A Double Taxation Agreement (DTA) is an agreement between two States which establishes a series of tax rules and guidelines to prevent companies that are located in different jurisdictions from having to pay twice for the same taxable event. It should be noted that DTAs seek to promote investments and economic relations between countries under a fairer tax treatment.
Scope of application
On January 1, 2004, the DTA between Peru and Chile entered into force. It is applicable exclusively to service transactions, and on income and/or equity. It is also applicable to those persons who have the status of resident in one or both Contracting States.
Concept of Residency
Article 3 defines the concepts of “person” and “society”. The first comprises natural persons, partnerships and any other group of persons. “Partnership” means any legal entity that is considered as such for tax purposes.
Article 4 specifies which persons or companies are considered to be resident in a Contracting State. In this regard, it states that a resident is subject to taxation by reason of his domicile, residence, place of address or other criterion of a similar nature. Paragraph 3 of Article 4 of the DTA between Peru and Chile states that if there is a problem of dual residence of a legal person, the way to resolve it will be to consider it as a resident only of the State that is a national.
Application of the Peru-Chile DTA between related companies
The application of the Double Taxation Agreement (DTA) must take into account the correct identification of the service provider and the final beneficiary of the use of the same.
In the case of a financing transaction, in which a Peruvian company receives a loan of money from its share domiciled in Chile, the interest generated in that transaction and paid to the taxpayer in Chile will be subject to taxation in Peru, according to Peruvian law. In this particular case, the tax thus charged may not exceed 15% of the gross amount of interest. In this sense, the Chilean taxpayer has the power to use the withholding as a credit against the income tax that must be paid in Chile.