Volume 5, Number 22, Page 3

Chilean Joint Ventures with Foreign Partners

by Antonio Ortúzar Solar, BárbaraVidaurre Millen and Jaime Munro Cabezas

In Chile there are no specific legal, tax or accounting provisions by means of which joint venture agreements are regulated. Therefore, joint ventures are governed by the stipulations of the applicable joint venture agreement, which is subject to general legislation.

Due to the fact that joint ventures themselves are not separate legal entities under Chilean legislation, joint venture partners often operate in Chile through a jointly and specially formed Chilean legal entity. This is because in Chile, generally only juridical or natural persons may be considered income and VAT taxpayers.

Only in exceptional cases may hereditary communities and companies that do not fulfill all of the legal requirements be considered taxpayers. Since a joint venture agreement does not have a juridical personality, for Chilean purposes it is not considered a taxpayer. Consequently, as a general rule, joint ventures cannot be taxpayers unless the parties organize a joint venture through an entity of a juridical nature.

If appropriate for their purposes, joint venture partners can simply work together, without establishing a legal entity. In this case, an active participant in the joint venture (hereinafter called the “Agent”), is considered for all legal, accounting and taxing purposes as the owner of the joint venture. The joint venture’s profits and losses can commingle with those of the Agent’s own activities.

It is nonetheless possible for joint venture partners to determine in detail the manner in which expenses, costs and profits will be distributed among them, and submit for the approval of the Chilean Internal Revenue Service (IRS), an accounting system that not only assures compliance with the respective accounting and taxing norms, but also allows the partners to directly reflect the correct proportions of the costs, expenses and profits that correspond to each partner. Although this approach implies adoption of a complex accounting system that must be submitted for the approval of the IRS, it has been used in Chile for certain joint ventures.

The partners of such a joint venture are subject to the following rules:

1) For all purposes it shall be understood that each partner of a joint venture is an individual taxpayer as each such partner receives separate profits.
2) A global accounting is required for expenses incurred in exploration and exploitation stages jointly developed by the partners. The accounting must be undertaken by the partner acting as “operator” of the joint venture (the “Operator”).
3) The Operator must report expenses monthly to each partner, within the first 8 days of the month following the month in which the expenses arose, indicating the proportion and value of the expenses corresponding to each partner.
4) Each partner must impute to its fiscal debit any corresponding VAT resulting from the accounting in number 3 above.
5) Since the partners of the joint venture are joint owners of the assets they purchase, intangible assets are depreciated in accordance with the ownership quota that each partner holds in such assets.
6) The Operator must act by means of a power of attorney granted by the partners and, therefore, the Operator must execute all acts and contracts relating to the joint venture, on his own behalf and on behalf of the other partners.

The above method may have certain tax advantages for the parties (i.e., to reflect directly in their accounting the expenses, costs and profits obtained from the joint venture). But it presents a number of disadvantages: complex accounting; ease of termination of the joint venture (by revocation of the power of attorney to the agent); and direct exposure to creditors’ claims (third party creditors of the joint venture have direct access to all of the net worth of each partner to enforce the payment of their credits).

If a joint venture operates in this fashion without a “joint venture vehicle,” a foreign partner, in order to undertake its activities in the country, must establish a presence by, granting power of attorney to a Chilean agent, representation office, or formally establish a Chilean branch. In the latter case the foreign partner must appoint, by public deed, a person present in Chile with broad powers to represent it, and must register and publish certain information, including the amount and form of capital in Chile.

The obligations of the branch must be supported by liquid assets retained in Chile, although no minimum capital is required. Foreign corporations are fully liable for the activities of their Chilean branches and the financial statements of branches must be published. Branches are subject to income tax on locally derived income only.

Largely due to the disadvantages described above, joint venture partners often operate in Chile through a jointly formed Chilean entity.

The two entities customarily used as joint venture vehicles are the Limited Liability Company (Sociedad de Responsabilidad Limitada) and the Stock Corporation (Sociedad Anónima).

Limited Liability Company - Sociedad de Responsabilidad Limitada (SRL)

This is the most commonly used business entity in Chile. As in the case of a corporation, the liability of members is limited to the capital contributions they make (plus any additional amount indicated in the bylaws). The entity is legally distinct from its members. Accordingly, for Chilean purposes, losses of the entity may not be set off against the other income of the members.

A minimum of two and a maximum of 50 members is required. The SRL is automatically dissolved if there is only one member - therefore, total control is achieved through ownership by related entities or nominees. Foreign legal entities may be members.

SRLs are not subject to the control of a regulatory authority and have no obligation to publish or file accounts. The SRL’s name must include the name of one or all of the members, or an indication of the company purpose, and must end with the word “Limitada.”

SRLs are formed by public deed, an extract of which must be published in the Official Gazette and registered at the Commerce Registry of the company domicile, both within 60 days of the date of the public deed. Any amendment to the bylaws (which are included in the original deed) requires the unanimous consent of all members, and must also be executed through a public deed, an excerpt of which must be registered at the Commerce Registry and published in the Official Gazette within 60 days from the date of the amendment deed. It is important to note that the transfer or assignment of ownership rights by one member to another member or to a third party requires amendment of the bylaws, and therefore must be agreed upon unanimously by the members.

Chilean law sets out the circumstances in which a SRL shall be dissolved, including agreement by all the members and expiry of an agreed term (which is not renewed). The members may enter into a separate agreement (similar to a shareholders’ agreement) binding them to consent to deed amendments, sales of ownership interests or dissolution under such conditions as are set out in the respective agreement.

Once a person in Chile has been authorized by power of attorney to undertake the procedural steps to form the SRL, it normally takes 3 to 4 weeks for the SRL to be established.

The public deed will set out how the SRL is to be managed. Management powers may be exercised by one or more of the members, a board of directors, or by a third party.

The SRL’s capital is set out in the public deed. Capital contributions may consist of cash, property (including technology) or services provided to the SRL. Capital may be increased or reduced by agreement of all partners and amendment of the SRL public deed. Prior approval of the IRS is also required in the case of a decrease.

The liability of members is limited to the amount of their capital contributions to the SRL or such greater amount as may be set out in the deed.

The members can decide distribution of profits and losses in any way they freely agree.

Stock Corporation - Sociedad Anónima (SA)

The SA may be either public/open or private/closed. It is public if it publicly offers its shares (in accordance with applicable law), or if it has at least 500 shareholders, or if more than 10 percent of its issued capital is held by more than 100 shareholders (shareholders who individually hold more than 10 percent of the share capital are excluded for the purpose of this final calculation). All other SAs are private.

Public SAs are subject to the control of the Superintendency of Securities and Insurance and must list on the Stock Exchange, publish (and send to all shareholders) an annual report and audited annual financial statements and distribute at least 30% of net profits (unless all shareholders agree otherwise). These requirements do not apply to private corporations.

A minimum of two shareholders is required. The SA is automatically dissolved if all its shares are held by one entity. As with SRLs, total control is achieved through ownership by related or nominee entities.

Management is in the hands of the directors, a minimum of five for public and three for private corporations. Directors may be of any nationality and are appointed by the shareholders in ordinary general meetings.

An SA is formed by public deed including the SA’s by-laws, an extract of which must be published and registered. An SA’ s name must end with the words “Sociedad Anónima” or the initials “S.A.”.

Capital is set out in the bylaws and may consist of contributions of cash or property. Shares may not be issued as payment for personal services or for formation of the corporation. A minimum of one third of the capital must be subscribed on formation and the balance within three years. Capital may be increased or reduced by an extraordinary meeting of shareholders and with the approval of the Chilean IRS in the case of a decrease. Existing shareholders have a “first option” to acquire new shares and that right is transferable to third parties. Preferentia shares may be issued.

Corporations may not pay dividends (i.e., distribute profits) out of annual profits until previous years’ losses have been recouped. Interim or provisional dividends may be declared by the directors but they are personally liable if such dividends exceed annual profits available for distribution.

The board of directors cannot restrict share transfers and the by-laws of public SAs cannot limit the free transfer of shares. However, shareholder agreements restricting transfer (and other) rights are permitted. They must be registered with the corporation and made available to other shareholders and interested third parties.

Both merger and/or division of a SA is permitted by a resolution adopted by holders of at least two thirds of all voting shares and passed at an extraordinary general meeting.

In the case of merger, liquidation of the corporation’s assets, the issuance of preferred shares and certain other circumstances, dissenting shareholders have the right to require the SA to buy their shares, at net asset backing in the case of private corporations and market value in the case of public corporations.

The liability of shareholders is limited to the payment for subscribed shares within the term to which the shareholder has committed

“Permanent establishments” such as agents and representation offices and legal entities such as formal branches, SAs and SRLs are considered taxpayers, and as such must comply with normal registration requirements. Thus the permanent establishment must obtain its tax number (“RUT”) and file a Declaration of Start Up of Activities, within two months from the date activities are initiated. Both are accomplished by filing a simple form with the Chilean IRS.

Once an RUT has been obtained, and start up of activities has been declared, the taxpayer must have accounting records stamped before the IRS, and comply with the legal provisions and IRS regulations related to accounting. In general terms, taxpayers must keep three main books (Daily, Inventory and Balance Sheet), and other accessory books required by law (Purchases and Sales, Remuneration).

These books must be kept in Spanish and the values expressed in legal Chilean currency. The taxpayer may file a request with the IRS to keep accounts in foreign currency, which is permitted only in certain cases.

Income Tax

Formal branches of foreign companies, “permanent establishments”, and local entities owned by foreign non-domiciled members or shareholders are taxed in the same manner, as follows:

1) Corporate Tax, called First Category Tax, at a rate of 15 percent, assessed on net taxable earnings as determined by complete accounting records. This tax is filed and paid in April of each year, with regard to the preceding fiscal year. Taxpayers must make provisional monthly payments which are set off against the annual tax.
The fiscal year begins on January I and ends on December 31. The law empowers the tax authorities to authorize a different fiscal year, but currently the authorities have a policy of not granting permission to establish other dates for the fiscal year.
2) Additional Tax assessed on profits remitted abroad to non-domiciled and non-resident headquarters, members or shareholders, at a rate of 35%. A credit equal to the First Category Tax effectively paid is granted against the Additional Tax, consistent with Chile’ s Comprehensive Integrated Income Tax system. Thus, the total tax burden is 35 %, and the net Additional Tax paid is 20% of net taxable income.

Antonio Ortúzar Solar, BárbaraVidaurre Millen and Jaime Munro Cabezas are with the office of Baker & McKenzie in Santiago, Chile. They may be ritched at (56-2) 367-7000