New Law in Chile: Payments of Invoices in 30 Days
Small to Medium size companies are collectively one of the largest sources of employment in most countries. These same companies face a constant threat to their finances since they often have to accept payment terms with which they do not feel comfortable. Debtors, and especially large businesses, often insist on long payment terms which are often detrimental to the liquidity of SMEs and thereby the entire economy.
On January 2019, Law 21.131 was published, which essentially states that payment of invoices for sales and services provided must be made within 30 days of receipt of the invoice.
Although the original bill was intended only to amend the “Small Businesses Statute”, the law ended up as a rule of general application, affecting all entities that issue and/or receive invoices in Chile, regardless of their size.
This legislation also outlines the exceptional cases in which a different timeframe can be applied, and the requisites to do so. Moreover, it includes a scheme for the gradual implementationof the law.
Firstly, the law includes all sales and provision of services operations, as well as other operations strictly included by law.
If payment is not made within this term, the debtor (the buyer or beneficiary of the services provided) will be considered, for all legal purposes, at default. This means that the creditor (in this case the seller or service provider) can rightfully sue for damages, and specific rules for interests and their charging apply. Interest applies from the first day of default up to the date of effective payment, and specific interests are set. Also, the seller or service provider must pay a fixed commission, consisting of 1% of the owed amount for outstanding balance.
For ‘exceptional cases’ (these are not explained or established by the law), an extension of the 30-day term to pay invoices can be made. This extension is done by an agreementbetween the service provider and the beneficiary (creditor and debtor respectively), which has the following requisites:
- that it be in writing,
- that it is signed by the parties who take part,
- and that it doesn’t constitute abuse for the creditor (a concept which is also not clarified by the law).
This agreement must also be registered, within five days of its conclusion, in a special registry held by the Ministry of Economy, Development and Tourism. If not timely registered, the standard 30-day term for payment will apply.
As mentioned above, the implementation of the law will be gradual, applying it in stages: the 30-day period won’t fully apply until February 2021; in the meantime (from May 2019 up until February 2021), the term will consist of 60 days instead of 30. This timeline of gradual implementation only applies to the private sector so any contracts with the public institutions will start immediately.
We work with service and technology providers who service the industrial sectors. In Chile, this tends to be the large mining companies. We often see companies who face cash flow pressures because large mining companies have payment terms of at least 60 days and up to 90 days in some cases. This leads to many companies using factoring companies to finance their invoices but this comes at a cost to companies who are already facing financial pressures. We believe the new law is a step in the right direction but there are questions about how it will work in the real world.
It is our opinion that we will see mining companies asking for longer payment terms in their contracts and then registering it with the Ministry of Economy, Development, and Tourism as per the new requirements set out in the law. This is not much different than how things are done currently, where payment terms are expressed in most contracts that suppliers sign with the mining companies. The next question that comes to mind. Will companies be penalized for asking for a 30-day term in comparison to a competitor who may be willing to accept a longer-term? This is not clear right now but as the law is implemented we will be providing advice to clients to how they can deal with this issue.
Regardless, it is good that this very important topic is being publicly discussed and steps are being taken by lawmakers to deal with the issue which will ultimately benefit the economy.
Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. We also have legal teams in Peru, Bolivia, Ecuador, Brazil, and Argentina. Over the last 18 years, we have been supporting foreign companies with their growth in Latin America. Many of our clients are technology companies, service providers and engineering companies that focus on the mining, energy and infrastructure markets.
To better understand how we can support your management team in the Region, please contact Cody Mcfarlane at firstname.lastname@example.org