From July 2nd of the current year, the agreement that was signed by Chile, Colombia, Mexico and Peru in the city of Washington, United States, on October 14th, 2017, came into effect to standardize the tax treatment provided to Avoid Double Taxation (CDI) among the Parties to the Framework Agreement of the Pacific Alliance.
This Convention amends the CDI concluded by Peru with Chile and Mexico, those entered by Colombia with Chile and Mexico, as well as the CDT between Chile and Mexico, and regulates taxation between Colombia and Peru, both of which belong to the Andean Community of Nations (CAN), through a Protocol.
Now, the Convention standardizes the tax treatment applicable to interest and capital gains obtained by recognized Pension Funds from each of these jurisdictions, which are now considered residents of said jurisdictions for the purposes of the CDI and the Protocol.
For the purposes of the Convention, the following are recognized Pension Funds:
- In Colombia: Those administered by the Pension and Severance Funds Management Companies supervised by the Financial Superintendence of Colombia, and the retirement and disability pension funds regulated by the Organic Statute of the Financial System and managed by entities subject to inspection and oversight by the Financial Superintendence of Colombia.
- In Peru: The pension funds regulated by the Unified Text of the Law on the Private Pension Fund Management System, the Military-Police Pension Fund, and the Military and Police Pension Guarantee Fund.
- In Mexico: The Specialized Investment Companies for Retirement Funds (SIEFORES) established in accordance with the Law on Retirement Savings Systems.
- In Chile: The pension funds established under the pension system of Decree Law No. 3,500.
Below, we summarize the applicable tax treatment for the recognized Pension Funds referred to in the Convention.
- Concept
- Interests: This includes capital gains derived from the sale of debt instruments (i.e., bonds).
- Capital gains derived from the transfer of shares issued by a resident of a Contracting State.
- Treatment according to the Convention
- Shared taxation in the Contracting States. However, the maximum withholding tax rate in the debtor country shall be 10%.
- Shared taxation in the Contracting States. However, if the shares are sold through the Latin American Integrated Market, composed of the Stock Exchanges of Chile, Colombia, Mexico and Peru (MILA), the taxation shall be exclusive to the country of the Pension Fund.
- Exceptions
- If the interest is subject to a rate lower than 10% in the debtor country or is exempted due to the nature of the debtor, the provisions of each CDI/Protocol shall apply.
- If the shares are disposed outside of MILA, the capital gain will be subject to the provisions in each CDI/Protocol.
In addition, the Convention regulates a system of credits for taxes paid abroad exclusively applicable between Colombia and Peru.
The tax provisions described above will be applicable to Colombia and Peru, with respect to taxes on interest and capital gains obtained and the amounts paid, credited to the account, made available or accounted for as an expense, from the January 1st, 2024, immediately following that in which the Convention enters into force.
According to the official communication of the Pacific Alliance, this regulation seeks to encourage the participation of institutional investors in the capital markets of the member countries in order to consolidate and develop a more integrated, liquid and deep regional capital market, which benefit its affiliates with access to more investment alternatives and with better profitability options.
