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Chile Issues Circular on Activation of Interest and Royalties MFN Clauses in Tax Treaties with Austria, China, Ecuador, and Spain

The Chilean tax authority (SII) has issued Circular No. 50 of 11 October 2018 concerning the activation of the MFN clauses with respect to interest and royalty income under Chile's tax treaties with Austria, China, Ecuador, and Spain as a result of Chile's 2016 tax treaty with Japan.

Interest Income

With respect to the 2012 tax treaty with Austria, the 1999 tax treaty with Ecuador, and the 2003 tax treaty with Spain, 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 of machinery or equipment, otherwise the rate is 10%.

Similar changes apply with respect to the 2015 tax treaty with China. Click the following for previous coverage of the changes.

Royalty Income

With respect to royalty income, the following withholding tax rates apply as from 1 January 2017 with respect to the tax treaties with Austria and Spain:

  • 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.

No changes are made with respect to the tax treaty with China, because the MFN clause in that treaty does not cover withholding tax on royalties. With respect to the Ecuador tax treaty, the MFN clause in the treaty does cover withholding tax on royalties but prescribes a minimum withholding tax rate of 10%, which was already reached in an agreement between Chile and Ecuador as of 1 January 2004.

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