To avoid double taxation in cross‑border transactions, states have developed unilateral, bilateral, and multilateral mechanisms. Among these are treaties (DTT, or CDT for its initials in Spanish) which are international agreements through which the contracting states limit and allocate their taxing powers. This also helps promote the mobility of capital and individuals and contributes to the prevention of tax evasion and avoidance. 

Generally, DTTs establish specific rules to allocate -and, where applicable, limit- the taxing powers of the contracting states depending on the nature of each category of income. For business profits, the general rule is that they may be taxed only in the state of residence of the enterprise, even when the profits arise in the other contracting state. The exception applies when there is a permanent establishment in the state where the activity is carried out; in such cases, that state may tax the profits attributable to the permanent establishment. 

Regarding dividends, DTTs do not modify the taxation applicable in Chile, as the country has incorporated into its treaties the so‑called “Chile Clause.” This clause allows the application of the additional tax without being subject to the treaty’s maximum rate limits, provided that the First Category Tax is creditable against the additional tax. 

For other types of income, such as interest, royalties, or capital gains, DTTs establish different criteria for allocating taxing rights, since these categories may be subject to taxation both in the source state and in the residence state. In such cases, DTTs generally allow the source State to tax the income, but set maximum withholding tax rates, without prejudice to any exceptions included in each specific treaty. 

On our Treaty Rates microsite we maintain updated information on specific categories of income and their treatment under the DTTs signed and in force in Chile. In particular, the Treaty Rates Matrix compiles the maximum Additional Tax withholding limits applicable to various categories of income—mainly interest, royalties, and capital gains—according to the provisions of each DTT. 

This matrix summarizes: 

• The applicable withholding tax rates on interest, including distinctions based on the type of credit, the financial institution involved, or the nature of the instrument. 

• The applicable withholding tax rates on royalties, which may vary depending on the type of intangible asset or the use of industrial, commercial, or scientific equipment. 

• Capital gains rules, indicating the cases in which taxation corresponds to the source State and those in which an exceptional maximum rate applies. 

• Complementary information, such as the date on which each DTT entered into force, the existence of most‑favoured‑nation clauses, and the application of special articles to certain categories of services. 

Our microsite is informational in nature and is intended to serve as a guide for the application of DTTs. Nevertheless, the analysis of each situation must consider the specific factual background of the taxpayer and the transaction, the full wording of the applicable treaty and its protocol, as well as its possible interaction with the Multilateral Instrument (MLI) and the interpretive framework provided by the OECD (OCDE, for its initials in Spanish) Model Commentaries. 

For further advice on this and other tax matters, contact our Tax team.