A reform of company law in Chile designed to create a strong venture capital market does not go far enough, according to leading Chilean financial experts.
In July, the government of Michelle Bachelet, who became Chile’s first female president in March, introduced a bill to congress that would allow the creation of limited partnership companies. The new type of company, called sociedad por acciones (equities company), would more clearly separate the role of shareholders and managers.
Under the proposed law – expected to be approved by congress before December – shareholders in the new type of company would not be subject to capital gains tax (CGT) if they sold their stock during the first three years of investment.
CGT is a progressive tax in Chile ranging from zero to 40% in line with the level of capital gain. Under the reforms, these rates would only apply to shareholders after three years.
However, Patricio Arrau, principal partner of Santiago financial consultants Gerens, who has been leading the business community’s push for a dynamic venture capital market, says: “The new reforms put too many requisites on entrepreneurs who wish to invest in this type of company
“Unfortunately, Chile’s taxation authorities are reluctant to take on the role necessary for this reform to work properly. In the US, the Internal Revenue Service supervises the system to ensure that there is a clear delineation between shareholders and company management.
“This needs to happen in this country. The tax authorities here seem afraid that existing businesses will use the reforms as a means to avoid paying CGT. Hence, all the red tape.”
He adds that despite the reforms’ limitations they will help to create a deeper venture capital market in Chile than in any other South American country.
Pablo Correa, head of economics research of Banco Santander in Santiago, says: “I think the changes are a first step in the right direction. I do not expect the industry to be radically transformed by them. At first, the business community was highly enthusiastic about the reforms; now it wants to wait and see.
Form filling
“It is still difficult to know the amount of form filling that would be involved in setting up one of the new companies. The legislation leaves it to the tax authorities to spell out the details.
“However, Chile’s tax office is part of the ministry of finance, and I think it will want to ensure that the reforms have some impact.”
He adds that it is difficult to estimate if hundreds or thousands of companies would be created under the new structure.
The Chilean government says a state agency, the corporation for the development of production, would provide finance for entrepreneurs that wish to invest in the new type of company (although it has not yet specified the total amount of funds available).
The Chilean business community has been waiting for the venture capital reforms since 2003, when president Ricardo Lagos’s government originally backed them.
