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contract will establish the rights and obligations of the parties regarding the investment and cannot be modified or rescinded unilaterally by either party.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.