[Senate Executive Report 117-1]
[From the U.S. Government Publishing Office]


117th Congress    }                                {       Exec. Rept.
                                 SENATE
 2d Session       }                                {             117-1

======================================================================



 
                       TAX CONVENTION WITH CHILE

                                _______
                                

                  April 7, 2022.--Ordered to be printed

                                _______
                                

         Mr. Menendez, from the Committee on Foreign Relations,
                        submitted the following

                                 REPORT

                    [To accompany Treaty Doc. 112-8]

    The Committee on Foreign Relations, to which was referred 
the Convention between the Government of the United States of 
America and the Government of the Republic of Chile for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with Respect to Taxes on Income and Capital, Signed in 
Washington on February 4 2010, with a Protocol Signed the Same 
Day, as Corrected by Exchanges of Notes Effected February 25, 
2011, and February 10 and 21, 2012, and a Related Agreement 
Effected by Exchange of Notes (the ``Related Agreement'') on 
February 4, 2010 (Treaty Doc. 112-8), having considered the 
same, reports favorably thereon with two reservations and one 
declaration, as indicated in the resolution of advice and 
consent, and recommends that the Senate give its advice and 
consent to ratification thereof, as set forth in this report 
and the accompanying resolution of advice and consent.

                                CONTENTS

                                                                    Page

  I. Purpose.......................................................... 1
 II. Background....................................................... 2
III. Major Provisions................................................. 2
 IV. Entry Into Force................................................. 3
  V. Implementing Legislation......................................... 3
 VI. Committee Action................................................. 3
VII. Committee Comments............................................... 3
VIII.Text of Resolution of Advice and Consent to Ratification......... 5

 IX. Technical Explanation............................................ 7

                               I. Purpose

    The purpose of the proposed Convention, Protocol, and 
Related Agreement (together the ``Treaty'') is to promote and 
facilitate trade and investment between the United States and 
Chile. In addition, the Treaty would prevent avoidance or 
evasion of the taxes of the two countries. The Treaty contains 
rigorous protections designed to protect against ``treaty 
shopping,'' which is the inappropriate use of a tax treaty by 
third-country residents, and provisions to ensure the exchange 
of information between tax authorities in both countries. While 
the proposed Convention is broadly consistent with the 2016 
U.S. Model Income Tax Treaty (the ``U.S. Model''), it deviates 
from the U.S. Model by including more restrictive limitation of 
benefit rules and would subject dividends, interest, and 
royalties to higher tax rates. The Treaty does not provide a 
tax exemption for some parent-subsidiary dividends.

                             II. Background

    The Treaty would be the first bilateral income tax treaty 
between the United States and Chile. If ratified, the proposed 
treaty would represent the third income tax treaty with a 
country in Latin America.

                         III. Major Provisions

    A detailed article-by-article analysis of the Protocol may 
be found in the Technical Explanation published by the 
Department of the Treasury on February 26, 2014, which is 
included in Annex 1 of this report. In addition, the staff of 
the Joint Committee on Taxation prepared an analysis of the 
Treaty, JCX-10-14 (February 24, 2014), which was of great 
assistance to the committee in reviewing the Treaty. A summary 
of the key provisions of the Treaty is set forth below.

                             GENERAL SCOPE

    Article 1 defines the scope of the Treaty as applying only 
to ``residents'' of the United States and Chile, except where 
the terms of the Treaty provide otherwise. It contains a 
standard ``saving clause'' pursuant to which each country 
retains the right to tax its residents and citizens as if the 
treaty had not come into effect, subject to certain exceptions.

                             COVERED TAXES

    Article 2 provides that the Treaty, in general, applies 
only to taxes on income or capital, including gains, imposed on 
the national level, irrespective of the manner in which they 
are levied. The proposed Treaty also applies to certain taxes 
that are enacted after the proposed Treaty was signed.

                               DIVIDENDS

    Article 10 provides that dividends may be fully taxed by 
the residence country and partially taxed by the source 
country. The proposed Treaty does not allow for complete 
exemption from withholding tax for some parent-subsidiary 
dividends. In addition, the Treaty stipulates special rules on 
taxation of undistributed earnings and does not include special 
rules for dividends for regulated investment companies and real 
estate investment trusts that are found in other recent U.S. 
tax treaties.

                         LIMITATION ON BENEFITS

    Consistent with current U.S. treaty policy, Article 24 
includes a ``Limitation on Benefits'' provision, which is 
designed to avoid treaty-shopping by limiting the indirect use 
of a treaty's benefits by third-country residents. This 
article's Limitation on Benefits provision generally reflects 
the anti-treaty-shopping provisions included in the U.S. Model 
treaty and more recent U.S. income tax treaties. Similar to 
agreements with other tax treaty partners, the proposed treaty 
contains a special rule such that so-called ``headquarters 
companies'' shall satisfy the requirements of the Limitation on 
Benefits provision.

                        EXCHANGE OF INFORMATION

    Article 27 provides authority for the two countries to 
exchange tax information and generally follows the current U.S. 
and OECD Model treaties. Under Article 27, the United States is 
allowed to obtain information (including from financial 
institutions) from Chile regardless of whether Chile needs the 
information for its own tax purposes.

                          IV. Entry Into Force

    The proposed Convention would enter into force when both 
the United States and Chile have notified each other that they 
have completed all of the necessary procedures required for 
entry into force. It will have effect, with respect to taxes 
withheld at source, for amounts paid or credited on or after 
the first day of the second month following the date of entry 
into force of the proposed Convention, and with respect to 
other taxes, for taxable years beginning on or after the first 
day of January of the calendar year immediately following the 
date of entry into force of the proposed Treaty. The Protocol 
and the Related Agreement would enter into force on the date of 
entry into force of the proposed Convention.

                      V. Implementing Legislation

    As is the case generally with income tax treaties, the 
Treaty is self-executing and does not require implementing 
legislation for the United States.

                          VI. Committee Action

    On March 29, 2022, the committee considered the proposed 
Treaty and ordered it favorably reported by voice vote, with a 
quorum present. The committee considered and voted on one 
amendment offered by Senator Paul. The amendment did not pass 
by a vote of 21-1.

                        VII. Committee Comments

    The Committee on Foreign Relations believes that the 
Protocol will stimulate increased trade and investment and 
promote closer co-operation between the United States and Chile 
on tax matters. The committee therefore urges the Senate to act 
promptly to give advice and consent to ratification of the 
Treaty, as set forth in this report and the accompanying 
resolution of advice and consent.

   A. RESERVATION ON TAX ON BASE EROSION PAYMENTS OF TAXPAYERS WITH 
                       SUBSTANTIAL GROSS RECEIPTS

    The committee has included a reservation in the recommended 
resolution of advice and consent preserving the right of the 
United States to impose a tax under the ``Base Erosion and 
Anti-Abuse Tax'' (BEAT) provision of Public Law 115-97 (the 
``2017 tax law''), enacted as Section 59A of the Internal 
Revenue Code.
    The BEAT provision generally prevents reductions of the 
U.S. tax base by discouraging multinational corporations from 
making ``base erosion payments'' from the United States to 
foreign jurisdictions. The committee's understanding of the 
BEAT reservation is that it is intended to apply to the BEAT 
provisions of Section 59A, entitled the ``tax on base erosion 
payments of taxpayers with substantial gross receipts,'' while 
they remain consistent with the general design of that section.

             B. RESERVATION ON RELIEF FROM DOUBLE TAXATION

    The committee has included a second reservation to address 
a technical issue. Based on discussions with the U.S. 
Department of the Treasury, the reservation with respect to 
Article 23 (Relief from Double Taxation) is intended to reflect 
changes made to the Internal Revenue Code in the 2017 tax law, 
subsequent to negotiation of the Treaty. The 2017 tax law 
substantially changed the way that the United States taxes 
earnings of foreign subsidiaries of U.S. corporations, and the 
taxation of dividends paid by such foreign subsidiaries. In 
particular, the 2017 tax law repealed the ``indirect credit'' 
that had been the primary mechanism for relief of double 
taxation on such dividends, and in turn created a deduction for 
such dividends received by U.S. corporations from foreign 
subsidiaries. The new language of (b) in Paragraph 1 of Article 
23 provided in the reservation makes clear that double taxation 
may be relieved in the same manner as it is under the Code--by 
providing the U.S. company with a deduction for dividends 
received. This language is simply an update to reflect current 
U.S. tax law, replacing language that no longer accurately 
described how relief from double taxation would occur in the 
Code in the case of dividends described in 1(b) of Article 23.

       C. DECLARATION ON THE SELF-EXECUTING NATURE OF THE TREATY

    The committee has included one declaration in the 
recommended resolution of advice and consent. The declaration 
states that the proposed Treaty is self-executing, as is the 
case generally with income tax treaties. Prior to the 110th 
Congress, the committee generally included such statements in 
the committee's report, but in light of the Supreme Court 
decision in Medellin v. Texas, 128 S. Ct. 1346 (2008), the 
committee determined that a clear statement in the Resolution 
is warranted. A further discussion of the committee's views on 
this matter can be found in Section VIII of Executive Report 
110-12.

     VIII. Text of Resolution of Advice and Consent to Ratification

    Resolved (two-thirds of the Senators present concurring 
therein),

SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO RESERVATIONS AND A 
                    DECLARATION

    The Senate advises and consents to the ratification of the 
Convention Between the Government of the United States of 
America and the Government of the Republic of Chile for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with Respect to Taxes on Income and Capital, signed at 
Washington February 4, 2010, with a Protocol signed the same 
day, as corrected by exchanges of notes effected February 25, 
2011, and February 10 and 21, 2012, and a related agreement 
effected by exchange of notes on February 4, 2010 (the 
``Convention'') (Treaty Doc. 112-8), subject to the 
reservations of section 2 and the declaration of section 3.

SECTION 2. RESERVATIONS

    The advice and consent of the Senate under Section 1 is 
subject to the following reservations, which shall be included 
in the instrument of ratification:
          (1) Nothing in the Convention shall be construed as 
        preventing the United States from imposing a tax under 
        section 59A, entitled the ``Tax on Base Erosion 
        Payments of Taxpayers with Substantial Gross 
        Receipts,'' of the Internal Revenue Code (as it may be 
        amended from time to time) on a company that is a 
        resident of the United States or the profits of a 
        company that is a resident of Chile that are 
        attributable to a permanent establishment in the United 
        States.
          (2) Paragraph 1 of Article 23 (Relief from Double 
        Taxation) of the Convention shall be deleted and 
        replaced by the following:
                  ``1. In accordance with the provisions and 
                subject to the limitations of the law of the 
                United States (as it may be amended from time 
                to time without changing the general principle 
                thereof):
                          a) the United States shall allow to a 
                        resident or citizen of the United 
                        States as a credit against the United 
                        States tax on income applicable to 
                        residents and citizens the income tax 
                        paid or accrued to Chile by or on 
                        behalf of such citizen or resident. For 
                        the purposes of this subparagraph, the 
                        taxes referred to in subparagraph b) of 
                        paragraph 3 and paragraph 4 of Article 
                        2 (Taxes Covered), excluding taxes on 
                        capital, shall be considered income 
                        taxes; and
                          b) in the case of a United States 
                        company owning at least 10 percent of 
                        the aggregate vote or value of the 
                        shares of a company that is a resident 
                        of Chile and from which the United 
                        States company receives dividends, the 
                        United States shall allow a deduction 
                        in the amount of such dividends in 
                        computing the taxable income of the 
                        United States company.''

SECTION 3. DECLARATION

    The advice and consent of the Senate under section 1 is 
subject to the following declaration:
          The Convention is self-executing.

                       IX. Technical Explanation

  DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE CONVENTION 
    BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE 
    GOVERNMENT OF THE REPUBLIC OF CHILE FOR THE AVOIDANCE OF DOUBLE 
TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON 
                           INCOME AND CAPITAL

    This is a Technical Explanation of the Convention between 
the Government of the United States and the Government of the 
Republic of Chile for the Avoidance of Double Taxation and the 
Prevention of Fiscal Evasion with Respect to Taxes on Income 
and Capital, signed on February 4, 2010 (the ``Convention'') as 
well as an amending Protocol signed the same day (the 
``Protocol'').
    Negotiations on the Convention took into account the U.S. 
Treasury Department's current tax treaty policy and the 
Treasury Department's Model Income Tax Convention, published on 
November 15, 2006 (the ``U.S. Model''). Negotiations also took 
into account the Model Tax Convention on Income and on Capital, 
published by the Organisation for Economic Cooperation and 
Development (the ``OECD Model''), and recent tax treaties 
concluded by both countries.
    On the date of signing of the Convention and the Protocol, 
the United States and Chile also exchanged diplomatic Notes 
(the ``2010 Exchange of Notes'') relating to various provisions 
of the Convention and the Protocol. The United States and Chile 
also exchanged diplomatic Notes on February 25, 2011 (the 
``2011 Exchange of Notes'') and on February 10 and 21, 2012 
(the ``2012 Exchange of Notes''). The 2010, 2011, and 2012 
Exchanges of Notes constitute an integral part of the overall 
agreement between the United States and Chile.
    The Technical Explanation is an official guide to the 
Convention, Protocol, and Exchanges of Notes. It reflects the 
policies behind particular Convention provisions, as well as 
understandings reached during the negotiations with respect to 
the application and interpretation of the Convention, Protocol, 
and Exchanges of Notes. References in the Technical Explanation 
to ``he'' or ``his'' should be read to mean ``he or she'' or 
``his and her.'' References to the ``Code'' are to the Internal 
Revenue Code of 1986, as amended.

                       ARTICLE 1 (GENERAL SCOPE)

    Article 1 provides that the Convention applies only to 
residents of the United States or Chile except where the terms 
of the Convention provide otherwise. Under Article 4 
(Residence) a person is generally treated as a resident of a 
Contracting State if that person is, under the laws of that 
State, liable to tax therein by reason of his domicile, 
residence, citizenship, place of management, place of 
incorporation, or any other criterion of a similar nature. 
However, if a person is considered a resident of both 
Contracting States, Article 4 provides rules for determining a 
State of residence (or no Contracting State of residence). This 
determination governs for all purposes of the Convention.
    Certain provisions are applicable to persons who may not be 
residents of either Contracting State. For example, paragraph 1 
of Article 25 (Non-Discrimination) applies to nationals of the 
Contracting States. In addition, under Article 27 (Exchange of 
Information), information may be exchanged with respect to 
residents of third states.
    Paragraph 2 of the Protocol states the generally accepted 
relationship both between the Convention and domestic law and 
between the Convention and other agreements to which both of 
the Contracting States are parties. That is, no provision in 
the Convention may restrict any exclusion, exemption, 
deduction, credit or other allowance or benefit accorded by the 
tax laws of the Contracting States, or by any other agreement 
between the Contracting States. The relationship between the 
non-discrimination provisions of the Convention and the General 
Agreement on Trade in Services (the ``GATS'') is addressed in 
paragraph 3 of the Protocol.
    Under paragraph 2 of the Protocol, for example, if a 
deduction would be allowed under the Code in computing the U.S. 
taxable income of a resident of Chile, the deduction also is 
allowed to that person in computing taxable income under the 
Convention. Paragraph 2 also means that the Convention may not 
increase the tax burden on a resident of a Contracting State 
beyond the burden determined under domestic law. Thus, a right 
to tax permitted by the Convention cannot be exercised unless 
that right also exists under domestic law.
    It follows that, under the principle of paragraph 2 of the 
Protocol, a taxpayer's U.S. tax liability need not be 
determined under the Convention if the Code would produce a 
more favorable result. A taxpayer may not, however, choose 
among the provisions of the Code and the Convention in an 
inconsistent manner in order to minimize tax. Thus, a taxpayer 
may use the Convention to reduce its taxable income, but may 
not combine both treaty and Code rules in a way that would be 
inconsistent with the intent of either set of rules. For 
example, assume that a resident of Chile has three separate 
businesses in the United States. One is a profitable permanent 
establishment and the other two are trades or businesses that 
would earn taxable income under the Code but that do not meet 
the permanent establishment threshold tests of the Convention. 
One is profitable and the other incurs a loss. Under the 
Convention, the income of the permanent establishment is 
taxable in the United States, and both the profit and loss of 
the other two businesses are ignored. Under the Code, all three 
would be subject to tax, but the loss would offset the profits 
of the two profitable ventures. The taxpayer may not invoke the 
Convention to exclude the profits of the profitable trade or 
business and invoke the Code to claim the loss of the loss 
trade or business against the profit of the permanent 
establishment. See Rev. Rul. 84-17, 1984-1 C.B. 308. If, 
however, the taxpayer invokes the Code for the taxation of all 
three ventures, he would not be precluded from invoking the 
Convention with respect, for example, to any dividend income he 
may receive from the United States that is not effectively 
connected with any of his business activities in the United 
States.
    Similarly, except as provided in paragraph 3, nothing in 
the Convention can be used to deny any benefit granted by any 
other agreement between the United States and Chile. For 
example, if certain benefits are provided for military 
personnel or military contractors under a Status of Forces 
Agreement between the United States and Chile, those benefits 
or protections will be available to residents of the 
Contracting States regardless of any provisions to the contrary 
(or silence) in the Convention.
    Paragraph 3 of the Protocol relates to non-discrimination 
obligations of the Contracting States under the GATS. The 
provisions of paragraph 3 are an exception to the rule provided 
in paragraph 2 of the Protocol under which the Convention shall 
not restrict in any manner any benefit now or hereafter 
accorded by any other agreement between the Contracting States.
    Subparagraph 3(a) of the Protocol provides that, unless the 
competent authorities determine that a taxation measure is not 
within the scope of the Convention, the national treatment 
obligations of the GATS shall not apply with respect to that 
measure. Further, any question arising as to the interpretation 
or application of the Convention, including in particular 
whether a measure is within the scope of the Convention, shall 
be considered only by the competent authorities of the 
Contracting States, and the procedures under the Convention 
exclusively shall apply to the dispute. Thus, paragraph 3 of 
Article XXII (Consultation) of the GATS may not be used to 
bring a dispute before the World Trade Organization unless the 
competent authorities of both Contracting States have 
determined that the relevant taxation measure is not within the 
scope of Article 25 (Non-Discrimination) of the Convention.
    The term ``measure'' for these purposes is defined broadly 
in paragraph 3 of the Protocol. It would include a law, 
regulation, rule, procedure, decision, administrative action or 
guidance, or any other similar provision or action.
    Paragraph 4 of the Protocol contains the traditional saving 
clause found in all U.S. income tax treaties. The Contracting 
States reserve their rights, except as provided otherwise in 
paragraph 4 of the Protocol, to tax their residents and 
citizens as provided under their domestic laws, notwithstanding 
any provisions of the Convention to the contrary. For example, 
if a resident of Chile performs professional services in the 
United States and the income from the services is not 
attributable to a permanent establishment in the United States, 
Article 7 (Business Profits) would by its terms prevent the 
United States from taxing the income. If, however, the resident 
of Chile is also a citizen of the United States, the saving 
clause permits the United States to include the remuneration in 
the worldwide income of the citizen and subject it to tax under 
the normal Code rules (i.e., without regard to Code section 
894(a)). Paragraph 4 of the Protocol also preserves the 
benefits of special foreign tax credit rules applicable to the 
U.S. taxation of certain U.S. income of its citizens resident 
in Chile. See paragraph 5 of Article 23 (Relief from Double 
Taxation).
    For purposes of the saving clause, ``residence'' is 
determined under Article 4 (Residence). Thus, an individual who 
is a resident of the United States under the Code (but not a 
U.S. citizen) but who is determined to be a resident of the 
other Contracting State under the tie-breaker rules of Article 
4 would be subject to U.S. tax only to the extent permitted by 
the Convention. The United States would not be permitted to 
apply its domestic law to that person to the extent that its 
law is inconsistent with the Convention.
    However, the person would still be treated as a U.S. 
resident for U.S. tax purposes other than determining the 
individual's U.S. tax liability. For example, in determining 
under Code section 957 whether a foreign corporation is a 
controlled foreign corporation, shares in that corporation held 
by the individual would be considered to be held by a U.S. 
resident. As a result, other U.S. citizens or residents might 
be deemed to be United States shareholders of a controlled 
foreign corporation subject to current inclusion of subpart F 
income recognized by the corporation. See Treas. Reg. 
Sec. 301.7701(b)-7(a)(3).
    Under paragraph 4 of the Protocol, each Contracting State 
also reserves its right to tax former citizens and former long-
term residents for a period of ten years following the loss of 
such status. Thus, paragraph 4 allows the United States to tax 
former U.S. citizens and former U.S. long-term residents in 
accordance with Code section 877. Section 877 generally applies 
to a former citizen or long-term resident of the United States 
who relinquishes citizenship or terminates long-term residency 
before June 17, 2008, if he fails to certify that he has 
complied with U.S. tax laws during the 5 preceding years, or if 
either of the following criteria exceed established thresholds: 
(a) the average annual net income tax of such individual for 
the period of 5 taxable years ending before the date of the 
loss of status; or (b) the net worth of such individual as of 
the date of the loss of status.
    The United States defines ``long-term resident'' as an 
individual (other than a U.S. citizen) who is a lawful 
permanent resident of the United States in at least 8 of the 
prior 15 taxable years. An individual is not treated as a 
lawful permanent resident for any taxable year in which the 
individual is treated as a resident of Chile under this 
Convention, or as a resident of any country other than the 
United States under the provisions of any other U.S. tax 
treaty, and the individual does not waive the benefits of the 
relevant tax treaty.
    Subparagraphs 4(a) and 4(b) of the Protocol set forth 
certain exceptions to the saving clause. The referenced 
provisions are intended to preserve benefits for citizens and 
residents of the Contracting States even if such benefits do 
not exist under domestic law.
    Subparagraph 4(a) of the Protocol lists certain provisions 
of the Convention that are applicable to all citizens and 
residents of a Contracting State, despite the general saving 
clause rule of paragraph 4:
          (1) Paragraph 2 of Article 9 (Associated Enterprises) 
        grants the right to a correlative adjustment with 
        respect to income tax due on profits reallocated under 
        Article 9.
          (2) Paragraphs 1 (b), 3, 4, and 6 of Article 18 
        (Pensions, Social Security, Alimony and Child Support) 
        provide exemptions from source or residence State 
        taxation for certain pension distributions, social 
        security payments, investment income of pension funds 
        located in the other Contracting State, alimony, and 
        child support.
          (3) Article 23 (Relief from Double Taxation) confers 
        to citizens and residents of one Contracting State the 
        benefit of a credit for income taxes paid to the other 
        or an exemption for income earned in the other State.
          (4) Article 25 (Non-Discrimination) protects 
        residents and nationals of one Contracting State 
        against the adoption of certain discriminatory taxation 
        practices in the other Contracting State.
          (5) Article 26 (Mutual Agreement Procedure) confers 
        certain benefits on citizens and residents of the 
        Contracting States in order to reach and implement 
        solutions to disputes between the two Contracting 
        States. For example, the competent authorities are 
        permitted to use a definition of a term that differs 
        from an internal law definition. The statute of 
        limitations may be waived for refunds, so that the 
        benefits of an agreement may be implemented.
    Subparagraph 4(b) of the Protocol provides a different set 
of exceptions to the saving clause. The benefits referred to 
are all intended to be granted to temporary residents of a 
Contracting State (for example, in the case of the United 
States, holders of non-immigrant visas), but not to citizens or 
to persons who have acquired permanent residence in that State. 
If beneficiaries of these provisions travel from one of the 
Contracting States to the other, and remain in the other long 
enough to become residents under its internal law, but do not 
acquire permanent residence status (i.e., in the U.S. context, 
they do not become ``green card'' holders) and are not citizens 
of that State, the host State will continue to grant these 
benefits even if they conflict with the statutory rules. The 
benefits preserved by this paragraph are: the host country 
exemptions for certain pension distributions and the beneficial 
tax treatment of pension fund contributions under paragraphs 2 
and 5 of Article 18 (Pensions, Social Security, Alimony and 
Child Support); government service salaries and pensions under 
Article 19 (Government Service); certain income of visiting 
students, apprentices, and trainees under Article 20 (Students 
and Trainees); and the income of diplomatic agents and consular 
officers under Article 28 (Members of Diplomatic Missions and 
Consular Posts).
    Paragraph 1 of the Protocol addresses special issues 
presented by fiscally transparent entities such as partnerships 
and certain estates and trusts. Because countries may take 
different views as to when an entity is fiscally transparent, 
the risks of both double taxation and double non-taxation are 
relatively high. The intention of paragraph 1 of the Protocol 
is to eliminate a number of technical problems that arguably 
would have prevented investors using such entities from 
claiming treaty benefits, even though such investors would be 
subject to tax on the income derived through such entities. The 
provision also prevents the use of such entities to claim 
treaty benefits in circumstances where the person investing 
through such an entity is not subject to tax on the income in 
its State of residence. The provision, and the corresponding 
requirements of other Articles of the Convention, should be 
interpreted with those two goals in mind.
    In general, this paragraph applies to any resident of a 
Contracting State who is entitled to income derived through an 
entity that is treated as fiscally transparent under the laws 
of either Contracting State. Treas. Reg. Sec.  1.894-
1(d)(3)(iii) provides that an entity will be fiscally 
transparent under the laws of an interest holder's jurisdiction 
with respect to an item of income to the extent that the laws 
of that jurisdiction require the interest holder resident in 
that jurisdiction to separately take into account on a current 
basis the interest holder's respective share of the item of 
income paid to the entity, whether or not distributed to the 
interest holder, and the character and source of the item in 
the hands of the interest holder are determined as if such item 
were realized directly by the interest holder. Entities falling 
under this description in the United States include 
partnerships, corporations that have made a valid election to 
be taxed under Subchapter S of Chapter 1 of the Code (``S'' 
corporations), common investment trusts under section 584, 
simple trusts, and grantor trusts. This paragraph also applies 
to other entities that are treated as partnerships or as 
disregarded entities for U.S. tax purposes, such as U.S. 
limited liability companies (``LLCs'').
    Under paragraph 1 of the Protocol, an item of income, 
profit or gain derived by such a fiscally transparent entity 
will be considered to be derived by a resident of a Contracting 
State if a resident is treated under the taxation laws of that 
State as deriving the item of income. For example, if a company 
that is a resident of Chile pays interest to an entity that is 
treated as fiscally transparent for U.S. tax purposes, the 
interest will be considered derived by a resident of the United 
States only to the extent that the taxation laws of the United 
States treat one or more U.S. residents (whose status as U.S. 
residents is determined, for this purpose, under U.S. tax law) 
as deriving the interest for U.S. tax purposes. In the case of 
a partnership, the persons who are, under U.S. tax laws, 
treated as partners of the entity would normally be the persons 
whom the U.S. tax laws would treat as deriving the interest 
income through the partnership. Also, it follows that persons 
whom the United States treats as partners but who are not U.S. 
residents for U.S. tax purposes may not claim a benefit for the 
interest paid to the entity, because they are not residents of 
the United States for purposes of claiming this benefit. If, 
however, the country in which they are treated as resident for 
tax purposes, as determined under the laws of that country, has 
an income tax convention with Chile, they may be entitled to 
claim a benefit under that convention. In contrast, if, for 
example, an entity is organized under U.S. laws and is 
classified as a corporation for U.S. tax purposes, interest 
paid by a company that is a resident of Chile to the U.S. 
entity will be considered derived by a resident of the United 
States since the U.S. corporation is treated under U.S. 
taxation laws as a resident of the United States and as 
deriving the income.
    The same result would be reached even if the tax laws of 
Chile would treat the entity differently (e.g., if the entity 
were not treated as fiscally transparent in the source State in 
the first example above where the entity is treated as a 
partnership for U.S. tax purposes). The results follow 
regardless of whether the entity is disregarded as a separate 
entity under the laws of one jurisdiction but not the other, 
such as a single-owner entity that is viewed as a branch for 
U.S. tax purposes and as a corporation for tax purposes under 
the laws of Chile. Similarly, the characterization of the 
entity in a third country is also irrelevant, even if the 
entity is organized in that third country. The outcome would be 
identical regardless of where the entity is organized (i.e., in 
the United States, in Chile, or as noted above, in a third 
country), subject to the saving clause of paragraph 4.
    For example, income from U.S. sources received by an entity 
organized under the laws of the United States, which is treated 
for tax purposes under the laws of Chile as a corporation and 
is owned by a shareholder who is a resident of Chile for its 
tax purposes, is not considered derived by the shareholder of 
that corporation even if, under the tax laws of the United 
States, the entity is treated as fiscally transparent. Rather, 
for purposes of the treaty, the income is treated as derived by 
the U.S. entity.
    These principles also apply to trusts to the extent that 
they are fiscally transparent in either Contracting State. For 
example, if X, a resident of Chile, creates a revocable trust 
in the United States and names persons resident in a third 
country as the beneficiaries of the trust, the trust's income 
would be regarded as being derived by a resident of Chile only 
to the extent that the laws of Chile treat X as deriving the 
income for its tax purposes, perhaps through application of 
rules similar to the U.S. ``grantor trust'' rules.
    Paragraph 1 of the Protocol is not an exception to the 
saving clause of paragraph 4 of the Protocol. Accordingly, 
paragraph 1 does not prevent a Contracting State from taxing an 
entity that is treated as a resident of that State under its 
tax law. For example, if a U.S. LLC with members who are 
residents of Chile elects to be taxed as a corporation for U.S. 
tax purposes, the United States will tax that LLC on its 
worldwide income on a net basis, without regard to whether 
Chile views the LLC as fiscally transparent.

                       ARTICLE 2 (TAXES COVERED)

    This Article specifies the U.S. taxes and the taxes of 
Chile to which the Convention applies. With two exceptions, the 
taxes specified in Article 2 are the covered taxes for all 
purposes of the Convention. A broader coverage applies, 
however, for purposes of Articles 25 (Non-Discrimination) and 
27 (Exchange of Information). Article 25 applies with respect 
to taxes of every kind and description imposed by a Contracting 
State or a political subdivision or local authority thereof, 
except that in the case of taxes not covered by the Convention, 
Article 25 does not apply to any tax laws of a Contracting 
State that are in force on the date of signature of the 
Convention. Article 27 applies with respect to all taxes 
imposed at the national level.
Paragraph 1
    Paragraph 1 identifies the categories of taxes to which the 
Convention applies. Paragraph 1 is based on the U.S. and OECD 
Models and defines the scope of application of the Convention. 
The Convention applies to taxes on income and on capital, 
including gains, imposed on behalf of a Contracting State, 
irrespective of the manner in which they are levied. Except 
with respect to Article 25 (Non-Discrimination), state and 
local taxes are not covered by the Convention.
Paragraph 2
    Paragraph 2 also is based on the U.S. and OECD Models and 
provides a definition of taxes on income and on capital. The 
Convention covers taxes on total income, on total capital, or 
on any part of income or of capital, and includes taxes on 
gains derived from the alienation of property as well as taxes 
on capital appreciation. The Convention does not apply, 
however, to social security or unemployment taxes, or any other 
charges where there is a direct connection between the levy and 
individual benefits. Nor does it apply to property taxes, 
except with respect to Article 25 (Non-Discrimination).
Paragraph 3
    Paragraph 3 lists the taxes in force at the time of 
signature of the Convention to which the Convention applies. 
Subparagraph 3(a) provides that the existing U.S. taxes subject 
to the rules of the Convention are the Federal income taxes 
imposed by the Code, together with the Federal excise taxes 
imposed on insurance premiums paid to foreign insurers (Code 
sections 4371 through 4374) and with respect to private 
foundations (Code sections 4940 through 4948). Social security 
and unemployment taxes (Code sections 1401, 3101, 3111 and 
3301) are specifically excluded from coverage. Subparagraph 
3(b) provides that the existing covered taxes of Chile are the 
taxes imposed under the Income Tax Act (Ley sobre Impuesto a la 
Renta).
Paragraph 4
    Under paragraph 4, the Convention will apply to any taxes 
that are identical, or substantially similar, to those 
enumerated in paragraph 3, and to taxes on capital, which are 
imposed in addition to, or in place of, the existing taxes 
after February 4, 2010, the date of signature of the 
Convention. The paragraph also provides that the competent 
authorities of the Contracting States will notify each other of 
any significant changes to their tax laws.

                    ARTICLE 3 (GENERAL DEFINITIONS)

    Article 3 provides general definitions and rules of 
interpretation applicable throughout the Convention. Certain 
other terms are defined in other articles of the Convention. 
For example, the term ``resident of a Contracting State'' is 
defined in Article 4 (Residence). The term ``permanent 
establishment'' is defined in Article 5 (Permanent 
Establishment). These definitions apply for all purposes of the 
Convention. Other terms, such as ``dividends,'' ``interest,'' 
and ``royalties'' are defined in specific articles for purposes 
of those articles.
Paragraph 1
    Paragraph 1 defines a number of basic terms used in the 
Convention. The introduction to paragraph 1 makes clear that 
these definitions apply for all purposes of the Convention, 
unless the context requires otherwise. This latter condition 
allows flexibility in the interpretation of the Convention in 
order to avoid results not intended by the Convention's 
negotiators.
    The geographical scope of the Convention with respect to 
the United States is set out in subparagraphs 1(a) and 1(c). It 
encompasses the United States of America, including the states 
and the District of Columbia. The term does not include Puerto 
Rico, the Virgin Islands, Guam or any other U.S. possession. 
For certain purposes, the term ``United States'' includes the 
territorial sea of the United States, as well as the sea bed 
and subsoil of undersea areas adjacent to the territorial sea 
of the United States to the extent that the United States 
exercises sovereignty in accordance with international law for 
the purpose of natural resource exploration and exploitation of 
such areas. This extension of the definition applies, however, 
only if the person, property or activity to which the 
Convention is being applied is connected with such natural 
resource exploration or exploitation. Thus, it would not 
include any activity involving the sea floor of an area over 
which the United States exercised sovereignty for natural 
resource purposes if that activity was unrelated to the 
exploration and exploitation of natural resources. This result 
is consistent with the result that would be obtained under 
Section 638, which treats the continental shelf as part of the 
United States for purposes of natural resource exploration and 
exploitation.
    The geographical scope of the Convention with respect to 
Chile is set out in subparagraphs 1(b) and 1(c). The term 
``Chile'' means the Republic of Chile and includes the 
territorial sea thereof as well as the sea bed and subsoil of 
the submarine areas adjacent to the territorial sea over which 
Chile exercises sovereign rights in accordance with 
international law.
    Subparagraph 1(d) defines the term ``person'' to include an 
individual, a company and any other body of persons. Paragraph 
1 of the 2010 Exchange of Notes provides that the term 
``person'' includes an estate, trust or partnership. The 
definition is significant for a variety of reasons. For 
example, under Article 4 (Residence), only a ``person'' can be 
a ``resident'' and therefore eligible for most benefits under 
the Convention. Also, all ``persons'' are eligible to claim 
relief under Article 26 (Mutual Agreement Procedure).
    The term ``company'' is defined in subparagraph 1(e) as a 
body corporate or an entity treated as a body corporate for tax 
purposes in the state where it is organized. The definition 
refers to the law of the state in which an entity is organized 
in order to ensure that an entity that is treated as fiscally 
transparent in its country of residence will not get 
inappropriate benefits, such as the reduced withholding rate 
provided by subparagraph 2(a) of Article 10 (Dividends). It 
also ensures that the Limitation on Benefits provisions of 
Article 24 will be applied at the appropriate level.
    The terms ``enterprise of a Contracting State'' and 
``enterprise of the other Contracting State'' are defined in 
subparagraph (f) respectively as an enterprise carried on by a 
resident of a Contracting State and an enterprise carried on by 
a resident of the other Contracting State. An enterprise of a 
Contracting State need not be carried on in that State. It may 
be carried on in the other Contracting State or a third state 
(e.g., a U.S. corporation doing all of its business in the 
other Contracting State would still be a U.S. enterprise).
    Paragraph 2 of the 2010 Exchange of Notes provides that the 
terms defined in subparagraph 1(f) of Article 3 of the 
Convention include an enterprise conducted through an entity 
(such as a partnership) that is treated as fiscally transparent 
in the Contracting State where the entity's owner is resident. 
The definition makes this point explicitly to ensure that the 
purpose of the Convention is not thwarted by an overly 
technical application of the term ``enterprise of a Contracting 
State'' to activities carried on through partnerships and 
similar entities. In accordance with Article 4 (Resident), an 
entity that is fiscally transparent in the Contracting State in 
which it is organized is not considered to be a resident of 
that Contracting State (although income derived through such an 
entity may be treated as the income of a resident of a 
Contracting State to the extent that it is taxed in the hands 
of resident partners or other resident owners). The definition 
makes clear that an enterprise conducted by such an entity will 
be treated as carried on by a resident of a Contracting State 
to the extent its partners or other owners are residents. This 
approach is consistent with Code section 875, which attributes 
a trade or business conducted by a partnership to its partners 
and a trade or business conducted by an estate or trust to its 
beneficiaries.
    Subparagraph 1(g) defines the term ``international 
traffic.'' The term means any transport by a ship or aircraft 
except when such transport is solely between places within a 
Contracting State. This definition is applicable principally in 
the context of Article 8 (International Transport). The 
definition combines with paragraph 2 of Article 8 to exempt 
from tax by the source State profits from the rental of ships 
of or aircraft on a full (time or voyage) basis and profits 
from the rental on a bareboat basis of ships or aircraft if the 
rental income is incidental to profits from the operation of 
ships or aircraft in international traffic.
    The exclusion from international traffic of transport 
solely between places within a Contracting State means, for 
example, that carriage of goods or passengers solely between 
New York and Chicago would not be treated as international 
traffic, whether carried by a U.S. or a foreign carrier. The 
substantive taxing rules of the Convention relating to the 
taxation of income from transport, principally Article 8 
(International Transport), therefore, would not apply to income 
from such carriage. Thus, if the carrier engaged in internal 
U.S. traffic were a resident of Chile (assuming that were 
possible under U.S. law), the United States would not be 
required to exempt the income from that transport under Article 
8. The income would, however, be treated as business profits 
under Article 7 (Business Profits), and therefore would be 
taxable in the United States only if attributable to a U.S. 
permanent establishment of the foreign carrier, and then only 
on a net basis. The gross basis U.S. tax imposed by section 887 
would never apply under the circumstances described. If, 
however, goods or passengers were carried by a carrier resident 
in Chile from a non-U.S. port to, for example, New York, and 
some of the goods or passengers continued on to Chicago, the 
entire transport would be international traffic. This would be 
true if the international carrier transferred the goods at the 
U.S. port of entry from a ship to a land vehicle, from a ship 
to a lighter, or even if the overland portion of the trip in 
the United States was handled by an independent carrier under 
contract with the original international carrier, so long as 
both parts of the trip were reflected in original bills of 
lading. For this reason, the Convention, following the U.S. 
Model, refers, in the definition of ``international traffic,'' 
to ``such transport'' being solely between places in the other 
Contracting State, while the OECD Model refers to the ship or 
aircraft being operated solely between such places. The 
formulation in the Convention is intended to make clear that, 
as in the above example, even if the goods are carried on a 
different aircraft for the internal portion of the 
international voyage than is used for the overseas portion of 
the trip, the definition applies to that internal portion as 
well as the external portion.
    Finally, a ``cruise to nowhere,'' i.e., a cruise beginning 
and ending in a port in the same Contracting State with no 
stops in a foreign port, would not constitute international 
traffic.
    Subparagraph 1(h) designates the ``competent authorities'' 
for the other Contracting State and the United States. The U.S. 
competent authority is the Secretary of the Treasury or his 
delegate. The Secretary of the Treasury has delegated the 
competent authority function to the Commissioner of Internal 
Revenue, who in turn has delegated the authority to the Deputy 
Commissioner (International) LB&I of the Internal Revenue 
Service. With respect to interpretative issues, the Deputy 
Commissioner (International) LB&I acts with the concurrence of 
the Associate Chief Counsel (International) of the Internal 
Revenue Service. In the case of Chile, the competent authority 
is the Minister of Finance or his authorized representative.
    The term ``national,'' as it relates to the United States 
and to Chile, is defined in subparagraph 1(i). This term is 
relevant for purposes of Articles 4 (Residence), 19 (Government 
Service) and 25 (Non-Discrimination). A national of one of the 
Contracting States is (1) an individual who is a citizen or 
national of that State, and (2) any legal person, partnership 
or association deriving its status as such from the laws in 
force in the State where it is established.
    Subparagraph 1(j) defines the term ``pension fund.'' The 
term means any person that is established in a Contracting 
State and that satisfies two criteria. First, as provided in 
clause 1(j)(i), the person must be generally exempt from income 
taxation in the Contracting State in which it is established. 
Second, as provided in clause 1(j)(ii), the person must be 
operated principally either to administer or provide pension or 
retirement benefits, or to earn income only for the benefit of 
one or more persons established in the same Contracting State 
that are generally exempt from income taxation in that 
Contracting State and are operated principally to administer or 
provide pension or retirement benefits.
    The definition recognizes that pension funds sometimes 
administer or provide benefits other than pension or retirement 
benefits, such as death benefits. However, in order for the 
fund to be considered a pension fund for purposes of the 
Convention, the provision of any other such benefits must be 
merely incidental to the fund's principal activity of 
administering or providing pension or retirement benefits. The 
definition also ensures that if a fund is a collective fund 
that earns income for the benefit of other funds, then each 
fund that participates in the collective fund must be a 
resident of the same Contracting State as the collective fund 
and must be entitled to benefits under the Convention in its 
own right.
    In the case of the United States, the term ``pension fund'' 
includes the following: a trust providing pension or retirement 
benefits under a Code section 401(a) qualified pension plan 
(which includes a section 401(k) plan); a profit sharing or 
stock bonus plan; a Code section 403(a) qualified annuity plan; 
a Code section 403(b) plan; a trust that is an individual 
retirement account under Code section 408; a Roth individual 
retirement account under Code section 408A or a simple 
retirement account under Code section 408(p); a trust providing 
pension or retirement benefits under a simplified employee 
pension plan under Code section 408(k); a trust described in 
section 457(g) providing pension or retirement benefits under a 
Code section 457(b) plan; and the Thrift Savings Fund (section 
7701(j)). A group trust described in Rev. Rul. 81-100, as 
amended by Rev. Rul. 2004-67 and Rev. Rul. 2011-1, qualifies as 
a pension fund only if each participant is a pension fund that 
is itself entitled to benefits under the Convention as a 
resident of the United States.
Paragraph 2
    Terms that are not defined in the Convention are dealt with 
in paragraph 2. Paragraph 2 provides that in the application of 
the Convention, any term used but not defined in the Convention 
will have the meaning that it has under the law of the 
Contracting State whose tax is being applied, unless the 
context requires otherwise. If the term is defined under both 
the tax and non-tax laws of a Contracting State, the definition 
in the tax law will take precedence over the definition in the 
non-tax laws. Finally, there also may be cases where the tax 
laws of a State contain multiple definitions of the same term. 
In such a case, the definition used for purposes of the 
particular provision at issue, if any, should be used.
    If the meaning of a term cannot be readily determined under 
the law of a Contracting State, or if there is a conflict in 
meaning under the laws of the two States that creates 
difficulties in the application of the Convention, the 
competent authorities, as indicated in paragraph 5 of the 
Protocol, may establish, pursuant to the provisions of Article 
26 (Mutual Agreement Procedure), a common meaning in order to 
prevent double taxation or to further any other purpose of the 
Convention. This common meaning need not conform to the meaning 
of the term under the laws of either Contracting State.
    The reference in paragraph 2 to the domestic law of a 
Contracting State means the law in effect at the time the 
treaty is being applied, not the law in effect at the time the 
treaty was signed. The use of ambulatory definitions, however, 
may lead to results that are at variance with the intentions of 
the negotiators and of the Contracting States when the treaty 
was negotiated and ratified. The inclusion in both paragraphs 1 
and 2 of an exception to the generally applicable definitions 
where the ``context otherwise requires'' is intended to address 
this circumstance. Where reflecting the intent of the 
Contracting States requires the use of a definition that is 
different from a definition under paragraph 1 or the law of the 
Contracting State applying the Convention, that definition will 
apply. Thus, flexibility in defining terms is necessary and 
permitted.

                         ARTICLE 4 (RESIDENCE)

    This Article sets forth rules for determining whether a 
person is a resident of a Contracting State for purposes of the 
Convention. As a general matter only residents of the 
Contracting States may claim the benefits of the Convention. 
The treaty definition of residence is to be used only for 
purposes of the Convention. The fact that a person is 
determined to be a resident of a Contracting State under 
Article 4 does not automatically entitle that person to the 
benefits of the Convention. In addition to being a resident, a 
person also must qualify for benefits under Article 24 
(Limitation on Benefits) in order to receive benefits conferred 
on residents of a Contracting State.
    The determination of residence for treaty purposes looks 
first to a person's liability to tax as a resident under the 
respective taxation laws of the Contracting States. As a 
general matter, a person who is liable to tax as a resident 
under the domestic laws of one Contracting State and not of the 
other is a resident of the State in which he is liable to tax 
as resident under domestic law. If, however, a person is liable 
to tax as a resident under the domestic laws of both 
Contracting States, the Article uses tie-breaker rules to 
assign a single State of residence (or no State of residence) 
to such a person for purposes of the Convention.
Paragraph 1
    The term ``resident of a Contracting State'' is defined in 
paragraph 1. In general, this definition incorporates the 
definitions of residence in U.S. law and that of Chile by 
referring to a resident as a person who, under the laws of a 
Contracting State, is liable to tax therein by reason of his 
domicile, residence, citizenship, place of management, place of 
incorporation or any other similar criterion. Thus, residents 
of the United States include aliens who are considered U.S. 
residents under Code section 7701(b). Paragraph 1 also 
specifically includes the two Contracting States, and political 
subdivisions and local authorities of the two States and any 
agency or instrumentality of the States, as residents for 
purposes of the Convention.
    The fact that a particular entity does not pay tax in 
practice will not necessarily mean that the entity is not a 
resident. An entity that is not fiscally transparent in its 
Contracting State of residence for purposes of paragraph 1 of 
the Protocol, and is not unconditionally exempt from tax, will 
generally be treated as a resident for purposes of the 
Convention. This is generally true even for an entity that, in 
practice, is not required to pay tax if it meets certain 
requirements with respect to its activities, types of income, 
or distribution practices. For example, a U.S. Regulated 
Investment Company (RIC) and a U.S. Real Estate Investment 
Trust (REIT) are residents of the United States for purposes of 
the treaty. These entities are taxable to the extent that they 
do not currently distribute their profits, and therefore may be 
regarded as ``liable to tax,'' even though these entities do 
not generally have taxable income in practice. They also must 
satisfy a number of requirements under the Code in order to be 
entitled to special tax treatment.
    Under paragraph 1 of Article 4, a person who is liable to 
tax in a Contracting State only in respect of income from 
sources within that State or capital situated therein will not 
be treated as a resident of that Contracting State for purposes 
of the Convention. Thus, a consular official of Chile who is 
posted in the United States, who may be subject to U.S. tax on 
U.S. source investment income, but is not taxable in the United 
States on non-U.S. source income (see Code section 
7701(b)(5)(B)), would not be considered a resident of the 
United States for purposes of the Convention. Under paragraph 3 
of the 2010 Exchange of Notes, a person who is liable to tax in 
a Contracting State only on profits attributable to a permanent 
establishment in that State will also not be treated as a 
resident of that State for purposes of the Convention. Thus, an 
enterprise of Chile with a permanent establishment in the 
United States is not, by virtue of that permanent 
establishment, a resident of the United States. The enterprise 
generally is subject to U.S. tax only with respect to its 
income that is attributable to the U.S. permanent 
establishment, not with respect to its worldwide income, as it 
would be if it were a U.S. resident.
    Paragraph 6 of the Protocol provides that entities such as 
pension funds as defined in Article 3 (General Definitions) and 
legal persons organized under the laws of a Contracting State 
and established exclusively for religious, charitable, 
scientific, artistic, cultural, or educational purposes are 
residents of the Contracting State in which they are 
established or organized. Such persons are liable to tax, 
notwithstanding that all or part of their income or gains may 
be exempt from tax under the domestic laws of that State. Thus, 
a section 501(c) organization organized in the United States 
(such as a U.S. charity) that is generally exempt from tax 
under U.S. law is nevertheless a resident of the United States 
for all purposes of the Convention.
    Paragraph 7 of the Protocol provides that Chile shall treat 
a U.S. citizen or an alien lawfully admitted for permanent 
residence (a ``green card holder'') as a resident of the United 
States only if such individual has a substantial presence, 
permanent home, or habitual abode in the United States and if 
that individual is not a resident of a State other than Chile 
for purposes of a double taxation convention between that State 
and Chile.
Paragraph 2
    If, under the domestic law of both Contracting States, and, 
thus, under paragraph 1, an individual is a resident of both 
Contracting States, a series of tie-breaker rules are provided 
in paragraph 2 to determine a single State of residence for 
that individual. These tests are to be applied in the order in 
which they are stated. The first test is based on where the 
individual has a permanent home. If that test is inconclusive 
because the individual has a permanent home available to him in 
both States, he will be considered to be a resident of the 
Contracting State where his personal and economic relations are 
closest (i.e., the location of his ``center of vital 
interests''). If that test is also inconclusive, or if he does 
not have a permanent home available to him in either State, he 
will be treated as a resident of the Contracting State where he 
maintains a habitual abode. If he has a habitual abode in both 
States or in neither of them, he will be treated as a resident 
of the Contracting State of which he is a national. If he is a 
national of both States or of neither, competent authorities 
shall settle the question by mutual agreement.
Paragraph 3
    Dual residents other than individuals (such as companies, 
trusts or estates) are addressed by paragraph 3. If such a 
person is, under the rules of paragraph 1, resident in both 
Contracting States, the competent authorities shall seek to 
determine a single State of residence for that person for 
purposes of the Convention. If the competent authorities are 
unable to reach such an agreement, that person may not claim 
any benefit provided by the Convention, except for those 
provided by Article 26 (Mutual Agreement Procedure).
    Regardless of the outcomes under this paragraph, dual 
resident companies, may be treated as a resident of a 
Contracting State for purposes other than that of obtaining 
benefits under the Convention. For example, if a dual resident 
company pays a dividend to a resident of Chile, the U.S. paying 
agent would withhold on that dividend at the appropriate treaty 
rate because reduced withholding is a benefit enjoyed by the 
resident of Chile, not by the dual resident company. The dual 
resident company that paid the dividend would, for this 
purpose, be treated as a resident of the United States under 
the Convention. In addition, information relating to dual 
resident persons can be exchanged under the Convention because, 
by its terms, Article 27 (Exchange of Information) is not 
limited to residents of the Contracting States.

                  ARTICLE 5 (PERMANENT ESTABLISHMENT)

    This Article defines the term ``permanent establishment,'' 
a term that is significant for several articles of the 
Convention. The existence of a permanent establishment in a 
Contracting State is necessary under Article 7 (Business 
Profits) for the taxation by that State of the business profits 
of a resident of the other Contracting State. Articles 10 
(Dividends), 11 (Interest), and 12 (Royalties) provide for 
reduced rates of tax at source on payments of these items of 
income to a resident of the other State only when the income is 
not attributable to a permanent establishment that the 
recipient has in the source State. The concept is also relevant 
in determining which Contracting State may tax certain gains 
under Article 13 (Capital Gains) and certain ``other income'' 
under Article 21 (Other Income).
Paragraph 1
    The basic definition of the term ``permanent 
establishment'' is contained in paragraph 1. As used in the 
Convention, the term means a fixed place of business through 
which the business of an enterprise is wholly or partly carried 
on. As indicated in the OECD Commentary to Article 5 (see 
paragraphs 4 through 8), a general principle to be observed in 
determining whether a permanent establishment exists is that 
the place of business must be ``fixed'' in the sense that a 
particular building or physical location is used by the 
enterprise for the conduct of its business, and that it must be 
foreseeable that the enterprise's use of this building or other 
physical location will be more than temporary.
Paragraph 2
    Paragraph 2 lists a number of types of fixed places of 
business that constitute a permanent establishment. This list 
is illustrative and non-exclusive. According to paragraph 2, 
the term permanent establishment includes a place of 
management, a branch, an office, a factory, a workshop, and a 
mine, oil or gas well, quarry or any other place of extraction 
or exploitation of natural resources.
Paragraph 3
    Subparagraphs 3(a) and 3(b) provide rules to determine 
whether a building site or a construction, assembly or 
installation project, or an installation or drilling rig or 
ship used for the exploration of natural resources constitutes 
a permanent establishment for the contractor, driller, etc. 
Subparagraph 3(a) provides that an installation used for on-
land exploration of natural resources does not create a 
permanent establishment unless it lasts, or the activity 
continues, for more than three months. Subparagraph 3(b) 
provides that a building site or construction or installation 
project and the supervisory activities in connection therewith, 
or a drilling rig or ship used for the exploration of natural 
resources not referred to in subparagraph 3(a) does not create 
a permanent establishment unless it lasts, or the activity 
continues, for more than six months. It is only necessary to 
refer to ``exploration'' and not ``exploitation'' in this 
context because exploitation activities are defined to 
constitute a permanent establishment under subparagraph 2(f). 
Thus, a drilling rig does not constitute a permanent 
establishment if a well is drilled in only two months, but if 
production begins in the following month the well becomes a 
permanent establishment as of that date.
    In applying subparagraphs 3(a) and 3(b), time spent by a 
sub-contractor on a building site is counted as time spent by 
the general contractor at the site for purposes of determining 
whether the general contractor has a permanent establishment. 
However, for the sub-contractor to be treated as having a 
permanent establishment, the sub-contractor's activities at the 
site must last for more than 12 months. If a sub-contractor is 
on a site intermittently, then, for purposes of applying the 
12-month rule, time is measured from the first day the sub-
contractor is on the site until the last day he is on the site 
(i.e., intervening days that the sub-contractor is not on the 
site are counted).
    Subparagraph 3(c) provides that an enterprise is deemed to 
have a permanent establishment in the other Contracting State 
if the enterprise performs services in that other State for a 
period or periods exceeding in the aggregate 183 days in any 
twelve month period, and these services are performed through 
one or more individuals who are present and performing such 
services in that other State. Subparagraph 3(c) applies only to 
the performance of services by an enterprise and only to 
services performed by an enterprise for third parties. Thus, 
the provision does not have the effect of deeming an enterprise 
to have a permanent establishment merely because services are 
provided to that enterprise. The provision only applies to 
services that are performed by an enterprise of a Contracting 
State within the other Contracting State. It is therefore not 
sufficient that the relevant services be merely furnished to a 
resident of the other Contracting State. Where, for example, an 
enterprise provides customer support or other services by 
telephone or computer to customers located in the other State, 
those would not be covered by subparagraph 3(c) because they 
are not performed by that enterprise within the other State. 
Another example would be that of an architect who is hired to 
design blueprints for the construction of a building in the 
other State. As part of completing the project, the architect 
must make visits to that other State, and his days of presence 
there would be counted for purposes of determining whether the 
183-day threshold is satisfied. However, the days that the 
architect spends working on the blueprint in his home office 
shall not count for purposes of the 183-day threshold, because 
the architect is not performing those services within the other 
State.
    Subparagraph 3(c) refers to days during which an enterprise 
performs services in the other Contracting State through one or 
more individuals who are present and performing such services 
in that other State. Accordingly, non-working days such as 
weekends or holidays would not count for purposes of the 
provision, as long as no services are actually being performed 
while in the other State on those days. For purposes of 
subparagraph 3(c), even if the enterprise sends many 
individuals simultaneously to the other State to provide 
services, their collective presence during one calendar day 
will count for only one day of the enterprise's presence in the 
other State. For instance, if an enterprise sends 20 employees 
to the other Contracting State to perform services for a client 
in that other State for 10 days, the enterprise will be 
considered to have performed services in that other State only 
for 10 days, not 200 days (20 employees x 10 days).
    By deeming the enterprise to provide services through a 
permanent establishment in the other Contracting State, 
subparagraph 3(c) allows the application of Article 7 (Business 
Profits), and accordingly, the taxation of the services shall 
be on a net basis. Such taxation is also limited to the profits 
attributable to the activities carried on in performing the 
relevant services. It will be important to ensure that only the 
profits properly attributable to the functions performed and 
risks assumed by provision of the services will be attributed 
to the deemed permanent establishment.
    For purposes of computing the time limits described in 
paragraph 3, the time limits apply separately to each 
installation, site or project, as the case may be. The time 
period begins when work (including preparatory work carried on 
by the enterprise) physically begins in a Contracting State. A 
series of contracts or projects by a contractor that are 
interdependent both commercially and geographically are to be 
treated as a single project for purposes of applying the time 
period. For example, the construction of a housing development 
would be considered as a single project even if each house were 
constructed for a different purchaser.
    If the relevant time limit is exceeded, the installation, 
site or project constitutes a permanent establishment from the 
first day of activity.
    Paragraph 3 provides that for purposes of computing the 
time limits in paragraph 3, activities carried on by an 
enterprise associated with another enterprise, within the 
meaning of Article 9 (Associated Enterprises), shall be 
regarded as carried on by the last-mentioned enterprise if the 
activities of both enterprises are substantially the same, 
unless they are carried on simultaneously.
Paragraph 4
    This paragraph contains exceptions to the general rule of 
paragraph 1, listing a number of activities that may be carried 
on through a fixed place of business but which nevertheless do 
not create a permanent establishment. The use of facilities 
solely to store, display or deliver merchandise belonging to an 
enterprise does not constitute a permanent establishment of 
that enterprise. The maintenance of a stock of goods belonging 
to an enterprise solely for the purpose of storage, display or 
delivery, or solely for the purpose of processing by another 
enterprise does not give rise to a permanent establishment of 
the first-mentioned enterprise. The maintenance of a fixed 
place of business solely for the purpose of purchasing goods or 
merchandise, or for collecting information, for the enterprise 
does not constitute a permanent establishment of that 
enterprise. The maintenance of a fixed place of business solely 
for the purpose of advertising, supplying information or 
carrying out scientific research for the enterprise or any 
other similar activity, if such activity is of a preparatory or 
auxiliary character does not constitute a permanent 
establishment of the enterprise.
Paragraph 5
    Paragraphs 5 and 6 specify when activities carried on by an 
agent or other person acting on behalf of an enterprise create 
a permanent establishment of that enterprise. Under paragraph 
5, a person is deemed to create a permanent establishment of 
the enterprise if that person has and habitually exercises an 
authority to conclude contracts that are binding on the 
enterprise. If, however, his activities are limited to those 
activities specified in paragraph 4 which would not constitute 
a permanent establishment if carried on by the enterprise 
through a fixed place of business, the person does not create a 
permanent establishment of the enterprise. For example, if the 
person has no authority to conclude contracts in the name of 
the enterprise with its customers for the sale of the goods 
produced by the enterprise, but it can enter into service 
contracts that are binding on the enterprise for the 
enterprise's business equipment, this contracting authority 
would not fall within the scope of the paragraph, even if 
exercised regularly.
    The Convention uses the U.S. Model language ``binding on 
the enterprise,'' rather than the OECD Model language ``in the 
name of that enterprise.'' This difference in language is not 
intended to be a substantive difference. As indicated in 
paragraph 32 to the OECD Commentaries on Article 5, paragraph 5 
of the Article is intended to encompass persons who have 
``sufficient authority to bind the enterprise's participation 
in the business activity in the State concerned.''
Paragraph 6
    Under paragraph 6, an enterprise is not deemed to have a 
permanent establishment in a Contracting State merely because 
it carries on business in that State through an independent 
agent, including a broker or general commission agent, if the 
agent is acting in the ordinary course of his business as an 
independent agent. Paragraph 8 of the Protocol identifies the 
two conditions that must be satisfied for a person to be within 
the scope of paragraph 6 of Article 5 of the Convention: the 
agent must be both legally and economically independent of the 
enterprise; and the agent must act in the ordinary course of 
its business in carrying out activities on behalf of the 
enterprise.
    Whether the agent and the enterprise are independent is a 
factual determination. Among the questions to be considered is 
the extent to which the agent operates on the basis of 
instructions from the enterprise. An agent that is subject to 
(i) detailed instructions regarding the conduct of its 
operations, or (ii) comprehensive control by the enterprise is 
not legally independent.
    In determining whether the agent is economically 
independent, a relevant factor is the extent to which the agent 
bears business risk. Business risk refers primarily to risk of 
loss. An independent agent typically bears risk of loss from 
its own activities. In the absence of other factors that would 
establish dependence, an agent that shares business risk with 
the enterprise, or has its own business risk, is economically 
independent because its business activities are not integrated 
with those of the principal. Conversely, an agent that bears 
little or no risk from the activities it performs is not 
economically independent and therefore is not described in 
paragraph 6.
    Another relevant factor in determining whether an agent is 
economically independent is whether the agent acts exclusively 
or nearly exclusively for the principal. Such a relationship 
may indicate that the principal has economic control over the 
agent. A number of principals acting in concert also may have 
economic control over an agent. The limited scope of the 
agent's activities and the agent's dependence on a single 
source of income may indicate that the agent lacks economic 
independence. It should be borne in mind, however, that 
exclusivity is not in itself dispositive; an agent may be 
economically independent notwithstanding an exclusive 
relationship with the principal if it has the capacity to 
diversify and acquire other clients without substantial 
modifications to its current business and without substantial 
harm to its business profits. Thus, exclusivity should be 
viewed merely as a pointer to further investigation of the 
relationship between the principal and the agent. Each case 
must be addressed on the basis of its own facts and 
circumstances.
Paragraph 7
    This paragraph clarifies that a company that is a resident 
of a Contracting State is not deemed to have a permanent 
establishment in the other Contracting State merely because it 
controls, or is controlled by, a company that is a resident of 
that other Contracting State, or that carries on business in 
that other Contracting State. The determination whether a 
permanent establishment exists is made solely on the basis of 
the factors described in paragraphs 1 through 6 of the Article. 
Whether a company is a permanent establishment of a related 
company, therefore, is based solely on those factors and not on 
the ownership or control relationship between the companies.

       ARTICLE 6 (INCOME FROM REAL PROPERTY (IMMOVABLE PROPERTY))

    This article deals with the taxation of income from real 
property (immovable property) situated in a Contracting State 
(the ``situs State''). The Article does not grant an exclusive 
taxing right to the situs State; the situs State is merely 
given the primary right to tax. The Article does not impose any 
limitation in terms of rate or form of tax imposed by the situs 
State, except that, as provided in paragraph 9 of the Protocol, 
the situs State must allow the taxpayer an election to be taxed 
on a net basis.
Paragraph 1
    The first paragraph of Article 6 states the general rule 
that income of a resident of a Contracting State derived from 
real property (immovable property) situated in the other 
Contracting State may be taxed in the Contracting State in 
which the property is situated. The paragraph specifies that 
income from real property (immovable property) includes income 
from agriculture and forestry. Given the availability of the 
net election in paragraph 9 of the Protocol, taxpayers 
generally should be able to obtain the same tax treatment in 
the situs country regardless of whether the income is treated 
as business profits or real property (immovable property) 
income.
Paragraph 2
    The term ``real property (immovable property)'' is defined 
in paragraph 2 by reference to the internal law definition in 
the situs State. In the case of the United States, the term has 
the meaning given to it by Treas. Reg. Sec. 1.897-1(b). In 
addition to the definitions in the two Contracting States, the 
paragraph specifies certain additional classes of property 
that, regardless of domestic law definitions, are within the 
scope of the term for purposes of the Convention. This expanded 
definition conforms to that in the OECD Model. The definition 
of ``real property (immovable property)'' for purposes of 
Article 6 is more limited than the expansive definition of 
``real property (immovable property)'' in paragraph 1 of 
Article 13 (Capital Gains). The Article 13 term includes not 
only real property (immovable property) as defined in Article 6 
but certain other interests in real property (immovable 
property).
Paragraph 3
    Paragraph 3 makes clear that all forms of income derived 
from the exploitation of real property (immovable property) are 
taxable in the Contracting State in which the property is 
situated. This includes income from any use of real property 
(immovable property), including, but not limited to, income 
from direct use by the owner (in which case income may be 
imputed to the owner for tax purposes) and rental income from 
the letting of real property (immovable property). In the case 
of a net lease of real property (immovable property), if a net 
election pursuant to paragraph 9 of the Protocol has not been 
made, the gross rental payment (before deductible expenses 
incurred by the lessee) is treated as income from the property.
    Other income closely associated with real property 
(immovable property) is covered by other Articles of the 
Convention, however, and not Article 6. For example, income 
from the disposition of an interest in real property (immovable 
property) is not considered ``derived'' from real property 
(immovable property); taxation of that income is addressed in 
Article 13 (Capital Gains). Interest paid on a mortgage on real 
property (immovable property) property would be covered by 
Article 11 (Interest). Distributions by a U.S. Real Estate 
Investment Trust or certain regulated investment companies 
would fall under Article 13 in the case of distributions of 
U.S. real property gain or Article 10 (Dividends) in the case 
of distributions treated as dividends. Finally, distributions 
from a United States Real Property Holding Corporation are not 
considered to be income from the exploitation of real property 
(immovable property); such payments would fall under Article 10 
or 13.
Paragraph 4
    This paragraph specifies that the basic rule of paragraph 1 
(as elaborated in paragraph 3) applies to income from real 
property (immovable property) of an enterprise and to income 
from real property (immovable property) used for the 
performance of independent personal services. This clarifies 
that the situs country may tax the real property income 
(including rental income) of a resident of the other 
Contracting State in the absence of attribution to a permanent 
establishment or a fixed base in the situs State. This 
provision represents an exception to the general rule under 
Articles 7 (Business Profits) and 14 (Independent Personal 
Services) that income must be attributable to a permanent 
establishment or fixed base in order to be taxable in the situs 
State.
Paragraph 9 of the Protocol
    The paragraph provides that a resident of one Contracting 
State that derives real property (immovable property) income 
from the other State may elect, for any taxable year, to be 
subject to tax in that other State on a net basis, as though 
the income were attributable to a permanent establishment in 
that other State. In the case of real property (immovable 
property) situated in the United States, the election may be 
terminated only with the consent of the competent authority of 
the United States. Termination of such election will be granted 
in accordance with the provisions of Treas. Reg. Sec. 1.871-
10(d)(2).
    The 2011 Exchange of Notes corrects a typographical error 
in the header of paragraph 9 of the Protocol. The header refers 
to paragraph 5 of Article 6. It should refer instead only to 
Article 6.

                      ARTICLE 7 (BUSINESS PROFITS)

    This Article provides rules for the taxation by a 
Contracting State of the business profits of an enterprise of 
the other Contracting State.
Paragraph 1
    Paragraph 1 states the general rule that business profits 
of an enterprise of one Contracting State may not be taxed by 
the other Contracting State unless the enterprise carries on 
business in that other Contracting State through a permanent 
establishment (as defined in Article 5 (Permanent 
Establishment)) situated there. When that condition is met, the 
State in which the permanent establishment is situated may tax 
the enterprise on the income that is attributable to the 
permanent establishment.
    Because Article 7 applies to income earned by an enterprise 
from the furnishing of personal services, the article also 
applies to income derived by a partner resident in a 
Contracting State that is attributable to personal services 
performed in the other Contracting State through a partnership 
with a permanent establishment in that other State. Income 
which may be taxed under this Article includes all income 
attributable to the permanent establishment in respect of the 
performance of the personal services carried on by the 
partnership (whether by the partner himself, other partners in 
the partnership, or by employees assisting the partners) and 
any income from activities ancillary to the performance of 
those services (e.g., charges for facsimile services).
    The application of Article 7 to a service partnership may 
be illustrated by the following example. A partnership formed 
in Chile has five partners (who agree to split profits 
equally), four of whom are resident and perform personal 
services only in Chile at Office A, and one of whom performs 
personal services at Office B, a permanent establishment in the 
United States. In this case, the four partners of the 
partnership resident in Chile may be taxed in the United States 
in respect of their share of the income attributable to the 
permanent establishment, Office B. The services giving rise to 
income which may be attributed to the permanent establishment 
would include not only the services performed by the one 
resident partner, but also, for example, if one of the four 
other partners came to the United States and worked on an 
Office B matter there, the income in respect of those services. 
Income from the services performed by the visiting partner 
would be subject to tax in the United States regardless of 
whether the visiting partner actually visited or used Office B 
while performing services in the United States.
Paragraph 2
    Paragraph 2 provides i rules for the attribution of 
business profits to a permanent establishment. The Contracting 
States will attribute to a permanent establishment the profits 
that it would have earned had it been a distinct and separate 
enterprise engaged in the same or similar activities under the 
same or similar conditions and dealing wholly independently 
with the enterprise of which it is a permanent establishment. 
This language incorporates the arm's-length standard for 
purposes of determining the profits attributable to a permanent 
establishment. The computation of business profits attributable 
to a permanent establishment under this paragraph is subject to 
the rules of paragraph 3 for the allowance of expenses incurred 
for the purposes of earning the profits.
    The ``attributable to'' concept of paragraph 2 is analogous 
but not equivalent to the ``effectively connected'' concept in 
Code section 864(c). The profits attributable to a permanent 
establishment may be from sources within or without a 
Contracting State.
    Paragraph 10 of the iProtocol provides that the business 
profits attributed to a permanent establishment include only 
those derived from the assets or activities of the permanent 
establishment. This rule is consistent with the ``asset-use'' 
and ``business activities'' tests of Code section 864(c)(2).
Paragraph 3
    Paragraph 3 provides i that in determining the business 
profits of a permanent establishment, deductions shall be 
allowed for the necessary expenses incurred for the purposes of 
the permanent establishment, ensuring that business profits 
will be taxed on a net basis. This rule is not limited to 
expenses incurred exclusively for the purposes of the permanent 
establishment, but includes a reasonable allocation of 
executive and general administrative expenses, research and 
development expenses, interest, and other expenses incurred for 
the purposes of the enterprise as a whole, or that part of the 
enterprise that includes the permanent establishment, whether 
incurred in the Contracting State in which the permanent 
establishment is situated or elsewhere. Deductions are to be 
allowed regardless of which accounting unit of the enterprise 
books the expenses, so long as they are incurred for the 
purposes of the permanent establishment. For example, a portion 
of the interest expense recorded on the books of the home 
office in one State may be deducted by a permanent 
establishment in the other if properly allocable thereto. This 
rule permits (but does not require) each Contracting State to 
apply the type of expense allocation rules provided by U.S. law 
(such as in Treas. Reg. Sec. Sec. 1.861-8 and 1.882-5).
    Paragraph 3 does not permit a deduction for expenses 
charged to a permanent establishment by another unit of the 
enterprise. Thus, a permanent establishment may not deduct a 
royalty deemed paid to the head office. Similarly, a permanent 
establishment may not increase its business profits by the 
amount of any notional fees for ancillary services performed 
for another unit of the enterprise, but also should not receive 
a deduction for the expense of providing such services, since 
those expenses would be incurred for purposes of a business 
unit other than the permanent establishment.
Paragraph 4
    Paragraph 4 provides that no business profits can be 
attributed to a permanent establishment merely because it 
purchases goods or merchandise for the enterprise of which it 
is a part. This rule applies only to an office that performs 
functions for the enterprise in addition to purchasing. The 
income attribution issue does not arise if the sole activity of 
the office is the purchase of goods or merchandise because such 
activity does not give rise to a permanent establishment under 
Article 5 (Permanent Establishment). A common situation in 
which paragraph 4 is relevant is one in which a permanent 
establishment purchases raw materials for the enterprise's 
manufacturing operation conducted outside the United States and 
sells the manufactured product. While business profits may be 
attributable to the permanent establishment with respect to its 
sales activities, no profits are attributable to it with 
respect to its purchasing activities.
Paragraph 5
    Paragraph 5 provides that profits shall be determined by 
the same method each year, unless there is good reason to 
change the method used. This rule assures consistent tax 
treatment over time for permanent establishments. It limits the 
ability of both the Contracting State and the enterprise to 
change the accounting methods to be applied to the permanent 
establishment. It does not, however, restrict a Contracting 
State from imposing additional requirements, such as the rules 
under Code section 481, to prevent amounts from being 
duplicated or omitted following a change in accounting method.
Paragraph 6
    Paragraph 6 coordinates the provisions of Article 7 and 
other provisions of the Convention. Under this paragraph, when 
business profits include items of income that are dealt with 
separately under other articles of the Convention, the 
provisions of those articles will, except when they 
specifically provide to the contrary, take precedence over the 
provisions of Article 7. For example, the taxation of dividends 
will be determined by the rules of Article 10 (Dividends), and 
not by Article 7, except where, as provided in paragraph 5 of 
Article 10, the dividend is attributable to a permanent 
establishment. In the latter case, the provisions of Article 7 
apply. Thus, an enterprise of one State deriving dividends from 
the other State may not rely on Article 7 to exempt those 
dividends from tax at source if they are not attributable to a 
permanent establishment of the enterprise in the other State. 
By the same token, if the dividends are attributable to a 
permanent establishment in the other State, the dividends may 
be taxed on a net income basis at the source State's full 
corporate tax rate, rather than on a gross basis under

                              ARTICLE 10.

    As provided in Article 8 (International Transport), income 
derived from shipping and air transport activities in 
international traffic described in that Article is taxable only 
in the country of residence of the enterprise regardless of 
whether it is attributable to a permanent establishment 
situated in the source State.
Paragraph 7
    Paragraph 7 incorporates into the Convention the rule of 
Code section 864(c)(6). Like the Code section on which it is 
based, paragraph 7 provides that any income or gain 
attributable to a permanent establishment or fixed base during 
its existence is taxable in the Contracting State where the 
permanent establishment or fixed base is situated, even if the 
payment of that income or gain is deferred until after the 
permanent establishment or fixed base ceases to exist. This 
rule applies with respect to this Article, paragraph 5 of 
Article 10 (Dividends), paragraph 6 of Article 11 (Interest), 
paragraph 4 of Article 12 (Royalties), paragraph 3 of Article 
13 (Capital Gains), Article 14 (Independent Personal Services), 
and paragraph 2 of Article 21 (Other Income).
    The effect of this rule can be illustrated by the following 
example. Assume a company that is a resident of the other 
Contracting State and that maintains a permanent establishment 
in the United States winds down the permanent establishment's 
business and sells the permanent establishment's inventory and 
assets to a U.S. buyer at the end of year 1 in exchange for an 
interest-bearing installment obligation payable in full at the 
end of year 3. Despite the fact that Article 13's threshold 
requirement for U.S. taxation is not met in year 3 because the 
company has no activities in the United States, the United 
States may tax the deferred income payment recognized by the 
company in year 3.
Paragraph 8
    Paragraph 8 provides that notwithstanding the provisions of 
paragraph 1, in the absence of a permanent establishment, the 
United States may impose its excise tax on insurance premiums 
paid to foreign insurers, and Chile may impose its tax on 
payments for insurance policies contracted with foreign 
insurers. However, notwithstanding the provisions of Article 2 
(Taxes Covered), such tax shall not exceed: (i) 2 percent of 
the gross amount of premiums in the case of policies of 
reinsurance; and (ii) 5 percent of the gross amount of premiums 
in the case of all other policies of insurance.
Paragraph 9
    Paragraph 9 defines the term ``business profits'' to mean 
income from any trade or business. In accordance with this 
broad definition, the term ``business profits'' includes income 
attributable to notional principal contracts and other 
financial instruments to the extent that the income is 
attributable to a trade or business of dealing in such 
instruments or is otherwise related to a trade or business (as 
in the case of a notional principal contract entered into for 
the purpose of hedging currency risk arising from a trade or 
business). Any other income derived from such instruments is, 
unless specifically covered in another article, dealt with 
under Article 21 (Other Income).
    In addition, the term includes income derived from the 
furnishing of personal services. Thus, a consulting firm 
resident in one State whose employees or partners perform 
services in the other State through a permanent establishment 
may be taxed in that other State on a net basis under Article 
7, and not under Article 15 (Dependent Personal Services), 
which applies only to income of employees. With respect to the 
enterprise's employees themselves, however, their salary 
remains subject to Article 15.
    Relationship to Other Articles
    This Article is subject to the saving clause of paragraph 4 
of the Protocol. Thus, if a citizen of the United States who is 
a resident of Chile under the Convention derives business 
profits from the United States that are not attributable to a 
permanent establishment in the United States, the United States 
may, subject to the special foreign tax credit rules of 
paragraph 3 of Article 23 (Relief from Double Taxation), tax 
those profits, notwithstanding the provision of paragraph 1 of 
this Article which would exempt the income from U.S. tax.
    The benefits of this Article are also subject to Article 24 
(Limitation on Benefits). Thus, an enterprise of Chile that 
derives income effectively connected with a U.S. trade or 
business may not claim the benefits of Article 7 unless the 
resident carrying on the enterprise qualifies for such benefits 
under Article 24.

                  ARTICLE 8 (INTERNATIONAL TRANSPORT)

    This Article governs the taxation of profits from the 
operation of ships and aircraft in international traffic. The 
term ``international traffic'' is defined in subparagraph 1(g) 
of Article 3 (General Definitions).
Paragraph 1
    Paragraph 1 provides that profits derived by an enterprise 
of a Contracting State from the operation in international 
traffic of ships or aircraft are taxable only in that 
Contracting State. Because paragraph 6 of Article 7 (Business 
Profits) defers to Article 8 with respect to shipping income, 
such income derived by a resident of one of the Contracting 
States may not be taxed in the other State even if the 
enterprise has a permanent establishment in that other State. 
Thus, if a U.S. airline has a ticket office in Chile, Chile may 
not tax the airline's profits attributable to that office under 
Article 7. Since entities engaged in international 
transportation activities normally will have many permanent 
establishments in a number of countries, the rule avoids 
difficulties that would be encountered in attributing income to 
multiple permanent establishments if the income were covered by 
Article 7.
Paragraph 2
    The profits from the operation of ships or aircraft in 
international traffic that is exempt from tax under paragraph 1 
is defined in paragraph 2.
    In addition to profits derived directly from the operation 
of ships or aircraft in international traffic, this definition 
also includes certain items of rental income. First, profits 
from the operation of ships or aircraft include profits of an 
enterprise of a Contracting State from the rental of ships or 
aircraft on a full (time or voyage) basis (i.e., with crew). 
Therefore, such profits are exempt from tax in the other 
Contracting State under paragraph 1. Also, paragraph 2 
encompasses profits from the charter or rental of ships or 
aircraft on a bareboat basis (i.e., without crew) if those 
profits are incidental to profits from the operation by the 
enterprise of ships or aircraft in international traffic. If 
profits of an enterprise from bareboat rentals are not 
incidental to profits from that enterprise's operation of ships 
or aircraft in international traffic, the profits from the 
bareboat rentals would constitute business profits and would be 
taxed in accordance with the provisions of Article 7.
    Paragraph 11 of the Protocol provides that inland transport 
within either Contracting State shall be treated as the 
operation of ships or aircraft in international traffic if 
undertaken as part of a transport that includes transport by 
ships or aircraft in international traffic. Thus, consistent 
with the Commentary to Article 8 of the OECD Model, profits of 
an enterprise from the inland transport of property or 
passengers within either Contracting State falls within Article 
8 if the transport is undertaken as part of the international 
transport of property or passengers by the enterprise. For 
example, if a U.S. shipping company contracts to carry property 
from Chile to a U.S. city and, as part of that contract, it 
transports the property by truck from its point of origin to an 
airport in Chile (or it contracts with a trucking company to 
carry the property to the airport) the income earned by the 
U.S. shipping company from the overland leg of the journey 
would be taxable only in the United States. Similarly, Article 
8 also would apply to all of the income derived from a contract 
for the international transport of goods, even if the goods 
were transported to the port by a lighter, not by the vessel 
that carried the goods in international waters.
    Finally, certain non-transport activities that are an 
integral part of the services performed by a transport company, 
or are ancillary to the enterprise's operation of ships or 
aircraft in international traffic, are understood to be covered 
in paragraph 1, though they are not specified in paragraph 2. 
These include, for example, the provision of goods and services 
by engineers, ground and equipment maintenance and staff, cargo 
handlers, catering staff and customer services personnel. Where 
the enterprise provides such goods to, or performs services 
for, other enterprises and such activities are directly 
connected with or ancillary to the enterprise's operation of 
ships or aircraft in international traffic, the profits from 
the provision of such goods and services to other enterprises 
will fall under this paragraph.
    For example, enterprises engaged in the operation of ships 
or aircraft in international traffic may enter into pooling 
arrangements for the purposes of reducing the costs of 
maintaining facilities needed for the operation of their ships 
or aircraft in other countries. For instance, where an airline 
enterprise agrees (for example, under an International Airlines 
Technical Pool agreement) to provide spare parts or maintenance 
services to other airlines landing at a particular location 
(which allows it to benefit from these services at other 
locations), activities carried on pursuant to that agreement 
will be ancillary to the operation of aircraft in international 
traffic by the enterprise.
    Also, advertising that the enterprise may do for other 
enterprises in magazines offered aboard ships or aircraft that 
it operates in international traffic or at its business 
locations, such as ticket offices, is ancillary to its 
operation of these ships or aircraft. Profits generated by such 
advertising fall within this paragraph. Income earned by 
concessionaires, however, is not covered by Article 8. These 
interpretations of paragraph 1 also are consistent with the 
Commentary to Article 8 of the OECD Model.
Paragraph 3
    Under this paragraph, profits of an enterprise of a 
Contracting State from the use, maintenance or rental of 
containers (including related equipment, such as barges and 
trailers, for the transport of such containers) used for the 
transport of goods or merchandise in international traffic are 
exempt from tax in the other Contracting State. This result 
obtains under paragraph 3 regardless of whether the recipient 
of the income is engaged in the operation of ships or aircraft 
in international traffic, and regardless of whether the 
enterprise has a permanent establishment in the other 
Contracting State. Only income from the use, maintenance or 
rental of containers that is incidental to other income from 
international traffic is covered by Article 8 of the OECD 
Model.
Paragraph 4
    This paragraph clarifies that the provisions of paragraphs 
1 and 3 also apply to profits of an enterprise of a Contracting 
State from participation in a pool, joint business or 
international operating agency. This refers to various 
arrangements for international cooperation by carriers in 
shipping and air transport. For example, airlines from two 
countries may agree to share the transport of passengers 
between the two countries. They each will fly the same number 
of flights per week and share the revenues from that route 
equally, regardless of the number of passengers that each 
airline actually transports. Paragraph 4 makes clear that with 
respect to each carrier the income dealt with in the Article is 
that carrier's share of the total transport, not the income 
derived from the passengers actually carried by the airline. 
This paragraph corresponds to paragraph 4 of Article 8 of the 
OECD Model.
    Relationship to Other Articles
    The taxation of gains from the alienation of ships, 
aircraft or containers is not dealt with in this Article but in 
paragraph 4 of Article 13 (Capital Gains).
    As with other benefits of the Convention, the benefit of 
exclusive residence country taxation under Article 8 is 
available to an enterprise only if it is entitled to benefits 
under Article 24 (Limitation on Benefits).
    This Article also is subject to the saving clause of 
paragraph 4 of the Protocol. Thus, if a citizen of the United 
States who is a resident of Chile derives profits from the 
operation of ships or aircraft in international traffic, 
notwithstanding the exclusive residence country taxation in 
paragraph 1 of Article 8, the United States may, subject to the 
special foreign tax credit rules of paragraph 3 of Article 23 
(Relief from Double Taxation), tax those profits as part of the 
worldwide income of the citizen. (This is an unlikely 
situation, however, because non-tax considerations (e.g., 
insurance) generally result in shipping activities being 
carried on in corporate form.)

                   ARTICLE 9 (ASSOCIATED ENTERPRISES)

    This Article incorporates into the Convention the arm's-
length principle reflected in the U.S. domestic transfer 
pricing provisions, particularly Code section 482. It provides 
that when related enterprises engage in a transaction on terms 
that are not arm's-length, the Contracting States may make 
appropriate adjustments to the taxable income and tax liability 
of such related enterprises to reflect what the income and tax 
of these enterprises with respect to the transaction would have 
been had there been an arm's-length relationship between them.
Paragraph 1
    This paragraph addresses the situation where an enterprise 
of a Contracting State is related to an enterprise of the other 
Contracting State, and there are arrangements or conditions 
imposed between the enterprises in their commercial or 
financial relations that are different from those that would 
have existed in the absence of the relationship. Under these 
circumstances, the Contracting States may adjust the income (or 
loss) of the enterprise to reflect what it would have been in 
the absence of such a relationship.
    The paragraph identifies the relationships between 
enterprises that serve as a prerequisite to application of the 
Article. As the Commentary to the OECD Model makes clear, the 
necessary element in these relationships is effective control, 
which is also the standard for purposes of section 482. Thus, 
the Article applies if an enterprise of one State participates 
directly or indirectly in the management, control, or capital 
of the enterprise of the other State. Also, the Article applies 
if any third person or persons participate directly or 
indirectly in the management, control, or capital of 
enterprises of different States. For this purpose, all types of 
control are included, i.e., whether or not legally enforceable 
and however exercised or exercisable.
    The fact that a transaction is entered into between such 
related enterprises does not, in and of itself, mean that a 
Contracting State may adjust the income (or loss) of one or 
both of the enterprises under the provisions of this Article. 
If the conditions of the transaction are consistent with those 
that would be made between independent persons, the income 
arising from that transaction should not be subject to 
adjustment under this Article.
    Similarly, the fact that associated enterprises may have 
concluded arrangements, such as cost sharing arrangements or 
general services agreements, is not in itself an indication 
that the
    two enterprises have entered into a non-arm's-length 
transaction that should give rise to an adjustment under 
paragraph 1. Both related and unrelated parties enter into such 
arrangements (e.g., joint venturers may share some development 
costs). As with any other kind of transaction, when related 
parties enter into an arrangement, the specific arrangement 
must be examined to see whether or not it meets the arm's-
length standard. In the event that it does not, an appropriate 
adjustment may be made, which may include modifying the terms 
of the agreement or recharacterizing the transaction to reflect 
its substance.
    It is understood that the ``commensurate with income'' 
standard for determining appropriate transfer prices for 
intangibles, added to Code section 482 by the Tax Reform Act of 
1986, was designed to operate consistently with the arm's-
length standard. The implementation of this standard in the 
section 482 regulations is in accordance with the general 
principles of paragraph 1 of Article 9 of the Convention, as 
interpreted by the OECD Transfer Pricing Guidelines.
    This Article also permits tax authorities to deal with thin 
capitalization issues. They may, in the context of Article 9, 
scrutinize more than the rate of interest charged on a loan 
between related persons. They also may examine the capital 
structure of an enterprise, whether a payment in respect of 
that loan should be treated as interest, and, if it is treated 
as interest, under what circumstances interest deductions 
should be allowed to the payor. Paragraph 2 of the Commentary 
to Article 9 of the OECD Model, together with the U.S. 
observation set forth in paragraph 15, sets forth a similar 
understanding of the scope of Article 9 in the context of thin 
capitalization.
Paragraph 2
    When a Contracting State has made an adjustment that is 
consistent with the provisions of paragraph 1, and the other 
Contracting State agrees that the adjustment was appropriate to 
reflect arm's-length conditions, that other Contracting State 
is obligated to make a correlative adjustment (sometimes 
referred to as a ``corresponding adjustment'') to the tax 
liability of the related person in that other Contracting 
State. Although the OECD Model does not specify that the other 
Contracting State must agree with the initial adjustment before 
it is obligated to make the correlative adjustment, the 
Commentary makes clear that the paragraph is to be read that 
way.
    As explained in the Commentary to Article 9 of the OECD 
Model, Article 9 leaves the treatment of ``secondary 
adjustments'' to the laws of the Contracting States. When an 
adjustment under Article 9 has been made, one of the parties 
will have in its possession funds that it would not have had at 
arm's length. The question arises as to how to treat these 
funds. In the United States, the general practice is to treat 
such funds as a dividend or contribution to capital, depending 
on the relationship between the parties. Under certain 
circumstances, the parties may be permitted to restore the 
funds to the party that would have the funds had the 
transactions been entered into on arm's length terms, and to 
establish an account payable pending restoration of the funds. 
See Rev. Proc. 99-32, 1999-2 C.B. 296.
    The Contracting State making a secondary adjustment will 
take the other provisions of the Convention, where relevant, 
into account. For example, if the effect of a secondary 
adjustment is to treat a U.S. corporation as having made a 
distribution of profits to its parent corporation in Chile, the 
provisions of Article 10 (Dividends) will apply, and the United 
States may impose a 5 percent withholding tax on the dividend. 
Also, if under Article 23 (Relief from Double Taxation) Chile 
generally gives a credit for taxes paid with respect to such 
dividends, it would also be required to do so in this case.
    The competent authorities are authorized by paragraph 3 of 
Article 26 (Mutual Agreement Procedure) to consult, if 
necessary, to resolve any differences in the application of 
these provisions. For example, there may be a disagreement over 
whether an adjustment made by a Contracting State under 
paragraph 1 was appropriate.
    If a correlative adjustment is made under paragraph 2, it 
is to be implemented, pursuant to paragraph 2 of Article 26 
(Mutual Agreement Procedure), notwithstanding any time limits 
or other procedural limitations in the law of the Contracting 
State making the adjustment. Thus, even if a statute of 
limitations has run, a refund of tax can be made in order to 
implement a correlative adjustment (statutory or procedural 
limitations , however, cannot be overridden to impose 
additional tax, because paragraph 2 of Article 1 (General 
Scope) provides that the Convention cannot restrict any 
statutory benefit). If a taxpayer has entered a closing 
agreement (or other written settlement) with the United States 
prior to bringing a case to the competent authorities, the U.S. 
competent authority will endeavor only to obtain a correlative 
adjustment from Chile. See Rev. Proc. 2006-54, 2006-2 C.B. 
1035, Sec. 7.05 (or any applicable successor procedures).
    Relationship to Other Articles
    The saving clause of paragraph 4 of the Protocol does not 
apply to paragraph 2 of Article 9 by virtue of an exception to 
the saving clause in subparagraph 4(a) of the Protocol. This 
ensures that the competent authorities of the Contracting 
States have the ability to make any adjustments necessary to 
relieve double taxation pursuant to the mutual agreement 
procedure.

                         ARTICLE 10 (DIVIDENDS)

    Article 10 provides rules for the taxation of dividends 
paid by a company that is a resident of one Contracting State 
to a beneficial owner that is a resident of the other 
Contracting State. The Article provides for full residence-
State taxation of such dividends and a limited source-State 
right to tax. Article 10 also provides rules for the imposition 
of a tax on branch profits by the State of source. Finally, the 
Article prohibits a State from imposing taxes on a company 
resident in the other Contracting State, other than a branch 
profits tax, on undistributed earnings.
Paragraph 1
    Paragraph 1 permits a Contracting State to tax its 
residents on dividends paid to them by a company that is a 
resident of the other Contracting State. For dividends from any 
other source paid to a resident, Article 21 (Other Income) 
grants the State of residence exclusive taxing jurisdiction 
(other than for dividends attributable to a permanent 
establishment in the other State).
Paragraph 2
    The State of source also may tax dividends beneficially 
owned by a resident of the other State, subject to the 
limitations of paragraphs 2 and 3. Paragraph 2 generally limits 
the rate of withholding tax in the State of source on dividends 
paid by a company resident in that State to 15 percent of the 
gross amount of the dividend. If, however, the beneficial owner 
of the dividend is a company resident in the other State and 
owns directly shares representing at least 10 percent of the 
voting stock of the company paying the dividend, then the rate 
of withholding tax is limited to 5 percent of the gross amount 
of the dividend. For application of this paragraph by the 
United States, shares are considered voting shares if they 
provide the power to elect, appoint or replace any person 
vested with the powers ordinarily exercised by the board of 
directors of a U.S. corporation.
    The determination of whether the ownership threshold for 
subparagraph (a) is met for purposes of the 5 percent maximum 
rate of withholding tax is made on the date on which 
entitlement to the dividend is determined. Thus, the 
determination would generally be made on the dividend record 
date.
    Paragraph 2 does not affect the taxation of the profits out 
of which the dividends are paid. The taxation by a Contracting 
State of the income of its resident companies is governed by 
the internal law of the Contracting State, subject to the 
provisions of paragraph 3 of Article 25 (Non-Discrimination).
    The term ``beneficial owner'' is not defined in the 
Convention, and is, therefore, defined as under the internal 
law of the State granting treaty benefits (i.e., the source 
State). The beneficial owner of the dividend for purposes of 
Article 10 is the person to which the income is attributable 
under the laws of the source State. Thus, if a dividend paid by 
a corporation that is a resident of one of the States (as 
determined under Article 4 (Residence)) is received by a 
nominee or agent that is a resident of the other State on 
behalf of a person that is not a resident of that other State, 
the dividend is not entitled to the benefits of this Article. 
However, a dividend received by a nominee on behalf of a 
resident of that other State would be entitled to benefits. 
These limitations are confirmed by paragraph 12 of the 
Commentary to Article 10 of the OECD Model. See also paragraph 
24 of the Commentary to Article 1 of the OECD Model.
    Special rules, however, apply to shares that are held 
through fiscally transparent entities. In that case, the rules 
of paragraph 1 of the Protocol will apply to determine whether 
the dividends should be treated as having been derived by a 
resident of a Contracting State. Residence-State principles 
shall be used to determine who derives the dividend, to assure 
that the dividends for which the source State grants benefits 
of the Convention will be taken into account for tax purposes 
by a resident of the residence State. Source-State principles 
of beneficial ownership shall then apply to determine whether 
the person who derives the dividends, or another resident of 
the other Contracting State, is the beneficial owner of the 
dividend. If the person who derives the dividend under 
paragraph 1 of the Protocol would not be treated as a nominee, 
agent, custodian, conduit, etc., under the source State's 
principles for determining beneficial ownership, that person 
will be treated as the beneficial owner of the income, profits 
or gains for purposes of the Convention.
    Assume for instance, that a company resident in Chile pays 
a dividend to LLC, an entity that is treated as fiscally 
transparent for U.S. tax purposes but is treated as a company 
for Chilean tax purposes. USCo, a corporation incorporated in 
the United States, is the sole interest holder in LLC. 
Paragraph 1 of the Protocol provides that USCo derives the 
dividend. Chile's principles of beneficial ownership shall then 
be applied to USCo. If under the laws of Chile USCo is found 
not to be the beneficial owner of the dividend, USCo will not 
be entitled to the benefits of Article 10 with respect to such 
dividend. If USCo is found to be a nominee, agent, custodian, 
or conduit for another person who is a resident of the United 
States, that person may be entitled to benefits with respect to 
the dividends.
    Beyond identifying the person to whom the principles of 
beneficial ownership shall be applied, the principles of 
paragraph 1 of the Protocol will also apply when determining 
whether other requirements, such as the ownership threshold of 
subparagraph 2(a) of Article 10 have been satisfied.
    For example, assume that FCo, a corporation that is a 
resident of Chile, owns a 50 percent interest in FP, a 
partnership that is organized in Chile. FP owns 100 percent of 
the sole class of stock of USCo, a company resident in the 
United States. Chile views FP as fiscally transparent under its 
domestic law, and accordingly taxes FCo currently on its 
distributive share of the income of FP and determines the 
character and source of the income received through FP in the 
hands of FCo as if such income were realized directly by FCo. 
In this case, FCo is treated as deriving 50 percent of the 
dividends paid by USCo under paragraph 1 of the Protocol. 
Moreover, FCo is treated as owning 50 percent of the stock of 
USCo directly. The same result would be reached even if the tax 
laws of the United States would treat FP differently (e.g., if 
FP were not treated as fiscally transparent in the United 
States), or if FP were organized in a third state, as long as 
FP were still treated as fiscally transparent under the laws of 
the other Contracting State. The same principles would apply in 
determining whether companies holding shares through other 
fiscally transparent entities such as partnerships, trusts, and 
estates would qualify for benefits. As a result, companies 
holding shares through such entities may be able to claim the 
benefits of subparagraph (a) under certain circumstances. The 
lower rate applies when the company's proportionate share of 
the shares held by the intermediate entity meets the 10 percent 
threshold, and the company meets the requirements of paragraph 
1 of the Protocol (i.e., the company's country of residence 
treats the intermediate entity as fiscally transparent) with 
respect to the dividend. Whether this ownership threshold is 
satisfied may be difficult to determine and often will require 
an analysis of the partnership or trust agreement.
Paragraph 3
    Paragraph 3 provides that dividends beneficially owned by 
an entity that is established and maintained in a Contracting 
State principally to provide or administer pensions or other 
similar benefits to employed and self-employed persons, or to 
earn income for the benefit of one or more such arrangements, 
and that is generally exempt from tax in that State, may not be 
taxed in the other Contracting State of which the payer of the 
dividends is a resident, provided that such dividends are not 
derived from the carrying on of a trade or business, directly 
or indirectly, by the beneficial owner or through an associated 
enterprise.
Paragraph 4
    Paragraph 4 defines the term dividends broadly and 
flexibly. The definition is intended to cover all arrangements 
that yield a return on an equity investment in a corporation as 
determined under the tax law of the state of source, as well as 
arrangements that might be developed in the future.
    The term includes income from shares, or other corporate 
rights that are not treated as debt under the law of the source 
State, and that participate in the profits of the company. The 
term also includes income from rights that is subjected to the 
same tax treatment as income from shares by the law of the 
State of source. Thus, a constructive dividend that results 
from a non-arm's length transaction between a corporation and a 
related party is a dividend. In the case of the United States, 
the term dividend includes amounts treated as a dividend under 
U.S. law upon the sale or redemption of shares or upon a 
transfer of shares in a reorganization. See, e.g., Rev. Rul. 
92-85, 1992-2 C.B. 69 (sale of foreign subsidiary's stock to 
U.S. sister company is a deemed dividend to extent of the 
subsidiary's and sister company's earnings and profits). 
Further, a distribution from a U.S. publicly traded limited 
partnership, which is taxed as a corporation under U.S. law, is 
a dividend for purposes of Article 10. However, a distribution 
by a limited liability company is not taxable by the United 
States under Article 10, provided the limited liability company 
is not characterized as an association taxable as a corporation 
under U.S. law.
    Finally, a payment denominated as interest may be treated 
as a dividend to the extent that the debt is re-characterized 
as equity under the laws of the source State.
Paragraph 5
    Paragraph 5 provides a rule for taxing dividends 
attributable to a permanent establishment or fixed base. In 
such case, the rules of Article 7 (Business Profits) or Article 
14 (Independent Personal Services), as the case may be, shall 
apply. Accordingly, the dividends will be taxed on a net basis 
using the rates and rules of taxation generally applicable to 
residents of the State in which the permanent establishment or 
fixed base is located, as such rules may be modified by the 
Convention. An example of dividends attributable to a permanent 
establishment would be dividends derived by a dealer in stock 
or securities from stock or securities that the dealer held for 
sale to customers.
Paragraph 6
    The right of a Contracting State to tax dividends paid by a 
company that is a resident of the other Contracting State is 
restricted by paragraph 6 to cases in which the dividends are 
paid to a resident of that Contracting State or are 
attributable to a permanent establishment or fixed base in that 
Contracting State. Thus, a Contracting State may not impose a 
``secondary'' withholding tax on dividends paid by a 
nonresident company out of earnings and profits from that 
Contracting State.
    The paragraph also restricts the right of a Contracting 
State to impose corporate level taxes on undistributed profits, 
other than a branch profits tax. The paragraph does not 
restrict a State's right to tax its resident shareholders on 
undistributed earnings of a corporation resident in the other 
State. For example, the authority of the United States to 
impose taxes on subpart F income and on earnings deemed 
invested in U.S. property, and its tax on income of a passive 
foreign investment company that is a qualified electing fund is 
in no way restricted by this provision.
Paragraph 7
    Paragraph 7 permits a Contracting State to impose a branch 
profits tax on a company resident in the other Contracting 
State. The tax is in addition to other taxes permitted by the 
Convention. The term ``company'' is defined in subparagraph 
1(e) of Article 3 (General Definitions).
    A Contracting State may impose a branch profits tax on a 
company if the company has income attributable to a permanent 
establishment in that Contracting State, derives income from 
real property (immovable property) in that Contracting State 
that is taxed on a net basis under Article 6 (Income from Real 
Property (Immovable Property)), or realizes gains taxable in 
that State under paragraph 1 of Article 13 (Capital Gains). In 
the case of the United States, the imposition of such tax is 
limited, however, to the portion of the aforementioned items of 
income that represents the amount of such income that is the 
``dividend equivalent amount.'' This is consistent with the 
relevant rules under the U.S. branch profits tax, and the term 
dividend equivalent amount is defined under U.S. law. The 
dividend equivalent amount is an amount for a particular year 
that is equivalent to the income described above that is 
included in the corporation's effectively connected earnings 
and profits for that year, after payment of the corporate tax 
under Articles 6 (Income from Real Property (Immovable 
Property), 7 (Business Profits) or 13 (Capital Gains), reduced 
for any increase in the corporation's U.S. net equity during 
the year or increased for any reduction in its U.S. net equity 
during the year. See Code section 884(b); Treas. Reg. 
Sec. 1.884-1. U.S. net equity is U.S. assets less U.S. 
liabilities. See Code section 884(c); Treas. Reg. Sec. 1.884-1.
    The dividend equivalent amount for any year approximates 
the dividend that a U.S. branch office would have paid during 
the year if the branch had been operated as a separate U.S. 
subsidiary company. If in the future Chile also imposes a 
branch profits tax, the base of its tax must be limited to an 
amount that is analogous to the dividend equivalent amount.
    As discussed in the explanation of Article 1 (General 
Scope), consistency principles prohibit a taxpayer from 
applying provisions of the Code and this Convention 
inconsistently. In the context of the branch profits tax, this 
consistency requirement means that if a Chilean company uses 
the principles of Article 7 to determine its U.S. taxable 
income then it must also use those principles to determine its 
dividend equivalent amount. Similarly, if the Chilean company 
instead uses the Code to determine its U.S. taxable income, it 
must also use the Code to determine its dividend equivalent 
amount. As in the case of Article 7, if a Chilean company, for 
example, does not from year to year consistently apply the Code 
or the Convention to determine its dividend equivalent amount, 
then the Chilean company must make appropriate adjustments or 
recapture amounts that would otherwise be subject to U.S. 
branch profits tax if it had consistently applied the Code or 
the Convention to determine its dividend equivalent amount from 
year to year.
Paragraph 8
    Paragraph 8 provides that the branch profits tax shall not 
be imposed at a rate exceeding five percent. It is intended 
that paragraph 8 apply equally if a taxpayer determines its 
taxable income under the laws of a Contracting State or under 
the provisions of Article 7. For example, as discussed above, 
consistency principles require a Chilean company that 
determines its U.S. taxable income under the Code to also 
determine its dividend equivalent amount under the Code. In 
that case, paragraph 8 would apply even though the Chilean 
company did not determine its dividend equivalent amount using 
the principles of Article 7.
Paragraph 12 of the Protocol
    As stated in paragraph 4 of the 2010 Exchange of Notes, at 
the time of the signing of the Convention, Chile has an 
integrated tax system pursuant to which it collects a total 35 
percent tax on business profits imposed at two levels. First, 
business profits of companies resident in Chile are subject to 
the First Category Tax at a rate of 17 percent. Second, in the 
case of non-resident shareholders, distributions are subject to 
Additional Tax at a rate of 35 percent of the gross amount of 
the distribution. Nonresident shareholders are allowed a credit 
for the First Category Tax in computing their liability for the 
Additional Tax. The effective rate of Additional Tax after a 
credit for the First Category Tax is 18 percent.
    Paragraph 12 of the Protocol reflects the unique operation 
of Chile's integrated tax system and is intended to prevent the 
avoidance of the Additional Tax. Accordingly, subparagraph (a) 
provides that paragraphs 2, 3, 7, and 8 of Article 10 
(Dividends) do not limit Chile's application of the Additional 
Tax provided that under the domestic law of Chile the First 
Category Tax is fully creditable in computing the amount of 
Additional Tax to be paid. Accordingly, as long as Chile allows 
a credit for the full amount of First Category Tax in computing 
the amount of Additional Tax to be paid, the Convention does 
not require Chile to reduce the rate of Additional Tax withheld 
on dividends paid by companies resident in Chile and 
beneficially owned by residents of the United States.
    As provided in subparagraph 12(b) of the Protocol, if Chile 
makes certain changes to the Additional Tax or First Category 
Tax, Chile's right to tax under Article 10 will be limited as 
described below.
    First, clause (i) of subparagraph 12(b) of the Protocol 
provides that if at any time under the domestic law of Chile 
the First Category Tax ceases to be fully creditable in 
computing the amount of Additional Tax to be paid, the 
provisions of subparagraph 12(a) of the Protocol shall not 
apply. Accordingly, the amount of Additional Tax imposed by 
Chile will be limited by paragraphs 2, 3, 7, and 8 of Article 
10 (Dividends).
    Second, clause (ii) of subparagraph 12(b) of the Protocol 
provides that if under the domestic law of Chile the rate of 
Additional Tax exceeds 35 percent, the provisions of Article 10 
will apply to both the United States and Chile, but the tax 
charged under subparagraphs 2(a) and 2(b) of Article 10 will 
not exceed 15 percent of the gross amount of dividends paid by 
a resident of a Contracting State and beneficially owned by a 
resident of the other Contracting State. In such case, Chile 
and the United States will be equally bound by the provisions 
of Article 10, and dividends paid by a company resident in a 
Contracting State and beneficially owned by a resident of the 
other Contracting State may be taxed in the first-mentioned 
State, however, the tax so charged shall not exceed 15 percent 
of the gross amount of the dividends, regardless of whether the 
beneficial owner is a company that owns directly 10 percent of 
the company paying the dividends. If the rate of Additional Tax 
exceeds 35 percent, clause (ii) of subparagraph 12(b) of the 
Protocol also provides that the Contracting States shall 
consult to reassess the balance of benefits of the Convention 
with a view to concluding a protocol to incorporate terms 
limiting the right of the source State to tax dividends under 
Article 10.
Paragraph 13 of the Protocol
    Paragraph 13 of the Protocol provides that Article 10 
(Dividends) shall not apply in the case of distributions or 
dividends paid by an enterprise when the investment is subject 
to a foreign investment contract under the Foreign Investment 
Statute (DL 600), as it may be amended from time to time 
without changing the general principles thereof.
Paragraph 14 of the Protocol
    Paragraph 14 of the Protocol imposes limitations on the 
rate reductions provided by paragraph 2 in the case of 
dividends paid by a RIC or a REIT.
    The first sentence of paragraph 14 provides that dividends 
paid by a RIC or a REIT are not eligible for the 5 percent rate 
of withholding tax of subparagraph 2(a) of Article 10 
(Dividends).
    The second sentence of paragraph 14 provides that the 15 
percent maximum rate of withholding tax of subparagraph (b) of 
paragraph 2 of Article 10 (Dividends) applies to dividends paid 
by RICs.
    The third sentence of paragraph 14 provides that the 15 
percent rate of withholding tax also applies to dividends paid 
by a REIT, provided that one of the three following conditions 
is met. First, the beneficial owner of the dividend is an 
individual holding an interest of not more than 10 percent in 
the REIT. Second, the dividend is paid with respect to a class 
of stock that is publicly traded and the beneficial owner of 
the dividend is a person holding an interest of not more than 5 
percent of any class of the REIT's shares. Third, the 
beneficial owner of the dividend holds an interest in the REIT 
of not more than 10 percent and the REIT is ``diversified.''
    Paragraph 14 provides a definition of the term diversified. 
A REIT is diversified if the gross value of no single interest 
in real property held by the REIT exceeds 10 percent of the 
gross value of the REIT's total interest in real property. 
Foreclosure property is not considered an interest in real 
property, and a REIT holding a partnership interest is treated 
as owning its proportionate share of any interest in real 
property held by the partnership.
Relationship to Other Articles
    Notwithstanding the foregoing limitations on source country 
taxation of dividends, the saving clause of paragraph 4 of the 
Protocol permits the United States to tax dividends received by 
its residents and citizens, subject to the special foreign tax 
credit rules of paragraph 3 of Article 23 (Relief from Double 
Taxation), as if the Convention had not come into effect.
    The benefits of this Article are also subject to the 
provisions of Article 24 (Limitation on Benefits). Thus, if a 
resident of the other Contracting State is the beneficial owner 
of dividends paid by a U.S. corporation, the shareholder must 
qualify for treaty benefits under at least one of the tests of 
Article 24 in order to receive the benefits of this Article.

                         ARTICLE 11 (INTEREST)

    Article 11 provides rules for the taxation of interest 
arising in one Contracting State and paid to a beneficial owner 
that is a resident of the other Contracting State.
Paragraph 1
    Paragraph 1 grants to the State of residence the non-
exclusive right to tax interest beneficially owned by its 
residents and arising in the other Contracting State.
Paragraph 2
    Paragraph 2 provides that the State of source also may tax 
interest beneficially owned by a resident of the other 
Contracting State, but generally limits the rate of tax to 10 
percent of the gross amount of the interest. However, the rate 
of tax is limited to 4 percent of the gross amount of the 
interest if the beneficial owner of the interest is a resident 
of the other Contracting State that is: (1) a bank; (2) an 
insurance company; (3) an enterprise substantially deriving its 
gross income from the active and regular conduct of a lending 
or finance business involving transactions with unrelated 
parties, where the enterprise is unrelated to the payer of the 
interest; (4) an enterprise that sold machinery or equipment, 
where the interest is paid in connection with the sale on 
credit of such machinery or equipment; or (5) any other 
enterprise, provided that in the three tax years preceding the 
tax year in which the interest is paid, the enterprise derives 
more than 50 percent of its liabilities from the issuance of 
bonds in the financial markets or from taking deposits at 
interest, and more than 50 percent of the assets of the 
enterprise consist of debt-claims against persons that do not 
have with the resident a relationship described in subparagraph 
(a) or (b) of paragraph 1 of Article 9 (Associated 
Enterprises).
    For purposes of subparagraph 2(a)(iii), under which certain 
enterprises substantially deriving their gross income from the 
active and regular conduct of a lending or finance business may 
qualify for the 4 percent rate, the term ``lending or finance 
business'' is defined to include the business of issuing 
letters of credit or providing guarantees, or providing charge 
and credit card services.
    The term ``beneficial owner'' is not defined in the 
Convention, and is therefore defined under the internal law of 
the State granting treaty benefits (i.e., the source State). 
The beneficial owner of the interest for purposes of Article 11 
is the person to which the income is attributable under the 
laws of the source State. Thus, if interest arising in a 
Contracting State is received by a nominee or agent that is a 
resident of the other State on behalf of a person that is not a 
resident of that other State, the interest is not entitled to 
the benefits of Article 11. However, interest received by a 
nominee on behalf of a resident of that other State would be 
entitled to benefits. These limitations are similar to those 
provided in paragraph 9 of the OECD Commentary to Article 11.
    Special rules apply to interest derived through fiscally 
transparent entities for purposes of determining the beneficial 
owner of the interest. In such cases, residence-State 
principles shall be used to determine who derives the interest, 
to assure that the interest for which the source State grants 
benefits of the Convention will be taken into account for tax 
purposes by a resident of the residence State.
    For example, assume that FCo, a corporation that is a 
resident of Chile, owns a 50 percent interest in FP, a 
partnership that is organized in Chile. FP receives interest 
arising in the United States. Chile views FP as fiscally 
transparent under its domestic law, and thus taxes FCo 
currently on its distributive share of the income of FP and 
determines the character and source of the income received 
through FP in the hands of FCo as if such income were realized 
directly by FCo. In this case, FCo is treated as deriving 50 
percent of the interest received by FP that arises in the 
United States under paragraph 1 of the Protocol. The same 
result would be reached even if the tax laws of the United 
States would treat FP differently (e.g., if FP were not treated 
as fiscally transparent in the United States), or if FP were 
organized in a third state, as long as FP were still treated as 
fiscally transparent under the laws of Chile.
    While residence-State principles control who is treated as 
deriving the interest, source-State principles of beneficial 
ownership apply to determine whether the person who derives the 
interest or another resident of the other Contracting State is 
the beneficial owner of the interest.
    If the person who derives the interest under paragraph 1 of 
the Protocol would not be treated as a nominee, agent, 
custodian, conduit, etc., under the source State's principles 
for determining beneficial ownership, that person will be 
treated as the beneficial owner of the interest for purposes of 
the Convention. In the example above, FCo is required to 
satisfy the beneficial ownership principles of the United 
States with respect to the interest it derives. If under the 
beneficial ownership principles of the United States, FCo is 
found not to be the beneficial owner of the interest, FCo will 
not be entitled to the benefits of Article 11 with respect to 
such interest. If FCo is found to be a nominee, agent, 
custodian, or conduit for a person who is a resident of the 
other Contracting State, that person may be entitled to 
benefits with respect to the interest.
Paragraph 3
    Paragraph 3 provides that the rate limitation of 
subparagraph 2(b) will be phased in. For five years from the 
date on which the provisions of paragraph 2 take effect, the 
rate of 15 percent will apply in lieu of the rate provided in 
subparagraph 2(b). Thereafter, the 10 percent rate will apply.
    In addition, paragraph 22 of the Protocol provides that, if 
Chile concludes with another state an income tax treaty that 
imposes a limit on rates of withholding on payments of interest 
lower than the limits imposed under paragraph 2 of Article 11, 
the United States and Chile shall, at the request of the United 
States, consult to reassess the balance of benefits of the 
Convention with a view to concluding a protocol incorporating 
such lower rates into the Convention.
Paragraph 4
    Paragraph 4 provides an anti-abuse exception to 
subparagraph 2(a). Interest described in that subparagraph may 
be taxed by the source State at a rate not exceeding 10 percent 
of the gross amount of the interest if the interest is paid as 
part of an arrangement involving back-to-back loans or another 
arrangement that is economically equivalent to and intended to 
have a similar effect as back-to-back loans. By referencing 
arrangements that are economically similar to and that have the 
effect of a back-to-back loan, paragraph 4 applies to 
transactions that would not meet the legal requirements of a 
loan but would nevertheless serve that purpose economically. 
For example, the term would encompass securities issued at a 
discount or certain swap arrangements intended to operate as 
the economic equivalent of a back-to-back loan.
Paragraph 5
    The term ``interest'' as used in Article 11 is defined in 
paragraph 5 to include, inter alia, income from debt claims of 
every kind, whether or not secured by a mortgage. Penalty 
charges for late payment are excluded from the definition of 
interest. Interest that is paid or accrued subject to a 
contingency is within the ambit of Article 11. This definition 
includes income from a debt obligation carrying the right to 
participate in profits if the contract by its character clearly 
evidences a loan at interest. The term does not, however, 
include amounts treated as dividends under Article 10 
(Dividends).
    The term ``interest'' also includes amounts subject to the 
same tax treatment as income from money lent under the law of 
the State in which the income arises. Thus, for purposes of the 
Convention, amounts that the United States will treat as 
interest include: (i) the difference between the issue price 
and the stated redemption price at maturity of a debt 
instrument (i.e., original issue discount (``OID'')), which may 
be wholly or partially realized on the disposition of a debt 
instrument (section 1273); (ii) amounts that are imputed 
interest on a deferred sales contract (section 483); (iii) 
amounts treated as interest or OID under the stripped bond 
rules (section 1286); (iv) amounts treated as original issue 
discount under the below-market interest rate rules (section 
7872); (v) a partner's distributive share of a partnership's 
interest income (section 702); (vi) the interest portion of 
periodic payments made under a ``finance lease'' or similar 
contractual arrangement that in substance is a borrowing by the 
nominal lessee to finance the acquisition of property; (vii) 
amounts included in the income of a holder of a residual 
interest in a REMIC (section 860E), because these amounts 
generally are subject to the same taxation treatment as 
interest under U.S. tax law; and (viii) interest with respect 
to notional principal contracts that are re-characterized as 
loans because of a ``substantial non-periodic payment.''
Paragraph 6
    Paragraph 6 provides a rule for taxing interest in cases 
where the beneficial owner of the interest either carries on 
business through a permanent establishment in the other 
Contracting State, in which the interest arises, or performs in 
that other State independent personal services from a fixed 
base in that other State, and the interest is attributable to 
that permanent establishment or fixed base. In such cases the 
provisions of Article 7 (Business Profits) or 14 (Independent 
Personal Services), as the case may be, will apply, and the 
State of source will retain the right to impose tax on such 
interest income.
    In the case of a permanent establishment or fixed base that 
once existed in the State of source but that no longer exists, 
the provisions of paragraph 6 also apply, by virtue of 
paragraph 7 of Article 7, to interest that would be 
attributable to such a permanent establishment or fixed base if 
it did exist in the year of payment or accrual. See the 
Technical Explanation of paragraph 7 of Article 7.
Paragraph 7
    Paragraph 7 provides a source rule for interest that is 
identical in substance to the interest source rule of the OECD 
Model. Interest is considered to arise in a Contracting State 
if paid by a resident of that State. As an exception, interest 
on a debt incurred in connection with a permanent establishment 
or a fixed base in one of the States and borne by the permanent 
establishment or fixed base is deemed to arise in that State. 
For this purpose, interest is considered to be borne by a 
permanent establishment or fixed base if it is allocable to 
taxable income of that permanent establishment or fixed base.
Paragraph 8
    Paragraph 8 provides that in cases involving special 
relationships between the payor and the beneficial owner of 
interest income, Article 11 applies only to that portion of the 
total interest payments that would have been made absent such 
special relationships (i.e., an arm's-length interest payment). 
Any excess amount of interest paid remains taxable according to 
the laws of the United States and Chile, respectively, with due 
regard to the other provisions of the Convention. Thus, if the 
excess amount would be treated under the source country's law 
as a distribution of profits by a corporation, such amount 
could be taxed as a dividend rather than as interest, but the 
tax would be subject, if appropriate, to the rate limitations 
of paragraph 2 of Article 10 (Dividends).
    The term ``special relationship'' is not defined in the 
Convention. In applying this paragraph, the United States 
considers the term to include the relationships described in 
Article 9, which in turn corresponds to the definition of 
``control'' for purposes of Code section 482.
    This paragraph does not address cases where, owing to a 
special relationship between the payer and the beneficial owner 
or between both of them and some other person, the amount of 
the interest is less than an arm's-length amount. In those 
cases a transaction may be characterized to reflect its 
substance and interest may be imputed consistent with the 
definition of ``interest'' in paragraph 5. For example, the 
United States would apply Code section 482 or 7872 to determine 
the amount of imputed interest in those cases.
Paragraph 9
    Paragraph 9 provides anti-abuse exceptions to paragraph 2 
for two classes of interest payments.
    The first class of interest, dealt with in subparagraph 
9(a), is so-called contingent interest. Under this provision, 
interest arising in one of the Contracting States that is 
determined with reference to receipts, sales, income, profits 
or other cash flows of the debtor or a related person, to any 
change in the value of any property of the debtor or a related 
person or to any dividend, partnership distribution or similar 
payment made by the debtor or a related person also may be 
taxed in the State in which it arises, and according to the 
laws of that State. If the beneficial owner is a resident of 
the other Contracting State, however, the gross amount of the 
interest may be taxed at a rate not exceeding the rate 
prescribed in subparagraph 2(b) of Article 10 (Dividends).
    The second class of interest that is dealt with in 
subparagraph 9(b) is excess inclusions from U.S. real estate 
mortgage investment conduits (``REMICs''). Subparagraph 9(b) 
serves as a backstop to Code section 860G(b). That section 
generally requires that a foreign person holding a residual 
interest in a REMIC take into account for U.S. tax purposes 
``any excess inclusion'' and ``amounts includible . [under the 
REMIC provisions] when paid or distributed (or when the 
interest is disposed of).''
    Without a full tax at source, non-U.S. transferees of 
residual interests would have a competitive advantage over U.S. 
transferees at the time these interests are initially offered. 
Absent this rule, the United States would suffer a revenue loss 
with respect to mortgages held in a REMIC because of 
opportunities for tax avoidance created by differences in the 
timing of taxable and economic income produced by such 
interests. In many cases, the transfer to the foreign person is 
simply disregarded under Treas. Reg. Sec. 1.860G-3. 
Subparagraph 9(b) also serves to indicate that excess 
inclusions from REMICs are not considered ``other income'' 
subject to Article 21 (Other Income) of the Convention.
Paragraph 10
    Paragraph 10 permits a Contracting State to impose its 
branch level interest tax on a company resident in the other 
Contracting State. The base of this tax is the excess, if any, 
of the interest allocable to the profits of the company that 
are either attributable to a permanent establishment in the 
first-mentioned State (including gains under paragraph 3 of 
Article 13 (Capital Gains)) or subject to tax in the first-
mentioned State under Article 6 (Income from Real Property 
(Immovable Property)) or paragraph 1 of Article 13 (Capital 
Gains)) over the interest paid by the permanent establishment, 
or in the case of profits subject to tax under Article 6 or 
Article 13(1), over the interest paid by that trade or business 
in the first-mentioned State. Such excess interest may be taxed 
as if it were interest arising in the first-mentioned State and 
beneficially owned by the resident of the other State. Thus, 
such excess interest may be taxed by the first-mentioned State 
at a rate not to exceed the applicable rates provided in 
paragraph 2.
Relationship to Other Articles
    Notwithstanding the foregoing limitations on source country 
taxation of interest, the saving clause of paragraph 4 of the 
Protocol permits the United States to tax its residents and 
citizens, subject to the special foreign tax credit rules of 
paragraph 3 of Article 23 (Relief from Double Taxation), as if 
the Convention had not come into force.
    As with other benefits of the Convention, the benefits of 
Article 11 are available to a resident of the other State only 
if that resident is entitled to those benefits under the 
provisions of Article 24 (Limitation on Benefits).

                         ARTICLE 12 (ROYALTIES)

    Article 12 provides rules for the taxation of royalties 
arising in one Contracting State and paid to a beneficial owner 
that is a resident of the other Contracting State.
Paragraph 1
    Paragraph 1 grants to the State of residence the non-
exclusive right to tax royalties paid to its residents and 
arising in the other Contracting State.
Paragraph 2
    Paragraph 2 provides that the State of source also may tax 
royalties, but if the beneficial owner of the royalties is a 
resident of the other Contracting State, the rate of tax shall 
be limited to 2 percent of the gross amount of the royalties 
described in subparagraph 3(a), and 10 percent of the gross 
amount of the royalties described in subparagraph 3(b).
    The term ``beneficial owner'' is not defined in the 
Convention, and is, therefore, defined under the internal law 
of the State granting treaty benefits (i.e., the source State). 
The beneficial owner of the royalty for purposes of Article 12 
is the person to which the income is attributable under the 
laws of the source State. Thus, if a royalty arising in a 
Contracting State is received by a nominee or agent that is a 
resident of the other State on behalf of a person that is not a 
resident of that other State, the royalty is not entitled to 
the benefits of Article 12. However, a royalty received by a 
nominee on behalf of a resident of that other State would be 
entitled to benefits. These limitations are similar to those 
provided in paragraph 4 of the OECD Commentary to Article 12.
    Special rules apply to royalties derived through fiscally 
transparent entities for purposes of determining the beneficial 
owner of the royalties. In such cases, residence-State 
principles shall be used to determine who derives the royalties 
to assure that the royalties for which the source State grants 
benefits of the Convention will be taken into account for tax 
purposes by a resident of the residence State.
    For example, assume that FCo, a company that is a resident 
of Chile, owns a 50 percent interest in FP, a partnership that 
is organized in Chile. FP receives royalties arising in the 
United States. Chile views FP as fiscally transparent under its 
domestic law, and thus taxes FCo currently on its distributive 
share of the income of FP and determines the source and 
character of the income received through FP in the hands of FCo 
as if such income were realized directly by FCo. In this case, 
FCo is treated as deriving 50 percent of the royalties received 
by FP that arise in the United States under paragraph 1 of the 
Protocol. The same result would be reached even if the tax laws 
of the United States would treat FP differently (e.g., if FP 
were not treated as fiscally transparent in the United States), 
or if FP were organized in a third state, as long as FP were 
still treated as fiscally transparent under the laws of Chile.
    While residence-State principles control who is treated as 
deriving the royalties, source-State principles of beneficial 
ownership apply to determine whether the person who derives the 
royalties, or another resident of the other Contracting State, 
is the beneficial owner of the royalties. If the person who 
derives the royalties under paragraph 1 of the Protocol would 
not be treated as a nominee, agent, custodian, conduit, etc., 
under the source State's principles for determining beneficial 
ownership, that person will be treated as the beneficial owner 
of the royalties for purposes of the Convention. In the example 
above, FCo must satisfy the beneficial ownership principles of 
the United States with respect to the royalties it derives. If 
under the beneficial ownership principles of the United States, 
FCo is found not to be the beneficial owner of the royalties, 
FCo will not be entitled to the benefits of Article 12 with 
respect to such royalties. If FCo is found to be a nominee, 
agent, custodian, or conduit for a person who is a resident of 
the other Contracting State, that person may be entitled to 
benefits with respect to the royalties.
    Paragraph 22 of the Protocol provides that, if Chile 
concludes with another state an income tax treaty that imposes 
a limit on withholding rates on payments of royalties that is 
lower than the limits imposed under paragraph 2 of Article 12, 
the United States and Chile shall, at the request of the United 
States, consult to reassess the balance of benefits of the 
Convention with a view to concluding a protocol incorporating 
such lower rates into the Convention.
Paragraph 3
    Paragraph 3 defines the term ``royalties'' as used in 
Article 12, and the term ``royalties'' comprises two categories 
of consideration. The first category is any consideration for 
the use of, or the right to use, industrial, commercial or 
scientific equipment, but not including ships, aircraft or 
containers as dealt with in Article 8 (International 
Transport). The second category is any consideration for the 
use of, or the right to use, any copyright of literary, 
artistic, scientific or other work (including computer 
software, cinematographic films, audio or video tapes or disks, 
and other means of image or sound reproduction), any patent, 
trademark, design or model, plan, secret formula or process, or 
other like intangible property, or for information concerning 
industrial, commercial, or scientific experience. The second 
category also includes gain derived from the alienation of any 
property included in the second category, to the extent the 
gain is contingent on the productivity, use, or disposition of 
the property. Gains that are not so contingent are dealt with 
under Article 13 (Capital Gains).
    For purposes of determining whether payments as 
consideration for computer software should be classified as 
royalties under Article 12, paragraph 16 of the Protocol 
provides that the paragraphs of the Commentary to Article 12 of 
the OECD Model Convention of 2008 addressing computer software 
(paragraphs 12 to 14.4 and paragraph 17 to 17.4) will apply.
    The term ``royalties'' is defined in the Convention and 
therefore is generally independent of domestic law. Certain 
terms used in the definition are not defined in the Convention, 
but these may be defined under domestic tax law. For example, 
the term ``secret process or formulas'' is found in the Code, 
and its meaning has been elaborated in the context of sections 
351 and 367. See Rev. Rul. 55-17, 1955-1 C.B. 388; Rev. Rul. 
64-56, 1964-1 C.B. 133; Rev. Proc. 69-19, 1969-2 C.B. 301.
    Consideration for the use or right to use cinematographic 
films, or works on film, tape, or other means of reproduction 
in radio or television broadcasting is specifically included in 
the definition of royalties. It is intended that, with respect 
to any subsequent technological advances in the field of radio 
or television broadcasting, consideration received for the use 
of such technology will also be included in the definition of 
royalties.
    If an artist who is resident in one Contracting State 
records a performance in the other Contracting State, retains a 
copyrighted interest in a recording, and receives payments for 
the right to use the recording based on the sale or public 
playing of the recording, then the right of such other 
Contracting State to tax those payments is governed by Article 
12. See Boulez v. Commissioner, 83 T.C. 584 (1984), aff'd, 810 
F.2d 209 (D.C. Cir. 1986). By contrast, if the artist earns in 
the other Contracting State income covered by Article 17 
(Artistes and Sportsmen), for example, endorsement income from 
the artist's attendance at a film screening, and if such income 
also is attributable to one of the rights described in Article 
12 (e.g., the use of the artist's photograph in promoting the 
screening), Article 17 and not Article 12 is applicable to such 
income.
    The term ``industrial, commercial, or scientific 
experience'' (sometimes referred to as ``know-how'') has the 
meaning ascribed to it in paragraph 11 et seq. of the 
Commentary to Article 12 of the OECD Model. Consistent with 
that meaning, the term may include information that is 
ancillary to a right otherwise giving rise to royalties, such 
as a patent or secret process.
    Know-how also may include, in limited cases, technical 
information that is conveyed through technical or consultancy 
services. It does not include general educational training of 
the user's employees, nor does it include information developed 
especially for the user, such as a technical plan or design 
developed according to the user's specifications. Thus, as 
provided in paragraph 11.3 of the Commentary to Article 12 of 
the OECD Model, the term ``royalties'' does not include 
payments received as consideration for after-sales service, for 
services rendered by a seller to a purchaser under a warranty, 
or for pure technical assistance.
    The term ``royalties'' also does not include payments for 
professional services (such as architectural, engineering, 
legal, managerial, medical or software development services). 
For example, income from the design of a refinery by an 
engineer (even if the engineer employed know-how in the process 
of rendering the design) or the production of a legal brief by 
a lawyer is not income from the transfer of know-how taxable 
under Article 12, but is income from services taxable under 
either Article 7 (Business Profits), 14 (Independent Personal 
Services) or 15 (Dependent Personal Services), as applicable. 
Professional services may be embodied in property that gives 
rise to royalties, however. Thus, if a professional contracts 
to develop patentable property and retains rights in the 
resulting property under the development contract, subsequent 
license payments made for those rights would be royalties.
Paragraph 4
    This paragraph provides a rule for taxing royalties in 
cases where the beneficial owner of the royalties carries on 
business through a permanent establishment in the State of 
source or performs in the source State independent personal 
services from a fixed based therein, and the royalties are 
attributable to that permanent establishment or fixed base. In 
such cases the provisions of Article 7 or Article 14, as the 
case may be, will apply.
    The provisions of paragraph 7 of Article 7 apply to this 
paragraph. For example, royalty income that is attributable to 
a permanent establishment and that accrues during the existence 
of the permanent establishment, but is received after the 
permanent establishment no longer exists, remains taxable under 
the provisions of Article 7, and not under this Article.
Paragraph 5
    Paragraph 5 contains the source rule for royalties. Under 
subparagraph 5(a), royalties are treated as arising in a 
Contracting State when the payer is a resident of that State. 
Where, however, the payer, whether he is a resident of a 
Contracting State, has in a Contracting State a permanent 
establishment or fixed base in connection with which the 
liability to pay the royalties was incurred, and such royalties 
are borne by such permanent establishment or fixed base, then 
such royalties will be deemed to arise in the State in which 
the permanent establishment or fixed base is situated.
    Subparagraph 5(b) provides that where a royalty is not 
treated as arising in a Contracting State under subparagraph 
5(a), and the royalties are for the use of, or the right to 
use, in a Contracting State any property or right described in 
paragraph 3, then such royalties will be deemed to arise in 
that State and not in the State of which the payer is resident.
Paragraph 6
    Paragraph 6 provides that in cases involving special 
relationships between the payer and beneficial owner of 
royalties or between both of them and some other person, 
Article 12 applies only to the extent the royalties would have 
been paid absent such special relationships (i.e., an arm's-
length royalty). Any excess amount of royalties paid remains 
taxable according to the laws of the two Contracting States, 
with due regard to the other provisions of the Convention. If, 
for example, the excess amount is treated as a distribution of 
corporate profits under domestic law, such excess amount will 
be taxed as a dividend rather than as royalties, but the tax 
imposed on the dividend payment will be subject to the rate 
limitations of paragraph 2 of Article 10 (Dividends).
Relationship to Other Articles
    Notwithstanding the foregoing limitations on source State 
taxation of royalties, the saving clause of paragraph 4 of the 
Protocol permits the United States to tax its residents and 
citizens, subject to the special foreign tax credit rules of 
paragraph 3 of Article 23 (Relief from Double Taxation), as if 
the Convention had not come into force.
    As with other benefits of the Convention, the benefits of 
Article 12 are available to a resident of the other State only 
if that resident is entitled to those benefits under Article 24 
(Limitation on Benefits).

                       ARTICLE 13 (CAPITAL GAINS)

    Article 13 assigns either primary or exclusive taxing 
jurisdiction over gains from the alienation of property to the 
State of residence or the State of source.
Paragraph 1
    Paragraph 1 of Article 13 preserves the non-exclusive right 
of the State of source to tax gains attributable to the 
alienation of real property situated in that State. The 
paragraph therefore permits the United States to apply Code 
section 897 to tax gains derived by a resident of Chile that 
are attributable to the alienation of real property situated in 
the United States (as defined in paragraph 2). Gains 
attributable to the alienation of real property include gains 
from any other property that is treated as a real property 
interest within the meaning of paragraph 2.
    Paragraph 1 refers to gains ``attributable to the 
alienation of real property (immovable property)'' rather than 
the OECD Model phrase ``gains from the alienation'' to clarify 
that the United States will look through distributions made by 
a REIT and certain RICs. Accordingly, distributions made by a 
REIT or certain RICs are taxable under paragraph 1 of Article 
13 (not under Article 10 (Dividends)) when they are 
attributable to gains derived from the alienation of real 
property.
Paragraph 2
    This paragraph defines the term ``real property (immovable 
property) situated in the other Contracting State.'' The term 
includes real property (immovable property) referred to in 
Article 6 (Income from Real Property (Immovable Property)) 
(i.e., an interest in the real property (immovable property) 
itself), a ``United States real property interest'' (when the 
United States is the other Contracting State under paragraph 1) 
as defined in Code section 897 and the regulations thereunder, 
as they may be amended from time to time without changing the 
general principles thereof, and an equivalent interest in real 
property (immovable property) situated in Chile, including 
shares or other rights deriving more than 50 percent of their 
value directly or indirectly from real property (immovable 
property) situated in Chile (when Chile is the other 
Contracting State under paragraph 1).
    Under Code section 897(c) the term ``United States real 
property interest'' includes shares in a U.S. corporation that 
owns sufficient U.S. real property interests to satisfy an 
asset-ratio test on certain testing dates. The term also 
includes certain foreign corporations that have elected to be 
treated as U.S. corporations for this purpose. Section 897(i).
Paragraph 3
    Paragraph 3 of Article 13 deals with the taxation of 
certain gains from the alienation of personal property (movable 
property) that are attributable to a permanent establishment 
that an enterprise of a Contracting State has in the other 
Contracting State, or that are attributable to a fixed base 
available to a resident of a Contracting State in the other 
Contracting State for the purpose of performing independent 
personal services. This also includes gains from the alienation 
of such a permanent establishment (alone or with the whole 
enterprise) or of the fixed base. Such gains may be taxed in 
the State in which the permanent establishment or fixed base is 
located.
    A resident of Chile that is a partner in a partnership 
doing business in the United States generally will have a 
permanent establishment in the United States as a result of the 
activities of the partnership, assuming that the activities of 
the partnership rise to the level of a permanent establishment. 
See Unger v. Commissioner, 936 F.2d 1316 (D.C. Cir. 1991); 
Donroy, Ltd., v. United States, 301 F.2d 200 (9th Cir. 1962). 
See also Rev. Rul. 91-32, 1991-1 C.B. 107. Further, under 
paragraph 3, the United States generally may tax a partner's 
distributive share of income realized by a partnership on the 
disposition of movable property forming part of the business 
property of the partnership in the United States.
    The gains subject to paragraph 3 may be taxed in the State 
in which the permanent establishment or fixed base is located, 
regardless of whether the permanent establishment or fixed base 
exists at the time of the alienation. This rule incorporates 
the rule of Code section 864(c)(6). Accordingly, income that is 
attributable to a permanent establishment or fixed base, but 
that is deferred and received after the permanent establishment 
or fixed base no longer exists, may nevertheless be taxed by 
the State in which the permanent establishment or fixed base 
was located.
Paragraph 4
    This paragraph limits the taxing jurisdiction of the State 
of source with respect to gains from the alienation of ships, 
aircraft, or containers operated or used in international 
traffic and from personal property (movable property) 
pertaining to the operation or use of such ships, aircraft, or 
containers.
    Under paragraph 4, such gains are taxable only in the 
Contracting State in which the alienator is resident. 
Notwithstanding paragraph 3, the rules of this paragraph apply 
even if the income is attributable to a permanent establishment 
or fixed base maintained by the enterprise in the other 
Contracting State. This result is consistent with the 
allocation of taxing rights under Article 8 (International 
Transport).
Paragraph 5
    Paragraph 5 provides that gains derived by a resident of a 
Contracting State from the alienation of shares or other rights 
or interests representing the capital of a company that is a 
resident of the other Contracting State may be taxed in that 
other State, but the rate of tax shall be limited to 16 percent 
of the amount of the gain. As stated in paragraph 4 of the 2010 
Exchange of Notes, the provisions of paragraph 5 (and paragraph 
7, discussed below) of Article 13 reflect the unique operation 
of Chile's integrated tax system and are intended to prevent 
the avoidance of the Additional Tax.
    Paragraph 16 of the Protocol provides that, if under the 
domestic law of Chile, the First Category Tax exceeds 30 
percent, paragraph 5 (and paragraph 7, discussed below) of 
Article 13 shall not apply. In such case, paragraph 4 of the 
2010 Exchange of Notes provides that
    Paragraph 16 of the Protocol will operate to limit the 
right of the source State to tax capital gains, and such gains 
will only be subject to tax in the residence State.
    Paragraph 22 of the Protocol provides that if Chile 
concludes with another state an income tax treaty that contains 
terms further limiting the right of the source State to tax 
capital gains under Article 13, the United States and Chile 
shall, at the request of the United States, consult to reassess 
the balance of benefits of the Convention with a view to 
concluding a protocol to incorporate such lower rates into the 
Convention.
Paragraph 6
    Notwithstanding the provisions of paragraph 5, the State of 
residence of the alienator has the exclusive right to tax gains 
from the alienation of certain shares of a company or other 
rights representing the capital of a company that in either 
case is a resident of the other Contracting State as described 
in paragraph 6.
    Gains derived by a pension fund from the alienation of 
shares or other rights representing the capital of a company 
that is a resident of the other Contracting State may be taxed 
only in the State of residence of the pension fund.
    In addition, gains derived by a mutual fund or other 
institutional investor from the alienation of shares of a 
company that is a resident of the other Contracting State may 
be taxed only in the State of residence of the mutual fund or 
other institutional investor, provided that the company's 
shares are substantially and regularly traded on a recognized 
stock exchanged located in that other State and the alienation 
occurred on a recognized stock exchange in that other State. 
For this purpose, paragraph 17 of the Protocol provides that 
the terms ``mutual fund'' and ``institutional investor'' do not 
include an investor of a Contracting State which directly or 
indirectly owns 10 percent or more of the shares or other 
rights representing the capital or of the profits in a company 
that is a resident of the other Contracting State.
    Finally, the State of residence of the alienator has the 
exclusive right to tax gains from the alienation of shares of a 
company that is a resident of the other Contracting State and 
whose shares are substantially and regularly traded on a 
recognized stock exchange located in that other State, provided 
that: (1) the shares were sold either on a recognized stock 
exchange in that other State or in a public offer for the 
acquisition of shares regulated by law; and (2) such shares 
were previously acquired either on a recognized stock exchange 
in that other State, in a public offer for the acquisition of 
such shares regulated by law, in a placement of first issue 
shares by that company at the time of the constitution of that 
company or of an increase in the capital of that company, or in 
an exchange of bonds convertible into shares.
Paragraph 7
    Paragraph 7 sets forth two exceptions to the limitation 
imposed by paragraph 5 on the rate of source State tax. As 
stated in paragraph 4 of the 2010 Exchange of Notes, the 
provisions of paragraph 7 (and paragraph 5, discussed above) of 
Article 13 reflect the unique operation of Chile's integrated 
tax system and are intended to prevent the avoidance of the 
Additional Tax.
    As provided in subparagraph 7(a), the State of source may 
tax gains derived by a resident of the other Contracting State 
if the recipient of the gain at any time during the 12-month 
period preceding the alienation owned shares, directly or 
indirectly, consisting of more than 50 percent of the capital 
of a company that is a resident of the first-mentioned State. 
As provided in subparagraph 7(b), the State of source may tax 
gains derived by a resident of the other Contracting State from 
the alienation of other rights not being shares or debt claims 
representing the capital of a company (such as a limited 
liability company) that is a resident of the first-mentioned 
State, if the recipient of the gain at any time during the 12-
month period preceding the alienation owned other such rights, 
directly or indirectly, consisting of 20 percent or more of the 
capital of that company. Paragraph 16 of the Protocol provides 
that the rate of Additional Tax imposed by Chile under the 
provisions of paragraph 7 of Article 13 shall not exceed 35 
percent.
    Paragraph 16 of the Protocol provides that the rate of 
Additional Tax imposed by Chile under the provisions of 
paragraph 7 shall not exceed 35 percent. In addition, paragraph 
16 of the Protocol provides that if under the domestic law of 
Chile, the First Category Tax exceeds 30 percent, paragraph 7 
(and paragraph 5, discussed above) of Article 13 shall not 
apply. In such case, paragraph 4 of the 2010 Exchange of Notes 
provides that paragraph 16 of the Protocol will operate to 
limit the right of the source State to tax capital gains, and 
such gains will only be subject to tax in the residence State.
    Under paragraph 22 of the Protocol, if Chile concludes with 
another state an income tax treaty that contains terms further 
limiting the right of the source State to tax capital gains 
under Article 13, the United States and Chile shall, at the 
request of the United States, consult to reassess the balance 
of benefits of the Convention with a view to concluding a 
protocol incorporating such lower rates into the Convention.
Paragraph 8
    Paragraph 8 provides that the State of residence of the 
alienator has the exclusive right to tax gains from the 
alienation of any property other than property referred to in 
paragraphs 1 through 7.
Paragraph 9
    The purpose of paragraph 9 is to provide a rule to address 
the mark-to-market exit tax regime for ``covered expatriates'' 
under Code section 877A. This rule is intended to coordinate 
United States and Chilean taxation of gains in the case of a 
timing mismatch. Such a mismatch may occur, for example, where 
a U.S. resident recognizes, for U.S. tax purposes, gain on a 
deemed sale of all property on the day before the individual 
expatriates to Chile. To avoid double taxation, paragraph 9 of 
Article 13 provides that where an individual who, upon ceasing 
to be a resident of one Contracting State, is treated for 
purposes of taxation by that State as having alienated a 
property and is taxed by that State by reason thereof, the 
individual may elect to be treated for the purposes of taxation 
by the other Contracting State as having sold and repurchased 
the property for its fair market value on the day before the 
expatriation date. The election in paragraph 9 therefore will 
be available to any individual who expatriates from the United 
States to Chile. The effect of the election will be to give the 
individual an adjusted basis for Chilean tax purposes equal to 
the fair market value of the property as of the date of the 
deemed alienation in the United States, with the result that 
only post-emigration gain will be subject to Chilean tax when 
there is an actual alienation of the property while the 
individual is a resident of Chile.
    If an individual recognizes in one Contracting State losses 
and gains from the deemed alienation of multiple properties, 
then the individual must apply paragraph 9 consistently with 
respect to all such properties. An individual who is deemed to 
have alienated multiple properties may only make the election 
under paragraph 9 if the deemed alienation of all such 
properties results in a net gain.
    Paragraph 9 provides that an individual who ceases to be a 
resident of one of the Contracting States may not make the 
election with respect to property situated in the other 
Contracting State. In addition, an individual may make the 
election only with respect to property that is treated as sold 
for its fair market value under a Contracting State's deemed 
disposition rules. At the time the Convention was signed, the 
following were the types of property that were generally 
excluded from the deemed disposition rules in the case of 
individuals who cease to be citizens or long term residents of 
the United States: (1) an eligible deferred compensation item 
as defined under Code section 877A(d)(3); (2) a specified tax 
deferred account as defined under Code section 877A(e)(2); and 
(3) an interest in a non-grantor trust as defined under Code 
section 877A(f)(3).
Relationship to Other Articles
    Notwithstanding the foregoing limitations on taxation of 
certain gains by the State of source, the saving clause of 
paragraph 4 of the Protocol permits the United States to tax 
its citizens and residents as if the Convention had not come 
into effect. Thus, any limitation in this Article on the right 
of the United States to tax gains does not apply to gains of a 
U.S. citizen or resident.
    The benefits of this Article are also subject to the 
provisions of Article 24 (Limitation on Benefits). Thus, only a 
resident of a Contracting State that satisfies one of the 
conditions in Article 24 is entitled to the benefits of this 
Article.

               ARTICLE 14 (INDEPENDENT PERSONAL SERVICES)

    The Convention addresses in separate Articles the taxation 
of different classes of income from personal services. Article 
14 concerns income from independent personal services, and 
Article 15 concerns income from dependent personal services. 
The Convention provides exceptions and additional rules for 
directors' fees (Article 16); income of artists and athletes 
(Article 17); pensions, social security benefits, alimony, and 
child support payments (Article 18); government service 
salaries (Article 19); and certain income of students and 
trainees (Article 20).
Paragraph 1
    Paragraph 1 of Article 14 provides the general rule that an 
individual resident of a Contracting State who derives income 
from performing professional services in an independent 
capacity will not be taxed with respect to that income by the 
other Contracting State. Such income may also be taxed in the 
other Contracting State only if one of two tests is met. First, 
if a resident of a Contracting State has a fixed base regularly 
available to him in the host State for the purpose of 
performing his activities, the host State may tax only so much 
of the income that is attributable to that fixed base and is 
derived from services performed in any state other than the 
residence State. Second, if a resident of a Contracting State 
is present in the host State for a period or periods equaling 
or exceeding 183 days in any 12-month period that begins or 
ends during the relevant taxable year (i.e., in the United 
States, the calendar year in which the services are performed), 
the host State may tax only so much of the income that is 
derived from the activities performed in the host State.
    Paragraph 5 of the 2010 Exchange of Notes provides that 
``performed in that other State'' does not mean ``received in 
that other State.'' This clarifies that Article 14 does not 
apply, for example, to payments to a U.S. individual by a 
client in Chile for services that were performed in the United 
States.
    Income derived by persons other than individuals or groups 
of individuals from the performance of independent personal 
services is not covered by Article 14. Such income generally 
would be business profits taxable in accordance with Article 7 
(Business Profits). Income derived by employees of such persons 
generally would be taxable in accordance with Article 15 
(Dependent Personal Services).
    The term ``fixed base'' is not defined in the Convention, 
but its meaning is understood to be identical to that of the 
term ``permanent establishment,'' as defined in Article 5 
(Permanent Establishment). The term ``regularly available'' 
also is not defined in the Convention. Whether a fixed base is 
regularly available to a person will be determined based on all 
the facts and circumstances.
    The 183-day period referred to in subparagraph 1(b) is to 
be measured using the ``days of physical presence'' method. 
Under this method, the days that are counted include any day in 
which a part of the day is spent in the host State. See Rev. 
Rul. 56-24, 1956-1 C.B. 851. Thus, days that are counted 
include the days of arrival and departure; weekends and 
holidays on which the employee does not work but is present 
within the State; vacation days spent in the host State before, 
during or after the employment period, unless the individual's 
presence before or after the employment can be shown to be 
independent of his presence there for employment purposes; and 
time during periods of sickness, training periods, strikes, 
etc., when the individual is present but not working. If 
illness prevented the individual from leaving the host State in 
sufficient time to qualify for the benefit, those days will not 
count. Also, any part of a day spent in the host State while in 
transit between two points outside the host State is not 
counted. If the individual is a resident of the host State for 
part of the taxable year concerned and a nonresident for the 
remainder of the year, the individual's days of presence as a 
resident do not count for purposes of determining whether the 
183-day period is exceeded.
    Paragraph 7 of Article 7 (Business Profits) clarifies that 
income that is attributable to a permanent establishment or 
fixed base but that is deferred and received after such 
permanent establishment or fixed base has ceased to exist may 
nevertheless be taxed by the State in which the permanent 
establishment or fixed base was located. Thus, under Article 
14, income derived by an individual resident of a Contracting 
State from services performed in the other Contracting State 
and attributable to a fixed base there may be taxed by that 
other State even if the income is deferred and received after 
there is no longer a fixed base available to the resident in 
that other State.
Paragraph 2
    Paragraph 2 provides that in cases where the host State may 
tax income from independent personal services under paragraph 
1, the host State will do so only on a net basis, as if such 
income were attributable to a permanent establishment and 
taxable by the host State under Article 7. For purposes of 
paragraph 1, the principles of paragraph 3 of Article 7 
(Business Profits) will apply to determine the income that is 
taxable in the host State, provided that related administrative 
requirements have been satisfied. Thus, all necessary expenses, 
including expenses not incurred in the host State, must be 
allowed as deductions in computing the net income from services 
subject to tax in the host State.
Paragraph 3
    Paragraph 3 contains a non-exhaustive list of activities 
that constitute ``professional services.'' The term includes 
independent scientific, literary, artistic, educational or 
teaching activities, as well as the independent activities of 
physicians, lawyers, engineers, architects, dentists, and 
accountants.
    In addition to applying to income in respect of 
professional services, Article 14 also applies to income in 
respect of other activities of an independent character. This 
includes personal services performed by an individual for his 
own account, whether as a sole proprietor or a partner, where 
he receives the income and bears the risk of loss arising from 
the services. However, the taxation of income of an individual 
from those types of independent services which are covered by 
Articles 16 through 18 is governed by the provisions of those 
articles. For example, taxation of the income of a corporate 
director would be governed by Article 16 rather than Article 
14.
    This Article applies to income derived by a partner 
resident in the Contracting State that is attributable to 
personal services of an independent character performed in the 
other State through a partnership that has a fixed base in that 
other Contracting State. Income which may be taxed under this 
Article includes all income attributable to the fixed base in 
respect of the performance of the personal services carried on 
by the partnership (whether by the partner himself, other 
partners in the partnership, or by employees assisting the 
partners) and any income from activities ancillary to the 
performance of those services (for example, charges for 
facsimile services). Income that is not derived from the 
performance of personal services and that is not ancillary 
thereto (for example, rental income from subletting office 
space), will be governed by other Articles of the Convention.
    The application of Article 14 to a service partnership may 
be illustrated by the following example: a partnership formed 
in a Contracting State has five partners (who agree to split 
profits equally), four of whom are resident and perform 
personal services only in that Contracting State at Office A, 
and one of whom performs personal services from Office B, a 
fixed base in the other Contracting State. In this case, the 
four partners of the partnership resident in the first-
mentioned Contracting State may be taxed in the other 
Contracting State in respect of their share of the income 
attributable to the fixed base, Office B. The services giving 
rise to income which may be attributed to the fixed base would 
include not only the services performed by the one resident 
partner, but also, for example, if one of the four other 
partners came to the other Contracting State and worked on an 
Office B matter there, the income in respect of those services 
also. As noted above, this would be the case regardless of 
whether such partner from the first-mentioned Contracting State 
actually visited or used Office B when performing services in 
the other State.
Relationship to other Articles
    This Article is subject to the provisions of the saving 
clause of paragraph 4 of the Protocol. Thus, if a resident of 
Chile who is a U.S. citizen performs independent personal 
services in the United States, the United States may tax his 
income without regard to the provisions of this Article, 
subject to the special foreign tax credit provisions of 
paragraph 3 of Article 23 (Relief from Double Taxation). In 
addition, as with other benefits of the Convention, the 
benefits of this Article are available to a resident of a 
Contracting State only if that resident is entitled to those 
benefits under Article 24 (Limitation on Benefits).

                ARTICLE 15 (DEPENDENT PERSONAL SERVICES)

    Article 15 apportions taxing jurisdiction over remuneration 
derived by a resident of a Contracting State as an employee 
between the States of source and residence.
Paragraph 1
    The general rule of Article 15 is contained in paragraph 1. 
Remuneration derived by a resident of a Contracting State as an 
employee may be taxed by the State of residence, and the 
remuneration also may be taxed by the other Contracting State 
to the extent derived from employment exercised (i.e., services 
performed) in that other Contracting State. Paragraph 1 also 
provides that the more specific rules of Articles 16 
(Directors' Fees), 18 (Pensions, Social Security, Alimony and 
Child Support), and 19 (Government Service) apply in the case 
of employment income described in one of those articles. Thus, 
even though the State of source has a right to tax employment 
income under Article 15, it may not have the right to tax that 
income under the Convention if the income is described, for 
example, in Article 18 and is not taxable in the State of 
source under the provisions of that article.
    Article 15 applies to any form of compensation for 
employment, including payments in kind. Paragraph 1.1 of the 
Commentary to Article 16 of the OECD Model is consistent with 
that interpretation.
    Consistent with Code section 864(c)(6), Article 15 also 
applies regardless of the timing of actual payment for 
services. Consequently, a person who receives the right to a 
future payment in consideration for services rendered in a 
Contracting State would be taxable in that State even if the 
payment is received at a time when the recipient is a resident 
of the other Contracting State. Thus, a bonus paid to a 
resident of a Contracting State with respect to services 
performed in the other Contracting State with respect to a 
particular taxable year would be subject to Article 15 for that 
year even if it was paid after the close of the year. An 
annuity received for services performed in a taxable year could 
be subject to Article 15 despite the fact that it was paid in 
subsequent years. In that case, it would be necessary to 
determine whether the payment constitutes deferred 
compensation, taxable under Article 15, or a qualified pension 
subject to the rules of Article 18. Article 15 also applies to 
income derived from the exercise of stock options granted with 
respect to services performed in the host State, even if those 
stock options are exercised after the employee has left the 
host State. If Article 15 is found to apply, whether such 
payments were taxable in the State where the employment was 
exercised would depend on whether the requirements of paragraph 
2 were satisfied in the year in which the services to which the 
payment relates were performed.
Paragraph 2
    Paragraph 2 sets forth an exception to the general rule 
that employment income may be taxed in the State where it is 
exercised. Under paragraph 2, the State where the employment is 
exercised may not tax the income from the employment if three 
conditions are satisfied: (a) the individual is present in the 
other Contracting State for a period or periods not exceeding 
183 days in any 12-month period that begins or ends during the 
relevant taxable year (i.e., in the United States, the calendar 
year in which the services are performed); (b) the remuneration 
is paid by, or on behalf of, an employer who is not a resident 
of that other Contracting State; and (c) the remuneration is 
not borne as a deductible expense by a permanent establishment 
or a fixed base which the employer has in that other State. In 
order for the remuneration to be exempt from tax in the source 
State, all three conditions must be satisfied. This exception 
is identical to that set forth in the OECD Model.
    The 183-day period in condition (a) is to be measured using 
the ``days of physical presence'' method. Under this method, 
the days that are counted include any day in which a part of 
the day is spent in the host State. See Rev. Rul. 56-24, 1956-1 
C.B. 851. Thus, days that are counted include the days of 
arrival and departure; weekends and holidays on which the 
employee does not work but is present within the State; 
vacation days spent in the host State before, during or after 
the employment period, unless the individual's presence before 
or after the employment can be shown to be independent of his 
presence there for employment purposes; and time during periods 
of sickness, training periods, strikes, etc., when the 
individual is present but not working. If illness prevented the 
individual from leaving the host State in sufficient time to 
qualify for the benefit, those days will not count. Also, any 
part of a day spent in the host State while in transit between 
two points outside the host State is not counted. If the 
individual is a resident of the host State for part of the 
taxable year concerned and a nonresident for the remainder of 
the year, the individual's days of presence as a resident do 
not count for purposes of determining whether the 183-day 
period is exceeded.
    Conditions (b) and (c) are intended to ensure that a 
Contracting State will not be required to allow a deduction to 
the payor for compensation paid and at the same time to exempt 
the employee on the amount received. Accordingly, if a foreign 
person pays the salary of an employee who is employed in the 
host State, but a host State corporation or permanent 
establishment reimburses the payor with a payment that can be 
identified as a reimbursement, neither condition (b) nor (c), 
as the case may be, will be considered to have been fulfilled.
    The reference to remuneration ``borne by'' a permanent 
establishment is understood to encompass all expenses that 
economically are incurred and not merely expenses that are 
currently deductible for tax purposes. Accordingly, the 
expenses referred to include expenses that are capitalizable as 
well as those that are currently deductible. Further, salaries 
paid by residents that are exempt from income taxation may be 
considered to be borne by a permanent establishment 
notwithstanding the fact that the expenses will be neither 
deductible nor capitalizable since the payor is exempt from 
tax.
Paragraph 3
    Paragraph 3 contains a special rule applicable to 
remuneration derived by a resident of a Contracting State as an 
employee aboard a ship or aircraft operated in international 
traffic. Such remuneration may be taxed only in the State of 
residence of the employee if the services are performed as a 
member of the regular complement of the ship or aircraft. The 
``regular complement'' includes the crew. In the case of a 
cruise ship, for example, it may also include others, such as 
entertainers, lecturers, etc., employed by the shipping company 
to serve on the ship throughout its voyage. The use of the term 
``regular complement'' is intended to clarify that a person who 
exercises his employment as, for example, an insurance salesman 
while aboard a ship or aircraft is not covered by this 
paragraph.
Relationship to other Articles
    If a U.S. citizen who is resident in Chile performs 
services as an employee in the United States and meets the 
conditions of paragraph 2 for source State exemption, he 
nevertheless is taxable in the United States by virtue of the 
saving clause of paragraph 4 of the Protocol, subject to the 
special foreign tax credit rule of paragraph 3 of Article 23 
(Relief from Double Taxation).

                      ARTICLE 16 (DIRECTORS' FEES)

    This Article provides that directors' fees and other 
similar payments derived by a resident of a Contracting State 
in his capacity as a member of the board of directors or an 
equivalent body of a company that is a resident of the other 
Contracting State may be taxed by the State where such fees or 
payments arise. Such fees or payments will be deemed to arise 
in the State in which the company is resident, except to the 
extent that such fees or payments are paid in respect of 
attendance at meetings held in the other Contracting State.
    This rule is an exception to the more general rules of 
Articles 7 (Business Profits), 14 (Independent Personal 
Services), and 15 (Dependent Personal Services). Thus, for 
example, in determining whether a director's fee paid to a non-
employee director is subject to tax in the State of residence 
of the corporation, it is not relevant to establish whether the 
fee is attributable to a permanent establishment in that State.

                  ARTICLE 17 (ARTISTES AND SPORTSMEN)

    This Article deals with the taxation in a Contracting State 
of entertainers and sportsmen resident in the other Contracting 
State from the performance of their services as such. The 
Article applies both to the income of an entertainer or 
sportsman who performs services on his own behalf and one who 
performs services on behalf of another person, either as an 
employee of that person, or pursuant to any other arrangement. 
The rules of this Article take precedence, in some 
circumstances, over those of Articles 14 (Independent Personal 
Services) and 15 (Dependent Personal Services).
    This Article applies only with respect to the income of 
entertainers and sportsmen. Others involved in a performance or 
athletic event, such as producers, directors, technicians, 
managers, coaches, etc., remain subject to the provisions of 
Articles 14 and 15. In addition, except as provided in 
paragraph 2, income earned by juridical persons is not covered 
by Article 17.
Paragraph 1
    Paragraph 1 describes the circumstances in which a 
Contracting State may tax the performance income of an 
entertainer or sportsman who is a resident of the other 
Contracting State. Under this paragraph, income derived by an 
individual resident of a Contracting State from activities as 
an entertainer or sportsman exercised in the other Contracting 
State may be taxed in that other State if the amount of the 
gross receipts derived by the performer equals or exceeds 
$5,000 (or its equivalent in Chilean pesos) for the taxable 
year. The $5,000 threshold includes expenses reimbursed to the 
individual or borne on his behalf. If the gross receipts exceed 
$5,000, the full amount, not just the excess, may be taxed in 
the State of performance.
    The Convention introduces this monetary threshold to 
distinguish between two groups of entertainers and athletes--
those who are paid relatively large sums of money for very 
short periods of service, and who would, therefore, normally be 
exempt from tax in the host State under the standard personal 
services income rules, from those who earn relatively modest 
amounts and are, therefore, not easily distinguishable from 
those who earn other types of personal services income.
    Tax may be imposed under paragraph 1 even if the performer 
would have been exempt from tax under Article 14 or 15. On the 
other hand, if the performer would be exempt from host-State 
tax under Article 17, but would be taxable under either Article 
14 or 15, tax may be imposed under either of those Articles. 
Thus, for example, if a performer derives remuneration from his 
activities in an independent capacity, and the performer does 
not have a permanent establishment in the host State, he may be 
taxed by the host State in accordance with Article 17 if his 
remuneration equals or exceeds $5,000 annually, despite the 
fact that he generally would be exempt from host State taxation 
under Article 14 or 15. However, a performer who receives less 
than the $5,000 threshold amount and therefore is not taxable 
under Article 17 nevertheless may be subject to tax in the host 
State under Article 14 or 15 if the tests for host-State 
taxability under the relevant Article are met. For example, if 
an entertainer who is an independent contractor earns $14,000 
of income in a State for the calendar year, but the income is 
attributable to his fixed base in the host State, that State 
may tax his income under Article 14 or 15.
    As explained in paragraph 9 of the Commentary to Article 17 
of the OECD Model, Article 17 of the Convention applies to all 
income connected with a performance by the entertainer, such as 
appearance fees, award or prize money, and a share of the gate 
receipts. Income derived from a Contracting State by a 
performer who is a resident of the other Contracting State from 
other than actual performance, such as royalties from record 
sales and payments for product endorsements, is not covered by 
this Article, but by other articles of the Convention, such as 
Article 12 (Royalties) or Article 7 (Business Profits). For 
example, if an entertainer receives royalty income from the 
sale of live recordings, the royalty income would be subject to 
the provisions of Article 12, even if the performance was 
conducted in the source State, although the entertainer could 
be taxed in the source State with respect to income from the 
performance itself under Article 17 if the $5,000 threshold is 
met.
    In determining whether income falls under Article 17 or 
another article, the controlling factor will be whether the 
income in question is predominantly attributable to the 
performance itself or to other activities or property rights. 
For instance, a fee paid to a performer for endorsement of a 
performance in which the performer will participate would be 
considered to be so closely associated with the performance 
itself that it normally would fall within Article 17. 
Similarly, a sponsorship fee paid by a business in return for 
the right to attach its name to the performance would be so 
closely associated with the performance that it would fall 
under Article 17 as well. As indicated in paragraph 9 of the 
Commentary to Article 17 of the OECD Model, however, a 
cancellation fee would not be considered to fall within Article 
17 but would be dealt with under Article 14 or 15.
    As indicated in paragraph 4 of the Commentary to Article 17 
of the OECD Model, where an individual fulfills a dual role as 
performer and non-performer (such as a player-coach or an 
actor-director), but his role in one of the two capacities is 
negligible, the predominant character of the individual's 
activities should control the characterization of those 
activities. In other cases there should be an apportionment 
between the performance-related compensation and other 
compensation.
    Consistent with Articles 14 and 15, Article 17 also applies 
regardless of the timing of actual payment for services. Thus, 
a bonus paid to a resident of a Contracting State with respect 
to a performance in the other Contracting State during a 
particular taxable year would be subject to Article 17 for that 
year even if it was paid after the close of the year. The 
determination as to whether the $5,000 threshold has been met 
is determined separately with respect to each year of payment. 
Accordingly, if an actor who is a resident of one Contracting 
State receives residual payments over time with respect to a 
movie that was filmed in the other Contracting State, the 
payments do not have to be aggregated from one year to another 
to determine whether the total payments have finally equaled or 
exceeded $5,000. Otherwise, residual payments received many 
years later could retroactively subject all earlier payments to 
tax by the other Contracting State.
Paragraph 2
    Paragraph 2 is intended to address the potential for 
circumvention of the rule in paragraph 1 when a performer's 
income does not accrue directly to the performer himself, but 
to another person. Foreign performers frequently perform in the 
United States as employees of, or under contract with, a 
company or other person.
    The relationship may truly be one of employee and employer, 
with no circumvention of paragraph 1 either intended or 
realized. On the other hand, the ``employer'' may, for example, 
be a company established and owned by the performer, which is 
merely acting as the nominal income recipient in respect of the 
remuneration for the performance (a ``star company''). The 
performer may act as an ``employee,'' receive a modest salary, 
and arrange to receive the remainder of the income from his 
performance from the company in another form or at a later 
time. In such case, absent the provisions of paragraph 2, the 
income arguably could escape host-State tax because the company 
earns business profits but has no permanent establishment in 
that country. The performer may largely or entirely escape 
host-State tax by receiving only a small salary, perhaps small 
enough to place him below the dollar threshold in paragraph 1. 
The performer might arrange to receive further payments in a 
later year, when he is not subject to host-State tax, perhaps 
as dividends or liquidating distributions.
    Paragraph 2 seeks to prevent this type of abuse while at 
the same time protecting the taxpayers' rights to the benefits 
of the Convention when there is a legitimate employee-employer 
relationship between the performer and the person providing his 
services. Under paragraph 2, when the income accrues to a 
person other than the performer, and the performer or any 
related persons participate, directly or indirectly, in the 
receipts or profits of that other person, the income may be 
taxed in the Contracting State where the performer's services 
are exercised, without regard to the provisions of the 
Convention concerning business profits (Article 7) or 
independent personal services income (Article 14).
    In cases where paragraph 2 is applicable, the income of the 
``employer'' may be subject to tax in the host State even if it 
has no permanent establishment or fixed base in the host State.
    Taxation under paragraph 2 is on the person providing the 
services of the performer. This paragraph does not affect the 
rules of paragraph 1, which apply to the performer himself. The 
income taxable by virtue of paragraph 2 is reduced to the 
extent of salary payments to the performer, which fall under 
paragraph 1.
    For purposes of paragraph 2, income is deemed to accrue to 
another person (i.e., the person providing the services of the 
performer) if that other person has control over, or the right 
to receive, gross income in respect of the services of the 
performer. Direct or indirect participation in the profits of a 
person may include, but is not limited to, the accrual or 
receipt of deferred remuneration, bonuses, fees, dividends, 
partnership income or other distributions.
    Paragraph 2 does not apply if it is established that 
neither the performer nor any persons related to the performer 
participate directly or indirectly in the receipts or profits 
of the person providing the services of the performer. Assume, 
for example, that a circus owned by a U.S. corporation performs 
in the other Contracting State, and promoters of the 
performance in the other State pay the circus, which, in turn, 
pays salaries to the circus performers. The circus is 
determined to have no permanent establishment in that State. 
Since the circus performers do not participate in the profits 
of the circus, but merely receive their salaries out of the 
circus' gross receipts, the circus is protected by Article 7 
and its income is not subject to host-country tax. Whether the 
salaries of the circus performers are subject to host-country 
tax under this Article depends on whether they exceed the 
$5,000 threshold in paragraph 1.
    Pursuant to Article 1 (General Scope) the Convention only 
applies to persons who are residents of one of the Contracting 
States. Thus, income of a star company that is not a resident 
of one of the Contracting States would not be eligible for 
benefits of the Convention.
Relationship to other Articles
    This Article is subject to the provisions of the saving 
clause of paragraph 4 of the Protocol. Thus, if an entertainer 
or a sportsman who is resident of Chile is a citizen of the 
United States, the United States may tax all of his income from 
performances in the United States without regard to the 
provisions of this Article (subject to the special foreign tax 
credit provisions of paragraph 3 of Article 23 (Relief from 
Double Taxation)). In addition, benefits of this Article are 
subject to the provisions of Article 24 (Limitation on 
Benefits).

   ARTICLE 18 (PENSIONS, SOCIAL SECURITY, ALIMONY AND CHILD SUPPORT)

    This Article deals with the taxation of pension payments 
(both private and government), social security benefits, 
contributions to pension funds, and alimony and child support 
payments.
Paragraph 1
    Paragraph 1 deals with the taxation of private (i.e., non-
government service) pension payments and other similar 
remuneration in consideration of past employment that are 
derived from sources within one Contracting State and 
beneficially owned by a resident of the other Contracting 
State. The term ``pension payments and other similar 
remuneration'' includes both periodic and single sum payments. 
The taxation of annuity payments that are not in consideration 
of past employment is dealt with in Article 21 (Other Income) 
of the Convention.
    Subparagraph 1(a) provides that pension payments and other 
similar remuneration that are derived from sources within one 
Contracting State and beneficially owned by a resident of the 
other Contracting State are taxable in both Contracting States. 
However, the tax imposed by the source State may not exceed 15 
percent of the gross amount of such payment.
    Subparagraph 1(b) contains an exception to the State of 
residence's right to tax pension payments and other similar 
remuneration under subparagraph 1(a). Under subparagraph 1(b), 
the State of residence must exempt from tax any amount of such 
payment that would be exempt from tax in the Contracting State 
in which the pension plan is established if the recipient were 
a resident of that State. Thus, for example, a distribution 
from certain individual retirement accounts (``IRAs''), such as 
a U.S. ``Roth IRA'' to a resident of Chile would be exempt from 
tax in Chile to the same extent the distribution would be 
exempt from tax in the United States if it were distributed to 
a U.S. resident. The same is true with respect to distributions 
from a traditional IRA to the extent that the distribution 
represents a return of non-deductible contributions. Similarly, 
if distributions from a traditional IRA were not subject to 
U.S. tax because they were ``rolled over'' to another U.S. IRA, 
then the distributions would be exempt from tax in Chile.
    Paragraph 1 is intended to cover payments made by qualified 
private retirement plans. In the United States, the plans 
covered by paragraph 1 include qualified plans under Code 
section 401(a), individual retirement plans (including 
individual retirement plans that are part of a simplified 
employee pension plan that satisfies Code section 408(k), 
individual retirement accounts, and Code section 408(p) 
accounts), Code section 403(a) qualified annuity plans, and 
Code section 403(b) plans. Distributions from Code section 457 
plans may also fall under paragraph 1 if they are not paid with 
respect to government services. The competent authorities may 
agree that distributions from other plans that generally meet 
criteria similar to those applicable to the listed plans also 
qualify for the benefits of paragraph 1. Payments in 
consideration of past employment in the private sector that are 
not eligible for the benefits of paragraph 1 generally are 
covered by Article 15 (Dependent Personal Services).
    Pensions in respect of government service and social 
security benefits are not covered by paragraph 1. Pensions in 
respect of government service are generally covered by 
paragraph 2, while social security benefits are covered by 
paragraph 3.
Paragraph 2
    Paragraph 2 deals with the taxation of pensions paid from 
the public funds of a Contracting State, or a political 
subdivision or a local authority thereof, to an individual in 
respect of services rendered to that State or subdivision or 
authority. Subparagraph 2(a) provides that such pensions are 
taxable only in that State. Subparagraph 2(b) provides an 
exception under which such pensions are taxable only in the 
other State if the individual is a resident of, and a national 
of, that other State.
    Pensions paid to retired civilian and military employees of 
a Government of either State are intended to be covered under 
paragraph 2. When benefits paid by a State in respect of 
services rendered to that State or a subdivision or local 
authority are in the form of social security benefits, however, 
those payments are covered by paragraph 3. As a general matter, 
the result will be the same whether paragraph 2 or 3 applies, 
since both pensions in respect of government service and social 
security benefits are taxable exclusively by the source State. 
The result will differ only when the payment is made to a 
national and resident of the other Contracting State, who is 
not also a citizen of the paying State (or, where the United 
States is the paying State, a lawful permanent resident of the 
United States). In such a case, social security benefits 
continue to be taxable at source while government pensions 
become taxable only in the residence State.
    In the case of the United States, paragraph 2 generally 
covers payments from Code section 457(g), 401(a), 403(a), and 
403(b) plans established for U.S. government employees, as well 
as payments from the Thrift Savings Fund (Code section 
7701(j)).
Paragraph 3
    Paragraph 3 deals with the taxation of social security 
benefits. This paragraph provides that, notwithstanding the 
provisions of paragraphs 1 and 2, payments made by one of the 
Contracting States under the provisions of its social security 
or similar legislation to a resident of the other Contracting 
State or to a citizen of the United States will be taxable only 
in the Contracting State making the payment. The reference to 
U.S. citizens is necessary to ensure that a social security 
payment by Chile to a U.S. citizen who is not resident in the 
United States will not be taxable by the United States.
    Paragraph 3 applies to social security benefits, regardless 
of whether the beneficiary contributed to the system as a 
private sector or Government employee. Payments made under 
provisions of the social security or similar legislation of a 
Contracting State include payments made pursuant to a pension 
plan or fund created under the social security system of that 
State. Paragraph 18 of the Protocol provides that in the case 
of Chile, the social security system referred to in paragraph 3 
of Article 18 is any pension scheme or fund administered by the 
Instituto de Prevision Social (formerly Instituto de 
Normalizacion Previsional) and the social security system 
created by Decree Law 3500 (DL 3500). In the case of the United 
States, the phrase ``similar legislation'' is intended to refer 
to U.S. Tier 1 Railroad Retirement benefits.
Paragraph 4
    Paragraph 4 provides that, if a resident of a Contracting 
State is a beneficiary of a pension plan established in the 
other Contracting State that is generally exempt from income 
taxation in that other State and operated to provide pension or 
retirement benefits, neither State will tax the income earned 
but not distributed by the plan until a payment or other 
similar remuneration is
    made from the plan. Thus, for example, if a U.S. citizen 
contributes to a U.S. qualified plan while working in the 
United States and then establishes residence in Chile, this 
paragraph ensures that neither the United States nor Chile will 
tax currently the plan's earnings and accretions with respect 
to that individual. Only at the time and to the extent that a 
payment or other similar remuneration is made from the plan 
(and not transferred to another pension fund in the United 
States), may the payment be subject to tax subject to the 
provisions of paragraph 1 of Article 18. Thus, if a 
distribution from a pension plan established in a Contracting 
State is not currently taxable in that State because it is 
rolled over into another pension plan in that State, such 
distribution shall also not be subject to tax in the other 
Contracting State.
Paragraph 5
    Paragraph 5 provides certain benefits with respect to 
contributions to a pension fund in the case of a short-term 
assignment where an individual participates in a pension fund 
in one State (the ``home State'') and performs services 
(whether or not as an employee) for a limited period of time in 
the other State (the ``host State''). It is not necessary for 
an individual to be a resident of the host State in order to 
claim the benefits of paragraph 5 (as long as the individual 
does not become a citizen or permanent resident of the host 
State). However, benefits are available under paragraph 5 only 
for so long as the individual performs services in a period not 
exceeding an aggregate of 60 months.
    If the requirements of paragraph 5 are satisfied, 
contributions paid by, or on behalf of, the individual with 
respect to the services performed in the host State to a 
pension fund that is generally exempt from income tax in the 
home State and operated primarily to provide pension or 
retirement benefits in the home State (whether or not sponsored 
by an employer) will be treated in the same way for tax 
purposes in the host State as a contribution paid to a pension 
plan that is generally exempt from income tax in the host State 
and operated primarily to provide pension or retirement 
benefits in the host State. Thus, for example, if a participant 
in a U.S. qualified plan goes to work temporarily in Chile, 
contributions to the U.S. qualified plan will be treated for 
tax purposes in Chile as contributions to a pension plan that 
is generally exempt in Chile and operated primarily to provide 
pension or retirement benefits in Chile.
    Under subparagraph 5(a), the individual must have been 
already contributing on a regular basis to the pension plan, or 
to another similar plan for which the first-mentioned plan was 
substituted, for a period ending immediately before the 
individual became a resident or is temporarily present in the 
host State. The rule regarding substituted plans would be 
satisfied, for example, if the employer has been acquired by a 
company that replaces the existing plan with its own plan, 
transferring membership in the old plan over into the new plan.
    Under subparagraph 5(b), the competent authority of the 
host State must determine that the home State plan to which the 
contribution is made generally corresponds to a pension plan 
recognized for tax purposes by the host State. For this 
purpose, paragraph 19 of the Protocol provides that the Chilean 
pension plans eligible for the benefits of paragraph 5 of 
Article 18 include the following and any identical or 
substantially similar plan that is established pursuant to 
legislation introduced after the date of signature of the 
Protocol: any pension scheme or fund administered by the 
Instituto de Prevision Social (formerly Instituto de 
Normalizaci"n Previsional) and the social security system 
created by Decree Law 3500 (DL 3500).
    Paragraph 19 of the Protocol also provides that the U.S. 
plans eligible for the benefits of paragraph 5 of Article 18 
include the following and any identical or substantially 
similar plan that is established pursuant to legislation 
introduced after the date of signature of the Protocol: 
qualified plans under Code section 401(a) (including Code 
section 401(k) arrangements), individual retirement plans 
(including individual retirement plans that are part of a 
simplified employee pension plan that satisfies section 408(k), 
individual retirement accounts, and Code section 408(p) simple 
retirement accounts), Code section 403(a) qualified annuity 
plans, Code section 403(b) plans, Code section 457(g) trusts 
providing benefits under Code section 457(b) plans, and the 
Thrift Savings Fund (Code section 7701(j)).
    If a particular plan in one Contracting State is of a type 
specified in paragraph 19 of the Protocol, it will not be 
necessary for taxpayers to obtain a determination from the 
competent authority of the other Contracting State that the 
plan generally corresponds to a pension or retirement plan 
established in and recognized for tax purposes in that State. A 
taxpayer who believes a particular plan in one Contracting 
State that is not described in paragraph 19 of the Protocol 
nevertheless satisfies the requirement of paragraph 5 of 
Article 18 may request a determination from the competent 
authority of the other Contracting State that the plan 
generally corresponds to a pension plan recognized for tax 
purposes by that State. In the case of the United States, such 
a determination must be requested under Revenue Procedure 2006-
54, 2006-2 C.B. 1035 (or any applicable analogous or successor 
guidance).
    Paragraph 5 applies only to the extent of the relief 
allowed by the host State to residents of that State for 
contributions to, or benefits accrued under, a pension plan 
established in the host State. Therefore, where the United 
States is the host State, the amount of contributions that may 
be excluded from an employee's income under this paragraph for 
U.S. tax purposes is limited to the U.S. dollar amount 
specified in Code section 415 or the U.S. dollar amount 
specified in section 402(g) to the extent contributions are 
made from the employee's compensation. For this purpose, the 
dollar limit specified in section 402(g)(1) means the amount 
applicable under section 402(g)(1) (including the age 50 catch-
up amount in section 402(g)(1)(C)) or, if applicable, the 
parallel dollar limit applicable under section 457(e)(15) plus 
the age 50 catch-up amount under section 414(v)(2)(B)(i) for a 
section 457(g) trust.
    Paragraph 5 does not address the treatment of employer 
contributions.
Paragraph 6
    Paragraph 6 deals with alimony and child support payments. 
Periodic payments made pursuant to a written separation 
agreement or a decree of divorce, separate maintenance or 
compulsory support, including payments for the support of a 
child, paid by a resident of a Contracting State to a resident 
of the other Contracting State generally are taxable in neither 
Contracting State. However, if the payer is entitled to relief 
from tax for such payments in the first-mentioned State, such 
payments will be taxable only in the other State.
Relationship to other Articles
    Under subparagraph 4(a) of the Protocol, paragraphs 1(b), 
3, 4 and 6 of Article 18 are excepted from the saving clause of 
paragraph 4 of the Protocol. Thus, the United States will not 
tax U.S. citizens and residents on the income described in 
those paragraphs even if such amounts otherwise would be 
subject to tax under U.S. law.
    Under subparagraph 4(b) of the Protocol, paragraphs 2 and 5 
of Article 18 are excepted from the saving clause but only with 
respect to individuals who are neither citizens of the 
Contracting State conferring the benefits nor persons who have 
been admitted for permanent residence in that State (i.e., in 
the United States, ``green card'' holders). Accordingly, for 
example, pension payments from the public funds of Chile to a 
U.S. permanent resident or citizen who is a Chilean national 
and resident (under paragraph 2 of Article 4) may be taxed by 
the United States pursuant to paragraph 4 of the Protocol even 
though such payments would be taxable only by Chile under 
paragraph 2 of Article 18. Similarly, if the United States is 
the host State for purposes of paragraph 5 of Article 18, a 
person who becomes a U.S. permanent resident or citizen will 
not be entitled to a deduction or exclusion for contributions 
to a pension plan established in Chile notwithstanding the 
provisions of paragraph 5 of Article 18.

                    ARTICLE 19 (GOVERNMENT SERVICE)

Paragraph 1
    Subparagraphs 1(a) and 1(b) deal with the taxation of 
government compensation other than pensions which are addressed 
by paragraph 2 of Article 18 (Pensions, Social Security, 
Alimony and Child Support). Subparagraph 1(a) provides that 
salaries, wages, and other remuneration, other than a pension, 
paid to any individual who rendered services to a Contracting 
State, political subdivision or local authority are taxable 
only in that State. Under subparagraph 1(b), such payments are, 
however, taxable exclusively in the other State (the host 
State) if the services are rendered in the host State and the 
individual is a resident of the host State who is either a 
national of that State or did not become a resident of that 
State solely for purposes of rendering the services. The 
paragraph applies to anyone performing services of a 
governmental nature for a government, whether as a government 
employee, an independent contractor, or an employee of an 
independent contractor.
Paragraph 2
    Paragraph 2 provides that the remuneration described in 
paragraph 1 will be subject to the rules of Articles 15 
(Dependent Personal Services), 16 (Directors' Fees), and 17 
(Artistes and Sportsmen) if the services rendered by an 
individual are in connection with a business conducted by a 
government.
    Under subparagraph 4(b) of the Protocol, the saving clause 
does not apply to the benefits conferred by one of the States 
under Article 19 if the recipient of the benefits is neither a 
citizen of that State nor a person who has been admitted for 
permanent residence there (i.e., in the United States, a 
``green card'' holder). Thus, a resident of the United States 
who in the course of performing functions of a governmental 
nature becomes a resident of Chile (but not a permanent 
resident), would be entitled to the benefits of this Article.

                   ARTICLE 20 (STUDENTS AND TRAINEES)

    This Article provides rules for host-State taxation of 
visiting students, apprentices, and business trainees. Persons 
who meet the tests of the Article will be exempt from tax in 
the State that they are visiting with respect to designated 
classes of income. Several conditions must be satisfied in 
order for an individual to be entitled to the benefits of this 
Article.
    First, the visitor must have been, either at the time of 
his arrival in the host State or immediately before, a resident 
of the other Contracting State.
    Second, the purpose of the visit must be the full-time 
education at a recognized educational institution such as a 
university, college or school, or full-time training of the 
visitor. Thus, if the visitor comes principally to work in the 
host State but also is a part-time student, he would not be 
entitled to the benefits of this Article, even with respect to 
any payments he may receive from abroad for his maintenance, 
education or training, and regardless of whether or not he is 
in a degree program. Whether a student is to be considered 
full-time will be determined by the rules of the educational 
institution at which he is studying.
    The host-State exemption applies to payments that are 
received by the student, apprentice or business trainee for the 
purposes of his maintenance, education or training and that 
arise or are remitted from outside the host State. A payment 
will be considered to arise outside the host State if the payer 
is located outside the host State. Thus, if an employer from 
one of the Contracting States sends an employee to the other 
Contracting State for full-time training, the payments the 
trainee receives from abroad from his employer for his 
maintenance or training while he is present in the host State 
will be exempt from tax in the host State. Where appropriate, 
substance prevails over form in determining the identity of the 
payer. Thus, for example, payments made directly or indirectly 
by a U.S. person with whom the visitor is training, but which 
have been routed through a source outside the United States 
(e.g., a foreign subsidiary), are not treated as arising 
outside the United States for this purpose.
    In the case of an apprentice or business trainee, the 
benefits of the Article will extend only for a period of not 
exceeding two years from the date the visitor first arrives in 
the host State for the purpose of training. If, however, a 
trainee remains in the host country for a third year, thus 
losing the benefits of the Article, he would not retroactively 
lose the benefits of the Article for the first two years.
    The saving clause of paragraph 4 of the Protocol does not 
apply to this Article with respect to an individual who is 
neither a citizen of the host State nor has been admitted for 
permanent residence there. The saving clause, however, does 
apply with respect to citizens and permanent residents of the 
host State. Thus, a U.S. citizen who is a resident of Chile and 
who visits the United States as a full-time student at an 
accredited university will not be exempt from U.S. tax on 
remittances from abroad that otherwise constitute U.S. taxable 
income. A person, however, who is not a U.S. citizen, and who 
visits the United States as a student and remains long enough 
to become a resident under U.S. law, but does not become a 
permanent resident (i.e., does not acquire a green card), will 
be entitled to the full benefits of the Article.

                       ARTICLE 21 (OTHER INCOME)

    Article 21 assigns taxing jurisdiction over income not 
dealt with in the other Articles (Articles 6 through 20) of the 
Convention. In order for an item of income to be ``dealt with'' 
in another Article it must be the type of income described in 
the article and, in most cases, it must have its source in a 
Contracting State. For example, all royalty income that arises 
in a Contracting State and that is beneficially owned by a 
resident of the other Contracting State is ``dealt with'' in 
Article 12 (Royalties). However, profits derived in the conduct 
of a business are ``dealt with'' in Article 7 (Business 
Profits) whether or not they have their source in one of the 
Contracting States.
    Examples of items of income covered by Article 21 include 
income from gambling, punitive (but not compensatory) damages 
and covenants not to compete. The article would also apply to 
income from a variety of financial transactions, where such 
income does not arise in the course of the conduct of a trade 
or business. For example, income from notional principal 
contracts and other derivatives would fall within Article 21 if 
derived by persons not engaged in the trade or business of 
dealing in such instruments, unless such instruments were being 
used to hedge risks arising in a trade or business. It would 
also apply to securities lending fees derived by an 
institutional investor. Further, in most cases guarantee fees 
paid within an intercompany group would be covered by Article 
21, unless the guarantor were engaged in the business of 
providing such guarantees to unrelated parties.
    Article 21 also applies to items of income that are not 
dealt with in the other articles because of their source or 
some other characteristic. For example, Article 11 (Interest) 
addresses only the taxation of interest arising in a 
Contracting State. Interest arising in a third State that is 
not attributable to a permanent establishment, therefore, is 
subject to Article 21.
    Distributions from partnerships are not generally dealt 
with under Article 21 because partnership distributions 
generally do not constitute income. Under the Code, partners 
include in income their distributive share of partnership 
income annually, and partnership distributions themselves 
generally do not give rise to income. This would also be the 
case under U.S. law with respect to distributions from trusts. 
Trust income and distributions that, under the Code, have the 
character of the associated distributable net income would 
generally be covered by another article of the Convention. See 
Code section 641, et seq.
Paragraph 1
    The general rule of Article 21 is contained in paragraph 1. 
Items of income not dealt with in other Articles that are 
earned by a resident of a Contracting State will be taxable 
only in the State of residence. This right of taxation applies 
whether or not the residence State exercises its right to tax 
the income covered by the Article. The residence taxation 
provided by paragraph 1 applies only when a resident of a 
Contracting State is the beneficial owner of the income. This 
is understood from the phrase ``income of a resident of a 
Contracting State.'' Thus, source taxation of income not dealt 
with in other articles of the Convention is not limited by 
paragraph 1 if it is nominally paid to a resident of the other 
Contracting State, but is beneficially owned by a resident of a 
third State. In addition, as discussed in greater detail below, 
where income not dealt with in other Articles of the Convention 
arises in the other Contracting State, paragraphs 2 and 3 
permit source-State taxation.
Paragraph 2
    This paragraph provides an exception to the general rule of 
paragraph 1 for income, other than income from immovable 
property as defined in paragraph 2 of Article 6 (Income from 
Real Property (Immovable Property)), that is effectively 
connected to a permanent establishment or fixed base maintained 
in a Contracting State by a resident of the other Contracting 
State. The taxation of such income is governed by the 
provisions of Article 7 (Business Profits) or 14 (Independent 
Personal Services), as the case may be. Therefore, for example, 
income arising outside the United States that is attributable 
to a permanent establishment maintained in the United States by 
a resident of Chile generally would be taxable by the United 
States under the provisions of Article 7. This would be true 
even if the income is sourced in a third State.
Paragraph 3
    Notwithstanding the provisions of paragraphs 1 and 2, 
income of a resident of one of the Contracting States not dealt 
with in other articles and arising in the other State may also 
be taxed in that other State.
Relationship to Other Articles
    This Article is subject to the saving clause of paragraph 4 
of the Protocol. Thus, the United States may tax the income of 
a resident of Chile that is not dealt with elsewhere in the 
Convention, if that resident is a citizen of the United States. 
The Article is also subject to the provisions of Article 24 
(Limitation on Benefits).

                          ARTICLE 22 (CAPITAL)

    This Article specifies the circumstances in which a 
Contracting State may impose tax on capital owned by a resident 
of the other Contracting State. At the time of the signing of 
the Convention, neither the United States nor Chile imposed 
taxes on capital. Nevertheless, the Article is drafted in a 
reciprocal manner. The Article was included at Chile's request.
    The Article provides the general rule in paragraph 4 that 
capital owned by a resident of a Contracting State may be taxed 
only by that Contracting State. Thus, in general, the source 
State cannot tax a resident of the other State on capital owned 
by that resident. Exceptions to this general rule are provided 
in paragraphs 1 and 2.
Paragraphs 1 and 2
    Paragraph 1 provides that capital represented by real 
property (immovable property) (as defined in Article 6 (Income 
from Real Property (Immovable Property)) which is owned by a 
resident of a Contracting State and located in the other State 
may be taxed by that other State. Under paragraph 2, the source 
State may tax capital which is represented by personal property 
(movable property) which is part of the business property of a 
permanent establishment maintained in that State by an 
enterprise of the other State or which pertains to a fixed base 
maintained in the source State by a resident of the other 
State.
Paragraph 3
    Paragraph 3 deals with capital represented by ships, 
aircraft and containers owned by a resident of a Contracting 
State and operated in international traffic, and by personal 
property (movable property) pertaining to the operation of such 
ships, aircraft or containers. Under the paragraph, such 
capital is taxable only in the residence State. Thus, for 
example, capital represented by ships owned by a resident of 
the United States and operated in international traffic will be 
exempt from capital tax in Chile.
Paragraph 4
    Paragraph 4 provides that all other elements of capital of 
a resident of a Contracting State shall be taxable only in that 
State.

                ARTICLE 23 (RELIEF FROM DOUBLE TAXATION)

    This Article describes the manner in which each Contracting 
State undertakes to relieve double taxation. The United States 
uses the foreign tax credit method under its domestic law, and 
by treaty.
Paragraph 1
    The United States agrees, in paragraph 1, to allow to its 
citizens and residents a credit against U.S. tax for income 
taxes paid or accrued to Chile. For this purpose, paragraph 1 
provides that the taxes referred to in subparagraph 3(b) and 
paragraph 4 of Article 2 (Taxes Covered), excluding taxes on 
capital, are considered income taxes.
    Subparagraph 1(b) provides for a deemed-paid credit, 
consistent with Code section 902, to a U.S. corporation in 
respect of dividends received from a corporation resident in 
Chile of which the U.S. corporation owns at least 10 percent of 
the voting stock. This credit is for the tax paid by the 
corporation to Chile on the profits out of which the dividends 
are considered paid.
    The credits allowed under paragraph 1 are allowed in 
accordance with the provisions and subject to the limitations 
of U.S. law, as that law may be amended over time, so long as 
the general principle of the Article, that is, the allowance of 
a credit, is retained. Thus, although the Convention provides 
for a foreign tax credit, the terms of the credit are generally 
determined by the U.S. domestic law in effect for the taxable 
year for which the credit is allowed. See, e.g., Code sections 
901-909 and the regulations under those sections. For example, 
a foreign levy is not a tax to the extent a person subject to 
the levy receives (or will receive), directly or indirectly, a 
specific economic benefit from the foreign country in exchange 
for payment pursuant to the levy. See Treas. Reg. Sec. 1.901-
2(a)(2). In addition, the credit generally is limited to the 
amount of U.S. tax due with respect to net foreign source 
income within the relevant foreign tax credit limitation 
category (see Code section 904(a) and (d)), and the dollar 
amount of the credit is determined in accordance with U.S. 
currency translation rules (see, e.g., Code section 986). 
Similarly, U.S. law applies to determine carryover periods for 
excess credits and other inter-year adjustments.
Paragraph 2
    Paragraph 2 provides that Chile will provide relief from 
double taxation through the credit method. Chile agrees in 
paragraph 2, in accordance with and subject to the provisions 
of the law of Chile, to allow a credit against Chilean tax for 
income taxes payable on income from sources outside Chile.
Paragraph 3
    Paragraph 3 provides special rules for the tax treatment in 
both States of certain types of income derived from U.S. 
sources by U.S. citizens who are residents of Chile. Since U.S. 
citizens, regardless of residence, are subject to United States 
tax at ordinary progressive rates on their worldwide income, 
the U.S. tax on the U.S. source income of a U.S. citizen 
resident in Chile may exceed the U.S. tax that may be imposed 
under the Convention on an item of U.S. source income derived 
by a resident of Chile who is not a U.S. citizen. The 
provisions of paragraph 3 ensure that Chile does not bear the 
cost of U.S. taxation of its citizens who are residents of 
Chile.
    Subparagraph 3(a) provides, with respect to items of income 
from sources within the United States, special credit rules for 
Chile. These rules apply to items of U.S.-source income that 
would be either exempt from U.S. tax or subject to reduced 
rates of U.S. tax under the provisions of the Convention if 
they had been received by a resident of Chile who is not a U.S. 
citizen. The tax credit allowed under paragraph 3 with respect 
to such items need not exceed the U.S. tax that may be imposed 
under the Convention, other than tax imposed solely by reason 
of the U.S. citizenship of the taxpayer under the provisions of 
the saving clause of paragraph 4 of the Protocol.
    For example, if a U.S. citizen resident in Chile receives a 
payment of royalties described in subparagraph 3(b) of Article 
12 (Royalties) from sources within the United States, the 
foreign tax credit granted by Chile would be limited to 10 
percent of the gross amount of the royalties--the U.S. tax that 
may be imposed under subparagraph 2(b) of Article 12--even if 
the shareholder is subject to U.S. net income tax because of 
his U.S. citizenship.
    Subparagraph 3(b) of Article 23 eliminates the potential 
for double taxation that can arise because subparagraph 3(a) 
provides that Chile need not provide full relief for the U.S. 
tax imposed on its citizens resident in Chile. Subparagraph 
3(b) provides that the United States will credit the income tax 
paid or accrued to Chile, after the application of subparagraph 
3(a). It further provides that in allowing the credit, the 
United States will not reduce its tax below the amount that is 
taken into account in Chile in applying subparagraph 3(a).
    Since the income described in subparagraph 3(a) generally 
will be U.S. source income, special rules are required to re-
source some of the income to Chile in order for the United 
States to be able to credit the tax paid to Chile. This re-
sourcing is provided for in subparagraph 3(c), which deems the 
items of income referred to in subparagraph 3(a) to be from 
foreign sources to the extent necessary to avoid double 
taxation under paragraph 3(b). Paragraph 3 of Article 26 
(Mutual Agreement Procedure) provides a mechanism by which the 
competent authorities can resolve any disputes regarding 
whether income is from sources within the United States.
    The following two examples illustrate the application of 
paragraph 3 in the case of U.S.-source royalties described in 
subparagraph 3(b) of Article 12 (Royalties) received by a U.S. 
citizen resident in Chile. In both examples, the U.S. rate of 
tax on residents of Chile, under subparagraph 2(b) of Article 
12, is 10 percent. In both examples, the U.S. income tax rate 
on the U.S. citizen is 35 percent. In example 1, the rate of 
income tax imposed in Chile on its resident (the U.S. citizen) 
is 25 percent (below the U.S. rate), and in example 2, the rate 
imposed on its resident is 40 percent (above the U.S. rate).

 
------------------------------------------------------------------------
                                        Example 1           Example 2
 
------------------------------------------------------------------------
Subparagraph (a)
U.S.-source royalty payment.....          $100.00             $100.00
Notional U.S. withholding tax               10.00               10.00
 (Article 12(2)(b)).............
Taxable income in Chile.........           100.00              100.00
Chilean tax before credit.......            25.00               40.00
Less: tax credit for notional               10.00               10.00
 U.S. withholding tax...........
Net post-credit tax paid to                 15.00               30.00
 Chile..........................
 
 
 
Subparagraphs (b) and (c)
U.S. pre-tax income.............          $100.00             $100.00
U.S. pre-credit citizenship tax.            35.00               35.00
Notional U.S. withholding tax...            10.00               10.00
U.S. tax eligible to be offset              25.00               25.00
 by credit......................
Tax paid to Chile...............            15.00               30.00
Income re-sourced from U.S. to              42.86               71.43
 foreign source (see below).....
U.S. pre-credit tax on re-                  15.00               25.00
 sourced income.................
U.S. credit for tax paid to                 15.00               25.00
 Chile..........................
Net post-credit U.S. tax........            10.00                0.00
Total U.S. tax..................            20.00               10.00
------------------------------------------------------------------------

    In both examples, in the application of subparagraph 3(a), 
Chile credits a 10 percent U.S. tax against its residence tax 
on the U.S. citizen. In the first example, the net tax paid to 
Chile after the foreign tax credit is $15.00; in the second 
example, it is $30.00. In the application of subparagraphs 3(b) 
and 3(c), from the U.S. tax due before credit of $35.00, the 
United States subtracts the amount of the U.S. source tax of 
$10.00, against which no U.S. foreign tax credit is allowed. 
This subtraction ensures that the United States collects the 
tax that it is due under the Convention as the State of source.
    In both examples, given the 35 percent U.S. tax rate, the 
maximum amount of U.S. tax against which credit for the tax 
paid to Chile may be claimed is $25 ($35 U.S. tax minus $10 
U.S. withholding tax). Initially, all of the income in both 
examples was from sources within the United States. For a U.S. 
foreign tax credit to be allowed for the full amount of the tax 
paid to Chile, an appropriate amount of the income must be 
treated as foreign-source income under subparagraph 3(c).
    The amount that must be re-sourced depends on the amount of 
tax for which the U.S. citizen is claiming a U.S. foreign tax 
credit. In example 1, the tax paid to Chile was $15. For this 
amount to be creditable against U.S. tax, $42.86 ($15 tax 
divided by 35 percent U.S. tax rate) must be re-sourced as 
foreign-source income. When the tax is credited against the $15 
of U.S. tax on this re-sourced income, there is a net U.S. tax 
of $10 due after credit ($25 U.S. tax eligible to be offset by 
credit, minus $15 tax paid to Chile). Thus, in example 1, there 
is a total of $20 in U.S. tax ($10 U.S. withholding tax plus 
$10 residual U.S. tax).
    In example 2, the tax paid to Chile was $30, but, because 
the United States subtracts the U.S. withholding tax of $10 
from the total U.S. tax of $35, only $25 of U.S. taxes may be 
offset by taxes paid to Chile. Accordingly, the amount that 
must be re-sourced to Chile is limited to the amount necessary 
to ensure a U.S. foreign tax credit for $25 of tax paid to 
Chile, or $71.43 ($25 tax paid to the other Contracting State 
divided by 35 percent U.S. tax rate). When the tax paid to 
Chile is credited against the U.S. tax on this re-sourced 
income, there is no residual U.S. tax ($25 U.S. tax minus $30 
tax paid to Chile, subject to the U.S. limit of $25). Thus, in 
example 2, there is a total of $10 in U.S. tax ($10 U.S. 
withholding tax plus $0 residual U.S. tax). Because the tax 
paid to Chile was $30 and the U.S. tax eligible to be offset by 
credit was $25, there is $5 of excess foreign tax credit 
available for carryover.

Paragraph 4

    Paragraph 4 provides that where in accordance with the 
Convention income derived or capital owned by a resident of a 
Contracting State is exempt from tax in that State, such State 
may nevertheless take into account the exempted income or 
capital in calculating the amount of tax on the remaining 
income or capital of such person. This rule provides for 
``exemption with progression.''

Paragraph 5

    Paragraph 5 provides that certain items of gross income 
that would be otherwise treated as from sources within a 
Contracting State will be treated as income from sources within 
the other Contracting State for the purposes of allowing relief 
of double taxation pursuant to Article 23. Paragraph 5 is 
intended to ensure that a resident of a Contracting State can 
obtain an appropriate amount of foreign tax credit for income 
taxes paid to the other Contracting State when the Convention 
assigns to such other State primary taxing rights over an item 
of gross income.
    Accordingly, for example, if the Convention allows Chile to 
tax an item of gross income (as defined under U.S. law) derived 
by a resident of the United States, the United States will 
treat that item of gross income as gross income from sources 
within Chile for U.S. foreign tax credit purposes. In the case 
of a U.S.-owned foreign corporation, however, section 
904(h)(10) may apply for purposes of determining the U.S. 
foreign tax credit with respect to income subject to this re-
sourcing rule. Section 904(h)(10) generally applies the foreign 
tax credit limitation separately to re-sourced income. See also 
Code sections 865(h) and 904(d)(6). Because paragraph 5 applies 
to items of gross income, not net income, U.S. expense 
allocation and apportionment rules, see, e.g., Treas. Reg. 
sections 1.861-9 and -9T, continue to apply to income re-
sourced under paragraph 5.

Relationship to other Articles

    Article 23 is not subject to the saving clause of paragraph 
4 of the Protocol. Thus, the United States will allow a credit 
to its citizens and residents in accordance with the Article, 
even if such credit were to provide a benefit not available 
under the Code (such as the re-sourcing provided by 
subparagraph 3(c) and paragraph 5).

                  ARTICLE 24 (LIMITATION ON BENEFITS)

    Article 24 contains anti-treaty-shopping provisions that 
are intended to prevent residents of third countries from 
benefiting from what is intended to be a reciprocal agreement 
between two countries. In general, the provision does not rely 
on a determination of purpose or intention but instead sets 
forth a series of objective tests. A resident of a Contracting 
State that satisfies one of the tests will receive benefits 
regardless of its motivations in choosing its particular 
business structure.
    The structure of the Article is as follows: Paragraph 1 
states the general rule that residents are entitled to benefits 
otherwise accorded to residents only to the extent provided in 
the Article. Paragraph 2 lists a series of attributes of a 
resident of a Contracting State, the presence of any one of 
which will entitle that person to all the benefits of the 
Convention. Paragraph 3 provides that, regardless of whether a 
person qualifies for benefits under paragraph 2, benefits may 
be granted to that person with regard to certain income earned 
in the conduct of an active trade or business. Paragraph 4 
provides that benefits also may be granted if the competent 
authority of the State from which benefits are claimed 
determines that it is appropriate to provide benefits in that 
case. Paragraph 5 provides special rules for so-called 
``triangular cases'' notwithstanding paragraphs 1 through 4 of 
the Article. Paragraph 6 defines certain terms used in the 
Article.

Paragraph 1

    Paragraph 1 provides that, except as otherwise provided, a 
resident of a Contracting State will be entitled to the 
benefits otherwise accorded to residents of a Contracting State 
under the Convention only to the extent provided in the 
Article. The benefits otherwise accorded to residents under the 
Convention include all limitations on source-based taxation 
under Articles 6 through 22, the treaty-based relief from 
double taxation provided by Article 23 (Relief from Double 
Taxation), and the protection afforded to residents of a 
Contracting State under Article 25 (Non-Discrimination). Some 
provisions do not require that a person be a resident in order 
to enjoy the benefits of those provisions. Article 26 (Mutual 
Agreement Procedure) is not limited to residents of the 
Contracting States, and Article 28 (Members of Diplomatic 
Missions and Consular Posts) applies to diplomatic agents or 
consular officials regardless of residence. Article 24 
accordingly does not limit the availability of treaty benefits 
under these provisions.
    Article 24 and the anti-abuse provisions of domestic law 
complement each other, as Article 24 effectively determines 
whether an entity has a sufficient nexus to the Contracting 
State to be treated as a resident for treaty purposes, while 
domestic anti-abuse provisions (e.g., business purpose, 
substance-over-form, step transaction or conduit principles) 
determine whether a particular transaction should be recast in 
accordance with its substance. Thus, internal law principles of 
the source Contracting State may be applied to identify the 
beneficial owner of an item of income, and Article 24 then will 
be applied to the beneficial owner to determine if that person 
is entitled to the benefits of the Convention with respect to 
such income.

Paragraph 2

    Paragraph 2 has six subparagraphs, each of which describes 
a category of residents that are entitled to all benefits of 
the Convention.
    It is intended that the provisions of paragraph 2 will be 
self-executing. Unlike the provisions of paragraph 4, discussed 
below, claiming benefits under paragraph 2 does not require 
advance competent authority ruling or approval. The tax 
authorities may, of course, on review, determine that the 
taxpayer has improperly interpreted the paragraph and is not 
entitled to the benefits claimed.

Individuals--Subparagraph 2(a)

    Subparagraph 2(a) provides that individual residents of a 
Contracting State will be entitled to all treaty benefits. If 
such an individual receives income as a nominee on behalf of a 
third country resident, benefits may be denied under the 
respective articles of the Convention by the requirement that 
the beneficial owner of the income be a resident of a 
Contracting State.

Governments--Subparagraph 2(b)

    Subparagraph 2(b) provides that the Contracting States and 
any political subdivision or local authority or any agency or 
instrumentality thereof will be entitled to all benefits of the 
Convention.

Publicly-Traded Corporations--Subparagraph 2(c)(i)

    Subparagraph 2(c) applies to two categories of companies: 
publicly traded companies and subsidiaries of publicly traded 
companies. A company resident in a Contracting State is 
entitled to all the benefits of the Convention under 
subparagraph 2(c)(i) if the principal class of its shares, and 
any disproportionate class of shares, is regularly traded on 
one or more recognized stock exchanges, and the company 
satisfies at least one of the following additional 
requirements: the company's principal class of shares is 
primarily traded on one or more recognized stock exchanges 
located in the Contracting State of which the company is a 
resident; or the company's primary place of management and 
control is in its State of residence.
    The term ``recognized stock exchange'' is defined in 
subparagraph (a) of paragraph 6. It includes (i) the NASDAQ 
System and any stock exchange registered with the Securities 
and Exchange Commission as a national securities exchange for 
purposes of the Securities Exchange Act of 1934, (ii) the 
``Bolsa de Comercio,'' ``Bolsa Electr"nica de Chile,'' and 
``Bolsa de Corredores,'' and any stock exchange recognized by 
the ``Superintendencia de Valores y Seguros'' according to Law 
No. 18.0845, and (iii) any other stock exchanges agreed upon by 
the competent authorities of the Contracting States.
    If a company has only one class of shares, it is only 
necessary to consider whether the shares of that class meet the 
relevant trading requirements. If the company has more than one 
class of shares, it is necessary as an initial matter to 
determine which class or classes constitute the ``principal 
class of shares.'' The term ``principal class of shares'' is 
defined in subparagraph 6(b) to mean the ordinary or common 
shares of the company representing the majority of the 
aggregate voting power and value of the company. If the company 
does not have a class of ordinary or common shares representing 
the majority of the aggregate voting power and value of the 
company, then the ``principal class of shares'' is that class 
or any combination of classes of shares that represents, in the 
aggregate, a majority of the voting power and value of the 
company. Although in a particular case involving a company with 
several classes of shares it is conceivable that more than one 
group of classes could be identified that account for more than 
50 percent of the shares, it is only necessary for one such 
group to satisfy the requirements of this subparagraph in order 
for the company to be entitled to benefits. Benefits would not 
be denied to the company even if a second, non-qualifying, 
group of shares with more than half of the company's voting 
power and value could be identified.
    A company whose principal class of shares is regularly 
traded on a recognized stock exchange will nevertheless not 
qualify for benefits under subparagraph 2(c)(i) if it has a 
disproportionate class of shares that is not regularly traded 
on a recognized stock exchange. The term ``disproportionate 
class of shares'' is defined in subparagraph 7(c). A company 
has a disproportionate class of shares if it has outstanding a 
class of shares which is subject to terms or other arrangements 
that entitle the holder to a larger portion of the company's 
income, profit, or gain in the other Contracting State than 
that to which the holder would be entitled in the absence of 
such terms or arrangements. Thus, for example, a company 
resident in Chile meets the test of subparagraph 6(c) if it has 
outstanding a class of ``tracking stock'' that pays dividends 
based upon a formula that approximates the company's return on 
its assets employed in the United States.
    The following example illustrates this result.
    Example. CCo is a corporation resident in Chile. CCo has 
two classes of shares: Common and Preferred. The Common shares 
are listed and regularly traded on the Bolsa de Comercio, a 
recognized Chilean stock exchange. The Preferred shares have no 
voting rights and are entitled to receive dividends equal in 
amount to interest payments that CCo receives from unrelated 
borrowers in the United States. The Preferred shares are owned 
entirely by a single investor that is a resident of a country 
with which the United States does not have a tax treaty. The 
Common shares account for more than 50 percent of the value of 
CCo and for 100 percent of the voting power. Because the owner 
of the Preferred shares is entitled to receive payments 
corresponding to the U.S. source interest income earned by CCo, 
the Preferred shares are a disproportionate class of shares. 
Because the Preferred shares are not regularly traded on a 
recognized stock exchange, CCo will not qualify for benefits 
under subparagraph 2(c)(i).
    The term ``regularly traded'' is not defined in the 
Convention. In accordance with paragraph 2 of Article 3 
(General Definitions), this term will be defined by reference 
to the domestic tax laws of the State from which treaty 
benefits are sought. In the case of the United States, this 
term is understood to have the meaning it has under Treas. Reg. 
Sec. 1.884-5(d)(4)(i)(B), relating to the branch tax provisions 
of the Code. Under these regulations, a class of shares is 
considered to be ``regularly traded'' if two requirements are 
met: trades in the class of shares are made in more than de 
minimis quantities on at least 60 days during the taxable year; 
and the aggregate number of shares in the class traded during 
the year is at least 10 percent of the average number of shares 
outstanding during the year. Treas. Reg. Sec. 1.884-
5(d)(4)(i)(A), (ii) and (iii) will not be taken into account 
for purposes of defining the term ``regularly traded'' under 
the Convention.
    The regular trading requirement can be met by trading on 
any recognized exchange or exchanges located in either State. 
Trading on one or more recognized stock exchanges may be 
aggregated for purposes of this requirement. Thus, a U.S. 
company could satisfy the regularly traded requirement through 
trading, in whole or in part, on a recognized stock exchange 
located in Chile. Authorized but unissued shares are not 
considered for purposes of this test.
    The term ``primarily traded'' is not defined in the 
Convention. In accordance with paragraph 2 of Article 3, this 
term will have the meaning it has under the laws of the State 
concerning the taxes to which the Convention applies, generally 
the source State. In the case of the United States, this term 
is understood to have the meaning it has under Treas. Reg. 
Sec. 1.884-5(d)(3), relating to the branch tax provisions of 
the Code. Accordingly, stock of a corporation is ``primarily 
traded'' if the number of shares in the company's principal 
class of shares that are traded during the taxable year on all 
recognized stock exchanges in the Contracting State of which 
the company is a resident exceeds the number of shares in the 
company's principal class of shares that are traded during that 
year on established securities markets in any other single 
foreign country.
    A company whose principal class of shares is regularly 
traded on a recognized exchange but cannot meet the primarily 
traded test may claim treaty benefits if its primary place of 
management and control is in its country of residence. This 
test should be distinguished from the ``place of effective 
management'' test which is used in the OECD Model and by many 
other countries to establish residence. In some cases, the 
place of effective management test has been interpreted to mean 
the place where the board of directors meets. By contrast, the 
primary place of management and control test looks to where 
day-to-day responsibility for the management of the company 
(and its subsidiaries) is exercised. The company's primary 
place of management and control will be located in the State in 
which the company is a resident only if the executive officers 
and senior management employees exercise day-to-day 
responsibility for more of the strategic, financial and 
operational policy decision making for the company (including 
direct and indirect subsidiaries) in that State than in the 
other State or any third state, and the staff that support the 
management in making those decisions are also based in that 
State. Thus, the test looks to the overall activities of the 
relevant persons to see where those activities are conducted.
    In most cases, it will be a necessary, but not a 
sufficient, condition that the headquarters of the company 
(that is, the place at which the Chief Executive Officer and 
other top executives normally are based) be located in the 
Contracting State of which the company is a resident.
    To apply the test, it will be necessary to determine which 
persons are to be considered ``executive officers and senior 
management employees.'' In most cases, it will not be necessary 
to look beyond the executives who are members of the board of 
directors (the ``inside directors'') in the case of a U.S. 
company. That will not always be the case, however; in fact, 
the relevant persons may be employees of subsidiaries if those 
persons make the strategic, financial and operational policy 
decisions. Moreover, it would be necessary to take into account 
any special voting arrangements that result in certain board 
members making certain decisions without the participation of 
other board members.

Subsidiaries of Publicly-Traded Corporations--Subparagraph 2(c)(ii)

    A company resident in a Contracting State is entitled to 
all the benefits of the Convention under subparagraph 2(c)(ii) 
if five or fewer publicly traded companies described in 
subparagraph 2(c)(i) are the direct or indirect owners of at 
least 50 percent of the aggregate vote and value of the 
company's shares (and at least 50 percent of any 
disproportionate class of shares). If the publicly-traded 
companies are indirect owners, however, each of the 
intermediate companies must be a resident of one of the 
Contracting States.
    Thus, for example, a company that is a resident of Chile, 
all the shares of which are owned by another company that is a 
resident of Chile, would qualify for benefits under 
subparagraph 2(c) if the principal class of shares (and any 
disproportionate classes of shares) of the parent company are 
regularly and primarily traded on a recognized stock exchange 
in Chile. However, such a subsidiary would not qualify for 
benefits under clause (ii) if the publicly traded parent 
company were a resident of a third state, for example, and not 
a resident of the United States or Chile. Furthermore, if a 
parent company in Chile indirectly owned the bottom-tier 
company through a chain of subsidiaries, each such subsidiary 
in the chain, as an intermediate owner, must be a resident of 
the United States or Chile in order for the subsidiary to meet 
the test in clause (ii).

Headquarters Companies--Subparagraph 2(d)

    Subparagraph 2(d) provides that a resident of one of the 
Contracting States is entitled to all the benefits of the 
Convention if that person functions as a recognized 
headquarters company for a multinational corporate group. The 
provisions of this paragraph are consistent with the other U.S. 
tax treaties where this provision has been adopted. For this 
purpose, the multinational corporate group includes all 
corporations that the headquarters company supervises and 
excludes affiliated corporations not supervised by the 
headquarters company. The headquarters company does not have to 
own shares in the companies that it supervises. In order to be 
considered a headquarters company, the person must meet several 
requirements that are enumerated in subparagraph 2(d). These 
requirements are discussed below.

Overall Supervision and Administration

    Clause (i) of subparagraph 2(d) provides that the person 
must provide a substantial portion of the overall supervision 
and administration of the group. This activity may include 
group financing, but group financing may not be the principal 
activity of the person functioning as the headquarters company. 
A person only will be considered to engage in supervision and 
administration if it engages in a number of the following 
activities: group financing, pricing, marketing, internal 
auditing, internal communications, and management. Other 
activities also could be part of the function of supervision 
and administration.
    In determining whether a ``substantial portion'' of the 
overall supervision and administration of the group is provided 
by the headquarters company, its headquarters-related 
activities must be substantial in relation to the same 
activities for the same group performed by other entities. 
Clause (i) does not require that the group that is supervised 
include persons in the other State. However, it is anticipated 
that in most cases the group will include such persons, due to 
the requirement in subparagraph 2(d)(vii), discussed below, 
that the income derived in the other Contracting State by the 
headquarters company be derived in connection with or be 
incidental to an active trade or business supervised by the 
headquarters company.

Active Trade or Business

    Clause (ii) of subparagraph 2(d) is the first of several 
requirements intended to ensure that the relevant group is 
truly ``multinational.'' This subparagraph provides that the 
corporate group supervised by the headquarters company must 
consist of corporations resident in, and engaged in active 
trades or businesses in, at least five countries. Furthermore, 
at least five countries must each contribute substantially to 
the income generated by the group, as the rule requires that 
the business activities carried on in each of the five 
countries (or groupings of countries) generate at least 10 
percent of the gross income of the group. For purposes of the 
10 percent gross income requirement, the income from multiple 
countries may be aggregated into non-overlapping groupings, as 
long as there are at least five individual countries or 
groupings that each satisfies the 10 percent requirement. If 
the gross income requirement under this subparagraph is not met 
for a taxable year, the taxpayer may satisfy this requirement 
by applying the 10 percent gross income test to the average of 
the gross incomes for the four years preceding the taxable 
year.
    Example. CHQ is a corporation resident in Chile. CHQ 
functions as a headquarters company for a group of companies. 
These companies are resident in the United States, Canada, New 
Zealand, the United Kingdom, Malaysia, the Philippines, 
Singapore, and Indonesia. The gross income generated by each of 
these companies for 2012 and 2013 is as follows:

 
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Country                                                                                                           2012                                   2013
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
United States.............................................................................................................................................                       $40                                    $45
Canada....................................................................................................................................................                       $25                                    $15
New Zealand...............................................................................................................................................                       $10                                    $20
United Kingdom............................................................................................................................................                       $30                                    $35
Malaysia..................................................................................................................................................                       $10                                    $12
Philippines...............................................................................................................................................                        $7                                    $10
Singapore.................................................................................................................................................                       $10                                     $8
Indonesia.................................................................................................................................................                        $5                                    $10
  Total...................................................................................................................................................                      $137                                   $155
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    For 2012, 10 percent of the gross income of this group is 
equal to $13.70. Only the United States, Canada, and the United 
Kingdom satisfy this requirement for that year. The other 
countries may be aggregated to meet this requirement. Because 
New Zealand and Malaysia have a total gross income of $20, and 
the Philippines, Singapore, and Indonesia have a total gross 
income of $22, these two groupings of countries may be treated 
as the fourth and fifth members of the group for purposes of 
clause (ii).
    In the following year, 10 percent of the gross income is 
$15.50. Only the United States, New Zealand, and the United 
Kingdom satisfy this requirement. Because Canada and Malaysia 
have a total gross income of $27, and the Philippines, 
Singapore, and Indonesia have a total gross income of $28, 
these two groupings of countries may be treated as the fourth 
and fifth members of the group for purposes of clause (ii). The 
fact that Canada replaced New Zealand in a group is not 
relevant for this purpose. The composition of the grouping may 
change from year to year.

Single Country Limitation

    Clause (iii) of subparagraph 2(d) provides that the 
business activities carried on in any one country other than 
the headquarters company's State of residence must generate 
less than 50 percent of the gross income of the group. If the 
gross income requirement under this subparagraph is not met for 
a taxable year, the taxpayer may satisfy this requirement by 
applying the 50 percent gross income test to the average of the 
gross incomes for the four years preceding the taxable year. 
The following example illustrates the application of this 
clause.
    Example. CHQ is a corporation resident in Chile. CHQ 
functions as a headquarters company for a group of companies. 
CHQ derives dividend income from a United States subsidiary in 
the 2008 taxable year. The state of residence of each of these 
companies, the situs of their activities and the amounts of 
gross income attributable to each for the years 2012 through 
2016 are set forth below.

 
----------------------------------------------------------------------------------------------------------------
                  Country                          Situs          2012      2011      2010      2009      2008
----------------------------------------------------------------------------------------------------------------
United States.............................  U.S.                    $100      $100       $95       $90       $85
Mexico....................................  U.S.                     $10        $8        $5        $0        $0
Canada....................................  U.S.                     $20       $18       $16       $15       $12
United Kingdom............................  U.K                      $30       $32       $30       $28       $27
New Zealand...............................  N.Z.                     $35       $42       $38       $36       $35
Japan.....................................  Japan                    $35       $32       $30       $30       $28
Singapore.................................  Singapore                $30       $25       $24       $22       $20
  Total...................................                          $260      $257      $238      $221      $207
----------------------------------------------------------------------------------------------------------------

    Because the United States' total gross income of $130 in 
2012 is not less than 50 percent of the gross income of the 
group, clause (iii) is not satisfied with respect to dividends 
derived in 2012. However, the United States' average gross 
income for the preceding four years may be used in lieu of the 
preceding year's average. The United States' average gross 
income for the years 2008-11 is $111.00 ($444/4). The group's 
total average gross income for these years is $230.75 ($923/4). 
Because $111 represents 48.1 percent of the group's average 
gross income for the years 2008 through 2011, the requirement 
under clause (iii) is satisfied.

Other State Gross Income Limitation

    Clause (iv) of subparagraph 2(d) provides that no more than 
25 percent of the headquarters company's gross income may be 
derived from the other Contracting State. Thus, if the 
headquarters company's gross income for the taxable year is 
$200, no more than $50 of this amount may be derived from the 
other Contracting State. If the gross income requirement under 
this subparagraph is not met for a taxable year, the taxpayer 
may satisfy this requirement by applying the 25 percent gross 
income test to the average of the gross incomes for the four 
years preceding the taxable year.

Independent Discretionary Authority

    Clause (v) of subparagraph 2(d) requires that the 
headquarters company have and exercise independent 
discretionary authority to carry out the functions referred to 
in clause (i). Thus, if the headquarters company was nominally 
responsible for group financing, pricing, marketing and other 
management functions, but merely implemented instructions 
received from another entity, the headquarters company would 
not be considered to have and exercise independent 
discretionary authority with respect to these functions. This 
determination is made individually for each function. For 
instance, a headquarters company could be nominally responsible 
for group financing, pricing, marketing and internal auditing 
functions, but another entity could be actually directing the 
headquarters company as to the group financing function. In 
such a case, the headquarters company would not be deemed to 
have independent discretionary authority for group financing, 
but it might have such authority for the other functions. 
Functions for which the headquarters company does not have and 
exercise independent discretionary authority are considered to 
be conducted by an entity other than the headquarters company 
for purposes of clause (i).

Income Taxation Rules

    Clause (vi) of subparagraph 2(d) requires that the 
headquarters company be subject to the generally applicable 
income taxation rules in its country of residence. This 
reference should be understood to mean that the company must be 
subject to the income taxation rules to which a company engaged 
in the active conduct of a trade or business would be subject. 
Thus, if one of the Contracting States has or introduces 
special taxation legislation that imposes a lower rate of 
income tax on headquarters companies than is imposed on 
companies engaged in the active conduct of a trade or business, 
or provides for an artificially low taxable base for such 
companies, a headquarters company subject to these rules is not 
entitled to the benefits of the Convention under subparagraph 
2(d).

In Connection With or Incidental to Trade or Business

    Clause (vii) of subparagraph 2(d) requires that the income 
derived in the other Contracting State be derived in connection 
with or be incidental to the active business activities 
referred to in clause (ii). This determination is made under 
the principles set forth in paragraph 3. For instance, assume 
that a Chilean company satisfies the other requirements in 
subparagraph 2(d) and acts as a headquarters company for a 
group that includes a U.S. corporation. If the group is engaged 
in the design and manufacture of computer software, but the 
U.S. corporation is also engaged in the design and manufacture 
of photocopying machines, the income that the Chilean company 
derives from the United States would have to be derived in 
connection with or be incidental to the income generated by the 
computer business in order to be entitled to the benefits of 
the Convention under subparagraph 2(d). Interest income 
received from the U.S. corporation also would be entitled to 
the benefits of the Convention under this subparagraph as long 
as the interest was attributable to the computer business 
supervised by the headquarters company. Interest income derived 
from an unrelated party would normally not, however, satisfy 
the requirements of this clause.

Tax Exempt Organizations--Subparagraph 2(e)

    Subparagraph 2(e) provides rules by which tax exempt 
organizations will be entitled to all the benefits of the 
Convention. Entities qualifying under this rule are those that 
are generally exempt from tax in their State of residence and 
that are organized and operated exclusively to fulfill 
religious, charitable, scientific, artistic, cultural, or 
educational purposes.

Pension Funds--Subparagraph 2(f)

    A pension fund will qualify for benefits under subparagraph 
2(f), if in the case of a person described in subclause (A) of 
clause (ii) of subparagraph (j) of paragraph 1 of Article 3 
(General Definitions), more than 50 percent of the 
beneficiaries, members or participants of the pension fund are 
individuals resident in either Contracting State. For purposes 
of this provision, the term ``beneficiaries'' should be 
understood to refer to the persons receiving benefits from the 
organization.

Ownership/Base Erosion--Subparagraph 2(g)

    Subparagraph 2(g) provides an additional method to qualify 
for treaty benefits that applies to any form of legal entity 
that is a resident of a Contracting State. The test provided in 
this subparagraph, the so-called ownership and base erosion 
test, is a two-part test. Both prongs of the test must be 
satisfied for the resident to be entitled to treaty benefits 
under subparagraph 2(g).
    The ownership prong of the test, under clause (i), requires 
that shares or other beneficial interests representing at least 
50 percent of the aggregate voting power and value (and at 
least 50 percent of any disproportionate class of shares) of 
the person be owned, directly or indirectly, on at least half 
the days of the person's taxable year by persons who are 
residents of the Contracting State of which that person is a 
resident and that are themselves entitled to treaty benefits 
under subparagraph 2(a), 2(b), 2(c)(i), 2(e) or 2(f). In the 
case of indirect owners, each of the intermediate owners must 
be a resident of that Contracting State.
    Trusts may be entitled to benefits under this provision if 
they are treated as residents under Article 4 (Residence) and 
they otherwise satisfy the requirements of this subparagraph. 
For purposes of this subparagraph, the beneficial interests in 
a trust will be considered to be owned by its beneficiaries in 
proportion to each beneficiary's actuarial interest in the 
trust. The interest of a remainder beneficiary will be equal to 
100 percent less the aggregate percentages held by income 
beneficiaries. A beneficiary's interest in a trust will not be 
considered to be owned by a person entitled to benefits under 
the other provisions of paragraph 2 if it is not possible to 
determine the beneficiary's actuarial interest. Consequently, 
if it is not possible to determine the actuarial interest of 
the beneficiaries in a trust, the ownership test under clause 
(i) cannot be satisfied, unless all possible beneficiaries are 
persons entitled to benefits under subparagraph 2(a), 2(b), 
2(c)(i), 2(e) or 2(f).
    The base erosion prong of clause (ii) of subparagraph 2(g) 
is satisfied with respect to a person if less than 50 percent 
of the person's gross income for the taxable year, as 
determined under the tax law in the person's State of 
residence, is paid or accrued, directly or indirectly, to 
persons who are not residents of either Contracting State 
entitled to benefits under subparagraph 2(a), 2(b), 2(c)(i), 
2(e) or 2(f), in the form of payments deductible for tax 
purposes in the payor's State of residence. These amounts do 
not include arm's-length payments in the ordinary course of 
business for services or tangible property. To the extent they 
are deductible from the taxable base, trust distributions are 
deductible payments. However, depreciation and amortization 
deductions, which do not represent payments or accruals to 
other persons, are disregarded for this purpose.

Paragraph 3

    Paragraph 3 sets forth an alternative test under which a 
resident of a Contracting State may receive treaty benefits 
with respect to certain items of income that are connected to 
an active trade or business conducted in its State of 
residence. A resident of a Contracting State may qualify for 
benefits under paragraph 3 even though it does not qualify 
under paragraph 2.
    Subparagraph 3(a) sets forth the general rule that a 
resident of a Contracting State engaged in the active conduct 
of a trade or business in that State may obtain the benefits of 
the Convention with respect to an item of income derived in the 
other Contracting State. The item of income, however, must be 
derived in connection with or incidental to that trade or 
business.
    The term ``trade or business'' is not defined in the 
Convention. Pursuant to paragraph 2 of Article 3 (General 
Definitions), when determining whether a resident of Chile is 
entitled to the benefits of the Convention under paragraph 3 of 
this Article with respect to an item of income derived from 
sources within the United States, the United States will 
ascribe to this term the meaning that it has under the law of 
the United States. Accordingly, the U.S. competent authority 
will refer to the regulations issued under section 367(a) for 
the definition of the term ``trade or business.'' In general, 
therefore, a trade or business will be considered to be a 
specific unified group of activities that constitutes or could 
constitute an independent economic enterprise carried on for 
profit. Furthermore, a corporation generally will be considered 
to carry on a trade or business only if the officers and 
employees of the corporation conduct substantial managerial and 
operational activities.
    The business of making or managing investments for the 
resident's own account will be considered to be a trade or 
business only when part of banking, insurance or securities 
activities conducted by a bank, insurance company or registered 
securities dealer. Such activities conducted by a person other 
than a bank, insurance company, or registered securities dealer 
will not be considered to be the conduct of an active trade or 
business, nor would they be considered to be the conduct of an 
active trade or business if conducted by a bank, insurance 
company or registered securities dealer but not as part of the 
company's banking, insurance, or dealer business. Because a 
headquarters operation is in the business of managing 
investments, a company that functions solely as a headquarters 
company will not be considered to be engaged in an active trade 
or business for purposes of paragraph 3.
    An item of income is derived in connection with a trade or 
business if the income-producing activity in the State of 
source is a line of business that ``forms a part of'' or is 
``complementary'' to the trade or business conducted in the 
State of residence by the income recipient.
    A business activity generally will be considered to form 
part of a business activity conducted in the State of source if 
the two activities involve the design, manufacture or sale of 
the same products or type of products, or the provision of 
similar services. The line of business in the State of 
residence may be upstream, downstream, or parallel to the 
activity conducted in the State of source. Thus, the line of 
business may provide inputs for a manufacturing process that 
occurs in the State of source, may sell the output of that 
manufacturing process, or simply may sell the same sorts of 
products that are being sold by the trade or business carried 
on in the State of source.
    Example 1. USCo is a corporation resident in the United 
States. USCo is engaged in an active manufacturing business in 
the United States. USCo owns 100 percent of the shares of CCo, 
a corporation resident in Chile. CCo distributes USCo products 
in Chile. Since the business activities conducted by the two 
corporations involve the same products, CCo's distribution 
business is considered to form a part of USCo's manufacturing 
business.
    Example 2. The facts are the same as in Example 1, except 
that USCo does not manufacture. Rather, USCo operates a large 
research and development facility in the United States that 
licenses intellectual property to affiliates worldwide, 
including CCo. CCo and other USCo affiliates then manufacture 
and market the USCo-designed products in their respective 
markets. Since the activities conducted by CCo and USCo involve 
the same product lines, these activities are considered to form 
a part of the same trade or business.
    For two activities to be considered to be 
``complementary,'' the activities need not relate to the same 
types of products or services, but they should be part of the 
same overall industry and be related in the sense that the 
success or failure of one activity will tend to result in 
success or failure for the other. Where more than one trade or 
business is conducted in the State of source and only one of 
the trades or businesses forms a part of or is complementary to 
a trade or business conducted in the State of residence, it is 
necessary to identify the trade or business to which an item of 
income is attributable. Royalties generally will be considered 
to be derived in connection with the trade or business to which 
the underlying intangible property is attributable. Dividends 
will be deemed to be derived first out of earnings and profits 
of the treaty-benefited trade or business, and then out of 
other earnings and profits. Interest income may be allocated 
under any reasonable method consistently applied. A method that 
conforms to U.S. principles for expense allocation will be 
considered a reasonable method.
    Example 3. Americair is a corporation resident in the 
United States that operates an international airline. CSub is a 
wholly-owned subsidiary of Americair resident in Chile. CSub 
operates a chain of hotels in Chile that are located near 
airports served by Americair flights. Americair frequently 
sells tour packages that include air travel to Chile and 
lodging at CSub hotels. Although both companies are engaged in 
the active conduct of a trade or business, the businesses of 
operating a chain of hotels and operating an airline are 
distinct trades or businesses. Therefore CSub's business does 
not form a part of Americair's business. However, CSub's 
business is considered to be complementary to Americair's 
business because they are part of the same overall industry 
(travel) and the links between their operations tend to make 
them interdependent.
    Example 4. The facts are the same as in Example 3, except 
that CSub owns an office building in Chile instead of a hotel 
chain. No part of Americair's business is conducted through the 
office building. CSub's business is not considered to form a 
part of or to be complementary to Americair's business. They 
are engaged in distinct trades or businesses in separate 
industries, and there is no economic dependence between the two 
operations.
    Example 5. USFlower is a corporation resident in the United 
States. USFlower produces and sells flowers in the United 
States and other countries. USFlower owns all the shares of 
CHolding, a corporation resident in Chile. CHolding is a 
holding company that is not engaged in a trade or business. 
CHolding owns all the shares of three corporations that are 
resident in Chile: CFlower, CLawn, and CFish. CFlower 
distributes USFlower flowers under the USFlower trademark in 
Chile. CLawn markets a line of lawn care products in Chile 
under the USFlower trademark. In addition to being sold under 
the same trademark, CLawn and CFlower products are sold in the 
same stores and sales of each company's products tend to 
generate increased sales of the other's products. CFish imports 
fish from the United States and distributes it to fish 
wholesalers in Chile. For purposes of paragraph 3, the business 
of CFlower forms a part of the business of USFlower, the 
business of CLawn is complementary to the business of USFlower, 
and the business of CFish is neither part of nor complementary 
to that of USFlower.
    An item of income derived from the State of source is 
``incidental to'' the trade or business carried on in the State 
of residence if production of the item facilitates the conduct 
of the trade or business in the State of residence. An example 
of incidental income is the temporary investment of working 
capital of a person in the State of residence in securities 
issued by persons in the State of source.
    Subparagraph 3(b) states a further condition to the general 
rule in subparagraph 3(a) in cases where the trade or business 
generating the item of income in question is carried on either 
by the person deriving the income or by any associated 
enterprises. Subparagraph 3(b) states that the trade or 
business carried on in the State of residence, under these 
circumstances, must be substantial in relation to the activity 
in the State of source. The substantiality requirement is 
intended to prevent a narrow case of treaty-shopping abuses in 
which a company attempts to qualify for benefits by engaging in 
de minimis connected business activities in the treaty country 
in which it is resident (i.e., activities that have little 
economic cost or effect with respect to the company business as 
a whole).
    The determination of substantiality is made based upon all 
the facts and circumstances and takes into account the 
comparative sizes of the trades or businesses in each 
Contracting State, the nature of the activities performed in 
each Contracting State, and the relative contributions made to 
that trade or business in each Contracting State.
    The determination in subparagraph 3(b) is also made 
separately for each item of income derived from the State of 
source. It therefore is possible that a person would be 
entitled to the benefits of the Convention with respect to one 
item of income but not with respect to another. If a resident 
of a Contracting State is entitled to treaty benefits with 
respect to a particular item of income under paragraph 3, the 
resident is entitled to all benefits of the Convention insofar 
as they affect the taxation of that item of income in the State 
of source.
    The application of the substantiality requirement only to 
income from related parties focuses only on potential abuse 
cases, and does not hamper certain other kinds of non-abusive 
activities, even though the income recipient resident in a 
Contracting State may be very small in relation to the entity 
generating income in the other Contracting State. For example, 
if a small U.S. research firm develops a process that it 
licenses to a very large, unrelated, pharmaceutical 
manufacturer in Chile, the size of the U.S. research firm would 
not have to be tested against the size of the manufacturer. 
Similarly, a small U.S. bank that makes a loan to a very large 
unrelated company operating a business in Chile would not have 
to pass a substantiality test to receive treaty benefits under 
paragraph 3.
    Subparagraph 3(c) provides special attribution rules for 
purposes of applying the substantive rules of subparagraphs 
3(a) and 3(b). Thus, these rules apply for purposes of 
determining whether a person meets the requirement in 
subparagraph 3(a) that it be engaged in the active conduct of a 
trade or business and that the item of income is derived in 
connection with that active trade or business, and for making 
the comparison required by the ``substantiality'' requirement 
in subparagraph 3(b). Subparagraph (c) attributes to a person 
activities conducted by persons ``connected'' to such person. A 
person (``X'') is connected to another person (``Y'') if X 
possesses 50 percent or more of the beneficial interest in Y 
(or if Y possesses 50 percent or more of the beneficial 
interest in X). For this purpose, X is connected to a company 
if X owns shares representing 50 percent or more of the 
aggregate voting power and value of the company or 50 percent 
or more of the beneficial equity interest in the company. X 
also is connected to Y if a third person possesses 50 percent 
or more of the beneficial interest in both X and Y. For this 
purpose, if X or Y is a company, the threshold relationship 
with respect to such company or companies is 50 percent or more 
of the aggregate voting power and value or 50 percent or more 
of the beneficial equity interest. Finally, X is connected to Y 
if, based upon all the facts and circumstances, X controls Y, Y 
controls X, or X and Y are controlled by the same person or 
persons.

Paragraph 4

    Paragraph 4 provides that a resident of one of the States 
that is not entitled to the benefits of the Convention as a 
result of paragraph 2 or 3 still may be granted benefits under 
the Convention at the discretion of the competent authority of 
the State from which benefits are claimed. Under paragraph 4, 
that competent authority will determine whether the 
establishment, acquisition or maintenance of the person seeking 
benefits under the Convention, or the conduct of such person's 
operations, has or had as one of its principal purposes the 
obtaining of benefits under the Convention. Benefits will not 
be granted, however, solely because a company was established 
prior to the effective date of a treaty or protocol. In that 
case a company would still be required to establish to the 
satisfaction of the competent authority clear non-tax business 
reasons for its formation in a Contracting State, or that the 
allowance of benefits would not otherwise be contrary to the 
purposes of the treaty. Thus, persons that establish operations 
in one of the States with a principal purpose of obtaining the 
benefits of the Convention ordinarily will not be granted 
relief under paragraph 4.
    The competent authority's discretion is quite broad. It may 
grant all of the benefits of the Convention to the taxpayer 
making the request, or it may grant only certain benefits. For 
instance, it may grant benefits only with respect to a 
particular item of income in a manner similar to paragraph 4. 
Further, the competent authority may establish conditions, such 
as setting time limits on the duration of any relief granted.
    For purposes of implementing paragraph 4, a taxpayer will 
be permitted to present his case to the relevant competent 
authority for an advance determination based on the facts. In 
these circumstances, it is also expected that, if the competent 
authority determines that benefits are to be allowed, they will 
be allowed retroactively to the time of entry into force of the 
relevant treaty provision or the establishment of the structure 
in question, whichever is later.
    Finally, there may be cases in which a resident of a 
Contracting State may apply for discretionary relief to the 
competent authority of his State of residence. This would 
arise, for example, if the benefit the resident is claiming is 
provided by the residence State, and not by the source State. 
So, for example, if a company that is a resident of the United 
States would like to claim the benefit of the re-sourcing rule 
of paragraph 3 of Article 23, but it does not meet any of the 
objective tests of this Article, it may apply to the U.S. 
competent authority for discretionary relief.

Paragraph 5

    Paragraph 5 deals with the treatment of income in the 
context of a so-called ``triangular case.'' An example of a 
triangular case would be a structure under which a resident of 
Chile earns interest income from the United States. The 
resident of Chile, who is assumed to qualify for benefits under 
one or more of the provisions of this Article, sets up a 
permanent establishment in a third jurisdiction that imposes 
only a low rate of tax on the income of the permanent 
establishment. The Chilean resident lends funds into the United 
States through the permanent establishment. The permanent 
establishment, despite its third-jurisdiction location, is an 
integral part of a Chilean resident. Therefore, the income that 
it earns on those loans, absent the provisions of paragraph 5, 
is entitled to a reduced rate of withholding tax under the 
Convention. Under a current Chilean income tax treaty with the 
host jurisdiction of the permanent establishment, the income of 
the permanent establishment is exempt from Chilean tax 
(alternatively, Chile may choose to exempt the income of the 
permanent establishment from Chilean income tax by statute). In 
addition, the third jurisdiction may exempt the income of the 
permanent establishment, for example by statute or ruling. 
Thus, the interest income is exempt from U.S. tax, is subject 
to little tax in the host jurisdiction of the permanent 
establishment, and is exempt from Chilean tax.
    Paragraph 5 applies reciprocally. However, the United 
States does not exempt the profits of a third-jurisdiction 
permanent establishment of a U.S. resident from U.S. tax, 
either by statute or by treaty.
    Paragraph 5 provides that the tax benefits that would 
otherwise apply under the Convention will not apply to any item 
of income if the combined tax actually paid in the residence 
State and the third state is less than 60 percent of the tax 
that would have been payable in the residence State if the 
income were earned in that State by the enterprise and were not 
attributable to the permanent establishment in the third state. 
In the case of dividends, interest and royalties to which this 
paragraph applies, the withholding tax rates under the 
Convention are replaced with a 15 percent withholding tax. Any 
other income to which the provisions of paragraph 5 apply is 
subject to tax under the domestic law of the source State, 
notwithstanding any other provisions of the Convention.
    In general, the principles employed under Code section 
954(b)(4) will be employed to determine whether the profits are 
subject to an effective rate of taxation that is above the 
specified threshold.
    Notwithstanding the level of tax on interest and royalty 
income of the permanent establishment, paragraph 5 will not 
apply under certain circumstances. In the case of royalties, 
paragraph 5 will not apply if the royalties are received as 
compensation for the use of, or the right to use, intangible 
property produced or developed by the permanent establishment 
itself. In the case of any other income, paragraph 5 will not 
apply if that income is derived in connection with, or is 
incidental to, the active conduct of a trade or business 
carried on by the permanent establishment in the third state. 
The business of making, managing or simply holding investments 
for the enterprise's own account is not considered to be an 
active trade or business, unless these are banking or 
securities activities carried on by a bank or registered 
securities dealer.

Paragraph 6

    Paragraph 6 defines several key terms for purposes of 
Article 24. Each of the defined terms is discussed above in the 
context in which it is used.

                    ARTICLE 25 (NON-DISCRIMINATION)

    This Article ensures that nationals of a Contracting State, 
in the case of paragraph 1, and residents of a Contracting 
State, in the case of paragraphs 2 through 4, will not be 
subject, directly or indirectly, to discriminatory taxation in 
the other Contracting State. Not all differences in tax 
treatment, either as between nationals of the two States, or 
between residents of the two States, are violations of the 
prohibition against discrimination. Rather, the non-
discrimination obligations of this Article apply only if the 
nationals or residents of the two States are comparably 
situated.
    Each of the relevant paragraphs of the Article provides 
that two persons that are comparably situated must be treated 
similarly. Although the actual words differ from paragraph to 
paragraph (e.g., paragraph 1 refers to two nationals ``in the 
same circumstances,'' paragraph 2 refers to two enterprises 
``carrying on the same activities'' and paragraph 4 refers to 
two companies that are ``similar''), the common underlying 
premise is that if the difference in treatment is directly 
related to a tax-relevant difference in the situations of the 
domestic and foreign persons being compared, that difference is 
not to be treated as discriminatory (i.e., if one person is 
taxable in a Contracting State on worldwide income and the 
other is not, or tax may be collectible from one person at a 
later stage, but not from the other, distinctions in treatment 
would be justified under paragraph 1). Other examples of such 
factors that can lead to non-discriminatory differences in 
treatment are noted in the discussions of each paragraph.
    The operative paragraphs of the Article also use different 
language to identify the kinds of differences in taxation 
treatment that will be considered discriminatory. For example, 
paragraphs 1 and 4 refer to any taxation that is more 
burdensome, while paragraph 2 specifies that a tax ``shall not 
be less favorably levied.'' Regardless of these differences in 
language, only differences in tax treatment that materially 
disadvantage the foreign person relative to the domestic person 
are properly the subject of the Article.

Paragraph 1

    Paragraph 1 provides that a national of one Contracting 
State may not be subject to taxation or connected requirements 
in the other Contracting State that are other or more 
burdensome than the taxes and connected requirements imposed 
upon a national of that other State in the same circumstances.
    The term ``national'' in relation to a Contracting State is 
defined in subparagraph 1(i) of Article 3 (General 
Definitions). The term includes both individuals and juridical 
persons. A national of a Contracting State is afforded 
protection under this paragraph even if the national is not a 
resident of either Contracting State. Thus, a U.S. citizen who 
is resident in a third country is entitled under this paragraph 
to the same treatment in Chile as a national of Chile who is in 
similar circumstances (i.e., presumably one who is resident in 
a third State).
    Paragraph 1 specifically states that a citizen or national 
of a Contracting State who is not a resident of that 
Contracting State and a citizen or national of the other 
Contracting State who is not a resident of the first-mentioned 
State are not in the same circumstances with respect to the tax 
of that first-mentioned State. Thus, for example, the United 
States is not obligated to apply the same taxing regime to a 
national of Chile who is not resident in the United States as 
it applies to a U.S. national who is not resident in the United 
States. U.S. citizens who are not residents of the United 
States but who are nevertheless subject to United States tax on 
their worldwide income are not in the same circumstances with 
respect to United States taxation as citizens of Chile who are 
not United States residents. Accordingly, Article 25 would not 
entitle a national of Chile resident in a third country to 
taxation at graduated rates on U.S. source dividends or other 
investment income that applies to a U.S. citizen resident in 
the same third country.

Paragraph 2

    Paragraph 2 of the Article provides that a Contracting 
State may not tax a permanent establishment of an enterprise of 
the other Contracting State less favorably than an enterprise 
of that first-mentioned State that is carrying on the same 
activities.
    The fact that a U.S. permanent establishment of an 
enterprise of Chile is subject to U.S. tax only on income that 
is attributable to the permanent establishment, while a U.S. 
corporation engaged in the same activities is taxable on its 
worldwide income is not, in itself, a sufficient difference to 
provide different treatment for the permanent establishment. 
There are cases, however, where the two enterprises would not 
be similarly situated and differences in treatment may be 
warranted. For instance, it would not be a violation of the 
non-discrimination protection of paragraph 2 to require the 
foreign enterprise to provide information in a reasonable 
manner that may be different from the information requirements 
imposed on a resident enterprise, because information may not 
be as readily available to the Internal Revenue Service from a 
foreign as from a domestic enterprise. Similarly, it would not 
be a violation of paragraph 2 to impose penalties on persons 
who fail to comply with such a requirement (see, e.g., sections 
874(a) and 882(c)(2)). Further, a determination that income and 
expenses have been attributed or allocated to a permanent 
establishment in conformity with the principles of Article 7 
(Business Profits) implies that the attribution or allocation 
was not discriminatory.
    Code section 1446 imposes on any partnership with income 
that is effectively connected with a U.S. trade or business the 
obligation to withhold tax on amounts allocable to a foreign 
partner. In the context of the Convention, this obligation 
applies with respect to a share of the partnership income of a 
partner resident in Chile, and attributable to a U.S. permanent 
establishment. There is no similar obligation with respect to 
the distributive shares of U.S. resident partners. It is 
understood, however, that this distinction is not a form of 
discrimination within the meaning of paragraph 2 of the 
Article. No distinction is made between U.S. and non-U.S. 
partnerships, since the law requires that partnerships of both 
U.S. and non-U.S. domicile withhold tax in respect of the 
partnership shares of non-U.S. partners. Furthermore, in 
distinguishing between U.S. and non-U.S. partners, the 
requirement to withhold on the non-U.S. but not the U.S. 
partner's share is not discriminatory taxation, but, like other 
withholding on nonresident aliens, is merely a reasonable 
method for the collection of tax from persons who are not 
continually present in the United States, and as to whom it 
otherwise may be difficult for the United States to enforce its 
tax jurisdiction. If tax has been over-withheld, the partner 
can, as in other cases of over-withholding, file for a refund.
    Paragraph 2 also makes clear that the provisions of 
paragraphs 1 and 2 do not obligate a Contracting State to grant 
to a resident of the other Contracting State any tax 
allowances, reliefs, etc., that it grants to its own residents 
on account of their civil status or family responsibilities. 
Thus, if a sole proprietor who is a resident of Chile has a 
permanent establishment in the United States, in assessing 
income tax on the profits attributable to the permanent 
establishment, the United States is not obligated to allow to 
the resident of Chile the personal allowances for himself and 
his family that he would be permitted to take if the permanent 
establishment were a sole proprietorship owned and operated by 
a U.S. resident, despite the fact that the individual income 
tax rates would apply.

Paragraph 3

    Paragraph 3 prohibits discrimination in the allowance of 
deductions. When a resident or an enterprise of a Contracting 
State pays interest, royalties or other disbursements to a 
resident of the other Contracting State, the first-mentioned 
Contracting State must allow a deduction for those payments in 
computing the taxable profits of the resident or enterprise as 
if the payment had been made under the same conditions to a 
resident of the first-mentioned Contracting State. Paragraph 3, 
however, does not require a Contracting State to give 
nonresidents more favorable treatment than it gives to its own 
residents. Consequently, a Contracting State does not have to 
allow nonresidents a deduction for items that are not 
deductible under its domestic law (for example, expenses of a 
capital nature).
    The term ``other disbursements'' is understood to include a 
reasonable allocation of executive and general administrative 
expenses, research and development expenses, and other expenses 
incurred for the benefit of a group of related persons that 
includes the person incurring the expense.
    An exception to the rule of paragraph 3 is provided for 
cases where the provisions of paragraph 1 of Article 9 
(Associated Enterprises), paragraph 8 of Article 11 (Interest) 
or pararaph 6 of Article 12 (Royalties) apply. All of these 
provisions permit the denial of deductions in certain 
circumstances in respect of transactions between related 
persons. Neither State is forced to apply the non-
discrimination principle in such cases. The exception with 
respect to paragraph 8 of Article 11 would include the denial 
or deferral of certain interest deductions under Code section 
163(j).
    Paragraph 3 also provides that any debts of an enterprise 
of a Contracting State to a resident of the other Contracting 
State are deductible in the first-mentioned Contracting State 
for purposes of computing the capital tax of the enterprise 
under the same conditions as if the debt had been contracted to 
a resident of the first-mentioned Contracting State. This 
provision is relevant for both States as the Convention covers 
taxes on income and capital, and under paragraph 6 of this 
Article, the nondiscrimination provisions apply to all taxes 
levied in both Contracting States at all levels of government. 
In the United States such taxes frequently are imposed by local 
governments and the same may be true in the case of Chile.

Paragraph 4

    Paragraph 4 requires that a Contracting State not impose 
more burdensome taxation on a company that is a resident of 
that State the capital of which is wholly or partly owned or 
controlled, directly or indirectly, by one or more residents of 
the other Contracting State than the taxation that it imposes 
or may impose on other similar companies of that first-
mentioned Contracting State. For this purpose it is understood 
that ``similar'' refers to similar activities or ownership of 
the company.
    This rule, like all non-discrimination provisions, does not 
prohibit differing treatment of entities that are in differing 
circumstances. Rather, a protected enterprise is only required 
to be treated in the same manner as other enterprises that, 
from the point of view of the application of the tax law, are 
in substantially similar circumstances both in law and in fact. 
The taxation of a distributing corporation under section 367(e) 
on an applicable distribution to foreign shareholders does not 
violate paragraph 4 of the Article because a foreign-owned 
corporation is not similar to a domestically-owned corporation 
that is accorded non-recognition treatment under sections 337 
and 355.
    For the reasons given above in connection with the 
discussion of paragraph 2 of the Article, it is also understood 
that the provision in Code section 1446 for withholding of tax 
on non-U.S. partners does not violate paragraph 4 of the 
Article.
    It is further understood that the ineligibility of a U.S. 
corporation with nonresident alien shareholders to make an 
election to be an ``S'' corporation does not violate paragraph 
4 of the Article. If a corporation elects to be an S 
corporation, it is generally not subject to income tax and the 
shareholders take into account their pro rata shares of the 
corporation's items of income, loss, deduction or credit. A 
nonresident alien does not pay U.S. tax on a net basis, and, 
thus, does not generally take into account items of loss, 
deduction or credit. Thus, the S corporation provisions do not 
exclude corporations with nonresident alien shareholders 
because such shareholders are foreign, but only because they 
are not net-basis taxpayers. Similarly, the provisions exclude 
corporations with other types of shareholders where the purpose 
of the provisions cannot be fulfilled or their mechanics 
implemented. For example, corporations with corporate 
shareholders are excluded because the purpose of the provision 
to permit individuals to conduct a business in corporate form 
at individual tax rates would not be furthered by their 
inclusion.
    Finally, it is understood that paragraph 4 does not require 
a Contracting State to allow foreign corporations to join in 
filing a consolidated return with a domestic corporation or to 
allow similar benefits between domestic and foreign 
enterprises.

Paragraph 5

    Paragraph 5 of the Article confirms that no provision of 
the Article will prevent either Contracting State from imposing 
the branch profits tax described in paragraph 7 of Article 10 
(Dividends) or the branch level interest tax described in 
paragraph 10 of Article 11 (Interest).

Paragraph 6

    As noted above, notwithstanding the specification of taxes 
covered by the Convention in Article 2 (Taxes Covered) for 
general purposes, for purposes of providing nondiscrimination 
protection this Article applies to taxes of every kind and 
description imposed by a Contracting State or a political 
subdivision or local authority thereof. However, in the case of 
taxes not covered by the Convention, the provisions of this 
Article shall not apply to any taxation laws of a Contracting 
State that were in force on February 4, 2010, the date of 
signature of the Convention. Customs duties are not considered 
to be taxes for purposes of this Article.

Relationship to Other Articles

    The saving clause of paragraph 4 of the Protocol does not 
apply to this Article by virtue of the exception for Article 25 
in that paragraph. Thus, for example, a U.S. citizen who is a 
resident of Chile may claim benefits in the United States under 
this Article.
    Nationals of a Contracting State may claim the benefits of 
paragraph 1 regardless of whether they are entitled to benefits 
under Article 24 (Limitation on Benefits), because that 
paragraph applies to nationals and not residents. They may not 
claim the benefits of the other paragraphs of this Article with 
respect to an item of income unless they are generally entitled 
to treaty benefits with respect to that income under a 
provision of Article 24.

                ARTICLE 26 (MUTUAL AGREEMENT PROCEDURE)

    This Article provides the mechanism for taxpayers to bring 
to the attention of competent authorities issues and problems 
that may arise under the Convention. It also provides the 
authority for cooperation between the competent authorities of 
the Contracting States to resolve disputes and clarify issues 
that may arise under the Convention and to resolve cases of 
double taxation not provided for in the Convention. The 
competent authorities of the two Contracting States are 
identified in subparagraph 1(h) of Article 3 (General 
Definitions).

Paragraph 1

    This paragraph provides that, where a resident of a 
Contracting State considers that the actions of one or both 
Contracting States will result in taxation that is not in 
accordance with the Convention, he may present his case to the 
competent authority of the Contracting State of which he is 
resident, or, if his case comes under paragraph 1 of Article 25 
(Non-Discrimination), to the competent authority of the State 
of which he is a national.
    Although the most common cases brought under this paragraph 
will involve economic double taxation arising from transfer 
pricing adjustments, the scope of this paragraph is not limited 
to such cases. For example, a taxpayer could request assistance 
from the competent authority if one Contracting State 
determines that the taxpayer has received deferred compensation 
taxable at source under Article 15 (Dependent Personal 
Services), while the taxpayer believes that such income should 
be treated as a pension that is taxable only in his country of 
residence pursuant to Article 18 (Pensions, Social Security, 
Alimony and Child Support).
    It is not necessary for a person requesting assistance 
first to have exhausted the remedies provided under the 
national laws of the Contracting States before presenting a 
case to the competent authorities, nor does the fact that the 
statute of limitations may have passed for seeking a refund 
preclude bringing a case to the competent authority. The case 
must be presented within three years from the first 
notification of the action resulting in taxation not in 
accordance with the provisions of the Convention.

Paragraph 2

    Paragraph 2 sets out the framework within which the 
competent authorities will deal with cases brought by taxpayers 
under paragraph 1. It provides that, if the competent authority 
of the Contracting State to which the case is presented judges 
the case to have merit and cannot reach a unilateral solution, 
it shall seek an agreement with the competent authority of the 
other Contracting State pursuant to which taxation not in 
accordance with the Convention will be avoided.
    Any agreement is to be implemented even if such 
implementation otherwise would be barred by the statute of 
limitations or by some other procedural limitation, such as a 
closing agreement. Paragraph 2, however, does not prevent the 
application of domestic-law procedural limitations that give 
effect to the agreement (e.g., a domestic-law requirement that 
the taxpayer file a return reflecting the agreement within one 
year of the date of the agreement).
    Where the taxpayer has entered a closing agreement (or 
other written settlement) with the United States before 
bringing a case to the competent authorities, the U.S. 
competent authority will endeavor only to obtain a correlative 
adjustment from Chile. See Rev. Proc. 2006-54, 2006-49 I.R.B. 
1035, Sec. 7.05. Because, as specified in paragraph 2 of the 
Protocol, the Convention cannot operate to increase a 
taxpayer's liability, temporal or other procedural limitations 
can be overridden only for the purpose of making refunds and 
not to impose additional tax.

Paragraph 3

    Paragraph 3 authorizes the competent authorities to resolve 
by mutual agreement any difficulties or doubts that may arise 
as to the application or interpretation of the Convention.
    The competent authorities may, for example, agree to the 
same allocation of income, deductions, credits or allowances 
between an enterprise in one Contracting State and its 
permanent establishment in the other or between related 
persons. These allocations are to be made in accordance with 
the arm's length principle underlying Article 7 (Business 
Profits) and Article 9 (Associated Enterprises). Agreements 
reached under Article 26 may include agreement on a methodology 
for determining an appropriate transfer price, on an acceptable 
range of results under that methodology, or on a common 
treatment of a taxpayer's cost sharing arrangement.
    The competent authorities also may agree to settle a 
variety of conflicting applications of the Convention. They may 
agree to settle conflicts regarding the characterization of 
particular items of income, the characterization of persons, 
the application of source rules to particular items of income, 
the meaning of a term, or the timing of an item of income.
    The competent authorities also may agree as to advance 
pricing arrangements. They also may agree as to the application 
of the provisions of domestic law regarding penalties, fines, 
and interest in a manner consistent with the purposes of the 
Convention.
    The competent authorities may also, for example, seek 
agreement on a uniform set of standards for the use of exchange 
rates. Agreements reached by the competent authorities under 
paragraph 3 need not conform to the internal law provisions of 
either Contracting State.

Paragraph 4

    Paragraph 4 provides that the competent authorities may 
communicate with each other for the purpose of reaching an 
agreement. This makes clear that the competent authorities of 
the two Contracting States may communicate without going 
through diplomatic channels. Such communication may be in 
various forms, including, where appropriate, through face-to-
face meetings of representatives of the competent authorities.

Paragraph 6 of the 2010 Exchange of Notes

    The competent authorities, through consultations, shall 
develop appropriate bilateral procedures, conditions, methods, 
and techniques for the implementation of the mutual agreement 
procedure provided in Article 26. Each competent authority may, 
in addition, develop unilateral procedures to facilitate the 
bilateral implementation of the mutual agreement procedure. For 
guidance in developing such bilateral implementation, the 
competent authorities will refer to the Best Practices 
identified in the OECD Manual on Effective Mutual Agreement 
Procedures.

Treaty termination in relation to competent authority dispute 
        resolution

    A case may be raised by a taxpayer after the Convention has 
been terminated with respect to a year for which a treaty was 
in force. In such a case the ability of the competent 
authorities to act is limited. They may not exchange 
confidential information, nor may they reach a solution that 
varies from that specified in its law.

Triangular competent authority solutions

    International tax cases may involve more than two taxing 
jurisdictions (e.g., transactions among a parent corporation 
resident in country A and its subsidiaries resident in 
countries B and C). As long as there is a complete network of 
treaties among the three countries, it should be possible, 
under the full combination of bilateral authorities, for the 
competent authorities of the three States to work together on a 
three-sided solution. Although country A may not be able to 
give information received under Article 27 (Exchange of 
Information) from country B to the authorities of country C, if 
the competent authorities of the three countries are working 
together, it should not be a problem for them to arrange for 
the authorities of country B to give the necessary information 
directly to the tax authorities of country C, as well as to 
those of country A. Each bilateral part of the trilateral 
solution must, of course, not exceed the scope of the authority 
of the competent authorities under the relevant bilateral 
treaty.

Relationship to Other Articles

    This Article is not subject to the saving clause of 
paragraph 4 of the Protocol by virtue of the exception in 
subparagraph 4(a) of the Protocol. Thus, rules, definitions, 
procedures, etc., that are agreed upon by the competent 
authorities under this Article may be applied by the United 
States with respect to its citizens and residents even if they 
differ from the comparable Code provisions. Similarly, as 
indicated above, U.S. law may be overridden to provide refunds 
of tax to a U.S. citizen or resident under this Article. A 
person may seek relief under Article 26 regardless of whether 
he is generally entitled to benefits under Article 24 
(Limitation on Benefits). As in all other cases, the competent 
authority is vested with the discretion to decide whether the 
claim for relief is justified.

                  ARTICLE 27 (EXCHANGE OF INFORMATION)

    This Article provides for the exchange of information 
between the competent authorities of the Contracting States.

Paragraph 1

    The obligation to obtain and provide information to the 
other Contracting State is set out in paragraph 1. The 
information to be exchanged is that which is foreseeably 
relevant for carrying out the provisions of the Convention or 
the domestic laws of the United States or Chile concerning 
taxes of every kind applied at the national level. This 
language is consistent with the standard of the U.S. and OECD 
Models. The parties intend for the phrase ``is foreseeably 
relevant'' to be interpreted to permit the exchange of 
information that ``may be relevant'' for purposes of Code 
section 7602, which authorizes the IRS to examine ``any books, 
papers, records, or other data which may be relevant or 
material'' (emphasis added). In United States v. Arthur Young & 
Co., 465 U.S. 805, 814 (1984), the Supreme Court stated that 
the language ``may be'' reflects Congress's express intention 
to allow the IRS to obtain ``items of even potential relevance 
to an ongoing investigation, without reference to its 
admissibility.'' However, the language ``may be'' would not 
support a request in which a Contracting State simply asked for 
information regarding all bank accounts maintained by residents 
of that Contracting State in the other Contracting State. Thus, 
the language of paragraph 1 is intended to provide for the 
exchange of information in tax matters to the widest extent 
possible, while clarifying that Contracting States are not at 
liberty to engage in ``fishing expeditions'' or otherwise to 
request information that is unlikely to be relevant to the tax 
affairs of a given taxpayer.
    Exchange of information with respect to each State's 
domestic law is authorized to the extent that taxation under 
domestic law is not contrary to the Convention. Thus, for 
example, information may be exchanged with respect to a covered 
tax, even if the transaction to which the information relates 
is a purely domestic transaction in the requesting State and, 
therefore, the exchange is not made to carry out the 
Convention. An example of such a case is provided in paragraph 
8(b) of the OECD Commentary: a company resident in one 
Contracting State and a company resident in the other 
Contracting State transact business between themselves through 
a third-country resident company. Neither Contracting State has 
a treaty with the third State. To enforce their internal laws 
with respect to transactions of their residents with the third-
country company (since there is no relevant treaty in force), 
the Contracting States may exchange information regarding the 
prices that their residents paid in their transactions with the 
third-country resident.
    Paragraph 1 clarifies that information may be exchanged 
that relates to the assessment or collection of, the 
enforcement or prosecution in respect of, or the determination 
of appeals in relation to the taxes covered by the Convention. 
Thus, the competent authorities may request and provide 
information for cases under examination or criminal 
investigation, in collection, on appeals, or under prosecution.
    The taxes covered by the Convention for purposes of this 
Article constitute a broader category of taxes than those 
referred to in Article 2 (Taxes Covered). Exchange of 
information is authorized with respect to taxes of every kind 
imposed by a Contracting State at the national level. 
Accordingly, information may be exchanged with respect to U.S. 
estate and gift taxes and excise taxes.
    Information exchange is not restricted by paragraph 1 of 
Article 1 (General Scope). Accordingly, information may be 
requested and provided under Article 27 with respect to persons 
who are not residents of either Contracting State. For example, 
if a third-country resident has a permanent establishment in 
Chile, and that permanent establishment engages in transactions 
with a U.S. enterprise, the United States could request 
information with respect to that permanent establishment, even 
though the third-country resident is not a resident of either 
Contracting State. Similarly, if a third-country resident 
maintains a bank account in Chile, and the Internal Revenue 
Service has reason to believe that funds in that account should 
have been reported for U.S. tax purposes but have not been so 
reported, information can be requested from Chile with respect 
to that person's account, even though that person is not the 
taxpayer under examination.
    Although the term ``United States'' does not encompass U.S. 
possessions for most purposes of the Convention, Code section 
7651 authorizes the Internal Revenue Service to utilize the 
provisions of the Code to obtain information from the U.S. 
possessions pursuant to a proper request made under Article 27. 
If necessary to obtain requested information, the Internal 
Revenue Service could issue and enforce an administrative 
summons to the taxpayer, a tax authority (or a government 
agency in a U.S. possession), or a third party located in a 
U.S. possession.

Paragraph 2

    Paragraph 2 provides assurances that any information 
exchanged will be treated as secret, subject to the same 
disclosure constraints as information obtained under the laws 
of the requesting State. Information received may be disclosed 
only to persons or authorities, including courts and 
administrative bodies, involved in the assessment, collection, 
or administration of, the enforcement or prosecution in respect 
of, or the determination of the of appeals in relation to, the 
taxes covered by the Convention. The information must be used 
by these persons in connection with the specified functions. 
Information may also be disclosed to legislative bodies, such 
as the tax-writing committees of Congress and the Government 
Accountability Office, engaged in the oversight of the 
preceding activities. Information received by these bodies must 
be for use in the performance of their role in overseeing the 
administration of U.S. tax laws. Information received may be 
disclosed in public court proceedings or in judicial decisions.

Paragraph 3

    Paragraph 3 provides that the obligations undertaken in 
paragraphs 1 and 2 to exchange information do not require a 
Contracting State to carry out administrative measures that are 
at variance with the laws or administrative practice of either 
State. Nor is a Contracting State required to supply 
information not obtainable under the laws or administrative 
practice of either State, or to disclose trade secrets or other 
information, the disclosure of which would be contrary to 
public policy.
    Thus, a requesting State may be denied information from the 
other State if the information would be obtained pursuant to 
procedures or measures that are broader than those available in 
the requesting State. However, the statute of limitations of 
the Contracting State making the request for information should 
govern a request for information. Thus, the Contracting State 
of which the request is made should attempt to obtain the 
information even if its own statute of limitations has passed. 
In many cases, relevant information will still exist in the 
business records of the taxpayer or a third party, even though 
it is no longer required to be kept for domestic tax purposes.
    While paragraph 3 states conditions under which a 
Contracting State is not obligated to comply with a request 
from the other Contracting State for information, the requested 
State is not precluded from providing such information, and 
may, at its discretion, do so subject to the limitations of its 
domestic law.

Paragraph 4

    Paragraph 4 provides that when information is requested by 
a Contracting State in accordance with this Article, the other 
Contracting State is obligated to obtain the requested 
information as if the tax in question were the tax of the 
requested State, even if that State has no direct tax interest 
in the case to which the request relates. In the absence of 
such a paragraph, some taxpayers have argued that subparagraph 
3(a) prevents a Contracting State from requesting information 
from a bank or fiduciary that the Contracting State does not 
need for its own tax purposes. This paragraph clarifies that 
paragraph 3 does not impose such a restriction and that a 
Contracting State is not limited to providing only the 
information that it already has in its own files.

Paragraph 5

    Paragraph 5 provides that a Contracting State may not 
decline to provide information because that information is held 
by a bank, other financial institution, nominee or person 
acting in an agency or fiduciary capacity or because it related 
to ownership interests in a person. Thus, paragraph 5 would 
effectively prevent a Contracting State from relying on 
paragraph 3 to argue that its domestic bank secrecy laws (or 
similar legislation relating to the disclosure of financial 
information by financial institutions or intermediaries) 
override its obligation to provide information under paragraph 
1. This paragraph also requires the disclosure of information 
regarding the beneficial owner of an interest in a person, such 
as the identity of a beneficial owner of bearer shares.

Paragraph 6

    Paragraph 6 provides that the requesting State may specify 
the form in which information is to be provided (e.g., 
depositions of witnesses and authenticated copies of unedited 
original documents). The intention is to ensure that the 
information may be introduced as evidence in the judicial 
proceedings of the requesting State. The requested State shall 
provide the information in the form requested to the same 
extent that it can obtain information in that form under its 
own laws and administrative practices with respect to its own 
taxes.

Paragraph 7

    Paragraph 7 states that the competent authorities of the 
Contracting States will consult with each other for the purpose 
of cooperating and advising in respect of any action to be 
taken in implementing this Article. For example, the competent 
authorities may develop an agreement upon the mode of 
application of the Article, and may also agree on specific 
procedures and timetables for the exchange of information. In 
particular, the competent authorities may agree on minimum 
thresholds regarding tax at stake or take other measures aimed 
at ensuring some measure of reciprocity with respect to the 
overall exchange of information between the Contracting States.

Paragraph 7 of the 2010 Exchange of Notes

    With regard to on-site interviews and examinations of books 
and records, paragraph 7 of the 2010 Exchange of Notes provides 
that the applicant State will notify the requested State when 
the applicant State has obtained the consent of persons to be 
interviewed by officials of the applicant State or for such 
officials to examine books and records in the possession or 
control of such consenting persons. Following such interview or 
examination of books and records, the applicant State may 
request information or documents related to such interview or 
examination under Article 27.

Treaty effective dates and termination in relation to exchange of 
        information

    Under paragraph 3 of Article 29 (Entry into Force), Article 
27 will be effective from the date of entry into force, and, 
the competent authority may seek information under the 
Convention without regard to the taxable period to which the 
matter relates, i.e., such period may be prior to the date of 
entry into force of the Convention. However, paragraph 20 of 
the Protocol, as amended by the 2012 Exchange of Notes, 
provides that, notwithstanding paragraph 3 of Article 29, 
information covered by paragraph 5 of Article 27, to the extent 
such information is covered by Article 1 of DFL No. 707 and 
Article 154 of DFL No. 3 of Chile, shall be available only with 
respect to bank account transactions that take place on or 
after January 1, 2010. Other bank information such as signature 
cards and other account opening documents may be exchanged 
without regard to the time they were created.
    A tax administration may also seek information with respect 
to a year for which the Convention was in force after the 
Convention has been terminated. In such a case, the ability of 
the other tax administration to act is limited. The Convention 
no longer provides authority for the tax administrations to 
exchange confidential information. They may only exchange 
information pursuant to domestic law or other international 
agreement or arrangement.

     ARTICLE 28 (MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS)

    This Article confirms that any fiscal privileges to which 
diplomatic or consular officials are entitled under general 
provisions of international law or under special agreements 
will apply notwithstanding any provisions to the contrary in 
the Convention. The agreements referred to include any 
bilateral agreements, such as consular conventions, that affect 
the taxation of diplomats and consular officials and any 
multilateral agreements dealing with these issues, such as the 
Vienna Convention on Diplomatic Relations and the Vienna 
Convention on Consular Relations. The United States generally 
adheres to the latter because its terms are consistent with 
customary international law.
    The Article does not independently provide any benefits to 
diplomatic agents and consular officers. Article 19 (Government 
Service) does so, as do Code section 893 and a number of 
bilateral and multilateral agreements. In the event that there 
is a conflict between the Convention and international law or 
such other treaties, under which the diplomatic agent or 
consular official is entitled to greater benefits under the 
latter, the latter laws or agreements shall have precedence. 
Conversely, if the Convention confers a greater benefit than 
another agreement, the affected person could claim the benefit 
of the tax treaty.
    Pursuant to subparagraph 4(b) of the Protocol, the saving 
clause of paragraph 4 of the Protocol does not apply to 
override any benefits of this Article available to an 
individual who neither is a U.S. citizen nor has been admitted 
for permanent residence in the United States.

                     ARTICLE 29 (ENTRY INTO FORCE)

    This Article contains the rules for bringing the Convention 
into force and giving effect to its provisions.

Paragraph 1

    Paragraph 1 provides for the ratification of the Convention 
by both Contracting States according to their constitutional 
and statutory requirements. The Contracting States will notify 
each other in writing, through diplomatic channels, when their 
respective applicable procedures have been satisfied.
    In the United States, the process leading to ratification 
and entry into force is as follows: Once a treaty has been 
signed by authorized representatives of the two Contracting 
States, the Department of State sends the treaty to the 
President who formally transmits it to the Senate for its 
advice and consent to ratification, which requires approval by 
two-thirds of the Senators present and voting. Prior to this 
vote, however, it generally has been the practice for the 
Senate Committee on Foreign Relations to hold hearings on the 
treaty and make a recommendation regarding its approval to the 
full Senate. Both Government and private sector witnesses may 
testify at these hearings. After the Senate gives its advice 
and consent to ratification of the treaty, an instrument of 
ratification is drafted for the President's signature. The 
President's signature completes the process in the United 
States.

Paragraph 2

    The first sentence of paragraph 2 provides that the 
Convention will enter into force on the date of the later of 
the notifications referred to in paragraph 1. The relevant date 
is the date on the second of these notification documents, and 
not the date on which the second notification is provided to 
the other Contracting State.
    The date on which a treaty enters into force is not 
necessarily the date on which its provisions take effect. 
Paragraph 2, therefore, also contains rules that determine when 
the provisions of the treaty will have effect.
    Under subparagraph 2(a), the Convention will have effect 
with respect to taxes withheld at source, for amounts paid or 
credited on or after the first day of the second month 
following the date on which the Convention enters into force. 
For example, if the date of the second of the notification 
documents referred to in paragraph 1 is April 25 of a given 
year, the withholding rates specified in paragraph 2 of Article 
10 (Dividends) would be applicable to any dividends paid or 
credited on or after June 1 of that year. This rule allows the 
benefits of the withholding reductions to be put into effect as 
soon as possible, without waiting until the following year. The 
delay of one to two months is required to allow sufficient time 
for withholding agents to be informed about the change in 
withholding rates. If for some reason a withholding agent 
withholds at a higher rate than that provided by the Convention 
(perhaps because it was not able to re-program its computers 
before the payment is made), a beneficial owner of the income 
that is a resident of the other Contracting State may make a 
claim for refund pursuant to Code section 1464.
    For all other taxes, subparagraph 2(b) specifies that the 
Convention will have effect for any taxable period beginning on 
or after January 1 of the calendar year immediately following 
the date on which the Convention enters into force.

Paragraph 3

    As discussed under Article 27 (Exchange of Information), 
the powers afforded the competent authority under that Article 
apply from the date of entry into force of the Convention, 
regardless of the taxable period to which the matter relates. 
Paragraph 20 of the Protocol, as amended by the 2012 Exchange 
of Notes, provides that notwithstanding paragraph 3 of Article 
29, information covered by paragraph 5 of Article 27, to the 
extent that such information is covered by Article 1 of DFL No. 
707 and Article 154 of DFL No. 3 of Chile, shall be available 
only with respect to bank account transactions that take place 
on or after January 1, 2010. Other bank information such as 
signature cards and other account opening documents may be 
exchanged without regard to the time they were created.

                        ARTICLE 30 (TERMINATION)

    Paragraph 1 provides that the Convention is to remain in 
effect indefinitely, unless terminated by one of the 
Contracting States in accordance with the provisions of Article 
30. Either State may terminate the Convention by giving to the 
other State a notice of termination in writing through 
diplomatic channels on or before the thirtieth day of June in 
any calendar year beginning after the year in which the 
Convention enters into force. Under subparagraph 2(a), if 
notice of termination is so given, the provisions of the 
Convention with respect to taxes withheld at source will cease 
to have effect for amounts paid or credited on or after January 
1 of the calendar year immediately following the date on which 
such notice is given. Under subparagraph 2(b), with respect to 
other taxes, the Convention will cease to have effect for 
taxable periods beginning on or after January 1 of the calendar 
year immediately following the date on which such notice is 
given. Under subparagraph 2(c), with respect to provisions of 
the Convention not covered by subparagraph 2(a) or 2(b), the 
Convention will cease to have effect on January 1 of the 
calendar year immediately following the date on which the 
notice is given.
    Article 30 relates only to unilateral termination of the 
Convention by a Contracting State. Nothing in that Article 
should be construed as preventing the Contracting States from 
concluding a new bilateral agreement, subject to ratification, 
that supersedes, amends or terminates provisions of the 
Convention without the six-month notification period.
    Customary international law observed by the United States 
and other countries, as reflected in the Vienna Convention on 
Treaties, allows termination by one Contracting State at any 
time in the event of a ``material breach'' of the agreement by 
the other Contracting State.

                                 OTHER

Paragraph 21 of the Protocol

    Paragraph 21 of the Protocol provides a rule regarding the 
taxation by Chile of certain remittances from pooled investment 
accounts (such as those established under the Foreign Capital 
Investment Fund Law No. 18.657, as it may be amended from time 
to time without changing the general principles thereof). 
Nothing in the Convention shall restrict the imposition by 
Chile of tax on remittances from such funds if the fund is 
required to be administered by a resident of Chile, although 
the imposition of remittance tax is only permitted in respect 
of investment in assets situated in Chile. The current tax 
imposed by Chile on remittances from such funds is 10 percent.

Paragraph 22 of the Protocol

    Paragraph 22 of the Protocol provides that the United 
States and Chile will consult together regarding the terms, 
operation and application of the Convention to ensure that it 
continues to serve the purposes of avoiding double taxation and 
preventing fiscal evasion. Either Contracting State may at any 
time request that such consultations be conducted expeditiously 
on matters relating to the terms, operation and application of 
the Convention which it considers require urgent resolution. 
The first such consultation in any event will take place within 
five years of the date on which the Convention enters into 
force. The Protocol also provides that the United States and 
Chile will conclude further protocols to amend the Convention, 
if appropriate. In addition, as explained earlier, paragraph 22 
of the Protocol provides that if Chile concludes an income tax 
treaty with another state that imposes a withholding rate 
limitation on payments of interest or royalties lower than the 
limits imposed under paragraph 2 of Article 11 (Interest) or 
paragraph 2 of Article 12 (Royalties) or that contains terms 
that further limit the right of the source State to tax capital 
gains under Article 13 (Capital Gains), the United States and 
Chile will, at the request of the United States, consult to 
reassess the balance of benefits of the Convention with a view 
to concluding a protocol to incorporate such lower rates or 
limiting terms into the Convention.

                                  [all]