How to Conduct Business in Chile

These are the highlights if you want to know how to conduct business in Chile. This entry was drafted by Estudio Jurídico Otero. Link to e-IURE Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case Estudio Jurídico Otero is an excellent option in Chile.

Chile has specific comparative advantages that make it the best place for foreign corporations to develop new business and expand their operations and sales in Latin America. Key among them is a stable and transparent legal framework for foreign investment, characterized by clear, non-discriminatory and non-discretionary rules. These principles are embodied both in the 1980 Political Constitution and in all laws, including the Direct Foreign Investment Law, known as Law 20.848.

All the rights guaranteed by Chile’s legal framework are further protected by Bilateral Investment Treaties (BITs). Up to this date, Chile has signed 52 BITs, 39 of which are in force at the time. In addition, Chile’s Free Trade Agreements (FTAs) with Canada, Mexico, South Korea, China, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the United States include specific chapters on investment-related issues, including dispute-settlement mechanisms that are similar to those used in BITs.

Since May 7, 2010, Chile became a member of the Organization for Economic Cooperation and Development (OECD), an international cooperation organization of 34 states, which aims to coordinate their economic and social policies. It is considered that the OECD brings together the most advanced and developed countries in the world, for its members represent 70% of the global market.

According to the Central Bank of Chile, between 2009 and 2014 $122,000 million entered the country under the concept of direct foreign investment. The five major investors of the period were United States with US$ 24.895 million (20.4% of the total), Netherlands with US$ 18.386 million (15.1%), Spain with US$ 11.935 million (9.8%), Canada with $5,401 million (4.4%) and United Kingdom $6.016 million (4.9%). The mechanisms that can be used by foreign investors to enter Chile are; law 20.848, on foreign direct investment and chapter XIV of the Central Bank Compendium of rules about foreign exchange. Until January 1 2016, foreign investment entered the country using Decree Law 600, which has been repealed.

Based on constitutional principles, law 20.848, points out that foreign investors will hold the common legal regime applicable to domestic investors, without the possibility of arbitrary discrimination towards them, both directly or indirectly, thus ensuring the non-discriminatory treatment and limiting the discretionally of the administrative authority towards foreign investors.

The non-discrimination treatment assures all people, regardless of their nationality, “to be treated by the State and its bodies in economic matters without arbitrary discrimination”. Therefore, foreign investors enjoy the same rights and guarantees as local investors. The principle of non-discretionary treatment governs the activities in every economic sector and entails the existence of clear, well-known and transparent rules, which assure foreign investors they will be treated fairly and impartially.

1.- Main Foreign Investors’ Rights

Foreign investors in Chile can own up to 100% of a Chilean-based company, and there is no time limit on property rights. They also have access to all productive activities and sectors of the economy, except for a few restrictions in areas such as the fishing sector, air transport and mass media. In the case of fishing, restrictions are subject to the rules of international reciprocity.

The State has a very minor productive role in Chile. Only a few strategic activities – such as exploration and exploitation of lithium, liquid and gaseous hydrocarbons deposits in coastal waters under national jurisdiction or located in areas classified as important to national security, and the production of nuclear energy – are restricted to the State. However, under certain circumstances, foreign companies can invest even in these sectors.

Law 20.848 guarantees foreign investors the right to repatriate the capital transferred at any time and to the remission of profits that their investments generate, once fulfilled all tax obligations that apply according to national rules. Additionally, it guarantees the right to access the formal exchange market to liquidate the currencies constituent of its investment and to get the foreign exchange necessary to remit the capital invested or the utilities obtained corresponding to its investment, all of the above with the exchange rate that parts involved freely agree.

In addition foreign investors are granted an exemption from the sales and services tax in the import of certain capital goods which will later be specified.

The repatriation of all invested capital is exempt from tax, assessment or charge relative to the original amount of the investment. Only the profits of capital over that amount are subject to the rules contained in the law of Tax on Income and the Tax code.

2.- Advantages for foreign investors

Although the Chilean constitutional regime is based in the principle of non-discrimination, law 20.848 offers certain tax advantages for foreigners investors.

One of them is the exemption of the sales and services tax on the import of capital goods intended for the development, exploration or exploitation in Chile’s of mining, industrial, forestry, energy, infrastructure or telecommunications projects, and technological, medical, or scientific research and development that involve investments by an amount equal to or exceeding five million dollars of the United States of North America.

This exemption is valid after, at least twelve months as from the internment to the country or acquisition in Chile of the first capital assets whose value added tax exemption is requested. For the granting of this exemption, the investor must submit an application to the Ministry of finance together with the certificate of foreign investor issued by the Foreign Investment Promotion Agency.

3.- Taxation

All Chilean companies must pay the First Category Tax which has two taxation systems: semi integrated and attributed income. The tax rate will depend on the system of taxation to which the company decides to submit to, if it’s attributed income the tax rate is 25% and if it is the semi integrated system, the tax rate is 27%. There is also tax rate of 35% for the distribution and remittance of profits abroad with the right to use as a credit to the consignment, the first category tax paid. This subject is explained in detail in the section about conducting business in Chile.

About Conducting Business In Chile

In general terms, business in Chile are conducted and formalized through a company that usually is organized as a Limited Liability Company, a Simplified Joint Stock Company (SpA) or as a Corporation all of which can be a subsidiary of a foreign entity, or through the incorporation of a Branch of a foreign corporation in Chile.

Chilean Law requires that only some and specific kind of businesses are conducted through corporations, such as banks, mutual funds and insurances companies.

Among the types of business entities, please be aware that the Branch of a foreign entity presents a major difference to the other type of entities, as the incorporation of a Branch is formalized through the designation of an Agent who shall be empowered with broad managing and representation powers of attorney, and the foreign parent company is fully liable for the activities of its Chilean Branch. Its liability is not limited to the capital allocated to the Branch in Chile and, moreover, the local IRS is empowered to assess the branch’s taxable income if it considers that the accounting records are not appropriately reflecting that income. Moreover, although the Chilean Branch of a foreign company can deduct specific expenses incurred by the foreign parent company in connection with the Branch’s activities that are necessary to produce the local Branch’s income, there are some IRS rulings that state that payments made abroad to cover such expenses are subject to a 35% withholding tax. General unspecified charges are not deductible.

Types of companies most commonly used in Chile

• Limited Liability Company (Sociedad de Responsabilidad Limitada): they can be formed by at least two natural or legal, national or foreign people who limit their liability to the amount of the contributions made and there isn`t a minimum capital set. The object, management and control of the society can be freely agreed by the partners.
• Corporation (Sociedad Anónima): It is a society formed by the meeting of a joint fund provided by two or more shareholders responsible only for their respective contributions and administered by a Board of Directors composed of at least three members.
• Simplified Joint Stock Company (SpA): this is a simplified version of a Corporation. It is a legal entity created by one or more persons by means of an act of Constitution, whose participation in the capital is represented by shares. Additionally, the SpA is governed by the rules applicable to the Corporations. The main feature of this society is the possibility of having a single shareholder, with the capital divided into shares.

Similarities between the Simplified Joint Stock Company, Limited Liability Company and Corporations:

The main similarities between the Simplified Joint Stock Company, Limited Liability Company and the Corporation are the following:

1. Incorporation

Simplified Joint Stock Companies, Limited Liability Companies and Corporations are incorporated through the granting of public deed, the publication of a summary of it in the official journal, and its registration in the Trade Registration of the Real Estate Conservative. The relevant statutes should be included in the public deed of incorporation.

The company formation process takes a time of approximately two to three weeks from the date from which the powers are granted to be able to represent foreign partners or shareholders.

2. Liability

Companies are liable up to the amount of the capital established in the bylaws.

Furthermore, partners and shareholders are responsible only up to the amount of the contributions made and committed.

3. Control

Neither of these companies are subject to specific control by any government agency, except for the authority of local IRS. The only exception are Public Limited Companies which are subject to the supervision of the Superintendence.

4.Taxation:

In September 29, 2014, a tax law reform was published, which modified the income taxation system and introduced other settings to the tax system. This new system is progressively entering into force, in order to be fully applicable in the year 2018.

The same tax structure applies for Simplified Joint Stock Companies, Limited Liability Companies and Corporations, which we can divide in two stages: the first stage, when generating utilitie; and the second, dividend distribution to the shareholders or partners.

In first stage, the applicable rate will depend on the taxation system a company decides to submit, the attributed income regime has a tax rate of 25% and the semi integrated (or partially integrated) regime has a 27% tax rate. However, the possibility of choosing between systems will be determined by the type of legal entity and by its composition.

Simplified Joint Stock Companies and Limited Liability Companies can select the Attributed Income tax regime, when formed exclusively by natural persons either with or without residence or domicile in Chile and when formed by legal entities without domicile or residence in Chile.

The default system for Simplified Joint Stock Companies and for Limited Liability Companies that do not exercise its right to choose, is the partially integrated regime.

In consideration to the Semi Integrated regime, all First Category taxpayers are able to choose this regime, without any further requirements. Additionally, Companies in which any of their shareholders or partners are legal entities with domicile o residence in Chile and Corporations, are required and obliged to partake in this regime.

Taxpayers must remain at least five commercial years in the elected tax regime, only being able to change after that time lapse, in addition to complying with the aforementioned requirements.

In second stage, you must pay for the income generated to partners or shareholders because of the company’s profits. The rate of this personal income tax will vary according to the Tax Regime under which the company operates.

For the payment in the second stage, a tax credit is granted because of taxes paid in the first stage.

In the event of the company operating under the Attributed Income Tax Regime, the rate of the personal tax for the partners or shareholders will be of maximum 35% on earnings, and they will be able to use 100% of the tax paid by the company as a credit.

In the event of the company operating under the Semi Integrated Regime:

1. a) The personal tax rate for partners or shareholders residents in Chile will be progressive, of 0% to 44,45% on earnings.
2. b) The personal tax rate for the shareholders or partners residents in countries with which Chile has subscribed an Agreement to Avoid Double Taxation, will be of maximum 35% on earnings.
3. c) The personal tax rate for the shareholders or partners resident in countries with which Chile has not subscribed an Agreement to Avoid Double Taxation, will be of maximum 44,45% on earnings.

In the Semi Integrated Regime, 65% of the tax paid by the company can be used as a credit to pay Personal taxes.

Differences between Simplified Joint Stock Company, Limited Liability Company and Corporations:

1. Management:

Corporation: A Board of Directors manages it and appoints the general manager (CEO) and other persons that are also representatives, all of whom are legal representatives of the corporation with the powers of attorney and limitations granted by the Board. Certain essential matters such as merger, termination, capital increases, the sale of all or the majority of corporation´s assets as well as other relevant company matters, must be decided upon by the Shareholders in an Extraordinary Shareholders Meeting. The annual report and balance sheet must be approved by the Shareholders Meeting. The Board is elected by shareholders and it must be comprised of at least three members. The directors do not need to be domiciled in Chile and can be nationals or foreign. The corporation´s bylaws can determine the existence of back up directors, in similar number as official Directors, all of which can be compensated or not.

The Directors have the right to be duly informed; their duties cannot be delegated and are exercised collectively in a special and specific meeting. In the exercise of their duties, Directors must use the concern that persons usually use for their own business, and will severally and jointly be liable for damages caused to the company or the shareholders through fraudulent and tortuous acts.

Board Meetings must be held in the place indicated in the summons or otherwise in the Corporate Bylaws and directors must assist in person. However, it is possible to authorize Board Meetings in which one or more directors are connected by phone or video conference.

Simplified Joint Stock Company: The Administration regime will be established in the society bylaws. In case the bylaws don´t stipulate the regime, the society will be submitted to the rules applicable to the Corporations.

Limited Liability Company:  They are managed by the partners or by whomever they appoint for such purposes in its bylaws or through specific powers of attorney granted in a different public deed. This representative will have the powers expressly granted to him.

Therefore, the management of a Limited Liability Company is simpler as it does not require shareholders and/or board meetings, unless management is stipulated to be through a Board of Directors, which is exceptional.

Nevertheless, if the manager has been appointed in the company’s bylaws, his removal must be done by amending such bylaws, fulfilling the same requirements to incorporate the company (public deed which abstract must be registered and published).

2. Capital:

The law does not require a minimum amount of capital but it must be enough to allow the business entity to finance start-up costs. In Limited Liability Companies, Simplified Joint Stock Companies and Corporations the capital can be contributed at incorporation or within the term agreed to in the bylaws but subject to a three year term and in accordance to company needs.

Corporation:  Its capital is divided in shares. The initial capital must be subscribed and paid in the period of 3 years, otherwise the company’s capital is reduced to the paid amount, except for bonds convertible into shares, all of the aforesaid pursuant to law. The law does not allow the shareholder to pay its stock with direct personal work for the corporation.

Simplified Joint Stock Company: The society’s capital must be set in an accurate way in the bylaws and will be divided in a determined number of nominative actions. Social capital and its subsequent increases should be fully commited and paid in the term indicated in the bylaws. If not specified otherwise by the bylaws, the term will be five years. If it is not commited in that period, the society´s capital shall be reduced to the amount effectively subscribed and paid.

Limited Liability Company: Its capital is not divided into shares and the percentage ownership of the Company is represented by the percentage contribution to the company’s capital. The initial capital must be paid in the period agreed in the bylaws.

3. Transfer of shares or rights:

Stock Company and Corporation: The procedure to transfer shares is simple and does not require significant formalities, it can be done through private deed signed before two witnesses or authorized by a Certifying Officer.

Limited Liability Company: Ownership interests cannot be freely assigned by one partner to another partner, this being a modification of the company´s bylaws has to be formalized through a public deed unanimously agreed by all partners.  The deed of incorporation must be amended and an abstract must be published in the Official Gazette and registered with the local Registry of Commerce.

4. Profits:

Corporation: Utilities may only be distributed if there are profits in the respective commercial year. Furthermore, profits may only be distributed in proportion to the number of shares owned by each shareholder. The law states that annually, at least 30% of the yearly profits must be distributed as dividends, unless the shareholders unanimously agree not to distribute.

Simplified Joint Stock Company: The profits can only be distributed if there are utilities in the corresponding exercise.

Otherwise it is subject to the statute stipulations and if there is nothing said in the Statute the rules of Limited Companies will be applied. The Statute may establish that society must pay a dividend on a fixed amount, determined or to be determined, to the stocks of a specific series.

Limited Liability Company: If the partners agree, the benefits can be distributed in a different proportion from the participation in the society.

5. Unique Tax on non-deductible expenses:

In Corporations, Simplified Joint Stock Company and Limited Liability Companies Certain transactions, such as non-deductible expenses, presumed withdrawals corresponding to utilization of the company’s fixed assets and loans of the company to its shareholders who are natural persons are subject to a unique tax.

The determination of the tax will depend on the possibility to attribute to any of them owners of the company a benefit by the rejected expenditure, if the expenditure is attributed to the company the tax rate will be of 35%, in the event that is attributed to a shareholder or partner will be of 10% additional to the progressive personal income tax or in the case of shareholder or non-resident partners in Chile, to the withholding tax.

6. Duration:

Corporations and Simplified Joint Stock Company: The duration may be indefinite.

Limited Liability Company: The term may not be indefinite. Nevertheless, the partners may incorporate it for the period of time they agree to, with no legal limit, and it may be automatically extended.

7. Amendments:

Corporations: Amendments to the by-laws must be approved through an Extraordinary Shareholders Agreement and depending on the nature of the agreement, different voting majorities may be required.

Simplified Joint Stock Company: The stipulations of the social Statute can be modified by a shareholders meeting agreement, which shall be recorded in a minute that should be legalized and made public deed. No meeting shall be required if all of the shareholders sign a public deed or private protocolized document evidencing the modification. A summary of the modification document must be registered and published.

Limited Liability Company: All partners must unanimously agree to amend the by-laws through a public deed.

8. Miscellaneous

It is important to highlight that Corporations cannot maintain or purchase their own shares except in very specific cases only regarding publicly traded companies, and the transaction must be approved by 2/3 of the shareholders.

The Simplified Joint Stock Companies that for more than 90 days in a row has 500 or more shareholders or, at least, 10% of its subscribed capital belongs to a minimum of 100 shareholders, will be transformed into a Limited Company.

The Simplified Joint Stock Company may acquire and own shares of its own emission, with the exception that it is prohibited by the bylaws and these shares must be disposed of within the term set in the bylaws, otherwise must be disposed of in the term of a year counting since there acquisition.

Any national or foreign natural or legal person intending to develop an economic activity in Chile, should get a Tax Number (RUT) granted by the Tax Service. This procedure must be performed by: legal persons or individuals not resident in Chile that will invest in the country; Natural persons or legal entities not resident or domiciled in Chile involved in societies as partners or shareholders; and persons not resident or domiciled in Chile that intend to develop agencies, branches or permanent establishments in the country.

All Chilean Companys and legal or natural foreign persons, that plans to invest in Chile, must appoint a legal representative who is a Chilean resident, which will act on its behalf to the administration of the Republic of Chile.

It is not necessary that the directors or managers of the company are neither Chilean nor residents.