Bank Financing

Last verified on Wednesday 28th February 2018

Chile

Felipe Rencoret Prieto
Larraín, Rencoret, Urzúa Abogados
  1. 1.

    What are the most common forms of bank financing in your jurisdiction?

  2. The most common forms of bank financing are: (i) deposits in current accounts and the other sight deposits, (ii) sight obligations a bank may receive from the public, pension funds and other institutional investors; (iii) cross-border loans; (iv) issuance of bonds either locally or abroad; (v) issuance of subordinated bonds. Subordinated bonds are issued for an average period of not less than five years and shall not be subject to early payment, and they may not be acquired by any company subject to the supervision of the Superintendency of Banks and Financial Institutions, or for subsidiaries or companies affiliated with such enterprises.

  3. 2.

    Are any governmental or central bank registrations or approvals required for a foreign lender (being a lender not incorporated in your jurisdiction or operating through a branch or office outside of your jurisdiction) to lend to a borrower in your jurisdiction?

  4. No, there are no governmental or central bank registrations or approvals required for a foreign lender to lend to a borrower in Chile.

    On the other hand, according to the Chilean Central Bank Act, any person may freely engage in foreign exchange transactions. Notwithstanding this, the Act allows the Central Bank to impose restrictions and limitations on said transactions. Currently, there are no foreign exchange restrictions in force. Regarding limitations, in accordance with Chapter XIV of the Compendium of Foreign Exchange Regulation of the Central Bank of Chile, foreign credits shall be notified to the Central Bank of Chile and the corresponding funds shall be conducted through a banking institution. The funds may be made available abroad to the borrower, but disposal of funds shall also be reported to the Central Bank of Chile.

  5. 3.

    Are there any foreign exchange provisions restricting, or governmental or central bank registrations or approvals required for, a borrower in your jurisdiction to contract debt obligations in a foreign currency or to remit funds abroad?

  6. There are no foreign exchange restrictions in force either to remit funds to Chile or to remit those funds abroad. Transactions must be notified to the Central Bank and conducted through a banking institution.

  7. 4.

    Are there any governmental or central bank registrations or approvals required for the prepayment of loans abroad?

  8. Regarding domestic loans, the law provides that the parties may freely agree the prepayment of a loan. However, if the loan does not exceed US$200,000 (approximately), the debtor is entitled to prepay even against the lender’s consent, provided that:

    • if the owed amount is not adjustable (by domestic inflation), the borrower pays:
      • the anticipated principal;
      • the agreed interest until the date of prepayment; and
      • the prepayment fee, which cannot exceed the equivalent of one month of the agreed interest calculated over the prepaid principal;
    • if the owed amount is adjustable, the borrower pays:
      • the anticipated principal;
      • the agreed interests until the date of prepayment; and
      • the prepayment fee, which it cannot exceed the equivalent of one and a half month of the agreed interest calculated over the prepaid principal.

    Notwithstanding the foregoing, if the amount to be prepaid is less than 20 per cent of the outstanding principal, such prepayment will always require the approval of the lender.

    No regulation applies with respect to cross-border loans.

  9. 5.

    Are any mandatory governmental or central bank deposits required to be made from loan proceeds?

  10. In the case of cross-border loans obtained by local banks, the Central Bank obliges local banks to maintain a deposit of 9 per cent if the proceeds refer to term obligations and 3.6 per cent for sight obligations.

  11. 6.

    Describe any governmental measures that may be taken to declare a moratorium on the loan obligations of private companies.

  12. The declaration of a moratorium on loan obligations of private companies shall require the approval of a law by the National Congress. There are no moratorium laws in effect in Chile.

  13. 7.

    Describe any environmental liabilities and any other areas of lender liability that may arise as a result of the activities of a borrower or the realisation of a security interest.

  14. Such environmental liabilities or any other areas of lender liability would not arise.

  15. 8.

    Are interest payments or loan fees subject to a withholding tax?

  16. The following taxes apply: 4 per cent withholding tax on interest payments and all other payments deemed to be interest payments, to the extent paid to a person domiciled or residing outside of Chile provided that the lender under the cross-border loan is a foreign or international financial institution registered before the Chilean Tax Authority or a foreign bank, otherwise the withholding tax rate on interest payment will be 35 per cent; and a withholding tax of up to 35 per cent that will be imposed on payments of fees, compensations and reimbursement of costs, levied on the gross amount of such payment, if made to persons domiciled or residing outside of Chile, unless such payment is qualified as a comisión mercantil and is reported to the Internal Revenue Service in a timely manner and, thus, benefits from the tax exemption established under the provisions of paragraph 2 of article 59 of the Income Tax Law, in which case no withholding tax is applicable, or is deemed a technical assistance service fee, in which case it will be subject to a 20 per cent withholding tax.

  17. 9.

    What other taxes or mandatory fees, for example, transaction, registration or documentary, apply to loan transactions?

  18. Loan transactions, either domestic or cross-border, are subject to a stamp tax in Chile. The stamp tax rate is 0.066 per cent for a month or fraction of month between the date in which the loan is made and the maturity date thereof. The ceiling for this tax is 0.8 per cent.

  19. 10.

    Are there different taxes applicable to loans repayable to lenders in your jurisdiction and loans repayable to lenders in a foreign jurisdiction?

  20. Regarding loan repayments to lenders in Chile, said operation is not subject to tax obligations. On the other hand, tax treatment referred to loan repayments to lenders in a foreign jurisdiction differs as follows: payment of capital: no taxes apply; payment of interest: see question 8.

  21. 11.

    Is your country party to any double taxation treaties that reduce taxes payable by borrowers in respect of loan payments abroad?

  22. Yes, it is. All the treaties entered into by the Republic of Chile to avoid double taxation are based on the OECD model so they reduce taxes payable by borrowers in respect of loan payments abroad. According to those treaties, the payments of interest derived from loans granted by banks and insurance companies and other specific cases established in the treaties are subject to a 5 per cent rate as withholding tax. In the rest of cases, the general rate is 15 per cent.

    In the absence of a treaty, the applicable Chilean tax rate as withholding tax is 35 per cent in most cases. This rate is nevertheless reduced under exceptional tax treatment provided in the law for specific forms of financing.

    Furthermore, article 59 No. 1 of the Income Tax Law sets a reduced 4 per cent income withholding tax rate on interest arising from, among other things: foreign loans obtained from foreign banks or foreign and international financial institutions; supplier credit on the acquisition of foreign assets imported to Chile, and bonds issued by local corporations. The withholding tax is due over the gross payment, without any deductions, and it is levied upon remittance of the funds, but also when the debt is extinguished by means equivalent to payment, such as offsetting.

    Chilean thin capitalisation rules limit the ability of local taxpayers to receive funding at the reduced 4 per cent income withholding tax rate on interest, when such funding is higher than three times the equity of the borrower. 

  23. 12.

    Do any financing structures receive favourable tax treatment, such as prepayments of exports?

  24. Cross-border loans, regardless of the purpose thereof, have the same tax treatment in connection to interest payment. Nevertheless, there are certain rules that exempt certain transactions from stamp tax.

  25. 13.

    Describe any limitations on interest rates or the ability of lenders to charge default interest under loan agreements.

  26. Regarding local loan transactions, it is not possible to set an interest that exceeds the product of the respective capital and the greater of (i) 1.5 times the current interest rate governing at the time of the transaction, as determined by the Superintendent for each type of credit transaction; and (ii) the current interest rate governing at the time of the transactions increased by 2 per cent.

    Credit transactions denominated in non-indexed local currency, amounting to 200 UF or less for periods greater than or equal to 90 days, and except transactions (i) entered into with foreign or international banks or financial entities; (ii) agreed in foreign currency to finance foreign trade, (iii) entered into between the Central Bank of Chile and financial entities; and (iv) where the borrower is a bank, it is not possible to stipulate an interest rate exceeding the current interest rate existing at the time of the transaction, denominated in domestic non-indexed currency for amounts between 200 and 5,000 UF, and greater than or equal to 90 days increased by an additive term whose value will be: (i) 14 percentage points, on an annual basis, for transactions exceeding 50 UF; and (ii) 21 percentage points, on an annual basis, for transactions equal to or under 50 UF. Other limits apply to special cases and credit card transactions. Other ceilings apply to small size loans and consumer loans. Due to these changes, we may face a decrease in our income as a result of a decrease in the interest rate we may be able to charge our clients.

    Nevertheless, said interest rate limit does not apply to cross-border transactions. However, the Chilean IRS has the authority to challenge interest rates that exceed market standards. In such case, the amount paid as interest may be deemed a rejected expense.

  27. 14.

    Describe any restrictions that may apply to the choice of law, for example, whether a choice of New York or English law will be recognised and enforced in your jurisdiction.

  28. Chilean individuals and Chilean private entities may freely agree to submit their operations to foreign law and a foreign forum. Said submission has been duly recognised and enforced in Chile. On the other hand, the submission to foreign law and a foreign forum, when one of the parties is the Republic of Chile or a state-owned entity, requires a special authorisation granted by law.

  29. 15.

    Describe generally the requirements for the enforceability of a foreign judgment in your jurisdiction in respect of an outstanding loan.

  30. In any action or proceeding arising out of or relating to an outstanding loan, the courts in Chile will recognise as valid and final and will enforce any final and conclusive judgment for the payment of a fixed or readily calculable sum of money against the borrower obtained in the courts of the lender arising out of or in relation to the obligations of the borrower, without re-examining or re-litigating the merits of the original action, subject to the conditions and qualifications, provided the following conditions are met (the existence or non-existence of which would be determined by the Supreme Court of Chile):

    • if there is a treaty as to the enforcement of judgments between Chile and the foreign jurisdiction, such treaty will be applied;
    • if there is no treaty, the judgments will be enforced if there is reciprocity as to the enforcement of judgments;
    • if it can be proved that there is no reciprocity the judgment cannot be enforced in Chile;
    • if reciprocity cannot be proved, the judgment will be enforced if it has not been rendered by default within the meaning of Chilean law, that is if valid service of process was made upon the parties to the action unless the defendant was able to prove that due to other reasons it was prevented from assuming its defence. However, under Chilean law, service of process by means of mailing copies to the borrower shall not be deemed effective to cause proper service of process and, consequently, any judgment rendered in a legal proceeding in which process was served by means of mailing copies may be then effectively contested by the borrower in Chile; and
    • in any event, the judgment shall not be contrary to the public policy of Chile.

    Furthermore, a final judgment of the competent court will not be considered to be rendered by default if personal service of process is made on an agent for service of process in the corresponding jurisdiction, assuming such service of process is valid under the laws of that jurisdiction, except that as a defence to the enforcement of any such judgment in Chile the borrower may prove that because of circumstances beyond its control it was prevented from asserting defences available to it before the court rendering such judgment. In all events, the judgment must comply with international standards. Said judgment will comply with such international standards if the following conditions are met:

    • the competent court rendering the judgment had jurisdiction under the laws of the corresponding jurisdiction over the borrower, and the subject matter of the suit;
    • the judgment is enforceable and final in the competent court;
    • the borrower (or its agent for service of process) received due notice of the suit (assuming such service of process is itself valid under the laws of the corresponding jurisdiction) and was afforded an opportunity to defend in such suit;
    • the document evidencing such judgment has been duly legalised by the Chilean consul in the corresponding jurisdiction; and
    • the text of such judgment has been duly translated into Spanish by a sworn public translator in Chile.

    Assuming such a final judgment rendered by the competent court complied with the standards set forth above, and in the absence of any condition referred to above, which would render such foreign judgment unenforceable, such judgment would be enforceable in Chile by means of special proceedings for the enforcement of a foreign final judgment under the laws of Chile.

    With respect to the principles of Chilean public policy referred to above, assuming that payments of commission, compensation or indemnity and reimbursement of costs and expenses represent usual conditions prevailing in the relevant financial markets, a Chilean court would not find any provision of a lending agreement, with respect to such payments and reimbursements to be a violation of principles of Chilean public policy unless the application in any particular case of a provision of the lending agreement, to make a unilateral determination as to amounts owed on account of indemnities or reimbursements would, in the judgment of the court, result in a recovery by the plaintiff so arbitrary and unreasonable as to be considered contrary to basic and fundamental principles of the Chilean legal system.

    Upon compliance with the above, the courts in Chile will enforce a final and conclusive judgment for the payment of a fixed or readily calculable sum of money rendered by the court having jurisdiction, under its laws, over the borrower, in an action arising from the lending agreement, including any other transaction entered into pursuant thereto in accordance with the procedure contemplated by the Code of Civil Procedure for the enforcement of foreign judgments. To enforce such judgments in Chile rendered in relation to the lending agreement, including any other transaction entered into pursuant thereto against the borrower, the judgment must be presented to the Supreme Court of Chile, in duly legalised (by the corresponding Chilean consul) form and translated by an official translator of the Ministry of Foreign Affairs of Chile, and previously authenticated by the judicial authority of the relevant jurisdiction stating that the judgment was validly rendered and is binding on the parties in accordance with the laws of such jurisdiction. Said court will hear whatever presentation the borrower wishes to make, and the hearing will be limited to aspects relating to such enforcement and not to substantive issues resolved in the judgment.

  31. 16.

    Upon the closing of a loan, what procedural requirements (execution formalities, notarisation, registration, recordation or filing) should be observed to ensure that a loan agreement or related judgment is enforceable in your jurisdiction?

  32. Except for the official translation and the payment of the stamp tax, there are no other procedural requirements to be observed.

  33. 17.

    Does a loan agreement in English need to be translated or locally registered to be enforceable in your jurisdiction?

  34. See questions 15 and 16.

  35. 18.

    Must a foreign bank be registered in your jurisdiction to enforce any rights under the applicable loan documentation?

  36. No, it must not.

  37. 19.

    Are foreign lenders treated any differently from local lenders in enforcing loan documentation in the courts of your jurisdiction?

  38. No. They are treated in the same way as local lenders.

  39. 20.

    Is consideration required for the enforceability of a contractual obligation or guarantee?

  40. No, it isn’t.

  41. 21.

    To enforce a loan in your jurisdiction, need the loan be evidenced by a promissory note or other form of título executivo?

  42. The enforcement of the lender’s rights does not depend upon the availability of a promissory note nor other form of título executivo. However, the availability of a promissory or other form of título executivo contributes to the speediness to obtain such enforcement.

    Therefore, the lender may seek the enforcement of its rights under an executive proceeding if the loan is evidenced in a título executivo, such as: final and conclusive judgment; a notarised copy of a public deed; a promissory note; or any other title to which the law grants executive force. On the other hand, if a lender does not have a título executivo, the lender shall seek the enforcement of its rights in an ordinary proceeding and once a final judgment is obtained, it shall seek its enforcement.

  43. 22.

    To enforce a guarantee (aval) in your jurisdiction, is it necessary that the guarantee be evidenced by a guarantee agreement or other form of título executivo?

  44. See question 21.

  45. 23.

    Are there any restrictions on loans to multiple borrowers or on a guarantee in respect of a loan to an affiliated entity?

  46. No, there are not.

  47. 24.

    Can a party grant a secured or unsecured guarantee in respect of a loan to an unaffiliated third party?

  48. The following distinction shall be made. If the party granting the security is:

    • an individual: the approval of the spouse is required in certain cases; or
    • a legal entity:
      • limited liability company: the approval of all partners of the limited liability company is required; or
      • corporation: a shareholders' approval is required.
  49. 25.

    Is there a distinction between the granting of a security interest and the perfection of a security interest?

  50. The Chilean system provides a registration procedure to perfect a security interest. In that regard, mortgages on water rights, mining concessions and real estate must be registered before the corresponding real estate registrar to be perfected, giving the secured lender the corresponding priority. Likewise, a pledge without conveyance must be registered before the civil registrar to be perfected, giving the secured lender the corresponding priority. On the other hand, commercial pledges and pledges on securities granted in favour of banks are perfected by the physical delivery of the pledged asset to be perfected and the secured lender is given the corresponding priority.

  51. 26.

    What is the most common form of granting and perfecting a security interest in movable assets?

  52. The most common form is the pledge without conveyance.

  53. 27.

    What is the most common form of granting and perfecting a security interest in real estate?

  54. The most common form is the real estate mortgage.

  55. 28.

    What is the most common form of granting and perfecting a security interest in receivables and accounts?

  56. The most common form is the commercial pledge and the pledge without conveyance.

  57. 29.

    Does your jurisdiction recognise the transfer of assets to a trust for the benefit of a lender as a means of granting a security interest in such assets?

  58. Security interests in collateral registered under the name of a collateral agent for the benefit or one or more lenders are valid and recognised in Chile, provided that the agency agreement complies with certain legal requirements.

  59. 30.

    Does your jurisdiction recognise the fiduciary transfer of assets (such as an alienação fiduciária) to a lender as a means of granting a security interest in such assets?

  60. No, it does not.

  61. 31.

    Are there any types of asset that cannot be pledged as collateral under the laws of your jurisdiction?

  62. No, it does not.

  63. 32.

    Describe any restrictions on enforcement of security. For example, any statutory regime that may stay the enforcement of the security or provide that enforcement is limited to public sale through the courts.

  64. According to Chilean law, the sale of any collateral must always be made through public auction. The action is normally made by the corresponding court unless the collateral consists of shares where the auction is made by the Stock Exchange.

    However, please note that the enforcement of collateral is made through court proceedings that are normally regulated by the laws governing the creation and perfection of the relevant security.

  65. 33.

    Describe any other relevant legal considerations in connection with loans to a borrower in your jurisdiction.

  66. As mentioned above, any person may freely engage in a foreign exchange transaction, and until now the Central Bank has not imposed any foreign exchange restrictions. However, the Central Bank is entitled to impose those restrictions (ie, reserve requirement, prior authorisation) if required to do so for the stability of the currency or the financing of the balance of payments of the country and for a predetermined period, considering the most favoured nation principle. In that regard, Chile has reserved the authority of the Central Bank on each free trade agreement (investment chapter) already executed.

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Questions

  1. 1.

    What are the most common forms of bank financing in your jurisdiction?


  2. 2.

    Are any governmental or central bank registrations or approvals required for a foreign lender (being a lender not incorporated in your jurisdiction or operating through a branch or office outside of your jurisdiction) to lend to a borrower in your jurisdiction?


  3. 3.

    Are there any foreign exchange provisions restricting, or governmental or central bank registrations or approvals required for, a borrower in your jurisdiction to contract debt obligations in a foreign currency or to remit funds abroad?


  4. 4.

    Are there any governmental or central bank registrations or approvals required for the prepayment of loans abroad?


  5. 5.

    Are any mandatory governmental or central bank deposits required to be made from loan proceeds?


  6. 6.

    Describe any governmental measures that may be taken to declare a moratorium on the loan obligations of private companies.


  7. 7.

    Describe any environmental liabilities and any other areas of lender liability that may arise as a result of the activities of a borrower or the realisation of a security interest.


  8. 8.

    Are interest payments or loan fees subject to a withholding tax?


  9. 9.

    What other taxes or mandatory fees, for example, transaction, registration or documentary, apply to loan transactions?


  10. 10.

    Are there different taxes applicable to loans repayable to lenders in your jurisdiction and loans repayable to lenders in a foreign jurisdiction?


  11. 11.

    Is your country party to any double taxation treaties that reduce taxes payable by borrowers in respect of loan payments abroad?


  12. 12.

    Do any financing structures receive favourable tax treatment, such as prepayments of exports?


  13. 13.

    Describe any limitations on interest rates or the ability of lenders to charge default interest under loan agreements.


  14. 14.

    Describe any restrictions that may apply to the choice of law, for example, whether a choice of New York or English law will be recognised and enforced in your jurisdiction.


  15. 15.

    Describe generally the requirements for the enforceability of a foreign judgment in your jurisdiction in respect of an outstanding loan.


  16. 16.

    Upon the closing of a loan, what procedural requirements (execution formalities, notarisation, registration, recordation or filing) should be observed to ensure that a loan agreement or related judgment is enforceable in your jurisdiction?


  17. 17.

    Does a loan agreement in English need to be translated or locally registered to be enforceable in your jurisdiction?


  18. 18.

    Must a foreign bank be registered in your jurisdiction to enforce any rights under the applicable loan documentation?


  19. 19.

    Are foreign lenders treated any differently from local lenders in enforcing loan documentation in the courts of your jurisdiction?


  20. 20.

    Is consideration required for the enforceability of a contractual obligation or guarantee?


  21. 21.

    To enforce a loan in your jurisdiction, need the loan be evidenced by a promissory note or other form of título executivo?


  22. 22.

    To enforce a guarantee (aval) in your jurisdiction, is it necessary that the guarantee be evidenced by a guarantee agreement or other form of título executivo?


  23. 23.

    Are there any restrictions on loans to multiple borrowers or on a guarantee in respect of a loan to an affiliated entity?


  24. 24.

    Can a party grant a secured or unsecured guarantee in respect of a loan to an unaffiliated third party?


  25. 25.

    Is there a distinction between the granting of a security interest and the perfection of a security interest?


  26. 26.

    What is the most common form of granting and perfecting a security interest in movable assets?


  27. 27.

    What is the most common form of granting and perfecting a security interest in real estate?


  28. 28.

    What is the most common form of granting and perfecting a security interest in receivables and accounts?


  29. 29.

    Does your jurisdiction recognise the transfer of assets to a trust for the benefit of a lender as a means of granting a security interest in such assets?


  30. 30.

    Does your jurisdiction recognise the fiduciary transfer of assets (such as an alienação fiduciária) to a lender as a means of granting a security interest in such assets?


  31. 31.

    Are there any types of asset that cannot be pledged as collateral under the laws of your jurisdiction?


  32. 32.

    Describe any restrictions on enforcement of security. For example, any statutory regime that may stay the enforcement of the security or provide that enforcement is limited to public sale through the courts.


  33. 33.

    Describe any other relevant legal considerations in connection with loans to a borrower in your jurisdiction.


Other chapters in Bank Financing