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.