Investment Incentives

The Chile Competes Plan

The pro-growth plan called Chile Competes, is based on four capital market areas:

• Reactivation of the proposed capital market reform law (MK2). The Finance Minister reduced the articles by half in order to achieve rapid passage of the law in the Senate. The ministry hopes to facilitate financing of small and medium-sized business, through four areas: regulation of banking licenses and the insurance industry, improvement in the oversight of the superinendincies, and the formation of seed capital.
• To internationalize the peso by creating regulations that allow foreign entities to issue bonds in Chilean pesos in order to develop an international market for peso-denominated financial instruments.
• Financial integration: initiatives to develop the derivatives market.
• A capital markets committee, that will carry out the design of policies to develop financial markets and consult with the private sector on these matters.

The Chile Invests Plan

On March 14, 2007, the government presented a package of measures to accelerate national economic growth. The plan was based on several items, including:

• Tax benefits. In order to promote foreign investment in Chile the Finance Ministry will send a proposed law that will provide a tax framework for derivatives. The Chile Competes Plan will also include new measures to internationalize the peso: it will connect the local peso market with global liquidation and custody systems, so that foreign institutions well enter Chile. These institutions will not have to pay taxes or be domiciled in Chile to effect these operations. Lastly, after consulting with the private sector, the government announced that it will send the MK3 law to Congress in the second half of 2007, which will include the approval of a 4% income tax that foreign institutions pay on credits offered, a new law on financial collateral to extend guarantees in the securities market, and expanded exemption from tax on capital gains.

Taxes that affect foreigners

• Additional Tax: the additional tax applies to individuals or corporations that are not domiciled in Chile, at a rate of 35%. The taxable amount is based on the earnings that are transferred abroad from a source in Chile.
• This tax is accrued annually. The payers of this tax have the right to deduct the payments of First Category Tax paid for earnings transferred abroad.

Foreign Institutional Investors

The Chilean tax system includes an exemption from the Income Tax Law that may affect institutional investors, such as mutual funds and pension funds, for the earnings obtained due to 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. 
The transfer of said assets must be effected on the Chilean Stock Exchange through a public offer of acquisition, according to the Chilean Stock Exchange Law No. 18,045, or through any other system authorized by the Superintendency of Securities and Insurance.

In order to enjoy this exemption, foreign institutional investors must comply with the following requirements while operating in Chile:

• To be established abroad and not be domiciled in Chile.
• To prove that the entity is a foreign institutional investor, according to requirements in the Income Tax Law Article 18 bis letters a) through f).
• To participate neither directly nor indirectly in the control of the companies whose issues the investor holds, nor to own directly or indirectly 10% or more of the capital or earnings of said entities.
• To hold a written contract with a bank or stock brokerage firm incorporated in Chile stating that the bank or brokerage firm will be responsible as intermediary for executing buy and sell orders, for verifying at the moment of the transaction that the earnings are exempt from the Income Tax Law, or, if the earnings are subject to this law, that the proper retentions are effected on behalf of the tax payers by the entities that pay or distribute the earnings.
• To be registered with the Internal Revenue Service, according to instructions in the Exemption Resolution No. 56 of 2001.

Investment Platform

The investment platform, or business platform, allows foreign investors to establish in Chile a corporate platform to administer investments in third countries without having to pay Chilean income tax on earnings from those investments.

The corporate business platforms must be incorporated to according to Chilean law and must be open corporations, or close corporations that agree in their statutes to operate according to the rules for open corporations.
Notwithstanding the above, Chilean law does not consider these corporate business platforms to be domiciled in Chile nor residents of Chile and they are only subject to income tax from Chilean sources on dividends received on investments in corporations established in Chile or from an additional value obtained from the transfer of shares of said corporation, which are subject to an additional tax of 35%. First Category Tax paid may be used as a credit against this tax. The Additional Tax is withheld by the corporation that distributes the dividends.  

In the case that shareholders of these corporations are domiciled or reside in Chile, they will be subject to the general tax regime included in the Income Tax Law, that is, subject to First Category Tax and Global Complementary Tax, with the right to treat the 35% Additional Tax paid by the corporation as a credit on tax on Chilean income.

Earnings from foreign sources generated by corporate business platforms from investment or services performed or for capital gains, are not subject to any income tax for generation of the earnings or its remittance abroad.

These corporations may invest abroad and also in Chilean corporations. They may also perform services for associated or related companies, as long as these companies are not located in tax havens.
To be subject to this regime, the corporate platforms must be enrolled in a special registry of the SII. This procedure may replace the declaration of Initiation of Activities, required to carry out business activities in Chile.

The application of the provisions of banking secrecy established under the General Banking Law does not apply to corporations established under this regime, and any information in this area must be provided to the SII.
The complete text on this subject may be found in Article 41 D of the Income Tax Law.

Measures for Growth

• Promote the issuance of bonds as a financing source for enterprises, by establishing a  tax regime for bonds that will assure that interest will be taxed and release the tax paid on capital gains to new instruments issued in public offer (legal change).
• Reduce the bonds issuance costs for small enterprises. In order to boost the issuance of bonds from companies with sales less than UF 1 million per year, the Government will grant a subsidy for the cost of intermediation, structuring and issuance to 100 enterprises.

Effects of these measures on credit:
This set of measures could generate US$3,600 million in additional private financing for enterprises and persons. The following box breaks down the sources of such credit.