Chile and Australia’s trade and investment relationship has strengthened considerably over the past few years, most notably by the signing of the Double Taxation Agreement (DTA) (or “Convention between Australia and the Republic of Chile for the avoidance of double taxation with respect to taxes on income and fringe benefits and the prevention of fiscal evasion”) in 2010.
The DTA’s main objective is to “promote closer economic cooperation between Australia and Chile by reducing taxation barriers.” The DTA benefits individuals and corporations alike and simplifies tax across both jurisdictions.
The double taxation agreement provides beneficial tax rates to Australian companies doing business in Chile. The main advantage is that it is much easier and cheaper for companies to repatriate funds back to Australia. With this in mind, many companies and individuals operating across Australia and Chile may be unaware of the DTA or its benefits. In today’s post, we will take a high-level look at the implications and benefits of the DTA.
Benefits for corporations
For corporations, the DTA affects the treatment of withholding tax on profits, shares, royalties and interest. Prior to the DTA, all profits repatriated to an overseas parent company were subject to a 35% withholding tax. The DTA now provides that business profits are to be taxed only in the recipient’s country of residence (unless profits are derived through a branch or another prescribed permanent establishment in that country). In addition, dividend withholding tax was reduced from 30% to 5% for inter-corporate dividends on certain non-portfolio holdings, and to 15% on all other cases. Withholding tax on interest is to be reduced from 10% to 5% where the interest is paid to an unrelated financial institution. Royalty withholding tax was also reduced from 30% to 5 to 10%. As an example, particularly companies dealing with software sales and licenses will benefit from these lower withholding rates.
Another key factor is that the term “permanent establishment” is defined in the DTA. This affords greater certainty to corporations in what is a complicated area of law. Under the DTA, “permanent establishment” is understood particularly (a) place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place relating to the exploration for or the exploitation of natural resources; and (g) an agricultural, pastoral or forestry property. It is important to determine whether a business comprises a permanent establishment in the other country it is operating in away from its main operations, as different withholding taxes will apply depending on this.
Benefits for individuals
The DTA has many benefits for individuals which are often overlooked. In particular, under the DTA dual residents are considered residents of only one country based on the individual’s economic relations (their “centre of vital interests”). Profits derived from professional services must be taxed in the country of residency. Correspondingly, employees’ remuneration will generally be taxable in the country were the services are rendered, and directors’ remuneration will only be taxed in the country in which the director is a resident for tax purposes.
The team at Harris Gómez Group can assist you in understanding not only the general provisions of the DTA but specifically how it will affect your business. International tax can be frustrating and confusing, however, by organising a plan both companies and individuals can become more tax-effective and avoid paying double taxes.
Harris Gomez Group opened its doors in 1997 as an Australian legal and commercial firm. In 2001, we expanded our practice to the international market with the establishment of our office in Santiago, Chile. This international expansion meant we could provide an essential bridge for Australian companies with interests and activities in Latin America, and in so doing, became the first Australian law firm with an office in Latin America.
We provide innovative technology and resources businesses with legal and commercial expertise to realise their global potential. Our goal is to see innovative businesses establish and thrive in the global market. We are proud members of Austmine.
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