Chile Tax Alert - 12 July 2012
Argentina terminates treaty as from 2013
By Hugo Hurtado and Jose Miguel Prieto
The Argentine government notified Chile on 29 June 2012 that it has terminated the 1976 income tax treaty and 2003 protocol between the two countries because it considers that the treaty is being abused.
Unlike Chile's other tax treaties, which are based on the OECD model treaty, the Argentina treaty generally allocates exclusive taxation rights to the country in which income is sourced. Under the protocol to the treaty, net wealth that constitutes shares or participations in the capital of a company can be taxed only by the country in which the investor is resident, with the result that Chilean residents are exempt from the Argentine tax on net wealth in respect of these assets.
Article 26 of the treaty allows a contracting party to terminate it at any time by giving written notice between 1 January and 30 June. The treaty will remain in effect for individuals until 31 December 2012. With respect to companies, treaty benefits will be available for earnings, income, benefits or capital obtained during the fiscal year in which the notification of termination was made. Thus, Argentine source income obtained by companies resident in Chile as from 1 January 2013 will no longer be entitled to benefits under the treaty, and vice versa.
The termination of the treaty could have negative implications for companies using the Argentina-Chile treaty to structure their Latin American investments. For example, dividends paid by an Argentine company will no longer be nontaxable income in Chile and withholding taxes may apply on payments made by Chilean companies to Argentina, and vice versa. Affected companies should carefully review the implications of the termination of the treaty on their business models that include Chilean companies with holdings in Argentina and vice versa.
It is unclear at this juncture whether the two countries will renegotiate a new treaty.