On December 19, 2023, a bilateral tax treaty between Chile and the United States entered into force, which will help prevent duplicity in the payment of taxes, along with tax evasion of income and wealth taxes. This treaty represents a significant opportunity for Chile and the United States to facilitate commercial operations, provide tax benefits, and strengthen bilateral relations. In addition, Chile has now become the second Latin American country after Mexico to have a double tax treaty in force with the United States.
Who is subject to the treaty? Those who qualifying as residents under Article 4 of the treaty are subject to it. The United States introduced the concept of a “qualified person,” which goes beyond simple residency and requires compliance with additional standards, such as the limitation of benefits (LOB) rule, which seeks to avoid treaty shopping and abuses in the application of the treaty.
Concerning withholding taxes, the treaty will apply to all amounts paid or accrued from February 1, 2024. Meanwhile, it will apply to all other treaty-related taxes from January 1, 2024.
The agreement reduces taxation in the source state of the income using exemptions or rate reductions. Unlike the current case, taxes levied in the source country may be used as a credit in the recipient’s country of residence, regardless of the source of the income (relevant for remuneration of services and capital gains).
Double taxation is avoided by not granting credits for withholding taxes in Chile against U.S. taxes since non-domiciled or non-residents in Chile are subject to tax (0%–35%) on remuneration for services in Chile or abroad. With the agreement, income for the services of U.S. residents will not be taxed in Chile unless related to a permanent establishment. Wages and salaries will be taxed in the country of residence unless the services are rendered in the other state for more than 183 days.
What happens with dividends, interest, and royalties? Dividends are taxed in the shareholder’s country of residence or the paying company. In the latter case, the tax applied has limitations in the cases of dividends coming from the United States previously taxed at 30%; the tax established cannot be higher than 5% or 15%, depending on whether the beneficiary has at least 10% of the voting shares in the paying company. In the case of Chilean dividends, the right to a credit for the total corporate tax paid (first category tax) and a maximum tax charge of 35% between corporate tax and withholding tax is provided.
Concerning pension funds, the regulations establish that Chilean pension funds will be exempt from withholding taxes on dividends paid by foreign companies. U.S. pension funds will be subject to withholding tax on dividends distributed by Chilean companies.
The tax applied on interest (before the agreement, 30% in the United States and 35% in Chile) is significantly reduced. These may be taxed in the country of residence of the payer of the income. The withholding tax applied may not exceed 4% in the case of banks, insurance companies, and financial entities or 10% in other types of entities. The 10% cap was established for five years, after which it will increase to 15%.
Royalties will be taxed in the payer’s country of residence, reducing the rate from 30% to 10%. The agreement sometimes excludes tax, imposing a maximum rate of 2% for using industrial, commercial, or scientific equipment.
The agreement about capital gains distinguishes between those obtained from the disposal of real estate, or shares or rights in real estate companies, or from the disposal of assets of a permanent establishment and those resulting from the disposal of shares, rights, or other interests representing the capital of a company. In the first case, the agreement allows them to be taxed in the country where the assets are located. In the case of a company’s capital gains, they may be taxed in the company’s residential jurisdiction, with a reduced rate of 16% for minority participations, 0% when the seller is a pension fund, and 0% for shares with stock market presence and complying with certain conditions. Depending on the case, the transfer of subsidiaries or companies where the seller maintains a significant contribution may be taxed without limitation.
The entry into force of the agreement with the United States not only directly impacts direct investment but may also affect the payment deductions between related parties, providing tax optimization possibilities for companies operating in both countries. However, professional advice and keeping updated on current tax regulations and interpretations are essential.