By Javiera Campos, Director of International Taxation at CCL Auditores Consultores.
Read the letter to the editor in Diario Financiero here.
Dear Editor,
Diario Financiero reported on the statement issued by the Ministry of Finance indicating that it has submitted to the Chilean Congress the Convention to avoid double taxation with the United States.
As stated in the published article, the Convention is expected to increase U.S. investment in the country. I would like to pause on this point and recall that the Convention includes a broad Limitation on Benefits clause (LOB), which precisely aims to limit treaty shopping and abuses in the use of the Convention.
Indeed, one of the aspects that has not been fully considered when highlighting the potential to become an investment hub for the region (leveraging Chile’s extensive network of treaties with the rest of Latin America) is the scope of the LOB clause, which expressly addresses the case of holding companies within multinational groups.
In this regard, among other equally strict requirements, it is required not only that these entities be holding companies that perform a substantial portion of the supervision and general management of the companies in a discretionary and independent manner, but also that the group of operating companies in other jurisdictions be residents of at least five countries where they actively conduct business, and that each of these countries generate at least 10% of the gross income of the group in question.
You may judge how many multinational groups will, in practice, be able to meet the requirements imposed to qualify for the application of the Convention under this specific provision, especially considering the relative weight of the different economies in the region today.