About the US-Chile Tax Treaty

by and | Apr 28, 2022

On March 29th, the US Committee on Foreign Relations (the “Commission”) approved the resolution ratifying the agreement to avoid double taxation between this country and Chile (the “Treaty”), subject to two reservations, and proposed to the full Senate (the “Full”) to provide its advice and consent.

Implications of the Treaty

  1. Regarding residence: With the entry into force of the Treaty, the concept of residence takes on special relevance for natural persons, in respect of which the agreement establishes that when a person is a resident of both contracting states, their situation will be defined considering certain specific criteria, with a certain order of priority. Specifically, the Treaty states that a natural person will be considered a resident only in the state in which you have a permanent residence, and if you have one in both states, it is understood that it is in the one in which you maintain closer personal and economic relations. If the above is not applicable, the state where you usually live will be considered. If you habitually live in both states or in neither of them, the Treaty indicates that you will be considered a resident only in the state in which you are a national, and if you are in both or not in either, the case must be resolved by mutual agreement of the authorities of the contracting states. The foregoing would limit the consideration of a taxpayer as a resident in one of the contracting states, limiting the applicable taxation.
  2. Regarding taxation: It should be noted that the Treaty is applicable not only to income taxes, but also to wealth tax, widely discussed in Chile and incorporated into the government plan of President Boric. In this regard, the agreement does not establish limits taxes with respect to the patrimony constituted by real estate, which must be taxed in each state where they are located. However, it indicates that “with respect to the other assets of a resident of a Contracting State, they can only be taxed in that State”, that is, in the country of residence of the taxpayer, which will be determined in accordance with the concept of residence. defined by the Convention itself. The foregoing would allow the conclusion that with respect to the remaining assets that make up the patrimony of a natural person (excluding real estate) they should be taxed with patrimony tax only in the country of residence of the owner.
  3. Regarding the applicable rates: Additionally, with the entry into force of the Treaty, the application of reduced rates would proceed with respect to various payments made between both states. Taking special relevance:
Dividends
CH to US
US to CH
> 35% perpetually extends the transitory validity of the clause
> 5% if you own 10% or more and 15% in other cases.
Interests
Source country
> 4% beneficiary is a financial or insurance entity and 10% if interest originates from back-to-back representative credit or another economically equivalent.
> 15% remaining cases the first 5 years the Treaty enters into force, and after that, 10%.
Royalties
Source country
> 2% in the case of the use, or the right to use, of industrial, commercial or scientific equipment.
> 10% en el caso de pagos por el uso, o el derecho al uso, de derechos de autor sobre obras literarias, artísticas, científicas u otras obras (incluidos programas de computación, películas, cintas, discos de sonido o imagen y otros medios de reproducción o sonido), de patentes, marcas, diseños o modelos, planos, fórmulas o procedimientos secreteos u otra propiedad intangible o por informaciones relativas a experiencias industriales, comerciales o científicas (incluyendo las ganancias obtenidas por la enajenación de este tipo de bienes).
Dividends
CH to US
> 35% perpetually extends the transitory validity of the clause
US to CH
> 5% if you own 10% or more and 15% in other cases.
Interests
Source country
> 4% beneficiary is a financial or insurance entity and 10% if interest originates from back-to-back representative credit or another economically equivalent.
> 15% remaining cases the first 5 years the Treaty enters into force, and after that, 10%.
Royalties
País fuente
> 2% in the case of the use, or the right to use, of industrial, commercial or scientific equipment.
> 10% in the case of payments for the use, or the right to use, of copyrights on works literary, artistic, scientific or other works (including computer programs, films, tapes, sound or image discs and other means of reproduction or sound), of patents, trademarks, designs or models, plans, secret formulas or procedures or other proprietary intangible or by information relating to industrial, commercial or scientific experiences (including gains obtained from the alienation of this type of property).
  1. Regarding control and access to information: Finally, the Treaty incorporates the obligation to exchange information between the Chilean Internal Revenue Service (“SII”) and its counterpart in the United States (“IRS”). Establishing that they must (i) exchange information that is pertinent to apply the provisions of the agreement, (ii) or to apply the provisions of the internal law of each contracting state to apply all kinds of taxes. Additionally, the impossibility of refusing to provide information is established, arguing that it would be in the hands of financial institutions, indicating in the protocol that this applies even to bank information for operations that were carried out as of January 1st, 2010 which would facilitates the audit activity of these entities.

Next steps

On April 11th, 2022, the ratification resolution was incorporated into the Executive calendar of the US Senate, initiating the stage of knowledge and discussion of the Agreement by the Plenary.
During this stage, the Plenary can establish and examine the amendments to the ratification resolution, and know those reservations incorporated by the Commission, which will be submitted to a simple majority vote. Normally, and unless there is no unanimous agreement of the senators present, the Treaty is known in a simplified procedure in which the ratification resolution reported by the Commission is submitted for its consideration, without incorporating new amendments.

Obtained the approval of the resolution of ratification of the Treaty by 2/3 of the Senators present, it will go to the President of the United States for its ratification and will enter into force once the instruments of ratification have been exchanged by the contracting states.
The reservations established by the Commission, by implying a modification of the text and of the obligations established in the Treaty, will require their acceptance by Chile, and therefore, could force the entry of a new project to the Chilean Congress.

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