Trademarks, trade names, brand names, copyright rights, technical know-how, patents, and industrial designs, to name a few, are all valuable intangible properties that are frequently transferred (or licensed) from one related entity to another related entity. This is particularly important for foreign companies who are operating in Chile since their intellectual property in most cases is what distinguishes their product, services, or company from the competition.
Understanding how to utilize the tax benefits of your IP is crucial to ensure your company is tax efficient. It will often be one of many strategies you may put in place between the parent and subsidiary companies to assist with your tax planning. A part of that process is understanding the double taxation agreements that are currently in place.
As of this date, Chile has more than 30 treaties in force with different countries. Using the treaty between Chile and Australia as an example, we will analyze royalties, one of the concepts that may generate some doubts in its application.
The term royalty is not defined in Chilean internal income tax law, however, different operations or activities are considered as royalties. In general, we can point out that a royalty is a payment for the use or enjoyment of some type of intellectual or industrial property, and even for certain consultancies or services. Unlike national legislation, the concept of royalty has been included in treaties to avoid international double taxation in which the cases we will analyze.
Under Chilean domestic law, a remittance made from Chile to abroad for royalties, regardless if the foreigner is a natural person or a legal entity, the following rates of withholding taxes are applied:
- The amounts or payments for the use, enjoyment, or exploitation of trademarks, patents, formulas, and other similar services, whether they consist of royalties or any other form of remuneration, are subject to a 30% withholding rate for additional tax.
- Payments for the use, enjoyment or exploitation of patents, utility models, industrial designs and designs, layout-designs or topographies of integrated circuits and new plant varieties, in accordance with the definitions and specifications contained in the Industrial Property Law and the Law Regulating the Rights of Breeders of New Varieties of Plants, as the case may be, shall be subject to a 15% withholding tax as an additional tax.
- Payments for the use, enjoyment, or exploitation of computer programs, understood as the set of instructions to be used directly or indirectly in a computer or processor, in order to make or obtain a certain process or result, contained in cassette, floppy disk, disk, magnetic tape, or other material or medium, in accordance with the definition or specifications contemplated in the Law on Intellectual Property, are subject to a withholding rate of 15% as an additional tax. However, payments for standard software are exempt from additional tax.
- The amounts paid for the use of publishing or copyright rights will be subject to a 15% withholding rate for additional tax.
However, under the application of the Double Taxation Agreement Treaty with Australia, we may consider as a royalty the following transactions for which the withholding rate may be different from that provided under domestic law.
Article 12 of the Treaty states that the term "royalties" means payments or credits, whether periodic or not, and however described or computed, to the extent to which they are made as consideration for the following transactions:
- the use of, or the right to use, any copyright, including motion picture films; and the use of, or the right to use, in connection with television, radio or other broadcasting, films or audio or video tapes or disks, or any other means of image or sound reproduction or transmission;
- the use of, or the right to use any patent, trademark, design or model, plan, secret formula or process or other like property or right;
- the use of, or the right to use, industrial, commercial or scientific equipment;
- the supply of information concerning technical, industrial, commercial or scientific experience;
- the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in letters a), b) or c) mentioned before.
Under the Treaty, royalties may be taxed in Chile or Australia, depending on the state from which they are derived. In any event, the withholding tax retention rate may not exceed:
- 5% of the gross amount of the royalties for the use of, or the right to use, any industrial, commercial or scientific equipment; and,
- 10% of the gross amount of the royalties in all other cases.
The same article provides that royalties are from a Contracting State when the debtor is a resident of that State. Generally, the remittance of a royalty by the debtor of a Contracting State shall be subject to withholding at the rates set out above.
We can see that when there is a treaty to avoid double taxation, the rates are more beneficial for those belonging to a treaty country, than for those that do not have a treaty in place. However, the type of royalty involved must be analyzed on a case-by-case basis to determine the applicable withholding rate.
It should be noted that when a cross-border transaction is carried out between related parties, the prices to be fixed must be considered an arm's length transaction, otherwise, you could be faced with a transfer pricing case in which the tax authority of each country will determine the real reason or price of the royalty.
Finally, it is important to consider that, for the application of the treaty, the certificate of residence of the company receiving the royalty payment issued by the tax authority of its country must be obtained.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.