Thursday, January 20, 2011

Applicable Regimes to Foreign Investment in Chile


There are two regimes pursuant to which a foreign investor can conduct its investment in Chile: (i) the Chilean Foreign Investment Statute (DL 600), and (ii) the Chapter XIV of the Compendium of Foreign Exchange Regulations of the Central Bank of Chile.

1.    Chilean Foreign Investment Statute (DL 600)

Adopted in 1974 as part of an opening-up that dramatically modified the existing policy for foreign investment, the DL 600 aimed to give foreign investors greater guarantees and incentives to invest in Chile. Since then only minor modifications have been made to the original text and, when so, only to reaffirm the importance given in Chile to a stable foreign investment policy. So far, around 70% of all the foreign investment made in Chile after the enactment of DL 600 has been conducted under its regulations.

1.1. Procedure and Foreign Investment Contract

An application must be submitted by the foreign investor to the Foreign Investment Committee containing all the relevant information in connection with the project to be funded.

In this regard, a foreign investor may be a foreign individual, a foreign legal entity including companies, corporations and foundations, foreign states and international organizations, and Chilean individuals or legal entities domiciled abroad.

Should the application be accepted, a public deed containing a Foreign Investment Contract will be executed between the State of Chile, duly represented, and the foreign investor. Such contract will establish the rights and obligations of the parties regarding the investment and cannot be modified or rescinded unilaterally by either party.

If the application is rejected the investment already made can be repatriated.

1.2.  Minimum investment

The Foreign Investment Committee may set a minimum amount of investment. As of 2010 the amount was fixed at US$5,000,000 for investments in currency and US$2,500,000 for investments conducted in other forms.

1.3. Term to materialize the investment

The Foreign Investment Contract shall provide the term in which the investor must conduct its investment. This term cannot exceed three years, or eight years in case of mining projects. However, the Committee may exceptionally extend this period: (a) up to twelve years in case of mining projects which need previous exploration work, and (b) up to eight years in case of industrial or non-mining extracting projects involving an investment of US$50 million or more.

1.4. Forms of investment

(a)    Foreign currency, converted into Chilean pesos through an authorized entity of the foreign exchange market at the best available rate for the investor;

(b)    Tangible assets, in all forms;

(c)    Technology under certain conditions;

(d)    Loans in connection to an investment, not exceeding 75% of the total investment;

(e)    Capitalization of loans and foreign debt; and

(f)     Capitalization of profits.

1.5. Rights of the foreign investor under the Foreign Investment Contract

(a)    Capital and profit remittance

Investors are entitled to repatriate the capital invested after one year. No taxes or other burden is applicable to such remittance of capital. Profits can be remitted at any time, after paying the relevant taxes.

For the remittance of both capital and profits the foreign investor is entitled to use the best available foreign exchange rate after obtaining a certificate from the Executive Vice-presidency of the Foreign Investment Committee.

(b)    Access to the Formal Exchange Market

Investors have guaranteed access to the Formal Exchange Market in order to convert currency for the purpose of incoming capital and for capital and profit repatriation.

(c)    Right not to be discriminated

The investor is guaranteed not to be discriminated in the course of its business activities. In this regard, foreign investors will be subject to the same regulations than local investors for a given investment sector.

(d)    Tax regime

(d.1) General tax regime

All Chilean companies are subject to a 17% corporate tax on profits. As a general rule, foreign investors are subject to a tax equal to 35% on profits remittances (“additional tax”), being able to use as credit the 17% corporate tax already paid. Therefore, the total tax burden will be 35%.

However, foreign investors can voluntarily adopt a special tax regime.

(d.2.) Special Tax Regime

The foreign investor can choose to adopt a special regime in which the additional tax that must pay is fixed in the amount of 42% of the profits (instead of 35%). This will ensure the investor that the tax rate will not be modified for a period of 10 years. The investor can at any time switch to the general tax regime and in such case it will not be able to switch back to the special regime again.

(e) Customs and indirect taxes

The foreign investor is allowed to freeze the existing custom and value added taxes corresponding to the import of machinery and equipment needed to implement the project. Should there be any changes in such taxes they will not be applicable to these imports. This invariability will also be applicable to those companies who receive the foreign investment, in which the foreign investor participates, for the amount corresponding to the investment.

1.6. Projects of US$50 million or more

For industrial and extractive projects, including mining projects, involving US$50 million or more, the foreign investor will have the following additional rights:

(a)  The right to tax invariability indicated in paragraph (d.2.) above can be extended up to 20 years.

(b)  Tax laws and rulings issued by the Chilean Internal Revenue Service regarding asset depreciation, loss carry-forward provisions and provisions in connection to the start-up expenses applicable at time of the execution of the Foreign Investment Contract will be maintained invariable for the same period of tax invariability applicable to the project.

(c)  The right to keep account booking in foreign currency.

(d)  In projects involving export of goods, the right to maintain invariable all applicable export regulations existing at the time of the Contract and to keep export proceeds in an off-shore account in order to pay with such proceeds obligations authorized by the Central Bank of Chile, make expenditures related to the project or to repatriate capital or profits originated there from.


2. Chapter XIV of the Compendium of Foreign Exchange Regulations of The Central Bank of Chile

The Chapter XIV of the Compendium of Foreign Exchange Regulations of the Central Bank of Chile (“Chapter XIV”) establishes the rules applicable to foreign loans, deposits, investments and capital contributions exceeding the amount of US$10,000.

Pursuant to Chapter XIV all loans, deposits, investments and capital contributions made from abroad must be materialized through the Formal Exchange Market (“FEM”) and notified to Central Bank. The Formal Exchange Market is formed by the banks established in Chile and other entities authorized by the Central Bank.

2.1. Simpler procedure

The procedure established in Chapter XIV is more straightforward than the one contained in the DL 600. If a foreign investor decides to materialize its investment through this set of regulations no Foreign Investment Contract or prior approval will be needed, but only to notify the Central Bank the main aspects of the transaction.

This represents a significant difference between Chile and China in terms of openness to foreign investment, considering that the latter does not provide any form of alternative investment procedure that merely demands notification. Chinese investment rules invariably require administrative approval from the Ministry of Commerce or its local counterpart.

2.2. No guaranteed access to FEM and no invariability

Contrasting with the case in which a Foreign Investment Contract has been executed pursuant to the DL600, neither the foreign investor nor the local recipient of the funds will have guaranteed access to the FEM or to the best available exchange rate for the repatriation of the capital, profits or interest when using the Chapter XVI procedure.

Also, the payment and fund remittance arising from the transaction above indicated, including interest, currency readjustments, profits and other benefits will be controlled by the rules currently in force at the time of the payment or remittance, including all taxations laws and rulings from the Chilean Internal Revenue Service.

2.3. Modifications of the investment

Foreign investors conducting their foreign investment trough Chapter XIV must inform the Central Bank of the following modifications affecting the transactions or contracts involved: substitution of creditor, debtor, depositor, deposit receiver, investor, capital contributor and receiver of a capital contribution; complete or partial transfer of the credits or of the rights over the investment or capital contributions; change of name, merger or splitting of companies; payment schedule, finance conditions or modification of the informed especial provisions of the loan; partial or complete capitalization of credits or other payment obligations; and change of an investment to capital contribution or vice versa.

2.4. Remittance of capital and profits/interest

Chapter XIV allows to remit loan’s principal and interest, capital contributed or invested and profits at any time.

The remittance of a loan’s principal is not subject to taxation. The remittance of interest will be subject to a 35% withholding tax (“additional tax”). In case the lender is a foreign or international financial institution the payment of interest will be subject to a 4% additional tax.

As per the capital contributions or investments, all Chilean companies are subject to 17% of corporate tax on profits. As a general rule, foreign investors are subject to additional tax equal to 35% on profits remittances, being able to use as credit the 17% corporate tax already paid. Therefore, the total tax burden will be 35%.

2.5. Switching from the DL 600 statute to Chapter XIV

The Chapter XIV procedure allows those investors who are currently conducting an investment according to DL 600 rules to subject it to Chapter XVI rules instead. In order to do so the foreign investor shall must: (i) execute a public deed containing the termination of the relevant Foreign Investment Contract (such deed must be concurrently executed by the State of Chile or by the Executive Vice President of the Foreign Investment Committee, depending on the case); and (ii) declare in writing to the Central Bank of Chile his willingness to maintain the investment in Chile subject to the terms and conditions of Chapter XIV and to resign the right of guaranteed access to the FEM for the remittance of the capital and profits, if applicable.

Monday, January 17, 2011

Comparative Analysis of Suitable Vehicles for Foreign Investment in Chile


As we mentioned in the previous article “Foreign Investment in Chile”, the Chilean legislation includes several types of legal entities suitable to carry on business. The most relevant for the purpose of foreign investment are the branches of foreign corporations (“agency”), the limited liability companies (“LLC”), the stock corporations and the corporations by shares. In this section we will make a brief comparison between these legal entities with emphasis on matters relevant to foreign investment.

1.     Legal status.

The LLCs, corporations and corporations by shares are considered to be legal entities independent from their parent companies (foreign investor) as is the case for the Chinese limited liability company and the Chinese joint stock limited company. The most relevant consequence is that the parent companies will only be responsible with the foreign investment vehicle (“FIE”) for the capital contribution that they have agreed to pay. In other words, the parent companies will not be liable in any part for the obligations that the FIE undertakes in the course of its business.

On the other hand, an agency –as is the case for a Chinese representative office- does not have independent legal status and is considered to be a representative or agent of the parent company, sharing the same legal personality. As a consequence, the parent company with all its assets will be held liable for the obligations of the agency in case the assets of the agency are not enough to satisfy its liabilities.

2.     Supervision by the Securities and Insurance Commission [Superintendencia de Valores y Seguros or SVS].

According to the Chilean Corporations Act corporations can either be “closed” corporations (closely-held) or “open” corporations (publicly-held). Open corporations are those registered in the Securities Registry, either voluntarily or according to the law. Corporations which according to the law must be registered in the Securities Registry -and therefore will be “open” corporations- are those whose shares or other issued securities are publicly traded, or have more than 500 shareholders, or at least 10% or more of the subscribed capital belongs to 100 or more shareholders, excluding those who individually or through other natural or legal persons exceed such percentage.

Closed corporations are those that do not fall within the previous definition.

As a general rule open corporations will be supervised by the SVS and closed corporations will not. “Special” corporations like banks and insurance companies will be also supervised by the SVS.

3.     Incorporation.

3.1.  Agency.

In order to incorporate an agency, the agent or its representative will need to register at a public notary in Chile several documents related to the parent corporation, that is, incorporation documents and certificate of good standing, copy of the bylaws and a general power of attorney which must contain certain compulsory faculties. A translation must be included for any of documents that are in a language other Spanish. On the same date and before the same public notary, besides stating the name, purpose, capital (including payment modalities) and domicile of the agency, the agent must declare in a public deed on behalf of the parent corporation that the parent corporation is familiar with the relevant legislation in Chile, that the corporation's assets in Chile will be subject to Chilean law (notably for ensuring responsibility in contracted obligations) and that the corporation will maintain enough assets in Chile to fulfill its obligations.

An excerpt of the notarized copy and statement described above shall be registered in the Commerce Registry and published in the Official Gazette within 60 days following the execution.

3.2.  LLC and Corporation.

LLCs and corporations must have at least two shareholders. This means that a foreign investor who wants to incorporate a LLC or a corporation will need to have at least a second shareholder in the company. However, since the law does not specify any minimal capital contribution, the second shareholder can be left with a nominal participation (“nominee shareholder”). This role is often fulfilled by a subsidiary company of the investor.

Both LLCs and corporations are incorporated by public deed. An excerpt of such deed must be registered in the corresponding Commerce Registry and published in the Official Gazette within 60 days following the execution of the public deed.

The statutes of the company contained in the deed of incorporation shall include, among others, the individual details of the shareholders, the name and domicile of the company, the scope of business, the projected duration of the company, the capital and the contributions of each shareholder –as well as the number of shares in the case of the corporations-, the management procedures, etc.

3.3   Corporation by Shares

The corporation by shares is allowed to have only one shareholder. It can also have more than one. Therefore, the foreign investor will not need to appoint a nominee shareholder in case only one investor wants to own the entire company.

The incorporation is substantially similar to that of the LLCs and regular corporations, but more flexible. The public deed can be replaced by a private document signed by the parties with the signatures authentified by a public notary and recorded into the notary registry. For the corporation by shares the excerpt of the public deed or private instrument must be registered and published within 30 days counted from the execution.

4.     Amendments.

Regarding the Agency, in case of any modification of the content of any of the incorporation documents, the agent must repeat the same legal formalities as for the constitution, that is, registration of documents before public notary, public deed statement, Commerce Registry registration and publication.

The same principle applies to the LLCs, corporations and corporation by shares. The statutes of the company may be amended following the same formalities of incorporation, i.e. public deed, registration and publication.

With respect to a corporation, the decision to amend –which will be recorded in a public deed- will be adopted by the shareholders meeting in accordance with the quorum required by the law or the statutes. The same rule is applicable to the corporation by shares as a general rule.

However, and this is a very important difference between the LLC and the corporations, in order to amend any part of the statutes of an LLC, all of the partners must agree and jointly execute the public deed of amendment.

No prior approval of governmental agencies is required to modify any of these legal vehicles, except for capital reduction which shall approved by the Internal Revenue Service.

5.     Capital.

Unlike some other countries, including China, the Chilean law does not require as a general rule any minimum capital in order to constitute an Agency, an LLC or a corporation. Only certain industries, like banking, require a minimum capital to operate.

The capital of a corporation or a corporation by shares will be divided in shares, allowing the formation of different series of shares. The capital of an LLC will be divided in rights normally expressed in percentages.

As a general rule the capital may be paid in cash or in kind, as agreed at the articles of association/statutes.

The capital of a corporation must be fully paid within three years except when a shorter period is provided in the statutes. As per the corporation by shares, the capital must be fully paid within five years from the incorporation, or within a different period established in the statutes.

6.    Administration.

6.1  Agency.

The agency will be managed by the agent who must be granted with broad faculties.

6.2  LLC.

The rules for the administration of a LLC in Chile differ from other countries. In China, the administration of a limited liability company has to be carried out by a board of directors. Replacing the board of directors with a single executive director is only possible in the case of a company that is relatively small or has relatively few shareholders.

The general rule in Chile is that a board of director is not necessary. Instead, all of the partners may manage the company and are empowered to carry on a wide number of acts and contracts on behalf of the company within its scope of business. That being said, the partners can agree on a different way of administration, such as appointing one or more partner or third parties as company administrators, or establishing a board of directors.

6.3  Corporations.

A corporation must be managed by a board of directors elected by the shareholders meeting. The board must be composed of at least three directors in the case of closed corporations and of at least five in the case of open corporations. Some major corporations require at least seven directors on the board. The statutes may establish the existence of alternate directors.

There are no legal restrictions on the nationality of the directors.

The board must be renewed within the period provided in the statutes, with a minimum of once every three years, and the directors can be reelected indefinitely.

The quorum required to hold a board meeting is the majority of directors of the company and the decisions must be adopted by the majority of the directors attending to the meeting, except if the statutes provide for a higher quorum. There are some important matters established by law that require higher approval quorums.

As a general rule the board meetings must be held in the company’s domicile. However, the directors may agree otherwise and hold the board meetings in a different place within or outside Chile. It should be pointed out that the directors can attend the meetings without being physically present, e.g. via conference call or videoconference, which is extremely useful for FIE directors who are not in Chile.

The corporation must have one or more managers in to whom the board may delegate some of its management powers.

6.4  Corporations by shares.

The statutes can establish any method of administration agreed by the shareholders. In case of silence of the statutes, the rules established for the closed corporations will apply.

7.     Distribution and remittance of profits.

Generally speaking profits can be remitted to the foreign parent company or shareholder with no limitations, pursuant to the foreign exchange regulations and after having paid the applicable taxes.

The agency’s profits may be remitted to the parent corporation at any time. The partners of a LLC may agree in the bylaws or afterwards the time and conditions of the profits distribution.

Corporations must distribute dividends once a year. Open corporations must distribute each year as a dividend at least 30% of the net profits, or the higher percentage indicated in the statutes, unless all of the shareholders agree otherwise. The statutes of closed corporations can establish a lower minimum percentage. The board of directors can also distribute interim dividends, with the directors being personally liable for reimbursing to the company any distributed sums not covered by the year's net profit. Preferred series of shares may have the right to preferred dividends.

Rules laid down for corporations will be applicable to corporations by shares, unless otherwise provided in the statutes. The statutes may also provide a fixed dividend for a preferred share series or dividends connected with a particular activity within the scope of business of the corporation.

8.     Transfer of shares or interest.

The transfer of shares or interest works very different in corporations and LLCs and it will be one of the most relevant aspects to consider when deciding which company to incorporate.

The shares of a corporation or corporations by shares may be freely transferred between the shareholders or to third parties. The parties may agree on limitations to the transferability of the shares by means of a shareholder agreement. The statutes of Closed corporations and corporations by shares may also contain certain limitations.

On the other hand, in order to transfer interest in a Chilean LLC, all partners must agree to the transfer and the bylaws must be modified by means of a public deed accordingly. This differs substantially from the Chinese case in which the shareholders of a limited liability company can freely transfer their shares between shareholders, and where in case of transfer to third parties the other shareholders only have a preemptive right that can be exercised by more than half of the other shareholders.

Wednesday, January 12, 2011

Foreign Investment in Chile

1.      Preliminary comments

The last financial crisis is retreating. As the economic climate stabilizes, foreign investors are going back to business. With a clear aim of attracting foreign investment, Chile has presented for decades several advantages in this field, such as a stable economical and political environment as well as a solid legal framework that guarantees fair treatment and certainty to foreign investors. The economic growth projections are on the rise too.

Today’s article and the following days’ will briefly summarize the main legal topics related to foreign investment in Chile with some references particularly intended for Chinese investors. It does not purport to be an exhaustive report and should not be considered as a substitute to the case-by-case analysis necessary to engage in any particular investment.

2.      Openness Towards Foreign Investment

A brief comparison with the Chinese situation may be illustrative in this first section. Even though China has been opening up for several decades and boasts higher foreign investment rates, restrictions on foreign investment still apply in certain areas of the economy, affecting both the allowed amount of investment and the required level of administrative approval. The Provisions on Guiding the Orientation on Foreign Investment along with the Foreign Investment Industrial Guidance Catalog divides investment in four categories, indicating whether the investment is encouraged, permitted, restricted or prohibited. In those activities where foreign investment is allowed, the Catalogue indicates whether a Chinese partner is compulsory or not, and, if yes, whether the Chinese party must hold a specific stake of the investment. Besides these restrictions, the Chinese regulations establish a rather complicated approval process that involves several governmental authorities such as the National Development and Reform Commission and the Ministry of Commerce at various levels.

Chile presents a comparatively less restrictive regime. Under Chilean law, enterprises may be wholly foreign-owned and have access to virtually every economic activity, with exceptions applying only according to special regulation such as those regarding the acquisition of land in frontier areas, the exploration and exploitation of hydrocarbons, the production of nuclear energy and the use of certain areas for aquiculture.

Foreign investment in Chile may be conducted in one of two ways, respectively regulated by the following legal provisions: (i) the Chilean Foreign Investment Statute (“DL 600”) and (ii) the Chapter XIV of the Compendium of Foreign Exchange Regulations of the Central Bank of Chile (“Chapter XIV”). Regarding the approval process, those investors who decide to make their investment according to the DL 600 will need to file an application before the Foreign Investment Committee. Objective criteria then determine approval or rejection of the application. Those investors who decide to carry on their investment based on Chapter XIV will be required to inform the Central Bank of such investments, but no prior approval will be necessary. These two mechanisms will be discussed in a different article.

3.      Setting Up an Investment Vehicle

The Chilean legislation recognizes several types of legal entities, the most relevant in terms of foreign investment being the branches of foreign corporations or agencies [agencia] (hereinafter “agency”), limited liability companies [sociedad de responsabilidad limitada] (“LLC”), stock corporations [sociedad anónima] and corporations by shares [sociedad por acciones].

If we want to draw a simple parallel between Chilean and Chinese legal entities, we could say that the Chilean agency is similar to the Chinese representative office [代表机构], that the Chilean LLC resembles a simplified Chinese LLC [有限责任公司] and that the Chilean corporation and corporation by shares are very similar to the Chinese joint stock limited company [股份有限公司] with the corporation by shares being much more flexible. We must point out, however, that when it comes to foreign investment in China, one of the special foreign investment vehicles –mainly the sino-foreign joint ventures, the wholly foreign owned enterprise or the holding companies- must be adopted, all of which are deemed to be limited liability companies.

As a general rule no specific form of organization is required in Chile to carry on business. Exceptions to this general rule are limited to areas such as banking and insurance, where companies must be set up as stock corporations. The most appropriate vehicle should be identified and selected on case-by-case basis.

It is not necessary for the foreign investor to be physically present in Chile to set up a legal entity. An agent invested with a legally binding power of attorney may carry on this task. Generally, the powers that are granted to the agent allow him to incorporate the company, join it as a partner/shareholder, amend its statutes or articles of incorporation, exercise other partner/shareholder rights, or sign documents necessary to the conducting of the investment. The principal may broaden or restrict the faculties according to the specific situation.

The power of attorney should be granted before a notary public in the country in which the foreign investor is located and then authorized before by the Chilean consul of this country. Finally, it must be given legal effect in Chile by the Ministry of Foreign Affairs.

The following article will provide a brief comparative analysis of the most suitable vehicles to conduct foreign investment in Chile.