U.S.-Chile Income Tax Treaty Enters into Force

For taxes withheld at the source, the treaty will have effect for amounts paid or credited on or after February 1, 2024. For all other taxes, the treaty will have effect for taxable periods beginning on or after January 1, 2024.

• Dividends. Article 10 of the treaty generally aligns with the 2006 U.S. model treaty. The source country of the dividends has the right to impose a 15% tax on the gross amount of dividends paid to a resident of the other country. However, this amount may be reduced to 5% of the gross amount of the dividends if the beneficial owner of the dividends is a company that owns at least 10% of the voting stock of the dividend-paying company and otherwise meets the limitation on benefits requirements.
• Interest. Article 11 of the treaty addresses the taxation of interest. Interest paid to banks, insurance companies, finance businesses, and similar entities is subject to a reduced rate of 4%. In all other instances, a 15% tax applies at source for the first five years the treaty is in effect. After the first five years, a 10% tax rate applies to interest payments.
• Royalties. Article 12 of the treaty provides rules for the taxation of royalties. Under these rules, royalties are sourced in the contracting state when the payor is a resident of that state. This is a departure from U.S. law, which sources royalties where the underlying intellectual property is located. Royalties paid for the right to use certain industrial, commercial, or scientific equipment are subject to a 2% tax rate. Royalties for the right to use all other intellectual property are subject to a 10% tax rate. 
• Capital Gains. Article 13 of the treaty provides rules for the taxation of capital gains. One provision of note is the treaty’s rule for the taxation of capital gain on the sale of shares of a company. Under Article 13(5), gains derived from the sale of shares of a company in the other contracting state may be taxed at a rate not to exceed 16% of the amount of the gain. The U.S. generally does not subject foreign shareholders to tax on the sale of shares in a U.S. entity. Therefore, this provision is expected to apply primarily to U.S. persons disposing of shares in a Chilean entity. Certain resourcing provisions in the treaty may apply to allow a foreign tax credit for the Chilean tax in these circumstances.
• Permanent Establishment. Article 5 of the treaty discusses the definition of a permanent establishment (PE). The U.S.-Chile treaty’s PE article differs from that in the U.S. model treaty in a few ways. A PE under the treaty includes an installation used for on-land exploration of natural resources to the extent the activity occurs for more than three months. Other U.S. income tax treaties generally require longer periods of activity, such as 6 or 12 months, to meet the definition of a PE. Another deviation deems a PE to exist if a resident of one country performs services in the other country for 183 days within any 12-month period. Other U.S. treaties typically require the services be performed on connected projects during the period.