Our director of Grupo Tributario, Andrea Bobadilla, was consulted by Diario Financiero about the elimination of “section 899” of the current US Tax Reform, a measure that reinforces the validity of the Double Taxation Agreement in our country.
This is the controversial “section 899”, which established retaliatory taxes against countries that unfairly taxed U.S. companies, which could have been applied to Chile.
The discussion in the US Congress of the so-called Big Beautiful Bill (or “Big Beautiful Law”), as the mega tax reform promoted by Donald Trump’s government is known, is advancing by leaps and bounds.
At the beginning of this week, the initiative passed its penultimate step on Capitol Hill in Washington, after the Senate approved it by just one vote – a tie-breaker led by the Vice President of the United States, J.D. Vance. At this time, the House of Representatives is continuing the discussion until it is fully cleared, although there is a high probability that it will become law this Thursday, so that it can be enacted by Trump no later than this Friday, July 4, when the American Independence Day is commemorated.
The rule has put the sustainability of public finances in the world’s leading economy at the center of the discussion, by renewing millions in tax benefits and cutting millions in federal spending. But in the case of Chile, there are other rules that have generated concern, although the most recent news shows a somewhat more reasonable outlook.
At the end of last week, in the framework of negotiations at the G7 meeting, the United States agreed to eliminate from the text the so-called “Section 899”, a rule that, among other aspects, imposed tax measures against investors from countries that adopt taxes defined as “unfair” towards U.S. companies and individuals. In the case of Chile, this could have been applied by virtue of the VAT levied on the operations of digital companies in our country.
However, the negotiation between the powers left that issue out of the new law, in exchange for the OECD exempting companies with U.S. parent companies from the application of the so-called “Pillar 2”, which establishes a global minimum tax of 15% for multinationals with annual revenues of at least 750 million euros.
A respite…
The elimination of these so-called “revenge taxes” in section 899 of the tax reform was received with relief in Chile, since it would confirm that our country would be subject to the reduced rates for profits and investments considered in the agreement that avoids double taxation between both nations.
The elimination of section 899 rules out the risk that Chile could have been considered as applying unfair taxes to the United States, and therefore, for example, would have increased the reduced tax rates that are now available under the treaty,“ explains Felipe Espina, a partner in EY Chile’s International Taxation practice, ”The elimination of section 899 rules out the risk that Chile could have been considered as applying unfair taxes to the United States, and therefore, for example, would have increased the reduced tax rates that are now available under the treaty,” explains Felipe Espina, a partner in EY Chile’s International Tax practice.
Section 899 contemplated a retaliatory tax consisting of an additional withholding of 5% for each year on their income in the United States, increasing the rate to 20% until this so-called “unfair tax” is eliminated, which would have been applied on the rates in force under domestic law or the reduced rates of the agreement between both nations, explains PwC Chile tax partner Loreto Pelegrí: “By eliminating section 899 of the reform, the reduced rates contemplated in the agreement would be applied. That is, 15% as a general rule, and 5% if the Chilean investor directly owns at least 10% of the voting shares of the entity distributing the dividends,” she argues.
The dismissal ensures the “full validity” of the double taxation agreement, which among its main benefits establishes a reduced rate of 5% on the distribution of dividends to Chile, complements the director of Albagli Zaliasnik’s Tax Group, Andrea Bobadilla: “This will undoubtedly promote tax confidence once again, which is so important when investing abroad. In short, eliminating a concrete risk of increasing tax burdens by up to 20% is very good news for domestic investors on U.S. soil.”
The International Tax partner at Deloitte Chile, Joseph Courand, adds that the exclusion of section 899 eliminates uncertainty regarding possible conflicts of law between U.S. domestic legislation and the double taxation treaty in force since 2023 between both parties.
“Unlike in Chile, where international treaties have a higher hierarchy than local law, in the United States, domestic law and international treaties have the same rank, so that if they conflict, the later-issued rule generally prevails. The elimination of section 899 reduces the risk of a subsequent domestic provision limiting or contradicting the benefits established in the treaty, which gives a greater degree of certainty to taxpayers resident in Chile,” he says.
Avoidance of capital outflows
The partner of the Palma law firm, María Soledad Diharasarri, lists the benefits that remain with the provisions of the treaty that prevents double taxation: the rate of capital gains tax on the disposal of shares of a Chilean or U.S. company is limited, and the rate of tax withheld at source on dividends and interest is limited.
“In addition, residents can use the tax paid or accrued in the other country as a tax credit. And there are specific additional benefits for certain investors on dividends and the payment of withholding taxes and capital gains on the sale of shares or rights in Chilean companies”, he adds.
The director of the Tax Area and partner of Arteaga Gorziglia, Andrés Ossandón, explains that since the agreement also included the exclusion of US companies from the global minimum tax, one effect that will be generated is that “it will become more attractive to maintain or migrate the headquarters of large multinational companies to the United States, compared to other jurisdictions that do adopt Pillar 2 of the OECD”.
The partner of the tax team of MBC Abogados, María Teresa Cremaschi, emphasizes that Chile has a “solid tax system, always respecting equality and non-discrimination, both principles established in our Political Constitution”, so she considers that the elimination of section 899 ratifies that Chile has a “solid tax system”.
While Peralta Sandoval Llaneza & Gutiérrez partner, Carlos Aranís, explains that another effect of the elimination of Section 899 is that it avoids an outflow of capital from the United States: “The reform could have seriously affected the return of their investments to Chilean investors, forcing them not only to leave the US, but eventually to pay taxes prematurely if they had to liquidate their investments or close operations. With the elimination of Section 899, Chilean investors will not be pressured to divest or prematurely liquidate their U.S. assets.”