How to Fund a Subsidiary in Chile: Debt vs. Equity

When expanding into a foreign market, one of the first and most critical decisions is how to fund the newly established entity. The chosen funding structure—whether equity, debt, or a mix of both—will impact everything from tax obligations and regulatory compliance to operational flexibility and long-term growth potential.

There are two primary methods for funding a company’s growth in Chile:

1. Equity contributions, and
2. Intercompany loans (debt financing).

The right approach will depend on several factors, including the scale of the planned operations, the long-term business objectives, and the Chilean tax regulations that govern each funding method.

Option 1: Funding Through Equity

This is the classic route—your parent company injects capital directly into the Chilean subsidiary and registers it as equity.

Sounds straightforward. But here’s what you need to know:

• The capital may be paid in (registered) during the incorporation process as initial capital and another part within a period not exceeding three years in the case of a corporation. In the case of a joint stock company, if nothing is specified in the bylaws, the period shall be five years.
• Business License Tax is tied to capital. In Chile, municipal governments charge a yearly “Patente Municipal” based on how much equity your company has. Rates vary between 0.2% and 0.5% of registered capital, depending on the municipality.
• So, more capital = higher annual municipal taxes.

While equity funding is relatively straightforward and well-suited for long-term investment, it limits flexibility in future tax planning. For this reason, companies often evaluate the equity amount carefully, balancing operational needs with the long-term tax and cost implications.

Option 2: Funding Through Intercompany Loans

Using intercompany loans is a flexible way for foreign companies to fund their Chilean subsidiary, especially in the early stages when the business is still growing. They offer more flexibility, especially when it comes to tax planning and repatriating funds.

To make sure the loan is treated properly for tax purposes, it needs to be at arm’s length—that means it should look like a deal you’d make with an unrelated third party. A simple loan agreement is required, outlining the repayment terms, interest rate, and other basic conditions.

Any interest paid on the loan is subject to withholding tax, but if the lender is based in a country that has a tax treaty with Chile, the rate is usually reduced to 10%. The principal amount, on the other hand, can typically be repaid without any tax.

There are some important rules to follow—like transfer pricing, stamp tax, and thin capitalization limits—so the loan has to be properly documented and registered. Otherwise, there’s a risk that the tax authority might treat it as equity, which can bring unexpected tax costs.

All in all, when done right, intercompany loans can be a smart and efficient way to fund a new subsidiary, giving companies more flexibility as the local business gets up and running.

What to Keep in Mind When Using Loans

If you’re funding your Chilean subsidiary with a loan, here are a few important things to consider:

• How the money enters Chile matters.
  The funds should come through the Formal Exchange Market—typically via a bank—and clearly labeled as a loan in favor of the Chilean entity. The bank then reports the transaction to the Central Bank.
• You’ll need a proper loan agreement.
  To avoid issues, the loan must be clearly documented, outlining the terms, interest, and repayment. Once booked, the loan triggers stamp tax (ITE)—charged monthly at 0.066%, capped at 0.8%. Loans without a maturity date are taxed higher, up to 0.332%.
• Watch your debt-to-equity ratio.
  Under Chile’s thin capitalization rules, a company can’t borrow more than three times its capital. If it does, a 35% withholding tax applies to the excess interest—even if a tax treaty exists. The good news? You can convert debt into equity later if needed.
• Stick to market terms.
  Because this is a related-party loan, transfer pricing rules apply. That means the interest rate and terms should reflect what you’d offer a third party. To avoid future tax issues, it’s smart to support the rate with a transfer pricing report, especially for larger loans.

Conclusion

Both debt and equity have their advantages and limitations when it comes to funding a Chilean subsidiary. Loans offer flexibility and allow for the repayment of principal without triggering withholding tax once the subsidiary becomes profitable. However, they do require careful structuring, documentation, and the payment of stamp tax.

Equity contributions, by contrast, are simpler to record and often easier to manage during the initial setup phase. That said, they can limit future tax planning strategies and directly increase the annual municipal license tax, as this is calculated based on registered capital.

In practice, most companies opt for a balanced approach, using a mix of debt and equity. The right combination will depend on the company’s financial policies, its growth projections in Chile, and the tax frameworks of both Chile and the parent company’s jurisdiction.

The key is to plan early. How funds are classified and recorded at the outset will have long-term implications for compliance, taxation, and operational flexibility. Proper registration with the Central Bank of Chile and accurate accounting treatment are essential to avoid issues later on.

Ax Legal helps industrial technology, engineering, and service companies to navigate the legal and commercial aspects of operating their business in Latin America. With deep knowledge of the industrial and natural resource sectors, we provide actionable and practical advice to help streamline our clients’ entries into Latin America, improve how they operate in the region, and to protect their interests.

Over the years, our team of legal and commercial advisors have developed a track record of working with companies of all sizes from Australia, Canada, the U.S., and Europe. The one common factor that connects our clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.

To better understand how we can support you in the Region, please contact Cody Mcfarlane at cmm@ax.legal