This article is written by Esha Barua Chowdhury who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.
The Foreign Investment in Chile has seen a decline owing to the 2020 pandemic and its effect on several economic variables. However, Invest Chile’s Managing Director Andrés Rodríguez is hopeful that if the government’s new strategy is implemented correctly, the Latin American country might see investments exceeding US$25 billion.
Invest Chile, the Chilean government’s Foreign Investment Promotion Agency has been preparing strategies to meet the above-mentioned goal to the extent that the agency has been holding meetings with leading companies like Amazon, Tesla, TechMahindra, Netflix, Alibaba, Baidú, etc.
According to the World Investment Report 2020 published by UNCTAD, FDI in Chile had increased by 63% from USD 7 billion to USD 11 billion in 2019, sustained by investment in utilities, mining, and services.
This article primarily discusses foreign direct investment and the regime in Chile together with the investment culture prevalent there.
What is Foreign Direct Investment?
Foreign Direct Investment is the investment made directly by a company or legal individual of one country into any business/ firm located and functioning in another company. When a foreign entity invests or purchases into the business of a country other than their home country to obtain a controlling stake over the company so purchased, the process is termed as a Foreign Direct Investment (FDI). FDI involves setting up a business, establishing operations, or purchasing assets in a foreign land.
If a multinational company from Britain starts operating in India, either by partnering with an existing firm or by setting up its segment, such investment shall be considered as a part of FDI in India.
Flows of Foreign Direct Investment
FDIs can be outward or inward, meaning if a different country invests in India, it is an inward investment and if an Indian entity invests in another country, it is considered to be an outward investment.
Not all foreign investments are FDI, How?
FDI is different from FPI (Foreign Portfolio Investment) since the latter is the investment made in financial assets and securities in businesses of other countries. The FDI so made flows into the primary market and aids to the growth in the GDP of the country. FDIs are usually made in an open market, ie a market that has lesser trade restrictions or is a free trade market (elimination of imports and exports). Chile is the seat of such open markets.
Kinds of FDI in Chile
FDI s can be Inwards and Outwards. FDI s can be of 4 types
What determines a foreign investment?
The economic and political state of the host often determines the nature of the guest. Economy, regulatory conditions, legal flexibility, political stability, market size scope, flexible government policies, exchange rates, labour costs, geographies, investor’s strategy, range of equity inflow, and relative factor endowments are some of the elements which determine FDIs of a country.
What is the position of Chile concerning foreign Investments?
- FDI is said to be beneficial for developing countries since it increases job opportunities and plays an important role in the economic development of the host country besides increasing the exchange rate of the country.
- The World Investment Report 2020 prepared by UNCTAD (United Nations conference on trade and development) forecasted that FDI in Latin America vis a vis Chile will plummet by 40-50%.
- The consistency in FDI in Chile during this Covid pandemic is noteworthy and has been better than opposed to other Latin American countries excluding Mexico, which has also seen a rise in investments. Invest Chile promotes investment in the country and brings forth the stats of the FDI inflow.
- In 2014, Chile’s government launched the Initiative of Productivity, Innovation, and Growth, stressing how the country would prioritize investment in five economic sectors: mining industry services, the sophisticated food industry, exportable technological services, sustainable tourism, and energy/logistics infrastructure for development.
FDI Regime in Chile
Chilean economic policy is founded on the principles of capital transparency and non-discrimination against foreign investors. Chile is regarded as one of the strongest investment destinations of Latin America (South America) due to its stable economic system, judicial security, growth potential, low-level risk, and high quality of infrastructure.
FDI regime in Chile is majorly regulated and governed by Law 20.848 and Chapter XIV of the Compendium of Foreign Exchange Regulation of the Central Bank of Chile which has been discussed below.
On a lighter note, no specific rule is available restricting foreign investment in Chile. The country has a foreign investment regime that is relatively favourable to inward investments.
Investments exceeding USD10,000 are performed under Chapter XIV. Such a provision is available to foreign investors who can be individuals or legal entities regardless of their place of origin
Law No. 20.848
Chile encourages foreign investment regardless of its place of origin. The Chilean Law 20.848 established a law allowing Foreign Direct Investment within the country according to which no international investor should be discriminated due to their place of origin and any investment made by such foreign entity would be treated similarly as the investments made by a local investor.
The law passed in 2015 to establish a new framework and to allow FDI amounted to the creation of the Foreign Investment Promotion Agency (APIE) which is also known as “Invest Chile”. The former Foreign Investment Committee is legally continued as Invest Chile.
Law 20.848 defines FDI and sets out the eligibility of investors to be treated as a foreign investors and subsequently the conditions that are required to be met in order to be regarded as a Foreign Investor.
What are the conditions to be fulfilled to be deemed a Foreign Investor in Chile?
The conditions for being a foreign investor are as under:
- Natural person or legal person/entity established overseas;
- Not resident or domiciled in Chile;
- That transfers overseas capital or assets to Chile.
What is the minimum amount that should be invested as FDI?
The minimum amount of foreign investment mandated by Chilean Law is at least US$5 Million or its equivalent in other currencies from other countries. Any investor that transfers such an amount would be a Foreign Investor in Chile.
What are the modes of FDI in Chile?
FDI also includes investments in the form of acquisitions, partnerships, or ownership of any company or capital in Chile, provided such investments should give the investor a control amounting to 10% voting shares of the company or an equivalent share capital if the company is not a stock company.
Forms of investment accepted by Chile
The amount transferred through investment can be in the following forms
- Freely convertible foreign currency;
- Physical goods in all their forms or states;
- Reinvestment of profits;
- Capitalization of loans;
- Technology in all its forms provided it may be capitalized;
- Loans associated with foreign investment from related companies.
Limitations of Foreign Investors to invest
In addition to ancillary limitations which may arise depending on a diversity of factors responsible for FDI, there are two major limitations that fend off foreign investments.
- There lies a prohibition in the FDI regime of Chile, according to which an investor is forbidden from acquiring the domain, tenancy, or possession of a real estate that borders the neighbouring country when such acquisition affects the nationals (corporations or persons) of such neighbouring. Nevertheless, the president of Chile may act as a silver lining to such a prohibition by issuing Supreme Decree to authorise such acquisitions on grounds of national interest.
- The chile government restricts foreign investments in the monopolistic sectors. Restrictions on domains like nuclear energy, hydrocarbons, defence, sea transport, and mining are put by the government due to national security purposes. These sectors are solely under the government. Chile imposes a ban on private investment projects in hydrocarbon exploitation.
The Political Constitution of the Republic which is the Chilean Supreme Law holds that the state of Chile is the exclusive owner of all the hydrocarbons, whether in a liquid or gaseous state, existing within the territory of the country. It accounts for the sole right of the State to extract, exploit, utilize, such hydrocarbon resources. Such a restriction is anti-FDI and also poses a barrier for national investors.
What are the Sectors in which investments are preferred by Chile?
Investments in the forms mentioned above can be made in Chile. It should also be noted that investments are preferred in manufacturing, forestry, energy, infrastructure, telecommunications, R&D, technological, medical, or scientific development projects. Capital goods imported and used for exploration development, or exploitation in Chile can be allowed a Value Added Tax during imports.
The company structures most commonly used by foreign investors in Chile
Chile prefers the investing companies to be established by public deed from a public notary. The deed would contain and specify the type of company, its activity area, the equity contribution of their respective partners (if any), and the structure of distribution of profits and the liabilities of the company for losses.
Following are some of the company structures that invest in Chile
- Individual Limited Liability Company (EIRL)
- Stock Company (SpA)
- Limited Liability Company; Corporation (S.A.), which can be public or closed.
How can foreign investors invest in Chile?
Foreign investment in Chile can be made in two ways:
- through a binding contract made with the State of Chile where the investor must submit a request to the FIC (Foreign Investment Committee) under Decree-Law 600 (DL 600) and
- by simply and freely investing through the Central Bank.
The Chilean policy complies with OECD ( Organisation for economic cooperation and development) standards for matters concerning FDIs. A foreign investor has to, however, subject itself to the regulations and controls of the Central Bank. One can purchase real estate (excluding the state-owned properties) in Chile freely without restrictions. As such there are no major limitations and the regulations are liberal enough to accommodate the foreign investors equally to the extent that there has been no nationalisation of private companies so far.
What are the impediments for foreign investors?
The system of exchange controls to ensure monetary stability has certain implications over inward investment. Registration for investors implying that Capital cannot be repatriated for one year and that Foreign loans are subject to a reserve requirement in terms of noninterest-bearing deposit at the Central Bank for 1 year is one such impediment for foreign investors
What are the investment aids offered by Chile towards FDIs?
Chile incentivises the investments which in turn acts as a magnet for future FDIs. The incentives are sometimes specific and at times are in the form of special tax regimes. Nowadays policies are made to facilitate foreign investments. DL600 contract is one of that investment facilitation instruments that has now become obsolete and are no longer required.
Below are some of the aids that are provided towards foreign investments
- Chile government has agencies like CORFO, ProChile, and SENCE that help the Foreign investors in the promotion of entrepreneurship, innovation, and research and allow the companies to access a broad national network
- Tax benefits are given for investments in R&D sectors. Credit against First Category Tax is provided to such R&D investments up to 35% of the entire amount invested
- Co-financing facilities are available for investment projects in technological sectors.
- Nonrepayable subsidies are given before the actual investments, primarily for the pre-investment studies to facilitate the decision-making process of the investors.
- For rural areas of Chile, subsidies in labour costs are given by the government
- Investment subsidy is given up to 20 % for the small and medium-sized companies for investments in the remote areas of Chile
FDI mechanism in Chile over the years
Foreign Investment Statute (DL 600)-
It was in force since 1974, allowed an investor to sign a legally binding contract with the state for the implementation of foreign investment projects, for which the investors received certain guarantees and rights
Chapter XIV of the Central Bank’s Compendium of exchange Regulations(CFER)
This is a simpler version of the investment mechanism implemented by chile. Under this, a foreign investor only had to comply with the registration procedures. However, it did not include the guarantees provided by DL-600
Chapter XIX of Central Bank’s Compendium of exchange Regulations(CFER)
This was mainly used for manufacturing and services sectors. Such debt conversion mechanism is no longer in operation
Recap of the major points
- Chile has an Open Investment regime.
- Foreign investors are treated legally the same as nationals. Foreign Investors are also granted the same repute as the nationals.
- Chile has a robust mechanism and institutional environment for the growth of FDI.
- There is no requirement of prior approvals/ screenings from the government of Chile for FDIs
- Law 20.848 and Chapter XIV governs the FDI investment in Chile
- Regulatory frameworks are friendly to attract FDIs
- Chile has got a sound legal framework, stable financial sector, and market-oriented policies to support FDI
- There is an openness for trade acting as an attractive investive climate
- Chile’s sovereign bond ratings are good enough to be considered for FDI
- Government aids are provided to counter the limitations and inhibitions to foreign investment.
Till today Chile has fared well in the FDI segment despite its small market. It has one of the highest FDI to GDP ratios due to the heavily concentrated investments in its natural resources. As has been discussed above, Chile ordains a flexible regime for FDIs. It has been constantly keeping track of its progress and enthusiastically promotes its FDI policies. The strong yet accommodating FDI policy implemented by Chile has amounted to the significant growth of its economy.
The liberal policies propagated and promoted through Invest Chile and the abundance of natural resources have attracted several investments by various foreign investors from all around the globe. Currently, Chile is one of the leading countries of Latin America in terms of investments made through FDI and shows a promise for growth.
Even though Chile is not the best market for foreign investment, the country has consistently promoted FDIs and attempted at making the investment procedures hassle-free and now with a new “ Tu Empresa en un Dia” (Your Company in One Day) initiative, designed for small companies the processes are going online paving way for remote investment procedures.
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