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Chile-Canada-Mexico

5 November 2021

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Chile Issues Circular on Activation of Interest MFN Clauses for Interest in Tax Treaties with Canada and Mexico

The Chilean tax authority (Servicio de Impuestos Internos - SII) has published Circular No. 59 of 22 October 2021 on the application of the MFN clause in Chile's 1998 tax treaties with Canada and Mexico, considering Chile's 2016 tax treaty with Japan. The Chile-Japan tax treaty entered into force on 1 January 2017, including a general withholding tax rate of 15% on interest, with lower rates in certain cases, as well as a scheduled reduction in the general rate to 10% from 1 January 2019. Given that the MFN clauses in Chile's tax treaties with Canada and Mexico were already triggered by Chile's 2003 tax treaty with Spain from 1 January 2004, Circular No. 59 concerns the scheduled reduction in the general rate to 10% from 1 January 2019. The main points regarding each treaty are summarized as follows:

1998 Chile-Canada Tax Treaty

The MFN clause in the 1998 tax treaty with Canada provides that if Chile signs an agreement with an OECD member country that provides for a withholding tax rate that is less than 15% for interest and royalties, but not less than 10%, then such lower rate shall apply automatically. The MFN clause was triggered by Chile's 2003 tax treaty with Spain from 1 January 2004, providing for a 10% withholding tax rate on interest from loans granted by banks and insurance companies; bonds and securities that are regularly and substantially traded on a recognized stock exchange; and the sale on credit of machinery and equipment. Otherwise, the rate is 15%. Further, the withholding tax rate on royalties was reduced to 10%.

Considering Chile's 2016 tax treaty with Japan, the withholding tax rate on interest in general under the Chile-Canada tax treaty is further reduced to 10% with effect from 1 January 2019. It is also noted that the Chile-Japan tax treaty does not impact withholding tax on royalties under the Chile-Canada tax treaty because the rate was already reduced to 10% due to the Chile-Spain treaty, which is the minimum rate allowed under the MFN clause.

1998 Chile-Mexico Tax treaty

The MFN clause in the 1998 tax treaty with Mexico provides that if Chile signs an agreement with another country that provides for a lower withholding tax rate on interest, then such lower rate shall apply automatically. However, such lower rate may not be less than 5%, if the interest is paid to a bank, and 10% in other cases. An MFN clause is also included for Royalties, with a minimum rate of 10%. The MFN clause was triggered by Chile's 2003 tax treaty with Spain from 1 January 2004, providing for a 5% withholding tax on loans granted by banks and a 10% withholding tax rate on interest from loans granted by insurance companies; bonds and securities that are regularly and substantially traded on a recognized stock exchange; and the sale on credit of machinery and equipment. Otherwise, the rate is 15%. Further, the withholding tax rate on royalties was reduced to 10%.

Considering Chile's 2016 tax treaty with Japan, the circular provides that the withholding tax rate on interest under the Chile-Mexico tax treaty is 5% on interest paid to banks and 10% in all other cases. It is also noted that the Chile-Japan tax treaty does not impact withholding tax on royalties under the Chile-Mexico tax treaty because the rate was already reduced to 10% due to the Chile-Spain Treaty, which is the minimum rate allowed under the MFN clause.

Additional Points

The circular provides that in the event that tax has been withheld on interest at rates higher than those agreed by application of the MFN clauses, taxpayers domiciled or resident in Chile, Canada or Mexico may request the refund of the amounts withheld in excess in accordance with the provisions of the legislation of each country.

Lastly, it is noted that other circulars have already been issued for the application of the MFN clauses in Chile's tax treaties with the following, considering the Chile-Japan treaty:

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