advantageous provisions are Articles 7 and 14, which establish clear rules for the taxation of business profits and independent personal services. These articles are particularly relevant for Chilean entrepreneurs, consultants, and professionals earning income from the U.S. without a prolonged physical presence or permanent establishment.
Article 7: Business Profits
Article 7 of the treaty provides that business profits earned by a Chilean resident from activities in the U.S. are only taxable in Chile unless the individual has a "permanent establishment" in the U.S. A permanent establishment generally refers to a fixed place of business, such as an office, branch, or factory.
This means that Chilean businesses providing services or selling goods in the U.S. can generally avoid U.S. taxation on their profits as long as they do not establish a taxable presence in the country. The treaty overrides the general U.S. taxation rules under which effectively connected income (ECI) from a U.S. trade or business is subject to taxation in the U.S. By ensuring that business profits are taxed only in Chile unless a permanent establishment exists, the treaty prevents double taxation and provides tax certainty to Chilean businesses.
How to Avoid a Permanent Establishment
To ensure that business profits remain taxable only in Chile, Chilean businesses and individuals should take specific measures to avoid creating a permanent establishment in the U.S.:
Avoid Fixed Places of Business: Do not establish an office, warehouse, or any other physical location in the U.S. that could be considered a permanent establishment.
Limit Employee or Agent Activities in the U.S.: Ensure that employees or agents operating in the U.S. do not regularly conclude contracts or engage in core business functions on behalf of the company.
Restrict U.S. Presence to Short-Term Visits: Limit the time spent in the U.S. for conducting business, as prolonged or habitual presence may trigger a taxable status.
Use Independent Agents: Employ independent representatives who act in the ordinary course of their business rather than dependent agents, as dependent agents may create a U.S. tax nexus.
Proper Documentation: Maintain records proving that business operations are conducted from Chile and that no fixed base exists in the U.S.
Article 14: Independent Personal Services
Article 14 extends similar benefits to independent professionals, such as consultants, engineers, lawyers, and other service providers. Under this provision, income derived from professional services performed in the U.S. is taxable only in Chile unless one of the following conditions is met:
The individual has a fixed base regularly available in the U.S. for the purpose of performing their activities.
The individual spends more than 183 days in the U.S. within a 12-month period.
If neither condition applies, the professional's income remains subject only to Chilean taxation, reducing administrative burdens and tax liabilities in the U.S. The treaty ensures that such income does not fall under the general U.S. sourcing rules, which might otherwise subject it to U.S. taxation under the effectively connected income (ECI) rules.
Source of Income and ECI Rules
Under general U.S. tax rules, income is sourced based on the place where services are performed. If a Chilean resident provides services while physically in the U.S., the income is typically considered U.S.-sourced and subject to U.S. taxation. Additionally, if the income is effectively connected to a U.S. trade or business (ECI), it is taxable in the U.S. at graduated rates.
However, the U.S.-Chile Tax Treaty modifies these rules by exempting Chilean residents from U.S. taxation on business profits and independent services income unless they have a permanent establishment or fixed base in the U.S., or exceed the 183-day threshold. This allows Chilean taxpayers to engage in U.S. business activities with reduced tax exposure.
Final Thoughts
The U.S.-Chile Tax Treaty offers substantial advantages to Chilean residents engaging in business or independent professional activities in the U.S. By ensuring compliance with treaty provisions and U.S. reporting requirements, Chilean taxpayers can maximize these benefits while avoiding unexpected tax liabilities.
At Barbosa Legal, we are committed to helping clients navigate international tax matters. Contact us to learn how you can benefit from the U.S.-Chile Tax Treaty and structure your business efficiently.