The U.S. and Chile Tax Treaty and its Impact on Foreign Direct Investment

The tax treaty signed between Chile and the United States will reduce withholding rates applicable to interest, royalties, and capital gains and will exempt certain income derived from pension funds, services, and business profits not attributable to permanent establishments. This Article concludes that the exemption and reduction of withholding taxes may have a positive impact on Chilean foreign direct investment (“FDI”) in the United States since Chilean investors and pension funds will benefit from this exemption or reduction and from the fact that a broader type of investment income (interest, capital gains, and services) will be available for tax credits under the Chilean Income Tax Law. However, it is not altogether clear whether the loss of revenues from the reduction of taxes applied to income accrued by U.S. residents in Chile will be rewarded with greater FDI from the United States in Chile. This conclusion is mainly based on the fact that unless the U.S. investor has an excess tax credit position, such reduction will be offset by the higher U.S. corporate income tax on the income.

Furthermore, the loss of revenues can be especially relevant for Chile as a result of applying the most favored nation clause included in several tax treaties signed with other Organisation for Economic Co-operation and Development (“OECD”) members.