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Country Commercial Guides for FY 2000:
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CHAPTER VII: INVESTMENT CLIMATE
Openness to Foreign Investment
A key feature of the Government of Chile's development strategy is a welcoming attitude towards foreign investors, embodied in the country's foreign investment law, known as D.L. (Decree Law) 600. D.L. 600 was promulgated in 1974 and has frequently been liberalized. Since 1991, nearly all foreign direct investment in Chile has taken place through D.L. 600. Under this law, foreign investment must be approved by the government's foreign investment committee, but approval procedures are expeditious and not burdensome. Typically, applications are approved within a matter of days and almost always within one month. The rare cases in which applications have been rejected reportedly involved suspected investor fraud. Investors choosing not to use D.L. 600 may invest via the provisions of chapter XIV of the Central Bank's foreign exchange regulations.
Under D.L. 600, investors sign standardized contracts giving them 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 remit capital after one year;
- to opt for either national tax treatment or a guaranteed rate (currently set at 42 percent) for the first ten years of an investment; and
- to acquire foreign currency at the inter-bank rate of exchange.
Investments over $50 million may qualify for tax concessions. This welcoming attitude to foreign investment, along with the country's wealth of natural resources, has led to about $21.6 billion of new foreign investment in the five years ending in 1998. Foreign direct investment has totaled more than $31.7 billion since 1974, and the flow in 1998 almost surpassed $6 billion. Foreign investors have purchased many of the assets privatized by the Chilean government over the last decade. Further privatization efforts may offer further such opportunities. Foreign firms compete on an equal basis in privatization processes.
Despite Chile's generally positive attitude toward foreign capital, some restrictions persist. Profits may be repatriated immediately, but capital may not be repatriated until after one year. Beginning in 1991, the Central Bank required that a variable percentage of loan funds and portfolio investment from foreign sources, including proceeds from "secondary" American depository receipts issues, be placed in a non-interest bearing account (known as the "Encaje") at the Central Bank for up to two years. (Alternatively, investors could pay an amount equal to the interest that would be foregone.) This requirement discouraged the use of financing sourced abroad by raising its cost (supplier credits are exempt from the Encaje requirement).
In response to pressure on the current account as a result of the successive Asian, Russian and Brazilian financial crises from late 1997 to early 1999, the Central Bank reduced the Encaje rate from 30 to ten percent in June 1998 and then to zero two months later. This policy adjustment was designed to compensate partially for the higher risk premium that Chilean borrowers faced as a result of the financial crisis, but also had the effect of eliminating the Encaje's negative effect on foreign financial flows. As of mid-1999, the Encaje still remained at zero; however, the Central Bank has the authority to reimpose the reserve requirement and could decide to raise the percentage if it determines that foreign investment flows threaten its ability to control the money supply and exchange rate.
Foreign investors may choose to have their profits taxed at a guaranteed 42 percent rate for the first ten years of their investment or at whatever rate applies to local firms, currently 35 percent on fully distributed earnings. U.S. and Chilean officials began negotiation of a bilateral tax treaty in June 1999. In the absence of such a treaty, U.S. and Chilean investors can be taxed in both countries, although in practice the IRS usually grants credits for taxes paid in Chile.
The major sectoral exception to the government's openness to investment is the fisheries sector. According to 1991 amendments to the navigation law (D.L. 222), vessels fishing in Chile's 200-mile exclusive economic zone (EEZ) must have majority Chilean ownership (exceptions are made for some distant waters). The law permits bilateral agreements to allow foreign-owned vessels to fish in Chile's EEZ, but no such agreements have been concluded. National treatment is also not granted for cabotage (reciprocity is applied instead). Top management (but not ownership) of radio and television broadcasting firms is reserved for Chilean nationals. Banks may establish either branches or subsidiaries, and other financial firms must establish subsidiaries. Finally, D.L. 600 gives the Central Bank the authority to restrict foreign investors' access to internal credit if a credit shortage exists. To our knowledge, this authority has never been exercised.
Chile does not subsidize or offer incentives specifically to attract foreign investment, although corporate tax exemptions are available to both foreign and Chilean firms investing in the extreme northern or southern areas of the country.
Right to Private Ownership and Establishment
Chile conducts pro-forma screening of foreign direct investment. Except for the fishing sector and others noted above, Chile does not restrict the right of establishment.
Protection of Property Rights
Chile has a very strong regime for the protection of property rights, including secured interests in property. A functioning legal system safeguards investments by Chileans and foreigners alike. Chile's intellectual property regime is generally compatible with international norms, but its protection of patents remains deficient. Efforts to enforce intellectual property rights in Chilean courts have been successful. Chile does not have a sui generis statute for protecting the design of semiconductors, nor does it have comprehensive trade secret protection. Chile belongs to the World Intellectual Property Organization.
The industrial property law promulgated in 1991 substantially improved Chile's protection of industrial patents, but falls short of international standards. The law provides a patent term of 15 years from the date of grant. Legislation to bring Chilean intellectual property protection into compliance with the WTO agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) was to be submitted by the GOC to the Congress in mid-1999, but as of July 1999 had not been sent to Congress.
The current law does not consider plant and animal varieties as patentable subject matter. Most importantly, the law does not provide transition (or "pipeline") protection for pharmaceutical patents filed before the law's promulgation. Because of the long lead times involved in the marketing of new pharmaceutical products, the law will not prevent local companies from pirating foreign pharmaceutical patents for several more years. In addition, the registration procedures required by the ministry of health to market new drugs are more onerous for the first-to-file, which tend to be foreign firms. Finally, the Central Bank reserves the right to disallow access to the inter-bank foreign exchange market for payments for the use of patents that exceed five percent of sales. These shortcomings have kept Chile since 1989 on the U.S. Trade Representative's "Special 301" watch list of countries with deficient intellectual property rights protection regimes. Chile's copyright law grants recording companies the right to authorize the use of a work for 50 years. U.S. recording industry representatives have said that the law grants more power to authors relative to producers than is the industry norm.
Chilean law provides for the protection of registered trademarks and places priority on trademark rights according to filing date. Currently, local use of the mark is not required for registration. Payments for use of trademarks may not exceed one percent of sales.
Trademark protection is less than airtight. Many parties can and do register well-known trademarks owned by U.S. companies. When challenged, Chilean courts usually vacate such trademark registrations if little has been invested in their commercialization. Significant investment by the prior registrant, however, makes this outcome much less likely. In addition, some Chilean parties "warehouse" trademarks in the knowledge that the procedure for vacating a registration goes through the Chilean court system and can require up to four years and substantial legal expenses. Foreign claimants often opt to buy back trademarks in order to avoid such lengthy litigation.
Transparency of the Regulatory System
Chilean regulatory systems tend to be very transparent. Government regulators have little discretion in many of their acts and very simple regulatory schemes tend to minimize discretion where it does exist. However, rulemaking processes are not transparent and do not generally include provision for public hearings or comment.
Labor
Chile has enjoyed generally calm labor relations since the return to democracy in 1990. Strikes have been few in the private sector, but public employees in health, education, and coal mining have held strikes in the last few years. 1998 saw an upswing in the number of labor disputes in key sectors such as the copper industry, but this resulted from wage freezes and layoffs due to temporarily low world commodity prices. Likewise, some labor unrest has attended the privatization of Chilean ports, scheduled to conclude in late 1999. Real wages rose steadily in the 1990s until the 1998 economic slowdown and are expect to resume their climb when an economic recovery takes hold next year. Union membership is voluntary, and only about 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. There is no sectoral bargaining; contracts are negotiated at the company level. The minimum monthly wage was increased to 90,500 pesos in 1999, about $180 at the then-current exchange rate. Workers are also paid a family allowance, which employers may deduct from their tax bills. The Chilean government is a signatory to ILO conventions on worker rights.
Efficient Capital Markets and Portfolio Investment
Chile's capital markets are well developed, very active and open to foreign portfolio investors. Credit is allocated on market terms and is available to foreigners. Publicly traded Chilean companies, despite recent volatility amid shaky world financial markets, continue to attract substantial international investment, aided by an effective regulatory system. Short-term and arbitrage investments have been discouraged by the country's "Encaje" requirement, described in section Openness to Foreign Investment.
Conversion and Transfer Policies
Foreign investors may use the inter-bank foreign exchange market to repatriate capital and earnings. Importers and others with recognized need also receive access to the inter-bank rate. Others must use the parallel exchange market. Over the last few years, the exchange rates in these two markets typically have differed by less than one-half of one percent.
Firms that invest via D.L. 600 may remit earnings immediately and may remit capital after one year. Investors are guaranteed access to foreign exchange in the official inter-bank currency market. Delays in repatriation are brief.
The Central Bank reserves the right to disallow access to the inter-bank market for royalty payments in excess of five percent of sales. In such cases, firms would have access to the informal market. Also, the Chilean internal tax service reserves the right to prevent royalties of over five percent of sales from being counted as expenses for domestic tax purposes.
Expropriation and Compensation
Chilean law grants the government broad authority to expropriate the property of foreign investors. The 1973-1990 military regime and the two democratic governments that have followed it have not nationalized any private firms, and nothing suggests that any expropriation is likely to occur in the foreseeable future.
Dispute Settlement
Except for U.S. investment covered by Overseas Private Investment Corporation insurance, disputes involving U.S. investors typically are settled in negotiations between the investor and the concerned government agency. Any dispute not resolved in this way is referred to local courts for adjudication. Recourse to the courts is sometimes not an attractive alternative for foreign investors, because civil suits often take years to resolve; litigants thus often choose to settle out of court. However, suits may be brought for the abrogation of constitutional rights under expedited procedures.
Chile's bilateral investment protection agreements with several countries allow for binding international arbitration between the government and investors. 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 the settlement of investment disputes in 1991. The U.S. and Chile do not have a bilateral investment treaty.
The Chilean-American Chamber of Commerce (AmCham) has established an arbitration panel consisting of local experts and businessmen to hear international contractual disputes. Formed in cooperation with the American Arbitration Association, the panel is meant to provide an alternative to adjudication, and companies electing to utilize the panel agree to abide by its decision.
Performance Requirements/Incentives
The last remaining performance requirement, pertaining to automobile assembly operations, expired in 1998. The foreign investment committee does not apply any performance requirements in its review of projects.
Political Violence
In the years since the 1990 return to democracy, major incidents of politically motivated attacks on projects or installations have dropped sharply; since 1994, there have been few incidents. Anti-American sentiment, civil disorder, and terrorism have become rare. There have been no incidents involving international terrorist groups.
Bilateral Investment Agreements
Chilean officials have signed bilateral investment protection agreements with over 20 countries, including Argentina, Spain, Germany, Switzerland, France, Belgium/Luxembourg, Malaysia, Brazil, Cuba, and Venezuela. Most of these agreements are still awaiting ratification by the Chilean congress.
OPIC and Other Investment Insurance Programs
A bilateral investment agreement with the Overseas Private Investment Corporation took effect in 1984. In 1987, the U.S. suspended OPIC operations in Chile because of Chile's failure to recognize internationally accepted standards of worker rights. In October 1990, the U.S. resumed OPIC coverage in Chile after the democratically-elected government reformed Chile's labor code. Chile has signed the convention of the World Bank's Multilateral Investment Guarantee Agency (MIGA) in 1986. MIGA's first project involved Chile, and it has remained active here.
Foreign Direct Investment
In 1998, the flow of U.S.-sourced investment in Chile, the largest of any single country, totaled $1.3 billion. Canada was second with $950 million, followed by Spain with $900 million. The major foreign investors in Chile (in order of importance) are the United States, Canada, Spain, the United Kingdom, South Africa, Australia and Japan. New investment in agriculture and livestock, construction, energy, fishing and aquaculture, forestry, and transport and communications totaled $1.3 billion in 1998, while new mining investment was $2.4 billion. The services and manufacturing sectors also benefited from the substantial direct foreign investment.
Chilean Foreign Investment
Regulations governing foreign investment by Chilean individuals and non-financial corporations are limited. Chilean investment abroad, principally in MERCOSUR and in neighboring countries, has increased dramatically in the last few years. According to Central Bank statistics, Chile's net foreign investment (formal and informal) abroad increased by more than 50 percent in 1998 to $3.7 billion, and total flows for the five years through 1998 totaled more than $8 billion. Regulations governing investment abroad by financial firms are fairly extensive, but the Central Bank is gradually lifting some of these restrictions. Insurance companies, pension funds and banks may invest an increasing portion of their assets abroad in a narrow range of low-risk instruments. The government does not provide any incentives for investment in developing countries.
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.
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