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Treaty between Belgium and Chile – details — Orbitax Tax News & Alerts

Details have become available of the first-time income and capital tax treaty and related protocol between Belgium and Chile, signed on 6 December 2007. The treaty was signed in the Dutch, English, French and Spanish languages, each text having equal authenticity. In the case of divergence, however, the English text prevails. The treaty generally follows the OECD Model Convention (2005).

The maximum rates of withholding tax are:

-   15% generally on dividends, but 0% on dividends paid if the receiving company owns directly at least 10% of the capital of the company distributing the dividends for an uninterrupted period of at least 12 months (Art. 10(2) of the treaty);
-   15% generally on interest, but 5% on interest derived from: (i) loans granted by banks and insurance companies; (ii) bonds or securities that are regularly and substantially traded on a regulated securities market; and (iii) a sale on credit paid by the purchaser of machinery or equipment to a beneficial owner that is the seller of the machinery or equipment (Art. 11(2)(a) and (b) of the treaty); and
-   10% on royalties generally, but 5% on royalties for the use of, or the right to use, any industrial, commercial or scientific equipment (Art. 12(a) and (b) of the treaty).

Art. 8 of the protocol contains a most-favoured nation clause, as a result of which the withholding tax on interest and royalties will be lowered automatically when Chile signs a new treaty with an OECD Member country providing for a lower rate or exemption.

Deviations from the OECD Model Convention include:

-   a building site or construction or installation project and the supervisory activities in connection therewith constitute a permanent establishment (PE) if such building site, project or activities last more than 6 months (Art. 5(3)(a) of the treaty);
-   the furnishing of services, including consultancy services, by an enterprise through employees or other individuals engaged by the enterprise for such purpose constitutes a PE where such activities continue within the contracting state for a period or periods aggregating more than 183 days within any 12-month period (Art. 5(3)(b) of the treaty);
-   the provisions on dividends, interest and royalties will not apply if the main purpose or one of the main purposes of the creation or assignment of the shares or other rights in respect of which the dividend is paid, of the debt claim, or of the rights in respect of the royalties, is to take advantage of one of those provisions (Art. 10(6), 11(7) and 12(7) of the treaty);
-   the definition of royalties includes tapes and other means of image or sound reproduction (Art. 12(3) of the treaty);
-   gains derived from the alienation of shares or other rights representing the capital of a company may be taxed in the source state if the alienator at any time during the 12-month period preceding such alienation owned, directly or indirectly, shares or other rights representing 20% or more of the capital of that company (Art. 13(4)(a) of the treaty);
-   any other gains derived from the alienation of shares or other rights representing the capital of a company may also be taxed in the source state but the tax may not exceed 16% of the amount of the gain;
-   gains derived from the alienation of shares derived by a pension fund are exempt;
-   the treaty contains an article on "independent personal services" under which income from such services is taxable only in the residence state, unless (i) the resident has a fixed base in the source state; or (ii) he is present in the source state for a period or periods amounting to or exceeding in the aggregate 183 days in any 12-month period commencing or ending in the fiscal year concerned (Art. 14 of the treaty);
-   under the "other income" article, items of income not dealt with in the treaty may be taxed in both states (Art. 21(3) of the treaty);
-   the provisions of the treaty shall not affect the taxation of a Belgian resident in Chile with respect to the profits attributable to a PE established in Chile in respect of the First Category Tax, as well as, where profits remitted or withdrawn from the PE to the resident of Belgium are concerned, the Additional Tax, provided that the First Category Tax is deductible in computing the Additional Tax (Art. 24(5) of the treaty);
-   the tax treatment of pension contributions to a recognized pension plan in the other contracting state paid by, or on behalf of, an individual who is a resident of a contracting state, or who is temporarily present in that state, will during a period not exceeding 60 months, be treated in the same way as contributions paid to a recognized pension plan in that state if (i) that individual was contributing on a regular basis to the pension plan for a period ending immediately before that individual became a resident of, or was temporarily present in, the first-mentioned State; and (ii) the competent authority of the first-mentioned state agrees that the pension plan generally corresponds to a pension plan recognized for tax purposes by that state (Art. 28(3) of the treaty); and
-   the contracting states will consult each other in case of abuse of the treaty (Art. 1 of the protocol).

Chile and Belgium apply the credit and exemption with progression method respectively, for the avoidance of double taxation (Art. 23(1) and (2) of the treaty). Dividends derived by a Belgian company from a Chilean company are exempt under the same conditions as if the company paying the dividends were established in Belgium or another EU Member State. For the application of this provision, the underlying profit tax and the Additional Tax are taken into account (Art. 23(2)(b) of the treaty). An exemption is not granted for profits attributable to a PE in Chile of a Belgian enterprise if, in accordance with Belgian law, losses incurred by the PE have been deducted from the profits of that enterprise in Belgium, to the extent that those profits were also exempt in Chile, pursuant to loss compensation rules (Art. 23(2)(d) of the treaty).

The treaty will apply for a minimum period of 5 years (Art. 30 of the treaty).