On December 19, 2023, the recently ratified Convention Between the Government of the United States of America and the Government of the Republic of Chile for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (Treaty), entered into force. The Treaty is only the second income tax convention between the United States and a South American country. Like other double-taxation conventions, the Treaty is expected to reduce tax barriers and increase cross-border investments for both US and Chilean persons and entities. The Treaty is expected to be particularly important to US multinationals that have mining (particularly, lithium) and financial interests in Chile.
In line with current US tax treaties and the US model treaty, the Treaty includes reduced rates of withholding tax on dividends, interest and royalties.
- Dividends are subject to a 15 percent withholding rate, unless the beneficial owner of the dividends directly owns at least 10 percent of the voting stock of the company paying the dividends. In these cases, dividends are subject to a 5 percent withholding rate.
- Interest arising in one state and paid to a resident of the other state is limited to either a 4 percent or 10 percent tax depending on who owns the interest. If the interest owner is a bank, insurance company, in the lending or finance business, sells machinery or equipment (and the interest is paid in connection to sale on credit of such), that interest will be taxed at 4 percent. All other cases are taxed at 10 percent.
- Royalties arising in one state but paid to the other that are payments for the use of industrial, commercial or scientific equipment are limited to a 4 percent rate in the state in which they arise. All other royalties are limited to 10 percent.
It also prohibits source-country taxation of business profits without a permanent establishment. And, the Treaty includes beneficial rules for individuals that have activities in both of the Treaty jurisdictions.
Notes of exchange between Chile and the United States confirm the application of two reservations made by the US Senate to the ratification of the Treaty. These reservations generally address changes in US tax law since the Treaty was signed in 2010. The first reservation states that nothing in the Treaty will prevent the United States from imposing the base-erosion and anti-abuse tax (BEAT) provisions of section 59A of the Internal Revenue Code of 1986, as amended (Code) on a US resident company, or on profits of a Chilean resident company, if those profits are attributable to a permanent establishment in the US Section 59A authorizes the imposition of tax equal to the base erosion minimum tax amount for the taxable year.
The second reservation amended the provision on relief from double taxation, which generally allows US citizens or residents who pay Chilean income tax to credit that payment against US income tax liability. The treaty originally stipulated that a US company receiving dividends from and owning at least 10 percent of the voting shares of a Chilean resident company is also allowed a credit against US income tax. In 2017, US tax rules were amended to generally require ownership of at least 10 percent of the vote and value of shares of a foreign corporation. In line with changes to US tax law, the US Senate requested a reservation amending this provision to also include ownership by value of the shares, as well as by vote.
In the notes of exchange to the Treaty, the Chilean government accepted both reservations.
Source: JD Supra