Tax Connect Flash | Chile | Conventions to eliminate Double Tax Treaties
As of 1 January 2017, the Conventions to eliminate Double Tax Treaties (DTT) with China, Italy, Japan, and the Czech Republic came into force.
All DTTs signed by Chile – currently 32 – are based mainly on the OECD's Model Tax Convention, and contemplate reductions of income tax rates generally applicable in matters of corporate profits, dividends, interest, royalties and others.
It should be noted that so far the general rate of income tax on interest paid to countries without DTT amounts to 35% (called Additional Tax) and regarding those with DTT was 15%.
Now, the important news of DDTs with China and Japan is that they establish a lower interest rate, reducing it from 15% to 10%. However, the 15% rate will be maintained for the next two years and will only fall to 10% as of 2019.
The rate reduction is especially relevant when taking into account that Chile holds 19 DTTs that contain a “most favored nation” clause (MFN) in terms of interest. This MNF applies to these 19 DTTs any treatment which is more beneficial that Chile might agree with another State.
In this way, the DTTs which would benefit from the reduction in interest taxation, are as follows: Australia, Austria, Belgium, Canada, Korea, Denmark, Ecuador, France, Ireland, Mexico, New Zealand, Poland, Paraguay, United Kingdom, Sweden and Switzerland. This will allow financing from these countries to Chilean companies to be more favourable.
In contrast, the DTTs in force with Brazil, Colombia, Croatia, Malaysia, Peru, Portugal, Russia, South Africa and Thailand do not contain an MFN on interest rate reduction and will maintain their current rate of 15%.