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The new Treaty provides many benefits for taxpayers, including reduced tax rates on certain capital gains and the possibility to apply reduced tax rates on dividends under local law.

On April 1, 2016, Chile and Uruguay signed the Convention for the Avoidance of Double Taxation (the Treaty).

The Treaty aligns with the Organization for Economic Co-operation and Development (OECD) Model Convention, as well as the recommendations in the OECD final reports in its Action Plan on Base Erosion and Profit Shifting (2015 BEPS Reports).

The Treaty includes the following key provisions:

— Introduction of a fiscally transparent entity/arrangement concept (Article 1)
— Permanent establishment configuration hypothesis related to the provision of services and the operation of equipment (Article 5)
— Business income provisions (Article 7)
— Withholding taxes for dividends, interest and royalties (Articles 10,11, 12)
— Reduced tax rate on capital gains under certain share dispositions (Article 13)
— Mandatory arbitration in Mutual Agreement Procedures (MAP) (Article 25)
— Principal purpose tests for the limitation of benefits (Article 28)

Based on the provisions of the latest tax reform law (Law No 20,899) (see Tax Alert 2016-217), as a consequence of the signature of this tax treaty, Uruguayan shareholders of Chilean companies will not be subject to the credit limitation rules applicable to dividends from Chilean entities subject to the partially integrated regime between January 1, 2017 and December 31, 2019.

Permanent establishment (Article 5)

As well as including the general requirements for a company to have a permanent establishment (PE) for purposes of the OECD Model, Article 5 describes certain activities that will not trigger the existence of a PE even if the activities are carried out at a fixed place of business, provided the activities are of a preparatory or auxiliary character.

Also, Article 5 establishes that, under certain circumstances, when a person habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts in a Contracting State on behalf of a person of the other Contracting State, the latter will be deemed to have a PE. This provision does not apply to independent agents, unless the agent is acting exclusively or almost exclusively on behalf of one or more companies to which it is closely related. For these purposes, Article 5 also includes a definition of closely related party.

In addition to the construction and services PE clauses, Article 5 also includes a PE configuration provision related to the operation of big or valuable equipment.

Finally, Article 5 sets the tax rate on insurance policy premiums at 10% of the gross amount of the premiums. The maximum rate is 2.5% for reinsurance policies. Unlike most conventions signed by Chile, the premiums do not qualify as business profits.

Dividends (Article 10)

Like all other conventions signed by Chile, the protocol of the Chile — Uruguay Treaty includes the so-called Chile Clause under which a reduced rate does not apply to the distribution of dividends from Chile to the extent the first category tax (i.e., corporate tax) is completely deductible against the additional tax (i.e., dividend withholding tax).

Interest (Article 11)

In addition to providing for a definition of the term "interest," Article 11 establishes a 4% tax rate for interest paid in the State in which the interest arises. Specifically, the 4% rate applies to interest paid on indebtedness arising from the sale on credit of machinery and equipment and finance project loans granted by banks with a maturity date of no less than three years. In all other cases, the Treaty establishes a maximum 10% rate.

The Treaty protocol includes the so-called Most Favored Nation Clause under which any lower rates to which Chile may agree in other conventions for the avoidance of double taxation will automatically apply, but the tax rate cannot be lower than 10%.

The rates established in Article 11 will affect conventions already signed by Chile that include such a clause and contain higher interest rates, as the reduced rates of this Treaty will apply to those conventions after its entry into force.

Royalties (Article 12)

The Treaty incorporates the term "royalties," which traditionally includes all kinds of payments for the use of or the right to use any copyright; any patent, trademark, industrial model or formula; and any industrial, commercial or scientific equipment or know-how.

As is common in the conventions executed according to the OECD Model, under this clause, royalties may be taxed in the Contracting State in which they arise, but the tax rate may not exceed 10%.

According to the provisions of the protocol, payments for the right to operate standardized computational programs (so called shrink-wrapped software) will be subject to the provisions of Article 7 (business profits).

Capital gains (Article 13)

Article 13 contains the general provisions relating to capital gains, including a provision applicable to capital gains arising out of direct and indirect transfers of shares of a company resident in the Other Contracting State.

The provision establishes that capital gains arising out of the transfer of shares that represent a direct or indirect participation in the capital of a company resident in the Other Contracting State may be subject to taxes in this State if, at any time during the 365 days before the disposal, the transferor owned, either directly or indirectly, at least 20% of the shares of the company. If said participation is lower than 20%, the applicable tax rate may not be higher than 16%.

Mutual Agreement Procedure (Article 25)

Paragraph 5 of Article 25 establishes that upon the request of the interested person, and with the agreement of the competent authorities, issues not resolved under a mutual agreement procedure shall be submitted to arbitration.

Exchange of information (Article 26)

Pursuant to the Treaty, the competent authorities of both Contracting States shall exchange information that is relevant for carrying out the provisions therein.

Entitlement to benefits (Article 28)

Article 28 limits the application of the Treaty benefits to qualified persons and provides instructions as to who should be considered a qualified person. Under this clause, entities entitled to Treaty benefits are basically those whose shares are publicly traded and those whose majority shareholders are entities entitled to the benefits of the Treaty.

In addition, under this provision, if a resident in a Contracting State is not entitled to the benefits of the Treaty, the competent authority will grant the benefits if, after having considered all the facts and relevant circumstances, it is possible to conclude that obtaining that benefit was not one of the main purposes of the incorporation, acquisition or transactions of such resident.

Entry into force (Article 31)

In Chile, the Treaty will apply to taxes on income received and amounts paid, credited to an account, put at the disposal or accounted for as expenses, on or after January 1 of the year immediately after the Treaty enters into force.

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