The US-Chile Tax Treaty: Key Provisions Explained

The United States and Chile have a tax treaty to clarify the tax obligations for individuals and companies active in both nations. The agreement aims to prevent the same income from being taxed by both countries and to stop tax evasion through cooperation between the two tax authorities. A tax treaty allocates taxing rights over the income of residents and provides rules for how different types of income are treated, often reducing the taxes one country can impose on the other’s residents. This treaty entered into force on December 19, 2023, with its provisions becoming effective at the start of 2024.

Determining Treaty Eligibility

The U.S.-Chile tax treaty benefits are available to individuals and entities considered “residents” of one or both countries. In the United States, this includes citizens, green card holders, and individuals meeting the substantial presence test. This test involves being physically present in the U.S. for at least 31 days in the current year and a weighted total of 183 days over a three-year period.

For a “dual resident” who qualifies in both countries, the treaty uses “tie-breaker” rules to assign a single country of residence. The first test is the location of a permanent home. If a permanent home exists in both countries, the deciding factor is the individual’s “center of vital interests,” meaning where personal and economic ties are closer.

If the center of vital interests is unclear, the next test is the “habitual abode,” or the country where the person spends more time. If residency is still unresolved, the final tie-breaker is citizenship. These hierarchical tests prevent conflicting tax claims on an individual’s worldwide income.

Taxation of Individual Income

Income from Employment

For income from employment, like salaries and wages, the treaty grants taxing rights to the employee’s country of residence. An exception is the “183-day rule.” Income earned by a resident of one country from work in the other country is only taxed in the country of residence if three conditions are met: the employee is present in the other country for 183 days or less in any 12-month period, the employer is not a resident of the other country, and the employer’s permanent establishment in that other country does not bear the cost of the compensation.

Independent Personal Services

The treaty also covers income earned by independent professionals, such as consultants or lawyers. Income an individual resident of one country earns from professional services in the other is not taxable in the other country unless the individual has a “fixed base” regularly available to them there. If a fixed base exists, the income attributable to it may be taxed in the country where the base is located.

Pensions and Social Security

The treaty provides specific rules for retirement income. Private pensions may be taxed by both the source and residence countries, but the source country’s tax on the gross amount is limited to 15%. Social security payments are taxable only in the country that makes the payments.

Taxation of Business and Investment Income

A central concept for business taxation is the “Permanent Establishment” (PE). A business’s profits from one country are not taxable in the other unless the enterprise operates through a PE, such as a branch, office, or factory, situated there. The treaty also includes a “services PE,” which can be created if an enterprise provides services in the other country for more than 183 days in any 12-month period.

The treaty reduces withholding taxes on income sent to a foreign resident. For dividends, the general rate is 15%, lowered to 5% if the beneficial owner is a company directly owning at least 10% of the voting stock of the paying company. Dividends from a U.S. Real Estate Investment Trust (REIT) may not qualify for the 5% rate.

For the first five years the treaty is in effect, the withholding rate on interest is capped at 15%, after which it will drop to 10%. A 4% rate applies to interest paid to certain financial institutions like banks and insurance companies. Royalties have a two-tiered system: a 2% rate for the use of industrial, commercial, or scientific equipment, and a 10% rate for patents, trademarks, or copyrights.

Regarding capital gains, the treaty specifies which country can tax profits from asset sales. Gains from selling real property are taxed in the country where the property is located. Gains from selling shares of a company may be taxed in the company’s country of residence if the seller had a significant ownership stake.

Claiming Treaty Benefits

The process for claiming benefits under the U.S.-Chile tax treaty depends on the direction of the income flow. For a resident of Chile receiving income from a U.S. source, the primary document is IRS Form W-8BEN. This form is provided to the U.S. withholding agent—the entity making the payment—to certify the recipient’s foreign status and claim a reduced rate of U.S. tax under the treaty. Without a valid Form W-8BEN on file, the payer would be required to withhold tax at the standard 30% U.S. statutory rate.

For a U.S. resident or citizen who needs to claim a specific treaty benefit on their U.S. tax return, the required filing is often Form 8833, “Treaty-Based Return Position Disclosure Under Section 6114.” This form is attached to the individual’s or entity’s income tax return. It is used to disclose that the taxpayer is taking a position that a U.S. tax law is overruled or modified by a treaty provision, such as claiming that certain income is exempt from U.S. tax because it was already taxed in Chile.

The Limitation on Benefits Provision

The treaty includes a Limitation on Benefits (LOB) article to prevent “treaty shopping.” This anti-abuse rule ensures that only bona fide residents of the U.S. and Chile receive treaty benefits, not residents of third countries routing investments through a company in either nation.

To qualify for treaty benefits, a resident must be a “qualified person.” An individual resident is automatically a qualified person. A company can qualify if it is publicly traded on a recognized stock exchange in either country.

Other entities can qualify by meeting specific ownership and base erosion tests. The ownership test requires that more than 50% of the company’s stock be owned by qualified persons. The base erosion test ensures a company is not used as a conduit by preventing a substantial portion of its income from being paid to non-residents as deductible payments like interest or royalties.