July 26, 2023
Pacific Alliance Double Taxation Convention on pensions funds will apply beginning 1 January 2024
On 2 July 2023, the Convention to Harmonize the Double Tax Treaties (DTT) of the Pacific Alliance (the Convention) entered into force. The Convention addresses the taxation of pension funds on their cross-border investments within the Pacific Alliance, which includes Chile, Colombia, Mexico and Peru (Convention members). The Convention will apply beginning 1 January 2024.
The Convention includes a Protocol regulating relations between Colombia and Peru (the Protocol CO-PE). The Protocol CO-PE seeks to properly integrate the Convention into Colombian and Peruvian law, such as Decision 578 of the Andean Community – CAN.
The Convention and the Protocol treat pension funds as tax residents and beneficial owners of income, allowing them to enjoy the benefits of the Convention and the applicable DTTs.
The Convention and the Protocol address the application of income tax to interest and the transfer of shares as follows:
The Protocol CO-PE’s benefits will only apply to interest and capital gains that derive from contributions towards the payment of future pensions (aportes con fines previsionales).1 It also includes (i) an interpretation rule similar to Article 3(2) of the OECD Model Convention, (ii) a provision to avoid double taxation, and (iii) a mutual agreement procedure (MAP) for disputes over its application.
The Convention’s second Protocol on the DTT between Mexico and Peru allows treaty benefits for interest and capital gains even though the income recipient is not subject to taxation in its country of residence.
The Convention will not apply automatically to a new State that adheres to the Pacific Alliance Agreement in the future. In that case, the new State must determine how it will apply the Convention and sign a Protocol on the Convention’s application with the other parties.
As the taxation of pensions funds may be affected starting 1 January 2024, funds may wish to consult with their EY advisors about the Convention’s potential effects.
Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor
1 This provision was introduced by request of Peru as it is possible that certain contributions to the pensions funds may be made for purposes not directly related to payment of future pensions.