Chile-United States International Income Tax Treaty Overview

The Chile U.S. & Tax Treaty: US/Chile Cross-Border Taxation

Chile U.S. & Tax Treaty, Cross-Border Taxation

Recently, the United States ratified a tax treaty with the country of Chile. While the origins of the tax treaty date back to around 2010, it was only recently that the tax treaty took effect. The tax treaty is similar to several other tax treaties already in and now that the tax treaty is in effect, it will impact how certain taxes may be treated for U.S. tax purposes. In addition, it will allow taxpayers who may qualify to make a treaty election to be treated as a foreign person for tax purposes which means some U.S. persons living in Chile may qualify to only have to file a Form 1040-NR along with Form 8833 and only be taxed on their US sourced income instead of their worldwide income — which is a great benefit for taxpayers who live and work in Chile and earn a significant amount of money that may be taxed at a lower tax rate in Chile than it would have been in the United States under the worldwide income tax rules. Let’s walk through some of the key aspects of the treaty:

SAVING CLAUSE

• • • With reference to Article 1 (General Scope) Notwithstanding any provision of the Convention, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if the Convention had not come into effect. For this purpose, the term “citizen” shall include a former citizen or long-term resident, but only for a period of 10 years following the loss of such status.

    • The provisions of this paragraph shall not affect:

      • a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), paragraphs 1 b) 3, 4, and 6 of Article 18 (Pensions, Social Security, Alimony and Child Support), and Articles 23 (Relief From Double Taxation), 25 (Non-Discrimination), and 26 (Mutual Agreement Procedure); and b) the benefits conferred by a Contracting State under paragraphs 2 and 5 of Article 18 (Pensions and Social Security), Articles 19 (Government Service), 20 (Students and Trainees), and 28 (Members of Diplomatic Missions and Consular Posts), upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that State.

What does this Mean?

This refers to the ‘Saving’ Clause. The Saving Clause used in the treaty is designed to allow each state to reserve the right to tax the individual under the general tax principles as if the treaty were not in effect. The ‘exceptions’ to the Saving Clause serve to prevent the countries from relying on general tax principles to circumvent the tax treaty.

Article 4 RESIDENCE

• • • For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof and any agency or instrumentality of such State, but does not include any person who is liable to tax in that State in respect only of income from sources in that State or of capital situated therein.

    • Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his status shall be determined as follows: a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (center of vital interests); b) if the State in which he has his center of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode; c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national; d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

    • Where by reason of the provisions of paragraphs 1 and 2 of this Article, a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall endeavor to determine by mutual agreement the mode of application of this Convention to that person. If the competent authorities do not reach such an agreement, that person shall not be entitled to claim any benefit provided by this Convention, except those provided by Article 26 (Mutual Agreement Procedure).

What does this Mean?

This Article deals with the concept of residence, which is relatively straightforward unless the taxpayer has dual residence. In that case, the Taxpayer needs to assess issues such as which country is their permanent home, habitual abode — and where they maintain significant contacts.

• • • With reference to paragraph 1 of Article 4 (Residence) Chile shall treat a United States citizen or an alien lawfully admitted for permanent residence (a “green card” holder) as a resident of the United States only if such individual has a substantial presence, permanent home, or habitual abode in the United States and if that individual is not a resident of a State other than Chile for the purposes of a double taxation convention between that State and Chile.

What does this Mean?

Expanding on the concept of residents, this additional paragraph is aimed directly at U.S. citizens or permanent residents and when Chile can treat the individual as a resident of the United States.

Article 16 TAXATION OF INCOME FROM REAL PROPERTY (IMMOVABLE PROPERTY)

1. 1. 1. Income derived by a resident of a Contracting State from real property (immovable property), including income from agriculture or forestry, situated in the other Contracting State may be taxed in that other State.

      2. For purposes of this Convention, except as otherwise provided, the term “real property (immovable property)” shall have the meaning which it has under the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to real property (immovable property), livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of real property (immovable property) and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources. Ships, aircraft and containers shall not be regarded as real property (immovable property).

      3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of real property (immovable property).

      4. The provisions of paragraphs 1 and 3 shall also apply to the income from real property of an enterprise and to income from real property (immovable property) used for the performance of independent personal services.

What does this Mean?

Like many treaties, income tax related to real property may be taxed in the country where the property is located as well as in the other country as well. In other words, just because the property is located in one country does not mean that the other country loses the opportunity to tax the income.

Article 18 PENSIONS, SOCIAL SECURITY, ALIMONY AND CHILD SUPPORT

1. 1. 1. a) Pension payments and other similar remuneration derived from sources within a Contracting State beneficially owned by a resident of the other Contracting State may be taxed by both Contracting States. Any tax so charged by the first-mentioned State may not exceed 15 percent of the gross amount of such pension payment or other similar remuneration. b) If, however, the payment is from a plan established in a Contracting State that is exempt from income taxation in that State and operated to provide pension or retirement benefits, the amount of any such payment that would be excluded from taxable income in that State if the recipient were a resident thereof shall be exempt from taxation in the other State.

      2. Notwithstanding the provisions of paragraph 1: a) any pension paid from the public funds of a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority in the discharge of functions of a governmental nature other than a payment to which paragraph 3 of this Article applies shall, subject to the provisions of subparagraph b), be taxable only in that State; b) such pension, however, shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State.

      3. Notwithstanding the provisions of paragraphs 1 and 2, payments made under provisions of the social security or similar legislation of a Contracting State to a resident of the other Contracting State or to a citizen of the United States shall be taxable only in the first-mentioned State. Payments made under provisions of the social security or similar legislation of a Contracting State include payments made pursuant to a pension plan or fund created under the social security system of that Contracting State.

      4. Where a resident of a Contracting State is a beneficiary of a plan established in the other Contracting State that is generally exempt from income taxation in that other State and operated to provide pension or retirement benefits, income earned but not distributed by the plan shall be taxable in either State only at such time as and, subject to paragraph 1, to the extent that a payment or other similar remuneration is made from the plan (and not transferred to another pension fund in that other State).

      5. Contributions in respect of services rendered paid by, or on behalf of, an individual who is a resident of a Contracting State or who is temporarily present in that State to a pension plan or fund that is generally exempt from income taxation in the other Contracting State and operated primarily to provide pension or retirement benefits in that other State (whether or not sponsored by an employer) shall, during a period not exceeding in the aggregate 60 months, be treated in the same way for tax purposes in the first-mentioned State as a contribution paid to a pension plan that is generally exempt from income taxation in the first-mentioned State and operated primarily to provide pension or retirement benefits in that first-mentioned State, if: a) such individual was contributing on a regular basis to the pension plan (or to another similar pension plan for which the first-mentioned pension plan was substituted) for a period ending immediately before that individual became a resident of or is temporarily present in the first-mentioned State; and b) the competent authority of the first-mentioned State agrees or has agreed that the pension plan generally corresponds to a pension plan recognized for tax purposes by that State. The relief available under this paragraph shall not exceed the relief that would be allowed by the first-mentioned State to residents of that State for contributions to, or benefits accrued under, a pension plan established in that State.

      6. Periodic payments made pursuant to a written separation agreement or a decree of divorce, separate maintenance or compulsory support, including payments for the support of a child, paid by a resident of a Contracting State to a resident of the other Contracting State, shall be exempt from tax in both Contracting States, except that, if the payer is entitled to relief from tax for such payments in the first-mentioned State, such payments shall be taxable only in the other State.

What does this Mean?

As with most tax treaties, the portion involving pensions is complicated. Here is a brief overview:

• • • Paragraph 1 explains that the pension paid out from one country to a person who is a resident of the other country can be taxed by both countries. But, any tax charged from the first country cannot exceed 15%. If the pension is the type of plan that is exempted in the first country where it was established, it will be exempt in the second country. Noting, this is not excluded from the saving clause.

    • Paragraph 2 explains that if it is a public pension fund from services rendered in that country, it will only be taxable in the country unless the person is a resident of the other country.

    • Paragraph 3 refers to Social Security, and limits taxes to the country making the payment.

    • Paragraph 4 limits taxation of certain pension income to when the income is actually distributed before it can be taxed.

    • Paragraph 5 refers to the tax rules involving pension payments and temporary residence in one country. The rule vary and are beyond the scope of this article.

    • Paragraph 6 refers to divorce and separation decree payments and beyond the scope of this article.

    • Paragraphs 3, 4, and 6 are exempted from the saving clause.

Article 19 GOVERNMENT SERVICE

1. 1. 1. a) Salaries, wages and other remuneration, other than a pension, paid by a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority in the discharge of functions of a governmental nature shall be taxable only in that State. b) Such remuneration, however, shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of that State who: i) is a national of that State; or ii) did not become a resident of that State solely for the purpose of rendering the services.

      2. The provisions of Articles 15 (Dependent Personal Services), 16 (Directors’ Fees) and 17 (Artistes and Sportsmen) shall apply to salaries, wages and other remuneration in respect of services rendered in connection with a business carried on by a Contracting State or a political subdivision or a local authority thereof.

What does this Mean?

This article means that when the payments are received for services rendered in one country for the performance of government activities, they are only taxed by that country, unless the person is a resident of the other country, performing services in that other country, and is a national or resident of that country (and not solely to perform the services).

Article 20 STUDENTS AND TRAINEES

• • • Payments received by a student, apprentice, or business trainee who is, or was immediately before visiting a Contracting State, a resident of the other Contracting State, and who is present in the first-mentioned State for the purpose of his full-time education at a recognized educational institution, such as a university, college or school, or for his full-time training, receives for the purposes of his maintenance, education or training shall not be taxed in that State, provided that such payments arise from, or are remitted from, sources outside that State. The exemption from tax provided by this paragraph shall apply to an apprentice or business trainee only for a period of time not exceeding two years from the date the apprentice or business trainee first arrives in the first-mentioned Contracting State for the purpose of training.

What does this Mean?

This means that certain payments for students, apprentices, or business trainees, who immediately before becoming a resident of one country were the resident of the other country (and in the present country for educational purposes), will not be taxed for 2-years for income from the services rendered in conjunction with their education.

Article 23 RELIEF FROM DOUBLE TAXATION

1. 1. 1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income applicable to residents and citizens: a) the income tax paid or accrued to Chile by or on behalf of such citizen or resident; and b) in the case of a United States company owning at least 10 percent of the voting stock of a company that is a resident of Chile and from which the United States company receives dividends, the income tax paid or accrued to Chile by or on behalf of the payer with respect to the profits out of which the dividends are paid. For the purposes of this paragraph, the taxes referred to in subparagraph b) of paragraph 3 and paragraph 4 of Article 2 (Taxes Covered), excluding taxes on capital, shall be considered income taxes.

      2. In Chile, double taxation shall, in accordance with the provisions and subject to the limitations of the law of Chile (as it may be amended from time to time without changing the general principle hereof), be eliminated as follows: Where a resident of Chile derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, Chile shall allow as a credit against the Chilean income tax of that person the United States tax paid under United States law and in accordance with the Convention, in respect of that income or any other income from sources outside Chile. This paragraph shall apply to all income referred to in the Convention.

      3. Where a United States citizen is a resident of Chile: a) with respect to items of income that under the provisions of this Convention are exempt from United States tax or that are subject to a reduced rate of United States tax when derived by a resident of Chile who is not a United States citizen, Chile shall allow as a credit against Chilean tax, only the tax paid, if any, that the United States may impose under the provisions of this Convention, other than taxes that may be imposed solely by reason of citizenship under the saving clause of paragraph 4 of the Protocol; b) for purposes of computing United States tax on those items of income referred to in subparagraph a), the United States shall allow as a credit against United States tax the income tax paid to Chile after the credit referred to in subparagraph a); the credit so allowed shall not reduce the portion of the United States tax that is creditable against the Chilean tax in accordance with subparagraph a); and c) for the exclusive purpose of relieving double taxation in the United States under subparagraph b), items of income referred to in subparagraph a) shall be deemed to arise in Chile to the extent necessary to avoid double taxation of such income under subparagraph b). 19 4. Where in accordance with any provision of the Convention income derived or capital owned by a resident of a Contracting State is exempt from tax in that State, such State may nevertheless, in calculating the amount of tax on the remaining income or capital of such person, take into account the exempted income or capital. 5. For the purposes of allowing relief from double taxation pursuant to this Article, an item of gross income, as determined under the laws of a Contracting State, derived by a resident of that State that under this Convention may be taxed in the other Contracting State (other than solely by reason of paragraph 4 of the Protocol), shall be deemed to be income from sources in that other State.

What does this Mean?

This article summarizes the double taxation rules for taxpayers who may be a resident of one country but still may be taxed in the other country.

Article 27 EXCHANGE OF INFORMATION

1. 1. 1. The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes of every kind imposed by a Contracting State insofar as the taxation thereunder is not contrary to the Convention, including information relating to the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by the Convention. The exchange of information is not restricted by Article 1 (General Scope) or Article 2 (Taxes Covered).

      2. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by the Convention or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

      3. In no case shall the provisions of the preceding paragraphs be construed so as to impose on a Contracting State the obligation: a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State; b) to supply information that is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; c) to supply information that would disclose any trade, business, industrial, commercial, or professional secret or trade process, or information the disclosure of which would be contrary to public policy (ordre public).

      4. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.

      5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person. 6. If specifically requested by the competent authority of a Contracting State, the competent authority of the other Contracting State shall provide information under this Article in the form requested, such as depositions of witnesses and authenticated copies of unedited original documents (including books, papers, statements, records, accounts, and writings), to the same extent such information can be obtained in the form requested under the laws and administrative practices of that other State with respect to its own taxes. 7. The competent authorities of the Contracting States shall consult with each other for the purpose of cooperating and advising in respect of any action to be taken in implementing this Article. 2

What does this Mean?

It means that the countries who are party to the tax treaty agreement intend to cooperate to ensure information is properly exchanged between the countries in furtherance of the treaty (aka a ‘cooperation’ clause).

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.