New agreement to avoid double taxation between Chile and the United States

Thu 07 Mar 2024

This article discusses the effects generated by the agreement which avoids double taxation between Chile and the United States. After many years, this agreement came into force on December 19, 2023, when President Joe Biden signed it.

The treaty applies from 1 February 2024 in respect of withholding taxes and applies for all other taxes from 1 January 2024.

Although the Chilean Parliament approved the initiative in 2015, after being amended and ratified by the United States, last June, it had to return to the Chilean Congress. The agreement was processed in less than a month after its entry on October 25, 2023.

The agreement seeks to strengthen the development of trade and international transactions between both countries, in addition to strengthening cooperation in tax matters. Another goal is to eliminate or reduce tax obstacles that affect the activities and investments from or to Chile. According to the Minister of Finance of Chile Mario Marcel’s comment from November 2023, “investment from the United States accounts for 10.9% of foreign investment and we hope that it continues to grow with this agreement.”

Consequently, Chile became the second Latin American country, after Mexico, to have a double tax agreement with the United States in force.

Tax effects

Among the tax opportunities of the agreement, the most relevant for Chileans is the reduction of the tax burden of a direct investment in the United States, for which the withholding of dividends paid from the United States used to be up to 30%, but from 1 February 2024 it shall be only 5%.

With respect to the payment of interest from Chile, in general terms, the Additional Tax rate shall be 15%, to be reduced to 10% after 5 years, while there shall be a preferential withholding of 4% applicable only to banking entities, insurance companies, financial institutions, among others.

Regarding services, the current withholding of 15% to 35% would be reduced to zero if there is no permanent establishment in Chile. As usual, it will be relevant to review the local Value Added Tax regulations.

Another interesting issue to consider is the payment of Royalties from Chile, where the current withholding rate is 30%; however, it shall be reduced to 10% for most items and 2% for the use of, or the right to use, industrial, commercial or scientific equipment (other than for international transport).

In the other hand, Capital Gain is limited to an Additional Tax withholding of 16% to the extent that the transferor has not owned in a period of 12 months before the transfer more than 50% of the corporate interest in the entity resident in Chile. However, each jurisdiction retains the right to tax immovable property in its jurisdiction.

Lastly, this agreement is expected to generate an opportunity to review the investment structures frequently conducted by Chilean residents in the United States or by the American residents in Chile. For example, financing with unrelated entities or through third parties in areas where some of those involved maintain current agreements to avoid double taxation.

Conclusion

The agreement should contribute to Chile being a hub for services and intangible assets that can be licensed in the region through American companies with holding entities domiciled in Chile. However, Mexico already has a double tax agreement with the United States and so would compete with Chile in this respect. However, the dynamics of business operating from Mexico and Chile and each jurisdiction’s particular attributes should be closely examined by those considering investing in Latin America through either Chile or Mexico.

From Chile’s point of view, this agreement represents a consolidation of the country within Latin America as a potential investment gateway to the United States.