Most companies will rely on agents to represent their business in international markets. What many do not realise is that there are legal and tax implications to be aware of, especially regarding permanent establishment (PE) that can arise from an agent relationship. Feel free to see our previous article practical advice setting up a Chilean agent that provides more details on this aspect.
Now that you are aware that some risks do exist, there is some very practical solutions that can be implemented which will help mitigate this risk when setting up an agent in Chile.
The first recommendation is directed towards companies that will ¨hire¨ an agent and pay a monthly fee to represent the company. We see this often with companies that are promoting a particular services on behalf of the foreign company. They will often find an agent that can act in a business development role and the company simply transfers a fee each month.
If a company has an agent/dealer relationship such as this, it is important that the Chilean professional uses a “contrato de honorario” (Chilean legal name of a contract for independent contractors). This mean that the person or legal entity who renders services will issue an invoice each month under their name or the companies.
Please note, that unlike Common Law countries, where this can be done with a simple excel invoice or even on the back of a napkin, it needs to be done as per Chilean tax legislation. This means that it will need to be issued as a official Chilean factura either electronically or in paper format.
This helps establish that the agent and company in question are truly separate entities.
The second recommendation is to ensure that there is clear limits to the degree in which the agent can act on behalf of the company.
The representative should only perform auxiliary or preparatory activities (as SII rulings state) with respect to developing of business and facilitating services to Latin America.
Under no circumstances should the agent have sufficient authority to close deals on behalf of the company or have the mandate/authority to conclude contracts on behalf of company. If so, the company could be trigger permanent establishment, which Chilean rulings have consistently resolved.
On the other hand, if the agent only performs preparatory or auxiliary activities and is not empowered to close business on the companies behalf, a PE would not be triggered in accordance with Chilean jurisprudence and the terms of the Convention to Avoid Double Taxation (Convention).
These limits of authority should be established in the “contrato de honoraria” and further reiterated in any POA´s the agent may hold.
The third recommendation is to ensure that the agent does not establish an office of the company or have any type of office that may be recognisable as the foreign companies office space, even if it is contracted by a third party.
The Convention to Avoid Double Taxation defines the “permanent establishment” (article 5) as a fixed place of business through which the business of an enterprise is wholly or partly carried on. This said, please consider that according to the Convention any “place of management” or an “office” is deemed as a PE, however the maintenance of a fixed place of business solely for the purpose of advertising is not considered a PE if it only carries on “preparatory” activities.
Considering this regulation, there are substantial elements that should be avoided such as setting up an office in Chile or a place where management decisions are made. All leases should be executed in the name of the agent or through the agents company and avoid using the companies image/brand (at least in excess).
It is advisable to have some of these points written in the “contrato a honoraria”, so that the agent knows exactly what they can and cannot do.
Lastly, we highly recommend that companies do not use generic agent contracts that are written in English.
We frequently see companies that believe the contract they use in their home country with very basic changes would be sufficient in Chile. You will truly be disappointed when you need to enforce it.
Instead, hire an attorney that can translate and localise the contract so that it is specific to Chile. This option is cost effective and will ultimately better protect your interests.
Harris Gomez Group focuses on providing our clients with practical advice. We understand that your number one priority is to grow your business in the most straight-forward and cost efficient ways possible. If you have an agent in Chile but realise that your agreement or relationship could be better structured, contact our office and we can review your current agreement to ensure that your protected.