This content is from: Local Insights

Chile

Chilean laws have been enacted primarily to attract and foster foreign investment. Chile's government and its agencies generally show a favourable attitude towards foreign investment, whether in the form of equity, loans or technology.

Foreign investors and their local companies are guaranteed the same treatment under the law that is given to Chilean nationals and their companies. In general, there are no foreign ownership restrictions, though some foreign exchange controls on the repatriation of capital and profits remain and these need be examined.

Foreign investment and exchange control policy

Since 1989 any person may freely engage in foreign exchange transactions and, therefore, sell and purchase foreign currency, either on a regular or an occasional basis, at such rates as the relevant parties determine in their discretion. There are no official exchanges rates in Chile.

The Central Bank of Chile has exercised its regulatory powers by requiring that inflows of foreign currency due to foreign investments brought into Chile, as well as foreign loans and other external indebtedness contracted abroad, be notified to the Central Bank at the time the proceeds are brought into Chile through the formal foreign exchange market or, otherwise, used and disposed of abroad. Since April 2001 there have been no requirement that the proceeds of such foreign investments, loans or other external indebtedness brought into Chile are converted into Chilean currency, but if such conversion is made it needs be effected in the formal foreign exchange market.

The formal foreign exchange market is exclusively composed of banks authorized to carry on business in Chile and of exchange entities expressly authorized by the Central Bank to form part of the system. Effective from May 12 2000, the Central Bank broadened the definition of the formal foreign exchange market to include broker-dealers and specifically authorized stockbrokers.

Only by notifying the Central Bank of Chile of such foreign investments, loans or other debt transactions giving rise to foreign currency payments will foreign investors and debtors, or the lenders or creditors, be granted access to the formal foreign exchange market to purchase and remit abroad the foreign currency payable thereunder.

Franchise, distribution, licence, and technical services agreements providing for foreign currency payments abroad need not be approved, registered or notified to the Central Bank. The franchisee, distributor, licensee, or technical services beneficiary, however, will always enjoy full access to the formal foreign exchange market to purchase and remit the foreign currency payable under the relevant agreement.

Chile's Foreign Investment Statute (Decree Law 600) provides that foreign investors whose investments are registered thereunder will be granted access to the formal foreign exchange market to repatriate capital and profits.

Foreign investment alternatives

The constitutional law of the Central Bank of Chile and the foreign investment statute

Regardless of the investment vehicle used, foreign investments brought into Chile in excess of $10,000 or its equivalent in another foreign currency, must be notified to the Central Bank pursuant to the provisions of the LOC as set forth above.

Foreign investments brought into Chile, however, equal to or over $1 million or its equivalent in another foreign currency, or which are $25,000 investments in tangible assets or technology, are eligible for an alternative registration process available under Decree Law 600.

Decree Law 600 still provides that capital invested thereunder may not be repatriated earlier than one year from the time the investment is made, but profits may be freely remitted abroad at any time. Should profits be applied to a capital increase, such capital increase will not be subject to the referred one-year term. This one-year lock-in period for capital invested from abroad does not exist any more under the LOC. As per quantitative limitations to the repatriation of capital or profits, there are no such limitations.

Under both foreign investment systems foreign investors are granted access to the formal foreign exchange market to purchase foreign currency to repatriate capital and profits.

Foreign investments under Decree Law 600 must be approved either by the Foreign Investment Committee (FIC) or by its executive vice-president, depending on the type of investment. The Central Bank's approval is also needed if foreign loans are to form part of foreign investments under Decree Law 600.

The approval process under Decree Law 600 generally takes one month. However, bringing foreign currency into Chile under Decree Law 600 may be authorized immediately after the filing of the foreign investment application.

Investments made under Decree Law 600 may consist of freely convertible foreign currency, tangible assets, technology, associated loans, capitalization of foreign loans registered with the Central Bank, and capitalization of profits. Investments under the Central Bank's regulations must be made in freely convertible foreign currency only.

With respect to the use of foreign loans as a source of financing, Decree Law 600 requires that 50% of any investment be made in freely convertible currency. Consequently, investment projects that are submitted to the FIC for approval must have a maximum component of associated loans equivalent to 50%.

As required by both the FIC and the Central Bank, capitalization of foreign loans may only be made in the debtor company itself, while profits entitled to be remitted abroad may be capitalized either in the company that actually generated those profits or elsewhere.

The FIC as a whole must approve the following investments: (i) those in excess of $5 million or its equivalent in other currencies; (ii) investments in areas of the economy that are usually performed by the state and those carried out by public utility companies; (iii) investments made in the mass media; and (iv) investments made by foreign states or foreign corporate bodies chartered under public law.

The FIC's executive vice-president, with the prior approval of the FIC's chairman, is authorized to approve all other investment projects, unless the latter deems it advisable to submit an investment project for the approval of the FIC.

It can be argued that Decree Law 600 affords sound legal protection to foreign investors in Chile, as the rights of foreign investors are secured by an investment contract entered into with the Republic of Chile. Foreign investment contracts are governed by Chilean law, are subject to the jurisdiction of Chilean courts and may not be unilaterally modified by the Republic of Chile.

Furthermore, Decree Law 600 grants foreign investors additional protection against discriminatory treatment vis-à-vis domestic investors by stating that foreign investors and local companies receiving foreign investments are subject to the general provisions of law applicable to domestic investors and that no discrimination, direct or indirect, may be made against them.

Nevertheless, Decree Law 600 provides that regulations may be enacted to limit foreign investor access to local financing. In practice, however, no general regulations are in effect in this regard.

Decree Law 600 also grants foreign investors special devices particularly designed for project financing. Such devices are mainly applicable to $50 million or more industrial or extractive projects, including mining projects, and typically entail the following benefits: obtaining an extension of up to 20 years on the application of the invariable income tax regime contemplated by Decree Law 600, and operating offshore accounts in which to deposit the proceeds obtained from exports of goods or services to cover expenses incurred abroad.

The funds that are deposited in such offshore accounts need not be returned to Chile and converted into local currency in the formal foreign exchange market; may be used to repay foreign loans authorized by the Central Bank and to make import payments; and may be made subject to liens in favour of lenders and other creditors.

Even though foreign investors are subject to the indirect taxation system (value added tax) and import duties generally applicable in Chile, Decree Law 600 grants foreign investors bringing tangible assets as part of the relevant investment project the right to elect to be subject to value added tax and import duties in effect on execution of the investment contract for the period during which such tangible assets will be imported into Chile. This is provided, however, that such assets are included in a list of machinery and equipment made by the Ministry of Economy and, further, that such assets are not manufactured or otherwise produced in Chile.

Under Decree Law 600, the net proceeds resulting from the sale of the shares or quota rights representing the investment made or from the total or partial liquidation are exempt from taxes, duties or charges up to the amount of the foreign investment materialized pursuant to Decree Law 600. Any excess is subject to local income taxes generally applicable. This tax provision is important as it protects foreign investors from the devaluation that the Chilean currency may have suffered between the date the investment is made and the date it is repatriated.

Decree Law 600 also gives foreign investors the right to elect to be subject to a 10-year invariable overall income tax regime of 42%. Nevertheless, since present income tax rates, in the aggregate, impose a lower tax burden, the special tax regime afforded by Decree Law 600 is not attractive.

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