This content is from: Chile

Chilean IRS interpretation of Article 12 of Chilean double tax treaties

Over the years, the Chilean IRS has issued a number of rulings on how to apply Article 12 (royalties) of double tax agreements (DTAs). These have been particularly in regard to the taxation over payments made from Chile to overseas countries for distribution rights, and their characterisation as intangible property.

Indeed, the Chilean tax authority, in Rulings No. 606 of 2015 and No. 2494 of 2016, referred to the application of Article 7 and Article 12 of the Chile–Spain DTA as a distribution agreement. Following the commentaries on Article 12 of the OECD Model Tax Convention, the taxpayer interpreted that payments for distribution rights should not fall within the scope of Article 12, but instead should fall under Article 7, since they would not be made for the use of, or the right to use, an element that was included in the definition of 'royalty' in Article 12.

However, the tax authority did not agree with this interpretation. Instead it declared that payments would consitute a royalty under Article 12 of the DTA, based on the fact that Spain made a special reservation, under which it stated that it did not concur with the interpretation that distribution rights for software should be deemed business profits.

Furthermore, the Chilean IRS ruled that, even if such a reservation did not exist, payments for the distribution of software should be deemed royalties, as Chilean DTAs do not follow the OECD Model Tax Convention, given that they include under the royalty definition the expression: "or other intangible property". The tax authority's understanding is that this phrase was expressly included in order to broaden the application of Article 12 to any kind of intangible asset. Based on this difference, the Chilean IRS, in this case, seems not to follow the commentaries issued by the OECD to the MTC.

These criteria were further confirmed through Rulings No. 124 and No. 125 of 2018, where the Chilean IRS insisted that payments for distribution rights on software and on a television channel, should fall within the scope of Article 12, because they would constitute "other intangible property".

Even though these criteria are highly debatable, it cannot be ignored that the Chilean IRS seems to have a formal position on the taxation that should be applicable to distribution rights at least for DTA purposes. However, from a domestic law perspective, and particularly as regards software, there are still some exemptions that could be explored.

Given the above, it is quite important that companies operating in Chile under any kind of distribution structures take into account the Chilean IRS's position on the application of Article 12, as this could potentially imply that withholding taxes could be applied in Chile. It is also crucial that a thorough review of the relevant agreements and licences is performed, to further confirm the tax treatment from a domestic law perspective, especially to determine whether some exemptions available on software could be applied.


Santiago Lopez ( and Nicolas Foppiano (
PwC Chile

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