A Case Study of International Tax Planning on a Hotel Construction and Management in Chile, through a Joint Venture of Korean and Venezuelan Partners

The purpose of this study is to provide both the tax consequences in Korea, Venezuela and Chile of the investment in a hotel construction and management project to be made in Chile by X Co. and Y Construction through a joint venture, as well as advice as to the most tax efficient structure for such investment. We recommend that the Joint Venture be incorporated under the Laws of the Republic of Ireland mainly for the following three reasons: (i) Chile has a Double Tax Convention in force with Ireland, according to which the profits of a resident of Ireland may be taxed in Chile but only the amount attributable to a PE, (ii) Ireland has a Double Tax Convention with Korea which allows beneficial tax rates when distributing dividends to Korea, and (iii) the Irish income tax rate for corporations (12.5%) and the withholding income tax on dividends (20%) are lower than the tax rates of other comparable jurisdictions; therefore this arrangement would allow X Korea and Y Venezuela to credit fully the income tax paid in Ireland. We may summarize the main tax aspects of the proposed transactions as follows: First, the $12 million dollars paid by the Investors to the Irish corporation (Joint Venture) shall not be taxed in Chile because the Joint Venture would not have a PE in Chile according to the Chile－Ireland Double Tax Convention. No withholding will be made in Chile in connection with this payment. Second, the Joint Venture will be taxed in Ireland on the $12 million gross income received from the Investors. The Joint Venture will be able to deduct the design and construction payments of $4 and $6 million, respectively. Third, the Joint Venture will distribute the net profit ($2 million) through dividends. The dividends paid to Y Venezuela will be subject to a 20% withholding tax in Ireland, and the dividends paid to X Korea will be subject to a withholding tax at a reduced rate of 10% because of the Double Tax Treaty entered into by Ireland and Korea. Fourth, Dividends paid by the Joint Venture shall be subject to taxation in Venezuela at a 34% flat income tax rate and in Korea at a 22% income tax rate, respectively. X Korea will credit both the withholding tax on dividends imposed in Ireland and the foreign tax deemed paid (indirect foreign tax credit). Y Venezuela shall fully credit the tax paid in Ireland.