Treasury Announces Entry into Force of Income Tax Treaty with Chile

On December 19, 2023, the U.S. Department of the Treasury announced the official implementation of a „new“ income tax treaty between the United States and Chile. This is the first bilateral tax agreement between the United States and any country to become effective in over a decade and only the second one in force with a South American nation. The U.S. Senate approved the treaty with a significant majority on June 22, 2023, and President Biden ratified it in December. The United States informed Chile that it had completed its necessary internal procedures, leading to the treaty’s entry into force on December 19, 2023. It shall be noted in this context, that the original treaty was signed in 2010 and modified several times thereafter (minor changes only) before now being ratified by the U.S.
While many provisions relate to double taxation issues in relation to natural persons, there are some provisions relevant for firms operating in the U.S. These include the following:
– The tax treaty limits the withholding tax rate on dividends paid by a resident company to a beneficial owner that is a resident of the other country to 15%. If the beneficial owner is a company holding a minimum of 10% of the voting stock in the company distributing the dividends, the withholding tax rate is reduced to 5%.
– The tax treaty reduces the withholding tax rate on interest to 15%, which is lowered to 10% after a five-year period. For interest paid to certain specific entities, such as banks and insurance companies, the withholding tax rate is 4% without a phase-in period.
– The tax treaty generally provides that gains from the sale of shares or other rights or interests representing the capital of a U.S. or Chilean company may be taxed in the United States or Chile, respectively, at the maximum rate of 16%. This limit does not apply to several substantial holdings.
Generally, the treaty provides for an exemption from taxation in the other contracting state for gains recognized by pension funds, mutual funds, and other institutional investors.
Also, according to the enclosed press statement, the treaty allows for the full exchange of information between the U.S. and Chilean tax authorities and includes a tax crediting system to ensure that taxes paid outside the home tax jurisdiction are credited towards tax obligations in the home jurisdiction.
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Please note that these are only the key provisions outlined in the „new“ treaty. For more detailed, comprehensive information, please refer to the original legal document.