2009 Investment Climate Statement - Chile

2009 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
February 2009

Openness to Foreign Investment

For the last three decades, Chile has made foreign direct investment (FDI) an essential part of its national development strategy. Chile's sound, market-oriented policies have created significant opportunities for foreign capital to participate in the country's steady economic growth. Chile's business climate is generally straightforward and transparent. Foreign investors receive national treatment in nearly all sectors. There are generally no special exemptions or incentives for FDI, as a matter of policy. A broad political consensus on the advantages of foreign investment means that Chile's policies towards FDI are unlikely to change.

Chile's openness and transparency to FDI is embodied in the country's 1974 foreign investment statute, known as DL (Decree Law) 600. DL 600 has been the main regulatory norm for foreign direct investment in Chile over the last 30 years. Under DL 600, a foreign investor may sign a contract with the Chilean State. The Foreign Investment Committee (FIC) of the Chilean Government, the entity responsible for administering DL 600, establishes the terms and conditions of the investment. Applications are typically approved within a matter of days and almost always within a month. The authority of the Foreign Investment Committee to reject a foreign investment is severely limited by the Chilean Constitution. The FIC's decision can be appealed if an investment is rejected.

The contract may not be modified unilaterally by the Chilean State or by the enactment of any legal regulations after it has been signed. Any foreign individual or foreign legal entity, as well as Chilean individuals with residence abroad, can invest in Chile through DL 600.

The contract acknowledges as foreign investment:

  • freely convertible currency;
  • capital goods;
  • technology.

The general regulations, terms, interest and other modalities of foreign credit contracts, as well as surcharges related to total costs to be paid by the debtor, including commissions, taxes and expenses, must also be authorized by the Central Bank of Chile. The investor can, under DL 600, increase the capital of the investment through both the capitalization of credits made under Chapter XIV of Central Bank regulations and the obligations derived from current imports and pending payments. DL 600 allows capital increases through the capitalization of transferable profits.

Foreign investors may request a maximum of three years to implement their investment. Investments of more than USD 50 million for industrial or non-mining extractive projects may request a time limit of up to eight years. In the case of mining projects, the time limit is eight years, but if exploration is required, the FIC can extend it to up to twelve years. In the event that more favorable regulations than those in the contract are subsequently enacted, the investor would have the right to request a relevant amendment.

The contract gives an investor the right:

  • to receive non-discriminatory treatment;
  • to participate in any form of investment;
  • to hold assets indefinitely;
  • to remit or reinvest earnings immediately and to remit capital after one year (or immediately with authorization from the FIC);
  • to acquire foreign currency at the inter-bank rate of exchange; and,
  • to opt for either national tax treatment, under which local firms are currently taxed at a rate of 35 percent on fully distributed earnings, or for a guaranteed tax rate currently set at 42 percent.

In June 2003, the FIC raised the minimum investment under DL 600 to USD 5 million per investor, and increased it to USD 250,000 in the case of fixed assets, technology, debt capitalization, and profit reinvestments. Capital investments below the new minimum level can still be channeled through Chapter XIV of the Central Bank's Compendium of Foreign Exchange Regulations. Title I of those Regulations is another mechanism provided for transferring foreign capital into Chile. Chapter XIV establishes regulations applicable to investors that govern foreign exchange operations related to credits, deposits, investments and capital contributions originating abroad. The procedure is applied to operations whenever the amount involved is greater than USD 10,000 or its equivalent in other foreign currencies.

In November 2002, the Chilean Government launched an Investment Platform initiative aimed at attracting international operations headquarters for the Latin American region to Chile. As part of this initiative:

  • A company that is set up exclusively as a platform for investments abroad and is located in Chile is exempt from Chilean earnings tax on the profits that overseas shareholders derive from its investments outside Chile. These platform companies can be either publicly or privately held, but in the latter case must submit to the same regulation as public companies;
  • Up to 15 percent of the platform company's shareholders may be resident in Chile; non-resident shareholders may not reside in tax havens;
  • Shareholders in the platform company can contribute capital either in the form of shares or equity in other companies, as well as in foreign currency;
  • If a platform company invests in Chilean assets, it must pay tax on profits derived from these investments. Similarly, the earnings of the platform company paid to Chilean shareholders are liable for the same tax (and have the same right to tax credits) as an investment abroad that repatriates profits to Chile;
  • Platform companies that invest in Chile must distribute earnings in the order in which they were obtained, starting with the oldest. As a result, separate accounting is required for earnings from investments abroad and on assets in Chile;
  • There are no restrictions on domestic borrowing by a platform company, but its overseas debt cannot exceed the value of the capital contributed by overseas shareholders;
  • The platform company may not invest in tax havens;
  • Platform companies are not entitled to bank secrecy (as defined under Chilean law).

By exempting platform companies from Chilean tax on overseas earnings, the initiative addresses the problem of three-way taxation and provides foreign investors with additional incentives to invest in Chile. This initiative is meant to foster regional joint ventures between foreign investors and Chilean partners. Also, in order to facilitate the entry of foreign capital into Chile, the initiative allows companies that are already established in the region to move their operation centers to Chile without incurring the transaction costs involved in selling and re-buying assets.

For most of the 1990s, the Chilean economy attracted large inflows of foreign capital, particularly FDI, especially in the mining sector. According to the United Nations Conference on Trade and Development's 2008 World Investment Report, the stock of total FDI in Chile reached 64.4 percent of Gross National Product in 2007, up from 48.1 percent in 1990. The average world figure for 2007 was 27.9 percent. Chile's total stock of foreign direct investment between 1974 and 2007 totaled USD 91.5 billion.

During 2007, FDI worth USD 7.3 billion was implemented through DL 600, representing a 23.8 percent increase on the previous year and representing 70.7 percent of total FDI gross inflows.

Another USD 5.6 billion entered through Chapter XIV of the Central Bank's Compendium of Foreign Exchange Regulations(CFER), totaling a stock of USD 7.3 billion in 2007. A third mechanism of the CFER played an important role between 1985 and 1991, totaling USD 3.6 billion. However this mechanism is no longer in operation.

Since 1990, multinational companies have committed more than USD 55 billion to Chile, a significant amount in an economy whose GDP reached USD 162.5 billion in 2007. Today more than 3,000 companies from 60 countries have operations in Chile. These figures represent the largest stock of FDI per capita and the highest FDI to GDP ratio of the major economies in Latin America.

According to a report by the Government of Chile's (GOC) Foreign Investment Committee, FDI in Chile totaled $10.5 billion for the January to mid-December period of 2008, a 44 percent increase over the same period of 2007. The trend of 2008 FDI shows an interesting level of diversification. According the FIC, while the mining sector (43.8 percent) continues to be the largest recipient of FDI, non-mining projects such as electricity, gas, water, general services, and transportation and communications accounted for 56.2 percent of investment.

Although Chile clearly encourages foreign investment, some restrictions do exist. Foreigners may not invest in Chilean fishing companies or media unless their country has a relevant reciprocity arrangement with Chile. The European Union signed such an agreement in 2002 with regard to commercial fishing companies.

There are no restrictions on foreign investment in telecommunications, but investors must acquire a license, and the number of licenses available is limited in some new sectors of the industry. Certain types of investment projects require additional authorization beyond the FIC. For example, projects in the mining sector require the Chilean Copper Commission's authorization; for investments in the fishing sector, projects require the approval of the Undersecretariat of Fishing; authorization from the Bank and Financial Institutions Regulatory Agency is required to operate in the banking sector, and the Securities and Exchange Commission for activities in insurance and investment funds. Other authorizations are required from the Pension Funds and Private Health Insurance regulatory agencies to participate in those sectors. For projects with a potential environmental impact, authorization is required from the National Environmental Commission (CONAMA) and/or the Regional Environmental Commission (COREMA).

The United States-Chile Free Trade Agreement (FTA) entered into force on January l, 2004. The chapter on investment is modeled on the standards found in agreements throughout the world such as the investment chapters in Chile's FTAs with Mexico and Canada, U.S. bilateral investment treaties, as well as customary international law. It incorporates innovations and improvements based on the experiences of both countries in implementing investment agreements and responds to new U.S. objectives set forth in the Trade Promotion Act (TPA) of 2002. The main objective of the FTA chapter is to provide stability and security to investors. It provides six basic forms of protection:

  • Non-discriminatory treatment, based on national treatment and most-favored-nation treatment, relative party investors;
  • Freedom from performance requirements;
  • Free transfer of investment funds;
  • Expropriation only when done consistent with international law;
  • A minimum standard of treatment in customary international law;
  • The ability to hire key managerial and technical personnel without regard to nationality.

Conversion and Transfer Policies

In the late 1980s and early 1990s, the GOC imposed strict controls on short-term capital inflows. In May 2000, the one-year withholding period requirement for foreign capital entering Chile under Chapter XIV was eliminated. This type of investment capital may now be repatriated immediately without penalty.

A second major move in 2000 was the virtual removal of the "encaje" or lock-in, which required foreign investors to deposit 30 percent of foreign-sourced loan funds and portfolio investment with the Central Bank in a non-interest-bearing account for up two years. The Central Bank reserves the right to re-impose the "encaje" mechanism in the future.

Additional reforms in 2001 and 2002 eliminated controls on flows of foreign capital into Chilean debt and equity markets and freed outflows associated with capital returns, dividends, and other investments from the need for Central Bank approval. In June 2003, the GOC sent to Congress a package of incentives for the development of local venture capital under the so-called II Capital Market Reform Bill. Some of these measures were approved on June 2007 under Law 20.190 that introduced tax incentives to promote the venture capital industry. The law encourages financial resources availability for small and medium-size companies (SMEs). The regulation provides tax benefits applicable to public as well as private funds. The law also provides benefits to investors that invest in venture capital companies with annual sales below 200 thousand UF (about US$7 million) as well as investment funds that invest in larger companies with annual sales below 400 thousand UF (about US$14 million). (Note: UF -Creation of an indexation system for the economy, based upon the existence of the Unidad de Fomento (UF), which in essence is a way of adjusting the value of any asset or liability for inflation, so that it maintains its value over time, in real terms. This value is adjusted daily by the Chilean Central Bank. As of January 14, 2009 1UF= CHP 21,396.29 and 1USD= CHP614.85)

The law authorized CORFO (Chile’s Development Promotion Agency, www.corfo.cl ) to take an equity position of up to 40 percent in specialized venture capital funds. It also allows banks to invest up to the equivalent of 1 percent of their asset base in venture capital, through investment fund administrators and subsidiaries.

Pursuant to changes in regulations governing foreign exchange, investors, importers, and others are guaranteed access to foreign exchange in the official inter-bank currency market without restriction.

The Central Bank reserves the right to deny access to the inter-bank currency market for royalty payments in excess of five percent of sales. The same restriction applies to payments for the use of patents that exceed five percent of sales. In such cases, firms would have access to the informal market. The Chilean tax service reserves the right to prevent royalties of over five percent of sales from being counted as expenses for domestic tax purpose.

Under the Investment Chapter of the U.S.-Chile FTA, each government must allow transfers of covered investment to be made freely and without delay into and out of its territory. These include transfers of profits, royalties, sales proceeds, and other remittances related to the investment. However, for certain types of short-term capital flows, the chapter allows Chile to impose transfer restrictions for 12 months, as long as those restrictions do not substantially impede transfers. If restrictions are found to impede transfers substantially, damages accrue from the date of the initiation of the measure.

Expropriation and Compensation

Chilean law grants the government authority to expropriate property, including property of foreign investors, only for public or national interests, on a non-discriminatory basis and in accordance with the due process of law.

The law requires the payment of compensation without delay at fair market value, in addition to any applicable interest. The 1973-1990 military regime and the four subsequent democratically-elected governments have not nationalized any private firm, and nothing suggests that any form of expropriation is likely in the foreseeable future.

Dispute Settlement

Except for U.S. investment covered by Overseas Private Investment Corporation (OPIC) insurance, disputes involving U.S. investors have been typically settled in negotiations between the investor and the concerned government entity. Disputes have been referred to the local judiciary system, although the time required for resolution may make this an unattractive option for foreign investors. Accordingly, litigants often chose to settle out of court. Suit may also be brought under expedited procedures involving the abrogation of constitutional rights.

Chile has signed several bilateral investment protection agreements with other countries allowing for binding international arbitration. The different agreements contain varying procedures; some allow the investor to choose either the host country's legal system or international arbitration but not both, while others specify that disputes must pass through the host country's legal system before recourse to international arbitration. Chile joined the International Center for Settlement of Investment Disputes (ICSID) in 1991.

Although the U.S. and Chile do not have a bilateral investment treaty (BIT), many issues normally covered in a BIT are addressed in the FTA. Section C of the Investment Chapter provides a mechanism for investors to pursue a claim against a host government that is in breach of the FTA's investment obligations, an investment agreement, or an investment authorization. Investment authorizations under DL 600 are not subject to this mechanism, and only agreements signed anytime after two years from the treaty's entry into force may make use of this dispute settlement mechanism. Under this section, the investor pursuing a claim may choose an arbitral forum – including the International Center for Settlement of Investment Disputes (ICSID), the Additional Facility of the Center - under the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules, or any other mutually agreed upon arbitral institution. The rules chosen will govern the proceedings except to the extent modified by the FTA. An investor may initiate a proceeding up to six months after the event which gave rise to the claim, and all claims must be brought within three years of the date when the claimant acquired knowledge of the breach and/or injury.

The chapter on investments encourages consultations or negotiations before recourse to dispute settlement mechanisms. If the parties fail to resolve the matter, a claim for arbitration can be submitted by the investor. Arbitration must be by mutual consent. Provisions in Section C ensure that the proceedings are transparent by requiring that all documents submitted to or issued by the tribunal be available to the public, and by stipulating that proceedings be public. The tribunal must also accept amicus curiae submissions. The section establishes clear and specific terms for making proceedings more efficient and avoiding frivolous claims. Domestic law is to be applied to all contracts. However, arbitral tribunals decide disputes in accordance with FTA obligations and applicable international law.

The judicial system in Chile is generally transparent and independent. The likelihood of government intervention in court cases is low. If a state-dependent firm is involved in the dispute, the Government of Chile may become directly involved through the State Defense Council (Consejo de Defensa del Estado). In cases where courts determine a firm is bankrupt, a receiver is named to distribute the debtor's remaining assets to the creditors.

Performance Requirements/Incentives

The Foreign Investment Committee does not apply performance requirements in its review of projects. The investment chapter in the FTA establishes the rules prohibiting performance requirements that apply to all investments, whether by third party or domestic investors.

The chapter also regulates the use of mandatory performance requirements as a condition for receiving incentives and explicitly states relevant exceptions. These include: government procurement, qualifications for export and foreign aid programs, and non-discriminatory health, safety and environmental requirements.

Chile does not subsidize foreign investment nor does it offer any special tax exemptions. There are, however, some regional incentives linked to isolated geographical zones and to the information technology sector. These benefits relate to co-financing of feasibility studies as well as to incentives for the purchase of land in industrial zones, the hiring of local labor and facilitation of project financing. Other important incentives include accelerated depreciation accounting for tax purposes, special tax treatment for retained earnings, and legal guarantees for remitting profits and capital.

CORFO (www.corfo.cl) has implemented the "Chile Invests" plan aimed at providing support and promoting FDI outside the Metropolitan Region (Santiago) in key sectors. An important objective of the plan is to encourage investments in areas of non-traditional high technology such as biotechnology, research and development of new materials, electronics and engineering processes, and new production techniques to increase the value added to natural resources. The plan also promotes investments in the energy sector mainly for non-conventional renewable energy projects. An example of an investment made under the plan is a proposed investment in a solar energy project worth USD 1.4 billion by a South Korean company in the northern desert of Chile during 2008. CORFO provides co-financing programs to pre-investment feasibility studies for projects using renewable non-conventional energy resources.

Right to Private Ownership/Establishment

Except for the fisheries and media sectors noted above, Chile does not restrict the right to private ownership or establishment.

Protection of Property Rights

On January 8, 2007, the U.S. placed Chile on the Special 301 Priority Watch List (PWL) due to concerns about its commitment to the protection of intellectual property rights. Chile had been on the Special 301 Watch List since 1989 and was subject to an Out-of-Cycle Review during much of 2006, which ultimately resulted in the PWL designation. Chile remained on the priority watch list for 2008.

There are substantive deficiencies in Chile’s IPR laws and regulations, as well as overall inadequate IPR enforcement. The main concerns involve patent and test data protection in the pharmaceutical sector and copyright piracy of movies, music and software.

Chile, as a member of the WTO, chose to qualify as a developing country for meeting its obligations as a TRIPS signatory. Chile's Congress approved the Miscellaneous Law in November 2003 to bring the country into compliance with TRIPS copyright obligations and address some concerns about copyrights and authors rights. U.S. industry representatives have stated the view that the law continues to fall short of those obligations.

Chile signed the World Intellectual Property Organization (WIPO) Treaties on Copyright and Performances and Phonograms in April 2001. Chile did not approve legislation to bring the country into compliance with TRIPS obligations related to industrial property until December 2004. The new law provides for, among other things, expedited court proceedings and the authority to seize illegal copies of patented products. To implement this new law, the GOC published regulations in November 2005.

In addition to deficiencies in IPR laws and regulations, there is a larger problem with overall inadequate IPR enforcement. The United States is concerned by an apparent lack of commitment to enforcement and prosecution of crimes and violations related directly to IPR.

There is evidence of growing interest among police and prosecutors in expanding active law enforcement efforts. In 2007, Chilean investigative Policy inaugurated a new unit focused on combating violations of IPR. However in some cases, current criminal penalties have proven inadequate in deterring growing piracy of computer software, music and video in Chile. The U.S. industry estimates losses related to video piracy alone at over USD 2 million annually. The trend is also leading to a significant drop in the value of the Chilean market for sound recordings - during the last five years, industry estimates that the market has shrunk by 62 percent. Millions of dollars are lost annually in tax revenue as well due to piracy.

The FTA seeks to have Chile strengthen its legal framework to provide copyrights and trademarks better protection. For example, the agreement increases the period of protection for copyrights and related rights to 70 years. The FTA also criminalizes end-user piracy and mandates both statutory and actual damages for IPR violations. Provisions of the agreement provide state-of-the-art protection for digital products and penalize tampering with anti-piracy technology. Chile enacted legislation to implement some of its FTA commitments on copyright protection in November 2003. Chile made two amendments to its copyrights law in 2003 – to implement TRIPS obligations and its FTA obligations. Further draft legislation is pending in the Chilean Congress to fulfill remaining FTA obligations. The United States is committed to working with Chile to improve enforcement and ensure full implementation of the FTA.

In relation to internet domain names, the U.S. and Chile committed to making a system available for the resolution of disputes. This follows international standards with respect to problems such as the cyber piracy of brands and trademarks for country domain names. Furthermore, both countries committed to creating a database containing information on individuals who have registered higher-level domain names. This database will protect the personal data of those who have registered.

Chile has begun to show the political will to address the deterioration of the protection of copyrights and trademarks which has occurred in recent years. The most significant step was the introduction of draft legislation in May 2007 on trademarks and copyrights. This bill remains under consideration in Congress. During 2008, Chile approved the Patent Cooperation Treaty, part of Chile’s Free Trade Agreement obligations to the U.S.

After seven years of discussion in Congress, the Chilean government passed the law that creates the National Institute of Industrial Property (INAPI) replacing the existing Department of Industrial property. INAPI is a technical and legal agency in charge of all the administrative actions related to industrial property registration and protection. INAPI will have regulatory and enforcement authority and will be overseen by the President of the republic, through the Ministry of Economy.

The most intractable area of IPR violation in Chile involves pharmaceutical products and related proprietary clinical test data. Chile lacks a clear and transparent system for protecting pharmaceutical patents and the proprietary clinical data related to innovative products.

The U.S.-Chile FTA seeks to strengthen significantly protection for valid patents and their accompanying clinical test data. For example, the FTA provides for the extension of the protection period for patents when there are unjustified delays in the patenting process. The Agreement also requires parties to protect confidential information provided to authorities in order to obtain marketing or health permits for pharmaceutical products and agricultural chemicals. In addition, the FTA establishes the obligation to undertake reasonable efforts to extend patent rights to qualifying plants.

The Institute of Public Health (ISP for Instituto de Salud Publica), Chile's general equivalent to the U.S. FDA, is the agency charged with granting marketing approval (sanitary approval in the wording of Chilean regulations) to new pharmaceutical products. The ISP has issued marketing/sanitary approval for unauthorized copies of patented products as well as of products whose patent application is still in the approval process. There have also been cases of the ISP allowing firms seeking to infringe on valid patents to use proprietary clinical test data from the company whose product patent will then be violated.

U.S. firms have been obligated to defend their patent rights in costly court proceedings that take several years and have produced unproductive results, i.e. are unable to keep the pirated goods from entering the market. Chilean authorities have not established an effective link between actions of the ISP and the Ministry of Economy's former Industrial Property Department, Chile's patent and trademark office, to prevent this from undermining effective patent protection.

In November 2005, the Ministry of Public Health (which oversees the ISP) published regulations establishing a mechanism to protect data related to pharmaceutical products and grant protection to pre-clinical pharmacological and toxicological studies. As of the end of 2006, the results of the new regulations have been mixed. By mid-2008, the Ministry of Health placed on its website for public discussion draft regulations which would be a partial step forward in the area of protecting clinical data. However, these regulations are still in draft form and have yet to be published and/or implemented.

Chile's trademark law is generally consistent with international standards, but contains some deficiencies addressed by the FTA.

Some U.S. trademark holders have complained of inadequate enforcement of trademark rights in Chile. The FTA requires government involvement in dispute resolution between trademarks and Internet domain names in order to prevent "cyber-squatting" of trademarked domain names. The FTA also applies the principle of "first in-time, first-in-right" to trademarks and geographical indicators (place-names).

Several U.S. nurseries have complained of violations of patented plant varieties in the fruit sector. They claim that in some cases, Chilean fruit produced from patented U.S. genetic stock has entered the U.S. market without paying the appropriate royalties. That being said, the agricultural sector is one area where Chile is clearly attempting to encourage the enforcement of stricter IPR protection. Chile's seed industry has spearheaded the enforcement of IPR among plant and seed exports. This program is largely unknown even in Chile but is the key to the success and growth of Chile's nascent seed industry (valued in 2007 at nearly USD 200 million in exports).

Transparency of Regulatory System

Chilean regulatory systems tend to be transparent, and government regulators generally have little discretion. While rulemaking processes do not generally include formal provisions for public hearing or comment, opening a business is normally easier in Chile than in many other developing countries. The FTA creates some additional obligations for transparency in regulatory processes.

Efficient Capital Markets/Portfolio Investment

Chile's capital markets are well developed and open to foreign portfolio investors. Credit is allocated on market terms and is available to foreigners, although the Central Bank does reserve the right to restrict foreign investors' access to internal credit if a credit shortage exists. To date, this authority has not been exercised.

Publicly traded Chilean companies attract substantial international investment. In late 2000, the Chilean Congress approved legislation on public stock tenders that provides greater legal protection of minority shareholder rights.

In November 2001, the core measures in a far-reaching reform of Chile's capital markets came into force. Among other things, the reform created an agricultural commodities exchange. In another modification, rules governing Chile's private pension fund (AFP for Administradora de Fondos de Pensiones) industry now allow fund administrators to operate five funds with different risk-return profiles instead of the single fund. This reform to the pension funds also promoted alternative voluntary pension plans (mirroring the U.S. 401K option).

Capital market reforms have leveled the playing field for foreign investors in the local market and those who invest through Chilean bonds abroad. This has slowly increased demand for local debt instruments among new foreign investors. The reforms also eliminated discrimination that affected commercial paper issues related to stamp taxes (a tax charge to all credit operations both to individuals and companies), and created a new tax exemption for cross-border bank lending that will allow foreign banks to compete on more equal terms.

The reforms increased incentives for personal savings through tax-deductible contributions to private pension funds administered by traditional AFPs and other financial service companies. The package also eliminated capital gains taxes related to short selling of shares and offered a capital gains tax exemption on the sale of widely-traded equities purchased after April 19, 2001. The law created an emerging markets stock grouping whereby investors can claim exemption from capital gains taxes for the first three years after a company's initial offering.

In June 2007 a second capital market reform came into force, which aims to promote the development of the venture capital industry, strengthening the stock and exchange market and deepen the Chilean financial markets. Currently, the GOC and the private financial sector are working on the drafting of a third capital market reform aimed at providing better levels and quality of credit to SMEs and internationalizing the Chilean capital market.

Under the U.S.-Chile FTA, U.S. insurance firms have full rights to establish subsidiaries or joint ventures for all insurance sectors, with limited exceptions. Chile also committed to phase in insurance branching rights and to modify its legislation to open cross-border supply of key insurance sectors such as marine, aviation and transport (MAT) insurance, and insurance brokerage of reinsurance. U.S. banks and securities firms are allowed to establish branches and subsidiaries and may invest in local firms without restriction, except under very limited circumstances. U.S. financial institutions are also able to offer financial services to citizens participating in Chile's privatized voluntary saving plans, and they have gained increased market access to Chile's mandatory social security system. Chile allows U.S.-based firms to offer services to Chileans in areas such as financial information, data processing and financial advisory services, with limited exceptions. Chilean mutual funds will be permitted to use foreign-based portfolio managers.

The Santiago Stock Exchange, as of December 2008, was one of the least impacted by the international financial crisis in the region. The IPSA dropped by 24.5 percent in 2008, vis-à-vis a 36.4 percent in the equivalent Dow Jones Industrial Average, 40 percent by Brazil’s equivalent BOVESPA, and 50.8 percent by Argentina’s equivalent MERVAL. The Chilean sovereign spread (EMBI) reached 353 basis points, in contrast to the 739 basis point average for Latin American, 619 basis point average for Asia and 707 basis point average for Europe.

The main institutional investors and suppliers of capital to local companies are the pension fund administrators. They managed a total investment portfolio of USD 111 billion as of December 2007, representing about 78 percent of Chile's GDP.

In 2007, pension fund administrators diversified their total portfolio investments as follows: 26.2 percent in the corporate sector, 7.8 percent in bonds with the Central Bank, 30.4 percent in the financial and banking sector, and 35.6 percent overseas. The majority of foreign investment was concentrated in emerging economies (56.5 percent of the total), with 41.8 percent carried out in developed economies.

The GOC has been consistently raising the percentage of pension funds that can invest overseas. In 2008, a reform package of the pension system was approved by Congress increasing the threshold for pension fund administrators to invest abroad (from 30 to 80 percent of their funds). The reform package also set the foundation on which to build a “solidarity pillar” to increase coverage among lower income contributors and self-employed workers and expand social security assistance coverage.

The Chilean banking system is sound and competitive, meeting Basel standards. There are currently 24 banks, and 12 are foreign-owned representational branches. Out of the 24 banks operating in Chile only two of them are totally owned by Chilean economic groups, (BCI and Corpbanca) the rest have some levels of incorporation with foreign institutions. Foreign banks can compete on the same terms as their domestic rivals. There are also 5 local Loan and Saving Corporations and there is one state-owned bank, Banco Estado, which is the nation’s third largest. Private banks manage most corporate business.

During 2007, the banking system registered profits of USD 1.84 billion, a 9 percent increased compared to the previous year. Total loans grew at only 12.84 percent compared to the 2006 average of 15.41 percent. Even though banking activity continued growing during 2007, there was a general deceleration on lending capacity especially in consumer loans. Company/business loans increased 12.77 percent; again lower than the same period the previous year (14.53 percent). This is explained by a slowdown in the growth of international trade loans that increased only by 5.06 percent compared to the 29.86 percent growth in 2006. Commercial loans grew by 14.56 percent, a 9 percent increased compared to the previous year (13.18 percent). Commercial loans represented 86.33 percent of total loans. Loans to individuals showed an annual increase of only 12.96 percent, due to a sustained decrease in the growth of consumer loans (only 7.78 percent), while in 2006, it increased by 21.65 percent. Mortgage loans increased 16.22 percent in 2007.

As of December 2007, Chilean banking system return on capital and reserves was 16.23 percent, a bit lower than the 18.61 percent figure recorded in 2006.

Three large, high-volume banks control roughly 62 percent of total loans: Santander-Santiago (12.84 percent), Banco de Chile (18.50 percent) and Banco Estado (12.18 percent)

Chilean banks posted a net profit of US$1.3 billion in the first 10 months of 2008. Banco Santander-Santiago, Chile’s largest bank and a unit of Spain’s Santander saw profits of US$420.1 million for the January-October period, while the number two bank, Banco de Chile earned US$363.3 million for the same period.

The banking system has become aggressively consumer-oriented, following a five-year “bancarization Plan” designed and implemented by Chile's Association of Banks and Financial Institutions. Chilean banks have established a presence in regional markets, such as Argentina, Costa Rica, Peru and Venezuela. Some have opened offices in the United States as well as Chile’s Asian Pacific trading partners, mainly in China.

Banco de Chile, a leader in the Chilean financial market since 1893, reached a merger agreement with U.S.-owned Citibank operations in Chile on July 20, 2007. Under the agreement, Citigroup will own 32.94 percent of LQ Financial Investments Inc., which is the controller of Bank of Chile's operations. The closing date for the operation was the first working day of April 2008. In late December 2007, the merger received approval from Chile's Fair Competition Tribunal and financial authorities.

The Chilean banking industry is characterized by the quality of its loan portfolio, due partly to strict limits on lending to a single debtor or group of related companies. This is capped at five percent of the capital and reserves of a bank for collateral-free loans and at 25 percent for collateralized loans (fixed assets).

Summary of Chilean Banking System (2007):
(USD millions)

Total Loans - 128,545
Deposits - 100,577
Net Income - 1,955
Total Assets - 173,967
Capital and Reserves - 12,048

Source: Chile's Superintendencia of Banks and Financial Institutions

In a bid to increase competition within the banking sector, the capital market reforms have also introduced some liberalizing changes in banking regulations regarding minimum capitalization requirements and controlling shareholders obligations, permitting local banks to participate in international loan syndicates.

The legislation on public stock tenders, known as the "OPA" law, regulates public offers and acquisitions of shares, and establishes a regime for corporate governance. According to the OPA law, any individual or group intending to take direct or indirect control of a corporation that has publicly listed shares must inform the general public prior to the action. Title XXV of the law indicates that a public offer for share acquisition must be made when the purchase stake would allow the buyer to take control of a corporation, or when the purchase target controls another corporation which represents 75 percent or more of the target's consolidated assets. With the exception of fishing companies or the media (as already mentioned above), there are no restrictions or prohibitions against foreign direct investment or control.

The foreign exchange market is quite deep for spot operations and short-term currency forwards (up to 360 days). Daily trading on these markets is estimated at around USD 800 million and USD 600 million, respectively.

General Information on the Financial Market (2007)

  • Banks and Financial Institutions: 24 participants. Total Loans: USD 129 billion, a 31 percent increase from 2006 (98.7 billion).
  • Pension Funds: 6 administrators. Funds under management: USD 111 billion corresponding to 8.3 million contributors as of September 2008.
  • Insurance Companies: 51 (21 general insurers, 30 life insurers).
  • Financial investments: USD 25.5 billion.

According to the Global Competitiveness Forum Report 2008-2009, Chile is the most competitive country of South America and the third most competitive of the Americas after the U.S. and Canada. Chile is ranked 28th in the world.

Political Violence

Chile is considered a low threat country. Over the last ten years there have been relatively few incidents of politically motivated attacks on projects or installations. Anti-American sentiment, civil disorder, and terrorism are rare, and there have been no incidents involving international terrorist groups. However, 2007 saw over 40 small scale bombings targeting mostly local service providers but also banks, a police station and the U.K. Embassy. There were also violent incidents in forestry plantations in southern Chile. These incidents appear to be related to the land claims of indigenous people (the Mapuche Native American group) in the VIII and IX Regions.


Corruption in Chile is generally limited, although a number of cases have occurred in recent years. The GOC responded with vigor in 2003 to a succession of uncharacteristic public and financial sector scandals related to corruption and influence peddling in the government's domestic development agency (CORFO), the Ministry of Public Works (MOP) and the Central Bank. In the wake of the scandals, the GOC, the courts and Congress enacted a number of legal and administrative reforms. These included rules to clarify and modernize public employee payments, new campaign finance legislation, a permanent budget commission to oversee government spending, simplified administrative procedures, and reforms to the MOP's procedure for awarding government contracts.

In late 2006, a major scandal erupted over the misuse of state funds by ChileDeportes (which organizes local-level sport activities) for political campaigns. In response to this scandal and to strengthen its own institutional framework, the government introduced 30 anti-corruption measures. This Transparency and Accountability Agenda seeks to increase access to public information, reduce administrative irregularities and violations of accountability standards and improve hiring mechanisms and system controls.

Another case under investigation is tied to investments in the state-owned railroad company EFE. Between 2003 and 2005, the GOC budgeted USD 1.1 billion to modernize and improve the railroad system running from Santiago to the southern Chile. As of December 2006, EFE had lost USD 1.4 billion, 7.54 times its total assets. All of EFE's senior executives were under investigation. As of mid-2008, the Chilean courts have indicted most senior executives at the EFE, accused of fraud and mismanagement of fiscal resources. The same has occurred in the case of ChileDeportes, but investigations continue in Congress in order to reform the Chilean sport promotion programs and avoid misuse of government resources.

Chile has signed and ratified the Organization of American States (OAS) Convention against Corruption. Chile is also a signatory to the Organization for Economic Cooperation and Development (OECD) Convention on Combating Bribery. Chilean law has not yet been modified to make bribing a foreign official a criminal act, but a wide range of bribery acts are punishable as crimes under the penal code. Bribery investigations are conducted by the GOC's General Comptroller’s Office.

In 2007 a new law came into force that provides protection for public employees who denounce irregularities or violations in accountability standards and at the same time, Chile ratified the United Nations Convention against Corruption.

Transparency International has a chapter in Chile. Chile ranked 22nd on Transparency International's corruption perceptions index for 2007.

Bilateral Investment Agreements

In 1991, Chile became a signatory of the Washington Convention of 1965, which created the International Center for Settlement of Investment Disputes (ICSID). Since then, Chile has negotiated numerous Bilateral Investment Treaties (BITs) through which Chile provides additional protection to foreign investment flows. According to Chile's Foreign Investment Committee, as of the end of 2006, Chile had signed 52 BITs, of which 38 are in force. There are agreements in force with Spain, Germany, Switzerland, Sweden, France, the United Kingdom, Australia, Austria, Belgium, Croatia, Denmark, Finland, France, Greece, Italy, Norway, Poland, Malaysia, China, Korea, Argentina, Brazil, Costa Rica, Ecuador, El Salvador, Guatemala Honduras, Nicaragua, Panama, Paraguay, Peru, Uruguay Cuba and Venezuela, among others. The Government of Chile has begun bilateral investment protection agreements negotiations with 15 others countries, including India, Morocco, Russia, Israel and Thailand.

OPIC/Other Investment Insurance Programs

A Bilateral Investment Agreement with the Overseas Private Investment Corporation (OPIC) took effect in 1984. Chile is a party to the convention of the World Bank's Multilateral Investment Guarantee Agency (MIGA).


Chile has enjoyed generally calm labor relations over the last decade, but 2007 saw a definite upswing in strike activity. Strikes and public protests have been concentrated in the mining, health, education, transportation, communication, and civil service sectors.

Union membership is voluntary, and approximately 12 percent of the workforce is unionized. Multiple unions exist in many companies, and management can negotiate collective agreements with any of the unions or with ad hoc groups of workers. Unions can form confederations or nationwide labor centrals and can affiliate with international labor federations. Contracts are normally negotiated at the company level; multi-company bargaining is permitted on a voluntary basis. Minimum wage, working hours, overtime, paid annual vacations and holidays are all established by Law. Women are entitled to state-funded maternity leave for a period of six weeks before and 12 weeks after childbirth. Layoffs are not permitted between conception and one year after the female employee has returned from maternity leave.

Chilean workers have a reputation for discipline, though their productivity and creativity also tend to be low. Top executive salaries are on a par with European countries, although well below those in the U.S. Chile allows companies to deduct set training costs (up to one percent of annual payroll) from corporate tax payments. A company can also use ten percent of the rebate to finance an analysis of its training needs, and 15 percent to run a training department.

On January 1, 2005, the maximum number of labor hours per week was reduced to 45 from 48 without any loss of salary to the employees.

A new subcontracting (outsourcing) law passed in 2006 and took effect in January 2007. It is caused some uncertainty in the labor market due to differing interpretations by the GOC's Labor Directorate and Chilean companies. The new law has also prompted new labor movements and related protests seeking better job conditions for outsourced workers. This has been particularly true in the mining and forestry sectors.

In Chile, more than 50 percent of the companies are estimated to subcontract part of their production, while 20.7 percent subcontracted their main economic activity. Prior to the law, a full 35 percent of Chile's labor force was estimated not to have a direct contractual link with the main company.

The new subcontracting law defines outsourcing as two different activities: subcontracting and the supply of outside labor.

Subcontracting is when a company permanently outsources a specific process to another firm which takes full responsibility for it, carrying it out with its own employees. In relation to the definition of outside workers, the law limits this to "temporary" labor, defined as those employed for periods of up to 90 (or 180 days in some cases) for the duration of an "emergency." In addition, only firms that register as suppliers of temporary labor and set up guarantees against their obligations to their own workers are allowed to fulfill this function. The law also sets limits on the number of staff that can be used on short-term jobs. The law also changed the secondary responsibility of companies using contractors regarding labor responsibilities, giving them primary responsibility.

Foreign Trade Zones and Free Ports

Chile has two tax-free zones, one is in the northern port of Iquique (Region I) and the other in the southern city of Punta Arenas (Region XII). Merchants and manufacturers in these zones are exempt from corporate tax, VAT and customs duties. Goods can be re-exported without paying taxes, but products that are sold within Chile must pay VAT (19 percent) and import duties upon leaving the zone (except to immediate geographical areas in which a lower tax rate applies). The same exemptions also applied to manufacturers in the Chacalluta and Las Americas Industrial Park in Arica (in the XV Arica and Parinacota Region created in October 2007).

Foreign Investment:

Between 1974 and 2007, gross materialized foreign investment totaled USD 82 billion. During the 1990s, investment represented an annual average of 6.4 percent of Chile’s GDP, rising to an annual average of 8 percent between 1995 and 2000. After this period, FDI inflows to Chile dropped significantly until 2006 when it reached 55.4 percent of GDP. In 2006, the average world figure was 24.8 percent.

According to UNCTAD's report, FDI into Chile reached USD 7.9 billion in 2006. Relative to population size, FDI in Chile was the highest in the region at USD 493 per capita.

However, during 2007-2008 Chile managed to change the downturn in FDI inflows and materialized FDI into Chile totaled USD 7.3 billion and authorized FDI amounted to 10.5 billion respectively. The stock of FDI reached 64.4 percent, while the world average in 2007 was 27.9 percent and in developing economies was 29.8 percent. That being said, much of the FDI recorded in 2007 was really a product of mergers and acquisitions across different sectors of the economy.

The service sector attracted 44.8 percent of FDI, followed by mining (22.9 percent), electricity, gas and water (12.3 percent) and forestry plantations (7.9 percent).

Between 1974 and 2007, the following sectors accounted for foreign investment materialized through DL 600:

Mining - 33 percent
Engineering/ Business Services - 1 percent
Electricity, Gas and Water - 20 percent
Manufacturing - 12 percent
Transportation/Communication - 11 percent
Construction - 3 percent
Agriculture, Forestry and Fishing - 1 percent each
Sewage, Sanitation and related Services - 1 percent

Within the services sector, the most important components were:

Financial Services - 10 percent
Insurance - 3 percent
Wholesale and Retail - 3 percent
Other Services - 2 percent

The U.S. remains the single largest direct investor, accounting for 25 percent of inflows from 1974 – 2007, totaling USD 16.3 billion. Fruits and Forestry sectors represent about 57 percent of US FDI to Chile, followed by the food industry (38 percent), the Chemical industry (34 percent), agriculture (33 percent) and transportation and warehousing (29 percent). Since 1997, however, FDI from the European Union has surpassed that of the U.S., primarily due to Spanish acquisitions in the energy and telecommunications sectors. The following represent the inflows of FDI under DL 600 by country from 1974 - 2007 (through 08/31/2007):

United States - 25 percent
Spain - 21 percent
Canada - 16 percent
United Kingdom - 9 percent
Australia - 5 percent
Japan - 3 percent
Ita1y - 3 percent
The Netherlands - 3 percent
France - 2.0 percent
Switzerland - 2 percent
Others - 10.3 percent

According to Central Bank statistics, total flows of Chilean investment abroad, principally to Mercosur countries, have totaled more than USD 18 billion since 1995. According to UNCTAD figures, by the end of 2006, the total Chilean stock of FDI abroad was USD 26.8 billion. Most of Chile's own overseas investment has gone to hemispheric partners like the United States, Mexico and Canada.

Statistical Annexes:

Foreign investment (1974-2007), USD Billion

DL 60052.
- Equity39.
- Other capital13.31776121531.167
Chapter XIV8.
- Equity6.
- Other Capital2.2203978499294284
Total FDI61.


DL 60012.19544.92.63.2883
-Repatriation Of Capital5.12483.22.01.9588
- Repayments7.17061.75821.3295
Chapter XIV1.97811.09131.4901
-Repatriation of Capital8901646229494758
- Repayments1.17655586191.3143
Total Remittances14.

Source: Foreign investment Committee

Foreign Investment DL 600. Authorized and Materialized by Selected Country of Origin (USD millions nominal)

Cayman Is.263.512.341.524.9347.4
Inter Org204.25.05.00334.8
South Africa419.10.4662.21.4402.9
United States13114.1-14.9337.5240.716,310

Source: Foreign Investment Committee

Foreign Direct Investment (DL 600) By Year: 1974-2008* (USD millions nominal)

PeriodAuthorized InvestmentImplemented Investment


Source: Foreign Investment Committee

2008 Data from January until mid-December
Materialized Foreign Investment by Sector Under DL 600: (USD millions nominal)





Food Manuf44262293945486965,282


Chemical Ind93572319602709460

Other Ind856601071191952520,850

Electricity, Water and Gas85977247308721934001,205,461


Wholesale, Retail and Transport142386818261713519,055



Fin services2629446006111618140,115


Engineering And Bus serv66174385351437153640

Sewage,Sanitation and similar serv1595959134-0

Other serv1222751872024539229,067