The Netherlands signs tax treaty with Chile

On 25 January 2021, the Netherlands and Chile signed a tax treaty aimed to eliminate double taxation and prevent tax evasion (Tax Treaty). The articles of the Tax Treaty are generally in line with the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (Multilateral Instrument or MLI).

The Netherlands is considered to be an attractive jurisdiction for international businesses and when operating an investment platform. It has a large network of bilateral investment treaties and double tax treaties. The Tax Treaty will provide for the opportunity for Dutch and Chilean resident taxpayers to invest in Chile and in The Netherlands on a more tax efficient manner. In addition, the Tax Treaty enables Chilean resident taxpayers to operate an investment platform in the Netherlands for their overseas investments.

In the below summary the most salient provisions of the Tax Treaty are highlighted.

Withholding taxes
Under the application of the Tax Treaty, tax on dividends levied by the source state is reduced to:

• 5% of the gross amount of the dividends if the recipient is a company which beneficially holds directly at least 25% of the capital of the company paying the dividends throughout a 365 days period.
• 0% of the gross amount of the dividends if the recipient is a recognized pension fund.
• In all other cases, tax on dividends is reduced to 15%.

Dividends distributed by Dutch resident corporate taxpayers to Chilean resident corporate taxpayers may be tax exempt under the application of the domestic Dutch dividend withholding tax exemption (subject to certain conditions) when the Tax Treaty enters into force.

Under the application of the Tax Treaty, tax on interest levied by the source state is reduced to:

• 4% in case the interest is beneficially owned by resident which operates a bank, insurance company, a lending or finance business in non-intra group transactions or an enterprise selling machinery or equipment.
• In all other cases tax on interest is reduced to 10%.

Under the application of the Tax Treaty, tax on royalties levied by the source state is reduced to:

• 2% in case the royalties are received in consideration for the use of industrial, commercial or scientific equipment (excluding ships, aircraft or containers)
• In all other cases tax on royalties is reduced to 10%.

Capital gains derived from alienation of shares
Taxing rights with respect to capital gains, derived from the alienation of shares (or other rights of participation) in an entity are allocated to the state of source if at any time during the 365 days preceding the alienation:

• The alienator owned, directly or indirectly, shares, comparable interests or other rights representing 20% or more of the capital of the entity; or
• That entity derives 50% or more of its value from immovable property situated in a jurisdiction.

In all other cases tax on capital gains derived from the alienation of shares levied by the source state is reduced to 16%. 

Anti-abuse provision
The Tax Treaty includes an anti-abuse rule, the so-called limitation of benefits test (LOB), which limits Tax Treaty application to qualifying persons. In summary, qualifying persons include:

1. Individuals;
2. Certain listed companies;
3. Companies involved in an ‘active business’;
4. Companies owned for at least 50% qualifying persons whom are equivalent beneficiaries; or
5. A resident which obtains approval from the competent authorities by demonstrating that neither its establishment, acquisition or maintenance, nor the conduct of its operations, had as one of its principal purposes the obtaining of such benefit. 

Dual resident entities
The tax residency of companies will be determined by way of a mutual agreement procedure (MAP) between the tax authorities of the Netherlands and Chile. In absence of any mutual agreement a company will in principle not be entitled to any tax relief or exemption provided by the tax treaty.

Entry into force
The Tax Treaty will most likely enter into force on 1 January 2022. The Tax Treaty will then apply to tax years, periods and taxable events taking place on or after this day.

Recommendation
It is recommended assessing whether your structure meets the future requirements of the Tax Treaty, assessing possibilities to improve the efficiency of your structure and verifying this with Chilean tax counsel. We would be pleased to share our comments and answer your questions on the upcoming application of the Tax Treaty.  

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