Key Takeaways from our Chile-U.S. Double Taxation Treaty Panel
Linklaters’ New York office hosted a panel discussion with the North American-Chilean Chamber of Commerce (NACCC) and Morales & Besa on the Chile-U.S. Double Taxation Treaty, which was recently approved and expected to come into effect by January 2024. Panelists included Linklaters Tax Partner Gabriel Grossman, Morales & Besa Tax Partner Santiago Martínez, NACCC President Oscar Stephens, and David E. Spencer of the Law Offices of David E. Spencer.
Key takeaways from the discussion included:
1. Reduced Taxes on Cross-border Investment between the U.S. and Chile: The reduced rates of withholding on U.S. source income will allow more tax efficient investing into the U.S. In particular, the reduced rate of withholding on U.S. source dividends and U.S. source interest improves the ability of Chilean businesses to efficiently operate within the U.S. Interest and Royalty payments flowing from Chile to the U.S. will enjoy reduced taxation and, in certain cases, service income will not be subject to Chilean withholding taxes. U.S. shareholders of Chilean companies will also be subject to a fully integrated tax system significantly reducing the maximum Chilean tax burden from Chilean source income. Further, tax on the gain from the sale of a Chilean company’s shares by a U.S. holder can see the withholding tax reduced almost by half under the treaty and gain on regularly traded shares may enjoy a complete exemption from tax where certain requirements are met.
2. Greater Certainty for Chilean and U.S. Multinationals: The provisions regarding relief from double taxation provide greater certainty about the creditability of taxes paid by a resident to the other jurisdiction. In particular, this eliminates potential concerns regarding the source of income for foreign tax credit limitation purposes within the U.S. Furthermore, income from gain on the disposition of property that may be taxed in Chile — which would otherwise be treated as U.S. source for U.S. tax purposes — will be able to be treated as non-U.S. source for foreign tax credit purposes as a result of the treaty.
3. Protection of Source-Country Tax Base: While the Chile-U.S. tax treaty provides notable relief on the rate of withholding tax, it also maintains a high level of source-country taxation rights. Interest is not exempt from withholding, and gain from the disposition of shares of a resident company may also be taxed by that jurisdiction. While those taxes should generally be creditable, the imposition of source country taxation means that there is greater pressure on ensuring that there is not a timing mismatch on income recognition between the two tax regimes.
4. Other Latin American Jurisdictions May Invest in the U.S. through Chile: Only two countries in South America have signed tax treaties with the U.S. This may present opportunities for other Latin American jurisdictions to invest in the U.S. through Chile; however, the effectiveness of such structures requires both strategic legal and tax analysis (in particular the application of the limitation on benefits provision of the treaty).
Linklaters’ lawyers have practiced in Latin America for decades and Linklaters was one of the first international firms to open an office in Brazil in 1997. The firm is highly ranked across key Latin America legal directories including Chambers, Legal 500, and Latin Lawyer, and in the past year took home three deal of the year awards for the firm’s work on the world’s first sovereign sustainability-linked bond offering. Learn more about our Latin America practice.