Chile is a country highly favorable to foreign investment, and as such, has a wide network of agreements to avoid double taxation. To date, Chile has 37 Double Taxation Agreements in force - download the complete guide to see the full listing -, which are indicated in Appendix 2.
We note that as of January 1, 2024, the DTA with the United States of America is in force, and will begin to affect withholding taxes as of February 1, 2024. Also in force is the Convention to harmonize the tax treatment provided for in treaties between the States Parties to the Pacific Alliance Framework Agreement (Chile, Colombia, Mexico, and Peru), which will be applicable in Chile as of January 1 2024, and the Multilateral Convention to apply measures related to tax treaties to prevent base erosion and profit shifting ("MLI"), which entered into force in Chile on March 1, 2021.
In the main, the MLI has affected certain provisions in the DTAs with respect to permanent establishments. Additionally, Chile has a relevant network of International Transportation Agreements, and Information Exchange Agreements in force.
Mutual Agreement Procedures
Currently, the Chilean tax authority ("Chilean IRS") is encouraging the use of mutual agreement procedures for transfer pricing audits. As of 2022, the Chilean IRS has created a specialized team for the application of these procedures, which is separate from the audit team. In turn, as of 2022, instructions have been issued regarding these agreements, embodied in General Ruling 19 of 2023.
Tax Court Jurisprudence
There is ample jurisprudence regarding the application of DTAs.
The Chilean Supreme Court of Justice has established criteria in relation to the obligation of the State of residence in the application of the credit or imputation method for taxes paid abroad. The foregoing in order to avoid the generation of double taxation (Supreme Court ruling in case 40023-2017 of 26/11/2019).
In line with the OECD model, Chilean Jurisprudence considers the residence factor as the main element for the purpose of determining the taxation power of a Contracting State (Court of Appeals Judgment of 14/04/2023).
Chliean IRS Rulings
The Chilean IRS has issued ample jurisprudence regarding the application of DTAs. This affords a high degree of certainty regarding the criteria adopted by the tax authority.
Concepts such as "resident", "beneficial owner", "permanent establishment" are dealt with in different official rulings and general rulings issued by the Chilean IRS from 2009 to date: See Chilean IRS rulings 1058 of 2021, 1746 of 2022, 2875 of 2022, 1383 of 2015, 1278 of 2021, 684 of 2021, 1342 of 2023, 1260 of 2022 and General Rulings 57 of 2009, 59 of 2014, 63 of 2021 and 19 of 2023.
Hierarchy of domestic law versus DTAs
In Chile, the DTAs have the same hierarchy as domestic law. This has been established in the Chilean Constitution, specifically in Article 5.
Chile Clause: Special treatment for the distribution of dividends to countries with a DTA in force
Chile has an integrated income tax system. Under this system the corporate tax paid at the level of a Chilean subsidiary grants a credit against withholding taxes when distributing a dividend.
In the case of countries with a DTA in force, 100% of the corporate taxes paid may be used as a credit against withholding taxes.
Thus, Chile reserves the preferential application of domestic law over the provisions of the DTA in this matter. As a consequence, in all DTAs currently in force, the total effective tax burden on a dividend will be 35%.
