[Senate Executive Report 113-9]
[From the U.S. Government Publishing Office]
113th Congress Exec. Rept.
SENATE
2nd Session 113-9
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TAX CONVENTION WITH CHILE
_______
April 29, 2014.--Ordered to be printed
_______
Mr. Menendez, from the Committee on Foreign Relations,
submitted the following
REPORT
[To accompany Treaty Doc. 112-8]
The Committee on Foreign Relations, to which was referred
the Convention between the Government of the United States of
America and the Government of the Republic of Chile for the
Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income and Capital, signed in
Washington on February 4, 2010, with a protocol signed the same
day, as corrected by the exchanges of notes effected February
25, 2011, and February 10 and 21, 2012, and a related agreement
effected by exchange of notes on February 4, 2010 (Treaty Doc.
112-8), having considered the same, reports favorably thereon
with one declaration, as indicated in the resolution of advice
and consent, and recommends that the Senate give its advice and
consent to ratification thereof, as set forth in this report
and the accompanying resolution of advice and consent.
CONTENTS
Page
I. Purpose..........................................................1
II. Background.......................................................2
III. Major Provisions.................................................2
IV. Entry Into Force.................................................3
V. Implementing Legislation.........................................3
VI. Committee Action.................................................3
VII. Committee Comments...............................................4
VIII.Text of Resolution of Advice and Consent to Ratification.........4
IX. Technical Explanation............................................5
I. Purpose
The purpose of the Convention is to promote and facilitate
trade and investment between the United States and Chile.
Principally, the Convention provides for reduced withholding
rates on cross-border payments of dividends, interest,
royalties, and certain other income. In addition, the
Convention would prevent avoidance or evasion of the taxes of
the two countries. The Convention contains rigorous protections
designed to protect against ``treaty shopping,'' which is the
inappropriate use of a tax treaty by third-country residents,
and provisions to ensure the exchange of information between
tax authorities in both countries. While the proposed
Convention broadly follows the 2006 U.S. Model Income Tax
Treaty (the ``U.S. Model''), it deviates from the U.S. Model by
including more restrictive limitation of benefit rules and
would subject dividends, interest, and royalties to higher tax
rates. Similar to the treaty with Hungary, the Convention does
not provide a tax exemption for some parent-subsidiary
dividends.
II. Background
The Convention would be the first bilateral income tax
treaty between the United States and Chile. If ratified, the
proposed treaty would represent the third income tax treaty
with a country in Latin America.
III. Major Provisions
A detailed article-by-article analysis of the Protocol may
be found in the Technical Explanation published by the
Department of the Treasury on February 26, 2014, which is
included in Annex 1 of this report. In addition, the staff of
the Joint Committee on Taxation prepared an analysis of the
Convention, JCX-10-14 (February 24, 2014), which was of great
assistance to the committee in reviewing the Convention. A
summary of the key provisions of the Convention is set forth
below.
GENERAL SCOPE
Article 1 defines the scope of the proposed treaty as
applying only to ``residents'' of the United States and Chile,
except where the terms of the Convention provide otherwise. It
contains a standard ``saving clause'' pursuant to which each
country retains the right to tax its residents and citizens as
if the treaty had not come into effect, subject to certain
exceptions.
COVERED TAXES
Article 2 provides that the proposed treaty, in general,
applies only to taxes on income or capital, including gains,
imposed on the national level, irrespective of the manner in
which they are levied. The proposed treaty also applies to
certain taxes that are enacted after the treaty was signed.
DIVIDENDS
Article 10 provides that dividends may be fully taxed by
the residence country and partially taxed by the source
country. Although some of the provisions in this article are
consistent with the U.S. Model, the proposed treaty does not
allow for complete exemption from withholding tax for some
parent-subsidiary dividends. In addition, the proposed treaty
stipulates special rules on taxation of undistributed earnings
and does not include special rules for dividends for regulated
investment companies and real estate investment trusts that are
found in other recent U.S. tax treaties.
LIMITATION ON BENEFITS
Consistent with current U.S. treaty policy, Article 24
includes a ``Limitation on Benefits'' provision, which is
designed to avoid treaty-shopping by limiting the indirect use
of a treaty's benefits by third-country residents. This
article's Limitation on Benefits provision generally reflects
the anti-treaty-shopping provisions included in the U.S. Model
treaty and more recent U.S. income tax treaties. Similar to
agreements with other tax treaty partners, the proposed treaty
contains a special rule such that so-called "headquarters
companies" shall satisfy the requirements of the Limitation on
Benefits provision.
EXCHANGE OF INFORMATION
Article 27 provides authority for the two countries to
exchange tax information and generally follows the current U.S.
and OECD Model treaties. Under Article 27, the United States is
allowed to obtain information (including from financial
institutions) from Chile regardless of whether Chile needs the
information for its own tax purposes.
IV. Entry Into Force
The proposed Convention would enter into force when both
the United States and Chile have notified each other that they
have completed all of the necessary procedures required for
entry into force. It will have effect, with respect to taxes
withheld at source, for amounts paid or credited on or after
the first day of the second month following the date of entry
into force of the proposed Treaty, and with respect to other
taxes, for taxable years beginning on or after the first day of
January of the calendar year immediately following the date of
entry into force of the proposed Treaty. The Protocol and the
related Agreement would enter into force on the date of entry
into force of the proposed Convention.
V. Implementing Legislation
As is the case generally with income tax treaties, the
Protocol is self-executing and does not require implementing
legislation for the United States.
VI. Committee Action
The committee held a public hearing on the Convention on
February 26, 2014. Testimony was received from Robert Stack,
Deputy Assistant Secretary (International Tax Affairs) at the
U.S. Department of the Treasury, Thomas Barthold, Chief of
Staff of the Joint Committee on Taxation, William Reinsch,
President of the National Foreign Trade Council, Paul Nolan,
Vice President, Tax for McCormick & Company, Inc., and Nancy
McLernon, President & CEO of the Organization for International
Investment. A transcript of the hearing is included in Annex 2
of Executive Report 113-??.
On April 1, 2014, the committee considered the Protocol and
ordered it favorably reported by voice vote, with a quorum
present and without objection.
VII. Committee Comments
The Committee on Foreign Relations believes that the
Protocol will stimulate increased trade and investment and
promote closer co-operation between the United States and Chile
on tax matters. The committee therefore urges the Senate to act
promptly to give advice and consent to ratification of the
Protocol, as set forth in this report and the accompanying
resolution of advice and consent.
A. LIMITATION ON BENEFITS
The committee applauds the Treasury Department's
significant efforts to address treaty shopping both in this
Convention and in other bilateral tax treaties. After careful
examination of this Convention, as well as testimony and
responses to questions for the record from the Treasury
Department, the committee is of the view that the Convention's
protections against treaty-shopping are robust and will
substantially deny treaty shoppers the benefit of the
Convention. The committee believes that it is critical for the
Treasury Department to closely monitor and keep the committee
informed on the effectiveness of the above-mentioned provisions
in discouraging and eliminating treaty-shopping under the
Convention.
B. DECLARATION ON THE SELF-EXECUTING NATURE OF THE PROTOCOL
The committee has included one declaration in the
recommended resolution of advice and consent. The declaration
states that the Protocol is self-executing, as is the case
generally with income tax treaties. Prior to the 110th
Congress, the committee generally included such statements in
the committee's report, but in light of the Supreme Court
decision in Medellin v. Texas, 128 S. Ct. 1346 (2008), the
committee determined that a clear statement in the Resolution
is warranted. A further discussion of the committee's views on
this matter can be found in Section VIII of Executive Report
110-12.
VIII. Text of Resolution of Advice and Consent to Ratification
Resolved (two-thirds of the Senators present concurring
therein),
SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO A DECLARATION
The Senate advises and consents to the ratification of the
Convention Between the Government of the United States of
America and the Government of the Republic of Chile for the
Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income and Capital, signed at
Washington February 4, 2010, with a Protocol and a related
agreement effected by exchange of notes February 4, 2010, as
corrected by exchanges of notes effected February 25, 2011, and
February 10 and 21, 2012 (the ``Convention'') (Treaty Doc. 112-
8), subject to the declaration of section 2.
SECTION 2. DECLARATION
The advice and consent of the Senate under section 1 is
subject to the following declaration:
The Convention is self-executing.
IX. Technical Explanation
DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE CONVENTION
BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE
GOVERNMENT OF THE REPUBLIC OF CHILE FOR THE AVOIDANCE OF DOUBLE
TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON
INCOME AND CAPITAL
This is a Technical Explanation of the Convention between
the Government of the United States and the Government of the
Republic of Chile for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income
and Capital, signed on February 4, 2010 (the ``Convention'') as
well as an amending Protocol signed the same day (the
``Protocol'').
Negotiations on the Convention took into account the U.S.
Treasury Department's current tax treaty policy and the
Treasury Department's Model Income Tax Convention, published on
November 15, 2006 (the ``U.S. Model''). Negotiations also took
into account the Model Tax Convention on Income and on Capital,
published by the Organisation for Economic Cooperation and
Development (the ``OECD Model''), and recent tax treaties
concluded by both countries.
On the date of signing of the Convention and the Protocol,
the United States and Chile also exchanged diplomatic Notes
(the ``2010 Exchange of Notes'') relating to various provisions
of the Convention and the Protocol. The United States and Chile
also exchanged diplomatic Notes on February 25, 2011 (the
``2011 Exchange of Notes'') and on February 10 and 21, 2012
(the ``2012 Exchange of Notes''). The 2010, 2011, and 2012
Exchanges of Notes constitute an integral part of the overall
agreement between the United States and Chile.
The Technical Explanation is an official guide to the
Convention, Protocol, and Exchanges of Notes. It reflects the
policies behind particular Convention provisions, as well as
understandings reached during the negotiations with respect to
the application and interpretation of the Convention, Protocol,
and Exchanges of Notes. References in the Technical Explanation
to ``he'' or ``his'' should be read to mean ``he or she'' or
``his and her.'' References to the ``Code'' are to the Internal
Revenue Code of 1986, as amended.
ARTICLE 1 (GENERAL SCOPE)
Article 1 provides that the Convention applies only to
residents of the United States or Chile except where the terms
of the Convention provide otherwise. Under Article 4
(Residence) a person is generally treated as a resident of a
Contracting State if that person is, under the laws of that
State, 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.
However, if a person is considered a resident of both
Contracting States, Article 4 provides rules for determining a
State of residence (or no Contracting State of residence). This
determination governs for all purposes of the Convention.
Certain provisions are applicable to persons who may not be
residents of either Contracting State. For example, paragraph 1
of Article 25 (Non-Discrimination) applies to nationals of the
Contracting States. In addition, under Article 27 (Exchange of
Information), information may be exchanged with respect to
residents of third states.
Paragraph 2 of the Protocol states the generally accepted
relationship both between the Convention and domestic law and
between the Convention and other agreements to which both of
the Contracting States are parties. That is, no provision in
the Convention may restrict any exclusion, exemption,
deduction, credit or other allowance or benefit accorded by the
tax laws of the Contracting States, or by any other agreement
between the Contracting States. The relationship between the
non-discrimination provisions of the Convention and the General
Agreement on Trade in Services (the ``GATS'') is addressed in
paragraph 3 of the Protocol.
Under paragraph 2 of the Protocol, for example, if a
deduction would be allowed under the Code in computing the U.S.
taxable income of a resident of Chile, the deduction also is
allowed to that person in computing taxable income under the
Convention. Paragraph 2 also means that the Convention may not
increase the tax burden on a resident of a Contracting State
beyond the burden determined under domestic law. Thus, a right
to tax permitted by the Convention cannot be exercised unless
that right also exists under domestic law.
It follows that, under the principle of paragraph 2 of the
Protocol, a taxpayer's U.S. tax liability need not be
determined under the Convention if the Code would produce a
more favorable result. A taxpayer may not, however, choose
among the provisions of the Code and the Convention in an
inconsistent manner in order to minimize tax. Thus, a taxpayer
may use the Convention to reduce its taxable income, but may
not combine both treaty and Code rules in a way that would be
inconsistent with the intent of either set of rules. For
example, assume that a resident of Chile has three separate
businesses in the United States. One is a profitable permanent
establishment and the other two are trades or businesses that
would earn taxable income under the Code but that do not meet
the permanent establishment threshold tests of the Convention.
One is profitable and the other incurs a loss. Under the
Convention, the income of the permanent establishment is
taxable in the United States, and both the profit and loss of
the other two businesses are ignored. Under the Code, all three
would be subject to tax, but the loss would offset the profits
of the two profitable ventures. The taxpayer may not invoke the
Convention to exclude the profits of the profitable trade or
business and invoke the Code to claim the loss of the loss
trade or business against the profit of the permanent
establishment. See Rev. Rul. 84-17, 1984-1 C.B. 308. If,
however, the taxpayer invokes the Code for the taxation of all
three ventures, he would not be precluded from invoking the
Convention with respect, for example, to any dividend income he
may receive from the United States that is not effectively
connected with any of his business activities in the United
States.
Similarly, except as provided in paragraph 3, nothing in
the Convention can be used to deny any benefit granted by any
other agreement between the United States and Chile. For
example, if certain benefits are provided for military
personnel or military contractors under a Status of Forces
Agreement between the United States and Chile, those benefits
or protections will be available to residents of the
Contracting States regardless of any provisions to the contrary
(or silence) in the Convention.
Paragraph 3 of the Protocol relates to non-discrimination
obligations of the Contracting States under the GATS. The
provisions of paragraph 3 are an exception to the rule provided
in paragraph 2 of the Protocol under which the Convention shall
not restrict in any manner any benefit now or hereafter
accorded by any other agreement between the Contracting States.
Subparagraph 3(a) of the Protocol provides that, unless the
competent authorities determine that a taxation measure is not
within the scope of the Convention, the national treatment
obligations of the GATS shall not apply with respect to that
measure. Further, any question arising as to the interpretation
or application of the Convention, including in particular
whether a measure is within the scope of the Convention, shall
be considered only by the competent authorities of the
Contracting States, and the procedures under the Convention
exclusively shall apply to the dispute. Thus, paragraph 3 of
Article XXII (Consultation) of the GATS may not be used to
bring a dispute before the World Trade Organization unless the
competent authorities of both Contracting States have
determined that the relevant taxation measure is not within the
scope of Article 25 (Non-Discrimination) of the Convention.
The term ``measure'' for these purposes is defined broadly
in paragraph 3 of the Protocol. It would include a law,
regulation, rule, procedure, decision, administrative action or
guidance, or any other similar provision or action.
Paragraph 4 of the Protocol contains the traditional saving
clause found in all U.S. income tax treaties. The Contracting
States reserve their rights, except as provided otherwise in
paragraph 4 of the Protocol, to tax their residents and
citizens as provided under their domestic laws, notwithstanding
any provisions of the Convention to the contrary. For example,
if a resident of Chile performs professional services in the
United States and the income from the services is not
attributable to a permanent establishment in the United States,
Article 7 (Business Profits) would by its terms prevent the
United States from taxing the income. If, however, the resident
of Chile is also a citizen of the United States, the saving
clause permits the United States to include the remuneration in
the worldwide income of the citizen and subject it to tax under
the normal Code rules (i.e., without regard to Code section
894(a)). Paragraph 4 of the Protocol also preserves the
benefits of special foreign tax credit rules applicable to the
U.S. taxation of certain U.S. income of its citizens resident
in Chile. See paragraph 5 of Article 23 (Relief from Double
Taxation).
For purposes of the saving clause, ``residence'' is
determined under Article 4 (Residence). Thus, an individual who
is a resident of the United States under the Code (but not a
U.S. citizen) but who is determined to be a resident of the
other Contracting State under the tie-breaker rules of Article
4 would be subject to U.S. tax only to the extent permitted by
the Convention. The United States would not be permitted to
apply its domestic law to that person to the extent that its
law is inconsistent with the Convention.
However, the person would still be treated as a U.S.
resident for U.S. tax purposes other than determining the
individual's U.S. tax liability. For example, in determining
under Code section 957 whether a foreign corporation is a
controlled foreign corporation, shares in that corporation held
by the individual would be considered to be held by a U.S.
resident. As a result, other U.S. citizens or residents might
be deemed to be United States shareholders of a controlled
foreign corporation subject to current inclusion of subpart F
income recognized by the corporation. See Treas. Reg.
Sec. 301.7701(b)-7(a)(3).
Under paragraph 4 of the Protocol, each Contracting State
also reserves its right to tax former citizens and former long-
term residents for a period of ten years following the loss of
such status. Thus, paragraph 4 allows the United States to tax
former U.S. citizens and former U.S. long-term residents in
accordance with Code section 877. Section 877 generally applies
to a former citizen or long-term resident of the United States
who relinquishes citizenship or terminates long-term residency
before June 17, 2008, if he fails to certify that he has
complied with U.S. tax laws during the 5 preceding years, or if
either of the following criteria exceed established thresholds:
(a) the average annual net income tax of such individual for
the period of 5 taxable years ending before the date of the
loss of status; or (b) the net worth of such individual as of
the date of the loss of status.
The United States defines ``long-term resident'' as an
individual (other than a U.S. citizen) who is a lawful
permanent resident of the United States in at least 8 of the
prior 15 taxable years. An individual is not treated as a
lawful permanent resident for any taxable year in which the
individual is treated as a resident of Chile under this
Convention, or as a resident of any country other than the
United States under the provisions of any other U.S. tax
treaty, and the individual does not waive the benefits of the
relevant tax treaty.
Subparagraphs 4(a) and 4(b) of the Protocol set forth
certain exceptions to the saving clause. The referenced
provisions are intended to preserve benefits for citizens and
residents of the Contracting States even if such benefits do
not exist under domestic law.
Subparagraph 4(a) of the Protocol lists certain provisions
of the Convention that are applicable to all citizens and
residents of a Contracting State, despite the general saving
clause rule of paragraph 4:
(1) Paragraph 2 of Article 9 (Associated Enterprises)
grants the right to a correlative adjustment with
respect to income tax due on profits reallocated under
Article 9.
(2) Paragraphs 1 (b), 3, 4, and 6 of Article 18
(Pensions, Social Security, Alimony and Child Support)
provide exemptions from source or residence State
taxation for certain pension distributions, social
security payments, investment income of pension funds
located in the other Contracting State, alimony, and
child support.
(3) Article 23 (Relief from Double Taxation) confers
to citizens and residents of one Contracting State the
benefit of a credit for income taxes paid to the other
or an exemption for income earned in the other State.
(4) Article 25 (Non-Discrimination) protects
residents and nationals of one Contracting State
against the adoption of certain discriminatory taxation
practices in the other Contracting State.
(5) Article 26 (Mutual Agreement Procedure) confers
certain benefits on citizens and residents of the
Contracting States in order to reach and implement
solutions to disputes between the two Contracting
States. For example, the competent authorities are
permitted to use a definition of a term that differs
from an internal law definition. The statute of
limitations may be waived for refunds, so that the
benefits of an agreement may be implemented.
Subparagraph 4(b) of the Protocol provides a different set
of exceptions to the saving clause. The benefits referred to
are all intended to be granted to temporary residents of a
Contracting State (for example, in the case of the United
States, holders of non-immigrant visas), but not to citizens or
to persons who have acquired permanent residence in that State.
If beneficiaries of these provisions travel from one of the
Contracting States to the other, and remain in the other long
enough to become residents under its internal law, but do not
acquire permanent residence status (i.e., in the U.S. context,
they do not become ``green card'' holders) and are not citizens
of that State, the host State will continue to grant these
benefits even if they conflict with the statutory rules. The
benefits preserved by this paragraph are: the host country
exemptions for certain pension distributions and the beneficial
tax treatment of pension fund contributions under paragraphs 2
and 5 of Article 18 (Pensions, Social Security, Alimony and
Child Support); government service salaries and pensions under
Article 19 (Government Service); certain income of visiting
students, apprentices, and trainees under Article 20 (Students
and Trainees); and the income of diplomatic agents and consular
officers under Article 28 (Members of Diplomatic Missions and
Consular Posts).
Paragraph 1 of the Protocol addresses special issues
presented by fiscally transparent entities such as partnerships
and certain estates and trusts. Because countries may take
different views as to when an entity is fiscally transparent,
the risks of both double taxation and double non-taxation are
relatively high. The intention of paragraph 1 of the Protocol
is to eliminate a number of technical problems that arguably
would have prevented investors using such entities from
claiming treaty benefits, even though such investors would be
subject to tax on the income derived through such entities. The
provision also prevents the use of such entities to claim
treaty benefits in circumstances where the person investing
through such an entity is not subject to tax on the income in
its State of residence. The provision, and the corresponding
requirements of other Articles of the Convention, should be
interpreted with those two goals in mind.
In general, this paragraph applies to any resident of a
Contracting State who is entitled to income derived through an
entity that is treated as fiscally transparent under the laws
of either Contracting State. Treas. Reg. Sec. 1.894-
1(d)(3)(iii) provides that an entity will be fiscally
transparent under the laws of an interest holder's jurisdiction
with respect to an item of income to the extent that the laws
of that jurisdiction require the interest holder resident in
that jurisdiction to separately take into account on a current
basis the interest holder's respective share of the item of
income paid to the entity, whether or not distributed to the
interest holder, and the character and source of the item in
the hands of the interest holder are determined as if such item
were realized directly by the interest holder. Entities falling
under this description in the United States include
partnerships, corporations that have made a valid election to
be taxed under Subchapter S of Chapter 1 of the Code (``S''
corporations), common investment trusts under section 584,
simple trusts, and grantor trusts. This paragraph also applies
to other entities that are treated as partnerships or as
disregarded entities for U.S. tax purposes, such as U.S.
limited liability companies (``LLCs'').
Under paragraph 1 of the Protocol, an item of income,
profit or gain derived by such a fiscally transparent entity
will be considered to be derived by a resident of a Contracting
State if a resident is treated under the taxation laws of that
State as deriving the item of income. For example, if a company
that is a resident of Chile pays interest to an entity that is
treated as fiscally transparent for U.S. tax purposes, the
interest will be considered derived by a resident of the United
States only to the extent that the taxation laws of the United
States treat one or more U.S. residents (whose status as U.S.
residents is determined, for this purpose, under U.S. tax law)
as deriving the interest for U.S. tax purposes. In the case of
a partnership, the persons who are, under U.S. tax laws,
treated as partners of the entity would normally be the persons
whom the U.S. tax laws would treat as deriving the interest
income through the partnership. Also, it follows that persons
whom the United States treats as partners but who are not U.S.
residents for U.S. tax purposes may not claim a benefit for the
interest paid to the entity, because they are not residents of
the United States for purposes of claiming this benefit. If,
however, the country in which they are treated as resident for
tax purposes, as determined under the laws of that country, has
an income tax convention with Chile, they may be entitled to
claim a benefit under that convention. In contrast, if, for
example, an entity is organized under U.S. laws and is
classified as a corporation for U.S. tax purposes, interest
paid by a company that is a resident of Chile to the U.S.
entity will be considered derived by a resident of the United
States since the U.S. corporation is treated under U.S.
taxation laws as a resident of the United States and as
deriving the income.
The same result would be reached even if the tax laws of
Chile would treat the entity differently (e.g., if the entity
were not treated as fiscally transparent in the source State in
the first example above where the entity is treated as a
partnership for U.S. tax purposes). The results follow
regardless of whether the entity is disregarded as a separate
entity under the laws of one jurisdiction but not the other,
such as a single-owner entity that is viewed as a branch for
U.S. tax purposes and as a corporation for tax purposes under
the laws of Chile. Similarly, the characterization of the
entity in a third country is also irrelevant, even if the
entity is organized in that third country. The outcome would be
identical regardless of where the entity is organized (i.e., in
the United States, in Chile, or as noted above, in a third
country), subject to the saving clause of paragraph 4.
For example, income from U.S. sources received by an entity
organized under the laws of the United States, which is treated
for tax purposes under the laws of Chile as a corporation and
is owned by a shareholder who is a resident of Chile for its
tax purposes, is not considered derived by the shareholder of
that corporation even if, under the tax laws of the United
States, the entity is treated as fiscally transparent. Rather,
for purposes of the treaty, the income is treated as derived by
the U.S. entity.
These principles also apply to trusts to the extent that
they are fiscally transparent in either Contracting State. For
example, if X, a resident of Chile, creates a revocable trust
in the United States and names persons resident in a third
country as the beneficiaries of the trust, the trust's income
would be regarded as being derived by a resident of Chile only
to the extent that the laws of Chile treat X as deriving the
income for its tax purposes, perhaps through application of
rules similar to the U.S. ``grantor trust'' rules.
Paragraph 1 of the Protocol is not an exception to the
saving clause of paragraph 4 of the Protocol. Accordingly,
paragraph 1 does not prevent a Contracting State from taxing an
entity that is treated as a resident of that State under its
tax law. For example, if a U.S. LLC with members who are
residents of Chile elects to be taxed as a corporation for U.S.
tax purposes, the United States will tax that LLC on its
worldwide income on a net basis, without regard to whether
Chile views the LLC as fiscally transparent.
ARTICLE 2 (TAXES COVERED)
This Article specifies the U.S. taxes and the taxes of
Chile to which the Convention applies. With two exceptions, the
taxes specified in Article 2 are the covered taxes for all
purposes of the Convention. A broader coverage applies,
however, for purposes of Articles 25 (Non-Discrimination) and
27 (Exchange of Information). Article 25 applies with respect
to taxes of every kind and description imposed by a Contracting
State or a political subdivision or local authority thereof,
except that in the case of taxes not covered by the Convention,
Article 25 does not apply to any tax laws of a Contracting
State that are in force on the date of signature of the
Convention. Article 27 applies with respect to all taxes
imposed at the national level.
Paragraph 1
Paragraph 1 identifies the categories of taxes to which the
Convention applies. Paragraph 1 is based on the U.S. and OECD
Models and defines the scope of application of the Convention.
The Convention applies to taxes on income and on capital,
including gains, imposed on behalf of a Contracting State,
irrespective of the manner in which they are levied. Except
with respect to Article 25 (Non-Discrimination), state and
local taxes are not covered by the Convention.
Paragraph 2
Paragraph 2 also is based on the U.S. and OECD Models and
provides a definition of taxes on income and on capital. The
Convention covers taxes on total income, on total capital, or
on any part of income or of capital, and includes taxes on
gains derived from the alienation of property as well as taxes
on capital appreciation. The Convention does not apply,
however, to social security or unemployment taxes, or any other
charges where there is a direct connection between the levy and
individual benefits. Nor does it apply to property taxes,
except with respect to Article 25 (Non-Discrimination).
Paragraph 3
Paragraph 3 lists the taxes in force at the time of
signature of the Convention to which the Convention applies.
Subparagraph 3(a) provides that the existing U.S. taxes subject
to the rules of the Convention are the Federal income taxes
imposed by the Code, together with the Federal excise taxes
imposed on insurance premiums paid to foreign insurers (Code
sections 4371 through 4374) and with respect to private
foundations (Code sections 4940 through 4948). Social security
and unemployment taxes (Code sections 1401, 3101, 3111 and
3301) are specifically excluded from coverage. Subparagraph
3(b) provides that the existing covered taxes of Chile are the
taxes imposed under the Income Tax Act (Ley sobre Impuesto a la
Renta).
Paragraph 4
Under paragraph 4, the Convention will apply to any taxes
that are identical, or substantially similar, to those
enumerated in paragraph 3, and to taxes on capital, which are
imposed in addition to, or in place of, the existing taxes
after February 4, 2010, the date of signature of the
Convention. The paragraph also provides that the competent
authorities of the Contracting States will notify each other of
any significant changes to their tax laws.
ARTICLE 3 (GENERAL DEFINITIONS)
Article 3 provides general definitions and rules of
interpretation applicable throughout the Convention. Certain
other terms are defined in other articles of the Convention.
For example, the term ``resident of a Contracting State'' is
defined in Article 4 (Residence). The term ``permanent
establishment'' is defined in Article 5 (Permanent
Establishment). These definitions apply for all purposes of the
Convention. Other terms, such as ``dividends,'' ``interest,''
and ``royalties'' are defined in specific articles for purposes
of those articles.
Paragraph 1
Paragraph 1 defines a number of basic terms used in the
Convention. The introduction to paragraph 1 makes clear that
these definitions apply for all purposes of the Convention,
unless the context requires otherwise. This latter condition
allows flexibility in the interpretation of the Convention in
order to avoid results not intended by the Convention's
negotiators.
The geographical scope of the Convention with respect to
the United States is set out in subparagraphs 1(a) and 1(c). It
encompasses the United States of America, including the states
and the District of Columbia. The term does not include Puerto
Rico, the Virgin Islands, Guam or any other U.S. possession.
For certain purposes, the term ``United States'' includes the
territorial sea of the United States, as well as the sea bed
and subsoil of undersea areas adjacent to the territorial sea
of the United States to the extent that the United States
exercises sovereignty in accordance with international law for
the purpose of natural resource exploration and exploitation of
such areas. This extension of the definition applies, however,
only if the person, property or activity to which the
Convention is being applied is connected with such natural
resource exploration or exploitation. Thus, it would not
include any activity involving the sea floor of an area over
which the United States exercised sovereignty for natural
resource purposes if that activity was unrelated to the
exploration and exploitation of natural resources. This result
is consistent with the result that would be obtained under
Section 638, which treats the continental shelf as part of the
United States for purposes of natural resource exploration and
exploitation.
The geographical scope of the Convention with respect to
Chile is set out in subparagraphs 1(b) and 1(c). The term
``Chile'' means the Republic of Chile and includes the
territorial sea thereof as well as the sea bed and subsoil of
the submarine areas adjacent to the territorial sea over which
Chile exercises sovereign rights in accordance with
international law.
Subparagraph 1(d) defines the term ``person'' to include an
individual, a company and any other body of persons. Paragraph
1 of the 2010 Exchange of Notes provides that the term
``person'' includes an estate, trust or partnership. The
definition is significant for a variety of reasons. For
example, under Article 4 (Residence), only a ``person'' can be
a ``resident'' and therefore eligible for most benefits under
the Convention. Also, all ``persons'' are eligible to claim
relief under Article 26 (Mutual Agreement Procedure).
The term ``company'' is defined in subparagraph 1(e) as a
body corporate or an entity treated as a body corporate for tax
purposes in the state where it is organized. The definition
refers to the law of the state in which an entity is organized
in order to ensure that an entity that is treated as fiscally
transparent in its country of residence will not get
inappropriate benefits, such as the reduced withholding rate
provided by subparagraph 2(a) of Article 10 (Dividends). It
also ensures that the Limitation on Benefits provisions of
Article 24 will be applied at the appropriate level.
The terms ``enterprise of a Contracting State'' and
``enterprise of the other Contracting State'' are defined in
subparagraph (f) respectively as an enterprise carried on by a
resident of a Contracting State and an enterprise carried on by
a resident of the other Contracting State. An enterprise of a
Contracting State need not be carried on in that State. It may
be carried on in the other Contracting State or a third state
(e.g., a U.S. corporation doing all of its business in the
other Contracting State would still be a U.S. enterprise).
Paragraph 2 of the 2010 Exchange of Notes provides that the
terms defined in subparagraph 1(f) of Article 3 of the
Convention include an enterprise conducted through an entity
(such as a partnership) that is treated as fiscally transparent
in the Contracting State where the entity's owner is resident.
The definition makes this point explicitly to ensure that the
purpose of the Convention is not thwarted by an overly
technical application of the term ``enterprise of a Contracting
State'' to activities carried on through partnerships and
similar entities. In accordance with Article 4 (Resident), an
entity that is fiscally transparent in the Contracting State in
which it is organized is not considered to be a resident of
that Contracting State (although income derived through such an
entity may be treated as the income of a resident of a
Contracting State to the extent that it is taxed in the hands
of resident partners or other resident owners). The definition
makes clear that an enterprise conducted by such an entity will
be treated as carried on by a resident of a Contracting State
to the extent its partners or other owners are residents. This
approach is consistent with Code section 875, which attributes
a trade or business conducted by a partnership to its partners
and a trade or business conducted by an estate or trust to its
beneficiaries.
Subparagraph 1(g) defines the term ``international
traffic.'' The term means any transport by a ship or aircraft
except when such transport is solely between places within a
Contracting State. This definition is applicable principally in
the context of Article 8 (International Transport). The
definition combines with paragraph 2 of Article 8 to exempt
from tax by the source State profits from the rental of ships
of or aircraft on a full (time or voyage) basis and profits
from the rental on a bareboat basis of ships or aircraft if the
rental income is incidental to profits from the operation of
ships or aircraft in international traffic.
The exclusion from international traffic of transport
solely between places within a Contracting State means, for
example, that carriage of goods or passengers solely between
New York and Chicago would not be treated as international
traffic, whether carried by a U.S. or a foreign carrier. The
substantive taxing rules of the Convention relating to the
taxation of income from transport, principally Article 8
(International Transport), therefore, would not apply to income
from such carriage. Thus, if the carrier engaged in internal
U.S. traffic were a resident of Chile (assuming that were
possible under U.S. law), the United States would not be
required to exempt the income from that transport under Article
8. The income would, however, be treated as business profits
under Article 7 (Business Profits), and therefore would be
taxable in the United States only if attributable to a U.S.
permanent establishment of the foreign carrier, and then only
on a net basis. The gross basis U.S. tax imposed by section 887
would never apply under the circumstances described. If,
however, goods or passengers were carried by a carrier resident
in Chile from a non-U.S. port to, for example, New York, and
some of the goods or passengers continued on to Chicago, the
entire transport would be international traffic. This would be
true if the international carrier transferred the goods at the
U.S. port of entry from a ship to a land vehicle, from a ship
to a lighter, or even if the overland portion of the trip in
the United States was handled by an independent carrier under
contract with the original international carrier, so long as
both parts of the trip were reflected in original bills of
lading. For this reason, the Convention, following the U.S.
Model, refers, in the definition of ``international traffic,''
to ``such transport'' being solely between places in the other
Contracting State, while the OECD Model refers to the ship or
aircraft being operated solely between such places. The
formulation in the Convention is intended to make clear that,
as in the above example, even if the goods are carried on a
different aircraft for the internal portion of the
international voyage than is used for the overseas portion of
the trip, the definition applies to that internal portion as
well as the external portion.
Finally, a ``cruise to nowhere,'' i.e., a cruise beginning
and ending in a port in the same Contracting State with no
stops in a foreign port, would not constitute international
traffic.
Subparagraph 1(h) designates the ``competent authorities''
for the other Contracting State and the United States. The U.S.
competent authority is the Secretary of the Treasury or his
delegate. The Secretary of the Treasury has delegated the
competent authority function to the Commissioner of Internal
Revenue, who in turn has delegated the authority to the Deputy
Commissioner (International) LB&I of the Internal Revenue
Service. With respect to interpretative issues, the Deputy
Commissioner (International) LB&I acts with the concurrence of
the Associate Chief Counsel (International) of the Internal
Revenue Service. In the case of Chile, the competent authority
is the Minister of Finance or his authorized representative.
The term ``national,'' as it relates to the United States
and to Chile, is defined in subparagraph 1(i). This term is
relevant for purposes of Articles 4 (Residence), 19 (Government
Service) and 25 (Non-Discrimination). A national of one of the
Contracting States is (1) an individual who is a citizen or
national of that State, and (2) any legal person, partnership
or association deriving its status as such from the laws in
force in the State where it is established.
Subparagraph 1(j) defines the term ``pension fund.'' The
term means any person that is established in a Contracting
State and that satisfies two criteria. First, as provided in
clause 1(j)(i), the person must be generally exempt from income
taxation in the Contracting State in which it is established.
Second, as provided in clause 1(j)(ii), the person must be
operated principally either to administer or provide pension or
retirement benefits, or to earn income only for the benefit of
one or more persons established in the same Contracting State
that are generally exempt from income taxation in that
Contracting State and are operated principally to administer or
provide pension or retirement benefits.
The definition recognizes that pension funds sometimes
administer or provide benefits other than pension or retirement
benefits, such as death benefits. However, in order for the
fund to be considered a pension fund for purposes of the
Convention, the provision of any other such benefits must be
merely incidental to the fund's principal activity of
administering or providing pension or retirement benefits. The
definition also ensures that if a fund is a collective fund
that earns income for the benefit of other funds, then each
fund that participates in the collective fund must be a
resident of the same Contracting State as the collective fund
and must be entitled to benefits under the Convention in its
own right.
In the case of the United States, the term ``pension fund''
includes the following: a trust providing pension or retirement
benefits under a Code section 401(a) qualified pension plan
(which includes a section 401(k) plan); a profit sharing or
stock bonus plan; a Code section 403(a) qualified annuity plan;
a Code section 403(b) plan; a trust that is an individual
retirement account under Code section 408; a Roth individual
retirement account under Code section 408A or a simple
retirement account under Code section 408(p); a trust providing
pension or retirement benefits under a simplified employee
pension plan under Code section 408(k); a trust described in
section 457(g) providing pension or retirement benefits under a
Code section 457(b) plan; and the Thrift Savings Fund (section
7701(j)). A group trust described in Rev. Rul. 81-100, as
amended by Rev. Rul. 2004-67 and Rev. Rul. 2011-1, qualifies as
a pension fund only if each participant is a pension fund that
is itself entitled to benefits under the Convention as a
resident of the United States.
Paragraph 2
Terms that are not defined in the Convention are dealt with
in paragraph 2. Paragraph 2 provides that in the application of
the Convention, any term used but not defined in the Convention
will have the meaning that it has under the law of the
Contracting State whose tax is being applied, unless the
context requires otherwise. If the term is defined under both
the tax and non-tax laws of a Contracting State, the definition
in the tax law will take precedence over the definition in the
non-tax laws. Finally, there also may be cases where the tax
laws of a State contain multiple definitions of the same term.
In such a case, the definition used for purposes of the
particular provision at issue, if any, should be used.
If the meaning of a term cannot be readily determined under
the law of a Contracting State, or if there is a conflict in
meaning under the laws of the two States that creates
difficulties in the application of the Convention, the
competent authorities, as indicated in paragraph 5 of the
Protocol, may establish, pursuant to the provisions of Article
26 (Mutual Agreement Procedure), a common meaning in order to
prevent double taxation or to further any other purpose of the
Convention. This common meaning need not conform to the meaning
of the term under the laws of either Contracting State.
The reference in paragraph 2 to the domestic law of a
Contracting State means the law in effect at the time the
treaty is being applied, not the law in effect at the time the
treaty was signed. The use of ambulatory definitions, however,
may lead to results that are at variance with the intentions of
the negotiators and of the Contracting States when the treaty
was negotiated and ratified. The inclusion in both paragraphs 1
and 2 of an exception to the generally applicable definitions
where the ``context otherwise requires'' is intended to address
this circumstance. Where reflecting the intent of the
Contracting States requires the use of a definition that is
different from a definition under paragraph 1 or the law of the
Contracting State applying the Convention, that definition will
apply. Thus, flexibility in defining terms is necessary and
permitted.
ARTICLE 4 (RESIDENCE)
This Article sets forth rules for determining whether a
person is a resident of a Contracting State for purposes of the
Convention. As a general matter only residents of the
Contracting States may claim the benefits of the Convention.
The treaty definition of residence is to be used only for
purposes of the Convention. The fact that a person is
determined to be a resident of a Contracting State under
Article 4 does not automatically entitle that person to the
benefits of the Convention. In addition to being a resident, a
person also must qualify for benefits under Article 24
(Limitation on Benefits) in order to receive benefits conferred
on residents of a Contracting State.
The determination of residence for treaty purposes looks
first to a person's liability to tax as a resident under the
respective taxation laws of the Contracting States. As a
general matter, a person who is liable to tax as a resident
under the domestic laws of one Contracting State and not of the
other is a resident of the State in which he is liable to tax
as resident under domestic law. If, however, a person is liable
to tax as a resident under the domestic laws of both
Contracting States, the Article uses tie-breaker rules to
assign a single State of residence (or no State of residence)
to such a person for purposes of the Convention.
Paragraph 1
The term ``resident of a Contracting State'' is defined in
paragraph 1. In general, this definition incorporates the
definitions of residence in U.S. law and that of Chile by
referring to a resident as a person who, under the laws of a
Contracting State, is liable to tax therein by reason of his
domicile, residence, citizenship, place of management, place of
incorporation or any other similar criterion. Thus, residents
of the United States include aliens who are considered U.S.
residents under Code section 7701(b). Paragraph 1 also
specifically includes the two Contracting States, and political
subdivisions and local authorities of the two States and any
agency or instrumentality of the States, as residents for
purposes of the Convention.
The fact that a particular entity does not pay tax in
practice will not necessarily mean that the entity is not a
resident. An entity that is not fiscally transparent in its
Contracting State of residence for purposes of paragraph 1 of
the Protocol, and is not unconditionally exempt from tax, will
generally be treated as a resident for purposes of the
Convention. This is generally true even for an entity that, in
practice, is not required to pay tax if it meets certain
requirements with respect to its activities, types of income,
or distribution practices. For example, a U.S. Regulated
Investment Company (RIC) and a U.S. Real Estate Investment
Trust (REIT) are residents of the United States for purposes of
the treaty. These entities are taxable to the extent that they
do not currently distribute their profits, and therefore may be
regarded as ``liable to tax,'' even though these entities do
not generally have taxable income in practice. They also must
satisfy a number of requirements under the Code in order to be
entitled to special tax treatment.
Under paragraph 1 of Article 4, a person who is liable to
tax in a Contracting State only in respect of income from
sources within that State or capital situated therein will not
be treated as a resident of that Contracting State for purposes
of the Convention. Thus, a consular official of Chile who is
posted in the United States, who may be subject to U.S. tax on
U.S. source investment income, but is not taxable in the United
States on non-U.S. source income (see Code section
7701(b)(5)(B)), would not be considered a resident of the
United States for purposes of the Convention. Under paragraph 3
of the 2010 Exchange of Notes, a person who is liable to tax in
a Contracting State only on profits attributable to a permanent
establishment in that State will also not be treated as a
resident of that State for purposes of the Convention. Thus, an
enterprise of Chile with a permanent establishment in the
United States is not, by virtue of that permanent
establishment, a resident of the United States. The enterprise
generally is subject to U.S. tax only with respect to its
income that is attributable to the U.S. permanent
establishment, not with respect to its worldwide income, as it
would be if it were a U.S. resident.
Paragraph 6 of the Protocol provides that entities such as
pension funds as defined in Article 3 (General Definitions) and
legal persons organized under the laws of a Contracting State
and established exclusively for religious, charitable,
scientific, artistic, cultural, or educational purposes are
residents of the Contracting State in which they are
established or organized. Such persons are liable to tax,
notwithstanding that all or part of their income or gains may
be exempt from tax under the domestic laws of that State. Thus,
a section 501(c) organization organized in the United States
(such as a U.S. charity) that is generally exempt from tax
under U.S. law is nevertheless a resident of the United States
for all purposes of the Convention.
Paragraph 7 of the Protocol provides that Chile shall treat
a U.S. 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 purposes of a double taxation convention between that State
and Chile.
Paragraph 2
If, under the domestic law of both Contracting States, and,
thus, under paragraph 1, an individual is a resident of both
Contracting States, a series of tie-breaker rules are provided
in paragraph 2 to determine a single State of residence for
that individual. These tests are to be applied in the order in
which they are stated. The first test is based on where the
individual has a permanent home. If that test is inconclusive
because the individual has a permanent home available to him in
both States, he will be considered to be a resident of the
Contracting State where his personal and economic relations are
closest (i.e., the location of his ``center of vital
interests''). If that test is also inconclusive, or if he does
not have a permanent home available to him in either State, he
will be treated as a resident of the Contracting State where he
maintains a habitual abode. If he has a habitual abode in both
States or in neither of them, he will be treated as a resident
of the Contracting State of which he is a national. If he is a
national of both States or of neither, competent authorities
shall settle the question by mutual agreement.
Paragraph 3
Dual residents other than individuals (such as companies,
trusts or estates) are addressed by paragraph 3. If such a
person is, under the rules of paragraph 1, resident in both
Contracting States, the competent authorities shall seek to
determine a single State of residence for that person for
purposes of the Convention. If the competent authorities are
unable to reach such an agreement, that person may not claim
any benefit provided by the Convention, except for those
provided by Article 26 (Mutual Agreement Procedure).
Regardless of the outcomes under this paragraph, dual
resident companies, may be treated as a resident of a
Contracting State for purposes other than that of obtaining
benefits under the Convention. For example, if a dual resident
company pays a dividend to a resident of Chile, the U.S. paying
agent would withhold on that dividend at the appropriate treaty
rate because reduced withholding is a benefit enjoyed by the
resident of Chile, not by the dual resident company. The dual
resident company that paid the dividend would, for this
purpose, be treated as a resident of the United States under
the Convention. In addition, information relating to dual
resident persons can be exchanged under the Convention because,
by its terms, Article 27 (Exchange of Information) is not
limited to residents of the Contracting States.
ARTICLE 5 (PERMANENT ESTABLISHMENT)
This Article defines the term ``permanent establishment,''
a term that is significant for several articles of the
Convention. The existence of a permanent establishment in a
Contracting State is necessary under Article 7 (Business
Profits) for the taxation by that State of the business profits
of a resident of the other Contracting State. Articles 10
(Dividends), 11 (Interest), and 12 (Royalties) provide for
reduced rates of tax at source on payments of these items of
income to a resident of the other State only when the income is
not attributable to a permanent establishment that the
recipient has in the source State. The concept is also relevant
in determining which Contracting State may tax certain gains
under Article 13 (Capital Gains) and certain ``other income''
under Article 21 (Other Income).
Paragraph 1
The basic definition of the term ``permanent
establishment'' is contained in paragraph 1. As used in the
Convention, the term means a fixed place of business through
which the business of an enterprise is wholly or partly carried
on. As indicated in the OECD Commentary to Article 5 (see
paragraphs 4 through 8), a general principle to be observed in
determining whether a permanent establishment exists is that
the place of business must be ``fixed'' in the sense that a
particular building or physical location is used by the
enterprise for the conduct of its business, and that it must be
foreseeable that the enterprise's use of this building or other
physical location will be more than temporary.
Paragraph 2
Paragraph 2 lists a number of types of fixed places of
business that constitute a permanent establishment. This list
is illustrative and non-exclusive. According to paragraph 2,
the term permanent establishment includes a place of
management, a branch, an office, a factory, a workshop, and a
mine, oil or gas well, quarry or any other place of extraction
or exploitation of natural resources.
Paragraph 3
Subparagraphs 3(a) and 3(b) provide rules to determine
whether a building site or a construction, assembly or
installation project, or an installation or drilling rig or
ship used for the exploration of natural resources constitutes
a permanent establishment for the contractor, driller, etc.
Subparagraph 3(a) provides that an installation used for on-
land exploration of natural resources does not create a
permanent establishment unless it lasts, or the activity
continues, for more than three months. Subparagraph 3(b)
provides that a building site or construction or installation
project and the supervisory activities in connection therewith,
or a drilling rig or ship used for the exploration of natural
resources not referred to in subparagraph 3(a) does not create
a permanent establishment unless it lasts, or the activity
continues, for more than six months. It is only necessary to
refer to ``exploration'' and not ``exploitation'' in this
context because exploitation activities are defined to
constitute a permanent establishment under subparagraph 2(f).
Thus, a drilling rig does not constitute a permanent
establishment if a well is drilled in only two months, but if
production begins in the following month the well becomes a
permanent establishment as of that date.
In applying subparagraphs 3(a) and 3(b), time spent by a
sub-contractor on a building site is counted as time spent by
the general contractor at the site for purposes of determining
whether the general contractor has a permanent establishment.
However, for the sub-contractor to be treated as having a
permanent establishment, the sub-contractor's activities at the
site must last for more than 12 months. If a sub-contractor is
on a site intermittently, then, for purposes of applying the
12-month rule, time is measured from the first day the sub-
contractor is on the site until the last day he is on the site
(i.e., intervening days that the sub-contractor is not on the
site are counted).
Subparagraph 3(c) provides that an enterprise is deemed to
have a permanent establishment in the other Contracting State
if the enterprise performs services in that other State for a
period or periods exceeding in the aggregate 183 days in any
twelve month period, and these services are performed through
one or more individuals who are present and performing such
services in that other State. Subparagraph 3(c) applies only to
the performance of services by an enterprise and only to
services performed by an enterprise for third parties. Thus,
the provision does not have the effect of deeming an enterprise
to have a permanent establishment merely because services are
provided to that enterprise. The provision only applies to
services that are performed by an enterprise of a Contracting
State within the other Contracting State. It is therefore not
sufficient that the relevant services be merely furnished to a
resident of the other Contracting State. Where, for example, an
enterprise provides customer support or other services by
telephone or computer to customers located in the other State,
those would not be covered by subparagraph 3(c) because they
are not performed by that enterprise within the other State.
Another example would be that of an architect who is hired to
design blueprints for the construction of a building in the
other State. As part of completing the project, the architect
must make visits to that other State, and his days of presence
there would be counted for purposes of determining whether the
183-day threshold is satisfied. However, the days that the
architect spends working on the blueprint in his home office
shall not count for purposes of the 183-day threshold, because
the architect is not performing those services within the other
State.
Subparagraph 3(c) refers to days during which an enterprise
performs services in the other Contracting State through one or
more individuals who are present and performing such services
in that other State. Accordingly, non-working days such as
weekends or holidays would not count for purposes of the
provision, as long as no services are actually being performed
while in the other State on those days. For purposes of
subparagraph 3(c), even if the enterprise sends many
individuals simultaneously to the other State to provide
services, their collective presence during one calendar day
will count for only one day of the enterprise's presence in the
other State. For instance, if an enterprise sends 20 employees
to the other Contracting State to perform services for a client
in that other State for 10 days, the enterprise will be
considered to have performed services in that other State only
for 10 days, not 200 days (20 employees x 10 days).
By deeming the enterprise to provide services through a
permanent establishment in the other Contracting State,
subparagraph 3(c) allows the application of Article 7 (Business
Profits), and accordingly, the taxation of the services shall
be on a net basis. Such taxation is also limited to the profits
attributable to the activities carried on in performing the
relevant services. It will be important to ensure that only the
profits properly attributable to the functions performed and
risks assumed by provision of the services will be attributed
to the deemed permanent establishment.
For purposes of computing the time limits described in
paragraph 3, the time limits apply separately to each
installation, site or project, as the case may be. The time
period begins when work (including preparatory work carried on
by the enterprise) physically begins in a Contracting State. A
series of contracts or projects by a contractor that are
interdependent both commercially and geographically are to be
treated as a single project for purposes of applying the time
period. For example, the construction of a housing development
would be considered as a single project even if each house were
constructed for a different purchaser.
If the relevant time limit is exceeded, the installation,
site or project constitutes a permanent establishment from the
first day of activity.
Paragraph 3 provides that for purposes of computing the
time limits in paragraph 3, activities carried on by an
enterprise associated with another enterprise, within the
meaning of Article 9 (Associated Enterprises), shall be
regarded as carried on by the last-mentioned enterprise if the
activities of both enterprises are substantially the same,
unless they are carried on simultaneously.
Paragraph 4
This paragraph contains exceptions to the general rule of
paragraph 1, listing a number of activities that may be carried
on through a fixed place of business but which nevertheless do
not create a permanent establishment. The use of facilities
solely to store, display or deliver merchandise belonging to an
enterprise does not constitute a permanent establishment of
that enterprise. The maintenance of a stock of goods belonging
to an enterprise solely for the purpose of storage, display or
delivery, or solely for the purpose of processing by another
enterprise does not give rise to a permanent establishment of
the first-mentioned enterprise. The maintenance of a fixed
place of business solely for the purpose of purchasing goods or
merchandise, or for collecting information, for the enterprise
does not constitute a permanent establishment of that
enterprise. The maintenance of a fixed place of business solely
for the purpose of advertising, supplying information or
carrying out scientific research for the enterprise or any
other similar activity, if such activity is of a preparatory or
auxiliary character does not constitute a permanent
establishment of the enterprise.
Paragraph 5
Paragraphs 5 and 6 specify when activities carried on by an
agent or other person acting on behalf of an enterprise create
a permanent establishment of that enterprise. Under paragraph
5, a person is deemed to create a permanent establishment of
the enterprise if that person has and habitually exercises an
authority to conclude contracts that are binding on the
enterprise. If, however, his activities are limited to those
activities specified in paragraph 4 which would not constitute
a permanent establishment if carried on by the enterprise
through a fixed place of business, the person does not create a
permanent establishment of the enterprise. For example, if the
person has no authority to conclude contracts in the name of
the enterprise with its customers for the sale of the goods
produced by the enterprise, but it can enter into service
contracts that are binding on the enterprise for the
enterprise's business equipment, this contracting authority
would not fall within the scope of the paragraph, even if
exercised regularly.
The Convention uses the U.S. Model language ``binding on
the enterprise,'' rather than the OECD Model language ``in the
name of that enterprise.'' This difference in language is not
intended to be a substantive difference. As indicated in
paragraph 32 to the OECD Commentaries on Article 5, paragraph 5
of the Article is intended to encompass persons who have
``sufficient authority to bind the enterprise's participation
in the business activity in the State concerned.''
Paragraph 6
Under paragraph 6, an enterprise is not deemed to have a
permanent establishment in a Contracting State merely because
it carries on business in that State through an independent
agent, including a broker or general commission agent, if the
agent is acting in the ordinary course of his business as an
independent agent. Paragraph 8 of the Protocol identifies the
two conditions that must be satisfied for a person to be within
the scope of paragraph 6 of Article 5 of the Convention: the
agent must be both legally and economically independent of the
enterprise; and the agent must act in the ordinary course of
its business in carrying out activities on behalf of the
enterprise.
Whether the agent and the enterprise are independent is a
factual determination. Among the questions to be considered is
the extent to which the agent operates on the basis of
instructions from the enterprise. An agent that is subject to
(i) detailed instructions regarding the conduct of its
operations, or (ii) comprehensive control by the enterprise is
not legally independent.
In determining whether the agent is economically
independent, a relevant factor is the extent to which the agent
bears business risk. Business risk refers primarily to risk of
loss. An independent agent typically bears risk of loss from
its own activities. In the absence of other factors that would
establish dependence, an agent that shares business risk with
the enterprise, or has its own business risk, is economically
independent because its business activities are not integrated
with those of the principal. Conversely, an agent that bears
little or no risk from the activities it performs is not
economically independent and therefore is not described in
paragraph 6.
Another relevant factor in determining whether an agent is
economically independent is whether the agent acts exclusively
or nearly exclusively for the principal. Such a relationship
may indicate that the principal has economic control over the
agent. A number of principals acting in concert also may have
economic control over an agent. The limited scope of the
agent's activities and the agent's dependence on a single
source of income may indicate that the agent lacks economic
independence. It should be borne in mind, however, that
exclusivity is not in itself dispositive; an agent may be
economically independent notwithstanding an exclusive
relationship with the principal if it has the capacity to
diversify and acquire other clients without substantial
modifications to its current business and without substantial
harm to its business profits. Thus, exclusivity should be
viewed merely as a pointer to further investigation of the
relationship between the principal and the agent. Each case
must be addressed on the basis of its own facts and
circumstances.
Paragraph 7
This paragraph clarifies that a company that is a resident
of a Contracting State is not deemed to have a permanent
establishment in the other Contracting State merely because it
controls, or is controlled by, a company that is a resident of
that other Contracting State, or that carries on business in
that other Contracting State. The determination whether a
permanent establishment exists is made solely on the basis of
the factors described in paragraphs 1 through 6 of the Article.
Whether a company is a permanent establishment of a related
company, therefore, is based solely on those factors and not on
the ownership or control relationship between the companies.
ARTICLE 6 (INCOME FROM REAL PROPERTY (IMMOVABLE PROPERTY))
This article deals with the taxation of income from real
property (immovable property) situated in a Contracting State
(the ``situs State''). The Article does not grant an exclusive
taxing right to the situs State; the situs State is merely
given the primary right to tax. The Article does not impose any
limitation in terms of rate or form of tax imposed by the situs
State, except that, as provided in paragraph 9 of the Protocol,
the situs State must allow the taxpayer an election to be taxed
on a net basis.
Paragraph 1
The first paragraph of Article 6 states the general rule
that income of a resident of a Contracting State derived from
real property (immovable property) situated in the other
Contracting State may be taxed in the Contracting State in
which the property is situated. The paragraph specifies that
income from real property (immovable property) includes income
from agriculture and forestry. Given the availability of the
net election in paragraph 9 of the Protocol, taxpayers
generally should be able to obtain the same tax treatment in
the situs country regardless of whether the income is treated
as business profits or real property (immovable property)
income.
Paragraph 2
The term ``real property (immovable property)'' is defined
in paragraph 2 by reference to the internal law definition in
the situs State. In the case of the United States, the term has
the meaning given to it by Treas. Reg. Sec. 1.897-1(b). In
addition to the definitions in the two Contracting States, the
paragraph specifies certain additional classes of property
that, regardless of domestic law definitions, are within the
scope of the term for purposes of the Convention. This expanded
definition conforms to that in the OECD Model. The definition
of ``real property (immovable property)'' for purposes of
Article 6 is more limited than the expansive definition of
``real property (immovable property)'' in paragraph 1 of
Article 13 (Capital Gains). The Article 13 term includes not
only real property (immovable property) as defined in Article 6
but certain other interests in real property (immovable
property).
Paragraph 3
Paragraph 3 makes clear that all forms of income derived
from the exploitation of real property (immovable property) are
taxable in the Contracting State in which the property is
situated. This includes income from any use of real property
(immovable property), including, but not limited to, income
from direct use by the owner (in which case income may be
imputed to the owner for tax purposes) and rental income from
the letting of real property (immovable property). In the case
of a net lease of real property (immovable property), if a net
election pursuant to paragraph 9 of the Protocol has not been
made, the gross rental payment (before deductible expenses
incurred by the lessee) is treated as income from the property.
Other income closely associated with real property
(immovable property) is covered by other Articles of the
Convention, however, and not Article 6. For example, income
from the disposition of an interest in real property (immovable
property) is not considered ``derived'' from real property
(immovable property); taxation of that income is addressed in
Article 13 (Capital Gains). Interest paid on a mortgage on real
property (immovable property) property would be covered by
Article 11 (Interest). Distributions by a U.S. Real Estate
Investment Trust or certain regulated investment companies
would fall under Article 13 in the case of distributions of
U.S. real property gain or Article 10 (Dividends) in the case
of distributions treated as dividends. Finally, distributions
from a United States Real Property Holding Corporation are not
considered to be income from the exploitation of real property
(immovable property); such payments would fall under Article 10
or 13.
Paragraph 4
This paragraph specifies that the basic rule of paragraph 1
(as elaborated in paragraph 3) applies to income from real
property (immovable property) of an enterprise and to income
from real property (immovable property) used for the
performance of independent personal services. This clarifies
that the situs country may tax the real property income
(including rental income) of a resident of the other
Contracting State in the absence of attribution to a permanent
establishment or a fixed base in the situs State. This
provision represents an exception to the general rule under
Articles 7 (Business Profits) and 14 (Independent Personal
Services) that income must be attributable to a permanent
establishment or fixed base in order to be taxable in the situs
State.
Paragraph 9 of the Protocol
The paragraph provides that a resident of one Contracting
State that derives real property (immovable property) income
from the other State may elect, for any taxable year, to be
subject to tax in that other State on a net basis, as though
the income were attributable to a permanent establishment in
that other State. In the case of real property (immovable
property) situated in the United States, the election may be
terminated only with the consent of the competent authority of
the United States. Termination of such election will be granted
in accordance with the provisions of Treas. Reg. Sec. 1.871-
10(d)(2).
The 2011 Exchange of Notes corrects a typographical error
in the header of paragraph 9 of the Protocol. The header refers
to paragraph 5 of Article 6. It should refer instead only to
Article 6.
ARTICLE 7 (BUSINESS PROFITS)
This Article provides rules for the taxation by a
Contracting State of the business profits of an enterprise of
the other Contracting State.
Paragraph 1
Paragraph 1 states the general rule that business profits
of an enterprise of one Contracting State may not be taxed by
the other Contracting State unless the enterprise carries on
business in that other Contracting State through a permanent
establishment (as defined in Article 5 (Permanent
Establishment)) situated there. When that condition is met, the
State in which the permanent establishment is situated may tax
the enterprise on the income that is attributable to the
permanent establishment.
Because Article 7 applies to income earned by an enterprise
from the furnishing of personal services, the article also
applies to income derived by a partner resident in a
Contracting State that is attributable to personal services
performed in the other Contracting State through a partnership
with a permanent establishment in that other State. Income
which may be taxed under this Article includes all income
attributable to the permanent establishment in respect of the
performance of the personal services carried on by the
partnership (whether by the partner himself, other partners in
the partnership, or by employees assisting the partners) and
any income from activities ancillary to the performance of
those services (e.g., charges for facsimile services).
The application of Article 7 to a service partnership may
be illustrated by the following example. A partnership formed
in Chile has five partners (who agree to split profits
equally), four of whom are resident and perform personal
services only in Chile at Office A, and one of whom performs
personal services at Office B, a permanent establishment in the
United States. In this case, the four partners of the
partnership resident in Chile may be taxed in the United States
in respect of their share of the income attributable to the
permanent establishment, Office B. The services giving rise to
income which may be attributed to the permanent establishment
would include not only the services performed by the one
resident partner, but also, for example, if one of the four
other partners came to the United States and worked on an
Office B matter there, the income in respect of those services.
Income from the services performed by the visiting partner
would be subject to tax in the United States regardless of
whether the visiting partner actually visited or used Office B
while performing services in the United States.
Paragraph 2
Paragraph 2 provides i rules for the attribution of
business profits to a permanent establishment. The Contracting
States will attribute to a permanent establishment the profits
that it would have earned had it been a distinct and separate
enterprise engaged in the same or similar activities under the
same or similar conditions and dealing wholly independently
with the enterprise of which it is a permanent establishment.
This language incorporates the arm's-length standard for
purposes of determining the profits attributable to a permanent
establishment. The computation of business profits attributable
to a permanent establishment under this paragraph is subject to
the rules of paragraph 3 for the allowance of expenses incurred
for the purposes of earning the profits.
The ``attributable to'' concept of paragraph 2 is analogous
but not equivalent to the ``effectively connected'' concept in
Code section 864(c). The profits attributable to a permanent
establishment may be from sources within or without a
Contracting State.
Paragraph 10 of the iProtocol provides that the business
profits attributed to a permanent establishment include only
those derived from the assets or activities of the permanent
establishment. This rule is consistent with the ``asset-use''
and ``business activities'' tests of Code section 864(c)(2).
Paragraph 3
Paragraph 3 provides i that in determining the business
profits of a permanent establishment, deductions shall be
allowed for the necessary expenses incurred for the purposes of
the permanent establishment, ensuring that business profits
will be taxed on a net basis. This rule is not limited to
expenses incurred exclusively for the purposes of the permanent
establishment, but includes a reasonable allocation of
executive and general administrative expenses, research and
development expenses, interest, and other expenses incurred for
the purposes of the enterprise as a whole, or that part of the
enterprise that includes the permanent establishment, whether
incurred in the Contracting State in which the permanent
establishment is situated or elsewhere. Deductions are to be
allowed regardless of which accounting unit of the enterprise
books the expenses, so long as they are incurred for the
purposes of the permanent establishment. For example, a portion
of the interest expense recorded on the books of the home
office in one State may be deducted by a permanent
establishment in the other if properly allocable thereto. This
rule permits (but does not require) each Contracting State to
apply the type of expense allocation rules provided by U.S. law
(such as in Treas. Reg. Sec. Sec. 1.861-8 and 1.882-5).
Paragraph 3 does not permit a deduction for expenses
charged to a permanent establishment by another unit of the
enterprise. Thus, a permanent establishment may not deduct a
royalty deemed paid to the head office. Similarly, a permanent
establishment may not increase its business profits by the
amount of any notional fees for ancillary services performed
for another unit of the enterprise, but also should not receive
a deduction for the expense of providing such services, since
those expenses would be incurred for purposes of a business
unit other than the permanent establishment.
Paragraph 4
Paragraph 4 provides that no business profits can be
attributed to a permanent establishment merely because it
purchases goods or merchandise for the enterprise of which it
is a part. This rule applies only to an office that performs
functions for the enterprise in addition to purchasing. The
income attribution issue does not arise if the sole activity of
the office is the purchase of goods or merchandise because such
activity does not give rise to a permanent establishment under
Article 5 (Permanent Establishment). A common situation in
which paragraph 4 is relevant is one in which a permanent
establishment purchases raw materials for the enterprise's
manufacturing operation conducted outside the United States and
sells the manufactured product. While business profits may be
attributable to the permanent establishment with respect to its
sales activities, no profits are attributable to it with
respect to its purchasing activities.
Paragraph 5
Paragraph 5 provides that profits shall be determined by
the same method each year, unless there is good reason to
change the method used. This rule assures consistent tax
treatment over time for permanent establishments. It limits the
ability of both the Contracting State and the enterprise to
change the accounting methods to be applied to the permanent
establishment. It does not, however, restrict a Contracting
State from imposing additional requirements, such as the rules
under Code section 481, to prevent amounts from being
duplicated or omitted following a change in accounting method.
Paragraph 6
Paragraph 6 coordinates the provisions of Article 7 and
other provisions of the Convention. Under this paragraph, when
business profits include items of income that are dealt with
separately under other articles of the Convention, the
provisions of those articles will, except when they
specifically provide to the contrary, take precedence over the
provisions of Article 7. For example, the taxation of dividends
will be determined by the rules of Article 10 (Dividends), and
not by Article 7, except where, as provided in paragraph 5 of
Article 10, the dividend is attributable to a permanent
establishment. In the latter case, the provisions of Article 7
apply. Thus, an enterprise of one State deriving dividends from
the other State may not rely on Article 7 to exempt those
dividends from tax at source if they are not attributable to a
permanent establishment of the enterprise in the other State.
By the same token, if the dividends are attributable to a
permanent establishment in the other State, the dividends may
be taxed on a net income basis at the source State's full
corporate tax rate, rather than on a gross basis under
ARTICLE 10.
As provided in Article 8 (International Transport), income
derived from shipping and air transport activities in
international traffic described in that Article is taxable only
in the country of residence of the enterprise regardless of
whether it is attributable to a permanent establishment
situated in the source State.
Paragraph 7
Paragraph 7 incorporates into the Convention the rule of
Code section 864(c)(6). Like the Code section on which it is
based, paragraph 7 provides that any income or gain
attributable to a permanent establishment or fixed base during
its existence is taxable in the Contracting State where the
permanent establishment or fixed base is situated, even if the
payment of that income or gain is deferred until after the
permanent establishment or fixed base ceases to exist. This
rule applies with respect to this Article, paragraph 5 of
Article 10 (Dividends), paragraph 6 of Article 11 (Interest),
paragraph 4 of Article 12 (Royalties), paragraph 3 of Article
13 (Capital Gains), Article 14 (Independent Personal Services),
and paragraph 2 of Article 21 (Other Income).
The effect of this rule can be illustrated by the following
example. Assume a company that is a resident of the other
Contracting State and that maintains a permanent establishment
in the United States winds down the permanent establishment's
business and sells the permanent establishment's inventory and
assets to a U.S. buyer at the end of year 1 in exchange for an
interest-bearing installment obligation payable in full at the
end of year 3. Despite the fact that Article 13's threshold
requirement for U.S. taxation is not met in year 3 because the
company has no activities in the United States, the United
States may tax the deferred income payment recognized by the
company in year 3.
Paragraph 8
Paragraph 8 provides that notwithstanding the provisions of
paragraph 1, in the absence of a permanent establishment, the
United States may impose its excise tax on insurance premiums
paid to foreign insurers, and Chile may impose its tax on
payments for insurance policies contracted with foreign
insurers. However, notwithstanding the provisions of Article 2
(Taxes Covered), such tax shall not exceed: (i) 2 percent of
the gross amount of premiums in the case of policies of
reinsurance; and (ii) 5 percent of the gross amount of premiums
in the case of all other policies of insurance.
Paragraph 9
Paragraph 9 defines the term ``business profits'' to mean
income from any trade or business. In accordance with this
broad definition, the term ``business profits'' includes income
attributable to notional principal contracts and other
financial instruments to the extent that the income is
attributable to a trade or business of dealing in such
instruments or is otherwise related to a trade or business (as
in the case of a notional principal contract entered into for
the purpose of hedging currency risk arising from a trade or
business). Any other income derived from such instruments is,
unless specifically covered in another article, dealt with
under Article 21 (Other Income).
In addition, the term includes income derived from the
furnishing of personal services. Thus, a consulting firm
resident in one State whose employees or partners perform
services in the other State through a permanent establishment
may be taxed in that other State on a net basis under Article
7, and not under Article 15 (Dependent Personal Services),
which applies only to income of employees. With respect to the
enterprise's employees themselves, however, their salary
remains subject to Article 15.
Relationship to Other Articles
This Article is subject to the saving clause of paragraph 4
of the Protocol. Thus, if a citizen of the United States who is
a resident of Chile under the Convention derives business
profits from the United States that are not attributable to a
permanent establishment in the United States, the United States
may, subject to the special foreign tax credit rules of
paragraph 3 of Article 23 (Relief from Double Taxation), tax
those profits, notwithstanding the provision of paragraph 1 of
this Article which would exempt the income from U.S. tax.
The benefits of this Article are also subject to Article 24
(Limitation on Benefits). Thus, an enterprise of Chile that
derives income effectively connected with a U.S. trade or
business may not claim the benefits of Article 7 unless the
resident carrying on the enterprise qualifies for such benefits
under Article 24.
ARTICLE 8 (INTERNATIONAL TRANSPORT)
This Article governs the taxation of profits from the
operation of ships and aircraft in international traffic. The
term ``international traffic'' is defined in subparagraph 1(g)
of Article 3 (General Definitions).
Paragraph 1
Paragraph 1 provides that profits derived by an enterprise
of a Contracting State from the operation in international
traffic of ships or aircraft are taxable only in that
Contracting State. Because paragraph 6 of Article 7 (Business
Profits) defers to Article 8 with respect to shipping income,
such income derived by a resident of one of the Contracting
States may not be taxed in the other State even if the
enterprise has a permanent establishment in that other State.
Thus, if a U.S. airline has a ticket office in Chile, Chile may
not tax the airline's profits attributable to that office under
Article 7. Since entities engaged in international
transportation activities normally will have many permanent
establishments in a number of countries, the rule avoids
difficulties that would be encountered in attributing income to
multiple permanent establishments if the income were covered by
Article 7.
Paragraph 2
The profits from the operation of ships or aircraft in
international traffic that is exempt from tax under paragraph 1
is defined in paragraph 2.
In addition to profits derived directly from the operation
of ships or aircraft in international traffic, this definition
also includes certain items of rental income. First, profits
from the operation of ships or aircraft include profits of an
enterprise of a Contracting State from the rental of ships or
aircraft on a full (time or voyage) basis (i.e., with crew).
Therefore, such profits are exempt from tax in the other
Contracting State under paragraph 1. Also, paragraph 2
encompasses profits from the charter or rental of ships or
aircraft on a bareboat basis (i.e., without crew) if those
profits are incidental to profits from the operation by the
enterprise of ships or aircraft in international traffic. If
profits of an enterprise from bareboat rentals are not
incidental to profits from that enterprise's operation of ships
or aircraft in international traffic, the profits from the
bareboat rentals would constitute business profits and would be
taxed in accordance with the provisions of Article 7.
Paragraph 11 of the Protocol provides that inland transport
within either Contracting State shall be treated as the
operation of ships or aircraft in international traffic if
undertaken as part of a transport that includes transport by
ships or aircraft in international traffic. Thus, consistent
with the Commentary to Article 8 of the OECD Model, profits of
an enterprise from the inland transport of property or
passengers within either Contracting State falls within Article
8 if the transport is undertaken as part of the international
transport of property or passengers by the enterprise. For
example, if a U.S. shipping company contracts to carry property
from Chile to a U.S. city and, as part of that contract, it
transports the property by truck from its point of origin to an
airport in Chile (or it contracts with a trucking company to
carry the property to the airport) the income earned by the
U.S. shipping company from the overland leg of the journey
would be taxable only in the United States. Similarly, Article
8 also would apply to all of the income derived from a contract
for the international transport of goods, even if the goods
were transported to the port by a lighter, not by the vessel
that carried the goods in international waters.
Finally, certain non-transport activities that are an
integral part of the services performed by a transport company,
or are ancillary to the enterprise's operation of ships or
aircraft in international traffic, are understood to be covered
in paragraph 1, though they are not specified in paragraph 2.
These include, for example, the provision of goods and services
by engineers, ground and equipment maintenance and staff, cargo
handlers, catering staff and customer services personnel. Where
the enterprise provides such goods to, or performs services
for, other enterprises and such activities are directly
connected with or ancillary to the enterprise's operation of
ships or aircraft in international traffic, the profits from
the provision of such goods and services to other enterprises
will fall under this paragraph.
For example, enterprises engaged in the operation of ships
or aircraft in international traffic may enter into pooling
arrangements for the purposes of reducing the costs of
maintaining facilities needed for the operation of their ships
or aircraft in other countries. For instance, where an airline
enterprise agrees (for example, under an International Airlines
Technical Pool agreement) to provide spare parts or maintenance
services to other airlines landing at a particular location
(which allows it to benefit from these services at other
locations), activities carried on pursuant to that agreement
will be ancillary to the operation of aircraft in international
traffic by the enterprise.
Also, advertising that the enterprise may do for other
enterprises in magazines offered aboard ships or aircraft that
it operates in international traffic or at its business
locations, such as ticket offices, is ancillary to its
operation of these ships or aircraft. Profits generated by such
advertising fall within this paragraph. Income earned by
concessionaires, however, is not covered by Article 8. These
interpretations of paragraph 1 also are consistent with the
Commentary to Article 8 of the OECD Model.
Paragraph 3
Under this paragraph, profits of an enterprise of a
Contracting State from the use, maintenance or rental of
containers (including related equipment, such as barges and
trailers, for the transport of such containers) used for the
transport of goods or merchandise in international traffic are
exempt from tax in the other Contracting State. This result
obtains under paragraph 3 regardless of whether the recipient
of the income is engaged in the operation of ships or aircraft
in international traffic, and regardless of whether the
enterprise has a permanent establishment in the other
Contracting State. Only income from the use, maintenance or
rental of containers that is incidental to other income from
international traffic is covered by Article 8 of the OECD
Model.
Paragraph 4
This paragraph clarifies that the provisions of paragraphs
1 and 3 also apply to profits of an enterprise of a Contracting
State from participation in a pool, joint business or
international operating agency. This refers to various
arrangements for international cooperation by carriers in
shipping and air transport. For example, airlines from two
countries may agree to share the transport of passengers
between the two countries. They each will fly the same number
of flights per week and share the revenues from that route
equally, regardless of the number of passengers that each
airline actually transports. Paragraph 4 makes clear that with
respect to each carrier the income dealt with in the Article is
that carrier's share of the total transport, not the income
derived from the passengers actually carried by the airline.
This paragraph corresponds to paragraph 4 of Article 8 of the
OECD Model.
Relationship to Other Articles
The taxation of gains from the alienation of ships,
aircraft or containers is not dealt with in this Article but in
paragraph 4 of Article 13 (Capital Gains).
As with other benefits of the Convention, the benefit of
exclusive residence country taxation under Article 8 is
available to an enterprise only if it is entitled to benefits
under Article 24 (Limitation on Benefits).
This Article also is subject to the saving clause of
paragraph 4 of the Protocol. Thus, if a citizen of the United
States who is a resident of Chile derives profits from the
operation of ships or aircraft in international traffic,
notwithstanding the exclusive residence country taxation in
paragraph 1 of Article 8, the United States may, subject to the
special foreign tax credit rules of paragraph 3 of Article 23
(Relief from Double Taxation), tax those profits as part of the
worldwide income of the citizen. (This is an unlikely
situation, however, because non-tax considerations (e.g.,
insurance) generally result in shipping activities being
carried on in corporate form.)
ARTICLE 9 (ASSOCIATED ENTERPRISES)
This Article incorporates into the Convention the arm's-
length principle reflected in the U.S. domestic transfer
pricing provisions, particularly Code section 482. It provides
that when related enterprises engage in a transaction on terms
that are not arm's-length, the Contracting States may make
appropriate adjustments to the taxable income and tax liability
of such related enterprises to reflect what the income and tax
of these enterprises with respect to the transaction would have
been had there been an arm's-length relationship between them.
Paragraph 1
This paragraph addresses the situation where an enterprise
of a Contracting State is related to an enterprise of the other
Contracting State, and there are arrangements or conditions
imposed between the enterprises in their commercial or
financial relations that are different from those that would
have existed in the absence of the relationship. Under these
circumstances, the Contracting States may adjust the income (or
loss) of the enterprise to reflect what it would have been in
the absence of such a relationship.
The paragraph identifies the relationships between
enterprises that serve as a prerequisite to application of the
Article. As the Commentary to the OECD Model makes clear, the
necessary element in these relationships is effective control,
which is also the standard for purposes of section 482. Thus,
the Article applies if an enterprise of one State participates
directly or indirectly in the management, control, or capital
of the enterprise of the other State. Also, the Article applies
if any third person or persons participate directly or
indirectly in the management, control, or capital of
enterprises of different States. For this purpose, all types of
control are included, i.e., whether or not legally enforceable
and however exercised or exercisable.
The fact that a transaction is entered into between such
related enterprises does not, in and of itself, mean that a
Contracting State may adjust the income (or loss) of one or
both of the enterprises under the provisions of this Article.
If the conditions of the transaction are consistent with those
that would be made between independent persons, the income
arising from that transaction should not be subject to
adjustment under this Article.
Similarly, the fact that associated enterprises may have
concluded arrangements, such as cost sharing arrangements or
general services agreements, is not in itself an indication
that the
two enterprises have entered into a non-arm's-length
transaction that should give rise to an adjustment under
paragraph 1. Both related and unrelated parties enter into such
arrangements (e.g., joint venturers may share some development
costs). As with any other kind of transaction, when related
parties enter into an arrangement, the specific arrangement
must be examined to see whether or not it meets the arm's-
length standard. In the event that it does not, an appropriate
adjustment may be made, which may include modifying the terms
of the agreement or recharacterizing the transaction to reflect
its substance.
It is understood that the ``commensurate with income''
standard for determining appropriate transfer prices for
intangibles, added to Code section 482 by the Tax Reform Act of
1986, was designed to operate consistently with the arm's-
length standard. The implementation of this standard in the
section 482 regulations is in accordance with the general
principles of paragraph 1 of Article 9 of the Convention, as
interpreted by the OECD Transfer Pricing Guidelines.
This Article also permits tax authorities to deal with thin
capitalization issues. They may, in the context of Article 9,
scrutinize more than the rate of interest charged on a loan
between related persons. They also may examine the capital
structure of an enterprise, whether a payment in respect of
that loan should be treated as interest, and, if it is treated
as interest, under what circumstances interest deductions
should be allowed to the payor. Paragraph 2 of the Commentary
to Article 9 of the OECD Model, together with the U.S.
observation set forth in paragraph 15, sets forth a similar
understanding of the scope of Article 9 in the context of thin
capitalization.
Paragraph 2
When a Contracting State has made an adjustment that is
consistent with the provisions of paragraph 1, and the other
Contracting State agrees that the adjustment was appropriate to
reflect arm's-length conditions, that other Contracting State
is obligated to make a correlative adjustment (sometimes
referred to as a ``corresponding adjustment'') to the tax
liability of the related person in that other Contracting
State. Although the OECD Model does not specify that the other
Contracting State must agree with the initial adjustment before
it is obligated to make the correlative adjustment, the
Commentary makes clear that the paragraph is to be read that
way.
As explained in the Commentary to Article 9 of the OECD
Model, Article 9 leaves the treatment of ``secondary
adjustments'' to the laws of the Contracting States. When an
adjustment under Article 9 has been made, one of the parties
will have in its possession funds that it would not have had at
arm's length. The question arises as to how to treat these
funds. In the United States, the general practice is to treat
such funds as a dividend or contribution to capital, depending
on the relationship between the parties. Under certain
circumstances, the parties may be permitted to restore the
funds to the party that would have the funds had the
transactions been entered into on arm's length terms, and to
establish an account payable pending restoration of the funds.
See Rev. Proc. 99-32, 1999-2 C.B. 296.
The Contracting State making a secondary adjustment will
take the other provisions of the Convention, where relevant,
into account. For example, if the effect of a secondary
adjustment is to treat a U.S. corporation as having made a
distribution of profits to its parent corporation in Chile, the
provisions of Article 10 (Dividends) will apply, and the United
States may impose a 5 percent withholding tax on the dividend.
Also, if under Article 23 (Relief from Double Taxation) Chile
generally gives a credit for taxes paid with respect to such
dividends, it would also be required to do so in this case.
The competent authorities are authorized by paragraph 3 of
Article 26 (Mutual Agreement Procedure) to consult, if
necessary, to resolve any differences in the application of
these provisions. For example, there may be a disagreement over
whether an adjustment made by a Contracting State under
paragraph 1 was appropriate.
If a correlative adjustment is made under paragraph 2, it
is to be implemented, pursuant to paragraph 2 of Article 26
(Mutual Agreement Procedure), notwithstanding any time limits
or other procedural limitations in the law of the Contracting
State making the adjustment. Thus, even if a statute of
limitations has run, a refund of tax can be made in order to
implement a correlative adjustment (statutory or procedural
limitations , however, cannot be overridden to impose
additional tax, because paragraph 2 of Article 1 (General
Scope) provides that the Convention cannot restrict any
statutory benefit). If a taxpayer has entered a closing
agreement (or other written settlement) with the United States
prior to bringing a case to the competent authorities, the U.S.
competent authority will endeavor only to obtain a correlative
adjustment from Chile. See Rev. Proc. 2006-54, 2006-2 C.B.
1035, Sec. 7.05 (or any applicable successor procedures).
Relationship to Other Articles
The saving clause of paragraph 4 of the Protocol does not
apply to paragraph 2 of Article 9 by virtue of an exception to
the saving clause in subparagraph 4(a) of the Protocol. This
ensures that the competent authorities of the Contracting
States have the ability to make any adjustments necessary to
relieve double taxation pursuant to the mutual agreement
procedure.
ARTICLE 10 (DIVIDENDS)
Article 10 provides rules for the taxation of dividends
paid by a company that is a resident of one Contracting State
to a beneficial owner that is a resident of the other
Contracting State. The Article provides for full residence-
State taxation of such dividends and a limited source-State
right to tax. Article 10 also provides rules for the imposition
of a tax on branch profits by the State of source. Finally, the
Article prohibits a State from imposing taxes on a company
resident in the other Contracting State, other than a branch
profits tax, on undistributed earnings.
Paragraph 1
Paragraph 1 permits a Contracting State to tax its
residents on dividends paid to them by a company that is a
resident of the other Contracting State. For dividends from any
other source paid to a resident, Article 21 (Other Income)
grants the State of residence exclusive taxing jurisdiction
(other than for dividends attributable to a permanent
establishment in the other State).
Paragraph 2
The State of source also may tax dividends beneficially
owned by a resident of the other State, subject to the
limitations of paragraphs 2 and 3. Paragraph 2 generally limits
the rate of withholding tax in the State of source on dividends
paid by a company resident in that State to 15 percent of the
gross amount of the dividend. If, however, the beneficial owner
of the dividend is a company resident in the other State and
owns directly shares representing at least 10 percent of the
voting stock of the company paying the dividend, then the rate
of withholding tax is limited to 5 percent of the gross amount
of the dividend. For application of this paragraph by the
United States, shares are considered voting shares if they
provide the power to elect, appoint or replace any person
vested with the powers ordinarily exercised by the board of
directors of a U.S. corporation.
The determination of whether the ownership threshold for
subparagraph (a) is met for purposes of the 5 percent maximum
rate of withholding tax is made on the date on which
entitlement to the dividend is determined. Thus, the
determination would generally be made on the dividend record
date.
Paragraph 2 does not affect the taxation of the profits out
of which the dividends are paid. The taxation by a Contracting
State of the income of its resident companies is governed by
the internal law of the Contracting State, subject to the
provisions of paragraph 3 of Article 25 (Non-Discrimination).
The term ``beneficial owner'' is not defined in the
Convention, and is, therefore, defined as under the internal
law of the State granting treaty benefits (i.e., the source
State). The beneficial owner of the dividend for purposes of
Article 10 is the person to which the income is attributable
under the laws of the source State. Thus, if a dividend paid by
a corporation that is a resident of one of the States (as
determined under Article 4 (Residence)) is received by a
nominee or agent that is a resident of the other State on
behalf of a person that is not a resident of that other State,
the dividend is not entitled to the benefits of this Article.
However, a dividend received by a nominee on behalf of a
resident of that other State would be entitled to benefits.
These limitations are confirmed by paragraph 12 of the
Commentary to Article 10 of the OECD Model. See also paragraph
24 of the Commentary to Article 1 of the OECD Model.
Special rules, however, apply to shares that are held
through fiscally transparent entities. In that case, the rules
of paragraph 1 of the Protocol will apply to determine whether
the dividends should be treated as having been derived by a
resident of a Contracting State. Residence-State principles
shall be used to determine who derives the dividend, to assure
that the dividends for which the source State grants benefits
of the Convention will be taken into account for tax purposes
by a resident of the residence State. Source-State principles
of beneficial ownership shall then apply to determine whether
the person who derives the dividends, or another resident of
the other Contracting State, is the beneficial owner of the
dividend. If the person who derives the dividend under
paragraph 1 of the Protocol would not be treated as a nominee,
agent, custodian, conduit, etc., under the source State's
principles for determining beneficial ownership, that person
will be treated as the beneficial owner of the income, profits
or gains for purposes of the Convention.
Assume for instance, that a company resident in Chile pays
a dividend to LLC, an entity that is treated as fiscally
transparent for U.S. tax purposes but is treated as a company
for Chilean tax purposes. USCo, a corporation incorporated in
the United States, is the sole interest holder in LLC.
Paragraph 1 of the Protocol provides that USCo derives the
dividend. Chile's principles of beneficial ownership shall then
be applied to USCo. If under the laws of Chile USCo is found
not to be the beneficial owner of the dividend, USCo will not
be entitled to the benefits of Article 10 with respect to such
dividend. If USCo is found to be a nominee, agent, custodian,
or conduit for another person who is a resident of the United
States, that person may be entitled to benefits with respect to
the dividends.
Beyond identifying the person to whom the principles of
beneficial ownership shall be applied, the principles of
paragraph 1 of the Protocol will also apply when determining
whether other requirements, such as the ownership threshold of
subparagraph 2(a) of Article 10 have been satisfied.
For example, assume that FCo, a corporation that is a
resident of Chile, owns a 50 percent interest in FP, a
partnership that is organized in Chile. FP owns 100 percent of
the sole class of stock of USCo, a company resident in the
United States. Chile views FP as fiscally transparent under its
domestic law, and accordingly taxes FCo currently on its
distributive share of the income of FP and determines the
character and source of the income received through FP in the
hands of FCo as if such income were realized directly by FCo.
In this case, FCo is treated as deriving 50 percent of the
dividends paid by USCo under paragraph 1 of the Protocol.
Moreover, FCo is treated as owning 50 percent of the stock of
USCo directly. The same result would be reached even if the tax
laws of the United States would treat FP differently (e.g., if
FP were not treated as fiscally transparent in the United
States), or if FP were organized in a third state, as long as
FP were still treated as fiscally transparent under the laws of
the other Contracting State. The same principles would apply in
determining whether companies holding shares through other
fiscally transparent entities such as partnerships, trusts, and
estates would qualify for benefits. As a result, companies
holding shares through such entities may be able to claim the
benefits of subparagraph (a) under certain circumstances. The
lower rate applies when the company's proportionate share of
the shares held by the intermediate entity meets the 10 percent
threshold, and the company meets the requirements of paragraph
1 of the Protocol (i.e., the company's country of residence
treats the intermediate entity as fiscally transparent) with
respect to the dividend. Whether this ownership threshold is
satisfied may be difficult to determine and often will require
an analysis of the partnership or trust agreement.
Paragraph 3
Paragraph 3 provides that dividends beneficially owned by
an entity that is established and maintained in a Contracting
State principally to provide or administer pensions or other
similar benefits to employed and self-employed persons, or to
earn income for the benefit of one or more such arrangements,
and that is generally exempt from tax in that State, may not be
taxed in the other Contracting State of which the payer of the
dividends is a resident, provided that such dividends are not
derived from the carrying on of a trade or business, directly
or indirectly, by the beneficial owner or through an associated
enterprise.
Paragraph 4
Paragraph 4 defines the term dividends broadly and
flexibly. The definition is intended to cover all arrangements
that yield a return on an equity investment in a corporation as
determined under the tax law of the state of source, as well as
arrangements that might be developed in the future.
The term includes income from shares, or other corporate
rights that are not treated as debt under the law of the source
State, and that participate in the profits of the company. The
term also includes income from rights that is subjected to the
same tax treatment as income from shares by the law of the
State of source. Thus, a constructive dividend that results
from a non-arm's length transaction between a corporation and a
related party is a dividend. In the case of the United States,
the term dividend includes amounts treated as a dividend under
U.S. law upon the sale or redemption of shares or upon a
transfer of shares in a reorganization. See, e.g., Rev. Rul.
92-85, 1992-2 C.B. 69 (sale of foreign subsidiary's stock to
U.S. sister company is a deemed dividend to extent of the
subsidiary's and sister company's earnings and profits).
Further, a distribution from a U.S. publicly traded limited
partnership, which is taxed as a corporation under U.S. law, is
a dividend for purposes of Article 10. However, a distribution
by a limited liability company is not taxable by the United
States under Article 10, provided the limited liability company
is not characterized as an association taxable as a corporation
under U.S. law.
Finally, a payment denominated as interest may be treated
as a dividend to the extent that the debt is re-characterized
as equity under the laws of the source State.
Paragraph 5
Paragraph 5 provides a rule for taxing dividends
attributable to a permanent establishment or fixed base. In
such case, the rules of Article 7 (Business Profits) or Article
14 (Independent Personal Services), as the case may be, shall
apply. Accordingly, the dividends will be taxed on a net basis
using the rates and rules of taxation generally applicable to
residents of the State in which the permanent establishment or
fixed base is located, as such rules may be modified by the
Convention. An example of dividends attributable to a permanent
establishment would be dividends derived by a dealer in stock
or securities from stock or securities that the dealer held for
sale to customers.
Paragraph 6
The right of a Contracting State to tax dividends paid by a
company that is a resident of the other Contracting State is
restricted by paragraph 6 to cases in which the dividends are
paid to a resident of that Contracting State or are
attributable to a permanent establishment or fixed base in that
Contracting State. Thus, a Contracting State may not impose a
``secondary'' withholding tax on dividends paid by a
nonresident company out of earnings and profits from that
Contracting State.
The paragraph also restricts the right of a Contracting
State to impose corporate level taxes on undistributed profits,
other than a branch profits tax. The paragraph does not
restrict a State's right to tax its resident shareholders on
undistributed earnings of a corporation resident in the other
State. For example, the authority of the United States to
impose taxes on subpart F income and on earnings deemed
invested in U.S. property, and its tax on income of a passive
foreign investment company that is a qualified electing fund is
in no way restricted by this provision.
Paragraph 7
Paragraph 7 permits a Contracting State to impose a branch
profits tax on a company resident in the other Contracting
State. The tax is in addition to other taxes permitted by the
Convention. The term ``company'' is defined in subparagraph
1(e) of Article 3 (General Definitions).
A Contracting State may impose a branch profits tax on a
company if the company has income attributable to a permanent
establishment in that Contracting State, derives income from
real property (immovable property) in that Contracting State
that is taxed on a net basis under Article 6 (Income from Real
Property (Immovable Property)), or realizes gains taxable in
that State under paragraph 1 of Article 13 (Capital Gains). In
the case of the United States, the imposition of such tax is
limited, however, to the portion of the aforementioned items of
income that represents the amount of such income that is the
``dividend equivalent amount.'' This is consistent with the
relevant rules under the U.S. branch profits tax, and the term
dividend equivalent amount is defined under U.S. law. The
dividend equivalent amount is an amount for a particular year
that is equivalent to the income described above that is
included in the corporation's effectively connected earnings
and profits for that year, after payment of the corporate tax
under Articles 6 (Income from Real Property (Immovable
Property), 7 (Business Profits) or 13 (Capital Gains), reduced
for any increase in the corporation's U.S. net equity during
the year or increased for any reduction in its U.S. net equity
during the year. See Code section 884(b); Treas. Reg.
Sec. 1.884-1. U.S. net equity is U.S. assets less U.S.
liabilities. See Code section 884(c); Treas. Reg. Sec. 1.884-1.
The dividend equivalent amount for any year approximates
the dividend that a U.S. branch office would have paid during
the year if the branch had been operated as a separate U.S.
subsidiary company. If in the future Chile also imposes a
branch profits tax, the base of its tax must be limited to an
amount that is analogous to the dividend equivalent amount.
As discussed in the explanation of Article 1 (General
Scope), consistency principles prohibit a taxpayer from
applying provisions of the Code and this Convention
inconsistently. In the context of the branch profits tax, this
consistency requirement means that if a Chilean company uses
the principles of Article 7 to determine its U.S. taxable
income then it must also use those principles to determine its
dividend equivalent amount. Similarly, if the Chilean company
instead uses the Code to determine its U.S. taxable income, it
must also use the Code to determine its dividend equivalent
amount. As in the case of Article 7, if a Chilean company, for
example, does not from year to year consistently apply the Code
or the Convention to determine its dividend equivalent amount,
then the Chilean company must make appropriate adjustments or
recapture amounts that would otherwise be subject to U.S.
branch profits tax if it had consistently applied the Code or
the Convention to determine its dividend equivalent amount from
year to year.
Paragraph 8
Paragraph 8 provides that the branch profits tax shall not
be imposed at a rate exceeding five percent. It is intended
that paragraph 8 apply equally if a taxpayer determines its
taxable income under the laws of a Contracting State or under
the provisions of Article 7. For example, as discussed above,
consistency principles require a Chilean company that
determines its U.S. taxable income under the Code to also
determine its dividend equivalent amount under the Code. In
that case, paragraph 8 would apply even though the Chilean
company did not determine its dividend equivalent amount using
the principles of Article 7.
Paragraph 12 of the Protocol
As stated in paragraph 4 of the 2010 Exchange of Notes, at
the time of the signing of the Convention, Chile has an
integrated tax system pursuant to which it collects a total 35
percent tax on business profits imposed at two levels. First,
business profits of companies resident in Chile are subject to
the First Category Tax at a rate of 17 percent. Second, in the
case of non-resident shareholders, distributions are subject to
Additional Tax at a rate of 35 percent of the gross amount of
the distribution. Nonresident shareholders are allowed a credit
for the First Category Tax in computing their liability for the
Additional Tax. The effective rate of Additional Tax after a
credit for the First Category Tax is 18 percent.
Paragraph 12 of the Protocol reflects the unique operation
of Chile's integrated tax system and is intended to prevent the
avoidance of the Additional Tax. Accordingly, subparagraph (a)
provides that paragraphs 2, 3, 7, and 8 of Article 10
(Dividends) do not limit Chile's application of the Additional
Tax provided that under the domestic law of Chile the First
Category Tax is fully creditable in computing the amount of
Additional Tax to be paid. Accordingly, as long as Chile allows
a credit for the full amount of First Category Tax in computing
the amount of Additional Tax to be paid, the Convention does
not require Chile to reduce the rate of Additional Tax withheld
on dividends paid by companies resident in Chile and
beneficially owned by residents of the United States.
As provided in subparagraph 12(b) of the Protocol, if Chile
makes certain changes to the Additional Tax or First Category
Tax, Chile's right to tax under Article 10 will be limited as
described below.
First, clause (i) of subparagraph 12(b) of the Protocol
provides that if at any time under the domestic law of Chile
the First Category Tax ceases to be fully creditable in
computing the amount of Additional Tax to be paid, the
provisions of subparagraph 12(a) of the Protocol shall not
apply. Accordingly, the amount of Additional Tax imposed by
Chile will be limited by paragraphs 2, 3, 7, and 8 of Article
10 (Dividends).
Second, clause (ii) of subparagraph 12(b) of the Protocol
provides that if under the domestic law of Chile the rate of
Additional Tax exceeds 35 percent, the provisions of Article 10
will apply to both the United States and Chile, but the tax
charged under subparagraphs 2(a) and 2(b) of Article 10 will
not exceed 15 percent of the gross amount of dividends paid by
a resident of a Contracting State and beneficially owned by a
resident of the other Contracting State. In such case, Chile
and the United States will be equally bound by the provisions
of Article 10, and dividends paid by a company resident in a
Contracting State and beneficially owned by a resident of the
other Contracting State may be taxed in the first-mentioned
State, however, the tax so charged shall not exceed 15 percent
of the gross amount of the dividends, regardless of whether the
beneficial owner is a company that owns directly 10 percent of
the company paying the dividends. If the rate of Additional Tax
exceeds 35 percent, clause (ii) of subparagraph 12(b) of the
Protocol also provides that the Contracting States shall
consult to reassess the balance of benefits of the Convention
with a view to concluding a protocol to incorporate terms
limiting the right of the source State to tax dividends under
Article 10.
Paragraph 13 of the Protocol
Paragraph 13 of the Protocol provides that Article 10
(Dividends) shall not apply in the case of distributions or
dividends paid by an enterprise when the investment is subject
to a foreign investment contract under the Foreign Investment
Statute (DL 600), as it may be amended from time to time
without changing the general principles thereof.
Paragraph 14 of the Protocol
Paragraph 14 of the Protocol imposes limitations on the
rate reductions provided by paragraph 2 in the case of
dividends paid by a RIC or a REIT.
The first sentence of paragraph 14 provides that dividends
paid by a RIC or a REIT are not eligible for the 5 percent rate
of withholding tax of subparagraph 2(a) of Article 10
(Dividends).
The second sentence of paragraph 14 provides that the 15
percent maximum rate of withholding tax of subparagraph (b) of
paragraph 2 of Article 10 (Dividends) applies to dividends paid
by RICs.
The third sentence of paragraph 14 provides that the 15
percent rate of withholding tax also applies to dividends paid
by a REIT, provided that one of the three following conditions
is met. First, the beneficial owner of the dividend is an
individual holding an interest of not more than 10 percent in
the REIT. Second, the dividend is paid with respect to a class
of stock that is publicly traded and the beneficial owner of
the dividend is a person holding an interest of not more than 5
percent of any class of the REIT's shares. Third, the
beneficial owner of the dividend holds an interest in the REIT
of not more than 10 percent and the REIT is ``diversified.''
Paragraph 14 provides a definition of the term diversified.
A REIT is diversified if the gross value of no single interest
in real property held by the REIT exceeds 10 percent of the
gross value of the REIT's total interest in real property.
Foreclosure property is not considered an interest in real
property, and a REIT holding a partnership interest is treated
as owning its proportionate share of any interest in real
property held by the partnership.
Relationship to Other Articles
Notwithstanding the foregoing limitations on source country
taxation of dividends, the saving clause of paragraph 4 of the
Protocol permits the United States to tax dividends received by
its residents and citizens, subject to the special foreign tax
credit rules of paragraph 3 of Article 23 (Relief from Double
Taxation), as if the Convention had not come into effect.
The benefits of this Article are also subject to the
provisions of Article 24 (Limitation on Benefits). Thus, if a
resident of the other Contracting State is the beneficial owner
of dividends paid by a U.S. corporation, the shareholder must
qualify for treaty benefits under at least one of the tests of
Article 24 in order to receive the benefits of this Article.
ARTICLE 11 (INTEREST)
Article 11 provides rules for the taxation of interest
arising in one Contracting State and paid to a beneficial owner
that is a resident of the other Contracting State.
Paragraph 1
Paragraph 1 grants to the State of residence the non-
exclusive right to tax interest beneficially owned by its
residents and arising in the other Contracting State.
Paragraph 2
Paragraph 2 provides that the State of source also may tax
interest beneficially owned by a resident of the other
Contracting State, but generally limits the rate of tax to 10
percent of the gross amount of the interest. However, the rate
of tax is limited to 4 percent of the gross amount of the
interest if the beneficial owner of the interest is a resident
of the other Contracting State that is: (1) a bank; (2) an
insurance company; (3) an enterprise substantially deriving its
gross income from the active and regular conduct of a lending
or finance business involving transactions with unrelated
parties, where the enterprise is unrelated to the payer of the
interest; (4) an enterprise that sold machinery or equipment,
where the interest is paid in connection with the sale on
credit of such machinery or equipment; or (5) any other
enterprise, provided that in the three tax years preceding the
tax year in which the interest is paid, the enterprise derives
more than 50 percent of its liabilities from the issuance of
bonds in the financial markets or from taking deposits at
interest, and more than 50 percent of the assets of the
enterprise consist of debt-claims against persons that do not
have with the resident a relationship described in subparagraph
(a) or (b) of paragraph 1 of Article 9 (Associated
Enterprises).
For purposes of subparagraph 2(a)(iii), under which certain
enterprises substantially deriving their gross income from the
active and regular conduct of a lending or finance business may
qualify for the 4 percent rate, the term ``lending or finance
business'' is defined to include the business of issuing
letters of credit or providing guarantees, or providing charge
and credit card services.
The term ``beneficial owner'' is not defined in the
Convention, and is therefore defined under the internal law of
the State granting treaty benefits (i.e., the source State).
The beneficial owner of the interest for purposes of Article 11
is the person to which the income is attributable under the
laws of the source State. Thus, if interest arising in a
Contracting State is received by a nominee or agent that is a
resident of the other State on behalf of a person that is not a
resident of that other State, the interest is not entitled to
the benefits of Article 11. However, interest received by a
nominee on behalf of a resident of that other State would be
entitled to benefits. These limitations are similar to those
provided in paragraph 9 of the OECD Commentary to Article 11.
Special rules apply to interest derived through fiscally
transparent entities for purposes of determining the beneficial
owner of the interest. In such cases, residence-State
principles shall be used to determine who derives the interest,
to assure that the interest for which the source State grants
benefits of the Convention will be taken into account for tax
purposes by a resident of the residence State.
For example, assume that FCo, a corporation that is a
resident of Chile, owns a 50 percent interest in FP, a
partnership that is organized in Chile. FP receives interest
arising in the United States. Chile views FP as fiscally
transparent under its domestic law, and thus taxes FCo
currently on its distributive share of the income of FP and
determines the character and source of the income received
through FP in the hands of FCo as if such income were realized
directly by FCo. In this case, FCo is treated as deriving 50
percent of the interest received by FP that arises in the
United States under paragraph 1 of the Protocol. The same
result would be reached even if the tax laws of the United
States would treat FP differently (e.g., if FP were not treated
as fiscally transparent in the United States), or if FP were
organized in a third state, as long as FP were still treated as
fiscally transparent under the laws of Chile.
While residence-State principles control who is treated as
deriving the interest, source-State principles of beneficial
ownership apply to determine whether the person who derives the
interest or another resident of the other Contracting State is
the beneficial owner of the interest.
If the person who derives the interest under paragraph 1 of
the Protocol would not be treated as a nominee, agent,
custodian, conduit, etc., under the source State's principles
for determining beneficial ownership, that person will be
treated as the beneficial owner of the interest for purposes of
the Convention. In the example above, FCo is required to
satisfy the beneficial ownership principles of the United
States with respect to the interest it derives. If under the
beneficial ownership principles of the United States, FCo is
found not to be the beneficial owner of the interest, FCo will
not be entitled to the benefits of Article 11 with respect to
such interest. If FCo is found to be a nominee, agent,
custodian, or conduit for a person who is a resident of the
other Contracting State, that person may be entitled to
benefits with respect to the interest.
Paragraph 3
Paragraph 3 provides that the rate limitation of
subparagraph 2(b) will be phased in. For five years from the
date on which the provisions of paragraph 2 take effect, the
rate of 15 percent will apply in lieu of the rate provided in
subparagraph 2(b). Thereafter, the 10 percent rate will apply.
In addition, paragraph 22 of the Protocol provides that, if
Chile concludes with another state an income tax treaty that
imposes a limit on rates of withholding on payments of interest
lower than the limits imposed under paragraph 2 of Article 11,
the United States and Chile shall, at the request of the United
States, consult to reassess the balance of benefits of the
Convention with a view to concluding a protocol incorporating
such lower rates into the Convention.
Paragraph 4
Paragraph 4 provides an anti-abuse exception to
subparagraph 2(a). Interest described in that subparagraph may
be taxed by the source State at a rate not exceeding 10 percent
of the gross amount of the interest if the interest is paid as
part of an arrangement involving back-to-back loans or another
arrangement that is economically equivalent to and intended to
have a similar effect as back-to-back loans. By referencing
arrangements that are economically similar to and that have the
effect of a back-to-back loan, paragraph 4 applies to
transactions that would not meet the legal requirements of a
loan but would nevertheless serve that purpose economically.
For example, the term would encompass securities issued at a
discount or certain swap arrangements intended to operate as
the economic equivalent of a back-to-back loan.
Paragraph 5
The term ``interest'' as used in Article 11 is defined in
paragraph 5 to include, inter alia, income from debt claims of
every kind, whether or not secured by a mortgage. Penalty
charges for late payment are excluded from the definition of
interest. Interest that is paid or accrued subject to a
contingency is within the ambit of Article 11. This definition
includes income from a debt obligation carrying the right to
participate in profits if the contract by its character clearly
evidences a loan at interest. The term does not, however,
include amounts treated as dividends under Article 10
(Dividends).
The term ``interest'' also includes amounts subject to the
same tax treatment as income from money lent under the law of
the State in which the income arises. Thus, for purposes of the
Convention, amounts that the United States will treat as
interest include: (i) the difference between the issue price
and the stated redemption price at maturity of a debt
instrument (i.e., original issue discount (``OID'')), which may
be wholly or partially realized on the disposition of a debt
instrument (section 1273); (ii) amounts that are imputed
interest on a deferred sales contract (section 483); (iii)
amounts treated as interest or OID under the stripped bond
rules (section 1286); (iv) amounts treated as original issue
discount under the below-market interest rate rules (section
7872); (v) a partner's distributive share of a partnership's
interest income (section 702); (vi) the interest portion of
periodic payments made under a ``finance lease'' or similar
contractual arrangement that in substance is a borrowing by the
nominal lessee to finance the acquisition of property; (vii)
amounts included in the income of a holder of a residual
interest in a REMIC (section 860E), because these amounts
generally are subject to the same taxation treatment as
interest under U.S. tax law; and (viii) interest with respect
to notional principal contracts that are re-characterized as
loans because of a ``substantial non-periodic payment.''
Paragraph 6
Paragraph 6 provides a rule for taxing interest in cases
where the beneficial owner of the interest either carries on
business through a permanent establishment in the other
Contracting State, in which the interest arises, or performs in
that other State independent personal services from a fixed
base in that other State, and the interest is attributable to
that permanent establishment or fixed base. In such cases the
provisions of Article 7 (Business Profits) or 14 (Independent
Personal Services), as the case may be, will apply, and the
State of source will retain the right to impose tax on such
interest income.
In the case of a permanent establishment or fixed base that
once existed in the State of source but that no longer exists,
the provisions of paragraph 6 also apply, by virtue of
paragraph 7 of Article 7, to interest that would be
attributable to such a permanent establishment or fixed base if
it did exist in the year of payment or accrual. See the
Technical Explanation of paragraph 7 of Article 7.
Paragraph 7
Paragraph 7 provides a source rule for interest that is
identical in substance to the interest source rule of the OECD
Model. Interest is considered to arise in a Contracting State
if paid by a resident of that State. As an exception, interest
on a debt incurred in connection with a permanent establishment
or a fixed base in one of the States and borne by the permanent
establishment or fixed base is deemed to arise in that State.
For this purpose, interest is considered to be borne by a
permanent establishment or fixed base if it is allocable to
taxable income of that permanent establishment or fixed base.
Paragraph 8
Paragraph 8 provides that in cases involving special
relationships between the payor and the beneficial owner of
interest income, Article 11 applies only to that portion of the
total interest payments that would have been made absent such
special relationships (i.e., an arm's-length interest payment).
Any excess amount of interest paid remains taxable according to
the laws of the United States and Chile, respectively, with due
regard to the other provisions of the Convention. Thus, if the
excess amount would be treated under the source country's law
as a distribution of profits by a corporation, such amount
could be taxed as a dividend rather than as interest, but the
tax would be subject, if appropriate, to the rate limitations
of paragraph 2 of Article 10 (Dividends).
The term ``special relationship'' is not defined in the
Convention. In applying this paragraph, the United States
considers the term to include the relationships described in
Article 9, which in turn corresponds to the definition of
``control'' for purposes of Code section 482.
This paragraph does not address cases where, owing to a
special relationship between the payer and the beneficial owner
or between both of them and some other person, the amount of
the interest is less than an arm's-length amount. In those
cases a transaction may be characterized to reflect its
substance and interest may be imputed consistent with the
definition of ``interest'' in paragraph 5. For example, the
United States would apply Code section 482 or 7872 to determine
the amount of imputed interest in those cases.
Paragraph 9
Paragraph 9 provides anti-abuse exceptions to paragraph 2
for two classes of interest payments.
The first class of interest, dealt with in subparagraph
9(a), is so-called contingent interest. Under this provision,
interest arising in one of the Contracting States that is
determined with reference to receipts, sales, income, profits
or other cash flows of the debtor or a related person, to any
change in the value of any property of the debtor or a related
person or to any dividend, partnership distribution or similar
payment made by the debtor or a related person also may be
taxed in the State in which it arises, and according to the
laws of that State. If the beneficial owner is a resident of
the other Contracting State, however, the gross amount of the
interest may be taxed at a rate not exceeding the rate
prescribed in subparagraph 2(b) of Article 10 (Dividends).
The second class of interest that is dealt with in
subparagraph 9(b) is excess inclusions from U.S. real estate
mortgage investment conduits (``REMICs''). Subparagraph 9(b)
serves as a backstop to Code section 860G(b). That section
generally requires that a foreign person holding a residual
interest in a REMIC take into account for U.S. tax purposes
``any excess inclusion'' and ``amounts includible . [under the
REMIC provisions] when paid or distributed (or when the
interest is disposed of).''
Without a full tax at source, non-U.S. transferees of
residual interests would have a competitive advantage over U.S.
transferees at the time these interests are initially offered.
Absent this rule, the United States would suffer a revenue loss
with respect to mortgages held in a REMIC because of
opportunities for tax avoidance created by differences in the
timing of taxable and economic income produced by such
interests. In many cases, the transfer to the foreign person is
simply disregarded under Treas. Reg. Sec. 1.860G-3.
Subparagraph 9(b) also serves to indicate that excess
inclusions from REMICs are not considered ``other income''
subject to Article 21 (Other Income) of the Convention.
Paragraph 10
Paragraph 10 permits a Contracting State to impose its
branch level interest tax on a company resident in the other
Contracting State. The base of this tax is the excess, if any,
of the interest allocable to the profits of the company that
are either attributable to a permanent establishment in the
first-mentioned State (including gains under paragraph 3 of
Article 13 (Capital Gains)) or subject to tax in the first-
mentioned State under Article 6 (Income from Real Property
(Immovable Property)) or paragraph 1 of Article 13 (Capital
Gains)) over the interest paid by the permanent establishment,
or in the case of profits subject to tax under Article 6 or
Article 13(1), over the interest paid by that trade or business
in the first-mentioned State. Such excess interest may be taxed
as if it were interest arising in the first-mentioned State and
beneficially owned by the resident of the other State. Thus,
such excess interest may be taxed by the first-mentioned State
at a rate not to exceed the applicable rates provided in
paragraph 2.
Relationship to Other Articles
Notwithstanding the foregoing limitations on source country
taxation of interest, the saving clause of paragraph 4 of the
Protocol permits the United States to tax its residents and
citizens, subject to the special foreign tax credit rules of
paragraph 3 of Article 23 (Relief from Double Taxation), as if
the Convention had not come into force.
As with other benefits of the Convention, the benefits of
Article 11 are available to a resident of the other State only
if that resident is entitled to those benefits under the
provisions of Article 24 (Limitation on Benefits).
ARTICLE 12 (ROYALTIES)
Article 12 provides rules for the taxation of royalties
arising in one Contracting State and paid to a beneficial owner
that is a resident of the other Contracting State.
Paragraph 1
Paragraph 1 grants to the State of residence the non-
exclusive right to tax royalties paid to its residents and
arising in the other Contracting State.
Paragraph 2
Paragraph 2 provides that the State of source also may tax
royalties, but if the beneficial owner of the royalties is a
resident of the other Contracting State, the rate of tax shall
be limited to 2 percent of the gross amount of the royalties
described in subparagraph 3(a), and 10 percent of the gross
amount of the royalties described in subparagraph 3(b).
The term ``beneficial owner'' is not defined in the
Convention, and is, therefore, defined under the internal law
of the State granting treaty benefits (i.e., the source State).
The beneficial owner of the royalty for purposes of Article 12
is the person to which the income is attributable under the
laws of the source State. Thus, if a royalty arising in a
Contracting State is received by a nominee or agent that is a
resident of the other State on behalf of a person that is not a
resident of that other State, the royalty is not entitled to
the benefits of Article 12. However, a royalty received by a
nominee on behalf of a resident of that other State would be
entitled to benefits. These limitations are similar to those
provided in paragraph 4 of the OECD Commentary to Article 12.
Special rules apply to royalties derived through fiscally
transparent entities for purposes of determining the beneficial
owner of the royalties. In such cases, residence-State
principles shall be used to determine who derives the royalties
to assure that the royalties for which the source State grants
benefits of the Convention will be taken into account for tax
purposes by a resident of the residence State.
For example, assume that FCo, a company that is a resident
of Chile, owns a 50 percent interest in FP, a partnership that
is organized in Chile. FP receives royalties arising in the
United States. Chile views FP as fiscally transparent under its
domestic law, and thus taxes FCo currently on its distributive
share of the income of FP and determines the source and
character of the income received through FP in the hands of FCo
as if such income were realized directly by FCo. In this case,
FCo is treated as deriving 50 percent of the royalties received
by FP that arise in the United States under paragraph 1 of the
Protocol. The same result would be reached even if the tax laws
of the United States would treat FP differently (e.g., if FP
were not treated as fiscally transparent in the United States),
or if FP were organized in a third state, as long as FP were
still treated as fiscally transparent under the laws of Chile.
While residence-State principles control who is treated as
deriving the royalties, source-State principles of beneficial
ownership apply to determine whether the person who derives the
royalties, or another resident of the other Contracting State,
is the beneficial owner of the royalties. If the person who
derives the royalties under paragraph 1 of the Protocol would
not be treated as a nominee, agent, custodian, conduit, etc.,
under the source State's principles for determining beneficial
ownership, that person will be treated as the beneficial owner
of the royalties for purposes of the Convention. In the example
above, FCo must satisfy the beneficial ownership principles of
the United States with respect to the royalties it derives. If
under the beneficial ownership principles of the United States,
FCo is found not to be the beneficial owner of the royalties,
FCo will not be entitled to the benefits of Article 12 with
respect to such royalties. If FCo is found to be a nominee,
agent, custodian, or conduit for a person who is a resident of
the other Contracting State, that person may be entitled to
benefits with respect to the royalties.
Paragraph 22 of the Protocol provides that, if Chile
concludes with another state an income tax treaty that imposes
a limit on withholding rates on payments of royalties that is
lower than the limits imposed under paragraph 2 of Article 12,
the United States and Chile shall, at the request of the United
States, consult to reassess the balance of benefits of the
Convention with a view to concluding a protocol incorporating
such lower rates into the Convention.
Paragraph 3
Paragraph 3 defines the term ``royalties'' as used in
Article 12, and the term ``royalties'' comprises two categories
of consideration. The first category is any consideration for
the use of, or the right to use, industrial, commercial or
scientific equipment, but not including ships, aircraft or
containers as dealt with in Article 8 (International
Transport). The second category is any consideration for the
use of, or the right to use, any copyright of literary,
artistic, scientific or other work (including computer
software, cinematographic films, audio or video tapes or disks,
and other means of image or sound reproduction), any patent,
trademark, design or model, plan, secret formula or process, or
other like intangible property, or for information concerning
industrial, commercial, or scientific experience. The second
category also includes gain derived from the alienation of any
property included in the second category, to the extent the
gain is contingent on the productivity, use, or disposition of
the property. Gains that are not so contingent are dealt with
under Article 13 (Capital Gains).
For purposes of determining whether payments as
consideration for computer software should be classified as
royalties under Article 12, paragraph 16 of the Protocol
provides that the paragraphs of the Commentary to Article 12 of
the OECD Model Convention of 2008 addressing computer software
(paragraphs 12 to 14.4 and paragraph 17 to 17.4) will apply.
The term ``royalties'' is defined in the Convention and
therefore is generally independent of domestic law. Certain
terms used in the definition are not defined in the Convention,
but these may be defined under domestic tax law. For example,
the term ``secret process or formulas'' is found in the Code,
and its meaning has been elaborated in the context of sections
351 and 367. See Rev. Rul. 55-17, 1955-1 C.B. 388; Rev. Rul.
64-56, 1964-1 C.B. 133; Rev. Proc. 69-19, 1969-2 C.B. 301.
Consideration for the use or right to use cinematographic
films, or works on film, tape, or other means of reproduction
in radio or television broadcasting is specifically included in
the definition of royalties. It is intended that, with respect
to any subsequent technological advances in the field of radio
or television broadcasting, consideration received for the use
of such technology will also be included in the definition of
royalties.
If an artist who is resident in one Contracting State
records a performance in the other Contracting State, retains a
copyrighted interest in a recording, and receives payments for
the right to use the recording based on the sale or public
playing of the recording, then the right of such other
Contracting State to tax those payments is governed by Article
12. See Boulez v. Commissioner, 83 T.C. 584 (1984), aff'd, 810
F.2d 209 (D.C. Cir. 1986). By contrast, if the artist earns in
the other Contracting State income covered by Article 17
(Artistes and Sportsmen), for example, endorsement income from
the artist's attendance at a film screening, and if such income
also is attributable to one of the rights described in Article
12 (e.g., the use of the artist's photograph in promoting the
screening), Article 17 and not Article 12 is applicable to such
income.
The term ``industrial, commercial, or scientific
experience'' (sometimes referred to as ``know-how'') has the
meaning ascribed to it in paragraph 11 et seq. of the
Commentary to Article 12 of the OECD Model. Consistent with
that meaning, the term may include information that is
ancillary to a right otherwise giving rise to royalties, such
as a patent or secret process.
Know-how also may include, in limited cases, technical
information that is conveyed through technical or consultancy
services. It does not include general educational training of
the user's employees, nor does it include information developed
especially for the user, such as a technical plan or design
developed according to the user's specifications. Thus, as
provided in paragraph 11.3 of the Commentary to Article 12 of
the OECD Model, the term ``royalties'' does not include
payments received as consideration for after-sales service, for
services rendered by a seller to a purchaser under a warranty,
or for pure technical assistance.
The term ``royalties'' also does not include payments for
professional services (such as architectural, engineering,
legal, managerial, medical or software development services).
For example, income from the design of a refinery by an
engineer (even if the engineer employed know-how in the process
of rendering the design) or the production of a legal brief by
a lawyer is not income from the transfer of know-how taxable
under Article 12, but is income from services taxable under
either Article 7 (Business Profits), 14 (Independent Personal
Services) or 15 (Dependent Personal Services), as applicable.
Professional services may be embodied in property that gives
rise to royalties, however. Thus, if a professional contracts
to develop patentable property and retains rights in the
resulting property under the development contract, subsequent
license payments made for those rights would be royalties.
Paragraph 4
This paragraph provides a rule for taxing royalties in
cases where the beneficial owner of the royalties carries on
business through a permanent establishment in the State of
source or performs in the source State independent personal
services from a fixed based therein, and the royalties are
attributable to that permanent establishment or fixed base. In
such cases the provisions of Article 7 or Article 14, as the
case may be, will apply.
The provisions of paragraph 7 of Article 7 apply to this
paragraph. For example, royalty income that is attributable to
a permanent establishment and that accrues during the existence
of the permanent establishment, but is received after the
permanent establishment no longer exists, remains taxable under
the provisions of Article 7, and not under this Article.
Paragraph 5
Paragraph 5 contains the source rule for royalties. Under
subparagraph 5(a), royalties are treated as arising in a
Contracting State when the payer is a resident of that State.
Where, however, the payer, whether he is a resident of a
Contracting State, has in a Contracting State a permanent
establishment or fixed base in connection with which the
liability to pay the royalties was incurred, and such royalties
are borne by such permanent establishment or fixed base, then
such royalties will be deemed to arise in the State in which
the permanent establishment or fixed base is situated.
Subparagraph 5(b) provides that where a royalty is not
treated as arising in a Contracting State under subparagraph
5(a), and the royalties are for the use of, or the right to
use, in a Contracting State any property or right described in
paragraph 3, then such royalties will be deemed to arise in
that State and not in the State of which the payer is resident.
Paragraph 6
Paragraph 6 provides that in cases involving special
relationships between the payer and beneficial owner of
royalties or between both of them and some other person,
Article 12 applies only to the extent the royalties would have
been paid absent such special relationships (i.e., an arm's-
length royalty). Any excess amount of royalties paid remains
taxable according to the laws of the two Contracting States,
with due regard to the other provisions of the Convention. If,
for example, the excess amount is treated as a distribution of
corporate profits under domestic law, such excess amount will
be taxed as a dividend rather than as royalties, but the tax
imposed on the dividend payment will be subject to the rate
limitations of paragraph 2 of Article 10 (Dividends).
Relationship to Other Articles
Notwithstanding the foregoing limitations on source State
taxation of royalties, the saving clause of paragraph 4 of the
Protocol permits the United States to tax its residents and
citizens, subject to the special foreign tax credit rules of
paragraph 3 of Article 23 (Relief from Double Taxation), as if
the Convention had not come into force.
As with other benefits of the Convention, the benefits of
Article 12 are available to a resident of the other State only
if that resident is entitled to those benefits under Article 24
(Limitation on Benefits).
ARTICLE 13 (CAPITAL GAINS)
Article 13 assigns either primary or exclusive taxing
jurisdiction over gains from the alienation of property to the
State of residence or the State of source.
Paragraph 1
Paragraph 1 of Article 13 preserves the non-exclusive right
of the State of source to tax gains attributable to the
alienation of real property situated in that State. The
paragraph therefore permits the United States to apply Code
section 897 to tax gains derived by a resident of Chile that
are attributable to the alienation of real property situated in
the United States (as defined in paragraph 2). Gains
attributable to the alienation of real property include gains
from any other property that is treated as a real property
interest within the meaning of paragraph 2.
Paragraph 1 refers to gains ``attributable to the
alienation of real property (immovable property)'' rather than
the OECD Model phrase ``gains from the alienation'' to clarify
that the United States will look through distributions made by
a REIT and certain RICs. Accordingly, distributions made by a
REIT or certain RICs are taxable under paragraph 1 of Article
13 (not under Article 10 (Dividends)) when they are
attributable to gains derived from the alienation of real
property.
Paragraph 2
This paragraph defines the term ``real property (immovable
property) situated in the other Contracting State.'' The term
includes real property (immovable property) referred to in
Article 6 (Income from Real Property (Immovable Property))
(i.e., an interest in the real property (immovable property)
itself), a ``United States real property interest'' (when the
United States is the other Contracting State under paragraph 1)
as defined in Code section 897 and the regulations thereunder,
as they may be amended from time to time without changing the
general principles thereof, and an equivalent interest in real
property (immovable property) situated in Chile, including
shares or other rights deriving more than 50 percent of their
value directly or indirectly from real property (immovable
property) situated in Chile (when Chile is the other
Contracting State under paragraph 1).
Under Code section 897(c) the term ``United States real
property interest'' includes shares in a U.S. corporation that
owns sufficient U.S. real property interests to satisfy an
asset-ratio test on certain testing dates. The term also
includes certain foreign corporations that have elected to be
treated as U.S. corporations for this purpose. Section 897(i).
Paragraph 3
Paragraph 3 of Article 13 deals with the taxation of
certain gains from the alienation of personal property (movable
property) that are attributable to a permanent establishment
that an enterprise of a Contracting State has in the other
Contracting State, or that are attributable to a fixed base
available to a resident of a Contracting State in the other
Contracting State for the purpose of performing independent
personal services. This also includes gains from the alienation
of such a permanent establishment (alone or with the whole
enterprise) or of the fixed base. Such gains may be taxed in
the State in which the permanent establishment or fixed base is
located.
A resident of Chile that is a partner in a partnership
doing business in the United States generally will have a
permanent establishment in the United States as a result of the
activities of the partnership, assuming that the activities of
the partnership rise to the level of a permanent establishment.
See Unger v. Commissioner, 936 F.2d 1316 (D.C. Cir. 1991);
Donroy, Ltd., v. United States, 301 F.2d 200 (9th Cir. 1962).
See also Rev. Rul. 91-32, 1991-1 C.B. 107. Further, under
paragraph 3, the United States generally may tax a partner's
distributive share of income realized by a partnership on the
disposition of movable property forming part of the business
property of the partnership in the United States.
The gains subject to paragraph 3 may be taxed in the State
in which the permanent establishment or fixed base is located,
regardless of whether the permanent establishment or fixed base
exists at the time of the alienation. This rule incorporates
the rule of Code section 864(c)(6). Accordingly, income that is
attributable to a permanent establishment or fixed base, but
that is deferred and received after the permanent establishment
or fixed base no longer exists, may nevertheless be taxed by
the State in which the permanent establishment or fixed base
was located.
Paragraph 4
This paragraph limits the taxing jurisdiction of the State
of source with respect to gains from the alienation of ships,
aircraft, or containers operated or used in international
traffic and from personal property (movable property)
pertaining to the operation or use of such ships, aircraft, or
containers.
Under paragraph 4, such gains are taxable only in the
Contracting State in which the alienator is resident.
Notwithstanding paragraph 3, the rules of this paragraph apply
even if the income is attributable to a permanent establishment
or fixed base maintained by the enterprise in the other
Contracting State. This result is consistent with the
allocation of taxing rights under Article 8 (International
Transport).
Paragraph 5
Paragraph 5 provides that gains derived by a resident of a
Contracting State from the alienation of shares or other rights
or interests representing the capital of a company that is a
resident of the other Contracting State may be taxed in that
other State, but the rate of tax shall be limited to 16 percent
of the amount of the gain. As stated in paragraph 4 of the 2010
Exchange of Notes, the provisions of paragraph 5 (and paragraph
7, discussed below) of Article 13 reflect the unique operation
of Chile's integrated tax system and are intended to prevent
the avoidance of the Additional Tax.
Paragraph 16 of the Protocol provides that, if under the
domestic law of Chile, the First Category Tax exceeds 30
percent, paragraph 5 (and paragraph 7, discussed below) of
Article 13 shall not apply. In such case, paragraph 4 of the
2010 Exchange of Notes provides that
Paragraph 16 of the Protocol will operate to limit the
right of the source State to tax capital gains, and such gains
will only be subject to tax in the residence State.
Paragraph 22 of the Protocol provides that if Chile
concludes with another state an income tax treaty that contains
terms further limiting the right of the source State to tax
capital gains under Article 13, the United States and Chile
shall, at the request of the United States, consult to reassess
the balance of benefits of the Convention with a view to
concluding a protocol to incorporate such lower rates into the
Convention.
Paragraph 6
Notwithstanding the provisions of paragraph 5, the State of
residence of the alienator has the exclusive right to tax gains
from the alienation of certain shares of a company or other
rights representing the capital of a company that in either
case is a resident of the other Contracting State as described
in paragraph 6.
Gains derived by a pension fund from the alienation of
shares or other rights representing the capital of a company
that is a resident of the other Contracting State may be taxed
only in the State of residence of the pension fund.
In addition, gains derived by a mutual fund or other
institutional investor from the alienation of shares of a
company that is a resident of the other Contracting State may
be taxed only in the State of residence of the mutual fund or
other institutional investor, provided that the company's
shares are substantially and regularly traded on a recognized
stock exchanged located in that other State and the alienation
occurred on a recognized stock exchange in that other State.
For this purpose, paragraph 17 of the Protocol provides that
the terms ``mutual fund'' and ``institutional investor'' do not
include an investor of a Contracting State which directly or
indirectly owns 10 percent or more of the shares or other
rights representing the capital or of the profits in a company
that is a resident of the other Contracting State.
Finally, the State of residence of the alienator has the
exclusive right to tax gains from the alienation of shares of a
company that is a resident of the other Contracting State and
whose shares are substantially and regularly traded on a
recognized stock exchange located in that other State, provided
that: (1) the shares were sold either on a recognized stock
exchange in that other State or in a public offer for the
acquisition of shares regulated by law; and (2) such shares
were previously acquired either on a recognized stock exchange
in that other State, in a public offer for the acquisition of
such shares regulated by law, in a placement of first issue
shares by that company at the time of the constitution of that
company or of an increase in the capital of that company, or in
an exchange of bonds convertible into shares.
Paragraph 7
Paragraph 7 sets forth two exceptions to the limitation
imposed by paragraph 5 on the rate of source State tax. As
stated in paragraph 4 of the 2010 Exchange of Notes, the
provisions of paragraph 7 (and paragraph 5, discussed above) of
Article 13 reflect the unique operation of Chile's integrated
tax system and are intended to prevent the avoidance of the
Additional Tax.
As provided in subparagraph 7(a), the State of source may
tax gains derived by a resident of the other Contracting State
if the recipient of the gain at any time during the 12-month
period preceding the alienation owned shares, directly or
indirectly, consisting of more than 50 percent of the capital
of a company that is a resident of the first-mentioned State.
As provided in subparagraph 7(b), the State of source may tax
gains derived by a resident of the other Contracting State from
the alienation of other rights not being shares or debt claims
representing the capital of a company (such as a limited
liability company) that is a resident of the first-mentioned
State, if the recipient of the gain at any time during the 12-
month period preceding the alienation owned other such rights,
directly or indirectly, consisting of 20 percent or more of the
capital of that company. Paragraph 16 of the Protocol provides
that the rate of Additional Tax imposed by Chile under the
provisions of paragraph 7 of Article 13 shall not exceed 35
percent.
Paragraph 16 of the Protocol provides that the rate of
Additional Tax imposed by Chile under the provisions of
paragraph 7 shall not exceed 35 percent. In addition, paragraph
16 of the Protocol provides that if under the domestic law of
Chile, the First Category Tax exceeds 30 percent, paragraph 7
(and paragraph 5, discussed above) of Article 13 shall not
apply. In such case, paragraph 4 of the 2010 Exchange of Notes
provides that paragraph 16 of the Protocol will operate to
limit the right of the source State to tax capital gains, and
such gains will only be subject to tax in the residence State.
Under paragraph 22 of the Protocol, if Chile concludes with
another state an income tax treaty that contains terms further
limiting the right of the source State to tax capital gains
under Article 13, the United States and Chile shall, at the
request of the United States, consult to reassess the balance
of benefits of the Convention with a view to concluding a
protocol incorporating such lower rates into the Convention.
Paragraph 8
Paragraph 8 provides that the State of residence of the
alienator has the exclusive right to tax gains from the
alienation of any property other than property referred to in
paragraphs 1 through 7.
Paragraph 9
The purpose of paragraph 9 is to provide a rule to address
the mark-to-market exit tax regime for ``covered expatriates''
under Code section 877A. This rule is intended to coordinate
United States and Chilean taxation of gains in the case of a
timing mismatch. Such a mismatch may occur, for example, where
a U.S. resident recognizes, for U.S. tax purposes, gain on a
deemed sale of all property on the day before the individual
expatriates to Chile. To avoid double taxation, paragraph 9 of
Article 13 provides that where an individual who, upon ceasing
to be a resident of one Contracting State, is treated for
purposes of taxation by that State as having alienated a
property and is taxed by that State by reason thereof, the
individual may elect to be treated for the purposes of taxation
by the other Contracting State as having sold and repurchased
the property for its fair market value on the day before the
expatriation date. The election in paragraph 9 therefore will
be available to any individual who expatriates from the United
States to Chile. The effect of the election will be to give the
individual an adjusted basis for Chilean tax purposes equal to
the fair market value of the property as of the date of the
deemed alienation in the United States, with the result that
only post-emigration gain will be subject to Chilean tax when
there is an actual alienation of the property while the
individual is a resident of Chile.
If an individual recognizes in one Contracting State losses
and gains from the deemed alienation of multiple properties,
then the individual must apply paragraph 9 consistently with
respect to all such properties. An individual who is deemed to
have alienated multiple properties may only make the election
under paragraph 9 if the deemed alienation of all such
properties results in a net gain.
Paragraph 9 provides that an individual who ceases to be a
resident of one of the Contracting States may not make the
election with respect to property situated in the other
Contracting State. In addition, an individual may make the
election only with respect to property that is treated as sold
for its fair market value under a Contracting State's deemed
disposition rules. At the time the Convention was signed, the
following were the types of property that were generally
excluded from the deemed disposition rules in the case of
individuals who cease to be citizens or long term residents of
the United States: (1) an eligible deferred compensation item
as defined under Code section 877A(d)(3); (2) a specified tax
deferred account as defined under Code section 877A(e)(2); and
(3) an interest in a non-grantor trust as defined under Code
section 877A(f)(3).
Relationship to Other Articles
Notwithstanding the foregoing limitations on taxation of
certain gains by the State of source, the saving clause of
paragraph 4 of the Protocol permits the United States to tax
its citizens and residents as if the Convention had not come
into effect. Thus, any limitation in this Article on the right
of the United States to tax gains does not apply to gains of a
U.S. citizen or resident.
The benefits of this Article are also subject to the
provisions of Article 24 (Limitation on Benefits). Thus, only a
resident of a Contracting State that satisfies one of the
conditions in Article 24 is entitled to the benefits of this
Article.
ARTICLE 14 (INDEPENDENT PERSONAL SERVICES)
The Convention addresses in separate Articles the taxation
of different classes of income from personal services. Article
14 concerns income from independent personal services, and
Article 15 concerns income from dependent personal services.
The Convention provides exceptions and additional rules for
directors' fees (Article 16); income of artists and athletes
(Article 17); pensions, social security benefits, alimony, and
child support payments (Article 18); government service
salaries (Article 19); and certain income of students and
trainees (Article 20).
Paragraph 1
Paragraph 1 of Article 14 provides the general rule that an
individual resident of a Contracting State who derives income
from performing professional services in an independent
capacity will not be taxed with respect to that income by the
other Contracting State. Such income may also be taxed in the
other Contracting State only if one of two tests is met. First,
if a resident of a Contracting State has a fixed base regularly
available to him in the host State for the purpose of
performing his activities, the host State may tax only so much
of the income that is attributable to that fixed base and is
derived from services performed in any state other than the
residence State. Second, if a resident of a Contracting State
is present in the host State for a period or periods equaling
or exceeding 183 days in any 12-month period that begins or
ends during the relevant taxable year (i.e., in the United
States, the calendar year in which the services are performed),
the host State may tax only so much of the income that is
derived from the activities performed in the host State.
Paragraph 5 of the 2010 Exchange of Notes provides that
``performed in that other State'' does not mean ``received in
that other State.'' This clarifies that Article 14 does not
apply, for example, to payments to a U.S. individual by a
client in Chile for services that were performed in the United
States.
Income derived by persons other than individuals or groups
of individuals from the performance of independent personal
services is not covered by Article 14. Such income generally
would be business profits taxable in accordance with Article 7
(Business Profits). Income derived by employees of such persons
generally would be taxable in accordance with Article 15
(Dependent Personal Services).
The term ``fixed base'' is not defined in the Convention,
but its meaning is understood to be identical to that of the
term ``permanent establishment,'' as defined in Article 5
(Permanent Establishment). The term ``regularly available''
also is not defined in the Convention. Whether a fixed base is
regularly available to a person will be determined based on all
the facts and circumstances.
The 183-day period referred to in subparagraph 1(b) is to
be measured using the ``days of physical presence'' method.
Under this method, the days that are counted include any day in
which a part of the day is spent in the host State. See Rev.
Rul. 56-24, 1956-1 C.B. 851. Thus, days that are counted
include the days of arrival and departure; weekends and
holidays on which the employee does not work but is present
within the State; vacation days spent in the host State before,
during or after the employment period, unless the individual's
presence before or after the employment can be shown to be
independent of his presence there for employment purposes; and
time during periods of sickness, training periods, strikes,
etc., when the individual is present but not working. If
illness prevented the individual from leaving the host State in
sufficient time to qualify for the benefit, those days will not
count. Also, any part of a day spent in the host State while in
transit between two points outside the host State is not
counted. If the individual is a resident of the host State for
part of the taxable year concerned and a nonresident for the
remainder of the year, the individual's days of presence as a
resident do not count for purposes of determining whether the
183-day period is exceeded.
Paragraph 7 of Article 7 (Business Profits) clarifies that
income that is attributable to a permanent establishment or
fixed base but that is deferred and received after such
permanent establishment or fixed base has ceased to exist may
nevertheless be taxed by the State in which the permanent
establishment or fixed base was located. Thus, under Article
14, income derived by an individual resident of a Contracting
State from services performed in the other Contracting State
and attributable to a fixed base there may be taxed by that
other State even if the income is deferred and received after
there is no longer a fixed base available to the resident in
that other State.
Paragraph 2
Paragraph 2 provides that in cases where the host State may
tax income from independent personal services under paragraph
1, the host State will do so only on a net basis, as if such
income were attributable to a permanent establishment and
taxable by the host State under Article 7. For purposes of
paragraph 1, the principles of paragraph 3 of Article 7
(Business Profits) will apply to determine the income that is
taxable in the host State, provided that related administrative
requirements have been satisfied. Thus, all necessary expenses,
including expenses not incurred in the host State, must be
allowed as deductions in computing the net income from services
subject to tax in the host State.
Paragraph 3
Paragraph 3 contains a non-exhaustive list of activities
that constitute ``professional services.'' The term includes
independent scientific, literary, artistic, educational or
teaching activities, as well as the independent activities of
physicians, lawyers, engineers, architects, dentists, and
accountants.
In addition to applying to income in respect of
professional services, Article 14 also applies to income in
respect of other activities of an independent character. This
includes personal services performed by an individual for his
own account, whether as a sole proprietor or a partner, where
he receives the income and bears the risk of loss arising from
the services. However, the taxation of income of an individual
from those types of independent services which are covered by
Articles 16 through 18 is governed by the provisions of those
articles. For example, taxation of the income of a corporate
director would be governed by Article 16 rather than Article
14.
This Article applies to income derived by a partner
resident in the Contracting State that is attributable to
personal services of an independent character performed in the
other State through a partnership that has a fixed base in that
other Contracting State. Income which may be taxed under this
Article includes all income attributable to the fixed base in
respect of the performance of the personal services carried on
by the partnership (whether by the partner himself, other
partners in the partnership, or by employees assisting the
partners) and any income from activities ancillary to the
performance of those services (for example, charges for
facsimile services). Income that is not derived from the
performance of personal services and that is not ancillary
thereto (for example, rental income from subletting office
space), will be governed by other Articles of the Convention.
The application of Article 14 to a service partnership may
be illustrated by the following example: a partnership formed
in a Contracting State has five partners (who agree to split
profits equally), four of whom are resident and perform
personal services only in that Contracting State at Office A,
and one of whom performs personal services from Office B, a
fixed base in the other Contracting State. In this case, the
four partners of the partnership resident in the first-
mentioned Contracting State may be taxed in the other
Contracting State in respect of their share of the income
attributable to the fixed base, Office B. The services giving
rise to income which may be attributed to the fixed base would
include not only the services performed by the one resident
partner, but also, for example, if one of the four other
partners came to the other Contracting State and worked on an
Office B matter there, the income in respect of those services
also. As noted above, this would be the case regardless of
whether such partner from the first-mentioned Contracting State
actually visited or used Office B when performing services in
the other State.
Relationship to other Articles
This Article is subject to the provisions of the saving
clause of paragraph 4 of the Protocol. Thus, if a resident of
Chile who is a U.S. citizen performs independent personal
services in the United States, the United States may tax his
income without regard to the provisions of this Article,
subject to the special foreign tax credit provisions of
paragraph 3 of Article 23 (Relief from Double Taxation). In
addition, as with other benefits of the Convention, the
benefits of this Article are available to a resident of a
Contracting State only if that resident is entitled to those
benefits under Article 24 (Limitation on Benefits).
ARTICLE 15 (DEPENDENT PERSONAL SERVICES)
Article 15 apportions taxing jurisdiction over remuneration
derived by a resident of a Contracting State as an employee
between the States of source and residence.
Paragraph 1
The general rule of Article 15 is contained in paragraph 1.
Remuneration derived by a resident of a Contracting State as an
employee may be taxed by the State of residence, and the
remuneration also may be taxed by the other Contracting State
to the extent derived from employment exercised (i.e., services
performed) in that other Contracting State. Paragraph 1 also
provides that the more specific rules of Articles 16
(Directors' Fees), 18 (Pensions, Social Security, Alimony and
Child Support), and 19 (Government Service) apply in the case
of employment income described in one of those articles. Thus,
even though the State of source has a right to tax employment
income under Article 15, it may not have the right to tax that
income under the Convention if the income is described, for
example, in Article 18 and is not taxable in the State of
source under the provisions of that article.
Article 15 applies to any form of compensation for
employment, including payments in kind. Paragraph 1.1 of the
Commentary to Article 16 of the OECD Model is consistent with
that interpretation.
Consistent with Code section 864(c)(6), Article 15 also
applies regardless of the timing of actual payment for
services. Consequently, a person who receives the right to a
future payment in consideration for services rendered in a
Contracting State would be taxable in that State even if the
payment is received at a time when the recipient is a resident
of the other Contracting State. Thus, a bonus paid to a
resident of a Contracting State with respect to services
performed in the other Contracting State with respect to a
particular taxable year would be subject to Article 15 for that
year even if it was paid after the close of the year. An
annuity received for services performed in a taxable year could
be subject to Article 15 despite the fact that it was paid in
subsequent years. In that case, it would be necessary to
determine whether the payment constitutes deferred
compensation, taxable under Article 15, or a qualified pension
subject to the rules of Article 18. Article 15 also applies to
income derived from the exercise of stock options granted with
respect to services performed in the host State, even if those
stock options are exercised after the employee has left the
host State. If Article 15 is found to apply, whether such
payments were taxable in the State where the employment was
exercised would depend on whether the requirements of paragraph
2 were satisfied in the year in which the services to which the
payment relates were performed.
Paragraph 2
Paragraph 2 sets forth an exception to the general rule
that employment income may be taxed in the State where it is
exercised. Under paragraph 2, the State where the employment is
exercised may not tax the income from the employment if three
conditions are satisfied: (a) the individual is present in the
other Contracting State for a period or periods not exceeding
183 days in any 12-month period that begins or ends during the
relevant taxable year (i.e., in the United States, the calendar
year in which the services are performed); (b) the remuneration
is paid by, or on behalf of, an employer who is not a resident
of that other Contracting State; and (c) the remuneration is
not borne as a deductible expense by a permanent establishment
or a fixed base which the employer has in that other State. In
order for the remuneration to be exempt from tax in the source
State, all three conditions must be satisfied. This exception
is identical to that set forth in the OECD Model.
The 183-day period in condition (a) is to be measured using
the ``days of physical presence'' method. Under this method,
the days that are counted include any day in which a part of
the day is spent in the host State. See Rev. Rul. 56-24, 1956-1
C.B. 851. Thus, days that are counted include the days of
arrival and departure; weekends and holidays on which the
employee does not work but is present within the State;
vacation days spent in the host State before, during or after
the employment period, unless the individual's presence before
or after the employment can be shown to be independent of his
presence there for employment purposes; and time during periods
of sickness, training periods, strikes, etc., when the
individual is present but not working. If illness prevented the
individual from leaving the host State in sufficient time to
qualify for the benefit, those days will not count. Also, any
part of a day spent in the host State while in transit between
two points outside the host State is not counted. If the
individual is a resident of the host State for part of the
taxable year concerned and a nonresident for the remainder of
the year, the individual's days of presence as a resident do
not count for purposes of determining whether the 183-day
period is exceeded.
Conditions (b) and (c) are intended to ensure that a
Contracting State will not be required to allow a deduction to
the payor for compensation paid and at the same time to exempt
the employee on the amount received. Accordingly, if a foreign
person pays the salary of an employee who is employed in the
host State, but a host State corporation or permanent
establishment reimburses the payor with a payment that can be
identified as a reimbursement, neither condition (b) nor (c),
as the case may be, will be considered to have been fulfilled.
The reference to remuneration ``borne by'' a permanent
establishment is understood to encompass all expenses that
economically are incurred and not merely expenses that are
currently deductible for tax purposes. Accordingly, the
expenses referred to include expenses that are capitalizable as
well as those that are currently deductible. Further, salaries
paid by residents that are exempt from income taxation may be
considered to be borne by a permanent establishment
notwithstanding the fact that the expenses will be neither
deductible nor capitalizable since the payor is exempt from
tax.
Paragraph 3
Paragraph 3 contains a special rule applicable to
remuneration derived by a resident of a Contracting State as an
employee aboard a ship or aircraft operated in international
traffic. Such remuneration may be taxed only in the State of
residence of the employee if the services are performed as a
member of the regular complement of the ship or aircraft. The
``regular complement'' includes the crew. In the case of a
cruise ship, for example, it may also include others, such as
entertainers, lecturers, etc., employed by the shipping company
to serve on the ship throughout its voyage. The use of the term
``regular complement'' is intended to clarify that a person who
exercises his employment as, for example, an insurance salesman
while aboard a ship or aircraft is not covered by this
paragraph.
Relationship to other Articles
If a U.S. citizen who is resident in Chile performs
services as an employee in the United States and meets the
conditions of paragraph 2 for source State exemption, he
nevertheless is taxable in the United States by virtue of the
saving clause of paragraph 4 of the Protocol, subject to the
special foreign tax credit rule of paragraph 3 of Article 23
(Relief from Double Taxation).
ARTICLE 16 (DIRECTORS' FEES)
This Article provides that directors' fees and other
similar payments derived by a resident of a Contracting State
in his capacity as a member of the board of directors or an
equivalent body of a company that is a resident of the other
Contracting State may be taxed by the State where such fees or
payments arise. Such fees or payments will be deemed to arise
in the State in which the company is resident, except to the
extent that such fees or payments are paid in respect of
attendance at meetings held in the other Contracting State.
This rule is an exception to the more general rules of
Articles 7 (Business Profits), 14 (Independent Personal
Services), and 15 (Dependent Personal Services). Thus, for
example, in determining whether a director's fee paid to a non-
employee director is subject to tax in the State of residence
of the corporation, it is not relevant to establish whether the
fee is attributable to a permanent establishment in that State.
ARTICLE 17 (ARTISTES AND SPORTSMEN)
This Article deals with the taxation in a Contracting State
of entertainers and sportsmen resident in the other Contracting
State from the performance of their services as such. The
Article applies both to the income of an entertainer or
sportsman who performs services on his own behalf and one who
performs services on behalf of another person, either as an
employee of that person, or pursuant to any other arrangement.
The rules of this Article take precedence, in some
circumstances, over those of Articles 14 (Independent Personal
Services) and 15 (Dependent Personal Services).
This Article applies only with respect to the income of
entertainers and sportsmen. Others involved in a performance or
athletic event, such as producers, directors, technicians,
managers, coaches, etc., remain subject to the provisions of
Articles 14 and 15. In addition, except as provided in
paragraph 2, income earned by juridical persons is not covered
by Article 17.
Paragraph 1
Paragraph 1 describes the circumstances in which a
Contracting State may tax the performance income of an
entertainer or sportsman who is a resident of the other
Contracting State. Under this paragraph, income derived by an
individual resident of a Contracting State from activities as
an entertainer or sportsman exercised in the other Contracting
State may be taxed in that other State if the amount of the
gross receipts derived by the performer equals or exceeds
$5,000 (or its equivalent in Chilean pesos) for the taxable
year. The $5,000 threshold includes expenses reimbursed to the
individual or borne on his behalf. If the gross receipts exceed
$5,000, the full amount, not just the excess, may be taxed in
the State of performance.
The Convention introduces this monetary threshold to
distinguish between two groups of entertainers and athletes--
those who are paid relatively large sums of money for very
short periods of service, and who would, therefore, normally be
exempt from tax in the host State under the standard personal
services income rules, from those who earn relatively modest
amounts and are, therefore, not easily distinguishable from
those who earn other types of personal services income.
Tax may be imposed under paragraph 1 even if the performer
would have been exempt from tax under Article 14 or 15. On the
other hand, if the performer would be exempt from host-State
tax under Article 17, but would be taxable under either Article
14 or 15, tax may be imposed under either of those Articles.
Thus, for example, if a performer derives remuneration from his
activities in an independent capacity, and the performer does
not have a permanent establishment in the host State, he may be
taxed by the host State in accordance with Article 17 if his
remuneration equals or exceeds $5,000 annually, despite the
fact that he generally would be exempt from host State taxation
under Article 14 or 15. However, a performer who receives less
than the $5,000 threshold amount and therefore is not taxable
under Article 17 nevertheless may be subject to tax in the host
State under Article 14 or 15 if the tests for host-State
taxability under the relevant Article are met. For example, if
an entertainer who is an independent contractor earns $14,000
of income in a State for the calendar year, but the income is
attributable to his fixed base in the host State, that State
may tax his income under Article 14 or 15.
As explained in paragraph 9 of the Commentary to Article 17
of the OECD Model, Article 17 of the Convention applies to all
income connected with a performance by the entertainer, such as
appearance fees, award or prize money, and a share of the gate
receipts. Income derived from a Contracting State by a
performer who is a resident of the other Contracting State from
other than actual performance, such as royalties from record
sales and payments for product endorsements, is not covered by
this Article, but by other articles of the Convention, such as
Article 12 (Royalties) or Article 7 (Business Profits). For
example, if an entertainer receives royalty income from the
sale of live recordings, the royalty income would be subject to
the provisions of Article 12, even if the performance was
conducted in the source State, although the entertainer could
be taxed in the source State with respect to income from the
performance itself under Article 17 if the $5,000 threshold is
met.
In determining whether income falls under Article 17 or
another article, the controlling factor will be whether the
income in question is predominantly attributable to the
performance itself or to other activities or property rights.
For instance, a fee paid to a performer for endorsement of a
performance in which the performer will participate would be
considered to be so closely associated with the performance
itself that it normally would fall within Article 17.
Similarly, a sponsorship fee paid by a business in return for
the right to attach its name to the performance would be so
closely associated with the performance that it would fall
under Article 17 as well. As indicated in paragraph 9 of the
Commentary to Article 17 of the OECD Model, however, a
cancellation fee would not be considered to fall within Article
17 but would be dealt with under Article 14 or 15.
As indicated in paragraph 4 of the Commentary to Article 17
of the OECD Model, where an individual fulfills a dual role as
performer and non-performer (such as a player-coach or an
actor-director), but his role in one of the two capacities is
negligible, the predominant character of the individual's
activities should control the characterization of those
activities. In other cases there should be an apportionment
between the performance-related compensation and other
compensation.
Consistent with Articles 14 and 15, Article 17 also applies
regardless of the timing of actual payment for services. Thus,
a bonus paid to a resident of a Contracting State with respect
to a performance in the other Contracting State during a
particular taxable year would be subject to Article 17 for that
year even if it was paid after the close of the year. The
determination as to whether the $5,000 threshold has been met
is determined separately with respect to each year of payment.
Accordingly, if an actor who is a resident of one Contracting
State receives residual payments over time with respect to a
movie that was filmed in the other Contracting State, the
payments do not have to be aggregated from one year to another
to determine whether the total payments have finally equaled or
exceeded $5,000. Otherwise, residual payments received many
years later could retroactively subject all earlier payments to
tax by the other Contracting State.
Paragraph 2
Paragraph 2 is intended to address the potential for
circumvention of the rule in paragraph 1 when a performer's
income does not accrue directly to the performer himself, but
to another person. Foreign performers frequently perform in the
United States as employees of, or under contract with, a
company or other person.
The relationship may truly be one of employee and employer,
with no circumvention of paragraph 1 either intended or
realized. On the other hand, the ``employer'' may, for example,
be a company established and owned by the performer, which is
merely acting as the nominal income recipient in respect of the
remuneration for the performance (a ``star company''). The
performer may act as an ``employee,'' receive a modest salary,
and arrange to receive the remainder of the income from his
performance from the company in another form or at a later
time. In such case, absent the provisions of paragraph 2, the
income arguably could escape host-State tax because the company
earns business profits but has no permanent establishment in
that country. The performer may largely or entirely escape
host-State tax by receiving only a small salary, perhaps small
enough to place him below the dollar threshold in paragraph 1.
The performer might arrange to receive further payments in a
later year, when he is not subject to host-State tax, perhaps
as dividends or liquidating distributions.
Paragraph 2 seeks to prevent this type of abuse while at
the same time protecting the taxpayers' rights to the benefits
of the Convention when there is a legitimate employee-employer
relationship between the performer and the person providing his
services. Under paragraph 2, when the income accrues to a
person other than the performer, and the performer or any
related persons participate, directly or indirectly, in the
receipts or profits of that other person, the income may be
taxed in the Contracting State where the performer's services
are exercised, without regard to the provisions of the
Convention concerning business profits (Article 7) or
independent personal services income (Article 14).
In cases where paragraph 2 is applicable, the income of the
``employer'' may be subject to tax in the host State even if it
has no permanent establishment or fixed base in the host State.
Taxation under paragraph 2 is on the person providing the
services of the performer. This paragraph does not affect the
rules of paragraph 1, which apply to the performer himself. The
income taxable by virtue of paragraph 2 is reduced to the
extent of salary payments to the performer, which fall under
paragraph 1.
For purposes of paragraph 2, income is deemed to accrue to
another person (i.e., the person providing the services of the
performer) if that other person has control over, or the right
to receive, gross income in respect of the services of the
performer. Direct or indirect participation in the profits of a
person may include, but is not limited to, the accrual or
receipt of deferred remuneration, bonuses, fees, dividends,
partnership income or other distributions.
Paragraph 2 does not apply if it is established that
neither the performer nor any persons related to the performer
participate directly or indirectly in the receipts or profits
of the person providing the services of the performer. Assume,
for example, that a circus owned by a U.S. corporation performs
in the other Contracting State, and promoters of the
performance in the other State pay the circus, which, in turn,
pays salaries to the circus performers. The circus is
determined to have no permanent establishment in that State.
Since the circus performers do not participate in the profits
of the circus, but merely receive their salaries out of the
circus' gross receipts, the circus is protected by Article 7
and its income is not subject to host-country tax. Whether the
salaries of the circus performers are subject to host-country
tax under this Article depends on whether they exceed the
$5,000 threshold in paragraph 1.
Pursuant to Article 1 (General Scope) the Convention only
applies to persons who are residents of one of the Contracting
States. Thus, income of a star company that is not a resident
of one of the Contracting States would not be eligible for
benefits of the Convention.
Relationship to other Articles
This Article is subject to the provisions of the saving
clause of paragraph 4 of the Protocol. Thus, if an entertainer
or a sportsman who is resident of Chile is a citizen of the
United States, the United States may tax all of his income from
performances in the United States without regard to the
provisions of this Article (subject to the special foreign tax
credit provisions of paragraph 3 of Article 23 (Relief from
Double Taxation)). In addition, benefits of this Article are
subject to the provisions of Article 24 (Limitation on
Benefits).
ARTICLE 18 (PENSIONS, SOCIAL SECURITY, ALIMONY AND CHILD SUPPORT)
This Article deals with the taxation of pension payments
(both private and government), social security benefits,
contributions to pension funds, and alimony and child support
payments.
Paragraph 1
Paragraph 1 deals with the taxation of private (i.e., non-
government service) pension payments and other similar
remuneration in consideration of past employment that are
derived from sources within one Contracting State and
beneficially owned by a resident of the other Contracting
State. The term ``pension payments and other similar
remuneration'' includes both periodic and single sum payments.
The taxation of annuity payments that are not in consideration
of past employment is dealt with in Article 21 (Other Income)
of the Convention.
Subparagraph 1(a) provides that pension payments and other
similar remuneration that are derived from sources within one
Contracting State and beneficially owned by a resident of the
other Contracting State are taxable in both Contracting States.
However, the tax imposed by the source State may not exceed 15
percent of the gross amount of such payment.
Subparagraph 1(b) contains an exception to the State of
residence's right to tax pension payments and other similar
remuneration under subparagraph 1(a). Under subparagraph 1(b),
the State of residence must exempt from tax any amount of such
payment that would be exempt from tax in the Contracting State
in which the pension plan is established if the recipient were
a resident of that State. Thus, for example, a distribution
from certain individual retirement accounts (``IRAs''), such as
a U.S. ``Roth IRA'' to a resident of Chile would be exempt from
tax in Chile to the same extent the distribution would be
exempt from tax in the United States if it were distributed to
a U.S. resident. The same is true with respect to distributions
from a traditional IRA to the extent that the distribution
represents a return of non-deductible contributions. Similarly,
if distributions from a traditional IRA were not subject to
U.S. tax because they were ``rolled over'' to another U.S. IRA,
then the distributions would be exempt from tax in Chile.
Paragraph 1 is intended to cover payments made by qualified
private retirement plans. In the United States, the plans
covered by paragraph 1 include qualified plans under Code
section 401(a), individual retirement plans (including
individual retirement plans that are part of a simplified
employee pension plan that satisfies Code section 408(k),
individual retirement accounts, and Code section 408(p)
accounts), Code section 403(a) qualified annuity plans, and
Code section 403(b) plans. Distributions from Code section 457
plans may also fall under paragraph 1 if they are not paid with
respect to government services. The competent authorities may
agree that distributions from other plans that generally meet
criteria similar to those applicable to the listed plans also
qualify for the benefits of paragraph 1. Payments in
consideration of past employment in the private sector that are
not eligible for the benefits of paragraph 1 generally are
covered by Article 15 (Dependent Personal Services).
Pensions in respect of government service and social
security benefits are not covered by paragraph 1. Pensions in
respect of government service are generally covered by
paragraph 2, while social security benefits are covered by
paragraph 3.
Paragraph 2
Paragraph 2 deals with the taxation of pensions 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. Subparagraph 2(a) provides that such pensions are
taxable only in that State. Subparagraph 2(b) provides an
exception under which such pensions are taxable only in the
other State if the individual is a resident of, and a national
of, that other State.
Pensions paid to retired civilian and military employees of
a Government of either State are intended to be covered under
paragraph 2. When benefits paid by a State in respect of
services rendered to that State or a subdivision or local
authority are in the form of social security benefits, however,
those payments are covered by paragraph 3. As a general matter,
the result will be the same whether paragraph 2 or 3 applies,
since both pensions in respect of government service and social
security benefits are taxable exclusively by the source State.
The result will differ only when the payment is made to a
national and resident of the other Contracting State, who is
not also a citizen of the paying State (or, where the United
States is the paying State, a lawful permanent resident of the
United States). In such a case, social security benefits
continue to be taxable at source while government pensions
become taxable only in the residence State.
In the case of the United States, paragraph 2 generally
covers payments from Code section 457(g), 401(a), 403(a), and
403(b) plans established for U.S. government employees, as well
as payments from the Thrift Savings Fund (Code section
7701(j)).
Paragraph 3
Paragraph 3 deals with the taxation of social security
benefits. This paragraph provides that, notwithstanding the
provisions of paragraphs 1 and 2, payments made by one of the
Contracting States under the provisions of its social security
or similar legislation to a resident of the other Contracting
State or to a citizen of the United States will be taxable only
in the Contracting State making the payment. The reference to
U.S. citizens is necessary to ensure that a social security
payment by Chile to a U.S. citizen who is not resident in the
United States will not be taxable by the United States.
Paragraph 3 applies to social security benefits, regardless
of whether the beneficiary contributed to the system as a
private sector or Government employee. 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
State. Paragraph 18 of the Protocol provides that in the case
of Chile, the social security system referred to in paragraph 3
of Article 18 is any pension scheme or fund administered by the
Instituto de Prevision Social (formerly Instituto de
Normalizacion Previsional) and the social security system
created by Decree Law 3500 (DL 3500). In the case of the United
States, the phrase ``similar legislation'' is intended to refer
to U.S. Tier 1 Railroad Retirement benefits.
Paragraph 4
Paragraph 4 provides that, if a resident of a Contracting
State is a beneficiary of a pension 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, neither State will tax the income earned
but not distributed by the plan until a payment or other
similar remuneration is
made from the plan. Thus, for example, if a U.S. citizen
contributes to a U.S. qualified plan while working in the
United States and then establishes residence in Chile, this
paragraph ensures that neither the United States nor Chile will
tax currently the plan's earnings and accretions with respect
to that individual. Only at the time and to the extent that a
payment or other similar remuneration is made from the plan
(and not transferred to another pension fund in the United
States), may the payment be subject to tax subject to the
provisions of paragraph 1 of Article 18. Thus, if a
distribution from a pension plan established in a Contracting
State is not currently taxable in that State because it is
rolled over into another pension plan in that State, such
distribution shall also not be subject to tax in the other
Contracting State.
Paragraph 5
Paragraph 5 provides certain benefits with respect to
contributions to a pension fund in the case of a short-term
assignment where an individual participates in a pension fund
in one State (the ``home State'') and performs services
(whether or not as an employee) for a limited period of time in
the other State (the ``host State''). It is not necessary for
an individual to be a resident of the host State in order to
claim the benefits of paragraph 5 (as long as the individual
does not become a citizen or permanent resident of the host
State). However, benefits are available under paragraph 5 only
for so long as the individual performs services in a period not
exceeding an aggregate of 60 months.
If the requirements of paragraph 5 are satisfied,
contributions paid by, or on behalf of, the individual with
respect to the services performed in the host State to a
pension fund that is generally exempt from income tax in the
home State and operated primarily to provide pension or
retirement benefits in the home State (whether or not sponsored
by an employer) will be treated in the same way for tax
purposes in the host State as a contribution paid to a pension
plan that is generally exempt from income tax in the host State
and operated primarily to provide pension or retirement
benefits in the host State. Thus, for example, if a participant
in a U.S. qualified plan goes to work temporarily in Chile,
contributions to the U.S. qualified plan will be treated for
tax purposes in Chile as contributions to a pension plan that
is generally exempt in Chile and operated primarily to provide
pension or retirement benefits in Chile.
Under subparagraph 5(a), the individual must have been
already contributing on a regular basis to the pension plan, or
to another similar plan for which the first-mentioned plan was
substituted, for a period ending immediately before the
individual became a resident or is temporarily present in the
host State. The rule regarding substituted plans would be
satisfied, for example, if the employer has been acquired by a
company that replaces the existing plan with its own plan,
transferring membership in the old plan over into the new plan.
Under subparagraph 5(b), the competent authority of the
host State must determine that the home State plan to which the
contribution is made generally corresponds to a pension plan
recognized for tax purposes by the host State. For this
purpose, paragraph 19 of the Protocol provides that the Chilean
pension plans eligible for the benefits of paragraph 5 of
Article 18 include the following and any identical or
substantially similar plan that is established pursuant to
legislation introduced after the date of signature of the
Protocol: any pension scheme or fund administered by the
Instituto de Prevision Social (formerly Instituto de
Normalizaci"n Previsional) and the social security system
created by Decree Law 3500 (DL 3500).
Paragraph 19 of the Protocol also provides that the U.S.
plans eligible for the benefits of paragraph 5 of Article 18
include the following and any identical or substantially
similar plan that is established pursuant to legislation
introduced after the date of signature of the Protocol:
qualified plans under Code section 401(a) (including Code
section 401(k) arrangements), individual retirement plans
(including individual retirement plans that are part of a
simplified employee pension plan that satisfies section 408(k),
individual retirement accounts, and Code section 408(p) simple
retirement accounts), Code section 403(a) qualified annuity
plans, Code section 403(b) plans, Code section 457(g) trusts
providing benefits under Code section 457(b) plans, and the
Thrift Savings Fund (Code section 7701(j)).
If a particular plan in one Contracting State is of a type
specified in paragraph 19 of the Protocol, it will not be
necessary for taxpayers to obtain a determination from the
competent authority of the other Contracting State that the
plan generally corresponds to a pension or retirement plan
established in and recognized for tax purposes in that State. A
taxpayer who believes a particular plan in one Contracting
State that is not described in paragraph 19 of the Protocol
nevertheless satisfies the requirement of paragraph 5 of
Article 18 may request a determination from the competent
authority of the other Contracting State that the plan
generally corresponds to a pension plan recognized for tax
purposes by that State. In the case of the United States, such
a determination must be requested under Revenue Procedure 2006-
54, 2006-2 C.B. 1035 (or any applicable analogous or successor
guidance).
Paragraph 5 applies only to the extent of the relief
allowed by the host State to residents of that State for
contributions to, or benefits accrued under, a pension plan
established in the host State. Therefore, where the United
States is the host State, the amount of contributions that may
be excluded from an employee's income under this paragraph for
U.S. tax purposes is limited to the U.S. dollar amount
specified in Code section 415 or the U.S. dollar amount
specified in section 402(g) to the extent contributions are
made from the employee's compensation. For this purpose, the
dollar limit specified in section 402(g)(1) means the amount
applicable under section 402(g)(1) (including the age 50 catch-
up amount in section 402(g)(1)(C)) or, if applicable, the
parallel dollar limit applicable under section 457(e)(15) plus
the age 50 catch-up amount under section 414(v)(2)(B)(i) for a
section 457(g) trust.
Paragraph 5 does not address the treatment of employer
contributions.
Paragraph 6
Paragraph 6 deals with alimony and child support payments.
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 generally are taxable in neither
Contracting State. However, if the payer is entitled to relief
from tax for such payments in the first-mentioned State, such
payments will be taxable only in the other State.
Relationship to other Articles
Under subparagraph 4(a) of the Protocol, paragraphs 1(b),
3, 4 and 6 of Article 18 are excepted from the saving clause of
paragraph 4 of the Protocol. Thus, the United States will not
tax U.S. citizens and residents on the income described in
those paragraphs even if such amounts otherwise would be
subject to tax under U.S. law.
Under subparagraph 4(b) of the Protocol, paragraphs 2 and 5
of Article 18 are excepted from the saving clause but only with
respect to individuals who are neither citizens of the
Contracting State conferring the benefits nor persons who have
been admitted for permanent residence in that State (i.e., in
the United States, ``green card'' holders). Accordingly, for
example, pension payments from the public funds of Chile to a
U.S. permanent resident or citizen who is a Chilean national
and resident (under paragraph 2 of Article 4) may be taxed by
the United States pursuant to paragraph 4 of the Protocol even
though such payments would be taxable only by Chile under
paragraph 2 of Article 18. Similarly, if the United States is
the host State for purposes of paragraph 5 of Article 18, a
person who becomes a U.S. permanent resident or citizen will
not be entitled to a deduction or exclusion for contributions
to a pension plan established in Chile notwithstanding the
provisions of paragraph 5 of Article 18.
ARTICLE 19 (GOVERNMENT SERVICE)
Paragraph 1
Subparagraphs 1(a) and 1(b) deal with the taxation of
government compensation other than pensions which are addressed
by paragraph 2 of Article 18 (Pensions, Social Security,
Alimony and Child Support). Subparagraph 1(a) provides that
salaries, wages, and other remuneration, other than a pension,
paid to any individual who rendered services to a Contracting
State, political subdivision or local authority are taxable
only in that State. Under subparagraph 1(b), such payments are,
however, taxable exclusively in the other State (the host
State) if the services are rendered in the host State and the
individual is a resident of the host State who is either a
national of that State or did not become a resident of that
State solely for purposes of rendering the services. The
paragraph applies to anyone performing services of a
governmental nature for a government, whether as a government
employee, an independent contractor, or an employee of an
independent contractor.
Paragraph 2
Paragraph 2 provides that the remuneration described in
paragraph 1 will be subject to the rules of Articles 15
(Dependent Personal Services), 16 (Directors' Fees), and 17
(Artistes and Sportsmen) if the services rendered by an
individual are in connection with a business conducted by a
government.
Under subparagraph 4(b) of the Protocol, the saving clause
does not apply to the benefits conferred by one of the States
under Article 19 if the recipient of the benefits is neither a
citizen of that State nor a person who has been admitted for
permanent residence there (i.e., in the United States, a
``green card'' holder). Thus, a resident of the United States
who in the course of performing functions of a governmental
nature becomes a resident of Chile (but not a permanent
resident), would be entitled to the benefits of this Article.
ARTICLE 20 (STUDENTS AND TRAINEES)
This Article provides rules for host-State taxation of
visiting students, apprentices, and business trainees. Persons
who meet the tests of the Article will be exempt from tax in
the State that they are visiting with respect to designated
classes of income. Several conditions must be satisfied in
order for an individual to be entitled to the benefits of this
Article.
First, the visitor must have been, either at the time of
his arrival in the host State or immediately before, a resident
of the other Contracting State.
Second, the purpose of the visit must be the full-time
education at a recognized educational institution such as a
university, college or school, or full-time training of the
visitor. Thus, if the visitor comes principally to work in the
host State but also is a part-time student, he would not be
entitled to the benefits of this Article, even with respect to
any payments he may receive from abroad for his maintenance,
education or training, and regardless of whether or not he is
in a degree program. Whether a student is to be considered
full-time will be determined by the rules of the educational
institution at which he is studying.
The host-State exemption applies to payments that are
received by the student, apprentice or business trainee for the
purposes of his maintenance, education or training and that
arise or are remitted from outside the host State. A payment
will be considered to arise outside the host State if the payer
is located outside the host State. Thus, if an employer from
one of the Contracting States sends an employee to the other
Contracting State for full-time training, the payments the
trainee receives from abroad from his employer for his
maintenance or training while he is present in the host State
will be exempt from tax in the host State. Where appropriate,
substance prevails over form in determining the identity of the
payer. Thus, for example, payments made directly or indirectly
by a U.S. person with whom the visitor is training, but which
have been routed through a source outside the United States
(e.g., a foreign subsidiary), are not treated as arising
outside the United States for this purpose.
In the case of an apprentice or business trainee, the
benefits of the Article will extend only for a period of not
exceeding two years from the date the visitor first arrives in
the host State for the purpose of training. If, however, a
trainee remains in the host country for a third year, thus
losing the benefits of the Article, he would not retroactively
lose the benefits of the Article for the first two years.
The saving clause of paragraph 4 of the Protocol does not
apply to this Article with respect to an individual who is
neither a citizen of the host State nor has been admitted for
permanent residence there. The saving clause, however, does
apply with respect to citizens and permanent residents of the
host State. Thus, a U.S. citizen who is a resident of Chile and
who visits the United States as a full-time student at an
accredited university will not be exempt from U.S. tax on
remittances from abroad that otherwise constitute U.S. taxable
income. A person, however, who is not a U.S. citizen, and who
visits the United States as a student and remains long enough
to become a resident under U.S. law, but does not become a
permanent resident (i.e., does not acquire a green card), will
be entitled to the full benefits of the Article.
ARTICLE 21 (OTHER INCOME)
Article 21 assigns taxing jurisdiction over income not
dealt with in the other Articles (Articles 6 through 20) of the
Convention. In order for an item of income to be ``dealt with''
in another Article it must be the type of income described in
the article and, in most cases, it must have its source in a
Contracting State. For example, all royalty income that arises
in a Contracting State and that is beneficially owned by a
resident of the other Contracting State is ``dealt with'' in
Article 12 (Royalties). However, profits derived in the conduct
of a business are ``dealt with'' in Article 7 (Business
Profits) whether or not they have their source in one of the
Contracting States.
Examples of items of income covered by Article 21 include
income from gambling, punitive (but not compensatory) damages
and covenants not to compete. The article would also apply to
income from a variety of financial transactions, where such
income does not arise in the course of the conduct of a trade
or business. For example, income from notional principal
contracts and other derivatives would fall within Article 21 if
derived by persons not engaged in the trade or business of
dealing in such instruments, unless such instruments were being
used to hedge risks arising in a trade or business. It would
also apply to securities lending fees derived by an
institutional investor. Further, in most cases guarantee fees
paid within an intercompany group would be covered by Article
21, unless the guarantor were engaged in the business of
providing such guarantees to unrelated parties.
Article 21 also applies to items of income that are not
dealt with in the other articles because of their source or
some other characteristic. For example, Article 11 (Interest)
addresses only the taxation of interest arising in a
Contracting State. Interest arising in a third State that is
not attributable to a permanent establishment, therefore, is
subject to Article 21.
Distributions from partnerships are not generally dealt
with under Article 21 because partnership distributions
generally do not constitute income. Under the Code, partners
include in income their distributive share of partnership
income annually, and partnership distributions themselves
generally do not give rise to income. This would also be the
case under U.S. law with respect to distributions from trusts.
Trust income and distributions that, under the Code, have the
character of the associated distributable net income would
generally be covered by another article of the Convention. See
Code section 641, et seq.
Paragraph 1
The general rule of Article 21 is contained in paragraph 1.
Items of income not dealt with in other Articles that are
earned by a resident of a Contracting State will be taxable
only in the State of residence. This right of taxation applies
whether or not the residence State exercises its right to tax
the income covered by the Article. The residence taxation
provided by paragraph 1 applies only when a resident of a
Contracting State is the beneficial owner of the income. This
is understood from the phrase ``income of a resident of a
Contracting State.'' Thus, source taxation of income not dealt
with in other articles of the Convention is not limited by
paragraph 1 if it is nominally paid to a resident of the other
Contracting State, but is beneficially owned by a resident of a
third State. In addition, as discussed in greater detail below,
where income not dealt with in other Articles of the Convention
arises in the other Contracting State, paragraphs 2 and 3
permit source-State taxation.
Paragraph 2
This paragraph provides an exception to the general rule of
paragraph 1 for income, other than income from immovable
property as defined in paragraph 2 of Article 6 (Income from
Real Property (Immovable Property)), that is effectively
connected to a permanent establishment or fixed base maintained
in a Contracting State by a resident of the other Contracting
State. The taxation of such income is governed by the
provisions of Article 7 (Business Profits) or 14 (Independent
Personal Services), as the case may be. Therefore, for example,
income arising outside the United States that is attributable
to a permanent establishment maintained in the United States by
a resident of Chile generally would be taxable by the United
States under the provisions of Article 7. This would be true
even if the income is sourced in a third State.
Paragraph 3
Notwithstanding the provisions of paragraphs 1 and 2,
income of a resident of one of the Contracting States not dealt
with in other articles and arising in the other State may also
be taxed in that other State.
Relationship to Other Articles
This Article is subject to the saving clause of paragraph 4
of the Protocol. Thus, the United States may tax the income of
a resident of Chile that is not dealt with elsewhere in the
Convention, if that resident is a citizen of the United States.
The Article is also subject to the provisions of Article 24
(Limitation on Benefits).
ARTICLE 22 (CAPITAL)
This Article specifies the circumstances in which a
Contracting State may impose tax on capital owned by a resident
of the other Contracting State. At the time of the signing of
the Convention, neither the United States nor Chile imposed
taxes on capital. Nevertheless, the Article is drafted in a
reciprocal manner. The Article was included at Chile's request.
The Article provides the general rule in paragraph 4 that
capital owned by a resident of a Contracting State may be taxed
only by that Contracting State. Thus, in general, the source
State cannot tax a resident of the other State on capital owned
by that resident. Exceptions to this general rule are provided
in paragraphs 1 and 2.
Paragraphs 1 and 2
Paragraph 1 provides that capital represented by real
property (immovable property) (as defined in Article 6 (Income
from Real Property (Immovable Property)) which is owned by a
resident of a Contracting State and located in the other State
may be taxed by that other State. Under paragraph 2, the source
State may tax capital which is represented by personal property
(movable property) which is part of the business property of a
permanent establishment maintained in that State by an
enterprise of the other State or which pertains to a fixed base
maintained in the source State by a resident of the other
State.
Paragraph 3
Paragraph 3 deals with capital represented by ships,
aircraft and containers owned by a resident of a Contracting
State and operated in international traffic, and by personal
property (movable property) pertaining to the operation of such
ships, aircraft or containers. Under the paragraph, such
capital is taxable only in the residence State. Thus, for
example, capital represented by ships owned by a resident of
the United States and operated in international traffic will be
exempt from capital tax in Chile.
Paragraph 4
Paragraph 4 provides that all other elements of capital of
a resident of a Contracting State shall be taxable only in that
State.
ARTICLE 23 (RELIEF FROM DOUBLE TAXATION)
This Article describes the manner in which each Contracting
State undertakes to relieve double taxation. The United States
uses the foreign tax credit method under its domestic law, and
by treaty.
Paragraph 1
The United States agrees, in paragraph 1, to allow to its
citizens and residents a credit against U.S. tax for income
taxes paid or accrued to Chile. For this purpose, paragraph 1
provides that the taxes referred to in subparagraph 3(b) and
paragraph 4 of Article 2 (Taxes Covered), excluding taxes on
capital, are considered income taxes.
Subparagraph 1(b) provides for a deemed-paid credit,
consistent with Code section 902, to a U.S. corporation in
respect of dividends received from a corporation resident in
Chile of which the U.S. corporation owns at least 10 percent of
the voting stock. This credit is for the tax paid by the
corporation to Chile on the profits out of which the dividends
are considered paid.
The credits allowed under paragraph 1 are allowed in
accordance with the provisions and subject to the limitations
of U.S. law, as that law may be amended over time, so long as
the general principle of the Article, that is, the allowance of
a credit, is retained. Thus, although the Convention provides
for a foreign tax credit, the terms of the credit are generally
determined by the U.S. domestic law in effect for the taxable
year for which the credit is allowed. See, e.g., Code sections
901-909 and the regulations under those sections. For example,
a foreign levy is not a tax to the extent a person subject to
the levy receives (or will receive), directly or indirectly, a
specific economic benefit from the foreign country in exchange
for payment pursuant to the levy. See Treas. Reg. Sec. 1.901-
2(a)(2). In addition, the credit generally is limited to the
amount of U.S. tax due with respect to net foreign source
income within the relevant foreign tax credit limitation
category (see Code section 904(a) and (d)), and the dollar
amount of the credit is determined in accordance with U.S.
currency translation rules (see, e.g., Code section 986).
Similarly, U.S. law applies to determine carryover periods for
excess credits and other inter-year adjustments.
Paragraph 2
Paragraph 2 provides that Chile will provide relief from
double taxation through the credit method. Chile agrees in
paragraph 2, in accordance with and subject to the provisions
of the law of Chile, to allow a credit against Chilean tax for
income taxes payable on income from sources outside Chile.
Paragraph 3
Paragraph 3 provides special rules for the tax treatment in
both States of certain types of income derived from U.S.
sources by U.S. citizens who are residents of Chile. Since U.S.
citizens, regardless of residence, are subject to United States
tax at ordinary progressive rates on their worldwide income,
the U.S. tax on the U.S. source income of a U.S. citizen
resident in Chile may exceed the U.S. tax that may be imposed
under the Convention on an item of U.S. source income derived
by a resident of Chile who is not a U.S. citizen. The
provisions of paragraph 3 ensure that Chile does not bear the
cost of U.S. taxation of its citizens who are residents of
Chile.
Subparagraph 3(a) provides, with respect to items of income
from sources within the United States, special credit rules for
Chile. These rules apply to items of U.S.-source income that
would be either exempt from U.S. tax or subject to reduced
rates of U.S. tax under the provisions of the Convention if
they had been received by a resident of Chile who is not a U.S.
citizen. The tax credit allowed under paragraph 3 with respect
to such items need not exceed the U.S. tax that may be imposed
under the Convention, other than tax imposed solely by reason
of the U.S. citizenship of the taxpayer under the provisions of
the saving clause of paragraph 4 of the Protocol.
For example, if a U.S. citizen resident in Chile receives a
payment of royalties described in subparagraph 3(b) of Article
12 (Royalties) from sources within the United States, the
foreign tax credit granted by Chile would be limited to 10
percent of the gross amount of the royalties--the U.S. tax that
may be imposed under subparagraph 2(b) of Article 12--even if
the shareholder is subject to U.S. net income tax because of
his U.S. citizenship.
Subparagraph 3(b) of Article 23 eliminates the potential
for double taxation that can arise because subparagraph 3(a)
provides that Chile need not provide full relief for the U.S.
tax imposed on its citizens resident in Chile. Subparagraph
3(b) provides that the United States will credit the income tax
paid or accrued to Chile, after the application of subparagraph
3(a). It further provides that in allowing the credit, the
United States will not reduce its tax below the amount that is
taken into account in Chile in applying subparagraph 3(a).
Since the income described in subparagraph 3(a) generally
will be U.S. source income, special rules are required to re-
source some of the income to Chile in order for the United
States to be able to credit the tax paid to Chile. This re-
sourcing is provided for in subparagraph 3(c), which deems the
items of income referred to in subparagraph 3(a) to be from
foreign sources to the extent necessary to avoid double
taxation under paragraph 3(b). Paragraph 3 of Article 26
(Mutual Agreement Procedure) provides a mechanism by which the
competent authorities can resolve any disputes regarding
whether income is from sources within the United States.
The following two examples illustrate the application of
paragraph 3 in the case of U.S.-source royalties described in
subparagraph 3(b) of Article 12 (Royalties) received by a U.S.
citizen resident in Chile. In both examples, the U.S. rate of
tax on residents of Chile, under subparagraph 2(b) of Article
12, is 10 percent. In both examples, the U.S. income tax rate
on the U.S. citizen is 35 percent. In example 1, the rate of
income tax imposed in Chile on its resident (the U.S. citizen)
is 25 percent (below the U.S. rate), and in example 2, the rate
imposed on its resident is 40 percent (above the U.S. rate).
------------------------------------------------------------------------
Example 1 Example 2
------------------------------------------------------------------------
Subparagraph (a)
U.S.-source royalty payment..... $100.00 $100.00
Notional U.S. withholding tax 10.00 10.00
(Article 12(2)(b)).............
Taxable income in Chile......... 100.00 100.00
Chilean tax before credit....... 25.00 40.00
Less: tax credit for notional 10.00 10.00
U.S. withholding tax...........
Net post-credit tax paid to 15.00 30.00
Chile..........................
Subparagraphs (b) and (c)
U.S. pre-tax income............. $100.00 $100.00
U.S. pre-credit citizenship tax. 35.00 35.00
Notional U.S. withholding tax... 10.00 10.00
U.S. tax eligible to be offset 25.00 25.00
by credit......................
Tax paid to Chile............... 15.00 30.00
Income re-sourced from U.S. to 42.86 71.43
foreign source (see below).....
U.S. pre-credit tax on re- 15.00 25.00
sourced income.................
U.S. credit for tax paid to 15.00 25.00
Chile..........................
Net post-credit U.S. tax........ 10.00 0.00
Total U.S. tax.................. 20.00 10.00
------------------------------------------------------------------------
In both examples, in the application of subparagraph 3(a),
Chile credits a 10 percent U.S. tax against its residence tax
on the U.S. citizen. In the first example, the net tax paid to
Chile after the foreign tax credit is $15.00; in the second
example, it is $30.00. In the application of subparagraphs 3(b)
and 3(c), from the U.S. tax due before credit of $35.00, the
United States subtracts the amount of the U.S. source tax of
$10.00, against which no U.S. foreign tax credit is allowed.
This subtraction ensures that the United States collects the
tax that it is due under the Convention as the State of source.
In both examples, given the 35 percent U.S. tax rate, the
maximum amount of U.S. tax against which credit for the tax
paid to Chile may be claimed is $25 ($35 U.S. tax minus $10
U.S. withholding tax). Initially, all of the income in both
examples was from sources within the United States. For a U.S.
foreign tax credit to be allowed for the full amount of the tax
paid to Chile, an appropriate amount of the income must be
treated as foreign-source income under subparagraph 3(c).
The amount that must be re-sourced depends on the amount of
tax for which the U.S. citizen is claiming a U.S. foreign tax
credit. In example 1, the tax paid to Chile was $15. For this
amount to be creditable against U.S. tax, $42.86 ($15 tax
divided by 35 percent U.S. tax rate) must be re-sourced as
foreign-source income. When the tax is credited against the $15
of U.S. tax on this re-sourced income, there is a net U.S. tax
of $10 due after credit ($25 U.S. tax eligible to be offset by
credit, minus $15 tax paid to Chile). Thus, in example 1, there
is a total of $20 in U.S. tax ($10 U.S. withholding tax plus
$10 residual U.S. tax).
In example 2, the tax paid to Chile was $30, but, because
the United States subtracts the U.S. withholding tax of $10
from the total U.S. tax of $35, only $25 of U.S. taxes may be
offset by taxes paid to Chile. Accordingly, the amount that
must be re-sourced to Chile is limited to the amount necessary
to ensure a U.S. foreign tax credit for $25 of tax paid to
Chile, or $71.43 ($25 tax paid to the other Contracting State
divided by 35 percent U.S. tax rate). When the tax paid to
Chile is credited against the U.S. tax on this re-sourced
income, there is no residual U.S. tax ($25 U.S. tax minus $30
tax paid to Chile, subject to the U.S. limit of $25). Thus, in
example 2, there is a total of $10 in U.S. tax ($10 U.S.
withholding tax plus $0 residual U.S. tax). Because the tax
paid to Chile was $30 and the U.S. tax eligible to be offset by
credit was $25, there is $5 of excess foreign tax credit
available for carryover.
Paragraph 4
Paragraph 4 provides that where in accordance with 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 take into account the exempted income or
capital in calculating the amount of tax on the remaining
income or capital of such person. This rule provides for
``exemption with progression.''
Paragraph 5
Paragraph 5 provides that certain items of gross income
that would be otherwise treated as from sources within a
Contracting State will be treated as income from sources within
the other Contracting State for the purposes of allowing relief
of double taxation pursuant to Article 23. Paragraph 5 is
intended to ensure that a resident of a Contracting State can
obtain an appropriate amount of foreign tax credit for income
taxes paid to the other Contracting State when the Convention
assigns to such other State primary taxing rights over an item
of gross income.
Accordingly, for example, if the Convention allows Chile to
tax an item of gross income (as defined under U.S. law) derived
by a resident of the United States, the United States will
treat that item of gross income as gross income from sources
within Chile for U.S. foreign tax credit purposes. In the case
of a U.S.-owned foreign corporation, however, section
904(h)(10) may apply for purposes of determining the U.S.
foreign tax credit with respect to income subject to this re-
sourcing rule. Section 904(h)(10) generally applies the foreign
tax credit limitation separately to re-sourced income. See also
Code sections 865(h) and 904(d)(6). Because paragraph 5 applies
to items of gross income, not net income, U.S. expense
allocation and apportionment rules, see, e.g., Treas. Reg.
sections 1.861-9 and -9T, continue to apply to income re-
sourced under paragraph 5.
Relationship to other Articles
Article 23 is not subject to the saving clause of paragraph
4 of the Protocol. Thus, the United States will allow a credit
to its citizens and residents in accordance with the Article,
even if such credit were to provide a benefit not available
under the Code (such as the re-sourcing provided by
subparagraph 3(c) and paragraph 5).
ARTICLE 24 (LIMITATION ON BENEFITS)
Article 24 contains anti-treaty-shopping provisions that
are intended to prevent residents of third countries from
benefiting from what is intended to be a reciprocal agreement
between two countries. In general, the provision does not rely
on a determination of purpose or intention but instead sets
forth a series of objective tests. A resident of a Contracting
State that satisfies one of the tests will receive benefits
regardless of its motivations in choosing its particular
business structure.
The structure of the Article is as follows: Paragraph 1
states the general rule that residents are entitled to benefits
otherwise accorded to residents only to the extent provided in
the Article. Paragraph 2 lists a series of attributes of a
resident of a Contracting State, the presence of any one of
which will entitle that person to all the benefits of the
Convention. Paragraph 3 provides that, regardless of whether a
person qualifies for benefits under paragraph 2, benefits may
be granted to that person with regard to certain income earned
in the conduct of an active trade or business. Paragraph 4
provides that benefits also may be granted if the competent
authority of the State from which benefits are claimed
determines that it is appropriate to provide benefits in that
case. Paragraph 5 provides special rules for so-called
``triangular cases'' notwithstanding paragraphs 1 through 4 of
the Article. Paragraph 6 defines certain terms used in the
Article.
Paragraph 1
Paragraph 1 provides that, except as otherwise provided, a
resident of a Contracting State will be entitled to the
benefits otherwise accorded to residents of a Contracting State
under the Convention only to the extent provided in the
Article. The benefits otherwise accorded to residents under the
Convention include all limitations on source-based taxation
under Articles 6 through 22, the treaty-based relief from
double taxation provided by Article 23 (Relief from Double
Taxation), and the protection afforded to residents of a
Contracting State under Article 25 (Non-Discrimination). Some
provisions do not require that a person be a resident in order
to enjoy the benefits of those provisions. Article 26 (Mutual
Agreement Procedure) is not limited to residents of the
Contracting States, and Article 28 (Members of Diplomatic
Missions and Consular Posts) applies to diplomatic agents or
consular officials regardless of residence. Article 24
accordingly does not limit the availability of treaty benefits
under these provisions.
Article 24 and the anti-abuse provisions of domestic law
complement each other, as Article 24 effectively determines
whether an entity has a sufficient nexus to the Contracting
State to be treated as a resident for treaty purposes, while
domestic anti-abuse provisions (e.g., business purpose,
substance-over-form, step transaction or conduit principles)
determine whether a particular transaction should be recast in
accordance with its substance. Thus, internal law principles of
the source Contracting State may be applied to identify the
beneficial owner of an item of income, and Article 24 then will
be applied to the beneficial owner to determine if that person
is entitled to the benefits of the Convention with respect to
such income.
Paragraph 2
Paragraph 2 has six subparagraphs, each of which describes
a category of residents that are entitled to all benefits of
the Convention.
It is intended that the provisions of paragraph 2 will be
self-executing. Unlike the provisions of paragraph 4, discussed
below, claiming benefits under paragraph 2 does not require
advance competent authority ruling or approval. The tax
authorities may, of course, on review, determine that the
taxpayer has improperly interpreted the paragraph and is not
entitled to the benefits claimed.
Individuals--Subparagraph 2(a)
Subparagraph 2(a) provides that individual residents of a
Contracting State will be entitled to all treaty benefits. If
such an individual receives income as a nominee on behalf of a
third country resident, benefits may be denied under the
respective articles of the Convention by the requirement that
the beneficial owner of the income be a resident of a
Contracting State.
Governments--Subparagraph 2(b)
Subparagraph 2(b) provides that the Contracting States and
any political subdivision or local authority or any agency or
instrumentality thereof will be entitled to all benefits of the
Convention.
Publicly-Traded Corporations--Subparagraph 2(c)(i)
Subparagraph 2(c) applies to two categories of companies:
publicly traded companies and subsidiaries of publicly traded
companies. A company resident in a Contracting State is
entitled to all the benefits of the Convention under
subparagraph 2(c)(i) if the principal class of its shares, and
any disproportionate class of shares, is regularly traded on
one or more recognized stock exchanges, and the company
satisfies at least one of the following additional
requirements: the company's principal class of shares is
primarily traded on one or more recognized stock exchanges
located in the Contracting State of which the company is a
resident; or the company's primary place of management and
control is in its State of residence.
The term ``recognized stock exchange'' is defined in
subparagraph (a) of paragraph 6. It includes (i) the NASDAQ
System and any stock exchange registered with the Securities
and Exchange Commission as a national securities exchange for
purposes of the Securities Exchange Act of 1934, (ii) the
``Bolsa de Comercio,'' ``Bolsa Electr"nica de Chile,'' and
``Bolsa de Corredores,'' and any stock exchange recognized by
the ``Superintendencia de Valores y Seguros'' according to Law
No. 18.0845, and (iii) any other stock exchanges agreed upon by
the competent authorities of the Contracting States.
If a company has only one class of shares, it is only
necessary to consider whether the shares of that class meet the
relevant trading requirements. If the company has more than one
class of shares, it is necessary as an initial matter to
determine which class or classes constitute the ``principal
class of shares.'' The term ``principal class of shares'' is
defined in subparagraph 6(b) to mean the ordinary or common
shares of the company representing the majority of the
aggregate voting power and value of the company. If the company
does not have a class of ordinary or common shares representing
the majority of the aggregate voting power and value of the
company, then the ``principal class of shares'' is that class
or any combination of classes of shares that represents, in the
aggregate, a majority of the voting power and value of the
company. Although in a particular case involving a company with
several classes of shares it is conceivable that more than one
group of classes could be identified that account for more than
50 percent of the shares, it is only necessary for one such
group to satisfy the requirements of this subparagraph in order
for the company to be entitled to benefits. Benefits would not
be denied to the company even if a second, non-qualifying,
group of shares with more than half of the company's voting
power and value could be identified.
A company whose principal class of shares is regularly
traded on a recognized stock exchange will nevertheless not
qualify for benefits under subparagraph 2(c)(i) if it has a
disproportionate class of shares that is not regularly traded
on a recognized stock exchange. The term ``disproportionate
class of shares'' is defined in subparagraph 7(c). A company
has a disproportionate class of shares if it has outstanding a
class of shares which is subject to terms or other arrangements
that entitle the holder to a larger portion of the company's
income, profit, or gain in the other Contracting State than
that to which the holder would be entitled in the absence of
such terms or arrangements. Thus, for example, a company
resident in Chile meets the test of subparagraph 6(c) if it has
outstanding a class of ``tracking stock'' that pays dividends
based upon a formula that approximates the company's return on
its assets employed in the United States.
The following example illustrates this result.
Example. CCo is a corporation resident in Chile. CCo has
two classes of shares: Common and Preferred. The Common shares
are listed and regularly traded on the Bolsa de Comercio, a
recognized Chilean stock exchange. The Preferred shares have no
voting rights and are entitled to receive dividends equal in
amount to interest payments that CCo receives from unrelated
borrowers in the United States. The Preferred shares are owned
entirely by a single investor that is a resident of a country
with which the United States does not have a tax treaty. The
Common shares account for more than 50 percent of the value of
CCo and for 100 percent of the voting power. Because the owner
of the Preferred shares is entitled to receive payments
corresponding to the U.S. source interest income earned by CCo,
the Preferred shares are a disproportionate class of shares.
Because the Preferred shares are not regularly traded on a
recognized stock exchange, CCo will not qualify for benefits
under subparagraph 2(c)(i).
The term ``regularly traded'' is not defined in the
Convention. In accordance with paragraph 2 of Article 3
(General Definitions), this term will be defined by reference
to the domestic tax laws of the State from which treaty
benefits are sought. In the case of the United States, this
term is understood to have the meaning it has under Treas. Reg.
Sec. 1.884-5(d)(4)(i)(B), relating to the branch tax provisions
of the Code. Under these regulations, a class of shares is
considered to be ``regularly traded'' if two requirements are
met: trades in the class of shares are made in more than de
minimis quantities on at least 60 days during the taxable year;
and the aggregate number of shares in the class traded during
the year is at least 10 percent of the average number of shares
outstanding during the year. Treas. Reg. Sec. 1.884-
5(d)(4)(i)(A), (ii) and (iii) will not be taken into account
for purposes of defining the term ``regularly traded'' under
the Convention.
The regular trading requirement can be met by trading on
any recognized exchange or exchanges located in either State.
Trading on one or more recognized stock exchanges may be
aggregated for purposes of this requirement. Thus, a U.S.
company could satisfy the regularly traded requirement through
trading, in whole or in part, on a recognized stock exchange
located in Chile. Authorized but unissued shares are not
considered for purposes of this test.
The term ``primarily traded'' is not defined in the
Convention. In accordance with paragraph 2 of Article 3, this
term will have the meaning it has under the laws of the State
concerning the taxes to which the Convention applies, generally
the source State. In the case of the United States, this term
is understood to have the meaning it has under Treas. Reg.
Sec. 1.884-5(d)(3), relating to the branch tax provisions of
the Code. Accordingly, stock of a corporation is ``primarily
traded'' if the number of shares in the company's principal
class of shares that are traded during the taxable year on all
recognized stock exchanges in the Contracting State of which
the company is a resident exceeds the number of shares in the
company's principal class of shares that are traded during that
year on established securities markets in any other single
foreign country.
A company whose principal class of shares is regularly
traded on a recognized exchange but cannot meet the primarily
traded test may claim treaty benefits if its primary place of
management and control is in its country of residence. This
test should be distinguished from the ``place of effective
management'' test which is used in the OECD Model and by many
other countries to establish residence. In some cases, the
place of effective management test has been interpreted to mean
the place where the board of directors meets. By contrast, the
primary place of management and control test looks to where
day-to-day responsibility for the management of the company
(and its subsidiaries) is exercised. The company's primary
place of management and control will be located in the State in
which the company is a resident only if the executive officers
and senior management employees exercise day-to-day
responsibility for more of the strategic, financial and
operational policy decision making for the company (including
direct and indirect subsidiaries) in that State than in the
other State or any third state, and the staff that support the
management in making those decisions are also based in that
State. Thus, the test looks to the overall activities of the
relevant persons to see where those activities are conducted.
In most cases, it will be a necessary, but not a
sufficient, condition that the headquarters of the company
(that is, the place at which the Chief Executive Officer and
other top executives normally are based) be located in the
Contracting State of which the company is a resident.
To apply the test, it will be necessary to determine which
persons are to be considered ``executive officers and senior
management employees.'' In most cases, it will not be necessary
to look beyond the executives who are members of the board of
directors (the ``inside directors'') in the case of a U.S.
company. That will not always be the case, however; in fact,
the relevant persons may be employees of subsidiaries if those
persons make the strategic, financial and operational policy
decisions. Moreover, it would be necessary to take into account
any special voting arrangements that result in certain board
members making certain decisions without the participation of
other board members.
Subsidiaries of Publicly-Traded Corporations--Subparagraph 2(c)(ii)
A company resident in a Contracting State is entitled to
all the benefits of the Convention under subparagraph 2(c)(ii)
if five or fewer publicly traded companies described in
subparagraph 2(c)(i) are the direct or indirect owners of at
least 50 percent of the aggregate vote and value of the
company's shares (and at least 50 percent of any
disproportionate class of shares). If the publicly-traded
companies are indirect owners, however, each of the
intermediate companies must be a resident of one of the
Contracting States.
Thus, for example, a company that is a resident of Chile,
all the shares of which are owned by another company that is a
resident of Chile, would qualify for benefits under
subparagraph 2(c) if the principal class of shares (and any
disproportionate classes of shares) of the parent company are
regularly and primarily traded on a recognized stock exchange
in Chile. However, such a subsidiary would not qualify for
benefits under clause (ii) if the publicly traded parent
company were a resident of a third state, for example, and not
a resident of the United States or Chile. Furthermore, if a
parent company in Chile indirectly owned the bottom-tier
company through a chain of subsidiaries, each such subsidiary
in the chain, as an intermediate owner, must be a resident of
the United States or Chile in order for the subsidiary to meet
the test in clause (ii).
Headquarters Companies--Subparagraph 2(d)
Subparagraph 2(d) provides that a resident of one of the
Contracting States is entitled to all the benefits of the
Convention if that person functions as a recognized
headquarters company for a multinational corporate group. The
provisions of this paragraph are consistent with the other U.S.
tax treaties where this provision has been adopted. For this
purpose, the multinational corporate group includes all
corporations that the headquarters company supervises and
excludes affiliated corporations not supervised by the
headquarters company. The headquarters company does not have to
own shares in the companies that it supervises. In order to be
considered a headquarters company, the person must meet several
requirements that are enumerated in subparagraph 2(d). These
requirements are discussed below.
Overall Supervision and Administration
Clause (i) of subparagraph 2(d) provides that the person
must provide a substantial portion of the overall supervision
and administration of the group. This activity may include
group financing, but group financing may not be the principal
activity of the person functioning as the headquarters company.
A person only will be considered to engage in supervision and
administration if it engages in a number of the following
activities: group financing, pricing, marketing, internal
auditing, internal communications, and management. Other
activities also could be part of the function of supervision
and administration.
In determining whether a ``substantial portion'' of the
overall supervision and administration of the group is provided
by the headquarters company, its headquarters-related
activities must be substantial in relation to the same
activities for the same group performed by other entities.
Clause (i) does not require that the group that is supervised
include persons in the other State. However, it is anticipated
that in most cases the group will include such persons, due to
the requirement in subparagraph 2(d)(vii), discussed below,
that the income derived in the other Contracting State by the
headquarters company be derived in connection with or be
incidental to an active trade or business supervised by the
headquarters company.
Active Trade or Business
Clause (ii) of subparagraph 2(d) is the first of several
requirements intended to ensure that the relevant group is
truly ``multinational.'' This subparagraph provides that the
corporate group supervised by the headquarters company must
consist of corporations resident in, and engaged in active
trades or businesses in, at least five countries. Furthermore,
at least five countries must each contribute substantially to
the income generated by the group, as the rule requires that
the business activities carried on in each of the five
countries (or groupings of countries) generate at least 10
percent of the gross income of the group. For purposes of the
10 percent gross income requirement, the income from multiple
countries may be aggregated into non-overlapping groupings, as
long as there are at least five individual countries or
groupings that each satisfies the 10 percent requirement. If
the gross income requirement under this subparagraph is not met
for a taxable year, the taxpayer may satisfy this requirement
by applying the 10 percent gross income test to the average of
the gross incomes for the four years preceding the taxable
year.
Example. CHQ is a corporation resident in Chile. CHQ
functions as a headquarters company for a group of companies.
These companies are resident in the United States, Canada, New
Zealand, the United Kingdom, Malaysia, the Philippines,
Singapore, and Indonesia. The gross income generated by each of
these companies for 2012 and 2013 is as follows:
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Country 2012 2013
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
United States............................................................................................................................................. $40 $45
Canada.................................................................................................................................................... $25 $15
New Zealand............................................................................................................................................... $10 $20
United Kingdom............................................................................................................................................ $30 $35
Malaysia.................................................................................................................................................. $10 $12
Philippines............................................................................................................................................... $7 $10
Singapore................................................................................................................................................. $10 $8
Indonesia................................................................................................................................................. $5 $10
Total................................................................................................................................................... $137 $155
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
For 2012, 10 percent of the gross income of this group is
equal to $13.70. Only the United States, Canada, and the United
Kingdom satisfy this requirement for that year. The other
countries may be aggregated to meet this requirement. Because
New Zealand and Malaysia have a total gross income of $20, and
the Philippines, Singapore, and Indonesia have a total gross
income of $22, these two groupings of countries may be treated
as the fourth and fifth members of the group for purposes of
clause (ii).
In the following year, 10 percent of the gross income is
$15.50. Only the United States, New Zealand, and the United
Kingdom satisfy this requirement. Because Canada and Malaysia
have a total gross income of $27, and the Philippines,
Singapore, and Indonesia have a total gross income of $28,
these two groupings of countries may be treated as the fourth
and fifth members of the group for purposes of clause (ii). The
fact that Canada replaced New Zealand in a group is not
relevant for this purpose. The composition of the grouping may
change from year to year.
Single Country Limitation
Clause (iii) of subparagraph 2(d) provides that the
business activities carried on in any one country other than
the headquarters company's State of residence must generate
less than 50 percent of the gross income of the group. If the
gross income requirement under this subparagraph is not met for
a taxable year, the taxpayer may satisfy this requirement by
applying the 50 percent gross income test to the average of the
gross incomes for the four years preceding the taxable year.
The following example illustrates the application of this
clause.
Example. CHQ is a corporation resident in Chile. CHQ
functions as a headquarters company for a group of companies.
CHQ derives dividend income from a United States subsidiary in
the 2008 taxable year. The state of residence of each of these
companies, the situs of their activities and the amounts of
gross income attributable to each for the years 2012 through
2016 are set forth below.
----------------------------------------------------------------------------------------------------------------
Country Situs 2012 2011 2010 2009 2008
----------------------------------------------------------------------------------------------------------------
United States............................. U.S. $100 $100 $95 $90 $85
Mexico.................................... U.S. $10 $8 $5 $0 $0
Canada.................................... U.S. $20 $18 $16 $15 $12
United Kingdom............................ U.K $30 $32 $30 $28 $27
New Zealand............................... N.Z. $35 $42 $38 $36 $35
Japan..................................... Japan $35 $32 $30 $30 $28
Singapore................................. Singapore $30 $25 $24 $22 $20
Total................................... $260 $257 $238 $221 $207
----------------------------------------------------------------------------------------------------------------
Because the United States' total gross income of $130 in
2012 is not less than 50 percent of the gross income of the
group, clause (iii) is not satisfied with respect to dividends
derived in 2012. However, the United States' average gross
income for the preceding four years may be used in lieu of the
preceding year's average. The United States' average gross
income for the years 2008-11 is $111.00 ($444/4). The group's
total average gross income for these years is $230.75 ($923/4).
Because $111 represents 48.1 percent of the group's average
gross income for the years 2008 through 2011, the requirement
under clause (iii) is satisfied.
Other State Gross Income Limitation
Clause (iv) of subparagraph 2(d) provides that no more than
25 percent of the headquarters company's gross income may be
derived from the other Contracting State. Thus, if the
headquarters company's gross income for the taxable year is
$200, no more than $50 of this amount may be derived from the
other Contracting State. If the gross income requirement under
this subparagraph is not met for a taxable year, the taxpayer
may satisfy this requirement by applying the 25 percent gross
income test to the average of the gross incomes for the four
years preceding the taxable year.
Independent Discretionary Authority
Clause (v) of subparagraph 2(d) requires that the
headquarters company have and exercise independent
discretionary authority to carry out the functions referred to
in clause (i). Thus, if the headquarters company was nominally
responsible for group financing, pricing, marketing and other
management functions, but merely implemented instructions
received from another entity, the headquarters company would
not be considered to have and exercise independent
discretionary authority with respect to these functions. This
determination is made individually for each function. For
instance, a headquarters company could be nominally responsible
for group financing, pricing, marketing and internal auditing
functions, but another entity could be actually directing the
headquarters company as to the group financing function. In
such a case, the headquarters company would not be deemed to
have independent discretionary authority for group financing,
but it might have such authority for the other functions.
Functions for which the headquarters company does not have and
exercise independent discretionary authority are considered to
be conducted by an entity other than the headquarters company
for purposes of clause (i).
Income Taxation Rules
Clause (vi) of subparagraph 2(d) requires that the
headquarters company be subject to the generally applicable
income taxation rules in its country of residence. This
reference should be understood to mean that the company must be
subject to the income taxation rules to which a company engaged
in the active conduct of a trade or business would be subject.
Thus, if one of the Contracting States has or introduces
special taxation legislation that imposes a lower rate of
income tax on headquarters companies than is imposed on
companies engaged in the active conduct of a trade or business,
or provides for an artificially low taxable base for such
companies, a headquarters company subject to these rules is not
entitled to the benefits of the Convention under subparagraph
2(d).
In Connection With or Incidental to Trade or Business
Clause (vii) of subparagraph 2(d) requires that the income
derived in the other Contracting State be derived in connection
with or be incidental to the active business activities
referred to in clause (ii). This determination is made under
the principles set forth in paragraph 3. For instance, assume
that a Chilean company satisfies the other requirements in
subparagraph 2(d) and acts as a headquarters company for a
group that includes a U.S. corporation. If the group is engaged
in the design and manufacture of computer software, but the
U.S. corporation is also engaged in the design and manufacture
of photocopying machines, the income that the Chilean company
derives from the United States would have to be derived in
connection with or be incidental to the income generated by the
computer business in order to be entitled to the benefits of
the Convention under subparagraph 2(d). Interest income
received from the U.S. corporation also would be entitled to
the benefits of the Convention under this subparagraph as long
as the interest was attributable to the computer business
supervised by the headquarters company. Interest income derived
from an unrelated party would normally not, however, satisfy
the requirements of this clause.
Tax Exempt Organizations--Subparagraph 2(e)
Subparagraph 2(e) provides rules by which tax exempt
organizations will be entitled to all the benefits of the
Convention. Entities qualifying under this rule are those that
are generally exempt from tax in their State of residence and
that are organized and operated exclusively to fulfill
religious, charitable, scientific, artistic, cultural, or
educational purposes.
Pension Funds--Subparagraph 2(f)
A pension fund will qualify for benefits under subparagraph
2(f), if in the case of a person described in subclause (A) of
clause (ii) of subparagraph (j) of paragraph 1 of Article 3
(General Definitions), more than 50 percent of the
beneficiaries, members or participants of the pension fund are
individuals resident in either Contracting State. For purposes
of this provision, the term ``beneficiaries'' should be
understood to refer to the persons receiving benefits from the
organization.
Ownership/Base Erosion--Subparagraph 2(g)
Subparagraph 2(g) provides an additional method to qualify
for treaty benefits that applies to any form of legal entity
that is a resident of a Contracting State. The test provided in
this subparagraph, the so-called ownership and base erosion
test, is a two-part test. Both prongs of the test must be
satisfied for the resident to be entitled to treaty benefits
under subparagraph 2(g).
The ownership prong of the test, under clause (i), requires
that shares or other beneficial interests representing at least
50 percent of the aggregate voting power and value (and at
least 50 percent of any disproportionate class of shares) of
the person be owned, directly or indirectly, on at least half
the days of the person's taxable year by persons who are
residents of the Contracting State of which that person is a
resident and that are themselves entitled to treaty benefits
under subparagraph 2(a), 2(b), 2(c)(i), 2(e) or 2(f). In the
case of indirect owners, each of the intermediate owners must
be a resident of that Contracting State.
Trusts may be entitled to benefits under this provision if
they are treated as residents under Article 4 (Residence) and
they otherwise satisfy the requirements of this subparagraph.
For purposes of this subparagraph, the beneficial interests in
a trust will be considered to be owned by its beneficiaries in
proportion to each beneficiary's actuarial interest in the
trust. The interest of a remainder beneficiary will be equal to
100 percent less the aggregate percentages held by income
beneficiaries. A beneficiary's interest in a trust will not be
considered to be owned by a person entitled to benefits under
the other provisions of paragraph 2 if it is not possible to
determine the beneficiary's actuarial interest. Consequently,
if it is not possible to determine the actuarial interest of
the beneficiaries in a trust, the ownership test under clause
(i) cannot be satisfied, unless all possible beneficiaries are
persons entitled to benefits under subparagraph 2(a), 2(b),
2(c)(i), 2(e) or 2(f).
The base erosion prong of clause (ii) of subparagraph 2(g)
is satisfied with respect to a person if less than 50 percent
of the person's gross income for the taxable year, as
determined under the tax law in the person's State of
residence, is paid or accrued, directly or indirectly, to
persons who are not residents of either Contracting State
entitled to benefits under subparagraph 2(a), 2(b), 2(c)(i),
2(e) or 2(f), in the form of payments deductible for tax
purposes in the payor's State of residence. These amounts do
not include arm's-length payments in the ordinary course of
business for services or tangible property. To the extent they
are deductible from the taxable base, trust distributions are
deductible payments. However, depreciation and amortization
deductions, which do not represent payments or accruals to
other persons, are disregarded for this purpose.
Paragraph 3
Paragraph 3 sets forth an alternative test under which a
resident of a Contracting State may receive treaty benefits
with respect to certain items of income that are connected to
an active trade or business conducted in its State of
residence. A resident of a Contracting State may qualify for
benefits under paragraph 3 even though it does not qualify
under paragraph 2.
Subparagraph 3(a) sets forth the general rule that a
resident of a Contracting State engaged in the active conduct
of a trade or business in that State may obtain the benefits of
the Convention with respect to an item of income derived in the
other Contracting State. The item of income, however, must be
derived in connection with or incidental to that trade or
business.
The term ``trade or business'' is not defined in the
Convention. Pursuant to paragraph 2 of Article 3 (General
Definitions), when determining whether a resident of Chile is
entitled to the benefits of the Convention under paragraph 3 of
this Article with respect to an item of income derived from
sources within the United States, the United States will
ascribe to this term the meaning that it has under the law of
the United States. Accordingly, the U.S. competent authority
will refer to the regulations issued under section 367(a) for
the definition of the term ``trade or business.'' In general,
therefore, a trade or business will be considered to be a
specific unified group of activities that constitutes or could
constitute an independent economic enterprise carried on for
profit. Furthermore, a corporation generally will be considered
to carry on a trade or business only if the officers and
employees of the corporation conduct substantial managerial and
operational activities.
The business of making or managing investments for the
resident's own account will be considered to be a trade or
business only when part of banking, insurance or securities
activities conducted by a bank, insurance company or registered
securities dealer. Such activities conducted by a person other
than a bank, insurance company, or registered securities dealer
will not be considered to be the conduct of an active trade or
business, nor would they be considered to be the conduct of an
active trade or business if conducted by a bank, insurance
company or registered securities dealer but not as part of the
company's banking, insurance, or dealer business. Because a
headquarters operation is in the business of managing
investments, a company that functions solely as a headquarters
company will not be considered to be engaged in an active trade
or business for purposes of paragraph 3.
An item of income is derived in connection with a trade or
business if the income-producing activity in the State of
source is a line of business that ``forms a part of'' or is
``complementary'' to the trade or business conducted in the
State of residence by the income recipient.
A business activity generally will be considered to form
part of a business activity conducted in the State of source if
the two activities involve the design, manufacture or sale of
the same products or type of products, or the provision of
similar services. The line of business in the State of
residence may be upstream, downstream, or parallel to the
activity conducted in the State of source. Thus, the line of
business may provide inputs for a manufacturing process that
occurs in the State of source, may sell the output of that
manufacturing process, or simply may sell the same sorts of
products that are being sold by the trade or business carried
on in the State of source.
Example 1. USCo is a corporation resident in the United
States. USCo is engaged in an active manufacturing business in
the United States. USCo owns 100 percent of the shares of CCo,
a corporation resident in Chile. CCo distributes USCo products
in Chile. Since the business activities conducted by the two
corporations involve the same products, CCo's distribution
business is considered to form a part of USCo's manufacturing
business.
Example 2. The facts are the same as in Example 1, except
that USCo does not manufacture. Rather, USCo operates a large
research and development facility in the United States that
licenses intellectual property to affiliates worldwide,
including CCo. CCo and other USCo affiliates then manufacture
and market the USCo-designed products in their respective
markets. Since the activities conducted by CCo and USCo involve
the same product lines, these activities are considered to form
a part of the same trade or business.
For two activities to be considered to be
``complementary,'' the activities need not relate to the same
types of products or services, but they should be part of the
same overall industry and be related in the sense that the
success or failure of one activity will tend to result in
success or failure for the other. Where more than one trade or
business is conducted in the State of source and only one of
the trades or businesses forms a part of or is complementary to
a trade or business conducted in the State of residence, it is
necessary to identify the trade or business to which an item of
income is attributable. Royalties generally will be considered
to be derived in connection with the trade or business to which
the underlying intangible property is attributable. Dividends
will be deemed to be derived first out of earnings and profits
of the treaty-benefited trade or business, and then out of
other earnings and profits. Interest income may be allocated
under any reasonable method consistently applied. A method that
conforms to U.S. principles for expense allocation will be
considered a reasonable method.
Example 3. Americair is a corporation resident in the
United States that operates an international airline. CSub is a
wholly-owned subsidiary of Americair resident in Chile. CSub
operates a chain of hotels in Chile that are located near
airports served by Americair flights. Americair frequently
sells tour packages that include air travel to Chile and
lodging at CSub hotels. Although both companies are engaged in
the active conduct of a trade or business, the businesses of
operating a chain of hotels and operating an airline are
distinct trades or businesses. Therefore CSub's business does
not form a part of Americair's business. However, CSub's
business is considered to be complementary to Americair's
business because they are part of the same overall industry
(travel) and the links between their operations tend to make
them interdependent.
Example 4. The facts are the same as in Example 3, except
that CSub owns an office building in Chile instead of a hotel
chain. No part of Americair's business is conducted through the
office building. CSub's business is not considered to form a
part of or to be complementary to Americair's business. They
are engaged in distinct trades or businesses in separate
industries, and there is no economic dependence between the two
operations.
Example 5. USFlower is a corporation resident in the United
States. USFlower produces and sells flowers in the United
States and other countries. USFlower owns all the shares of
CHolding, a corporation resident in Chile. CHolding is a
holding company that is not engaged in a trade or business.
CHolding owns all the shares of three corporations that are
resident in Chile: CFlower, CLawn, and CFish. CFlower
distributes USFlower flowers under the USFlower trademark in
Chile. CLawn markets a line of lawn care products in Chile
under the USFlower trademark. In addition to being sold under
the same trademark, CLawn and CFlower products are sold in the
same stores and sales of each company's products tend to
generate increased sales of the other's products. CFish imports
fish from the United States and distributes it to fish
wholesalers in Chile. For purposes of paragraph 3, the business
of CFlower forms a part of the business of USFlower, the
business of CLawn is complementary to the business of USFlower,
and the business of CFish is neither part of nor complementary
to that of USFlower.
An item of income derived from the State of source is
``incidental to'' the trade or business carried on in the State
of residence if production of the item facilitates the conduct
of the trade or business in the State of residence. An example
of incidental income is the temporary investment of working
capital of a person in the State of residence in securities
issued by persons in the State of source.
Subparagraph 3(b) states a further condition to the general
rule in subparagraph 3(a) in cases where the trade or business
generating the item of income in question is carried on either
by the person deriving the income or by any associated
enterprises. Subparagraph 3(b) states that the trade or
business carried on in the State of residence, under these
circumstances, must be substantial in relation to the activity
in the State of source. The substantiality requirement is
intended to prevent a narrow case of treaty-shopping abuses in
which a company attempts to qualify for benefits by engaging in
de minimis connected business activities in the treaty country
in which it is resident (i.e., activities that have little
economic cost or effect with respect to the company business as
a whole).
The determination of substantiality is made based upon all
the facts and circumstances and takes into account the
comparative sizes of the trades or businesses in each
Contracting State, the nature of the activities performed in
each Contracting State, and the relative contributions made to
that trade or business in each Contracting State.
The determination in subparagraph 3(b) is also made
separately for each item of income derived from the State of
source. It therefore is possible that a person would be
entitled to the benefits of the Convention with respect to one
item of income but not with respect to another. If a resident
of a Contracting State is entitled to treaty benefits with
respect to a particular item of income under paragraph 3, the
resident is entitled to all benefits of the Convention insofar
as they affect the taxation of that item of income in the State
of source.
The application of the substantiality requirement only to
income from related parties focuses only on potential abuse
cases, and does not hamper certain other kinds of non-abusive
activities, even though the income recipient resident in a
Contracting State may be very small in relation to the entity
generating income in the other Contracting State. For example,
if a small U.S. research firm develops a process that it
licenses to a very large, unrelated, pharmaceutical
manufacturer in Chile, the size of the U.S. research firm would
not have to be tested against the size of the manufacturer.
Similarly, a small U.S. bank that makes a loan to a very large
unrelated company operating a business in Chile would not have
to pass a substantiality test to receive treaty benefits under
paragraph 3.
Subparagraph 3(c) provides special attribution rules for
purposes of applying the substantive rules of subparagraphs
3(a) and 3(b). Thus, these rules apply for purposes of
determining whether a person meets the requirement in
subparagraph 3(a) that it be engaged in the active conduct of a
trade or business and that the item of income is derived in
connection with that active trade or business, and for making
the comparison required by the ``substantiality'' requirement
in subparagraph 3(b). Subparagraph (c) attributes to a person
activities conducted by persons ``connected'' to such person. A
person (``X'') is connected to another person (``Y'') if X
possesses 50 percent or more of the beneficial interest in Y
(or if Y possesses 50 percent or more of the beneficial
interest in X). For this purpose, X is connected to a company
if X owns shares representing 50 percent or more of the
aggregate voting power and value of the company or 50 percent
or more of the beneficial equity interest in the company. X
also is connected to Y if a third person possesses 50 percent
or more of the beneficial interest in both X and Y. For this
purpose, if X or Y is a company, the threshold relationship
with respect to such company or companies is 50 percent or more
of the aggregate voting power and value or 50 percent or more
of the beneficial equity interest. Finally, X is connected to Y
if, based upon all the facts and circumstances, X controls Y, Y
controls X, or X and Y are controlled by the same person or
persons.
Paragraph 4
Paragraph 4 provides that a resident of one of the States
that is not entitled to the benefits of the Convention as a
result of paragraph 2 or 3 still may be granted benefits under
the Convention at the discretion of the competent authority of
the State from which benefits are claimed. Under paragraph 4,
that competent authority will determine whether the
establishment, acquisition or maintenance of the person seeking
benefits under the Convention, or the conduct of such person's
operations, has or had as one of its principal purposes the
obtaining of benefits under the Convention. Benefits will not
be granted, however, solely because a company was established
prior to the effective date of a treaty or protocol. In that
case a company would still be required to establish to the
satisfaction of the competent authority clear non-tax business
reasons for its formation in a Contracting State, or that the
allowance of benefits would not otherwise be contrary to the
purposes of the treaty. Thus, persons that establish operations
in one of the States with a principal purpose of obtaining the
benefits of the Convention ordinarily will not be granted
relief under paragraph 4.
The competent authority's discretion is quite broad. It may
grant all of the benefits of the Convention to the taxpayer
making the request, or it may grant only certain benefits. For
instance, it may grant benefits only with respect to a
particular item of income in a manner similar to paragraph 4.
Further, the competent authority may establish conditions, such
as setting time limits on the duration of any relief granted.
For purposes of implementing paragraph 4, a taxpayer will
be permitted to present his case to the relevant competent
authority for an advance determination based on the facts. In
these circumstances, it is also expected that, if the competent
authority determines that benefits are to be allowed, they will
be allowed retroactively to the time of entry into force of the
relevant treaty provision or the establishment of the structure
in question, whichever is later.
Finally, there may be cases in which a resident of a
Contracting State may apply for discretionary relief to the
competent authority of his State of residence. This would
arise, for example, if the benefit the resident is claiming is
provided by the residence State, and not by the source State.
So, for example, if a company that is a resident of the United
States would like to claim the benefit of the re-sourcing rule
of paragraph 3 of Article 23, but it does not meet any of the
objective tests of this Article, it may apply to the U.S.
competent authority for discretionary relief.
Paragraph 5
Paragraph 5 deals with the treatment of income in the
context of a so-called ``triangular case.'' An example of a
triangular case would be a structure under which a resident of
Chile earns interest income from the United States. The
resident of Chile, who is assumed to qualify for benefits under
one or more of the provisions of this Article, sets up a
permanent establishment in a third jurisdiction that imposes
only a low rate of tax on the income of the permanent
establishment. The Chilean resident lends funds into the United
States through the permanent establishment. The permanent
establishment, despite its third-jurisdiction location, is an
integral part of a Chilean resident. Therefore, the income that
it earns on those loans, absent the provisions of paragraph 5,
is entitled to a reduced rate of withholding tax under the
Convention. Under a current Chilean income tax treaty with the
host jurisdiction of the permanent establishment, the income of
the permanent establishment is exempt from Chilean tax
(alternatively, Chile may choose to exempt the income of the
permanent establishment from Chilean income tax by statute). In
addition, the third jurisdiction may exempt the income of the
permanent establishment, for example by statute or ruling.
Thus, the interest income is exempt from U.S. tax, is subject
to little tax in the host jurisdiction of the permanent
establishment, and is exempt from Chilean tax.
Paragraph 5 applies reciprocally. However, the United
States does not exempt the profits of a third-jurisdiction
permanent establishment of a U.S. resident from U.S. tax,
either by statute or by treaty.
Paragraph 5 provides that the tax benefits that would
otherwise apply under the Convention will not apply to any item
of income if the combined tax actually paid in the residence
State and the third state is less than 60 percent of the tax
that would have been payable in the residence State if the
income were earned in that State by the enterprise and were not
attributable to the permanent establishment in the third state.
In the case of dividends, interest and royalties to which this
paragraph applies, the withholding tax rates under the
Convention are replaced with a 15 percent withholding tax. Any
other income to which the provisions of paragraph 5 apply is
subject to tax under the domestic law of the source State,
notwithstanding any other provisions of the Convention.
In general, the principles employed under Code section
954(b)(4) will be employed to determine whether the profits are
subject to an effective rate of taxation that is above the
specified threshold.
Notwithstanding the level of tax on interest and royalty
income of the permanent establishment, paragraph 5 will not
apply under certain circumstances. In the case of royalties,
paragraph 5 will not apply if the royalties are received as
compensation for the use of, or the right to use, intangible
property produced or developed by the permanent establishment
itself. In the case of any other income, paragraph 5 will not
apply if that income is derived in connection with, or is
incidental to, the active conduct of a trade or business
carried on by the permanent establishment in the third state.
The business of making, managing or simply holding investments
for the enterprise's own account is not considered to be an
active trade or business, unless these are banking or
securities activities carried on by a bank or registered
securities dealer.
Paragraph 6
Paragraph 6 defines several key terms for purposes of
Article 24. Each of the defined terms is discussed above in the
context in which it is used.
ARTICLE 25 (NON-DISCRIMINATION)
This Article ensures that nationals of a Contracting State,
in the case of paragraph 1, and residents of a Contracting
State, in the case of paragraphs 2 through 4, will not be
subject, directly or indirectly, to discriminatory taxation in
the other Contracting State. Not all differences in tax
treatment, either as between nationals of the two States, or
between residents of the two States, are violations of the
prohibition against discrimination. Rather, the non-
discrimination obligations of this Article apply only if the
nationals or residents of the two States are comparably
situated.
Each of the relevant paragraphs of the Article provides
that two persons that are comparably situated must be treated
similarly. Although the actual words differ from paragraph to
paragraph (e.g., paragraph 1 refers to two nationals ``in the
same circumstances,'' paragraph 2 refers to two enterprises
``carrying on the same activities'' and paragraph 4 refers to
two companies that are ``similar''), the common underlying
premise is that if the difference in treatment is directly
related to a tax-relevant difference in the situations of the
domestic and foreign persons being compared, that difference is
not to be treated as discriminatory (i.e., if one person is
taxable in a Contracting State on worldwide income and the
other is not, or tax may be collectible from one person at a
later stage, but not from the other, distinctions in treatment
would be justified under paragraph 1). Other examples of such
factors that can lead to non-discriminatory differences in
treatment are noted in the discussions of each paragraph.
The operative paragraphs of the Article also use different
language to identify the kinds of differences in taxation
treatment that will be considered discriminatory. For example,
paragraphs 1 and 4 refer to any taxation that is more
burdensome, while paragraph 2 specifies that a tax ``shall not
be less favorably levied.'' Regardless of these differences in
language, only differences in tax treatment that materially
disadvantage the foreign person relative to the domestic person
are properly the subject of the Article.
Paragraph 1
Paragraph 1 provides that a national of one Contracting
State may not be subject to taxation or connected requirements
in the other Contracting State that are other or more
burdensome than the taxes and connected requirements imposed
upon a national of that other State in the same circumstances.
The term ``national'' in relation to a Contracting State is
defined in subparagraph 1(i) of Article 3 (General
Definitions). The term includes both individuals and juridical
persons. A national of a Contracting State is afforded
protection under this paragraph even if the national is not a
resident of either Contracting State. Thus, a U.S. citizen who
is resident in a third country is entitled under this paragraph
to the same treatment in Chile as a national of Chile who is in
similar circumstances (i.e., presumably one who is resident in
a third State).
Paragraph 1 specifically states that a citizen or national
of a Contracting State who is not a resident of that
Contracting State and a citizen or national of the other
Contracting State who is not a resident of the first-mentioned
State are not in the same circumstances with respect to the tax
of that first-mentioned State. Thus, for example, the United
States is not obligated to apply the same taxing regime to a
national of Chile who is not resident in the United States as
it applies to a U.S. national who is not resident in the United
States. U.S. citizens who are not residents of the United
States but who are nevertheless subject to United States tax on
their worldwide income are not in the same circumstances with
respect to United States taxation as citizens of Chile who are
not United States residents. Accordingly, Article 25 would not
entitle a national of Chile resident in a third country to
taxation at graduated rates on U.S. source dividends or other
investment income that applies to a U.S. citizen resident in
the same third country.
Paragraph 2
Paragraph 2 of the Article provides that a Contracting
State may not tax a permanent establishment of an enterprise of
the other Contracting State less favorably than an enterprise
of that first-mentioned State that is carrying on the same
activities.
The fact that a U.S. permanent establishment of an
enterprise of Chile is subject to U.S. tax only on income that
is attributable to the permanent establishment, while a U.S.
corporation engaged in the same activities is taxable on its
worldwide income is not, in itself, a sufficient difference to
provide different treatment for the permanent establishment.
There are cases, however, where the two enterprises would not
be similarly situated and differences in treatment may be
warranted. For instance, it would not be a violation of the
non-discrimination protection of paragraph 2 to require the
foreign enterprise to provide information in a reasonable
manner that may be different from the information requirements
imposed on a resident enterprise, because information may not
be as readily available to the Internal Revenue Service from a
foreign as from a domestic enterprise. Similarly, it would not
be a violation of paragraph 2 to impose penalties on persons
who fail to comply with such a requirement (see, e.g., sections
874(a) and 882(c)(2)). Further, a determination that income and
expenses have been attributed or allocated to a permanent
establishment in conformity with the principles of Article 7
(Business Profits) implies that the attribution or allocation
was not discriminatory.
Code section 1446 imposes on any partnership with income
that is effectively connected with a U.S. trade or business the
obligation to withhold tax on amounts allocable to a foreign
partner. In the context of the Convention, this obligation
applies with respect to a share of the partnership income of a
partner resident in Chile, and attributable to a U.S. permanent
establishment. There is no similar obligation with respect to
the distributive shares of U.S. resident partners. It is
understood, however, that this distinction is not a form of
discrimination within the meaning of paragraph 2 of the
Article. No distinction is made between U.S. and non-U.S.
partnerships, since the law requires that partnerships of both
U.S. and non-U.S. domicile withhold tax in respect of the
partnership shares of non-U.S. partners. Furthermore, in
distinguishing between U.S. and non-U.S. partners, the
requirement to withhold on the non-U.S. but not the U.S.
partner's share is not discriminatory taxation, but, like other
withholding on nonresident aliens, is merely a reasonable
method for the collection of tax from persons who are not
continually present in the United States, and as to whom it
otherwise may be difficult for the United States to enforce its
tax jurisdiction. If tax has been over-withheld, the partner
can, as in other cases of over-withholding, file for a refund.
Paragraph 2 also makes clear that the provisions of
paragraphs 1 and 2 do not obligate a Contracting State to grant
to a resident of the other Contracting State any tax
allowances, reliefs, etc., that it grants to its own residents
on account of their civil status or family responsibilities.
Thus, if a sole proprietor who is a resident of Chile has a
permanent establishment in the United States, in assessing
income tax on the profits attributable to the permanent
establishment, the United States is not obligated to allow to
the resident of Chile the personal allowances for himself and
his family that he would be permitted to take if the permanent
establishment were a sole proprietorship owned and operated by
a U.S. resident, despite the fact that the individual income
tax rates would apply.
Paragraph 3
Paragraph 3 prohibits discrimination in the allowance of
deductions. When a resident or an enterprise of a Contracting
State pays interest, royalties or other disbursements to a
resident of the other Contracting State, the first-mentioned
Contracting State must allow a deduction for those payments in
computing the taxable profits of the resident or enterprise as
if the payment had been made under the same conditions to a
resident of the first-mentioned Contracting State. Paragraph 3,
however, does not require a Contracting State to give
nonresidents more favorable treatment than it gives to its own
residents. Consequently, a Contracting State does not have to
allow nonresidents a deduction for items that are not
deductible under its domestic law (for example, expenses of a
capital nature).
The term ``other disbursements'' is understood to include a
reasonable allocation of executive and general administrative
expenses, research and development expenses, and other expenses
incurred for the benefit of a group of related persons that
includes the person incurring the expense.
An exception to the rule of paragraph 3 is provided for
cases where the provisions of paragraph 1 of Article 9
(Associated Enterprises), paragraph 8 of Article 11 (Interest)
or pararaph 6 of Article 12 (Royalties) apply. All of these
provisions permit the denial of deductions in certain
circumstances in respect of transactions between related
persons. Neither State is forced to apply the non-
discrimination principle in such cases. The exception with
respect to paragraph 8 of Article 11 would include the denial
or deferral of certain interest deductions under Code section
163(j).
Paragraph 3 also provides that any debts of an enterprise
of a Contracting State to a resident of the other Contracting
State are deductible in the first-mentioned Contracting State
for purposes of computing the capital tax of the enterprise
under the same conditions as if the debt had been contracted to
a resident of the first-mentioned Contracting State. This
provision is relevant for both States as the Convention covers
taxes on income and capital, and under paragraph 6 of this
Article, the nondiscrimination provisions apply to all taxes
levied in both Contracting States at all levels of government.
In the United States such taxes frequently are imposed by local
governments and the same may be true in the case of Chile.
Paragraph 4
Paragraph 4 requires that a Contracting State not impose
more burdensome taxation on a company that is a resident of
that State the capital of which is wholly or partly owned or
controlled, directly or indirectly, by one or more residents of
the other Contracting State than the taxation that it imposes
or may impose on other similar companies of that first-
mentioned Contracting State. For this purpose it is understood
that ``similar'' refers to similar activities or ownership of
the company.
This rule, like all non-discrimination provisions, does not
prohibit differing treatment of entities that are in differing
circumstances. Rather, a protected enterprise is only required
to be treated in the same manner as other enterprises that,
from the point of view of the application of the tax law, are
in substantially similar circumstances both in law and in fact.
The taxation of a distributing corporation under section 367(e)
on an applicable distribution to foreign shareholders does not
violate paragraph 4 of the Article because a foreign-owned
corporation is not similar to a domestically-owned corporation
that is accorded non-recognition treatment under sections 337
and 355.
For the reasons given above in connection with the
discussion of paragraph 2 of the Article, it is also understood
that the provision in Code section 1446 for withholding of tax
on non-U.S. partners does not violate paragraph 4 of the
Article.
It is further understood that the ineligibility of a U.S.
corporation with nonresident alien shareholders to make an
election to be an ``S'' corporation does not violate paragraph
4 of the Article. If a corporation elects to be an S
corporation, it is generally not subject to income tax and the
shareholders take into account their pro rata shares of the
corporation's items of income, loss, deduction or credit. A
nonresident alien does not pay U.S. tax on a net basis, and,
thus, does not generally take into account items of loss,
deduction or credit. Thus, the S corporation provisions do not
exclude corporations with nonresident alien shareholders
because such shareholders are foreign, but only because they
are not net-basis taxpayers. Similarly, the provisions exclude
corporations with other types of shareholders where the purpose
of the provisions cannot be fulfilled or their mechanics
implemented. For example, corporations with corporate
shareholders are excluded because the purpose of the provision
to permit individuals to conduct a business in corporate form
at individual tax rates would not be furthered by their
inclusion.
Finally, it is understood that paragraph 4 does not require
a Contracting State to allow foreign corporations to join in
filing a consolidated return with a domestic corporation or to
allow similar benefits between domestic and foreign
enterprises.
Paragraph 5
Paragraph 5 of the Article confirms that no provision of
the Article will prevent either Contracting State from imposing
the branch profits tax described in paragraph 7 of Article 10
(Dividends) or the branch level interest tax described in
paragraph 10 of Article 11 (Interest).
Paragraph 6
As noted above, notwithstanding the specification of taxes
covered by the Convention in Article 2 (Taxes Covered) for
general purposes, for purposes of providing nondiscrimination
protection this Article applies to taxes of every kind and
description imposed by a Contracting State or a political
subdivision or local authority thereof. However, in the case of
taxes not covered by the Convention, the provisions of this
Article shall not apply to any taxation laws of a Contracting
State that were in force on February 4, 2010, the date of
signature of the Convention. Customs duties are not considered
to be taxes for purposes of this Article.
Relationship to Other Articles
The saving clause of paragraph 4 of the Protocol does not
apply to this Article by virtue of the exception for Article 25
in that paragraph. Thus, for example, a U.S. citizen who is a
resident of Chile may claim benefits in the United States under
this Article.
Nationals of a Contracting State may claim the benefits of
paragraph 1 regardless of whether they are entitled to benefits
under Article 24 (Limitation on Benefits), because that
paragraph applies to nationals and not residents. They may not
claim the benefits of the other paragraphs of this Article with
respect to an item of income unless they are generally entitled
to treaty benefits with respect to that income under a
provision of Article 24.
ARTICLE 26 (MUTUAL AGREEMENT PROCEDURE)
This Article provides the mechanism for taxpayers to bring
to the attention of competent authorities issues and problems
that may arise under the Convention. It also provides the
authority for cooperation between the competent authorities of
the Contracting States to resolve disputes and clarify issues
that may arise under the Convention and to resolve cases of
double taxation not provided for in the Convention. The
competent authorities of the two Contracting States are
identified in subparagraph 1(h) of Article 3 (General
Definitions).
Paragraph 1
This paragraph provides that, where a resident of a
Contracting State considers that the actions of one or both
Contracting States will result in taxation that is not in
accordance with the Convention, he may present his case to the
competent authority of the Contracting State of which he is
resident, or, if his case comes under paragraph 1 of Article 25
(Non-Discrimination), to the competent authority of the State
of which he is a national.
Although the most common cases brought under this paragraph
will involve economic double taxation arising from transfer
pricing adjustments, the scope of this paragraph is not limited
to such cases. For example, a taxpayer could request assistance
from the competent authority if one Contracting State
determines that the taxpayer has received deferred compensation
taxable at source under Article 15 (Dependent Personal
Services), while the taxpayer believes that such income should
be treated as a pension that is taxable only in his country of
residence pursuant to Article 18 (Pensions, Social Security,
Alimony and Child Support).
It is not necessary for a person requesting assistance
first to have exhausted the remedies provided under the
national laws of the Contracting States before presenting a
case to the competent authorities, nor does the fact that the
statute of limitations may have passed for seeking a refund
preclude bringing a case to the competent authority. The case
must be presented within three years from the first
notification of the action resulting in taxation not in
accordance with the provisions of the Convention.
Paragraph 2
Paragraph 2 sets out the framework within which the
competent authorities will deal with cases brought by taxpayers
under paragraph 1. It provides that, if the competent authority
of the Contracting State to which the case is presented judges
the case to have merit and cannot reach a unilateral solution,
it shall seek an agreement with the competent authority of the
other Contracting State pursuant to which taxation not in
accordance with the Convention will be avoided.
Any agreement is to be implemented even if such
implementation otherwise would be barred by the statute of
limitations or by some other procedural limitation, such as a
closing agreement. Paragraph 2, however, does not prevent the
application of domestic-law procedural limitations that give
effect to the agreement (e.g., a domestic-law requirement that
the taxpayer file a return reflecting the agreement within one
year of the date of the agreement).
Where the taxpayer has entered a closing agreement (or
other written settlement) with the United States before
bringing a case to the competent authorities, the U.S.
competent authority will endeavor only to obtain a correlative
adjustment from Chile. See Rev. Proc. 2006-54, 2006-49 I.R.B.
1035, Sec. 7.05. Because, as specified in paragraph 2 of the
Protocol, the Convention cannot operate to increase a
taxpayer's liability, temporal or other procedural limitations
can be overridden only for the purpose of making refunds and
not to impose additional tax.
Paragraph 3
Paragraph 3 authorizes the competent authorities to resolve
by mutual agreement any difficulties or doubts that may arise
as to the application or interpretation of the Convention.
The competent authorities may, for example, agree to the
same allocation of income, deductions, credits or allowances
between an enterprise in one Contracting State and its
permanent establishment in the other or between related
persons. These allocations are to be made in accordance with
the arm's length principle underlying Article 7 (Business
Profits) and Article 9 (Associated Enterprises). Agreements
reached under Article 26 may include agreement on a methodology
for determining an appropriate transfer price, on an acceptable
range of results under that methodology, or on a common
treatment of a taxpayer's cost sharing arrangement.
The competent authorities also may agree to settle a
variety of conflicting applications of the Convention. They may
agree to settle conflicts regarding the characterization of
particular items of income, the characterization of persons,
the application of source rules to particular items of income,
the meaning of a term, or the timing of an item of income.
The competent authorities also may agree as to advance
pricing arrangements. They also may agree as to the application
of the provisions of domestic law regarding penalties, fines,
and interest in a manner consistent with the purposes of the
Convention.
The competent authorities may also, for example, seek
agreement on a uniform set of standards for the use of exchange
rates. Agreements reached by the competent authorities under
paragraph 3 need not conform to the internal law provisions of
either Contracting State.
Paragraph 4
Paragraph 4 provides that the competent authorities may
communicate with each other for the purpose of reaching an
agreement. This makes clear that the competent authorities of
the two Contracting States may communicate without going
through diplomatic channels. Such communication may be in
various forms, including, where appropriate, through face-to-
face meetings of representatives of the competent authorities.
Paragraph 6 of the 2010 Exchange of Notes
The competent authorities, through consultations, shall
develop appropriate bilateral procedures, conditions, methods,
and techniques for the implementation of the mutual agreement
procedure provided in Article 26. Each competent authority may,
in addition, develop unilateral procedures to facilitate the
bilateral implementation of the mutual agreement procedure. For
guidance in developing such bilateral implementation, the
competent authorities will refer to the Best Practices
identified in the OECD Manual on Effective Mutual Agreement
Procedures.
Treaty termination in relation to competent authority dispute
resolution
A case may be raised by a taxpayer after the Convention has
been terminated with respect to a year for which a treaty was
in force. In such a case the ability of the competent
authorities to act is limited. They may not exchange
confidential information, nor may they reach a solution that
varies from that specified in its law.
Triangular competent authority solutions
International tax cases may involve more than two taxing
jurisdictions (e.g., transactions among a parent corporation
resident in country A and its subsidiaries resident in
countries B and C). As long as there is a complete network of
treaties among the three countries, it should be possible,
under the full combination of bilateral authorities, for the
competent authorities of the three States to work together on a
three-sided solution. Although country A may not be able to
give information received under Article 27 (Exchange of
Information) from country B to the authorities of country C, if
the competent authorities of the three countries are working
together, it should not be a problem for them to arrange for
the authorities of country B to give the necessary information
directly to the tax authorities of country C, as well as to
those of country A. Each bilateral part of the trilateral
solution must, of course, not exceed the scope of the authority
of the competent authorities under the relevant bilateral
treaty.
Relationship to Other Articles
This Article is not subject to the saving clause of
paragraph 4 of the Protocol by virtue of the exception in
subparagraph 4(a) of the Protocol. Thus, rules, definitions,
procedures, etc., that are agreed upon by the competent
authorities under this Article may be applied by the United
States with respect to its citizens and residents even if they
differ from the comparable Code provisions. Similarly, as
indicated above, U.S. law may be overridden to provide refunds
of tax to a U.S. citizen or resident under this Article. A
person may seek relief under Article 26 regardless of whether
he is generally entitled to benefits under Article 24
(Limitation on Benefits). As in all other cases, the competent
authority is vested with the discretion to decide whether the
claim for relief is justified.
ARTICLE 27 (EXCHANGE OF INFORMATION)
This Article provides for the exchange of information
between the competent authorities of the Contracting States.
Paragraph 1
The obligation to obtain and provide information to the
other Contracting State is set out in paragraph 1. The
information to be exchanged is that which is foreseeably
relevant for carrying out the provisions of the Convention or
the domestic laws of the United States or Chile concerning
taxes of every kind applied at the national level. This
language is consistent with the standard of the U.S. and OECD
Models. The parties intend for the phrase ``is foreseeably
relevant'' to be interpreted to permit the exchange of
information that ``may be relevant'' for purposes of Code
section 7602, which authorizes the IRS to examine ``any books,
papers, records, or other data which may be relevant or
material'' (emphasis added). In United States v. Arthur Young &
Co., 465 U.S. 805, 814 (1984), the Supreme Court stated that
the language ``may be'' reflects Congress's express intention
to allow the IRS to obtain ``items of even potential relevance
to an ongoing investigation, without reference to its
admissibility.'' However, the language ``may be'' would not
support a request in which a Contracting State simply asked for
information regarding all bank accounts maintained by residents
of that Contracting State in the other Contracting State. Thus,
the language of paragraph 1 is intended to provide for the
exchange of information in tax matters to the widest extent
possible, while clarifying that Contracting States are not at
liberty to engage in ``fishing expeditions'' or otherwise to
request information that is unlikely to be relevant to the tax
affairs of a given taxpayer.
Exchange of information with respect to each State's
domestic law is authorized to the extent that taxation under
domestic law is not contrary to the Convention. Thus, for
example, information may be exchanged with respect to a covered
tax, even if the transaction to which the information relates
is a purely domestic transaction in the requesting State and,
therefore, the exchange is not made to carry out the
Convention. An example of such a case is provided in paragraph
8(b) of the OECD Commentary: a company resident in one
Contracting State and a company resident in the other
Contracting State transact business between themselves through
a third-country resident company. Neither Contracting State has
a treaty with the third State. To enforce their internal laws
with respect to transactions of their residents with the third-
country company (since there is no relevant treaty in force),
the Contracting States may exchange information regarding the
prices that their residents paid in their transactions with the
third-country resident.
Paragraph 1 clarifies that information may be exchanged
that relates 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.
Thus, the competent authorities may request and provide
information for cases under examination or criminal
investigation, in collection, on appeals, or under prosecution.
The taxes covered by the Convention for purposes of this
Article constitute a broader category of taxes than those
referred to in Article 2 (Taxes Covered). Exchange of
information is authorized with respect to taxes of every kind
imposed by a Contracting State at the national level.
Accordingly, information may be exchanged with respect to U.S.
estate and gift taxes and excise taxes.
Information exchange is not restricted by paragraph 1 of
Article 1 (General Scope). Accordingly, information may be
requested and provided under Article 27 with respect to persons
who are not residents of either Contracting State. For example,
if a third-country resident has a permanent establishment in
Chile, and that permanent establishment engages in transactions
with a U.S. enterprise, the United States could request
information with respect to that permanent establishment, even
though the third-country resident is not a resident of either
Contracting State. Similarly, if a third-country resident
maintains a bank account in Chile, and the Internal Revenue
Service has reason to believe that funds in that account should
have been reported for U.S. tax purposes but have not been so
reported, information can be requested from Chile with respect
to that person's account, even though that person is not the
taxpayer under examination.
Although the term ``United States'' does not encompass U.S.
possessions for most purposes of the Convention, Code section
7651 authorizes the Internal Revenue Service to utilize the
provisions of the Code to obtain information from the U.S.
possessions pursuant to a proper request made under Article 27.
If necessary to obtain requested information, the Internal
Revenue Service could issue and enforce an administrative
summons to the taxpayer, a tax authority (or a government
agency in a U.S. possession), or a third party located in a
U.S. possession.
Paragraph 2
Paragraph 2 provides assurances that any information
exchanged will be treated as secret, subject to the same
disclosure constraints as information obtained under the laws
of the requesting State. Information received may 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 the of appeals in relation to, the
taxes covered by the Convention. The information must be used
by these persons in connection with the specified functions.
Information may also be disclosed to legislative bodies, such
as the tax-writing committees of Congress and the Government
Accountability Office, engaged in the oversight of the
preceding activities. Information received by these bodies must
be for use in the performance of their role in overseeing the
administration of U.S. tax laws. Information received may be
disclosed in public court proceedings or in judicial decisions.
Paragraph 3
Paragraph 3 provides that the obligations undertaken in
paragraphs 1 and 2 to exchange information do not require a
Contracting State to carry out administrative measures that are
at variance with the laws or administrative practice of either
State. Nor is a Contracting State required to supply
information not obtainable under the laws or administrative
practice of either State, or to disclose trade secrets or other
information, the disclosure of which would be contrary to
public policy.
Thus, a requesting State may be denied information from the
other State if the information would be obtained pursuant to
procedures or measures that are broader than those available in
the requesting State. However, the statute of limitations of
the Contracting State making the request for information should
govern a request for information. Thus, the Contracting State
of which the request is made should attempt to obtain the
information even if its own statute of limitations has passed.
In many cases, relevant information will still exist in the
business records of the taxpayer or a third party, even though
it is no longer required to be kept for domestic tax purposes.
While paragraph 3 states conditions under which a
Contracting State is not obligated to comply with a request
from the other Contracting State for information, the requested
State is not precluded from providing such information, and
may, at its discretion, do so subject to the limitations of its
domestic law.
Paragraph 4
Paragraph 4 provides that when information is requested by
a Contracting State in accordance with this Article, the other
Contracting State is obligated to obtain the requested
information as if the tax in question were the tax of the
requested State, even if that State has no direct tax interest
in the case to which the request relates. In the absence of
such a paragraph, some taxpayers have argued that subparagraph
3(a) prevents a Contracting State from requesting information
from a bank or fiduciary that the Contracting State does not
need for its own tax purposes. This paragraph clarifies that
paragraph 3 does not impose such a restriction and that a
Contracting State is not limited to providing only the
information that it already has in its own files.
Paragraph 5
Paragraph 5 provides that a Contracting State may not
decline to provide information because that information is held
by a bank, other financial institution, nominee or person
acting in an agency or fiduciary capacity or because it related
to ownership interests in a person. Thus, paragraph 5 would
effectively prevent a Contracting State from relying on
paragraph 3 to argue that its domestic bank secrecy laws (or
similar legislation relating to the disclosure of financial
information by financial institutions or intermediaries)
override its obligation to provide information under paragraph
1. This paragraph also requires the disclosure of information
regarding the beneficial owner of an interest in a person, such
as the identity of a beneficial owner of bearer shares.
Paragraph 6
Paragraph 6 provides that the requesting State may specify
the form in which information is to be provided (e.g.,
depositions of witnesses and authenticated copies of unedited
original documents). The intention is to ensure that the
information may be introduced as evidence in the judicial
proceedings of the requesting State. The requested State shall
provide the information in the form requested to the same
extent that it can obtain information in that form under its
own laws and administrative practices with respect to its own
taxes.
Paragraph 7
Paragraph 7 states that the competent authorities of the
Contracting States will consult with each other for the purpose
of cooperating and advising in respect of any action to be
taken in implementing this Article. For example, the competent
authorities may develop an agreement upon the mode of
application of the Article, and may also agree on specific
procedures and timetables for the exchange of information. In
particular, the competent authorities may agree on minimum
thresholds regarding tax at stake or take other measures aimed
at ensuring some measure of reciprocity with respect to the
overall exchange of information between the Contracting States.
Paragraph 7 of the 2010 Exchange of Notes
With regard to on-site interviews and examinations of books
and records, paragraph 7 of the 2010 Exchange of Notes provides
that the applicant State will notify the requested State when
the applicant State has obtained the consent of persons to be
interviewed by officials of the applicant State or for such
officials to examine books and records in the possession or
control of such consenting persons. Following such interview or
examination of books and records, the applicant State may
request information or documents related to such interview or
examination under Article 27.
Treaty effective dates and termination in relation to exchange of
information
Under paragraph 3 of Article 29 (Entry into Force), Article
27 will be effective from the date of entry into force, and,
the competent authority may seek information under the
Convention without regard to the taxable period to which the
matter relates, i.e., such period may be prior to the date of
entry into force of the Convention. However, paragraph 20 of
the Protocol, as amended by the 2012 Exchange of Notes,
provides that, notwithstanding paragraph 3 of Article 29,
information covered by paragraph 5 of Article 27, to the extent
such information is covered by Article 1 of DFL No. 707 and
Article 154 of DFL No. 3 of Chile, shall be available only with
respect to bank account transactions that take place on or
after January 1, 2010. Other bank information such as signature
cards and other account opening documents may be exchanged
without regard to the time they were created.
A tax administration may also seek information with respect
to a year for which the Convention was in force after the
Convention has been terminated. In such a case, the ability of
the other tax administration to act is limited. The Convention
no longer provides authority for the tax administrations to
exchange confidential information. They may only exchange
information pursuant to domestic law or other international
agreement or arrangement.
ARTICLE 28 (MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS)
This Article confirms that any fiscal privileges to which
diplomatic or consular officials are entitled under general
provisions of international law or under special agreements
will apply notwithstanding any provisions to the contrary in
the Convention. The agreements referred to include any
bilateral agreements, such as consular conventions, that affect
the taxation of diplomats and consular officials and any
multilateral agreements dealing with these issues, such as the
Vienna Convention on Diplomatic Relations and the Vienna
Convention on Consular Relations. The United States generally
adheres to the latter because its terms are consistent with
customary international law.
The Article does not independently provide any benefits to
diplomatic agents and consular officers. Article 19 (Government
Service) does so, as do Code section 893 and a number of
bilateral and multilateral agreements. In the event that there
is a conflict between the Convention and international law or
such other treaties, under which the diplomatic agent or
consular official is entitled to greater benefits under the
latter, the latter laws or agreements shall have precedence.
Conversely, if the Convention confers a greater benefit than
another agreement, the affected person could claim the benefit
of the tax treaty.
Pursuant to subparagraph 4(b) of the Protocol, the saving
clause of paragraph 4 of the Protocol does not apply to
override any benefits of this Article available to an
individual who neither is a U.S. citizen nor has been admitted
for permanent residence in the United States.
ARTICLE 29 (ENTRY INTO FORCE)
This Article contains the rules for bringing the Convention
into force and giving effect to its provisions.
Paragraph 1
Paragraph 1 provides for the ratification of the Convention
by both Contracting States according to their constitutional
and statutory requirements. The Contracting States will notify
each other in writing, through diplomatic channels, when their
respective applicable procedures have been satisfied.
In the United States, the process leading to ratification
and entry into force is as follows: Once a treaty has been
signed by authorized representatives of the two Contracting
States, the Department of State sends the treaty to the
President who formally transmits it to the Senate for its
advice and consent to ratification, which requires approval by
two-thirds of the Senators present and voting. Prior to this
vote, however, it generally has been the practice for the
Senate Committee on Foreign Relations to hold hearings on the
treaty and make a recommendation regarding its approval to the
full Senate. Both Government and private sector witnesses may
testify at these hearings. After the Senate gives its advice
and consent to ratification of the treaty, an instrument of
ratification is drafted for the President's signature. The
President's signature completes the process in the United
States.
Paragraph 2
The first sentence of paragraph 2 provides that the
Convention will enter into force on the date of the later of
the notifications referred to in paragraph 1. The relevant date
is the date on the second of these notification documents, and
not the date on which the second notification is provided to
the other Contracting State.
The date on which a treaty enters into force is not
necessarily the date on which its provisions take effect.
Paragraph 2, therefore, also contains rules that determine when
the provisions of the treaty will have effect.
Under subparagraph 2(a), the Convention will have effect
with respect to taxes withheld at source, for amounts paid or
credited on or after the first day of the second month
following the date on which the Convention enters into force.
For example, if the date of the second of the notification
documents referred to in paragraph 1 is April 25 of a given
year, the withholding rates specified in paragraph 2 of Article
10 (Dividends) would be applicable to any dividends paid or
credited on or after June 1 of that year. This rule allows the
benefits of the withholding reductions to be put into effect as
soon as possible, without waiting until the following year. The
delay of one to two months is required to allow sufficient time
for withholding agents to be informed about the change in
withholding rates. If for some reason a withholding agent
withholds at a higher rate than that provided by the Convention
(perhaps because it was not able to re-program its computers
before the payment is made), a beneficial owner of the income
that is a resident of the other Contracting State may make a
claim for refund pursuant to Code section 1464.
For all other taxes, subparagraph 2(b) specifies that the
Convention will have effect for any taxable period beginning on
or after January 1 of the calendar year immediately following
the date on which the Convention enters into force.
Paragraph 3
As discussed under Article 27 (Exchange of Information),
the powers afforded the competent authority under that Article
apply from the date of entry into force of the Convention,
regardless of the taxable period to which the matter relates.
Paragraph 20 of the Protocol, as amended by the 2012 Exchange
of Notes, provides that notwithstanding paragraph 3 of Article
29, information covered by paragraph 5 of Article 27, to the
extent that such information is covered by Article 1 of DFL No.
707 and Article 154 of DFL No. 3 of Chile, shall be available
only with respect to bank account transactions that take place
on or after January 1, 2010. Other bank information such as
signature cards and other account opening documents may be
exchanged without regard to the time they were created.
ARTICLE 30 (TERMINATION)
Paragraph 1 provides that the Convention is to remain in
effect indefinitely, unless terminated by one of the
Contracting States in accordance with the provisions of Article
30. Either State may terminate the Convention by giving to the
other State a notice of termination in writing through
diplomatic channels on or before the thirtieth day of June in
any calendar year beginning after the year in which the
Convention enters into force. Under subparagraph 2(a), if
notice of termination is so given, the provisions of the
Convention with respect to taxes withheld at source will cease
to have effect for amounts paid or credited on or after January
1 of the calendar year immediately following the date on which
such notice is given. Under subparagraph 2(b), with respect to
other taxes, the Convention will cease to have effect for
taxable periods beginning on or after January 1 of the calendar
year immediately following the date on which such notice is
given. Under subparagraph 2(c), with respect to provisions of
the Convention not covered by subparagraph 2(a) or 2(b), the
Convention will cease to have effect on January 1 of the
calendar year immediately following the date on which the
notice is given.
Article 30 relates only to unilateral termination of the
Convention by a Contracting State. Nothing in that Article
should be construed as preventing the Contracting States from
concluding a new bilateral agreement, subject to ratification,
that supersedes, amends or terminates provisions of the
Convention without the six-month notification period.
Customary international law observed by the United States
and other countries, as reflected in the Vienna Convention on
Treaties, allows termination by one Contracting State at any
time in the event of a ``material breach'' of the agreement by
the other Contracting State.
OTHER
Paragraph 21 of the Protocol
Paragraph 21 of the Protocol provides a rule regarding the
taxation by Chile of certain remittances from pooled investment
accounts (such as those established under the Foreign Capital
Investment Fund Law No. 18.657, as it may be amended from time
to time without changing the general principles thereof).
Nothing in the Convention shall restrict the imposition by
Chile of tax on remittances from such funds if the fund is
required to be administered by a resident of Chile, although
the imposition of remittance tax is only permitted in respect
of investment in assets situated in Chile. The current tax
imposed by Chile on remittances from such funds is 10 percent.
Paragraph 22 of the Protocol
Paragraph 22 of the Protocol provides that the United
States and Chile will consult together regarding the terms,
operation and application of the Convention to ensure that it
continues to serve the purposes of avoiding double taxation and
preventing fiscal evasion. Either Contracting State may at any
time request that such consultations be conducted expeditiously
on matters relating to the terms, operation and application of
the Convention which it considers require urgent resolution.
The first such consultation in any event will take place within
five years of the date on which the Convention enters into
force. The Protocol also provides that the United States and
Chile will conclude further protocols to amend the Convention,
if appropriate. In addition, as explained earlier, paragraph 22
of the Protocol provides that if Chile concludes an income tax
treaty with another state that imposes a withholding rate
limitation on payments of interest or royalties lower than the
limits imposed under paragraph 2 of Article 11 (Interest) or
paragraph 2 of Article 12 (Royalties) or that contains terms
that further limit the right of the source State to tax capital
gains under Article 13 (Capital Gains), the United States and
Chile will, at the request of the United States, consult to
reassess the balance of benefits of the Convention with a view
to concluding a protocol to incorporate such lower rates or
limiting terms into the Convention.