U.S. Senate Approves Highly Anticipated U.S.-Chile Income Tax Treaty
Highlights
- The U.S. Senate, in a vote of 95-2 on June 22, 2023, approved a Resolution of Advice and Consent to ratify 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 (the U.S.-Chile Tax Treaty) that was previously stalled in its chamber for more than a decade.
- Once all of the applicable procedural hurdles are overcome and the U.S. and Chile have notified each other in writing, through diplomatic channels, of their respective ratifications of the U.S.-Chile Tax Treaty, the U.S.-Chile Tax Treaty will enter into force on the date of receipt of the later of these notifications.
The U.S. Senate, in a vote of 95-2 on June 22, 2023, approved a Resolution of Advice and Consent (the Resolution) to ratify 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 (the U.S.-Chile Tax Treaty) that was previously stalled in its chamber for more than a decade.
Treaty Details
The Resolution delivered the U.S. Senate's formal approval of the U.S.-Chile Tax Treaty, subject to two reservations. The reservations were made due to changes to U.S. tax law under the 2017 Tax Cuts and Jobs Act since the U.S.-Chile Tax Treaty was signed. The first reservation clarifies that nothing in the agreement prevents the imposition of the Base Erosion and Anti-Abuse Tax (BEAT) under Internal Revenue Code (the Code) Section 59A. The second reservation changes Article 23 (Relief from Double Taxation) with a modified provision in order to account for the repeal of the indirect foreign tax credit rules of Code Section 902 and the implementation of the current "Dividends Received Deduction" under Code Section 245A.
As a result of the U.S. Senate's vote to approve the U.S.-Chile Tax Treaty, President Joe Biden may now sign an instrument of ratification to fully ratify the U.S.-Chile Tax Treaty in the United States. Importantly, however, though Chile completed its process of approval and ratification of the U.S.-Chile Tax Treaty in 2015, because the U.S. Senate approved the treaty subject to reservations, Chile must also approve and ratify these reservations. Once all of the applicable procedural hurdles are overcome and the U.S. and Chile have notified each other in writing, through diplomatic channels, of their respective ratifications of the U.S.-Chile Tax Treaty, the agreement will enter into force on the date of receipt of the latter of these notifications.
With respect to withholding taxes, the provisions will have effect for amounts paid or credited on or after the first day of the second month following the date on which the U.S.-Chile Tax Treaty enters into force. With respect to all other taxes, the provisions will have effect for taxable periods beginning on or after Jan. 1 following the date on which the treaty enters into force.
Advantages of the Treaty
The U.S.-Chile Tax Treaty will provide various advantages to multinational companies and individuals. The key benefits include:
- Dividends: The U.S.-Chile Tax Treaty provides that the withholding tax rate on dividends paid from a U.S. corporation to a Chilean shareholder is limited to 15 percent. Also, under specific circumstances, the withholding tax rate is reduced to 5 percent if the beneficial owner is a company that owns at least 10 percent of the voting stock of the dividend-paying company.
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Holland & Knight Insight: Unlike some other U.S. income tax treaties, there is no provision for a full exemption on dividend withholding tax. However, the withholding tax rates under the U.S.-Chile Tax Treaty are substantially lower than the default 30 percent U.S. withholding tax rate assessed on dividends paid by U.S. corporations to foreign shareholders. |
- Interest: The U.S.-Chile Tax Treaty provides that the withholding tax rate on interest is limited to generally 15 percent for the first five years from the date on which the U.S.-Chile Tax Treaty takes effect, and 10 percent thereafter. Additionally, the withholding tax is reduced to 4 percent if the beneficial owner of the interest is a bank, insurance company, or lending or finance business. The 4 percent reduced withholding tax rate may apply for certain other ventures as well.
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Holland & Knight Insight: Overall, these interest withholding tax rates are also materially lower than the default U.S. withholding tax rate assessed on U.S. source interest to a foreign payee of 30 percent, however, there may still be opportunities for certain Chilean taxpayers to utilize the exemption for "Portfolio Interest" under the Code to eliminate the potentially applicable U.S. withholding tax. |
- Royalties: The U.S.-Chile Tax Treaty provides that the withholding tax rate on royalties is limited to 10 percent if such payment is for the use of, or the right to use, most types of intellectual property, and reduced to 2 percent for the use of, or the right to use, certain industrial, commercial or scientific equipment (not including ships, aircraft or containers).
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Holland & Knight Insight: These withholding tax rates on royalties are still substantially lower than the default 30 percent U.S. withholding tax rate. However, many current bilateral income tax treaties that the United States has with certain European countries provide for a full exemption on royalties withholding tax. |
Looking Ahead
Once the U.S.-Chile Tax Treaty is finally entered into force, it will mark a material expansion of the U.S. bilateral income tax treaty network in Latin America. Chile will represent the third Latin American country (alongside Venezuela and Mexico) with a bilateral income tax treaty with the United States. It may be possible that the advancement of the U.S.-Chile Tax Treaty will provide momentum for the United States to negotiate, sign and ratify bilateral income tax treaties with other jurisdictions in Latin America.
As the U.S.-Chile Tax Treaty advances to ratification, multinational companies and individuals should analyze its potential implications now on cross-border activities and income between the United States and Chile.
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