I. STATUS AND ENTRY INTO FORCE
1.1. On December 19, 2023, the U.S. Department of Treasury announced the entry into force of the tax treaty between the United States and Chile, with the notification from the former to the latter that it had satisfied its applicable procedures for bringing the treaty into force.
1.2. Therefore,
a) With respect to withholding taxes, the treaty will apply for all amounts paid or credited on or after February 1, 2024.
b) With respect to other taxes, the treaty shall apply for taxable periods beginning on or after January 1, 2024.
II. ELIMINATION OF DOUBLE TAXATION
2.1. Treaty provides for limitation of taxing rights at source, whether as an exemption or as a rate reduction.
2.2. Unlike what happens today and subject to the limits set forth by the treaty, all taxes applied at source on income that is covered by the treaty should be credited in the country of residence, regardless of whether such income is deemed to be of domestic or foreign source (particularly relevant for service fees and capital gains).
III. CHANGES RELATED TO THE TAXATION OF SERVICES
3.1. Foreign residents are subject to Chilean withholding tax (0% – 35%) on service fees paid by a Chilean resident, regardless of where the service is provided (in Chile or abroad). Since the U.S. generally deems that services rendered by U.S. residents within its borders are domestic source income, double taxation would arise, since such country would probably not grant foreign tax credit for taxes withheld in Chile as those credits are limited to foreign source income.
3.2. Once the treaty has entered into force, fees qualifying as business profits derived from services rendered by U.S. residents within the U.S., may not be taxed in Chile. Such exemption is lost if the fees are attributable to a permanent establishment of such U.S. resident located in Chile (e.g., a Chilean branch, office, installations, site, project or mixed services rendered partially in Chile for a period or periods exceeding in the aggregate 183 days in any 12-month period, performed through one or more individuals who are present and performing such services Chile).
3.3. In general, salaries shall only be taxed at the residence of the employee, unless the services are rendered in the other state and the recipient exceeds a 183-days permanency threshold or the remuneration is paid by an employer residing or a permanent establishment located in that state.
IV. DIVIDENDS, INTEREST AND ROYALTIES
4.1. Dividends may be taxed in the country of residence of the shareholder and the country of residence of the company paying such dividend. However, in the latter case withholding taxes would be limited to
a) U.S. dividends, previously taxed at 30%, should be limited to 5% or 15% depending on whether the recipient directly owns at least 10% of the voting stock of the company paying the dividends.
b) Chilean dividends will be entitled to full corporate tax credit unlike the situation of non-treaty jurisdictions and a total aggregate burden of 35% between withholding tax and corporate income tax.
c) Chilean pension funds will be generally free off withholding taxes on dividends paid by companies of the other jurisdiction. U.S pension funds will be subject to dividends distributed by Chilean companies under letter b) above.
4.2. Interest may be taxed in the country where the payer is a resident, and withholding taxes imposed in the source country would be limited to 4% (in the case of banks, insurance companies and other financial institutions) or 10% in other cases (for 5 years, the 10% cap would be 15%), significantly reducing the 30% (U.S.) and 35% (Chile) existing withholding tax rates.
4.3. Royalties may be taxed in the country payer is a resident, limiting the taxation of the source country. In the cases of Chile and the U.S. it would reduce the generally applied 30% withholding tax to 10%. Please note that certain payments that under domestic law would have been royalties subject to such 30% withholding tax, would be classified as business profits under the treaty thus free of taxation as explained in 3.2. above. The treaty also imposes a maximum rate of 2% in the case of payments for the use of industrial, commercial, or scientific equipment.
V. CAPITAL GAINS
5.1. Chile currently levies income arising from the sale or disposal of assets located in the country, at a general 35% withholding tax rate. If the U.S. taxes capital gains at the residence of the seller double taxation may arise since the U.S. would probably not grant any foreign tax credit as capital gains obtained by U.S. resident are usually considered domestic source income.
5.2. The treaty contains several rules on capital gains that will depend on the type of seller and the circumstances of the sale:
a) Gains from the alienation of real estate (or shares, interest or rights from property-rich companies) and property from permanent establishments may be taxed in the state such property is situated.
b) Gains from the sale of shares or other rights or interests representing the capital of a company may be taxed where such company resides, but it would be generally limited. The reduced rate would generally be a 16% of such gain for minority shareholdings, 0% for pension fund sellers, 0% for sales of shares in stock exchange provided certain requirements are met. Sales of subsidiaries or companies in which the seller holds a significant participation may still be subject to unlimited domestic taxation depending of the case.
c) Other gains from the alienation of movable property may generally be taxed only where the transferor is a resident.
VI. RESERVES
The U.S. introduced two reservations to the treaty, regarding (a) the application of their Base Erosion Anti-Abuse Tax o “BEAT” for qualifying U.S. entities making base erosion payments to Chilean related parties, (b) replacing U.S. indirect foreign tax credit for a provision that allows ≥10% U.S. corporate shareholders of Chilean companies to deduct the amount of dividends received from the Chilean subsidiary in computing its taxable income.
VII. ENTITLEMENT TO TREATY BENEFITS
Other formal and substantial requirements should be fulfilled to access treaty benefits or avoid excessive withholdings (e.g., qualifying as a resident, beneficial ownership, complying with limitation on benefits provisions, antiavoidance rules, furnishing residence certificates and affidavits, etc.).
