Chile: MFN Principle in International Contracts

According to the most favored nation (MFN) principle a state has to grant the same foreign trade privilege to other states which it grated to a third state. The principle is the base of GATT and many other international trade agreements.


Chile-Japan Treaty

The treaty between Chile and Japan which came into effect in January 2017 includes lower withholding tax rates for interest and royalties. Due to the MFN principle and respective IRS decisions, other trade partners of Chile can now profit from these lower tax rates as well.


Specifically, the following withholding taxes are affected:

  • 4% on interest paid, credited, made available or recorded as an expense as from 1 January 2017 (Article 11 of the Treaty)
  • 2% withholding tax rate on royalties paid for the use of, or the right to use, industrial, commercial or scientific equipment, otherwise: 10% (Article 12 of the Treaty)


Article 11 does not apply to all taxpayers but just the following ones:

  • A bank, an insurance company or other financial institution lending money
  • An enterprise that sells machinery or equipment, where the interest is paid on the credit to buy such goods
  • Any other enterprise, that received more than 50% of its revenues from bonds or credits in the three years preceding the year of interest payment


Taxpayers that do not belong to this group will pay 15% withholding tax for the tax period 2017-2018, respectively 10% since January 1st, 2009.



Withholding Tax Rate Changes

The respective IRS decision leads to withholding tax rate adaptions for the following treaty partners:


Treaty Partners % Withholding Tax on Interest (Article 11) %

Withholding Tax on Royalties

(Article 12)

% Withholding Tax on Interest on bonds/securities
Japan 4% 2% n/a
Spain 4% retro-active from  January 1st, 2017


10% Standard rate since January 1st, 2019

2% retro-active from  January 1st, 2017


10% Standard rate

Ecuador 10% 5%
Italy n/a n/a 5%
China 10% Standard rate n/a 5%


These adaptations follow an initial IRS decision from April 2018 which already applied the MFN principle to the following treaty partner countries:


  • Czech Republic
  • Denmark
  • Ireland
  • Korea
  • Poland
  • UK


Due to the retro-active effectiveness of the withholding tax adaptations, companies from the treaty partners can be legible for tax returns for payments made since January 2017. Furthermore, future decisions of the IRS based on the MFN principle can be expected.



These regulatory changes could affect your business with view to customizing or support of your ERP/SAP system. Please contact us to learn about possible necessary reactions to the changes – we are happy to assist you!