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Mexico, January 2002


Arturo Garnham
Santiago - Chile


1. Introduction
2. Basic tax regime applicable to loans
3. Structuring a “leveraged” foreign investment in Chile
4. Leasing agreements as financing operations
5. Factoring operations


A Chilean operation may be financed withequity or with debt.

There are no taxes associated to the contribution of capital into a Chilean legal entity or permanent establishment. With respect to the repatriation of capital, if it is the result of a reduction of the corporate capital of the local entity in excess of the existing undistributed tax earnings, as a general rule, such capital repatriation is tax-free. Capital repatriationsare recharacterized as profit distributions in Chile up to the amount of the existing undistributed tax earnings.

There are many alternatives available for financing a Chilean operation with debt. The tax treatment generally varies depending on the structure of the operation and on the identities of the parties involved. Following is a brief description on the main tax issues arising fromfinancing a Chilean operation with debt.


2.1 Stamp Tax

Decree Law 3,475 of 1980 (as amended) provides that promissory notes, drafts and all other documents evidencing a credit operation are subject to Stamp Tax. The amount of this tax is based on the principal of the loan and the maturity date, at a rate of 0.134% per month or fraction thereof, with acap of 1.608%. Documents payable "on sight" or without a specific maturity date are subject to a special rate of 0.67% . Foreign loans are subject to the Stamp Tax even if no loan documentation is subscribed at the time the Chilean borrower accounts the debt in its records.

Therefore, when analyzing the tax impact of a financial operation, the potential application of this tax must be taken intoconsideration.

2.2 Income Tax

2.2.1 Deductibility for Chilean Borrower from an Income Tax Perspective

From the perspective of the Chilean borrower, interests paid or accrued are generally deductible as a necessary expense for purposes of the First Category Tax (Corporate Tax), provided (i) they correspond to the tax period in question; (ii) the taxpayer evidences its actual income inChile in accordance with full accounting records; and (iii) the loans are not used directly or indirectly for the acquisition, maintenance or exploitation of goods that do not generate income of such category.

2.2.2 Taxation of Interest Received by a Chilean Resident

Interest received and accrued by Chilean enterprises acting as Lenders is considered ordinary income subject to both the FirstCategory Tax at the corporate level and to Additional Withholding Tax on distribution to non resident partners or shareholders at a 35% rate. If the distribution is made to resident individuals, Surtax applies on a progressive rate instead of the 35% withholding tax. Please note that resident entities and individuals are subject to taxation on worldwide income and interest paid by a non-residentborrower is deemed to be a foreign source income for the Chilean lender.

In the event individuals resident in Chile receive interest payments of Chilean source, such interest is exempt from First Category Tax. This fact does not reduce the effective tax rate, as the First Category Tax is credited against Surtax. However, in this case taxes are due on a cash basis, and not on an accrual basis, andthus, some degree of deferral may be obtained.

2.2.3 Taxation of Interest Paid by a Chilean Resident to a Non-Resident

Interest payments made by Chilean residents acting as borrowers to non-resident lenders are generally subject to a 35% Withholding Tax. This rate is reduced to 4% in the case of interest payments made to (i) a foreign or international bank or (ii) to a foreign or...
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