A) Legal antecedents to adopt a corporate structure. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
1.- General. In <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Chile there are legally no one-person companies. Both LLCs and corporations require at least two shareholders or partners, respectively, who may be either individuals or entities, national or foreign.
In Chile there are no legal requirements as to minimum capital. The interests of partners or shareholders, respectively, may be apportioned as provided in the bylaws, without any minimum interest to be held by the minority partner or shareholder. There are likewise no impediments against the partners or shareholders being mutually affiliated companies (e.g. parent and subsidiary).
2.- Limited liability company. An LLC is basically governed by Law 3918, defined as a partnership and limited to 50 partners, based on trust, and therefore intuito personæ. Consequently, the entry or replacement of a partner requires an assignment of rights entailing amendments to the bylaws. So, both this aspect as well as any other amendment to the bylaws must have the unanimous approval or consent of the partners. The requirement for unanimous consent is usually a constraint with regard to divestment when the minority partner has a nominal capacity, since it may hamper the controlling partner's freedom of action in material issues such as early termination, dissolution, contribution of assets or liabilities, merger, assignment of rights, making majority control downright illusory (unless the minority partner is an entity controlled by the majority partner). It is less relevant in administrative matters since they are usually reserved to the majority partner, who exercises management and uses the company name directly or through agents appointed by a notarized instrument.
Besides amendments to the bylaws, an LLC suffers no major hindrances and may make its business purpose very broad, regulate management as best suits its partners' interests, e.g. having the majority partner manage directly or through agents, or entrusting management to both partners jointly, or even having the LLC be managed by a Board of Directors or Trustees as provided in the bylaws.
An LLC need not hold annual partners' meetings nor formal Board of Directors' meetings, if applicable, since it is usually managed directly by a managing partner or the agents appointed by the same.
Capital at an LLC may be established in any amount (no minimum or maximum), and the bylaws may provide for its piecemeal contribution - no contribution need be paid at the time of incorporation.
These companies are incorporated and evidenced by a notarized instrument, an excerpt of which must once be (a) registered in the Commerce Registry of the corporate domicile, and (b) published in the Official Gazette within 60 days from the date of incorporation. Amendments are subject to identical formalities and terms.
3.- Corporation. Private or public corporations are basically and comprehensively governed by Law 18046.
A corporation is a stock company and not a partnership. The identity of the partners is not as relevant as the fact of having made the contributions promised for furthering the business purpose. Consequently, shares may change hands freely without any amendment to the bylaws (although this right may be limited under a shareholders' agreement). Decisions are generally made by majority vote and not necessarily unanimously, even with regard to amendments to the bylaws.
The chief governing body is the shareholders' meeting, to convene at least once every year regularly and on an extraordinary basis whenever called. The regular meeting must examine and approve accounts and balance sheets, appoint the board of directors, appoint the account inspectors or external auditors, as applicable, declare dividends and decide on regular, material issues of the company. A special meeting, however, must make decisions regarding amendments to the bylaws and resolutions on early termination, merger, contribution of assets and liabilities, merger and spin-off of the company, the latter two being subject to a special majority vote
A corporation is managed by the board appointed by the shareholders, which can be removed by the same.
The board at private corporations must be composed of at least three individuals. Directors may be either Chilean or foreign and may reside or be domiciled in Chile or abroad. Resolutions and debates must be adopted or conducted at a duly constituted meeting, of which written minutes must be taken. Directors' duties may not be delegated but the bylaws may contemplate for the existence of alternate directors who are called to act incase the regular director is absent, so that the board may actually convene at the intervals provided in the bylaws.
The board must appoint a manager, who will be the company's regular representative, in whose absence there must be a person at least with sufficient faculties to be agent for service of process and represent the company in litigation.
Two regular account inspectors and two alternates are also required, or else independent accountants, who must report annually to the shareholders' meeting.
These companies are incorporated and evidenced by a notarized instrument, an excerpt of which must once be (a) registered in the Commerce Registry of the corporate domicile, and (b) published in the Official Gazette within 60 days from the date of incorporation. Amendments must be evidenced by a notarized copy of the Minutes of the relevant Special Shareholders' Meeting and are subject to the same formalities and terms as in (a) and (b) above.
4.- Foreign corporation agencies. Corporation Law 18046 provides that for a foreign corporation to establish an agency in Chile, its agent or representative must notarize, in the official language of the country of origin, translated into Spanish if originally in another language, the following documents:
a. The antecedents evidencing that the company is legally incorporated under the laws of the country of origin and a certificate of good standing.
b. Notarized copy of the current bylaws, and
c. A general power-of-attorney granted by the corporation to the agent, evidencing the legal capacity of the principal, clearly and accurately stating that the agent acts in Chile under the direct responsibility of the foreign corporation, with broad authority to engage in acts on its behalf. Usually foreign corporations are reluctant to operate as Agencies because they must grant a broad power-of-attorney to a single individual.
The above notwithstanding, the agent must represent in a notarized instrument on behalf of the foreign corporation, on even date therewith and before the same Notary, the following:
1. Name under which it will do business in Chile;
2. That the company is familiar with Chilean legislation and regulations that will govern the operation, its acts and contracts;
3. That the assets of the foreign corporation are subject to Chilean legislation, particularly to meet the obligations it incurs in Chile;
4. That the company agrees to keep liquid assets in Chile to meet any obligations it incurs in Chile;
5. Actual in-country capital to run its business and the date and manner in which the capital shall be paid into the Chilean agency's treasury;
An excerpt of the agent's representations must be published and recorded within 60 days from the date of the above.
The agent is required to publish the agency's annual balance sheet in a local newspaper within 4 months from the close of the relevant year, which could be unadvisable for your client because of the publicity.
5.- Transformation, merger, spin-off. Chilean law allows a company to undergo transformation by amending the bylaws, maintaining its legal existence. Therefore, an LLC may be transformed into a corporation or vice-versa at any time. Likewise, an agency may be changed into an LLC or corporation. Chilean legislation also allows for LLC and corporate reorganizations such as merger by creation or absorption and spin-off.
These are, in my opinion, the most relevant aspects to decide which company type best fits your needs. I am at your disposal to elaborate further if necessary.
B) Some tax considerations on deciding upon the type of company.
6.- General. The Chilean tax system is basically neutral. LLCs, corporations and agencies are subject to an annual 15% corporate tax levied on net taxable income, determined under the Revenue Law, as evidenced by full, reliable accounting. Additionally, there are personal (complementary or additional) income taxes levied on profits distributed by the company to the partner, shareholder or parent, respectively. In the case of partners, shareholders or parent companies not residing in Chile, i.e. the foreign owner, corporate profit distributions are taxed additionally at 35% minus a credit equivalent to 15% of distributed corporate profits. In other words, personal income taxes recognizes as a credit the corporate tax paid by the company on generating the profit remitted to the foreign owner.
This dual tax structure, with an low accrual-basis corporate tax complemented by a personal income tax levied at a high rate on the owner at the time of the corporate profit remittance or distribution -which recognizes the credit on corporate taxes paid- is rather neutral.
7.- Some differences. Nonetheless, there are some differences despite this neutrality:
7.1. Tax base for personal taxes. The 35% tax surcharge and credit right based on corporate tax is applied differently in the case of an LLC partner or agency parent as against a corporate shareholder. In both cases, the applicable tax surcharge is accrued at the time of the remittance or corporate profit withdrawal. However, an agency parent or the foreign partner of an LLC is only levied the tax surcharge for the withdrawals or remittances up to the amount of the Tax Profits Fund (FUT), i.e. the retained or non-distributed tax profits. Thus, the parent or partner is not levied the tax surcharge for any withdrawals in excess of the FUT, taxation being deferred until any subsequent year yielding an FUT to debit the excess withdrawal. However, foreign shareholders of a corporation pay the tax surcharge on the basis of their dividends, regardless whether the distributed amounts correspond to retained tax profits or exceed the same, i.e. whether the dividends exceed the FUT or not. This difference also exists with regard to a Chilean-residing or -domiciled partner or shareholder levied Individual Income Tax, with the residence, domicile or nationality of the partner or shareholder being irrelevant.
7.2. Reinvestment of corporate profits. LLC partners and agency parents who pay corporate taxes per their actual income calculated sing full accounting procedures may withdraw profits to reinvest them within 20 days in other companies, not being required to pay personal income taxes on said withdrawals as long as they do not withdraw profits from the company receiving said reinvestment. Corporate shareholders are not entitled to reinvestments.
7.3. Expenses rejected at the corporate level. LLC partners must consider as withdrawn from the company at year's end -despite any existing losses- all items considered non-deductible expenses and disbursements because they are not necessary to generate corporate income and constitute covert distributions of corporate profits. These items are levied personal income tax on the partner, pursuant to Article 21(1) of the Income Law, taxed at 35% in the case of the foreign owner and entitled to a credit since the rejected expense must be added to the profits yielded in the year taxed at the corporate level. In other words, the partner is levied a tax surcharge on items considered covert profit distributions.
These items are treated differently in the case of a corporation or agency, where they are levied a corporate tax at 35%, without credit, payable by the corporation or agency pursuant to Article 21(3) of the Income Law. Therefore, the shareholder is not levied personal tax on these items.
7.4. Assignment of rights compared to capital gains on share sales. The assignment of rights at an LLC constitutes, for the foreign assigning partner, regular income levied corporate tax and tax surcharge. Both taxes are levied to the extent the price of the assignment exceeds the book value, determined based on the most recent balance sheet plus contributions and minus withdrawals made through the date of the assignment. In this case, the book value includes the retained or non-distributed profits which do not pay taxes as a result of the assignment. The assignment of shares in a corporation is, for the foreign assigning shareholder, a capital gain to the extent he has held said shares for over one year. The greater value, i.e. the part of the sales price in excess of the CPI-restated purchase cost, is levied a single 15% tax without any room for considerations regarding the status of retained tax profits.
C ) Foreign Investment
8.- In Chile, there are basically two foreign investment systems.
The first one is Decree Law 600, the Foreign Investment Statute, which allows for capital transfers (foreign currency, related credits, capital goods, technology likely to be capitalized) under a statutory contract entered into by the State of Chile with the foreign investor, which regulates he rights, privileges and obligations of the parties. This statutory contract cannot be unilaterally modified by the State of Chile and only sums in excess of US$1 million are eligible. Three benefits are afforded by this system. The first is related to the exchange rate and confers the foreign investor the right to remit net profits annually without any limitation as to amount, repatriate capital once the mandatory minimum 1-year permanence term has expired, and confers the right to purchase the foreign currency on the formal currency market to remit profits and repatriate capital. The second is a tax benefit, conferring the foreign investor the right to tax invariability for 10 years from the date of project startup, paying a 42% net of income taxes. This invariability may be waived at any time by the foreign investor. Besides the invariability, there is another tax break consisting in declaring the repatriation of capital as tax-exempt for up to the amount of the investment actually made, and the excess amount may be remitted subject to regular taxation as explained in 7.4. Finally, from a tax standpoint, the investment in capital goods enjoys customs invariability and the imports are VAT-exempt. There are other rights such as non-discrimination. To become eligible, the application referred to below and notarization of the contract are required.
The second system was created under Chapter XIV of the Foreign Exchange Regulations of the Central Bank of Chile. Only foreign currency contributions in excess of US$100,000 are allowed under a Central Bank authorization, only conferring currency exchange rights with regard to profit remittances, repatriation of capital following the minimum 1-year stay, and access to the formal currency exchange market to purchase foreign currency to remit profits and repatriate capital. No other rights are vested. To enter this system, an application must be filed as indicated below.
If the future investors do not use a Chilean resident representative with full authority, they usually confer a power-of-attorney to be represented in Chile, the text of which will depend of the nature of the company and the investment mechanism chosen.
At any rate, it must include the necessary authority to file the requisite applications, enter into a contract with the State, register the investor as a Chilean taxpayer, establish the company, pay in capital, withdraw the necessary funds from the banks and any other authority deemed necessary on a case-by-case basis. Attached please fund a text of the power-of-attorney.
To start the establishment of a company, one must first execute the requisite powers-of-attorney at the Chilean Consulate or before a notary public whose signature is legalized and recorded at the Consulate. This second approach is preferable since it is faster.
In parallel fashion, the foreign investment application must be prepared (under DL 600, if this option is chosen) or the registration for capital contribution to be filed with the Central Bank.
Once the powers-of-attorney are received, the public instrument must be executed and publication requirements met. Then, the investor company must be registered in the Chilean Taxpayers' Registry, RUT (obtained immediately) and the application must be filed with the Foreign Investment Committee, if the DL 600 mechanism is chosen, enclosing the bylaws of the company and the annual reports and balance sheets for the last three fiscal years of the investor company.
If an LLC is the preferred option, it may be created immediately upon receipt of the powers-of-attorney, without having to wait for the funds or securing the investment authorization beforehand.
However, if it is the wish to establish a corporation, the DL investment application must be filed first, or else approved with the funds previously brought into the country if the chosen option is Chapter XIV of the Chilean Central Bank's Foreign Exchange Regulations.
It takes about to weeks to complete the paperwork associated with the incorporation of either company type, and everything must be evidenced in a public instrument recorded in the Commerce Registry and published in the Official Gazette, all of which may be done concurrently with the processing of the foreign investment application.
In the case of a corporation, the board must meet once the requisite procedures are complete, in order to appoint a chairman and general manager and issue the necessary powers-of-attorney.
It should be beared in mind that, for practical reasons, the Chilean company must have a general attorney-in-fact with a residence permit and Chilean ID card, since the Internal Revenue Service so requires to grant clearance for the startup of business activities.
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