Francisco Ugarte and Eugenio González of Carey in Santiago look at the new foreign investment law
As part of the well intentioned but highly controversial tax reform approved by Congress on 2014, Chile’s successful and long standing foreign direct investment regime, Decree Law No. 600 of 1974 ("DL 600 - Decree with Force of Law No. 523 of 1993 of the Ministry of Economy, Development and Reconstruction consolidates, coordinates and systematizes the text of the DL 600), came to an end.
The tax reform entrusted a commission to study and propose to Congress a new legal framework for FDI; an unexpected surprise given that in 2010 a similar commission concluded that the DL 600 was a valuable FDI investment mechanism which needed slight adjustments (The 2010 commission’s most innovative conclusion was to incorporate into the foreign investment contracts the OECD’s anti-corruption standards. However, none of the 2010 commission’s proposals were materialized in the end). The 2014 commission concluded its work on January, 2015, and shortly thereafter, Law No. 20,848 setting forth the new framework for FDI in Chile was enacted (the "New FDI Law"). It is worth mentioning that the New FDI Law did not repeal or amend Chapter XIV of the Compendium of Foreign Exchange Regulations issued by the Chilean Central Bank regarding information requirements that apply to foreign loans, investments and capital contributions.
The New FDI Law seeks a more modern approach at attracting FDI by removing deadlines for admission of foreign capital into the country and limitations to remit capital that existed under DL 600. However, critics posit that eliminating foreign investment agreements, which could only be amended with the prior consent of both the foreign investor and the State of Chile, will have a negative impact on the total amount of FDI.
Moreover, DL 600 foreign investors were able to choose between being subject to the general tax regime or a higher but invariable tax rate, depending on the nature and amount of the FDI. However the New FDI Law eliminates the DL 600’s invariable tax rates, leaving foreign investors subject to the current tax rate under Chilean law. The government’s view is that Chile’s large network of international foreign treaties (including free trade agreements and double tax treaties) affords sufficient protection to foreign investors, while critics foresee an adverse effect in FDI, especially in the mining industry.
But not all amendments have been negatively received.
Unlike the DL 600, the New FDI Law establishes a series of rights for everyone who qualifies as a foreign investor without the need of entering into an agreement with the State of Chile: the remittance abroad of transferred capital and net profits generated by the investment, upon fulfillment of the relevant tax obligations; access to the formal exchange market to settle or obtain foreign exchange; and non-discrimination regarding domestic investors, are granted by the sole effect of the law. In such circumstances, only an application for a certificate to be issued by the newly created Agency for the Promotion of Foreign Investment (the “Agency”) will be required to acknowledge that a foreign investor has the benefit of the new FDI regime.
Strategy to promote FDI: OECD recommendations
The 2014 commission received assistance from the OECD. Among its recommendations, significant importance was given to a more proactive role at promoting FDI, which we believe is a welcomed amendment, and unlike the DL 600’s passive role, the New FDI Law entrusts the President of the Republic to develop a strategy to actively seek FDI, including actions to position our country at an international level and as a center for foreign businesses and investments.
In addition, the New FDI Law creates two new institutions: (a) a Committee of Ministers, chaired by the Minister of Economy, intended mainly to advise the President of the Republic on the promotion of FDI by proposing a national strategy for the promotion of FDI, and (b) the Agency, being the successor of the former Foreign Investment Committee, which main tasks are (i) promoting and attracting capital inflows and FDI into Chile, (ii) overseeing the implementation of the proposed strategy for FDI, and (iii) issuing the ”investment certificates” mentioned above.
Entry into force: not without hesitation
Despite the fact that the 2014 tax reform originally intended to repeal the DL 600 as of January 1 2016; the New FDI Law took a step back and conferred an extension to request new foreign investment agreements under DL 600 for four more years as of January 1 2016.
Such change of heart is seen as a message of continuity to foreign investors and has been well received considering that the current administration is still pursuing more structural reforms to our legal system.
In summary, the New FDI Law seeks to incorporate a more proactive regime for FDI, without modifying former DL 600 agreements already in place. However, the outcome of the reform and how it will affect Chile in the long term is still unclear as any positive or negative effects on investments and economic growth in Chile are likely to be postponed given the last minute four year extension of the DL 600.
About the author
Francisco Ugarte is partner and co-head of the corporate, M&A, capital markets and banking and finance group at Carey. He advises international and local clients in M&A, including tender offers, negotiated transactions, auction processes, joint ventures, private equity, securities and debt offerings, derivatives, project financing and development, representing both corporations and financial institutions. He has been recognized as a leading lawyer in corporate/M&A, capital markets, banking and finance by different international publications such as Chambers Latin America, Latin Lawyer 250, The Legal 500, LACCA, and Best Lawyers. Also, ILO Client Choice has recognized him in M&A and derivatives.
Mr Ugarte graduated from Universidad Católica (JD, 1996) and earned a LLM at the University of Chicago (2001). He is a professor of the LLM program at Universidad Católica de Chile.
About the author
Eugenio González is an associate of Carey’s corporate, M&A and capital markets group. His practice focuses in the areas of mergers and acquisitions, capital markets, corporate law, commercial law, and general practice. He is a member of the Chilean Bar Associaton.
Mr. González graduated from Universidad de Chile, and was admitted to the bar in 2011.