Guide to Double Taxation Agreements: How to operate between the U.S. and LATAM without paying taxes twice

Globalization has blurred commercial borders, allowing entrepreneurs and companies throughout Latin America to expand their operations into the international market, especially towards the United States. However, this expansion brings a significant tax challenge: the possibility of paying taxes on the same income in two different countries.

This is where a fundamental tool for your financial strategy arises: Agreements to Avoid Double Taxation (DTA).

These are bilateral or multilateral international treaties designed to mitigate the excessive tax burden that occurs when two states have the power to tax the same income. For any international entrepreneur, understanding these mechanisms is the difference between a profitable operation and financial asphyxiation. These agreements not only define who has the right to collect, but they also establish reduced withholding rates and relief mechanisms to encourage investment.

How do double taxation agreements work?

To understand the agreements, it is necessary to analyze their technical structure. Most of these treaties follow the OECD model, which seeks to standardize the rules of the game worldwide.

• The concept of tax residence: The first step is to determine where the taxpayer or company is tax resident. The agreement establishes "tie-breaker rules" to prevent two countries from simultaneously claiming the same entity as a resident.
• Types of covered income: The agreements do not apply to indirect taxes (such as VAT), but rather to Income and Wealth Tax. They regulate issues such as business profits, dividends, royalties, and technical services.
• Methods of elimination: There are two main ways to save the taxpayer's pocket:
  • Exemption Method: The country of residence does not tax the income that was already taxed in the country of origin.
  • Discount or Tax Credit Method: The tax paid abroad is subtracted from the total tax to be paid in your country of residence, functioning as a "credit" towards the local tax debt.

Practical application: United States, Colombia, Argentina, Mexico, and Chile

The tax ecosystem varies drastically depending on the countries involved in your operation. Below, we break down how these five economic powers relate fiscally:

1. United States (The huge market)

‍The United States has a very selective treaty network in Latin America.

• With Mexico and Chile: The U.S. does have double taxation treaties in force and they are very robust with both countries. This means reduced rates on dividend withholding and clear rules to avoid double taxation for corporations and citizens operating on both sides of the border.
• With Colombia and Argentina: The U.S. does not have a treaty to avoid double taxation with these countries. However, if you have an LLC and operate from Colombia or Argentina, you can use internal regulations (such as tax credits for taxes paid abroad) to discount what was taxed to the IRS on your local return.

2. Mexico (The broadest network)

‍Mexico is one of the Latin American countries with the most extensive treaty network in the world.

• It has agreements in force with the United States, Colombia, Chile, and Argentina.
• This makes Mexico an excellent jurisdiction for holding or shared services operations in LATAM, since withholding taxes for cross-border payments between these countries are usually capped or significantly reduced.

3. Chile (The integrated economy)

‍Chile has an enviable economic integration policy.

• In addition to its awaited and now effective treaty with the United States, Chile has fully operational agreements with Mexico, Colombia, and Argentina.
• For Chilean service exporters, this means that invoicing to these countries drastically reduces withholdings for additional taxes, maximizing the profit margin.
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4. Colombia (Strategic growth)

‍Colombia has strengthened its treaty network in recent decades.

• It has agreements in force with Mexico and Chile, in addition to community regulations (Decision 578 of the CAN) that apply to other Andean countries.
• With Argentina and the U.S. there is no treaty in force, so operations to those destinations must be structured carefully, relying heavily on the Colombian Tax Statute to apply tax discounts.

5. Argentina (The structuring challenge)

‍The Argentine tax environment is complex, but it has international tools.

• Argentina has double taxation agreements with Chile and Mexico.
• Lacking an agreement with the United States or Colombia, Argentine entrepreneurs who export services to the U.S. (a very common scenario in IT and marketing) often resort to creating a US LLC to invoice, isolate risk, and manage the corresponding tax credits according to internal Argentine law.

Benefits of applying these agreements for your company

Correctly using double taxation agreements is not just a legal procedure; it is a business competitiveness strategy that directly impacts your cash flow:

• Legal certainty and evasion prevention: You know in advance how much you are going to pay and under what rules, granting greater transparency and prestige to your international operation.
• Cost reduction in contracting: If your company hires specialized services in a country with an agreement, withholding rates can drop from general rates of 20% or 30% to 10% or even 0%.
• Fostering investment: By limiting the withholding on dividends, partners receive a larger share of net profits, making it attractive to move capital across borders.
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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!

Frequently Asked Questions (FAQ)

If I pay taxes in the U.S., must I pay again in Colombia or Argentina?
‍Yes, you must declare them in your country, as there is no direct agreement. However, you can use the internal "Tax Discount" mechanism to subtract what you already paid in the U.S. and avoid double taxation.

Is there a double taxation agreement between the U.S. and Mexico or Chile?
‍Yes. The United States has robust and current treaties with both Mexico and Chile, which allows for a drastic reduction in tax withholdings between these jurisdictions.

What document do I need to apply the benefits of a treaty?
‍You only need to present a Certificate of Tax Residence, which must be issued by the tax authority of your country (SAT, SII, DIAN, or AFIP).

Do double taxation agreements apply to VAT?
‍No. These treaties focus exclusively on Income Tax, capital gains, and Wealth Tax. VAT is governed by the local regulations of each nation.

What happens if my country does not have an agreement with the United States?
‍You will have to rely on your local legislation. Fortunately, most Latin American countries allow the application of tax credits for taxes paid abroad to mitigate the tax burden.

Does having an LLC in the U.S. exempt me from declaring in my country of residence?
‍No. LLCs have "pass-through taxation," which means that profits flow directly to you as the owner, and you must declare them in the country where you are a tax resident.

Do Mexico and Colombia have an agreement to avoid double taxation?
‍Yes, both countries have a valid agreement. This greatly facilitates commercial and service exchange, reducing cross-border withholding tax rates.