Convention approval: Chile and the U.S. conclude the process of approving the Convention for the Avoidance of Double Taxation
On December 19, 2023, Chile and the USA exchanged diplomatic notes in relation to the Double Taxation Avoidance Convention (the “Convention“) undersigned between the two countries, thus finalising its processing.
Regarding its entry into force, most of the provisions will be applicable from January 1, 2024, except for those related to the reduced withholding tax rates, which will take effect from February 1, 2024, and the information exchange obligations are already in effect.
The following are some of the provisions contained in the Convention:
1. Business Profits: Currently, payments made for services from Chile to the U.S. are generally subject to withholding tax ranging from 15% to 35%. With the Convention, these payments would be exempt from withholding taxes, except for certain exceptions mentioned therein.
2. Interest: Interest payments made from Chile to the U.S. are currently subject to a withholding tax rate of 35%. Under the Convention, the rate would be reduced to 15%, which would further decrease to 10% within 5 years. Please note that the Chilean Income Tax law provides a more beneficial reduced withholding tax of 4% applicable to certain types of non-resident lenders, such as banks, financial institutions, pension funds and insurance companies, provided certain additional and specific requirements are met.
3. Royalties: Royalty payments made from Chile to the U.S. are generally subject to a withholding tax rate of 30%. With the Convention in effect, the rate would be reduced to 10%, or 2% in the case of royalties for the use of industrial, commercial, or scientific equipment.
4. Capital Gains: Currently, capital gains from the sale of shares obtained by non-residents in Chile are subject to a withholding tax rate of 35%. However, under the provisions of the Convention, this rate, depending on the type of asset to be disposed of, could be reduced to 16% if certain conditions established in the Convention are met, and in some specific cases, these gains may not be taxed. When capital gains arise from the sale of stocks, bonds, or other instruments traded on the stock exchange by a resident of a contracting state, they are not subject to Additional Tax. This exemption represents a strategic opportunity to attract investors to Chile.
5. Dividends: Regarding dividends paid from Chile to the U.S., the Chile Clause prevents a significant impact of the Treaty, so they will continue to be subject to a withholding tax rate of 35%. However, U.S. residents can utilize 100% of the credit for the First Category Tax paid against the Additional Tax on dividends. This results in an effective rate of 8% on dividends and a maximum marginal rate of 35% (i.e., First Category Tax plus Additional Tax). Under current legislation, this benefit extends until 2026, but with the Convention’s entry into force, it extends indefinitely.
Regarding dividends paid from the U.S. to partners or shareholders domiciled in Chile, they are currently subject to a withholding tax of 30%. According to the Convention, this rate is reduced to 5% and 15% for holdings less than 10%.
6. Elimination of Double Taxation: The Convention establishes specific mechanisms to avoid double taxation of the same income. These methods may include a tax credit for taxes paid in the country of origin of the income. The objective is to ensure that a taxpayer is not taxed twice on the same income in both countries, promoting the elimination of double taxation and encouraging investment between the two countries.