Written by Camila Weinstein, Tax Associate
Since its inception on July 23, 2013, the “Convention between the Republic of Chile and Australia for the Avoidance of Double Taxation” has served as a pivotal tool for individuals and businesses operating across these two jurisdictions. This Double Tax Treaty (DTT) offers a comprehensive framework to navigate the complexities of international taxation, providing clarity on tax obligations and preventing fiscal evasion. In this blog post, we explore the key provisions of the DTT and its implications for residents of Chile and Australia, offering valuable insights to optimize tax strategies and foster cross-border economic cooperation.
Publication of DTT
Since July 23, 2013, the “Convention between the Republic of Chile and Australia for the Avoidance of Double Taxation with respect to taxes on income and fringe benefits and the prevention of fiscal evasion” has been in effect. This Double Tax Treaty (“DTT”) between Chile and Australia was published and came into force on that date.
Scope of the DTT
The mentioned DTT applies exclusively to individuals who are residents of one or both contracting states. According to the provisions of the convention, a ‘resident of a contracting state’ refers to any individual who, under the laws of that state, is subject to taxation as a resident or by virtue of domicile in that state. This definition also encompasses the state itself, as well as any political subdivision or local authority thereof.
The taxes covered by this DTT are:
- In Australia: (i) the income tax, including the resource rent tax in respect of offshore projects relating to exploration for or exploitation of petroleum resources; and (ii) the fringe benefits tax, imposed under the federal law of Australia (hereinafter referred to as “Australian tax”); and
- In Chile: The taxes imposed under the Income Tax Act, “Ley sobre Impuesto a la Renta”, including the specific tax on mining activity (Impuesto Específico a la Actividad Minera), (hereinafter referred to as “Chilean tax”).
Main benefits from the Agreement
Dividends (Article 10)
Dividends paid by a company resident in one contracting state to a resident of the other contracting state may be taxed in the receiving state. However, if the beneficial owner of the dividends is a resident of the other contracting state, the tax charged in the distributing state should not exceed:
- 5% of the gross amount of the dividends if the beneficial owner is a company holding at least 10% of the voting power in the distributing company.
- 15% of the gross amount of the dividends in all other cases.
This provision does not limit the application of the Additional Tax payable in Chile, provided that the First Category Tax is fully creditable when computing the amount of Additional Tax.
Interests (Article 11)
Interest arising in one contracting state and paid to a resident of the other contracting state may be taxed in that other state. The tax charged on interest should not exceed:
- -5% of the gross amount of interest derived by a financial institution unrelated to and dealing independently with the payer.
- -10% of the gross amount of interest in all other cases.
Additionally, where interest is paid as part of an arrangement involving back-to-back loans or economically equivalent arrangements, the tax rate may be up to 10%.
Royalties (Article 12)
Royalties arising in one contracting state and paid to a resident of the other contracting state may also be taxed in the receiving state. The tax charged on royalties should not exceed:
- 5% of the gross amount of royalties for the use of industrial, commercial, or scientific equipment.
- 10% of the gross amount of royalties in all other cases.
Relief of Double Taxation (Article 23)
The agreement provides mechanisms to relieve double taxation for residents of both contracting states. Residents may credit the tax paid in one state against the tax payable in the other state, with specific provisions outlined for different types of income. For instance:
- Chilean tax paid on dividends shall be credited against Australian tax payable on the same income, subject to certain conditions.
- Tax paid in one state may be credited against the tax payable in the other state, ensuring that the same income is not taxed twice.
These provisions aim to facilitate cross-border transactions and investments by providing clarity and consistency in taxation matters, promoting economic growth and cooperation between the contracting states.
Limitation of Benefits
The provisions of Articles 10, 11 and 12 shall not apply if it was the main purpose or one of the main purposes of any person concerned with the assignment of dividends, interest or royalties or with the creation or assignment of a right or debt-claim in respect of which dividends, interest or royalties are paid to take advantage of those Articles by means of that creation or assignment. This is to prevent individuals or entities from engaging in artificial transactions or arrangements solely for the purpose of obtaining tax benefits, rather than for genuine economic or commercial reasons. Further, this aims to maintain the integrity of the double tax treaty by ensuring that its benefits are enjoyed by those engaged in legitimate cross-border economic activities, rather than by those seeking to exploit tax loopholes for purely tax-driven purposes.
Conclusion
As businesses continue to expand globally, understanding the intricacies of international taxation is essential for ensuring compliance and maximising tax efficiency. The Chile-Australia Double Tax Treaty stands as a testament to the commitment of both nations to promote fair and efficient taxation practices while facilitating cross-border transactions and investments. By providing clarity and consistency in tax matters, the treaty not only alleviates the burden of double taxation but also fosters a conducive environment for economic growth and cooperation between Chile and Australia. As businesses continue to expand globally, understanding and leveraging the provisions of this treaty are key to maximising tax efficiency and unlocking new at a global level.
