Lent, not given

In the first article of this series we explained that, during the twelve months beginning on December 1, 2026, donations to children, spouse, grandchildren and other forced heirs will pay half the tax. A practical question remained open, one that arises in almost every family with a business, the question of who pays that tax and with what money.

The problem is well known. When a parent donates to the children shares or interests in the family company, the tax is paid by the recipient and it is paid in cash, even if what is received does not generate cash immediately. Even when halved, that tax can be a sum the child does not have. The usual solution has been for the company to distribute profits to pay it, and those profits are in turn subject to personal taxes.

Law 21.850 opens another route. Under the ninth paragraph of its first transitional article, the recipient may finance the tax with a loan from the same company whose shares or interests the recipient receives, or from another related company, without that loan being subject to the taxation of article 21 of the Income Tax Law (Ley sobre Impuesto a la Renta). It is a useful tool, but it has precise formal requirements and leaves several questions open.

What the law allows

The rule has five elements, namely (i) the borrower is the recipient; (ii) the loan must be recorded in a loan agreement (mutuo) granted by public deed or in a promissory note (pagaré) authorized before a notary; (iii) the lender must be the company whose shares or corporate interests are donated, or another related company; (iv) the credit must be agreed at least in unidades de fomento (UF), the inflation-indexed unit of account, with a repayment term not exceeding ten years from its granting; and (v) its purpose is to finance the gift tax, so whatever is lent above that amount has no coverage under the rule.

If those conditions are met, the loan is not subject to the taxation of article 21. If they are not met, the same rule provides that such taxation will apply. There is also a rule for the company that lends the tax amounts, which provides that if the company borrows in order to grant the loan (loan agreements or promissory notes), the interest on that debt is not deductible as an expense.

Why article 21 matters

Article 21 of the Income Tax Law taxes, among other items, loans that a company makes to its owners, partners or shareholders when Chile's tax authority (SII) determines on a reasoned basis that they are a disguised withdrawal of profits. In that case, the amount lent, adjusted for inflation and net of whatever has been repaid, becomes subject to the global complementary or additional tax, increased by an amount equal to 10% of the amount lent.

A loan from the family company to a child to pay the tax on a donation is, at first sight, the kind of transaction the SII reviews closely. Law 21.850 removes that doubt for these particular loans, provided their formalities are observed. That makes the order of the steps important, because under the eighth paragraph of the same article the tax must be paid before the notary authorizes the deed of donation. The loan, therefore, is granted before the child owns what is received.

What the law does not say

The rule is brief and leaves at least four questions that the SII should address in its instructions.

The first is what is meant by other related companies, and related to whom. Article 8 number 17 of the Código Tributario (Tax Code) defines related parties for tax purposes and includes, among others, companies with a common controller and companies in relation to their owners of more than 10%. A favorable reading holds that it is enough for the lending company to be related to the donor, so that a family investment company could finance the tax even if what is donated is real estate. The unfavorable reading, closer to the text, understands that the company must be related to the one whose shares or interests are donated, and that the tool exists only when corporate shares or interests are donated. If the first is chosen and the SII adopts the second, the loan is exposed to article 21.

The second is interest. The law requires that the credit be agreed at least in unidades de fomento, which suggests that UF indexation is a floor, but it does not require an interest rate. An interest-free loan complies with the text, although it cannot be ruled out that the SII, using its general powers, may challenge a transaction whose terms depart widely from those a third party would agree to. Agreeing a moderate interest rate reduces that exposure and, in some companies, may be required for corporate reasons.

The third is what happens if the loan is not repaid. The law fixes the conditions when the loan is granted, but it does not regulate default or forgiveness. If in the tenth year the debt is still unpaid and the company forgives it, the SII could argue that the forgiveness conceals a withdrawal or a new donation, and it is unlikely that the protection of the rule extends to a debt that was never meant to be collected. A loan of this kind needs a realistic repayment plan from day one.

The fourth is the scope of the consequence of non-compliance. The rule says that if the loan does not meet the minimum conditions "se aplicará la tributación referida" ("the aforementioned taxation will apply"). A favorable reading understands that in that case the general rule is restored, under which the SII must prove that the loan is a disguised withdrawal. An unfavorable reading understands that non-compliance alone is enough to apply article 21. Until there are instructions, the prudent course is not to leave any condition open to interpretation.

What the lending company requires

Tax law permits the loan, but it does not replace the rules of the company that grants it. If it is a closely held corporation (sociedad anónima cerrada), article 44 of Law 18.046 requires that transactions of significant amount in which a director has an interest be approved beforehand by the board, with the interested director abstaining, and that they conform to terms of fairness similar to those prevailing in the market, unless the bylaws authorize otherwise. The same rule deems a director to have an interest when the transaction involves their spouse or a relative up to the second degree, so a loan to a director's child falls squarely within it. Companies limited by shares (sociedades por acciones) are governed, where their bylaws are silent, by the rules for closely held corporations, under article 424 of the Código de Comercio (Commercial Code). In limited liability companies (sociedades de responsabilidad limitada), one will have to look to the partnership deed.

There is also a family dimension. If the company has other partners, or if the recipient's siblings do not receive the same treatment, a long-term loan on favorable terms may be read as an advantage for one of them. It is advisable that the decision be documented and consistent with the complete succession plan.

What it really costs

The loan makes it possible to pay the tax today with company resources, but the recipient will still have to repay it, normally with the dividends or withdrawals received from that same company, and those dividends or withdrawals pay personal taxes when distributed. To this is added stamp tax, which taxes loans and promissory notes at a rate that rises with the term up to a maximum of 0.8%, under article 1 number 3 of Decreto Ley 3.475 (Decree Law 3.475). Law 21.850 does not exempt them from this tax, and on a ten-year loan the maximum rate is paid.

What does change is the calendar. The reduced tax is paid within the twelve-month window, with company resources, and the family has up to ten years to repay them.

How to do it in order

The order matters more than in an ordinary donation. First, what is donated must be valued and the donor's sworn statement prepared, in accordance with the instructions the SII issues. Then, the corporate approvals required for the loan must be obtained. Next, the loan agreement is granted by public deed or the promissory note is signed before a notary, in unidades de fomento and for a term of no more than ten years. With those funds the recipient files the return and pays the tax, and only then can the notary authorize the deed of donation. At the end come the entries in the shareholder register or the corporate amendments that apply, which the law allows to be made afterward.

What we still do not know

The SII has until November 16 to issue the resolutions with the instructions and forms for the reduction. Will it say anything about these loans? Will it specify which companies are considered related? Will it ask for additional documents to prove them? We will review it in the third part of this series, together with the question left open in the first, whether the limit on what can be donated is one half or one third of net worth.

A well-made loan makes it possible to take advantage of the reduction without selling assets or distributing profits. A poorly made one can turn a twelve-month benefit into a ten-year contingency.