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Chile Issues Circular on Activation of Interest and Royalties MFN Clauses by Tax Treaty with Japan

The Chilean tax authority (Servicio de Impuestos Internos - SII) has issued Circular No. 22 of 19 April 2018 concerning the activation of the MFN clauses with respect to interest and royalty income under six of its tax treaties as a result of the entry into force of the 2016 tax treaty with Japan.

Tax Treaties with Denmark, Poland, and South Korea

For the 2002 tax treaty with Denmark, the 2000 tax treaty with Poland, and the 2002 tax treaty with South Korea, the Circular provides that the following withholding tax rates apply as from 1 January 2017 with respect to interest income:

  • The rate is 4% where the beneficial owner of the interest is:
    • A bank;
    • An insurance company;
    • A company that substantially derives its gross income from the active and regular conduct of a lending or finance business involving transactions with unrelated persons and the company is unrelated to the payer of the interest ;
    • A company that sells machinery and equipment, where the interest is paid in connection with the sale on credit of such machinery or equipment; or
    • Any other company, provided that in the three taxable years preceding the taxable year in which the interest is paid, the company derives more than 50% of its liabilities from the issuance of bonds in financial markets or from taking deposits at interest, and more than 50% of the assets of the enterprise consist of debt-claims against unrelated persons;
  • The rate is 5% on interest derived from bonds or securities that are regularly and substantially traded on a recognized securities market; and
  • The rate is 15% in all other cases (this will be reduced to 10% from 1 January 2019).

With respect to interest income eligible for the 4% rate indicated above, if the interest is paid as part of an arrangement involving back-to-back loans or similar arrangements, the rate will instead be 5% if paid to a bank or insurance company or as part of a sale on credit, otherwise the rate is 10%.

With respect to royalty income, the following withholding tax rates apply as from 1 January 2017 for the three treaties:

  • 2% on royalties paid for the use of, or the right to use, any industrial, commercial, or scientific equipment; and
  • 10% in all other cases.

Tax Treaties with the Czech Republic, Ireland, and the UK

The Circular also covers the withholding tax changes in respect of interest and royalty income resulting from the MFN clauses in Chile's tax treaties with Ireland (previous coverage) and the UK (previous coverage), and the withholding tax changes in respect of interest income resulting from the MFN clause in the tax treaty with the Czech Republic (previous coverage).

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