CHILE – USA DOUBLE TAX TREATY AND PROTOCOL PROMULGATION.
On January 29th, the Chilean Official Gazette published the promulgation of the Chile – United States of America (“USA”) Double Tax Treaty (“DTT”) signed on February 4th, 2010, and effective December 19th, 2023.
We highlight the following aspects:
- Scope: Income and Wealth Taxes.
- Residency: Mutual Agreement procedure to determine residency for DTT purposes.
- Permanent Establishment (“PE”):
- The DTT introduces a “services PE” provision under which a PE shall be deemed constituted when an enterprise provides services in a Contracting State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 183 days within any 12 months. Further, the DTT deems that a PE exists if an installation used for on-land exploration of natural resources lasts, or the activity continues, for more than 3 months.
- A PE also exists if any of the following continues for more than 6 months: (i) a building site and related supervisory activities, (ii) a construction or installation project and related supervisory activities; or (iii) a drilling rig or ship used for the exploration of natural resources.
- Business Profits: Article 7 of the DTT allows the United States to impose an (indirect) excise tax on insurance premiums paid to foreign insurers. In contrast, Chile may tax payments for insurance policies contracted with foreign insurers. Under the DTT, the rates may not exceed 2% of the gross amount of the premiums for reinsurance policies, and 5% for all other policies.
- Withholding Tax Rates:
- Dividends: 5% – 10%.
- The Protocol to the DTT specifies that in the case of Chile, because of its integrated, two-level income tax on business profits (First Category Tax and Additional Tax), the provisions of paragraphs 2, 3, 7, and 8 of Article 10 (Dividends) shall not limit the application of the Additional Tax provided that under the domestic law of Chile, the First Category Tax is fully creditable in computing the amount of Additional Tax to be paid.
However: (i) if at any time under the domestic law of Chile the First Category Tax ceases to be fully creditable in computing the amount of Additional Tax to be paid, subparagraph a) shall not apply and the amount of Additional Tax imposed by Chile shall be limited by the provisions of paragraphs 2, 3, 7, and 8 of Article 10; and (ii) if the rate of Additional Tax imposed under the domestic law of Chile exceeds 35 percent, the provisions of Article 10 shall apply with respect to both the United States and Chile, but the tax charged under subparagraphs a) and b) of paragraph 2 of Article 10 shall not exceed 15% of the gross amount of dividends paid by a resident of a Contracting State and beneficially owned by a resident of the other Contracting State.
- Further, it provides that (i) Article 10 shall apply to dividend distributions or payments made by an entity when the investment is subject to a foreign contract agreement in line with the Foreign Investment Statute (DL600); (ii) paragraph 2 of Article 10 – beneficial rates – shall not apply in the case of dividends paid by a “Regulated Investment Company” (RIC) or a “Real Estate Investment Trust” (REIT).
In the case of dividends paid by a RIC, the 15% withholding rate shall apply. In the case of those paid by a REIT, the 15% withholding rate shall apply only if (a) the effective beneficiary of the dividends has a participation in the REIT not exceeding 10%; or (b) the dividends are paid concerning publicly traded shares and the effective beneficiary is a person with participation in any shares category of the REIT not exceeding 5%; or c) the effective beneficiary of the dividends is a person with participation in the REIT not exceeding 10% and is diversified. For these purposes, a REIT is “diversified” if any participation in a real estate asset exceeds 10% of the total participation in real estate. In the case that a REIT has a participation in a partnership that has participation in real estate, it shall be deemed that the REIT directly holds the participation in real estate in proportion to its participation in the said partnership.
2. Interest: 4% – 10%
3. Royalties: 2% – 10%
4. Capital Gains: A 16% tax rate applies with certain specifications.
- The DTT provides for exemptions from taxation in the other contracting state for gains recognized by (i) a pension fund that is a resident of a contracting state from the sale of shares of a company that is a resident of the other contracting state, (ii) a mutual fund or another institutional investor that is a resident of a contracting state from the sale of shares of a company that is a resident of the other contracting state and whose shares are substantially and regularly traded on a recognized stock exchange located in that other contracting state and (iii) a resident of a contracting state from the sale of certain shares of a company that is a resident of the other contracting state and whose shares are substantially and regularly traded on a recognized stock exchange located in that other contracting state.
f. Directors’ Shares or Participations: Directors’ participations, shares, and other similar payments that a resident from a Contracting State receives as a board member of a company resident in the other Contracting State shall be subject to tax in the country where they arise.
g. Taxation of Wealth
- Wealth comprised by real estate assets – ref. Article 6 – located in one Contracting State that belongs to a resident in the other Contracting State shall be subject to tax in both.
- Wealth comprised by movable property located in one Contracted State that is part of the assets of a permanent establishment resident in the other Contracting State, or by movable property that belongs to a fixed base belonging to a resident in the other Contracting State for the provision of independent personal services, shall be subject to ax in both.
- Wealth comprised by crafts, aircraft, and containers held by a resident in a Contracting State and exploited in international transportation, and by movable property affected to the exploitation of the former shall only be subject to tax in that Contracting State.
- Any other element of a resident’s wealth shall only be subject to tax in the country where that person is a resident.
h. Entitlement to Benefits Provision (“LOB”): a comprehensive LOB, by which a resident company may be eligible for benefits under the DTT if it:
(i) meet the requirements to qualify as a publicly traded resident of the United States or Chile (Publicly Traded Company Test);
(ii) is a subsidiary that has at least 50% of its vote and value owned by five or fewer companies that qualify under the Publicly Traded Company Test (Subsidiary of Publicly Traded Company Test);
(iii) satisfies an Ownership-Base Erosion Test, or
(iv) functions as a headquarters company for a multinational group (Headquarters Company Test).
Unlike some more recent treaties, the Treaty does not include a derivative-benefits test.
Alternatively, a resident company that fails all of these tests may still qualify for treaty benefits for an item of income if it meets the Active Trade or Business Test or is granted treaty benefits by the relevant competent authority.
i. Exchange of Information: The DTT requires the competent authorities to exchange information considered foreseeably relevant to carrying out the provisions of the Treaty or the domestic laws of the United States or Chile regarding any taxes imposed by either Contracting State
j. Double Taxation Relief: Both countries apply the credit method for the elimination of double taxation.