Chilean Economic and Investment Framework: Key Concepts and Regulations

Posted on Dec 7, 2024 in Economy

Central Bank of Chile (BCCh)

The Central Bank of Chile is an autonomous body with its own technical heritage, overseeing monetary exchange and credit. Its aim is to ensure currency stability and the normal functioning of internal and external payments. It regulates the amount of money circulating in the economy to curb inflation.

Reserve Ratio

The reserve ratio is the percentage of total deposits that a bank must hold in reserve, rather than lending out, to ensure its solvency. This ratio influences the ability of banks to place money in the market or reduce it.

Powers of the Central Bank

1. It has the exclusive power to issue banknotes, mint coins, and regulate other payment methods, such as credit cards, current accounts, and electronic money.
2. Regarding the regulation of money, it can provide liquidity to commercial banks that have unmatured documents. The BCCh can then recover or re-transfer these documents to the commercial banks. It may also assign its loan portfolio to banks at a fixed interest rate and under other conditions.
3. It has the power to regulate the financial system and the capital markets. This includes authorizing interest paid on deposits in current accounts, authorizing banks to associate credits with these accounts, and authorizing overdrafts.
4. It can grant credits to financial institutions and banks within 90 days to troubleshoot temporary liquidity issues.
5. It has the power to control financial officers.
6. It represents the state in economic matters before the IRS, as requested by the Finance Ministry.
7. It manages international exchange operations, including imports, exports, and changes in international indices.

Economic Indicators

• Forex: Foreign currency belonging to stable economies, such as the dollar and the euro.
• CPI (Consumer Price Index): An indicator developed by the National Institute of Statistics to calculate monthly changes in inflation. It is disclosed in the first week of each month and measures both positive and negative inflation.
• UF (Unidad de Fomento): A unit of account that reflects the value of the currency, adjusted for inflation. It is adjusted on the 10th of each month until the 9th of the following month and is applied to the previous month’s CPI.
• UTM and UTA (Monthly and Annual Tax Unit): Used as a benchmark for tax purposes and adjusted monthly according to the CPI. The UTA is the UTM multiplied by 12.

Interest Rates

Interest is the profit derived from lending money. The maximum conventional interest rate is the upper limit that the interest rate may reach, corresponding to 50% more than the current interest rate fixed by the Superintendent of Banks and Financial Institutions. The current interest rate is the average rate charged by banks and financial institutions, as set by the authority.

IPSA (Índice de Precio Selectivo de Acciones)

The IPSA is an index measuring the variation in the value of selected stocks. It can be positive or negative.

Types of Contracts

1. Adhesion Contract: One party dictates the terms of the contract without room for negotiation by the other party.
2. Directed Contract: Contractual clauses are imposed by an authority, often when one party is weaker (e.g., employment contracts).
3. Forced Contract: The law requires entering into a contract (e.g., mandatory auto insurance, AFP membership).
4. Type Contract: Pre-written contracts with clauses that can be discussed for future negotiations.
5. Law Contract: Involves specific legal subjects, with one party often being the state (e.g., highway concession contracts).

Economic Systems

• Centrally Planned Economy: The state has the initiative and direction of the economy, with imperative production targets and state ownership of production assets.
• Free Market System: The market is self-regulated by supply and demand, and property is in the hands of individuals.
• Social Market Economy (Mixed): The state has a regulatory and auditing function, exceptionally acting as a business entity or subsidiary where private entities lack initiative.

Economic Public Policy

Economic public policy is the legal framework in each country, aimed at the common good. Its principles include material order, freedom, equality, subsidiarity, and non-arbitrary discrimination.

Companies

A company is an entity designed to move the economy by producing goods and services. Its elements are capital, company, labor, and a defined purpose. Companies can be for-profit or non-profit.

Classification of Companies

1. Public
2. Private
3. Unipersonal
4. Collective
5. Civil or Commercial (depending on the activity)
6. Commercial (habitual trade)
7. Charitable (governed by civil law)
8. With or Without Legal Personality (PJ)
9. For-Profit (profits are withdrawn by owners)
10. Non-Profit (profits are reinvested)
11. Individual Limited Liability Company (SAC)
12. Stock Company (single shareholder with the option to sell shares)
13. Joint Venture (two or more persons with joint liability)
14. Based on the Importance of Persons in Decision-Making
15. Based on the Importance of Capital (e.g., corporations with voting rights)
16. Mixed Characteristics (combining the previous two)

Foreign Investment

• Direct Investment: Involves control of property for investment or business abroad.
• Indirect Investment: Typically takes the form of a loan to an agent in another country.

Decree-Law 600 (DL 600)

DL 600 establishes the terms and conditions for foreign investment contracts, ensuring equal treatment for foreign and local investors. Its purpose is to increase foreign investment in Chile. It applies to any foreign entity and Chileans residing abroad.

Key Features of DL 600

• Non-discrimination
• Non-discretionary procedures
• Economic freedom
• Free access to productive sectors
• Formal Exchange Market access
• Remittances of capital and profits
• Election of the tax regime

Foreign Investment Agreement

Under this voluntary scheme, foreign investors can sign a contract with the State of Chile, establishing rights and obligations for both parties. The minimum investment amount is US$1 million, excluding physical assets and technologies, which have a minimum of US$25,000.

Formal Exchange Market Access

Investors have guaranteed access to the Formal Exchange Market to settle capital contributions and acquire foreign currency for remittances.

Remittances

• Capital Remittance: Can occur after one year of income and is exempt from any contribution, tax, or levy up to the amount of investment realized.
• Profit Remittance: Not subject to time limits; net profits can be remitted after taxation.

Access to All Economic Sectors

Investors can engage in all economic activities, complying with existing legislation.

Action Against Discrimination

Article 9 of DL 600 guarantees non-discrimination, ensuring foreign investors are subject to the same laws and regulations as local investors.

Tax Regime

• Persons domiciled in Chile pay taxes on income from any source.
• Non-residents pay taxes only on Chilean-source income.
• Chilean companies pay a 17% corporate tax.
• Common System: The tax rate on profit remittances is 35%, deductible from the 17% corporate tax.
• Special Conditions: Investors can opt for a tax invariability regime with a 42% tax rate on profit remittances, fixed for 10 years. This can be waived once, subjecting the investor to the common system (currently 35%).
• Indirect Taxes: Foreign investors may have fixed sales tax and tariff regimes for imports of machinery and equipment not produced domestically.

Forms of Contributions under DL 600

• Freely convertible foreign currency
• Physical assets
• Technology eligible for capitalization
• Capitalization of credit and debt
• Capitalization of profits

Importance of DL 600

DL 600 is a widely used mechanism for transferring funds by foreign investors due to its principles of non-discrimination, discretion, economic freedom, and legal certainty.

Note: This content is for informational purposes only. Prohibited use in testing.