US-Chile double tax treaty - Introduction
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.The Journey to Ratification
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.Decoding the Treaty's Key Provisions
The Treaty introduces significant reductions in withholding taxes across various domains:Dividends:
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:
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%.Royalties:
The Treaty caps the withholding tax on royalties at 10%, with specific exceptions.Capital Gains:
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.Reconciling with TCJA
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 does not obstruct the imposition of the Base Erosion and Anti-Abuse Tax (BEAT) under Section 59A of the Internal Revenue Code.
- Modifications to Article 23, aligning it with the TCJA’s alterations to the foreign tax credit mechanism, particularly reflecting the shift from Section 902 credit to Section 245A's dividends-received deduction.