On November 15, 2023, the Senate unanimously approved the Agreement amending the Double Taxation Treaty between Chile and the United States (the “Treaty”). This marks the conclusion of the Treaty’s legislative process in Congress (previously approved unanimously by the Chamber of Deputies on November 8), pending only the presidential signature and the exchange of diplomatic notes to finalize its internal processing.
The Treaty will enter into force once both countries have notified, through the relevant diplomatic channels, the completion of the ratification procedures required by their respective domestic legislations.
The Treaty’s provisions will apply as follows:
- As a general rule, from January 1 of the year following the Treaty’s entry into force.
- In the case of withholding taxes (e.g., Chilean Whithholding Tax), they will become effective on the first day of the second month following the Treaty’s entry into force, applying to amounts paid or credited from that date.
- Regarding information exchange rules, they will come into effect from the date of entry into force, regardless of the tax period to which the information pertains.
Below, we provide a summary of the main tax-related changes that will result from the implementation of the Treaty, introducing new incentives to promote investments between both countries.
Dividends
The Treaty introduces a reduced withholding tax rate for dividend distributions, set at 15% as a general rule and 5% if the investor directly owns at least 10% of the voting shares of the distributing entity.
However, dividends paid from Chile to the United States will still be subject to a 35% Whithholding Tax (“WHT”), with the right to credit the entire Corporate Tax previously paid on the profits from which the dividend is distributed (Chile Clause).
Interest
The Treaty limits the maximum tax rate that both countries can apply to interest payments to residents of the other country. Initially set at 15% for the first five years, it will subsequently reduce to 10%. Additionally, a preferential rate of 4% applies if the creditor meets some hypothesis established in the Treaty (e.g., banks, insurance companies, financial institutions, etc.).
This will provide significant benefits to U.S. residents receiving interest from Chile, as current rules subject such payments to a 35% WHT.
Royalties
The Treaty limits the maximum tax rate that both countries can apply to royalties paid to residents of the other country. As a general rule, this rate is set at 10%, except in the case of payments for the use or right to use industrial, commercial, or scientific equipment, in which case the maximum rate applicable is 2%.
Under current local laws, royalty payments to foreign entities are subject to a 30% WHT, which may be reduced to 15% or even exempted based on the type of property or rights involved.
Capital Gains
The Treaty limits the maximum tax rate on capital gains realized by residents of one country from the sale of shares in a company from the other country. As a general rule, this rate is set at 16%. This limitation does not apply if the seller has at any time within the 12-month period preceding the transfer, directly or indirectly owned shares representing more than 50% of the capital, or other corporate rights representing more than 20% of the capital of the company being transferred.
Additionally, capital gains obtained by an investor of one country from the sale of shares, bonds, or other instruments with stock exchange presence in the other country, shall not be subject to taxation in the source country, provided certain requirements related to the acquisition and disposal of such instruments are met.
This also represents a significant benefit for US investors holding shares in Chilean entities, as the general WHT rate applicable in Chile to capital gains obtained by non-residents in these cases is 35%, which can be reduced to 10% in the case of the sale of shares of publicly traded corporations with stock exchange presence and other investment instruments, to the extent a series of requirements contemplated in local law are met.
Payments for Cross-Border Services
With the Treaty in force, payments for cross-border services will be subject to Income Tax only in the country where the service provider resides, provided the activity is not conducted through a permanent establishment, in which case the entity may be subject to taxation in the other country for the profits attributable to that permanent establishment.
Therefore, services provided by a United States based company to Chilean residents could be WHT exempted, in contrast to the current rule under local law, which imposes a 35% WHT on services rendered abroad, potentially reduced to 15% for professional or technical services.
