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Gesellschaften in Chile

<typohead type="4">ANNEX</typohead>

<typohead type="4">CHILEAN CORPORATE ORGANIZATIONS</typohead>

The three most important legal forms of business entities in <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Chile are:

1.                  Limited liability company ("LLC"), in Spanish "sociedad de responsabilidad limitada".

2.                  Stock corporation ("SC"), in Spanish "sociedad anónima".

3.                  Registered branch of a foreign stock corporation ("Branch"), in Spanish "Agencia".

1. Limited Liability Company

An LLC is formed by the execution of the charter agreement between the partners by public deed before a Chilean Notary Public. The formation process takes approximately 15 days from the execution of the public deed. Foreign partners have to appear with the corresponding powers of attorney duly legalized up to a Chilean Consul. The main characteristics of a LLC are the following:

· There must be at least two partners who may be either Chilean or foreign, individuals or companies.

· The liability of the partners is limited to the amount of their capital contributions.

· No minimum capital is required;

· The timing for capital contributions is fixed in the charter agreement; and

· The rights of the partners are personal and as such cannot be incorporated in negotiable titles.

There is a great flexibility in the provisions that can be included in the charter agreement.  The establishment of a LLC requires no governmental approval and LLCs are not supervised by any state entity aside from the Internal Revenue Service. Financial statements of LLCs are not published.

The public deed that creates a LLC must express: (1) the name and domicile of the partners; (2) the name and purpose of the LLC; (3) the system of management; (4) the amount of capital contribution and form of payment of each partner; (5) the liability of the partners limited to the amount of capital contributions; (6) the form of distribution of profits and losses; (7) the date when the LLC is to begin and end; (8) liquidation and arbitration procedures; (9) the domicile of the company. An abstract of the public deed is registered in the Registry of Commerce and published in the Official Gazette. LLCs are denoted by the words "Limitada" following the firm name.  The name of the LLC has to make reference to the purpose of the company or include the complete name of one or more of its partners.

Management responsibilities are shared by all partners or by managers selected by the partners. The management of the LLC is basically done by a general manager that should be a resident in Chile who is appointed by the partners or the managing partner. The partners make the appointment through a power of attorney that lists all the faculties with which he is entrusted. The general manager may be removed by the partners or by resignation. LLCs do not require board of directors or shareholders meetings.

2. Stock Corporations

SCs are classified as open or closed corporations. Open SCs are those that: (a) have 500 or more shareholders; (b) where at least, 10% of the capital subscribed belongs to a minimum of 100 shareholders, excluding those that individually, or through other natural or juridical persons, exceed such percentage; and (c) are registered in the Registry of Securities voluntarily or in fulfillment of a legal provision.  Closed SCs are those corporations which do not fulfill any of the above requirements. However, closed SCs may voluntarily fulfill the obligations of open SCs.

Open SCs are registered at the National Securities Registry and are supervised by the Superintendency of Securities ("SVS"). Closed SCs are not subject to control by the SVS. Financial statements of closed SCs are not published.

SCs are formed without special government authorization, except for SCs dedicated to the management of pension funds, banking, insurance, mutual funds, and stock exchanges. Both open and closed SCs have to be organized by two or more shareholders. Shareholders can be non-resident foreign, individuals or companies. Shareholders' liability is limited to capital contributions made or promised to the SC.

SCs are governed by the corporate charter ("Estatutos") contained in the public deed of incorporation, having been duly executed before a Notary Public in Chile. An abstract is published in the Official Gazette and registered in the Registry of Commerce.

Under Chilean law there is no distinction between articles of incorporation and by-laws. The corporate charter must basically state: (1) the initial shareholders; (2) the name and domicile of the SC; (3) the corporate purpose; (4) the duration, if any, of the SC (SC can have indefinite duration); (5) capital of the SC; (6) manner of payment of capital; (7) assessment of all contributions other than in money; (8) the board of directors or appointed officers; (9) the time and process for calling Regular or Special Shareholders Meetings; (10) the method for the distribution of profits; (11) liquidation procedure and dispute resolution; (12) the time for the receipt of balance sheets. Foreign companies should grant powers of attorney to form the SC. The formation process takes approximately 15 days from the date of the execution of the corporate charter.

The capital of the SC must be determined in the corporate charter and may be increased or reduced by amending the charter. Shares have no fixed par value. Both capital and value of the shares automatically change with the approval of the balance sheet for each fiscal year. The initial capital must be fully paid within three years. Bearer shares are not authorized; preferred shares may be issued upon fulfillment of certain conditions. Except by unanimous consent, open SCs must distribute profits of no less than 30% of the total net profits. However, closed SCs may expressly adopt another rule in the corporate charter. Shareholders have preemptive rights.

The board of directors manages the SC. The board is elected in Regular Shareholders Meetings where the shareholders may be represented by proxies. The board consists of a minimum of three directors in closed SCs and five directors in open SCs. Directors do not need to be shareholders and can be foreigners. The law does not sanction the lack of attendance to board meetings.

Duties of directors cannot be delegated, though alternate directors can be appointed. Directors must be physically present to participate in board meetings. Directors must exercise their duties with the care and diligence that individuals ordinarily use in their own business endeavors. Directors who as result of their fraudulent acts damage the SC, shareholders, or third parties, are held jointly and severally liable for damages.

Regular Shareholders Meetings are held annually and elect the members of the board of directors, approve the annual financial statements and distribution of dividends. All matters, other than those reserved by law or the Estatutos for the Special Shareholders Meetings, may be discussed and voted by the Regular Shareholders Meetings.

Special Shareholders Meetings are required for: (1) the dissolution of the SC; (2) the transformation, merger or split-off of the SC, and the amendment of the Estatutos; (3) the issuance of bonds or convertible debentures; (4) the alienation of the fixed assets and liabilities of the SC, or its entire assets; (5) the granting of real and personal guarantees to secure obligations of third parties, unless these are affiliates, in which case approval by the board will be sufficient; and (6) any other matter as specified in the Estatutos.

Except as specified below, resolutions of both Regular and Special Shareholders Meetings shall be adopted by simple majority of the shares present with voting rights.

A resolution involving amendment of the Estatutos, must be adopted in accordance with the majorities required by the then existing Estatutos which in the case of closed SCs cannot be less than absolute majority of the shares issued with voting rights.

There are some matters which require the affirmative vote of two-thirds of the shares issued with voting rights.

The amendments of the Estatutos for purpose of creating, modifying or eliminating preferences, must be approved by two-thirds of the shares of the affected class of stock.

3. Registered Branch

Foreign corporations permanently doing business in Chile should form a Branch, if they are not establishing a local company as those...cribed above. The Branch is not subject to the control of a governmental agency either in its formation or in its operation. The foreign corporation is required to appoint a representative in Chile, granting him broad powers of attorney. The Branch does not require board of directors or other formalities for its management. Although the Branch needs a certain assigned capital, there is no minimum requirement.

In order to register a Branch, the following documents in the official language of the country of origin, officially translated into Spanish by the Chilean Ministry of Foreign Affairs, have to be submitted for notarization before a Chilean Notary Public: (1) evidence of legal incorporation of the foreign corporation under the laws of the country of origin and certificate of present existence and good standing; (2) a copy of the current by-laws of the foreign corporation; (3) general and broad power of attorney granted by the foreign corporation to the agent in Chile.

Once these documents are duly certified by a Notary in the country of origin and legalized up the Chilean Consul, the agent must declare before a Notary Public in Chile: (1) the name under which the foreign corporation will operate in Chile; (2) its corporate purpose; (3) its acceptance of Chilean law and submit that its assets will be subject to Chilean law; (4) that the Branch will have enough liquid assets to cover its local liabilities; (5) the amount of capital assigned to the Branch; (6) the domicile of the Branch. An abstract of the certification and of the public deed is published in the Official Gazette and registered in the Registry of Commerce. The formation process takes approximately 60 to 90 days if the documentation has to be translated, which would be your case.

4. Comparison of the Three Corporate Structures

SCs and the LLCs are legal entities distinct and apart from their owners and, therefore the partners or shareholders are only liable for the amount of their equity contributions.  In contrast, a Branch of a foreign corporation is an extension of the foreign corporation and therefore, the acts of the legal representative of the Branch are binding on the foreign corporation.  The Branch requires only one foreign corporation, but any Chilean company (SC or LLC) needs at least two partners or shareholders.  The Branch, as such, cannot be a partner or shareholder of a local company because it is not a legal entity.  However, the Branch is considered a separate taxpayer for tax purposes.

Three important differences exist between a closed SC and a LLC.  First, the management of the LLC is much simpler than that of a closed SC because a LLC does not require board of directors or shareholders meetings or approval.  Second, any amendment of the partnership agreement of a LLC requires the approval of all partners, but with a SC, the majority rule applies for most decisions at the board of directors and shareholders.  Third, in a LLC any assignment of equity rights or the entrance of a new partner requires the consent of all partners while with a SC the transfer of shares may be freely made.

            5.           Income Tax.

Generally speaking, it can be said that the tax implications of setting-up a branch, a stock corporation or a limited liability company in Chile are almost the same. However, there are some relevant aspects we are not dealing with in this memo that need to be resolved on a case by case basis.

Irrespective of the type of legal entity, the corporate tax is a flat 15% rate payable on an annual basis. However, there are monthly provisional payments on account of the corporate tax throughout the year. In addition, and once profits are made available to the nonresident investor, the 35% tax becomes due. From the 35% additional tax, the investor can deduct as a tax credit the corporate tax actually paid by the company (15%). Thus, the effective additional tax rate is 20%, and the total overall tax burden for nonresident entities doing business through a branch or subsidiary in Chile is 35%.

Typically the investor prefers to set up a holding company in Chile, which in turn owns the rights, interests o shares in the Chilean subsidiary. The aim of using a holding company is to postpone the 20% additional tax that accrues on profits' distribution, given that the holding domiciled in Chile are not taxed until distribution of profits. Thus, if the investor decides to expand its activities in other areas of business in Chile, it can better use the funds already available in the holding company, without incurring in any tax costs.

Santiago, April 10,  2001

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