Chile: Applicability of the beneficial owner concept for dividends in Chile
Germán Campos Kennett
Fuenzalida Del Favero
Double tax treaties (DTT) that follow the OECD's Model Tax Convention normally include the concept of 'beneficial owner' to determine the true owner of dividends, interests and royalties in order to apply special tax rates provided under such treaties.
However, considering Chile's special tax system –a fully integrated system– the application of the so-called 'Chile Clause', and according to the Chilean IRS' interpretation, the beneficial ownership treatment contained in DTTs is only applicable to interests and royalties yet not to dividends. Hence, neither the special tax rates contained in article 10 (for dividends) of most of these conventions nor the concept of 'beneficial owner' are applicable in Chile. In other words, according to the Chilean IRS, from a Chilean Income Tax Law's perspective, the concept of beneficial owner lacks importance in respect to dividends.
Notwithstanding the above, a recent tax reform introduced the concept of beneficial ownership into the Income Tax Law, which would be applicable to dividends in a very specific scenario. In fact, article 41 C N0. 1 of the Chilean Income Tax Law states that when a taxpayer resident in Chile receives foreign dividends, it will have full credit against the corporate income tax for the taxes paid abroad when the income comes from a country that has signed a DTT with Chile, unless the beneficial owner of this income is a foreign entity or individual. In the latter case, to be eligible to benefit from a full imputation of credit for foreign income received by the Chilean taxpayer, the foreign beneficial owner of said income must be a resident in a country that also has a DTT with Chile; otherwise the final recipient of the income will not have the right to credit the income taxes paid abroad in that third country.
This tax reform sought to promote foreign investments, mainly between countries with which Chile had signed a convention to avoid double taxation, giving the opportunity to have the right to credit in Chile all the foreign income taxes paid, up to a maximum percentage of 'tax credit', that is, 35% of the net foreign income. Thus, the ultimate goal of said tax reform was to promote the use of Chile as an investment platform.
If the taxpayer is not the beneficial owner of the income, or if the other requirements established by article 41 C are not met, the sanction determined will consist in a prohibition for the foreign taxpayer to benefit from the full credit. If the Chilean entity withholds a lower amount due to the non-compliance of such requirements, then this entity shall pay and declare on behalf of the foreign shareholder the credit granted incorrectly.
Therefore, the concept of beneficial owner regarding dividends takes on importance once more in Chilean legislation in determining whether a non-Chilean resident could benefit from a full tax credit, as well as to avoid the sanctions described.