By Javiera Campos, Director of International Taxation at CCL Auditores Consultores.
Read the column in Diario Financiero.
This week, Diario Financiero reported the unanimous approval by the Chilean Senate of the Double Taxation Avoidance Agreement between Chile and the United States, a measure that has been broadly welcomed due to its expected impact on strengthening U.S. investment in strategic markets in Chile and, certainly, for the benefits it will also bring to Chilean investors in the United States.
However, once the initial excitement has passed and considering that 2024 and the entry into force of the Agreement are getting closer, it is time to set aside the celebration and review how investments have been structured in the past and whether there is room for improvement under the new context. This is because, in many cases, the potential entry into force of the Agreement was not taken into account, as it had been awaiting approval since its signing in 2010 without real progress in its processing.
In this context, many real estate, passive income, and even operational investments by Chileans in the United States have been structured for various reasons through companies in Canada, particularly through the use of Limited Partnerships (LPs), which are considered transparent entities both in Canada under its domestic legislation and in the United States, but not in Chile according to the administrative jurisprudence of the Internal Revenue Service (SII).
As a result, we are faced with what are known as hybrid entities, that is, entities that are considered transparent in one State and opaque in another. The difficulty lies precisely in the fact that both the Agreement with the United States and the domestic regulations of that country would limit the use of treaty benefits in cases where there is an interposition of a hybrid entity between the party distributing the income and its beneficial owner in the other State. This is because such structures may be deemed abusive, as they often seek to obtain reduced tax rates under the Agreement, while the income is not taxed in the investor’s country of residence until it is distributed from the hybrid entity.
Thus, the recommendation is to review how investments have been structured, considering the complexities of each particular case, and to carefully analyze whether adjustments or reorganizations are necessary so that the benefits provided by the Agreement become a reality and not merely an illusion read in the press.