The deal, however, must still receive approval from the regulatory authorities and shareholders.
If the merger succeeds, the new airlines would have combined revenues of more than $8bn, and would fly passengers to 115 destinations in 23 countries.
The new company would have a combined workforce of 40,000 employees and a total fleet of 241 aircraft.
"Together, LAN and TAM will be able to offer new destinations that neither company could have supported on its own,'' Marco Bologna, CEO of TAM, said.
"This will position us to compete with the foreign carriers that continue to increase service to our region, while creating new jobs in our home countries.''
TAM is Brazil's biggest airline, controlling 43 per cent of the domestic market in Latin America's biggest economy.
LAN, which also has operations in Peru and Argentina, is one of the biggest airlines in Latin America, with a strong network of international routes, which generate more revenue per passenger than domestic flights.