After 13 years of parliamentary discussion, the Treaty advanced in the U.S. Senate. What does it imply for individuals and businesses? What tax will software purchased by Chileans incur?
In early June of this year, the U.S. Senate Foreign Relations Committee overwhelmingly approved the processing of the agreement to avoid double taxation between Chile and the United States, after 13 years of parliamentary discussion (and four previous rejections by the U.S. Senate).
With the approval of this treaty, several mechanisms are established to eliminate double taxation between these two countries, presenting various advantages for both individuals and businesses.
Pablo Bravo, a partner at the law firm Apparcel Uriarte, comments, “With this treaty, Chile could be the first gateway to South America, allowing for more investments at the level of Chilean holdings, similar to what happens in Mexico. One of the objectives of these treaties is to enhance both inbound and outbound investment, as well as the provision of services and other incomes regulated by the treaties.”
While there are still stages for the end of double taxation to become a reality – the Chilean Congress must ratify some minor changes proposed by the United States – Bravo asserts that once it comes into effect, there will be positive effects and others that will need evaluation:
“In terms of financing through credits, which startups often need, this Treaty would encourage a new market for financing or venture capital for Chilean companies, as the interest paid from a Chilean company to a U.S. creditor will be reduced,” adds the lawyer. Another point is that by eliminating the fear of double taxation, fiscal uncertainty is reduced, encouraging companies and investors to engage in cross-border transactions. This can lead to an increase in foreign direct investment, job creation, and economic growth in both countries.
As a general rule, taxes must be paid in Chile for income generated by investments made abroad once they are repatriated to Chile. Against these taxes, the tax paid abroad can be deducted as a credit. But when the investment is made in a country with which Chile does not have a current agreement, there is only a catalog of incomes whose taxes incurred abroad can be used as a credit.
On the other hand, when investing in a country with a current treaty, the tax paid abroad for any kind of income can be used as a credit, with no previous limitation.
“This is very interesting given the current landscape in which Chilean taxpayers are looking to invest in the United States, especially to expand the potential market for their business development,” says the partner at Apparcel Uriarte.
The agreement establishes a maximum rate of 10% withholding tax when royalties are paid for industrial and intellectual property concepts. However, in the case of payments for software used by Chilean taxpayers, the benefits may be more apparent than real.
This is because most software contracted by Chileans is “standard,” meaning it cannot be modified or commercialized by end users. The Income Tax Law, since the 2014 reform, considers them exempt from Additional Tax (so the treaty’s benefit does not apply).
However, the 2020 reform taxed them with VAT, being exempt from Additional Tax. Thus, Chilean taxpayers will continue to pay VAT on these softwares, unless they can agree with the supplier on a non-standard software, in which case the applicable rate will be 10% Additional Tax instead of 19% VAT.
Moreover, the transitional rule that allowed dividends from Chilean companies coming from entities under the Partially Integrated Regime to benefit from a credit equivalent to 100% of the First Category Tax paid by the company, even when paid to a country with a signed but not effective treaty, comes to an end.
This situation applies to the United States and the United Arab Emirates. The rule granted this benefit as an incentive for investment from the United States, but only for dividends paid until December 31, 2026.
If the treaty comes into effect before that date, dividends paid to residents of the United States will always enjoy the 100% credit mentioned above.
But if the internal approval process of the treaty in the United States takes longer than budgeted, only a new reform can extend the validity period of the benefit. This is considering the significant importance of inbound investment from the United States to Chile.
Finally, it is worth noting that the agreement to avoid double taxation between Chile and the United States promotes economic collaboration and the exchange of knowledge. This can facilitate the transfer of technology, business cooperation, joint research, and the development of joint projects.
“The elimination of double taxation between Chile and the United States provides greater legal certainty, reduces the tax burden, and promotes bilateral investment and trade. These advantages contribute to strengthening economic relations between the two countries and fostering growth and development,” concludes Bravo.