Signing a Double Tax Treaty (DTT), the UAE and Chile aim to eliminate dual taxation and enhance economic cooperation. Covering different forms of income and capital gains, the Double Tax Treaty presents reduced withholding tax rates specifically on dividends, interest, and royalties. Inclusive clauses covering the exchange of information, mutual agreement procedure, and non-discrimination are integral to the Double Tax Treaty, which awaits ratification by both nations for enforcement.
Double Tax Treaty Overview and Applicability
The Double Tax Treaty applies to taxes on income and capital gains imposed by either or both of the Contracting States. Covered taxes include income tax and corporate tax in the UAE, along with taxes prescribed by Chile’s Income Tax Act. The DTT defines a resident of a Contracting State as an individual subject to tax in that state based on domicile, residence, place of management, or similar criteria. In situations where a non-individual is acknowledged as a resident in both Contracting States, the competent authorities will collectively determine the residency status for DTT matters. If an accord isn’t achieved, the individual forfeits entitlement to DTT advantages.
Enterprise Gains and Permanent Establishment
As per the Double Tax Treaty, a permanent establishment (PE) refers to a fixed business location where an enterprise conducts its business either entirely or partially. This covers areas like workshops, quarries, management sites, offices, factories, oil or gas wells, branches, mines, or places dedicated to extracting natural resources.
The Double Tax Treaty further clarifies that a PE is deemed to exist if an enterprise provides services in a Contracting State using employees or other engaged personnel for the same or related project for more than 183 days within 12 months. Furthermore, the activities of associated enterprises in a Contracting State contribute to determining the duration of services. According to the Double Tax Treaty (DTT), the right to tax the profits generated by a company is vested in the Contracting State where the company has its residence unless the company conducts operations in the other Contracting State through a Permanent Establishment (PE). In such cases, the profits linked to the PE could be subject to taxation in the other State, but only to the degree that they arise from the activities of the PE.
Withholding Tax Rate Structure
The Double Tax Treaty (DTT) establishes the maximum withholding tax rates applicable to dividends, interest, and royalties paid from one Contracting State to a resident of the other. The outlined rates are as follows:
- Dividends: 0% for recognized pension funds without business activities or associated enterprises; 5% for companies holding at least 25% voting power in the paying company for a minimum of 6 months; otherwise, 10%;
- Interest: 4% for beneficiaries such as banks, insurance companies, finance companies, or machinery/equipment sellers; otherwise, 10%;
- Royalties: 2% for royalties associated with industrial, commercial, or scientific equipment; otherwise, 10%.
Tax Treatment of Capital Gains
The Double Tax Treaty (DTT) delegates the right to tax capital gains resulting from the sale of specific assets by a resident of one Contracting State to the other.
These assets encompass:
- Immovable property located in the other State;
- Movable property constituting part of the business assets of a Permanent Establishment (PE) in the other State;
- Shares or rights deriving over 50% of their value from immovable property in the other State;
- Shares or rights representing at least 25% of the capital of a company resident in the other State.
Nevertheless, the DTT includes an exemption for capital gains arising from the sale of shares or rights in a company listed on a recognized stock exchange in either Contracting State, provided the seller owns no more than 5% of the shares or rights. Farahat & Co a leading tax consultants in dubai handling double taxation services in UAE.
Read More: UK UAE Double Tax Treaty