2010 Investment Climate Statement - Chile

2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2010

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.

Most FDI in Chile must enter through either of the following mechanisms: the Foreign Investment Statute Decree Law 600 (DL 600) or Chapter XIV of the Central Bank’s Compendium of Foreign Exchange Regulations (CFER).

Chile's openness and transparency to FDI is embodied in the foreign investment statute, known as DL 600. This law has been the main regulatory norm for FDI in Chile during the last 40 years. Under DL 600, a foreign investor may sign a contract with the Government of Chile (GOC). Chile's Foreign Investment Committee (FIC), 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 FIC's authority to reject a foreign investment is severely limited by the Chilean Constitution. The FIC's decision can be appealed if an investment is rejected.

An investment contract may not be modified unilaterally by the GOC 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;
-- credits associated with foreign investments;
-- capitalization of foreign loans and debts whose contracts have been authorized by the Chilean Central Bank; and
-- capitalization of profits transferable abroad.

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. DL 600 allows for capital increases in a given investment.

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 up to eight years for implementation. In the case of mining projects, the implementation is eight years, but if exploration is required, the FIC can extend it to up to 12 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 USD 250,000 in the case of fixed assets, technology, debt capitalization, and profit reinvestments. FDI valued below these levels but above USD 10,000 is made through Chapter XIV of the Central Bank's CFER. Chapter XIV establishes regulations that govern foreign exchange operations related to credits, deposits, investments, and capital contributions originating abroad. Investments made under Chapter XIV do not involve signing a contract with the Chilean state. Instead, the Central Bank grants authorization for a given investment. FDI made under Chapter XIV must be in a foreign currency and does not convey any special rights to the investor, such as access to a guaranteed tax rate. The investor must inform the Chilean Central Bank of the investment through a commercial bank or other authorized financial institution. FDI valued at less than USD 10,000 does not require Central Bank approval.

In November 2002, the Chilean Government launched an Investment
Platform Initiative aimed at attracting international corporations' Latin American headquarters 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 tax on the profits that overseas shareholders derive from 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 but 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.

The Initiative addresses the problem of three-way taxation by exempting platform companies from Chilean tax on overseas earnings 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. To facilitate the entry of foreign capital into Chile, the Initiative also allows companies that are already established in the region to move their centers of operation to Chile without incurring the transaction costs involved in selling and re-buying assets.

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 that of the FIC. For example, projects in the copper mining sector require the Chilean Copper Commission's authorization; investments in the fishing sector 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 must authorize projects related to insurance and investment funds. Additional 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). Chile also maintains national security related restrictions on investments in the areas of nuclear energy, defense, maritime transportation, real estate, and mining.

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, for investors from either country;
-- Freedom from performance requirements;
-- Free transfer of investment funds;
-- Expropriation only when consistent with international law;
-- A minimum standard of treatment in customary international law; and
-- The ability to hire key managerial and technical personnel without regard to nationality.

RANKING ACCORDING TO: 2007 2008 2009 2010
TI - Corruption Perceptions Index 20th 22nd 23rd --
HF - Index of Economic Freedom 8th 8th 8th 10th
WB – Ease of Doing Business Index -- -- 40th 49th

Conversion and Transfer Policies

Chile’s regulation ensures that capital markets are well developed and open to both foreign portfolio investors and FDI. Most of the legal framework regulating capital markets in Chile was introduced in the early 1980s and then reformed and revamped especially after the severe economic crisis in 1983. In the late 1980s and early 1990s, the GOC imposed strict controls on short-term capital inflows. In May 2000, Chile eliminated the one-year withholding period requirement for foreign capital entering the country under Chapter XIV. 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 loans 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 if needed in the future.

In June 2007, the GOC passed Law 20.190 that introduced tax incentives to promote venture capital. The law improves the availability of financial resources for small- to medium-sized enterprises (SMEs) and provides tax benefits to public as well as private venture capital funds. The legislation creates incentives for investments in venture capital companies with annual sales below UF 200,000 (about USD 8.3 million) as well as larger companies with annual sales up to UF 400,000 (about USD 16 million). [NOTE: The Unidad de Fomento (UF) is an inflation-indexed unit of account adjusted daily by the Chilean Central Bank so that it maintains its value over time in real terms. On January 5, 2010, 1 UF was equivalent to about CHP 20,923 and 1 USD was equivalent to about CHP 506.] Law 20.190 authorizes 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.

During 2000-2008, the Government enacted significant new legislation to strengthen local capital markets, increase market flexibility, provide incentives for savings, and foster greater financial opportunities for small- and medium-sized companies through Capital Market Reforms I and II. In 2009, Capital Market Reforms III was introduced in Congress but had not yet reached a vote by the end of the year. This latest set of reforms aims to improve current levels of competition in the credit market by increasing available credit instruments and to improve consumer information. The bill also increases liquidity, deepens credit markets, improves flexibility for investment funds, creates Exchange Traded Funds (ETFs), allows access to secondary markets, and fosters investment in mutual and investment funds.

Pursuant to changes in foreign exchange regulations, 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 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 appropriate government entity. Disputes have been referred to the local judicial 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 two years after the FTA'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 ICSID -- 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 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 FTA 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 of the FTA 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 FTA chapter on investments 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.

In 2009, a large American investor in Chile had a project temporarily halted as the result of a court decision. The GOC worked with the company to resolve the situation so that the investment could resume.

Performance Requirements/Incentives

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

The FTA investment chapter also regulates the use of mandatory performance requirements as a condition for receiving incentives and spells out the 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 the 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.

Chile has other special incentive programs aimed mostly at promoting investment and employment in remote or disadvantaged regions, the development of new businesses, support for micro, small-, and medium-sized enterprises, and promotion of technological innovation.

CORFO has implemented the "Chile Invests" plan with the goal of fostering FDI outside the Santiago Metropolitan Region in certain sectors. A key objective of the plan is to encourage investment in areas of non-traditional 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 resource exports. The plan also promotes investments in the energy sector mainly for non-conventional renewable energy projects. CORFO provides co-financing programs to pre-investment feasibility studies for projects using renewable non-conventional energy resources.

The Arica Law of 2001 grants tax credits to companies in the provinces of Arica and Parinacota both in Region XV (Arica and Parinacota). Investment projects amounting to over 2,000 UTM (about USD 145,000) in Arica are eligible for a tax credit of 30 percent of the value of the fixed physical assets (40 percent for tourism projects). Investment projects totaling more than 1,000 UTM (about USD 72,500) in Parinacota are eligible for a tax credit of 40 percent of the value of the fixed physical assets. These incentives will be applied until December 31, 2011 and may be repaid up to 2034. [NOTE: The Unidad Tributaria Mensual (UTM) is similar to the UF. It is an inflation-indexed measure of value, adjusted on a monthly basis. On January 5, 2010, 1 UTM was equivalent to about CHP 36,679 and 1 USD was equivalent to about CHP 506.]

The Austral Plan of 1999 provides tax credits for investments in Regions XI (Aysen) and XII (Magallanes) and the province of Palena in Region X (Los Lagos). Investment projects totaling 2,000 UTM (about USD 145,000) in the transport, energy, tourism, property, manufacturing, agriculture, aquaculture, and research and development sectors are eligible for a tax credit of up to 32 percent of the value of fixed physical assets. Credits are granted until 2011 but may be repaid up to 2030.

A third investment promotion plan for the province of Tierra del Fuego in Region XII (Magallanes) is available for mining, manufacturing, transport, fishing and tourism companies that produce goods or services made up of at least 25 percent of local labor and inputs.

According to data provided by the Chilean Internal Revenue Service (SII), tax credits granted in 2008 for investments under the Arica Law totaled about USD 24 million and those granted under the Austral Plan totaled about USD 126 million.

Other investment incentives have been introduced through the “Chile Competes Plan.” The Plan includes an exemption from the income tax normally paid by institutional investors, such as mutual funds and pension funds, on earnings from the transfer of corporate stock that is publicly traded, or bonds or other publicly offered securities representing debt issued by the Central Bank of Chile, the Chilean Government, or by companies incorporated in Chile.

Right to Private Ownership and Establishment

Except for the limitations in the fisheries and media sectors noted above, Chile does not, in general, restrict the right to private ownership or establishment. Section 24 of Article 19 of the Constitution establishes the “absolute, exclusive, inalienable and permanent domain” of the Chilean state over all mineral, hydrocarbon, and fossil fuel deposits within Chilean territory. Under Chilean law, the Government may grant concession rights to individuals and companies for exploration and development of these natural resources for a finite period. There are also national security-related measures regarding the purchase of real estate by foreigners in certain geographic areas.

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 (IPR). 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 PWL in 2008 and 2009.

Chile has undertaken a number of legislative reforms to strengthen its IPR regime and bring it in line with international commitments, including the U.S. – Chile FTA. However, there are still substantive deficiencies in Chile's IPR laws and enforcement of existing IPR protections. The main concerns involve patent and test data protection in the pharmaceutical sector and copyright piracy of movies, music, and software.

As a member of the World Trade Organization, Chile chose to qualify as a developing country for meeting its obligations as a signatory to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). 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 has been a member of the World Intellectual Property Organization (WIPO) since 1975 and adhered in April 2001 to the Treaties on Copyright and Performances and Phonograms. Chile approved legislation to comply with TRIPS obligations related to industrial property in December 2004. The new law provides for, among other things, expedited court proceedings and the authority to seize illegal copies of patented products. In 2008, Chile ratified the Patent Cooperation Treaty (PCT), which came into force in June 2009. In 2009, the Chilean Congress considered but did not vote on two other FTA commitments: accession to the Trademark Law Treaty (TLT) and the 1991 Convention on the International Union for the Protection of New Varieties of Plants (UPOV).

In addition to deficiencies in IPR laws and regulations, there is a larger problem with overall inadequate IPR enforcement. The FTA seeks to have Chile strengthen its legal framework to provide better protection to copyrights and trademarks. For example, the agreement requires an increase in the period of protection for copyrights and related rights to 70 years. The FTA also requires the criminalization of end-user piracy and mandates both statutory and actual damages for IPR violations. Provisions of the FTA require state-of-the-art protection for digital products and penalties for tampering with anti-piracy technology. Chile enacted legislation to implement some of its FTA and TRIPS commitments on copyright protection in 2003.

In October 2009, the Chilean Congress passed a landmark upgrade to copyright legislation, which included new provisions mandating penalties for IPR violations. However, the Congress dropped key language from the bill implementing some FTA commitments on internet service provider liability and copyright infringement on the internet. The Chilean executive branch requested the reinsertion of some of the language, a portion of which was approved by the Congress in January 2010. The bill was then sent for final administrative processing before becoming law.

The U.S. and Chile have committed to making a system available for the resolution of disputes regarding internet domain names. 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.

In April 2008, the Chilean congress passed a law that created the National Institute of Industrial Property (INAPI), replacing the Department of Industrial Property. INAPI began operations in January 2009 and is a technical and legal agency in charge of all the administrative actions related to industrial property registration and protection. INAPI is overseen by the President of Chile, through the Ministry of Economy.

One serious 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. Food and Drug Administration, is the agency charged with granting marketing approval 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 -- that seek 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 often have garnered unproductive results, i.e. the U.S. firms are unable to keep the pirated goods from entering the market.

In November 2005, the Ministry of Public Health (which oversees the ISP) published regulations establishing a mechanism to help protect data related to pharmaceutical products and pre-clinical pharmacological and toxicological studies. In 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 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 U.S. – Chile FTA creates some additional obligations for transparency in regulatory processes.

Efficient Capital Markets and 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 Capital Market Reform I came into force. The reform created an agricultural commodities exchange and allowed administrators of Chile's private pension funds (AFP for Administradora de Fondos de Pensiones) to operate five funds with different risk-return profiles instead of one single fund. The reform to the pension funds also promoted alternative voluntary pension plans (mirroring the U.S. 401K option).

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

Capital Market Reform I 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 reform also 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, Capital Market Reform II entered into force, which aims to promote the development of the venture capital industry, strengthen the stock and exchange markets, and deepen other Chilean financial markets. In September 2009, the GOC introduced Capital Market Reform III 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. U.S.-based firms are allowed to offer services in Chile 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 rebounded strongly from the recent international financial crisis, rising by more than 50 percent in 2009, its best year since 1993. In December 2009, the Chilean sovereign spread on the Emerging Markets Bond Index (EMBI) was 381 basis points in contrast to the 799 basis point average for Latin America.
The main institutional investors and suppliers of capital to local companies are the pension fund administrators (AFP). As of June 2009, Chile's five AFPs managed a total investment portfolio of USD 102 billion, representing about 76 percent of Chile's GDP. The pension funds administered by the AFP belong to 8.5 million contributors. As of June 2009, the total resources under administration were distributed in five different funds of varying degrees of risk. As of June 2009, accumulated savings in the voluntary contributions system (APV) of the AFP system totaled USD 2.6 billion.

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 60 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 and meets Basel standards. There are currently 24 banks operating in Chile, and 12 are foreign-owned representational branches. Only two banks are completely owned by Chilean economic interests (BCI and Corpbanca). The rest have some level of incorporation with foreign institutions. Foreign banks can compete on the same terms as their domestic rivals. There are also five local Savings and Loan Corporations, and one state-owned bank, Banco Estado, which is the nation’s third largest. Private banks manage most corporate business.

Starting from January 2008, upon a request of the Superintendency of Banks, banks must present their financial information on a consolidated basis instead of individually. This new obligation was part of the migration process to the International Financial Accounting Rules (IFRS) that entered into force in 2009.

During 2008, the banking system registered profits of USD 1.53 billion, a 17 percent decrease compared to the previous year. The Chilean banking system did not escape the adverse effects of the international financial crisis. It absorbed minor losses but remained within adequate capitalization levels and maintained good risk indicators. Chilean banks posted a net profit of USD 2.2 billion in the first 11 months of 2009.

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.

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).

In 2009, Chile enacted several critical reforms as part of the process to join the Organization for Economic Cooperation and Development (OECD). One of these reforms was a law that Chile enacted in 2009 allowing for the exchange of tax information between tax authorities, including information based on bank account activity (information previously restricted under Chilean law).

Summary of Chilean Banking System (November 2009):
(USD millions, 1USD = CHP496)

Total Loans - 136,172
Deposits - 113,495
Net Income - 2,245
Total Assets - 203,048
Capital and Reserves - 13,608

Source: Chile's Superintendency of Banks and Financial Institutions

In a bid to increase competition within the banking sector, the capital market reforms have also liberalized 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% or more of the target's consolidated assets. With the exception of fishing companies or the media, there are no restrictions or prohibitions on 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 (November 2009)

-- Banks and Financial Institutions: 24 participants. Total Loans: USD 136 billion, a 38 percent increase from 2006 (98.7 billion).

-- Pension Funds: 5 administrators. Funds under management: USD 100.2 billion corresponding to 8.5 million contributors as of June 2009.

-- Insurance Companies: 51 (21 general insurers, 30 life insurers).

According to the World Economic Forum's Global Competitiveness Report for 2009-2010, 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 30th in the world.

Competition from State-Owned Enterprises

Chile has relatively few state-owned enterprises (SOEs), most having been privatized during the military government's economic reforms between 1974 and 1989. Notable exceptions are the national copper company, CODELCO, the national petroleum company, ENAP, and the state-owned bank, Banco Estado.

In general, private enterprise is allowed to compete with public enterprise under the same terms and conditions (e.g., there are many private copper mines and private banks). However, there are specific areas where this does not hold and SOEs enjoy special advantages. For example, ENAP is the only refining company in Chile.

Most SOEs in Chile are structured so that the company management reports to a board of directors, which includes the relevant government minister (e.g., the Minister of Mining sits on ENAP's board of directors). Most board members are independent representatives from the private sector and academia, or from that industry's main labor union or trade association. Board members are usually designated by the President of Chile.

Chile passed a law in October 2009, which modifies CODELCO's corporate governing structure. The law removes the Ministers of Finance and Mining and a representative of the military from the board of directors. It also expands the board to nine members, three of whom are designated by the President of Chile, two of whom are nominated by CODELCO's labor unions and approved by the President of Chile, and four of whom are elected by a vote of the Consejo de Alta Dirección Pública (Chile's independent committee that makes high-level civil service appointments) and subsequently approved by the President of Chile.

Chile has two sovereign wealth funds constituted principally from state copper revenues. The Economic and Social Stabilization fund was established in 2007 and was valued at USD 12.6 billion in November 2009. During 2009, the Government withdrew money from the Economic and Social Stabilization fund to pay for its stimulus package designed to combat the effects of the international financial crisis. The Reserve Pension Fund was established in 2006 and was valued at USD 3.5 billion in November 2009. The stated purpose of this fund is to assist the Government with payments to those eligible to receive pensions but who remain indigent (Chile uses a privatized pension system). A third sovereign wealth fund, called the Bicentennial Fund, is planned in the future to encourage Chileans to study abroad through the use of government funded scholarships.

The sovereign wealth funds are administered by the Chilean Central Bank, at the direction of the Ministry of Finance. The Ministry of Finance receives advice on policy related to the funds from an external Finance Committee made up of independent advisors. The Ministry of Finance publishes monthly, quarterly, and yearly reports on the funds. In 2008, the Peterson Institute of International Economy ranked Chile eight out of 34 funds worldwide in terms of transparency and best practices.

Corporate Social Responsibility

There is general awareness of corporate social responsibility among both producers and consumers in Chile. As part of the OECD accession process, Chile passed a law in September 2009 setting out new rules to help bolster corporate social responsibility.

Political Violence

The potential for terrorist activity and civil disturbance is low in Chile. Crime rates are low to moderate throughout the country. During the last 10 years there have been relatively few incidents of politically motivated attacks on investment projects or installations. Incidents of anti-American sentiment and civil disorder are rare, and there have been no incidents involving international terrorist groups. However, since 2007 Chile has experienced an increasing number of small-scale bombings targeting mostly local service providers but also banks, a police station, and the U.K. Embassy. Anarchist groups have claimed credit for some of the bombs. There have also been violent incidents in forestry plantations in southern Chile. These incidents in southern Chile 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 2003, Law 19.882 came into effect to establish a more efficient and professional civil service. The law introduced new performance-based incentives for in-service promotion on merit; reduced the number of political appointees in public service positions; established a new selection procedure; clarified and modernized public employee payments; and reformed the MOP's procedure for awarding government contracts. In 2005, Congress passed Law 20.054 to regulate political party and candidate financing, and established caps on election spending.

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 southern Chile. As of December 2006, EFE had lost USD 1.4 billion, 7.5 times its total assets. All of EFE's senior executives were under investigation. As of December 2008, the Chilean courts had indicted most senior executives at EFE, accusing them of fraud and mismanagement of fiscal resources. However, on December 2009, the courts absolved the three most senior executives of all charges. The General Prosecutor’s Office is currently appealing the ruling.

Chile has signed and ratified the Organization of American States (OAS) Convention against Corruption. Chile is also a signatory to the OECD Convention on Combating Bribery. In 2009, as part of the OECD accession process, Chile passed a law that completed the implementation of its Anti-Bribery Convention obligations. 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 ranked Chile 23rd in its corruption perceptions index for 2009. The World Bank report on Governance Indicators released in June 2008 ratified Chile´s status as one of the world´s most transparent countries. On Control of Corruption, Chile ranked 90.3 percent, ahead of Japan and Italy and on a level similar to the average for OECD countries (90.5 percent).

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 2009, Chile had signed 51 BITs, of which 38 are in force. There are agreements in force with Argentina, Australia, Austria, Belgium, Bolivia, China, Costa Rica, Croatia, Cuba, Czech Republic, Denmark, Ecuador, El Salvador, Finland, France, Germany, Greece, Guatemala, Honduras, Iceland, Italy, Malaysia, Nicaragua, Norway, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Romania, Spain, Sweden, Switzerland, Ukraine, the United Kingdom, Uruguay, and Venezuela. The Government of Chile has begun bilateral investment protection agreement negotiations with 15 others countries, including India, Morocco, Russia, Israel, and Thailand.

In January 2010, the United States and Chile announced the successful conclusion of negotiations on a bilateral tax treaty.

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 strikes do occur. Strikes and public protests have been concentrated in the mining, health, education, transportation, and civil service sectors.

Union membership is voluntary, and approximately 13 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.

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 10 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 took effect in January 2007. Initially it 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.

The 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. However, the law does not permit companies to outsource its main economic activity. Regarding 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." Additionally, 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.

In Chile, more than 50 percent of 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.

According to the OECD Review of Labor Market and Social Policies of April 2009, Chile should invest more in employment and active social policies to reduce its high levels of income inequality and poverty.

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, 0.8 percent of the c.i.f. value). The same exemptions also apply to manufacturers in the Chacalluta and Las Americas Industrial Park in Arica (in the XV Arica and Parinacota Region created in October 2007). Mining, fishing and financial services are not eligible for free zone concessions. Management companies and firms established in the free zone are exempt from payment of tariffs, VAT, other charges on imports, first category income tax under the Income Tax Law, and payment of VAT on goods and services for all their operations in the free zone.

Foreign Investment

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 2009 World Investment Report, the stock of total FDI in Chile totaled more than USD 100 billion or 59.6 percent of Gross Domestic Product in 2008 -- down from 60.7 percent in 2007. The Report showed the world average for inward FDI in 2008 was 24.5 percent. Since 1990, multinational companies have committed more than USD 55 billion in investments to Chile, a significant amount in an economy whose GDP reached about USD 170 billion in 2008. Today more than 3,000 companies from 60 countries have operations in Chile.

The FIC reported that the country's net accumulated FDI made under DL 600 totaled USD 44.2 billion between 1974 and 2008. In 2008, the mining sector attracted 45.1 percent of FDI through DL600, followed by utilities (with 26.7 percent), with transport and communications accounting for 13.5 percent. An especially significant U.S. investment was Wal-Mart's acquisition of Chile's D&S supermarket chain for more than USD 2 billion in December 2008. Net accumulated FDI made under Chapter XIV of the Central Bank's CFER totaled USD 30.3 billion between 1974 and 2008.

In 2009, authorized FDI in Chile was USD 6.3 billion. This figure is the second highest in eight years after the historic peak of 2008. In 2009, the service sector accounted for 61.9 percent of total authorized FDI (USD 3.9 billion), followed by utilities with 12.2 percent, manufacturing at 9.3 percent, transport and communications at 5.5 percent, and construction at 5.4 percent.

The United States was Chile's main investment partner in 2009, accounting for USD 3.7 billion of 59.4 percent of total FDI. Australia was the second biggest investor with USD 560 million (8.9 percent of total FDI), and Peru the third biggest with USD 400 million (6.4 percent of total FDI).

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

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

Within the services sector, the most important components were:

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

The U.S. remains the single largest direct investor, accounting for 24.2 percent of inflows from 1974 – 2008, totaling USD 16.9 billion. Fruits and forestry sectors represent about 57 percent of U.S. FDI to Chile, followed by the insurance sector (39 percent), the food industry (37.7 percent), company services (37 percent), the chemical industry (35 percent), agriculture (33 percent), the wood and paper industry (29 percent), retail (29.5 percent), communications (25.3 percent), and mining (23.2 percent).

The following represent the inflows of FDI under DL 600 by country from 1974 - 2008 (through 08/31/2008):

United States – 24.2%
Spain – 20.8%
Canada – 18.5%
United Kingdom - 8.3%
Australia – 4.5%
Japan – 3.2%
Ita1y – 2.4%
The Netherlands – 2.6%
France - 2.2%
Switzerland – 2.4%
Others – 11.5%

According to Central Bank statistics between 1990 and the first half of 2009, total flows of Chilean investment abroad totaled USD 48.6 billion distributed over 65 countries in Latin America. These destination countries were mainly: MERCOSUR (51 percent), the Andean Nations Community (29 percent), Central America and the Caribbean (2 percent), NAFTA (9 percent), and the EU (2 percent).

Argentina is the main recipient of Chilean FDI abroad representing 32 percent of total outward FDI (USD 15.5 billion), followed by Brazil (18 percent), Peru (15 percent), and Colombia (13 percent). The United States is Chile's fifth largest recipient of FDI with a 7 percent share. Chilean investment abroad has been divided as follows:

Services – 41%
Energy – 30%
Manufacturing – 18%
Agriculture and livestock – 6%
Mining – 5%

Statistical Annexes

FDI 1974-2008 (USD billion)

Mechanism 1974-2003 2004 2005 2006 2007 2008
DL 60053.
- Equity40.
- Other capital13.46121531.166645
Chapter XIV10.
- Equity7.
- Other Capital2.40.980.600.300.371.2
Total FDI63.
DL 60013.
- Repatriation
Of Capital5.
- Repayments7.81.70.581.30.420.31
Chapter XIV2.71.00.911.41.31.6
- Repatriation
of Capital
- Repayments1.80.560.621.40.440.26
Total Remittances15.
Source: Foreign Investment Committee (www.cinver.cl)

FDI (DL 600) by Country of Origin (USD million, nominal)
Cape verde0167
Cayman Islands0304,356
Costa Rica04,038
Dominican Republic076
El Salvador0250
International Org.0349,766
Korea, Republic of040,371
Netherland Antilles032,312
New Zealand0158,791
Papua New Guinea00
South Africa1,236405,121
Taiwan R.O.C.74410,578
United Arab Emirates0180
United Kingdom142,4655,802,099
United States549,92016,944,808
Source: Foreign Investment Committee figures as of December 31, 2008

FDI (DL 600) by Year: 1998-2009* (USD million, nominal)
(*January to October 2009)
Year Jan-Oct Annual Total
Source: Foreign Investment Committee

FDI (DL 600) by Sector (USD million, nominal)

Sector 2008 1974-2008
Food, beverages and
Wood and paper53,8511,201,922
Other manufacturing112,1651,622,855
Electricity, gas, Water1,398,93514,363,530
Wholesale, retail trade2,7021,586,591
Transport, storage425,9851,159,345
Financial services (1)322,3566,937,828
Engineering – business
Sewage, sanitation
And similar services0522,644
Other Services (2)14,4611,349,813
(1) Includes: banking, investment companies, investment and risk capital funds and other financial services.
(2) Includes: restaurants and hotels, real estate activities, social and related community services, recreation
Source: Foreign Investment Committee

United States FDI to Chile (DL 600): 1974-2008
(USD thousand, nominal)

Period U.S.A. Total Value% DL600 U.S.A. Value %Total
Source: Foreign Investment Committee