On December 19, 2023, the U.S. Treasury Department announced that the Income Tax Treaty between the United States and Chile (the “Treaty”) entered into force.1 The Treaty was originally signed in February of 2010, and, after stalling for over a decade, was then overwhelmingly approved by the U.S. Senate in July 2023.
Amongst the notable benefits provided by the Treaty to qualifying taxpayers are reduced withholding rates on certain types of payments.2 In particular:
• Dividends (Article 10): Dividends paid by a U.S. corporation to a Chilean taxpayer are generally subject to a 15% withholding tax, reduced to 5% in the case of a beneficial owner that owns at least 10% of the voting stock of the payor.
• Interest (Article 11): Withholding tax on U.S. source interest payments is reduced to 15% for the first five years from the effective date of the Treaty and is reduced to 10% thereafter. In certain cases, the withholding tax rate is reduced to 4% without a phase-in schedule.
• Royalties (Article 12): The Treaty generally reduces withholding tax on royalty payments to 10% and further reduces the rate to 2% in the case of royalties received as consideration for the use of, or the right to use, industrial, commercial or scientific equipment (but not including ships, aircraft, or international transport containers).
For taxes withheld at source (which would include the items listed above), the Treaty takes effect for amounts paid, or credited, on or after February 1, 2024. For all other taxes, the Treaty is effective for taxable periods beginning on or after January 1, 2024.
In order to receive benefits under the Treaty, the taxpayer will need to satisfy the limitation on benefits (or “LOB”) article. This article, like in the case of other modern tax treaties, exists to prevent “treaty-shopping.” Individuals who are tax resident in one of the treaty countries should be entitled to treaty benefits outside unusual circumstances, but corporate taxpayers may need to satisfy requirements beyond merely being incorporated in one of the treaty jurisdictions.
For the structuring of inbound investment into the United States, consider the planning implications that the Treaty will have. For example, the reduction in the withholding tax rate on dividends may help to alleviate some of the timing challenges associated with corporate structures used for inbound real estate investments. With respect to interest payments, given the prevalence of planning related to the “portfolio interest exemption” for inbound loans to U.S. borrowers, some headaches might now be more easily managed, as Chilean lenders will be able to enjoy U.S. income tax savings even if they would not otherwise qualify for the portfolio interest exemption (e.g., because the lender owns 10% of the voting stock of the borrower).
As a result of the Treaty’s entry into force, it should also be noted that the Treaty has been added to the IRS’s list of treaties that meet the requirements for obtaining reduced capital gains rates on dividends received from qualifying foreign corporations.3 This means that U.S. taxpayers receiving dividends from Chilean corporations can now enjoy the benefit of a 20% maximum tax rate, as opposed to the higher ordinary income tax rates that would otherwise apply.4
The Treaty marks a landmark development for US-LatAm cross-border relations, as Chile represents only the third country from the region to enter into an income tax treaty with the United States (the other two being Mexico and Venezuela). With its entry into force, Chilean taxpayers with US-connected activities or investments, and US taxpayers with Chilean-connected activities or investments, should expect to see new tax-efficient planning opportunities.
[1] Available at https://home.treasury.gov/news/press-releases/jy2003.
[2] Without the benefit of the Treaty, such payments would generally be subject to a 30% U.S. withholding tax.
[3] See Notice 2024-11, 2024-2 IRB.
[4] The 3.8% net investment income tax still applies, however, effectively bringing the maximum rate to 23.8%.
