On December 19, 2023, the United States Department of the Treasury announced the entry into force of the tax treaty between the United States and Chile (the “Treaty”). Originally signed by the United States and Chile on February 4, 2010, the Treaty was approved by Chilean government in 2015 and was ratified by the United States Senate (subject to two reservations incorporated into the Treaty, discussed below) and signed by President Biden on June 22, 2023. The Treaty entered into force on December 19, 2023, following the exchange between the two countries of diplomatic notes providing that the necessary requirements for ratification of the Treaty had been satisfied. The Treaty is only the second comprehensive bilateral tax treaty that the U.S. has with a South American country (the other country being Venezuela).
Weil Observation: The entry into force of the Treaty is a much welcome development for U.S. taxpayers (including non-U.S. taxpayers with U.S. operations) doing business in Chile and Latin America. Chile is one of the largest economies in Latin America and has vast reserves of natural resources that are critical to the world economy, including emerging technologies (e.g., Chile has the world’s largest reserves and is the second largest producer of lithium as well as major producer of copper, both of which are a critical components of batteries, including those used in electric vehicles, solar cells wind turbines.) As investors become more concerned with the environmental impact of their investment (e.g., the emphasis on a company’s ESG factors) these emerging technologies will take center stage in the development of clean technology.
2006 U.S. Model Income Tax Convention and U.S.- Chile Treaty Comparison
Provisions in the Treaty generally follow the provisions of the 2006 U.S. Model Income Tax Convention and include the following:
- Reduced source-country withholding tax rates on dividends, interest, capital gains, and royalties;
- A prohibition on source-country taxation of a business enterprise absent the existence of a “permanent establishment”;
- A comprehensive limitation on benefits provision; and
- A provision allowing for the full exchange of information between the U.S. and Chilean tax authorities.
Weil Observation: The potential investment into Chile’s natural resources can be observed in some of the unique provisions of the Treaty. For example, the Treaty goes further than the 2006 U.S. Model Income Tax Convention, and expands the definition of a permanent establishment to include: (i) installations for on-land exploration; (ii) building sites, construction, or installation projects and any supervisory activity connected with these activities; and (iii) any drilling rig or ship used to explore for natural resources. This expanded definition will likely impact mining ventures in Chile.
As discussed above, the Treaty incorporates two reservations raised by the U.S. Senate. First, the Treaty does not preclude the application of Section 59A (the base erosion an anti-abuse tax or “BEAT”) of the U.S. Internal Revenue Code (the “Code”). Generally, the BEAT is a minimum tax applicable to certain related-party payments. Second, in taxpayer-favorable inclusions, the Treaty clarifies that U.S. citizens or residents paying Chilean income tax may claim foreign tax credits pursuant to the relevant provisions of the Code and that U.S. corporations receiving dividends received from Chilean companies of which they are ten-percent shareholders may deduct such dividends under Section 245A of the Code when computing their taxable income.
Weil Observation: As part of the effort to encourage cross boarder investment, the term “treaty beneficiaries” was expanded to include a “headquarters company test” which allows under certain circumstances a company that functions as the headquarters for a multinational corporate group to qualify for the treaty benefits.
Although the Treaty entered into force on December 19, 2023, its provisions will not take effect until 2024. Specifically, with respect to taxes withheld at source, the Treaty is effective 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.
Finally, the U.S. Internal Revenue Service updated Notice 2024-11, 2024 I.R.B. 2, to include the Treaty as a “comprehensive income tax treaty” for purposes of Section 11(h) of the Code. Accordingly, dividends paid by Chilean companies may be “qualified dividend income” for U.S. shareholders of such companies, provided the other requirements of Section 11(h) of the Code are satisfied.
Weil Observation: Chile has a comprehensive treaty network that may be accessible to U.S. taxpayers doing business in Latin America, subject to meeting any limitations on benefits (or similar) provisions in the Treaty and other applicable tax treaties.