Four months after the entry into force of the treaty that eliminates double taxation between the United States and Chile, different sectors, especially real estate, seem overly optimistic.
The year began with notable and long-awaited news in tax matters --the entry into force of the United States-Chile double taxation agreement.
Its official name, “Agreement to Avoid Double Taxation and to Prevent Tax Evasion in relation to Income and Property Taxes and its Protocol”, was fully approved in mid-November 2023, after its unanimous endorsement by the Chilean Senate.
Mexico and Venezuela have similar treaties with the United States. In the Chilean case, the South American country has this type of agreement with several of the countries with which it has FTAs, except Germany.
“It was something that had been expected for a long time, because it was a treaty that was signed around 2001, but its processing extended to internal issues in the United States for many years,” tax lawyer Claudio Bustos, partner of Bustos Tax & Legal, explains to AméricaEcomía.
It is an agreement model that fundamentally seeks to privilege taxation in the people's residence country, since double taxation occurs when a person resides in one nation, but at the same time has businesses or investments in another.
“Two tax criteria normally come together that allow, in some cases, taxes to be applied to the same income. One is the criterion of residence, that is, the country where the person lives. The other criterion for taxing is to take into consideration the physical location where the source of that income is."
Double taxation is generally solved in two ways. For one, countries' internal laws have been adopting rules and measures that tend to reduce such double taxation. The most common solution is to be able to deduct from some or all of the tax that was paid in the United States from the taxes paid in the country of residence.
That limit is 35% in Chile.
“In other words, if they applied a 20% tax to me in the United States, I will be able to fully deduct it from the tax I have to pay in Chile, because it is still within the 35% limit. But it is limited to 35%, and it is also limited to some cases, such as company dividends, or income from personal services,” warns Bustos.
This is where the second solution of the double taxation treaty comes into play, “which also offers two advantages. On the one hand, it gives the right to credit - understood as a deduction - for all the income that is contemplated in the treaty. Therefore, all the income contemplated in the treaty, if I receive it in Chile, is income from sources in the United States, and I will be able to deduct the tax paid in the United States up to the limit of 35% in Chile, as a credit," Bustos details.
The difference is that this treaty allows credit for all income, including interest, capital gains, real estate income, and more.
The second advantage that the treaty provides is that for some specific cases of income, it lowers the normal tax rate that would be applicable without the treaty.
“The normal rate is lowered to a preferential rate. The typical case is the dividends that I may receive from the United States, which instead of applying a rate of 30% on that dividend, the treaty limits it to 15% as a general rule or even 5%, if I have a stake of more than 10% in a company in the United States. Therefore, it is a quite relevant limitation,” comments the lawyer.
That 5% can later be deducted as a credit also in Chile. Therefore, double taxation is eliminated.
REAL ESTATE IMPACT
Florida is one of the areas that tend to be on the radar of Chilean investors in recent years and shows no sign of slowing down.
In this regard, the CEO of Miaminmobiliario Carlos Balart points out that, depending on the vehicles through which these investments are made, the benefits may be greater.
He mentions as an example that there is a notable improvement regarding the taxation of dividends in the United States. The real estate sector is one of the activities in which regulations would have a positive impact.
“It is expected that real estate investments will strengthen in this sense,” he adds.
In this regard, the executive points out that "in the case of income derived from the real estate business, we can mainly distinguish two, regardless of whether there are others: income from leases and income from the highest value obtained in the sale, that is, the capital gain.”
In any case, those looking to acquire a property in Miami should know that documentation will be required that demonstrates both the way in which the investment is made and the residence tax. This will also be reflected in Chile, through the presentation of sworn statements and documentation that records the payment of taxes in the United States.
Furthermore, the executive recommends keeping in mind that the agreement, like any other, contemplates a standard for the exchange of information, so it is important to monitor how said exchange will operate in practice between tax authorities in both countries, that is, the IRS. and IBS.
Another point to consider is the federal nature of the United States, which makes it necessary to review the internal regulations of each state, as well as review the investment structures to ensure correct qualification for the benefits of this agreement, depending on the vehicle that has been used.
SHAREHOLDERS AND DIGITAL NOMADS
Osiel González Azócar, Partner at Bruzzone & González , highlights that the agreement works in different ways, to take charge of three large cases that generate double taxation.
“The typical case is the person who is in the United States for a specific work or personal situation, for more than 183 days in a given year. That person will be a resident in the United States for tax purposes, but will also continue to be a resident in Chile. Therefore, there will be tax charges in both countries,” he comments.
Thus, the treaty creates a mechanism to avoid this conflict so that the taxpayer is considered a resident of a single country, the one where he has a permanent home at his disposal or his closest personal relationships, regardless of the time spent in the other nation.
“The second thing it does is eliminate taxes in certain cases. For example, in the case of services provided from Chile to a company in the United States. In these cases, the United States will no longer have the power to apply taxes on payments to Chile, there is a complete elimination," explains González.
The third case is that of dividends, which affects Chilean companies and individuals that invest in the United States.
“There it is a sum of two things. First of all, instead of 30%, which pays any distribution of profits from a United States company to its partner who is not a resident in the United States, when that partner is Chilean, it is reduced to 5% or 15% depending of the percentage of property you own (more or less than 10%). And in addition to that, in Chile, for the tax paid in the United States, both for the dividend and for the company's profit, they can be used as a credit in Chile against the taxes levied here on that income.”
This applies to any activity carried out by a Chilean that is subject to tax in the United States, including interest, salaries and income from services, rents and capital gains on the sale of real estate.
In this way, the treaty that avoids double taxation with the United States comes to offer an advantage for investments, especially those made from Chile [due to] the tax advantages it offers.
“The entry into force [of the agreement] is an opportunity to review how one currently structures investments, since there may be interesting opportunities for Chileans,” considers Balart.
“Treaties are also a tremendous instrument or tool for authorities to pursue tax evasion and avoidance. And they are also designed with that purpose,” details Claudio Bustos.
However, the treaty will still have to pass one more hurdle, because there was a partial validity from January 1 and a total validity that began on February 1, for monthly payment taxes.
“But for this April annual tax return process, it did not come into effect. So it will only take its acid test in 2025,” González concludes.
