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On 3 October 2024, the Irish High Court issued an important judgment concerning the tax residency of a Delaware LLC under the US/Ireland Double Tax Treaty (DTA).
This case involved the ability of three Irish subsidiaries of a Delaware LLC to claim group loss relief under Section 411 of the Taxes Consolidation Act 1997.
The key question was whether the Delaware LLC was considered “liable to tax” and thus “resident” under Article 4 of the US/Ireland DTA, which would enable the subsidiaries to claim group relief.
The High Court’s decision ultimately denied this relief.
The appeal was brought by Susquehanna International Group Ltd and two other companies, which sought to claim group relief by arguing that their parent, a Delaware LLC, was tax resident in the US.
The Irish Revenue disagreed, asserting that the LLC was not a company for group relief purposes and was not tax resident in the US under the DTA.
The crux of the issue was that the LLC was a disregarded entity for US tax purposes, meaning it was not subject to tax at the entity level.
Instead, its members, including several S Corporations and individuals, were taxed on their share of the LLC’s income.
This complex ownership structure raised questions about whether the LLC could be considered a separate taxable entity eligible for group relief.
Initially, the Tax Appeals Commission ruled in favour of the taxpayer, finding that the LLC was a company for the purposes of group relief and that it was resident in the US under the DTA.
The Commissioner took a purposive interpretation of the DTA, arguing that even though the LLC was fiscally transparent, it could still be considered tax resident under Article 4.
This was based on the LLC’s perpetual succession under Delaware law, which made it a body corporate.
The Irish High Court, however, overturned the Tax Appeals Commission’s decision. The Court focused on two key issues:
This ruling underscores the importance of understanding the complexities of entity classification in international tax law.
The Court’s decision hinged on the fiscally transparent nature of the Delaware LLC, which ultimately deprived it of treaty benefits and group relief eligibility.
While the LLC was structured under US law as a disregarded entity, this classification proved crucial in the Irish Revenue’s denial of relief.
For businesses with similar structures, this judgment highlights the need to carefully examine ownership arrangements and the potential tax implications.
Companies with complex cross-border structures should ensure that their parent entities meet the residency requirements under relevant tax treaties to benefit from relief provisions like group loss relief.
The Irish High Court’s decision serves as a reminder of the challenges posed by hybrid entities in international tax law.
While the Tax Appeals Commission initially supported the taxpayer’s position, the High Court’s strict interpretation of the US/Ireland DTA ultimately led to the denial of group relief.
Businesses should take note of this ruling and review their structures to ensure compliance with tax residency rules.
If you have any queries about this article on Group Loss Relief and Delaware LLCs or tax matters in Ireland, then please get in touch.
Alternatively, if you are a tax adviser in Ireland and would be interested in sharing your knowledge and becoming a tax native, then there is more information on membership here.
The India–Mauritius Double Tax Avoidance Agreement (DTAA), signed in 1983, has long been a pivotal treaty for investors due to its favourable tax terms.
For years, investors, particularly in the private equity and venture capital space, have utilised this treaty to minimise tax liabilities in India.
However, the treaty has also sparked numerous litigations and controversies, primarily concerning capital gains tax exemptions for investments made through Mauritius.
In a recent ruling, the Delhi High Court (HC) addressed a dispute concerning the application of the DTAA benefits to a Mauritius-based company, Tiger Global International.
This case clarified critical issues, including the significance of the Tax Residency Certificate (TRC), the Limitation of Benefits (LoB) clause, and the applicability of the grandfathering provision in the treaty.
The court’s decision has brought much-needed relief and certainty to taxpayers navigating the complexities of international taxation.
The case centres on Tiger Global International (the Assessee), a company incorporated in Mauritius for the purpose of making investments on behalf of Tiger Global Management LLC (TGM LLC), a Delaware-based investment manager.
The Assessee held a Category 1 Global Business License and a Tax Residency Certificate (TRC) from the Mauritius tax authorities.
Between October 2011 and April 2015, Tiger Global acquired shares in Flipkart Singapore and later transferred its holdings to Fit Holdings SARL, a Luxembourg-based entity.
The company sought clarity from India’s Income Tax Department (ITD) regarding the applicability of capital gains tax on these transactions under the DTAA.
However, the Advance Authority Ruling (AAR) ruled against the Assessee, stating that Tiger Global’s Mauritius-based structure lacked commercial substance and was merely a vehicle for *tax avoidance.
The Assessee argued that its investments were eligible for the **capital gains tax exemption** under Article 13(3A) of the DTAA.
This provision exempts Mauritian residents from Indian capital gains tax for shares acquired before April 1, 2017, and transferred thereafter.
The Assessee also relied on a Tax Residency Certificate (TRC) from the Mauritius authorities as proof of its eligibility for DTAA benefits, citing CBDT Circular No. 789, which upholds the TRC as sufficient evidence of residency.
The Assessee further contended that the Limitation of Benefits (LoB) clause, which restricts treaty benefits for entities with little economic substance, did not apply to the transactions in question because the shares were acquired prior to 2017.
They also argued that the AAR erred in questioning the motives behind the company’s establishment in Mauritius, as the purpose of incorporation should not disqualify it from treaty benefits.
The ITD took a starkly different position, arguing that the Mauritius-based entities were created solely to avoid capital gains tax in India.
The ITD asserted that TGM LLC, the US-based investment manager, exercised ultimate control and decision-making over the Mauritius entities, rendering the Mauritian companies mere intermediaries in a tax avoidance scheme.
The ITD relied on the Vodafone case, which allows the piercing of the corporate veil when an entity’s structure lacks commercial substance.
The ITD supported the AAR’s conclusion that Tiger Global International did not possess independent management and was ineligible for the DTAA benefits due to its tax avoidance motives.
The Delhi HC ruled in favour of the Assessee, providing a well-reasoned judgment that clarified the application of the India-Mauritius DTAA.
The court categorically held that TGM LLC was merely an investment manager and not the parent company of the Assessee.
The court observed that Tiger Global International was a significant entity with considerable economic activity, managing investments for more than 500 investors across 30 jurisdictions.
Regarding beneficial ownership, the court found no evidence to suggest that the Assessee was obligated to transfer revenues to TGM LLC or that it was merely acting on behalf of the US-based company.
Furthermore, the court upheld the Assessee’s Tax Residency Certificate (TRC) as conclusive proof of its eligibility for DTAA benefits, in line with earlier rulings.
Crucially, the court reaffirmed that grandfathering provisions under Article 13(3) of the DTAA would protect investments made before April 1, 2017, from the LoB clause.
This provision, the court held, was clear and unambiguous, ensuring that the General Anti-Avoidance Rules (GAAR) could not override treaty benefits.
The ruling of the Delhi High Court is a major victory for international investors who rely on the India-Mauritius DTAA for tax certainty.
The judgment clarifies that corporate structures established in tax-friendly jurisdictions should not automatically be viewed as vehicles for tax avoidance, and that the Tax Residency Certificate (TRC) holds substantial weight in determining eligibility for treaty benefits.
The decision imposes a high burden of proof on tax authorities to establish tax evasion or fraud, ensuring that only in cases of sham transactions will treaty benefits be denied.
This landmark ruling provides investors with the much-needed confidence to structure their investments in line with international treaties, reinforcing India’s position as a tax- and investment-friendly jurisdiction.
If you have any queries about this article, or Indian tax matters in general, then please get in touch.
A Foreign Tax Credit (FTC) allows individuals and businesses to avoid being taxed twice on the same income in two different countries.
For example, if an Indian company earns income in another country, it pays taxes in that country.
But when it brings the income back to India, it can claim an FTC to avoid paying tax again on the same income.
In 2024, India has introduced stricter rules on how businesses and individuals can claim these credits.
This change is part of the government’s effort to close loopholes and make sure that everyone is following the rules properly.
The new rules require taxpayers to provide more documentation and proof that they’ve paid taxes abroad.
Previously, it was easier to claim an FTC, but now taxpayers will have to show detailed tax payment records from the foreign country, including receipts, assessments, and tax returns.
These changes are aimed at reducing disputes with the Indian tax authorities.
In the past, many companies would claim credits without providing enough evidence, leading to disagreements with the government.
By tightening the rules, India hopes to make the system clearer and more transparent.
The new rules will mostly affect Indian companies with foreign income and Indian nationals working abroad.
For example, multinational companies that operate in several countries will need to ensure that they have all the necessary paperwork to claim the FTC.
Without proper documentation, they risk paying higher taxes or facing penalties.
Additionally, expatriates who live and work abroad but still have tax obligations in India will also need to be more careful when claiming their credits.
India’s move to tighten FTC rules is part of a broader effort to improve tax compliance and reduce tax disputes.
While this may create more work for businesses and individuals, it’s a necessary step to ensure that the tax system remains fair and efficient.
Taxpayers should be prepared to keep better records and provide more documentation when claiming FTCs in the future.
If you have any queries about this article on India Tightens Rules on Foreign Tax Credit Claims, or any other tax matters in India, then please get in touch.
The European Commission has initiated an infringement procedure against the Netherlands, challenging its current tax regime that provides a withholding tax (WHT) reduction exclusively to domestic investment funds, while excluding foreign funds..
This development may compel the Netherlands to reassess and potentially amend this discriminatory practice to align with EU law.
The infringement procedure enhances the likelihood that foreign multi-investor investment funds could successfully reclaim WHT paid in the Netherlands.
WHT refund applications for the 2021 tax year must be submitted by the end of 2024 to avoid being barred by the statute of limitations.
On 25 July 2024, the European Commission announced its decision to initiate this infringement procedure against the Netherlands through a letter of formal notice (INFR 2024/4017).
In the formal notice, the Commission challenges the Dutch WHT regime, which is seen as infringing upon the fundamental freedom of the movement of capital as outlined in Article 63 of the Treaty on the Functioning of the European Union (TFEU) and Article 40 of the European Economic Area Agreement.
The issue lies in the Dutch tax law that grants WHT reductions solely to domestic investment funds, excluding foreign funds that are otherwise comparable to Dutch investment vehicles.
This procedure could force the Netherlands to reconsider its approach to taxing foreign investment funds, particularly those with multiple investors, a practice that has been in place for many years.
The infringement procedure follows significant decisions by Dutch national courts, which were influenced by the Court of Justice of the European Union (CJEU) ruling in the Köln Aktienfonds DEKA case (CJEU case C-156/17, decision dated 30 January 2020).
In a ruling on 9 April 2021, the Dutch Supreme Court (Hoge Raad der Nederlanden) decided that foreign investment funds are not entitled to a refund of Dutch WHT.
Under current Dutch law, domestic investment funds effectively receive a reduction in Dutch WHT on dividend income through an offset mechanism applied to the WHT paid by distributing Dutch companies.
However, this offset is not available to foreign investment funds, creating a discrepancy that makes non-Dutch investment funds less appealing to Dutch investors and investments in Dutch companies less attractive to foreign funds.
Despite criticism, the Dutch Supreme Court upheld this regime, arguing that the tax situations of Dutch and foreign funds are not objectively comparable, and therefore, the regime does not constitute a restriction on the free movement of capital.
The European Commission’s infringement procedure could lead to significant changes in the Netherlands’ taxation of foreign investment funds.
Infringement proceedings are initiated under Article 258 TFEU when the Commission identifies potential breaches of EU law.
If a Member State fails to correct an identified breach, the Commission may issue a reasoned opinion and eventually refer the case to the CJEU.
Should the CJEU rule against the Netherlands, the country would be required to take corrective measures.
Failure to comply could result in the Commission imposing financial penalties under Article 260 para. 2 TFEU.
The Netherlands has two months to respond to the Commission’s concerns; otherwise, the Commission may escalate the procedure.
In summing up, the European Commission’s infringement procedure against the Netherlands marks a critical juncture for the country’s tax regime concerning foreign investment funds.
If upheld, this action could necessitate substantial changes to align Dutch tax practices with EU law, particularly in ensuring that foreign funds are treated equitably.
The potential repercussions include not only financial penalties but also a broader impact on the attractiveness of the Netherlands as an investment destination.
As the Netherlands faces the challenge of responding to the Commission’s concerns, the outcome could set a precedent for how similar cases are handled across the EU, reinforcing the principle of non-discrimination within the internal market.
If you have any queries about this article on the EU Infringement Procedure v Netherlands Fund Tax Rules, or Dutch tax matters in general, then please get in touch.
In a notable shift, the Federal Supreme Court of Switzerland has recently revised its stance on inter-cantonal double taxation, a move that greatly benefits taxpayers.
Historically, individuals and businesses faced significant hurdles in contesting double taxation across cantonal borders.
However, a key ruling from the Federal Supreme Court has now eased these restrictions, providing taxpayers with enhanced avenues to defend against inter-cantonal double taxation.
Intercantonal double taxation occurs when the same income or assets are taxed by more than one canton.
Previously, taxpayers could lose their right to appeal against such double taxation if they had unconditionally accepted their tax liability in one canton despite knowing about a competing tax claim from another canton.
This situation often affected companies relocating their registered offices between cantons, leading to simultaneous tax claims by both the original and new cantons of registration.
For example, if a company moved its registered office from one canton to another but allowed the assessment by the new canton to become legally binding without informing it of a competing claim from the original canton, it could end up being taxed by both cantons.
This resulted in effective double taxation, which was difficult to contest under previous legal precedents.
The landmark ruling delivered on 17 August 17, 2023, and concerned a married couple. They had been living in their own home in the canton of St. Gallen since 2010.
The husband had been working as a self-employed doctor in the canton of Schwyz since 2011.
After deregistering in St. Gallen and registering in Schwyz in 2018, the couple faced assessments by both cantons for the same tax year, leading to double taxation.
Despite the canton of Schwyz assessing the couple in 2020, St. Gallen also issued an assessment for 2018, claiming the couple’s domicile had not effectively changed.
The result was that the couple was taxed as residents in both cantons for the same period. Subsequent appeals against the St. Gallen assessment were unsuccessful, and their request for a revision of the Schwyz assessment was also denied.
Under the previous legal framework, taxpayers forfeited their right to appeal if they acknowledged their tax liability in one canton while knowing of a competing claim in another.
This forfeiture occurred if the taxpayer submitted to the assessment unconditionally, paid the required taxes without reservation, and did not pursue further legal remedies.
A 2020 Federal Supreme Court ruling emphasized that forfeiture should only occur in cases of clear abuse of rights or actions contrary to good faith, but it still left room for significant challenges for taxpayers facing double taxation.
The Federal Supreme Court has now revised this stance.
In its recent decision, the court determined that forfeiture of the right to appeal is no longer a proportionate response to a taxpayer’s conduct in inter-cantonal relations.
The court concluded that the elimination of unconstitutional inter-cantonal double taxation should be refused only in cases of qualified abuse by the taxpayer and where the canton has a legitimate interest in withholding the taxes, even if it has no legal claim under inter-cantonal tax law.
The ruling now restricts the previous practice on forfeiture, making it easier for taxpayers to challenge and eliminate intercantonal double taxation.
Misconduct by the taxpayer will now primarily result in the imposition of costs incurred, rather than a complete forfeiture of the right to appeal.
The ruling significantly enhances taxpayers’ ability to avoid or contest intercantonal double taxation. Here are some practical steps taxpayers should consider:
The Federal Supreme Court’s change in practice represents a significant victory for taxpayers, providing them with better tools to combat inter-cantonal double taxation.
If you have any queries on this article on Supreme Court Alters Practice on Inter-cantonal Double Tax, or other Swiss tax matters, then please get in touch.
India and Mauritius have signed a new protocol, dated 7 March 2024, amending the India-Mauritius tax treaty.
The protocol introduces a Principal Purpose Test (PPT) to address concerns about treaty shopping and tax avoidance.
This amendment aims to close loopholes and ensure that the tax treaty is not used for non-taxation or reduced taxation through tax evasion or avoidance.
The exact application and potential retrospective effect of these changes are not yet clear, but the amendment reflects a significant shift in India’s approach to tax treaties.
Mauritius has been a popular route for investments in India due to favorable tax provisions and no local taxes on capital gains.
Previously, the India-Mauritius tax treaty exempted capital gains earned by Mauritian residents from the sale of shares in Indian companies.
This changed in 2016, with the exemption withdrawn for shares acquired after 31 March 2017.
The shares acquired before that date were “grandfathered,” allowing capital gains tax exemption on their sale, regardless of when they were sold.
However, anti-abuse conditions were not part of the treaty’s 2016 amendments.
India has already introduced General Anti-Avoidance Rules (GAAR) into its domestic tax laws, effective from 1 April 2017, which aim to prevent tax avoidance by focusing on substance over form.
GAAR gives tax authorities the power to deny tax benefits if the main purpose of an arrangement is to obtain a tax benefit without commercial substance.
Additionally, India ratified the Multilateral Instrument (MLI) in 2019, an OECD initiative to combat base erosion and profit shifting.
MLI includes the Principal Purpose Test (PPT), which can deny tax treaty benefits if one of the principal purposes of an arrangement is to obtain a tax benefit inconsistent with the treaty’s purpose.
However, the India-Mauritius tax treaty was not part of MLI’s covered tax agreements, making this latest protocol significant for incorporating PPT.
The new protocol introduces anti-abuse conditions directly into the India-Mauritius tax treaty:
Benefits such as concessional withholding tax rates and capital gains tax exemptions will now be subject to the PPT. This means that if the primary purpose of an arrangement is to obtain a tax benefit, it can be denied.
The protocol expands the objects and purposes of the tax treaty to prevent non-taxation or reduced taxation due to tax evasion or avoidance, specifically targeting treaty shopping arrangements.
The protocol will take effect once both the Indian and Mauritian governments notify it according to their domestic laws. The exact application and potential retrospective effect are not yet clear.
The introduction of PPT into the India-Mauritius tax treaty aligns with international efforts to curb tax evasion and treaty shopping.
However, this move deviates from the approach taken in 2016 when the treaty was amended without introducing anti-abuse conditions.
There are concerns about the potential retrospective application of the PPT and its impact on previously grandfathered investments.
The lack of clarity on whether the amendments could apply to past transactions has raised concerns about investor sentiment and the stability of the tax treaty.
Given the Supreme Court of India and other courts’ rulings affirming treaty entitlement for Mauritian investors based on valid tax residency certificates, the retrospective application of the PPT could unsettle these rulings.
While the protocol’s intent is to prevent abuse, clarity on its application and potential retrospective effect is essential.
It is hoped that the government will provide further guidance to allow investors to understand and adapt to the new requirements.
If you have any queries about this article – India Amends Tax Treaty with Mauritius – or any other tax matters in India, then please get in touch.
The Upper Tribunal in Haworth v HMRC [2024] UKUT 00058 (TCC) upheld the interpretation of the “place of effective management” test for determining tax treaty residence, confirming that it is distinct from the “central management and control” test used to ascertain corporate residence.
The case revolved around a complex tax avoidance scheme involving corporate trustees and double tax treaties.
The case involved Jersey-based trustees of a family trust that held shares in a UK-incorporated company.
The trustees participated in a “round the world” tax avoidance scheme designed to avoid UK capital gains tax on a share disposal.
The scheme involved resigning UK trustees in favor of Mauritian trustees to dispose of shares, taking advantage of the UK-Mauritius Double Tax Treaty.
Article 4(3) of the Treaty provided a tie-breaker test for determining the residence of a person liable to tax in both contracting states, with the deciding factor being the “place of effective management.”
The trustees in Mauritius, who would not incur UK capital gains tax on the disposal, replaced the existing Jersey trustees.
The newly appointed trustees then disposed of shares, following which UK-resident trustees were reappointed. HMRC contended that the scheme was fraudulent, as the commercial reality pointed to the effective management being in the UK, negating the tax benefits claimed.
The First-tier Tribunal (FTT) applied the test for the “place of effective management,” which required considering the centre of top-level management.
It found that the trustees in the UK, along with their advisors, orchestrated and supervised the tax avoidance scheme, suggesting that the management of the trust effectively rested in the UK.
On appeal, the Upper Tribunal confirmed that the test used to determine the place of effective management differed from the central management and control test used to ascertain corporate residence.
The “top-level management” approach requires assessing where key management and commercial decisions are made, not just the location of individual trustees.
The appellants argued that the test for the place of effective management should be aligned with the central management and control test, emphasizing that the Mauritian trustees made the final decisions regarding the disposal of shares.
However, the Upper Tribunal upheld the FTT’s interpretation that the test should consider the broader circumstances, including the planning and implementation of the scheme.
The fact that certain decisions were taken in the UK and that the trustees acted under external influence was sufficient to challenge the notion of effective management in Mauritius.
The Upper Tribunal’s decision reinforces that the place of effective management test is distinct from the central management and control test.
This interpretation carries significant implications for international tax planning, as it suggests that assessing the “effective management” must consider the overall context and not just isolated decisions by trustees or corporate entities.
The ruling provides clarity on the application of the “place of effective management” test in double tax treaties, indicating that it should be interpreted with a broader perspective.
This decision could impact cross-border tax planning and the structure of trusts where treaty residence plays a critical role in tax liability.
This decision may also lead to greater scrutiny in tax avoidance schemes that rely on offshore entities to avoid UK tax liabilities.
Future cases involving the interpretation of double tax treaties will likely refer to this decision, emphasizing the importance of considering the context in which tax decisions are made.
It remains to be seen whether the case will be appealed to the Court of Appeal, which could lead to further clarification or modification of the established interpretation of the “place of effective management.”
If the Court of Appeal chooses to address the case, it could potentially depart from the decision in Smallwood, leading to a broader interpretation of tax treaty residence.
If you have any queries about this article on Haworth v HMRC, or any other UK tax matters, then please get in touch
In a significant move to adjust its tax framework, the Finance Act 2023 introduced an amendment that impacts non-residents receiving royalty and fees for technical services (FTS) in India.
Since its inception in 1974, the Income Tax Act 1961 has undergone numerous revisions, with the latest changes set to influence multinational corporations and their operations within India.
Previously, the tax rate for royalty and FTS received by non-residents was set at 10% (plus applicable surcharge and cess), as outlined in Section 115A of the Act.
This rate was momentarily increased to 25% in 2013 before being restored to 10% in 2015.
However, the Finance Act 2023 has now doubled this rate to 20% (plus surcharge and cess), effective from 1 April 2023.
The increase in the tax rate to 20% presents a significant shift for non-residents deriving income from royalty and FTS in India.
Given that many tax treaties with countries such as the United Kingdom, Canada, and the United States offer a lower tax rate of 15%, non-residents had previously opted for taxation under Section 115A of the Act due to its beneficial provisions, including specific exemptions from filing tax returns in India under certain conditions.
With the amendment, non-residents are likely to pivot towards claiming benefits under applicable tax treaties, which, while potentially offering lower tax rates, also necessitate additional compliance measures, including tax registrations in India and filing of income tax returns.
The requirement to file tax returns in India, necessitated by claiming treaty benefits, introduces a new layer of compliance for non-residents.
This includes the need for obtaining tax registrations and electronically filing Form 10F, a declaration form used by non-residents to claim treaty benefits.
Although there has been a temporary relief allowing manual submission of Form 10F until 30 September 2023, electronic filing will become mandatory thereafter, adding to the compliance burden for non-residents without a tax registration number.
Moreover, Indian payers making royalty or FTS payments to non-residents must now ensure that they collect and maintain specific documents from the non-residents to apply the treaty rates of withholding tax.
These documents include the Tax Residency Certificate, No Permanent Establishment Declaration, and the electronically filed Form 10F.
Failure to comply with these documentation requirements may result in withholding tax being applied at the higher domestic rate, along with potential penalties for the Indian payer.
The amendment could also have financial implications for Indian payers, especially in cases where royalty or FTS payments are grossed-up to cover the tax liability of the non-resident recipient.
The increased tax rate may lead to higher cash outflows for Indian payers, emphasizing the importance of efficient tax planning and compliance.
The Finance Act 2023’s decision to double the tax rate on royalty and FTS for non-residents marks an important change in India’s tax regime, aiming to align with global taxation practices.
While this may increase the tax burden and compliance requirements for non-residents, leveraging tax treaty benefits could mitigate some of these challenges.
As India continues to refine its tax laws, it is crucial for non-residents and Indian payers alike to stay informed and compliant with the evolving legal landscape.
If you have any thoughts on this article then please get in touch.
A significant development occurred on 19 December 2023 with the US Treasury Department’s announcement of the activation of the US-Chile Tax Treaty.
This Convention, formally known as 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 the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital – a bit of a mouthful! – marks a milestone as the first new U.S. tax treaty in over a decade.
Initiated in 2010, the treaty faced an extensive delay in the U.S. Senate, primarily due to aligning it with the 2017 Tax Cuts and Jobs Act’s (“TCJA’s”) radical changes.
Finally, in July 2023, the Senate gave it the nod, incorporating two crucial TCJA-related reservations.
This ratification opened doors for Chile, positioning it as the first nation to establish a new tax treaty with the U.S. in this era.
The Treaty introduces significant reductions in withholding taxes across various domains:
For dividends issued by a U.S. corporation to a Chilean owner, the withholding rate is generally reduced to 15%.
It further drops to 5% if the recipient is a company holding a minimum of 10% of the voting stock.
Interest payments see a withholding tax cut to 15% for the first five years, post-Treaty enforcement, and 10% thereafter. Notably, for certain beneficiaries like banks and insurance companies, this rate is as low as 4%.
The Treaty caps the withholding tax on royalties at 10%, with specific exceptions.
Residents of either country selling shares in the other’s companies are taxable only in their resident nation, subject to meeting certain criteria.
Additionally, the Treaty introduces a limitation-on-benefits provision to curtail treaty shopping, aligning with U.S. treaty practices.
The Senate’s ratification came with two critical reservations, later approved by Chile’s National Congress, ensuring the Treaty’s compatibility with the TCJA:
The Treaty’s provisions on withholding taxes will be applicable to payments made or credited from 1 February 2024, onwards.
Other tax provisions will be effective for tax years starting 1 January 2024.
Additionally, the provisions for information exchange are effective immediately.
The US-Chile Tax Treaty is important as it potentially creates a template for future US tax treaties.
For persons effected by the new treaty, understanding and potentially leveraging its benefits of will be key to optimising cross-border operations.
If you have any queries regarding this article on the US-Chile double tax treaty, or US or Chile tax matters in general, then please get in touch.