A Breakthrough in Tax Relations: Understanding the US-Chile Income Tax Treaty
The new US-Chile Income Tax Treaty, entered into force on December 19, 2023, represents a landmark development in bilateral economic cooperation. It provides clear guidelines preventing double taxation and encourages investment and business operations between the two nations. US and Chilean businesses and investors should review the treaty closely to understand the implications for their international operations and tax liabilities. Companies operating in both countries may find improved tax efficiency for their operations, and individuals may benefit from clearer rules regarding their tax liabilities.
Here are the key aspects of the treaty that could impact your business operations and tax planning:
- For taxes withheld at the source, the treaty applies to amounts paid or credited on or after February 1, 2024.
- For all other taxes, it applies to taxable periods beginning on or after January 1, 2024.
Taxes Covered – Article 2
- The treaty covers taxes on income and capital, including capital gains, imposed by the United States or Chile. It does not typically include state and local taxes or property taxes.
- Social security and unemployment taxes are excluded, as they are addressed in a separate bilateral agreement.
Residency – Article 4
- The treaty establishes regulations for determining tax residence and includes tie-breaker rules to decide the country of residence when an individual qualifies as a tax resident in both countries.
- US citizens or green card holders are only considered US residents if they have a substantial presence or home in the US and are not residents of a third country.
Permanent Establishment (PE) – Article 5
- The treaty outlines the conditions under which business profits may be taxed by the country where the economic activity occurs. Profits from a business in one treaty country are not taxable in the other unless there is a PE in that country.
- A “services PE” is created if services are performed in another country for more than 183 days in twelve months by individuals present in that country. Remote services provided via telephone or computer are not considered to create a PE.
Withholding at Source – Articles 10, 11, 12
- The treaty caps the withholding tax rate on dividends at 15%, potentially reducing it to 5% if the recipient is a company holding at least 10% of the voting stock of the paying entity and meets certain conditions. Dividends paid to pension funds are exempt from taxation in the source country.
- A reduced withholding tax rate on interests of 4% applies to interest income paid to financial institutions. A 15% rate applies to other interest payments for the first five years, reducing to 10% thereafter.
- Royalties are generally taxed in the payee’s country of residence, with limited taxation in the source country. The treaty sets a maximum 2% tax rate on payments for the use of industrial, commercial, or scientific equipment and a 10% rate for other types of royalties.
Capital Gains – Article 13
- Gains from the sale of shares in a company may be taxed at a rate not exceeding 16%. This will primarily affect US persons selling shares in Chilean entities.
Pensions – Article 18
- Pension distributions are taxed only upon disbursement, with the source country’s tax capped at 15%. Special exemptions apply, such as for US Roth IRA distributions to a Chilean resident, which are exempt to the extent they would be in the US.
Relief from Double Taxation – Article 23
- US taxpayers can claim foreign tax credits on their US income tax returns for taxes paid in Chile and vice versa, thereby reducing double taxation. The treaty aims to reduce or eliminate the incidence of double taxation on the same income, enhancing the financial environment for US taxpayers operating in Chile.
The new US-Chile Income Tax Treaty is a crucial development in strengthening the economic ties between the two countries. For a detailed analysis of how the new treaty may impact your situation or to explore strategic tax planning opportunities, please do not hesitate to contact your Marcum relationship partner, Fiorella Belardi or Martin Lopez.