The Chilean-U.S. Tax Treaty is Finally Reaching the Finish Line
After a 13-year waiting period, the Senate finally approved the tax treaty between the United States and Chile on June 22, 2023. The treaty passed with a 95-2 vote, making it one of the most bi-partisan bills to pass through Congress in recent history. Once the treaty enters into force, it will be only the third tax treaty in effect between the United States and a Latin American country (the others being Venezuela and Mexico).
Provisions of the Treaty
The treaty generally follows the U.S. Model Treaty, and contains provisions that provide the following:
- A withholding tax rate of 15% on dividends from a U.S. corporation to a Chilean shareholder, which may be reduced to 5% when the dividends are paid to Chilean corporate shareholder owning at least 10% of the voting stock of the U.S. company;
- A withholding tax rate of 15% on interest for the first five years from the date on which the treaty enters into force, and 10% thereafter. This rate is further reduced to 4% for certain financial institutions;
- A withholding tax rate of 10% for most royalties, which may be reduced to 2% for royalty payments related to certain industrial, scientific or commercial equipment;
- Determination of residency for individuals and companies, including tie-breaker rules;
- Additional measures to address Chile’s two-level corporate tax system;
- The application of permanent establishment rules for Chilean companies in the U.S.; and
- The exchange of tax and financial information between the U.S. and Chile.
Reservations in the Treaty
The treaty contains two reservations related to the 2017 Tax Cuts and Jobs Act (“TCJA”). One reservation regards the Base Erosion and Anti-Abuse Tax (“BEAT”) and states the U.S. retains the right to impose the BEAT on resident companies in the U.S. or on Chilean resident companies with profits attributable to a permanent establishment in the U.S. The other reservation is a technical correction for Article 23, which contemplates an indirect credit under I.R.C. Sec. 902, a provision that was repealed under the TCJA. To address this, the reservation would modify Article 23 to allow for relief from double taxation through utilization of the “dividends received deduction” under I.R.C. Sec. 245A.
Future of the Treaty
Despite having been passed by Congress, the treaty will not enter into force until ratified by both governments. As with all law changes, there may be pitfalls and opportunities for taxpayers. Multinational taxpayers should reach out to a trusted tax advisor to determine how the treaty may impact their cross-border activities and income streams.
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