Post by Camila Weinstein, Tax Associate
The U.S. Department of the Treasury announced on December 19 the entry into force of a comprehensive income tax treaty between the United States and Chile. The Chile tax treaty is significant as it is the first new comprehensive bilateral tax treaty signed by the United States to enter into force in over ten years. This treaty will reduce tax-related barriers to cross-border investments between the United States and Chile and is only the second U.S. comprehensive bilateral tax treaty in force with a South American country.
Prior Process and Approval
The Double Taxation Treaty (DTT) between Chile and the United States to avoid double taxation and prevent tax evasion in relation to income and wealth tax was agreed in Washington D.C. on 4 February 2010 as well as the notes exchanged; and is based on the model income and wealth tax treaty developed by the Organization for Economic Cooperation and Development (“OECD”), with specific differences derived from the need of both countries to agree with their own tax legislation and policy.
The Treaty was approved by the Chilean Congress in September 2015; while the US Senate ratified it on 22 June 2023, with two reservations that were negotiated in advance by the Chilean teams. The content of the reservations is intended to make the agreement consistent and compatible with US domestic rules due to recent reforms in the United States.
Finally, the tax treaty was approved by an overwhelming majority in the U.S. Senate on June 22, 2023, and President Biden signed the instrument of ratification in December. The treaty entered into force on December 19, 2023, when the United States notified Chile that it had satisfied its applicable procedures for bringing the treaty into force.
Benefits to be conferred by the Agreement
A.- Taxation of Investment Income:
Refers to the following income derived from:
(i) Dividends: Allows for taxation at source of 5% on direct dividends (i.e., where a 10% ownership threshold is met) and 15% on all other dividends. Additionally, provides for an exemption from withholding tax on certain cross-border dividend payments to pension funds.
(ii) Interests: Provides a limit of 4% on source-country withholding taxes on cross-border interest payments to banks, insurance companies and certain other financial enterprises. For the first five years following entry into force, the treaty provides a limit of 15% on all other cross-border interest payments. After the initial five-year period, the 15% limit is reduced to 10% for all other cross-border interest payments.
(iii) Cross-border royalty payments: The treaty provides a limit of 2% on source-country withholding taxes on cross-border payments of royalties that constitute a rental payment for the use of industrial, commercial, or scientific equipment, and a limit of 10% on all other cross-border royalty payments.
(iv) Capital gains: Gains derived from the sale of real property and from property interests may be taxed by the state in which the property is located. Gains from the alienation of shares or other right or interests in a company may either be taxed at a maximum rate of 16% by the state in which the company is resident. Gains from the alienation of ships, boats, aircrafts, and containers used in international traffic and gains from the alienation of any property not specifically addressed by the treaty´s provision on capital gains are taxable only in the state od residence of the seller.
B.- Taxation of Business Income: Permits source-country taxation of business profits only if the business profits are attributable to a “permanent establishment” located in the country (enterprises have permanent establishment in a country if it has performed services in that country for at least 183 days in a 13-month period).
C.- Taxation of Personal Services Income: Provides that an individual resident in one country and performing services in the other country will become taxable in the other country only of the enterprise has a fixed place of business (“a so-called “fixed base” which considers individuals to have a fixed base if it has performed services in that country for at least 183 days in the taxable year concerned).
D.- Pensions: Allows both the resident and source country to tax pension payments, although the source country´s taxation right is limited to 15% of the gross amount of the pension. Also, provides for exclusive source-country taxation of social security payments.
E.- Relief from Double Taxation: A resident shall be allowed to use taxes paid in the other jurisdiction as a credit against income tax.
Limitation of Benefits
Access to the benefits provided in the DTT is limited only to “qualified persons” (natural persons, listed companies, companies 50% owned by listed companies, parent companies, religious educational charities, pension funds, and companies actively carrying on a trade or business and whose income is derived in connection with such trade or business) and limits the abusive use of its benefits by residents of third jurisdictions. This provision is designed to address “treaty shopping”, which is the inappropriate use of a tax treaty by residents of a third country.
Effects and entry into force
A.- Taxes withheld at source for amounts paid or credited: As of 1 February 2024, on amounts paid or credited.
B.- Other taxes: Shall enter into force on 1 January 2024.