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Treatment of the Most-Favored-Nation Clause of the CDI’s

26 October, 2021
Treatment of the Most-Favored-Nation Clause of the CDI’s

According to Circular No. 059 of 2021, Chile has signed agreements with some countries to avoid double taxation in which a clause of the most favored nation is included, complying under certain assumptions, the extension of an agreement entered into with a third State or a lower rate for the categories of income indicated in each agreement if Chile makes an agreement as if it had been specified therein. 

This circular will provide instructions on the most favored nation clause in the agreements signed with Canada and Mexico. 

1. Chile – Canada Agreement

The protocol of the agreement with Canada states in paragraph 1 that, if the Republic of Chile concludes an Agreement with a State member of the Organization for Economic Cooperation and Development after the signature date of the Agreement, whereby Chile agrees to a tax rate on interest or royalties lower than 15% (which shall not be lower than 10% for interest and royalties) shall apply for paragraph 2 of Article 11 as from the date the provisions of such new Agreement become applicable, regarding interest, automatically for this Agreement, according to the situation. 

It should be noted that the interest rates of the agreement with Canada have already been lowered before due to the application of the most-favored-nation clause. The implementation thereof was stated in Circular No. 8 of 2005, specifying that, as from January 1, 2004, the rates of Article 11, paragraph 2, would be as follows:

2. “However, this interest may also be taxed in the Contracting State from which it derives and according to the laws of that State, but if the beneficial owner is a resident of the other Contracting State, the tax so required shall not exceed the:  

  1. 10 percent of the gross amount of interest derived from: – loans granted by banks and insurance companies; – bonds and securities regularly and substantially traded on a recognized stock exchange; – the sale on credit granted to the purchaser of machinery and equipment by the beneficial owner who is the seller of the machinery and equipment; 
  2. 15 percent of the gross amount of interest in all other cases.”

Consequently, the entry into force of the agreement with Japan does not make the most-favored-nation clause of paragraph 1 of the Protocol to the Chile-Canada Royalty Agreement applicable, since the 10% rate reduction limit established in that provision was reached with the entry into force of the agreement signed with Spain.

2. Chile – Mexico Agreement

Paragraph 3 of the protocol to the agreement with Mexico provides that, if Chile concludes an Agreement with another State, whereby the former agrees to a tax rate on an interest lower than or preferential to the proposal of this Agreement, regarding such income at a date after that on which the Agreement is signed, such lower or preferential rate shall apply for paragraph 2 of Article 11 automatically for this Agreement, as of the date on which the provisions of such new Agreement become applicable, respectively. However, this lower rate shall not be less than 5% for interest paid to banks and 10% in other cases.

Similarly, as in the previous case, the interest rates of the DTA with Mexico have already been lowered, as follows:

“2. Nevertheless, such interest may also be subject to taxation in the Contracting State from which it derives, according to the legislation of that State, but if the recipient of the interest is the beneficial owner, the tax so required may not exceed the:

  1. 5 percent of the gross amount of interest derived from loans granted by banks.
  2. 10 percent of the gross amount of interest derived from: – loans granted by insurance companies; – bonds and securities regularly and substantially traded on a recognized stock exchange; and – the sale on credit granted to the purchaser of machinery and equipment by the beneficial owner who is the seller of the machinery and equipment. 
  3. 15 percent of the gross amount of interest in all other cases”.

The entry into force of the agreement with Japan does not make the most favored nation clause of paragraph 4 of the Protocol to the Chile-Mexico Agreement on royalties applicable since the 10% rate reduction limit established by said rule was reached with the entry into force of the agreement signed with Spain.

3. Effects of having withheld more

In case of having withheld interest tax at rates higher than those agreed by application of the most favored nation clause, taxpayers domiciled or resident in Chile, Canada, or Mexico may request a refund of the amounts withheld in excess under the provisions of the legislation of each country.

In Chile, the refund will be subject to the procedure provided in Article No. 126 of the Tax Code.

Source: Servicio de Impuestos Internos 26/10/21