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March 29, 2022

BREAKING TAX NEWS | US-Chile tax treaty advances through the approval process

Today, the United States Senate Foreign Relations Committee (SFRC) approved the Convention between the Government of the United States of America and the Government of the Republic of Chile for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (Treaty). Next, the Senate must give its advice and consent to ratification of the Treaty with a two-thirds majority vote. Once the Senate takes action to approve the Treaty, the President must sign the instruments of ratification to complete the approval and ratification process in the United States. The Chilean government undertook, in 2015, the steps necessary for the Treaty to be approved in Chile. The Treaty would enter into force when all applicable approval procedures in the United States and Chile have been satisfied.

The SFRC's approval was subject to two reservations concerning the Base Erosion and Anti-abuse Tax (BEAT) and Article 23 (Relief from Double Taxation). The reservation concerning BEAT clarifies that the Treaty shall not prevent the imposition of BEAT under IRC Section 59A. Further, pursuant to the reservation, paragraph 1 of Article 23 of the Treaty would be deleted and replaced with the following:

  1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle thereof):
  1. the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income applicable to residents and citizens the income tax paid or accrued to Chile by or on behalf of such citizen or resident. For the purposes of this subparagraph, the taxes referred to in subparagraph b) of paragraph 3 and paragraph 4 of Article 2 (Taxes Covered), excluding taxes on capital, shall be considered income taxes; and
  2. in the case of a United States company owning at least 10% of the aggregate vote or value of the shares of a company that is a resident of Chile and from which the United States company receives dividends, the United States shall allow a deduction in the amount of such dividends in computing the taxable income of the United States company.

The Treaty was signed on February 4, 2010 (along with a Protocol), and was reported on favorably by the SFRC in 2014, and again in 2015. A vote was considered in 2019, but never materialized.

Significant provisions of the Treaty include:

  • Reduced withholding tax rates on dividends, interest and royalties
  • The allowance of a withholding tax on the sale of certain stock
  • A permanent establishment (PE) provision that deems a PE to exist from the provision of services under certain circumstances, and in cases where an installation used for on-land exploration of natural resources lasts for more than three months
  • A limitation-on-benefits provision that includes a "headquarters company test" and a triangular provision
  • Provisions providing for exchange of information between the tax authorities of the United States and Chile
  • Rules that source interest and royalty income to the residence of the payor or, alternatively, if the payor has a PE in connection with which the liability to pay interest or royalties was incurred, then to the location of the PE
  • A place-of-use test for sourcing royalty income in cases where the residence of the payor and the PE rules described previously do not apply

If the Treaty is ratified, the withholding provisions would become effective for amounts paid or credited on or after the first day of the second month following the date on which the Treaty enters into force. For all other taxes, the provisions would take effect for tax periods beginning on or after the first day of January following the date the Treaty enters into force.