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HMRC internal manual

Double Taxation Relief Manual

Double Taxation Relief Manual: Guidance by country: Chile: Interest

The UK-Chile Double Taxation Convention (DTC) contains a ‘Most Favoured Nation’ (MFN) clause in relation to paragraph (2) of Article 11 (interest) and paragraph (2) of Article 12 (royalties). The MFN can be found in the Exchange of Notes. The MFN was triggered following entry into force of the Chile-Japan DTC. That DTC entered into force on 1 January 2017.

The effect on the UK-Chile DTC in respect of interest is as follows:

Exclusions from the rate generally applicable – source state taxation

Article 11(2)(a) of the UK-Chile DTC provided for tax not exceeding 5 per cent of the gross amount of interest in the Contracting State in which the interest arises if the beneficial owner of the interest is derived from:

  1. loans granted by banks and insurance companies;
  2. bonds or securities that are regularly and substantially traded on a recognized securities market;
  3. a sale on credit paid by the purchaser of machinery and equipment to a beneficial owner that is the seller of the machinery and equipment.  

From 1 January 2017, the tax shall not exceed 4 per cent of the gross amount of interest falling within a) or c).

The tax charged on interest arising in a Contracting State that is derived from b) continues to be limited to 5 per cent of the gross amount and is unchanged by the MFN.

Exclusions from the rate generally applicable – categories of exclusion

In addition, the categories of loans to which the 4 per cent rate applies is extended to include interest arising on loans where the beneficial owner is:

  1. an enterprise substantially deriving its gross income from the active and regular conduct of a lending or finance business involving transactions with unrelated persons, where the enterprise is unrelated to the payer of the interest. For the purposes of this clause, the term “lending or finance business” includes the business of issuing letters of credit, providing guarantees or providing credit card services;

  2. any other enterprise, provided that in the three taxable years preceding the taxable year in which the interest is paid, the enterprise derives more than 50 per cent of its liabilities from the issuance of bonds in the financial markets or from taking deposits at interest, and more than 50 per cent of the assets of the enterprise consist of debt-claims against unrelated persons; 

For the purposes of the above, an enterprise is unrelated to a person if the enterprise does not have with the person a relationship described in subparagraph (a) or (b) of paragraph 1 of Article 9. 

Notwithstanding the provisions that provide for tax not to exceed 4 per cent in the state in which the interest arises, if interest is paid as part of an arrangement involving back-to-back loans or other arrangements that are economically equivalent and intended to have a similar effect to an arrangement involving back-to-back loans, such interest may be taxed in the Contracting State in which it arises but the tax so charged shall not exceed 10 per cent of the gross amount of the interest in d) and e) above. Tax charged shall not exceed 5 per cent of the gross amount of the interest in cases a) and c), above.

The term “arrangement involving back-to-back loans” includes, inter alia, any kind of arrangement structured in such a way that a financial institution which is a resident of a Contracting State receives interest arising in the other Contracting State and the financial institution pays an equivalent interest to another person which, if the person received the interest directly from the other Contracting State, would not be entitled to limitation of tax to 4 per cent of the gross amount with respect to that interest in that other Contracting State.

Additional changes

In all other cases, the Contracting State in which the interest arises will be limited to taxing the gross amount of interest at no more than 15 per cent from 1 January 2017 – 31 December 2018. From 1 January 2019, this will reduce to 10 per cent in line with the Chile-Japan DTC.