Corporate Tax News Issue 62 - May 2022

U.S. tax treaty ratification moves forward

The United States Senate Foreign Relations Committee on March 29, 2022 approved the agreement signed between the U.S. and Chile to avoid double taxation and prevent tax evasion in relation to income and wealth taxes. The agreement will now go to the full U.S. Senate, where it must be approved by two-thirds of its 100 members to obtain final approval. The treaty would then by forwarded to the State Department, which would draft an “Instrument of Ratification” for the president’s signature.

This tax treaty was signed by both parties in February 2010 and was approved and ratified by the Chilean Congress in 2015.

The following provisions are among the most important in the treaty:

  • The withholding tax rate on dividends distributed from the U.S. is reduced to 15%, or to 5% if the beneficial owner of the dividends directly owns at least 10% of the voting stock of the payor. In the case of dividends distributed from Chile, the tax rate is not limited by the treaty because of the tax integrated system applied in the country.
  • The withholding tax rate on interest payments is reduced to between 4% and 10%, depending on the type of beneficiary entity.
  • The withholding tax rate on royalties is reduced to rates between 2% and 10%, depending on the kind of royalty.

The treaty also includes provisions for the exchange of information between the Chilean and U.S. tax authorities.

The text of the treaty approved by the SFRC was subject to the following reservations:

  • The agreement will not constitute an impediment to the U.S. for the imposition of the base erosion and anti-abuse tax (BEAT)  on entities resident in the U.S., or on the profits of entities resident in Chile that are attributable to a permanent establishment in the U.S.
  • The first paragraph of Article 23, which prescribes the methods for eliminating double taxation from a U.S. perspective, is to be replaced with a modified provision to make it consistent with the system of credits for taxes paid currently in place under U.S. law. More specifically, the new provision would permit a U.S. corporate shareholder owning at least 10% of the vote or value of a Chilean tax resident company to deduct the amount of dividends received from the Chilean subsidiary in computing its taxable income (as it would under the dividends received deduction in IRC Section 245A).

While final approval of the U.S.-Chile treaty by the U.S. Senate is still uncertain, and the date of entry into force cannot be predicted, this development represents an important step forward to improve commercial and business relations between the two countries.

Franssesca Forné

Jerry Seade