Double Taxation Agreements: Operate Between the U.S. and LATAM Without Paying More Taxes

Expanding business operations across borders, especially between Latin America and the United States, introduces complex tax challenges. One of the most significant is the risk of being taxed twice on the same income by two different countries.

What Are Double Taxation Agreements and How Do They Function?

Double Taxation Agreements are bilateral or multilateral treaties that allocate taxing rights between countries to avoid taxing the same income twice. Most DTAs follow the Organization for Economic Cooperation and Development (OECD) model, which standardizes key concepts and rules globally.

Key elements include:

• Tax Residence Determination: DTAs establish "tie-breaker rules" to decide which country a person or entity is considered a tax resident of, preventing dual residency claims.
• Scope of Income Covered: These agreements typically apply to income taxes, including business profits, dividends, interest, royalties, and capital gains. They do not cover indirect taxes such as VAT.
• Methods to Eliminate Double Taxation:
  • Exemption Method: The resident country exempts income already taxed in the source country.
  • Credit Method: The resident country allows a tax credit for taxes paid abroad, reducing the domestic tax liability accordingly.

For example, under the U.S.-Mexico treaty, if a Mexican resident earns dividends from a U.S. company, the U.S. may withhold tax at a reduced rate of 10%, and Mexico will credit that tax against the resident’s Mexican tax liability, preventing double taxation.

A key criterion for applying these methods is the taxpayer’s ability to provide proof of tax payments and residency status, which ensures eligibility for treaty benefits and avoids disputes.

Another example involves interest income: a Chilean resident receiving interest from a U.S. entity benefits from a reduced withholding tax rate of 10% under the active Chile-U.S. treaty, compared to the standard 30% rate applied without a treaty. This reduction directly impacts the net income received and cash flow management.

An important exception to note is that some treaties exclude certain income types, such as pensions or social security benefits, from treaty benefits. For instance, the U.S.-Chile treaty excludes pensions from reduced withholding rates, requiring separate tax treatment under domestic laws.

A practical decision criterion for businesses is to assess whether the income type qualifies under the treaty and if the taxpayer can meet documentation requirements. For example, a company must verify if its dividend payments meet minimum ownership thresholds to qualify for reduced withholding rates.
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In addition, some treaties impose limits on the duration of benefits. For instance, a treaty may allow reduced withholding rates only if the beneficial owner holds the investment for a minimum period, such as 365 days, to prevent treaty shopping. This limitation is critical for short-term investors to consider.

As a case study, a U.S. investor receiving royalties from a Mexican company must ensure compliance with the treaty’s documentation and ownership requirements to benefit from a withholding tax rate reduction from 30% to 10%. Failure to meet these criteria results in the application of the higher standard rate, increasing tax costs.

Another example of a limit is the U.S.-Chile treaty’s minimum 10% ownership requirement for dividends to qualify for the lowest reduced rates (5%), which excludes smaller shareholders from maximum treaty benefits, impacting investment decisions.

In practice, a Chilean exporter of software services to the U.S. must carefully document ownership and residency to benefit from reduced withholding rates on royalties, illustrating the importance of administrative diligence in treaty application.

Country-Specific Insights: U.S. and Key Latin American Partners

Understanding the specific treaties and tax rules between the U.S. and Latin American countries is crucial for effective tax planning. Below is an overview of the current landscape for the 2026 tax year.

United StatesThe U.S. maintains selective DTAs in Latin America:

• Mexico and Chile: Active and comprehensive treaties exist, offering reduced withholding tax rates on dividends, interest, and royalties, alongside clear rules to prevent double taxation for individuals and corporations.
• Colombia and Argentina: No active DTAs exist with the U.S. For businesses operating via LLCs, domestic tax laws provide mechanisms such as foreign tax credits to mitigate double taxation.

One important criterion for U.S. taxpayers is to ensure they meet the residency requirements under the treaty to claim benefits. For instance, a U.S. citizen living in Chile must provide proof of residency to benefit from the U.S.-Chile treaty provisions.

As an exception, certain types of income such as pensions may be taxed differently or excluded from treaty benefits, requiring additional analysis before applying treaty provisions.

A concrete example is a U.S. citizen residing in Mexico who receives dividends from a Mexican company. Under the U.S.-Mexico treaty, the withholding tax on portfolio dividends is capped at 10%, but the individual must provide a certificate of tax residence to claim this benefit. Without proper documentation, higher domestic withholding taxes apply.

Another practical consideration is the timing of income recognition. For example, if a U.S. resident receives income late in the tax year, they must ensure timely submission of residency certificates to avoid default withholding rates.

Mexico

Mexico boasts one of the most extensive treaty networks globally, including agreements with the U.S., Colombia, Chile, and Argentina. This network facilitates cross-border business by capping withholding taxes and simplifying tax compliance.

However, an exception applies to certain types of income such as pensions, which may be taxed differently or excluded from treaty benefits depending on the specific treaty wording.

For example, tax authorities require a minimum holding period (often 365 days) for dividends to qualify for certain reduced withholding rates under specific OECD-aligned treaties, which is a critical decision criterion for investors.

A practical case involves an investor holding shares in a Chilean company. To benefit from the Mexico-Chile treaty's reduced withholding tax on dividends, the investor must hold the shares for the required period. Failing to meet this holding period results in the application of the standard withholding tax rate, increasing the investor’s tax liability.

Additionally, Mexico applies a beneficial ownership test to prevent treaty abuse. For instance, if a company is used solely to route income without substantial economic activity, treaty benefits may be denied.

Chile

Chile has established DTAs with the U.S., Mexico, Colombia, and Argentina, supporting its export-driven economy. For Chilean exporters, these treaties reduce withholding taxes on services, royalties, and dividends, enhancing profitability.

For example, a Chilean company exporting software services to the U.S. can benefit from reduced withholding tax rates on royalty payments under the Chile-U.S. treaty, which drops from a standard 30% to 10%.

In practice, companies must ensure compliance with treaty conditions such as minimum ownership thresholds to qualify for these benefits.

An illustrative case is a Chilean technology firm licensing software to a U.S. client. By meeting the treaty’s ownership and documentation requirements, the firm reduced withholding taxes on royalties, improving net revenue and reinvestment potential.

However, a limitation is that some treaties exclude certain capital gains from treaty benefits. For example, gains from the sale of shares in specific companies may be taxable only in the country of residence, requiring careful planning.
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Colombia

Colombia has treaties with Mexico and Chile and benefits from regional agreements such as Decision 578 of the Andean Community. However, no treaties exist with the U.S. or Argentina, requiring careful tax planning and reliance on domestic tax credits. In practice, Colombian residents receiving income from the U.S. must apply for foreign tax credits domestically to avoid double taxation, but this process can be complex and requires detailed documentation.

A practical example is a Colombian exporter who must maintain detailed invoices and U.S. tax payment certificates to claim credits effectively before the DIAN, highlighting the importance of administrative diligence. One limitation is that foreign tax credits in Colombia may be capped at the amount of Colombian tax attributable to the foreign income, which can limit the relief available and increase effective tax rates.

Additionally, Colombian tax authorities may require specific substantiation for cross-border transactions to confirm eligibility for credits, adding procedural steps.

Argentina

Argentina maintains DTAs with Chile and Mexico but lacks agreements with the U.S. and Colombia. Argentine entrepreneurs often establish U.S. LLCs to invoice clients in the U.S., enabling risk isolation and access to foreign tax credits under Argentine law.

A practical case is an Argentine IT consultant who forms a U.S. LLC to invoice American clients, thereby isolating liability and using the foreign tax credit mechanism in Argentina to offset U.S. taxes paid, reducing overall tax exposure.

This approach requires compliance with both U.S. and Argentine tax laws and proper documentation to substantiate tax credit claims before ARCA. However, a key decision criterion is the administrative cost and complexity of maintaining a U.S. LLC versus direct invoicing, which may affect the overall benefit of this structure for smaller entrepreneurs.

Moreover, Argentine tax authorities may scrutinize the economic substance of the LLC to ensure it is not a mere conduit entity, which could affect tax credit claims.

Strategic Benefits of Utilizing Double Taxation Agreements

Proper application of DTAs offers tangible business advantages:

• Legal Certainty: Clear rules reduce tax disputes and provide predictable tax liabilities, enhancing business credibility.
• Reduced Withholding Taxes: Cross-border payments such as dividends, interest, and royalties often benefit from significantly lowered withholding rates, sometimes dropping from 30% to as low as 0% depending on the treaty.
• Investment Encouragement: Lower tax burdens on repatriated profits make international investments more attractive and financially viable.

Case Example: A Chilean manufacturing firm exporting to Mexico saved significantly in withholding taxes on royalty payments by applying the Chile-Mexico treaty, improving cash flow and reinvestment capacity.

However, limitations exist; for instance, some treaties require minimum ownership percentages or holding periods to qualify for reduced rates, which can restrict eligibility for smaller investors.

For example, the U.S.-Chile treaty requires a minimum 10% ownership in the dividend-paying company for the lowest reduced withholding rates (5%). Investors holding less than this threshold face a 15% rate, impacting investment returns.

Another decision criterion is the administrative burden of maintaining compliance with treaty requirements, which may outweigh tax savings for smaller transactions.

Applying DTAs in Practice: Key Considerations

When leveraging these agreements, consider the following:

• Certificate of Tax Residence: To claim treaty benefits, taxpayers must present an official certificate issued by their home country’s tax authority (e.g., SAT in Mexico, DIAN in Colombia, ARCA in Argentina, SII in Chile, or the IRS for U.S. residents).
• LLC Taxation: U.S. LLCs are generally treated as pass-through entities, meaning profits flow directly to owners who must report income in their country of residence, potentially triggering foreign tax credit claims.
• Domestic Law Interaction: In the absence of a treaty, local tax statutes often provide relief mechanisms such as foreign tax credits to avoid double taxation, but these require careful compliance and documentation.
• Withholding Tax Caps: Each treaty specifies maximum withholding rates on dividends, interest, and royalties.
• Limitations and Exceptions: Some treaties exclude certain income types or impose conditions, such as minimum holding periods for dividends to qualify for reduced rates.

Decision Criteria: When deciding whether to form a U.S. LLC or operate directly, consider factors such as legal risk, tax treaty availability, administrative costs, and the ability to claim foreign tax credits effectively.

Case Study: Exporting IT Services from Argentina to the U.S.

An Argentine IT entrepreneur exports digital marketing services to U.S. clients. Since no DTA exists between Argentina and the U.S., the entrepreneur forms a U.S. LLC to invoice clients directly. This structure isolates legal risk and allows the entrepreneur to claim foreign tax credits in Argentina for applicable taxes paid, reducing the overall tax burden. This approach requires strict compliance with both U.S. and Argentine tax laws.

For example, if the owner pays U.S. federal taxes on the U.S.-sourced income earned, the Argentine owner can claim a foreign tax credit for this amount against their Argentine tax liability before ARCA, avoiding double taxation. However, the entrepreneur must maintain detailed records and certificates to substantiate the credit claim.

This case highlights the importance of understanding both treaty and domestic tax rules to optimize tax outcomes and manage compliance risks effectively.

Additionally, the entrepreneur must evaluate the cost-benefit of maintaining the LLC structure, including administrative fees and compliance costs, to ensure the arrangement remains financially advantageous.

Simplify your international expansion

Understanding international taxation is the first step to mastering the global market. At Openbiz, we specialize in simplifying tax structuring and company registration in the United States for entrepreneurs from all over LATAM. Do not let tax complexity stop your expansion dreams.

We help you with the creation of your LLC, obtaining your EIN, and the advice so that you apply these regulations correctly.

Ready to take your business to the next level? Contact Openbiz today!

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Common Questions About Double Taxation Agreements

Do I have to pay taxes twice if I earn income in the U.S. and live in Colombia or Argentina?

‍While you must report income in both countries, you can usually apply foreign tax credits under your local tax laws to offset U.S. taxes paid, avoiding double taxation despite the absence of a formal treaty. This requires proper documentation and compliance with domestic tax regulations to ensure credits are granted.

Which Latin American countries have double taxation treaties with the United States?

‍The U.S. currently has active treaties with Mexico and Chile. No treaties exist with Colombia or Argentina, so tax relief depends on domestic regulations in those countries. It is important to verify treaty status periodically as negotiations may change this landscape.

What documentation is required to benefit from a double taxation agreement?

‍You need a Certificate of Tax Residence issued by your country’s tax authority to prove your residency status and claim treaty benefits on withholding taxes. Additionally, you may need to submit forms specific to the treaty or tax authority, such as IRS Form W-8BEN for U.S. withholding tax purposes.

Do double taxation agreements apply to VAT or sales taxes?

‍No. DTAs focus exclusively on income, capital gains, and wealth taxes. VAT and sales taxes are governed by each country’s domestic laws and are not covered by these treaties. For example, a business selling goods in Mexico must comply with Mexican VAT rules independently of any DTA provisions.

Can forming a U.S. LLC exempt me from declaring income in my home country?

‍No. LLCs are typically pass-through entities, so income flows to the owner who must declare it in their country of residence, potentially applying foreign tax credits to avoid double taxation. Failure to report may lead to penalties and loss of treaty benefits.

Sources and editorial review

• IRS - Avoidance of Double Taxation
• OECD - Model Tax Convention on Income and on Capital
• Latin American Tax Authorities (ARCA, SAT, DIAN, SII)

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Reviewed by: Melissa Trejos, Compliance Specialist
Review date: August 2026
Last updated: August 2026 (Information valid for the 2026 tax year.)
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This content was prepared through documentary research and human review by experts in U.S. taxation. Artificial intelligence assistance was used to optimize the writing, with all content supervised and corrected by the editorial team to ensure accuracy and clarity. This content is for informational purposes only and does not constitute professional advice. Consult an accountant or attorney before making a decision.