June 12 2000 Overview (June 2000) Claro & Cia | Corporate & Commercial - Chile Corporate & Commercial Structures Limited Liability Privilege Open and Closed Corporations Formation Capital Requirements Transferability of Interest Management Structure Profit Allocation Income Tax StructuresCorporations and limited liability companies (LLCs) are the two most commonly used structures for setting up subsidiaries and joint ventures in Chile. Corporations and LLCs must approve articles for their internal governance. Shareholders of corporations and partners of LLCs are at liberty to include any provisions they deem convenient in such articles, provided that in doing so they do not contravene any mandatory provision and they address all items required by law. Limited Liability PrivilegeA foreign investor interested in establishing a partially or wholly owned subsidiary or a joint venture in Chile, will find that LLCs and corporations are particularly suitable for such purposes given that partners of LLCs and shareholders of corporations are afforded the privilege of limited liability.The liability of partners or shareholders for responsibility incurred by an LLC or corporation is limited to each partner's or shareholder's unpaid contribution to the company's capital. Consequently, partners of an LLC and shareholders of a corporation are not personally liable for the debts incurred by the LLC or corporation. Open and Closed CorporationsChile's Corporation Act distinguishes between open corporations and closed corporations. An open corporation is that which: publicly offers its shares; has 500 or more shareholders; or has at least 10% of its outstanding stock in the hands of a minimum of 100 shareholders (excluding shareholders who individually own more than 10% of the company's outstanding shares). Open corporations are subject to the control of the superintendent of securities and insurance and must register with the Securities' Registry. Closed corporations are any type of corporation that does not meet the criteria for open corporations. Formation LLCs and corporations are organized by their founding partners and shareholders, respectively, pursuant to a deed executed before a local notary public. An excerpt of the notarized deed must be recorded with the Commerce Registry and published in the Official Gazette.The law requires that at least two partners or shareholders (individuals or institutions) organize a company and that there continue to be at least two partners or shareholders, as applicable, throughout the company's life. Under Chilean law, less than two partners or shareholders leads to the automatic dissolution of an LLC or corporation.No restrictions apply as to the nationality of shareholders or partners, nor is it required that the shareholders or partners have their residence in or appoint an agent domiciled in Chile.Capital Requirements Despite there being no minimum capital requirements for LLCs and corporations, it is advisable that the amount of capital selected be reasonably related to the company's purpose. Capital of corporations must be subscribed and fully paid in within three years after the execution of the deed of incorporation. No capital contributions are required until this time. Capital contributions can be made in cash, assets provided they can be appraised, and only in the case of LLCs may include the work or industry contributed to the business by one or more of the LLC's partners.Transferability of InterestOne of the most salient differences between corporations and LLCs rests in the transferability of interests. Partners of an LLC are not at liberty to transfer their quota rights unless all other partners consent to such transfer and amend the LLC's founding agreement. However, if a closed corporation's bylaws impose no restrictions on share transferability, any shareholder may freely transfer its shares without the consent of the other shareholders and without amending such corporation's bylaws. The Corporation Act states that bylaws of closed corporations may impose certain restrictions on share transferability. Such restrictions, however, cannot be included in the bylaws of open corporations, although shareholders of open corporations are permitted to enter into agreements concerning share transferability provided that such agreements are registered with the corporation. A corporation cannot refuse registering a transfer of its shares if such transfer has been made in accordance with the law.Management Structure An LLC's structure is certainly simpler than the complex three-tiered structure of corporations. While the law requires that corporations be comprised of a board of directors, officers appointed by the board and the stockholders, an LLC can be freely structured, and its management freely determined by its partners, who may vest an LLC's management upon themselves, a board of directors or upon non-partners. The Corporation Act requires that a closed corporation's board of directors be comprised of at least three directors and that an open corporation's board be comprised of at least five directors. In either case, the board must appoint a general manager, who is precluded from holding simultaneously the office of chairman, auditor, or accountant, and must be given ample powers in connection with the corporation's trial representation. There are no legal restrictions regarding the nationality or residency of directors and officers of corporations and LLCs.Profit Allocation Under the Limited Liability Company Act, no restrictions apply to the distribution of profits, which may be freely apportioned by the partners of an LLC in the partnership agreement. If nothing is said in the partnership agreement, profits shall be distributed proportionately to each partner's contribution to the LLC's capital. Under the Corporation Act, dividends may be declared and paid out of the corporation's net profits for the fiscal year in which dividends are declared, or may be paid out of profits that accrued in preceding fiscal years. The Corporation Act requires that at least 30% of the net profits for each fiscal year be declared and paid as dividends, unless otherwise agreed by the unanimous consent of the shareholders.Income TaxThere is no material difference in the taxation of income generated by an LLC or a corporation.Of special note it that a 15% 'first category tax' will be levied on the company's net income accrued during each relevant fiscal year. A 35% 'additional tax' will be levied on any profits or dividends distributed or remitted abroad by the company to its partners or shareholders, as the case may be. Against the additional tax, a credit will be given for the first category tax originally paid by the company. As a result, a foreign company carrying on business in Chile will be subject to an aggregate Chilean income tax burden equal to 35%. For further information on this topic please contact Christian Eyzaguirre at Claro y Cia by telephone (+56 2 367 3000) or by fax (+56 2 206 0658) or by e-mail ([email protected]). The materials contained on this web site are for general information purposes only and are subject to the disclaimer.