Companies looking to expand abroad often want to have a presence in a specific market but in some cases, they want to have a presence without incorporating an entity. This could be for a variety of reasons, but mainly, it is to limit expenses until there is sufficient revenue to justify having a physical entity.
There is three ways for companies to expand into a target market without having a physical entity:
- Find an agent that represents the foreign company;
- Find a distributor that sells the companies products/services, or
- Market and sell from an office established outside the country.
Generally, we see companies do a combination of the three. They first come to Chile attending trade shows where they may meet agents or distributors that match well with their product or service. At the same time, they will look for specific opportunities and fly-in sales staff to attend meetings as needed.
The Legal and Tax Implications of Hiring an Agent
From a taxation and legal perspective, there are several aspects to be aware of, especially regarding permanent establishment (PE) that can arise from an agent relationship.
The main issue would be to determine if this kind of relationship would give rise to Permanent Establishment. In most cases, companies are looking to hire an agent in order to develop business for the company in a specific region. This scenario may indeed give place to a PE.
If a foreign entity is found to hold permanent establishment (PE) in Chile, such PE will be subject to the same taxes as Chilean taxpayers, i.e. to a First Category Income Tax (FCIT) of 21% on its net taxable income and will not be subject to any other tax while they do not distribute dividends abroad. In addition, when profits are distributed abroad, a 35% Additional Withholding Income Tax (AWIT) applies, against which the FCIT paid, is creditable. The overall taxation with Australia will be then 35%.
Generally speaking, the Chilean Income Tax Law does not have a definition of “permanent establishment”. In its Article 58 N° 1, it only gives examples of what may be considered as PE for Chilean tax purposes describing them as branches, offices, agents or representatives.
As there is no legal definition, the Chilean IRS has issued several rulings regarding this matter, in which it consistently defines “permanent establishment” as an extension of the foreign principal entity in Chile through the establishment of an office or agent that undertakes and develops a formal activity and that assumes the representation of the foreign entity with the power to conclude businesses in its name.
In short, that means an agent who is receiving a monthly salary from abroad, who is actively promoting the business and is able to close deals on behalf of the company could trigger PE.
Considering the definitions given above, you may already conclude that there are foreign entities that undertake business in Chile through an agent which triggers PE and others that do not.
Many companies try to skirt around this issue, hoping that no one will be the wiser. In reality, a company could get around this for some time but of course, Murphy’s Law, it will show its ugly head the moment business is starting to look good.
If you are serious about the Chilean market, you may be unnecessarily exposing yourself to risk. There is a very practical way to set up an agent/dealer relationship and it only involves making sure that you set up the relationship correctly from both a legal and business perspective from the very beginning.
We provide some basic guidelines in this article to help companies set up an agent/dealer relationship that will limit the risk of triggering PE while also ensuring that the agreement is effective.
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. Do not hesitate to contact our offices if we can assist you in anyway.