/ (562) 2787 60 00

/ Foreign investment in Chile: legal framework for mining

Index

Projects of international mining companies in Chile - Foreign Direct Investment Framework – Mining Property Rights – Environmental Permitting – Water Rights - Tax

The purpose of this newsletter is to provide an updated overview of the legal and regulatory framework governing international mining company projects in Chile.

Context of Chilean Mining: Chile is positioned as an undisputed power on the global mining scene, holding the world leadership in copper production and having vast reserves of other strategic minerals such as molybdenum, silver, gold and lithium. In this scenario, the state-owned company CODELCO, the largest copper producer in the world, coexists with large international mining conglomerates that operate world-class deposits.

Importance of the Legal Framework: Large-scale mining is characterized as a capital- intensive industry, with projects requiring multi-million dollar investments and development and operating horizons that extend for decades. Although Chile has historically consolidated a legal framework that offers security to investors, it is constantly evolving. Recent legislative reforms in crucial areas such as the concession regime, specific taxation, environmental management and water use have reconfigured significant aspects of the operating environment, directly impacting the strategies and profitability of international mining companies present in the country.

We shall refer to the following themes:

II. Foreign Investment Legislation

The framework specifically regulating foreign investment for international mining companies is as follows:

Law No. 20,848 (Framework for Foreign Direct Investment - FDI): in force since 2016, it replaced the well-known Decree Law No. 600. This law defines FDI as the transfer of capital or assets from abroad for an amount equal to or greater than US$5 million, or the acquisition of at least 10% of the control of a Chilean company. It also defines the Foreign Investor as the natural or legal person incorporated outside Chile, without residence or domicile in the country, who carries out such transfer.

Role of InvestChile: It is the public agency designated to promote FDI in Chile and assist foreign investors in their installation and development process. InvestChile is the entity that issues, at the request of the investor that meets the requirements, the "Foreign Investor Certificate". This certificate is the document that formally accredits the capacity as foreign investor under the law and enables access to the rights conferred by it. The agency also maintains a public portfolio of investment opportunities, including mining projects.

Rights of the Foreign Investor (Law 20,848): Holders of a Foreign Investor Certificate enjoy specific rights:

  1. Access to the formal foreign exchange market to liquidate the foreign currency of its investment and to acquire the necessary foreign currency to remit abroad the invested capital and the net profits generated (once the tax obligations have been fulfilled).
  2. The right to non arbitrary discrimination, ensuring that the common legal regime in force for national investors will be applied to them.
  3. Possibility to request to the Ministry of Finance the exemption of the Value Added Tax (VAT) on the importation of capital goods for investment projects exceeding US$5 million.

Tax Regime and End of General Invariability: A fundamental change introduced by Law 20,848 was the elimination of the general possibility of entering into contracts with the State guaranteeing the invariability of the tax regime, a key benefit of the previous DL 600 that attracted much mining investment. Under the current law, foreign investors are subject to the common tax regime in force in Chile. There was a transitional period that allowed some investments, under certain conditions, to opt for an invariable regime with a fixed total tax rate of 44.5% for 4 years.

Recent legislative history shows a clear tendency to rebalance the mining regulatory framework. Although the Chilean system was based on a strong recognition of the concessionaire's rights to encourage private investment, successive reforms in the areas of royalties, mine closure, mining licenses, water management and the end of general tax invariability point towards greater state control, greater state participation in mining income and greater consideration of environmental and social aspects. This progressive adjustment seeks a more significant contribution of mining to the sustainable development of the country, but at the same time increases regulatory complexity and operating costs for international companies.

IV. Mechanisms for Foreign Capital Investment (Law No. 20,848):

Law No. 20,848 establishes the framework for the entry and treatment of FDI:

  • Forms of Capital Contribution: The investment may materialize in various forms: transfer of freely convertible foreign currency, contribution of physical assets (machinery, equipment), reinvestment of profits generated in Chile, capitalization of credits owed by the recipient company, contribution of technology that may be capitalized, or credits associated with the investment from companies related to the foreign investor.
  • Foreign Investor Certificate: As mentioned, this certificate issued by InvestChile is the instrument that formalizes the investment under Law 20,848 and gives access to the rights it confers. In order to obtain it, the investor must submit a request to InvestChile with information that proves its identity and domicile (if it is a natural person) or its legal incorporation, bylaws and validity (if it is a legal person), as well as information about the receiving company in Chile and the powers of the representative who carries out the procedure. InvestChile has a legal term to issue the certificate once the background information is completed.
  • Registration and Follow-up: Although Law 20,848 eliminated the requirement of a formal contract with the State (as in DL 600), foreign investment operations must be reported to the Central Bank of Chile for statistical and exchange control purposes, according to current exchange regulations (Compendium of International Exchange Regulations). InvestChile also monitors the projects it supports.

The structural flexibility offered by Chile (with options such as the SpA, S.A. or branch already mentioned above), allows international investors to adapt the legal form of their operation to their global corporate and tax needs. However, it is essential to understand that, regardless of the structure chosen, all operations carried out within the Chilean territory in mining activity are fully subject to national legislation in all areas: mining, environmental, tax, labor, safety, etc. The choice of structure is, therefore, a relevant decision in terms of corporate governance and international tax planning, but does not exempt from full compliance with Chilean laws.

Additionally, although Law 20.848 provides a general framework and basic rights, the most robust investment protection against political or regulatory risks often comes from Bilateral Investment Treaties (BITs) or investment chapters in Free Trade Agreements (FTAs) signed by Chile. The possibility of resorting to investor-state dispute settlement mechanisms (international arbitration) is usually contemplated in these treaties. Therefore, the structuring of the investment - that is, the choice of the specific legal entity within the international group that makes the direct investment in Chile and its country of incorporation - acquires a fundamental strategic importance. As suggested in legal risk analysis, planning this structure before disputes arise, by choosing a parent entity or investment vehicle incorporated in a country that has a BIT with Chile, can be crucial to ensure access to these international protections. A late restructuring, undertaken when a dispute is already foreseeable, could be dismissed by an arbitral tribunal as illegitimate treaty shopping. Therefore, investment planning should consider not only the corporate form in Chile, but also the nationality of the direct investor entity to optimize protection under international law, especially in a context of regulatory changes such as those recently observed in the Chilean mining sector.

V. Environmental Assessment and Applicable Regulations

The environmental dimension is a critical and unavoidable component of large-scale mining operations in Chile. Mining projects, by their nature and scale, generate significant interactions with the environment and communities, which requires compliance with a strict environmental regulatory framework and the obtaining of specific authorizations before and during the operation, as well as for the closure stage. The Chilean environmental legal structure is constituted as follows:

Environmental Impact Assessment System (SEIA):

The SEIA is the main preventive environmental management instrument in Chile, whose objective is to ensure that projects or activities likely to cause environmental impact are responsible for such impacts and comply with current regulations.

  • Legal Framework: It is regulated by Law No. 19,300 on General Bases of the Environment and its Regulations, as amended by Law 20,417 of 2010 and Supreme Decree No. 40 of 2012 of the Ministry of the Environment.
  • Administration: The administration of the SEIA corresponds to the Environmental Evaluation Service (SEA), a technical and decentralized public agency, with regional directorates. The SEA acts as coordinator of the process, interacting with the various State Administration Bodies with Environmental Competence (OAECA) that must rule on specific matters of the mining project. The SEIA seeks to determine whether a project complies with environmental regulations and whether it adequately addresses its significant impacts. The evaluation ends with the issuance of an Environmental Qualification Resolution (RCA) by the Regional Evaluation Commission or the Executive Director of the SEA (for interregional projects), which certifies environmental compliance. The SEIA functions as a "one-stop shop", integrating in its evaluation the obtaining of the Sectoral Environmental Permits (PAS) applicable to the project.

Evaluation Instruments for Mining Projects:

Mining projects must be submitted to the SEIA prior to implementation. Depending on the magnitude of their potential impacts, they must do so through one of two instruments and also depends on the type and size of the mining project:

  • Environmental Impact Assessment (EIA): This is the most demanding evaluation instrument and is required for those projects or activities that generate or present any of the effects, characteristics or circumstances listed in Law 19.300. For mining, this typically includes mining development projects (exploitation, processing plants, tailings deposits, etc.) above certain production thresholds (e.g., >5,000 tons/month), or those that generate health risks, significant adverse effects on renewable natural resources (including water and soil), resettlement of human communities, significant alteration of human communities, significant alteration of living systems and customs of indigenous groups, location near population or protected areas, or alteration of cultural heritage.
  • Environmental Impact Statement (DIA): This is submitted for those projects or activities that should be submitted for environmental assessment but do not generate any of the effects, characteristics or circumstances indicated in the same law that require the submission of an EIA. It typically applies to smaller scale mining projects or minor modifications of existing projects.

Main Relevant Sectoral Environmental Regulations for Mining:

In addition to the general framework of the SEIA, mining operations must comply with a series of specific environmental regulations, among which the following stand out:

  • Emission standards for air pollutants (particulate matter, gases).
  • Noise emission standards.
  • Primary and secondary quality standards for surface water and groundwater.
  • Regulations on handling and disposal of hazardous and non-hazardous industrial solid waste.
  • Regulation for the Approval of Design, Construction, Operation and Closure of Tailings Storage Facilities (DS No. 248/2006): Key technical standard that establishes the specific requirements for these critical facilities, whose supervision corresponds mainly to SERNAGEOMIN.

Law No. 20,551 on Closure of Mining Sites and Facilities:

This law, in force since 2012, specifically regulates the final stage of the mining cycle, establishing the obligation to plan and financially guarantee the closure of operations. Every mining site, before starting operations, must submit and obtain the approval of a Closure Plan by SERNAGEOMIN. The objective is to ensure that, once mining is completed, the facilities are in an environmentally stable (physically and chemically) and safe condition, preventing risks to the health, safety of people and the environment, and avoiding the abandonment of sites and the generation of environmental liabilities.

Differentiated Procedures: The law establishes two procedures according to the scale of the operation:

  • ○ General Application Procedure: For operations with extraction or beneficiation capacity greater than 10,000 tons per month (tpm). It requires the presentation of a detailed Closure Plan, which includes a description of the closure measures for each facility, its valuation and schedule. It also requires the constitution of a financial guarantee to ensure compliance with the plan.
  • Simplified Procedure: For sites with a capacity of 10,000 tpm or less. The Closure Plan is less complex and is based on methodological guidelines prepared by SERNAGEOMIN. It does not require a financial guarantee, but it does require compliance with the committed measures.
○

Closing Standards: The plan must ensure two fundamental conditions:

  • Physical Stability: Achieve structural safety of slopes (pits, dumps, tailings), prevent collapse or removal, and dismantle facilities that are not necessary for post-closure stability.
  • Chemical Stability: Control or prevent the generation and migration of contaminants, especially acid rock drainage (ARD), protecting surface and groundwater and soil quality.

Financial Guarantee (General Procedure): This is one of the pillars of the law. The company must provide a guarantee (by means of instruments such as bank notes, insurance policies, certificates of deposit, etc.) in favor of SERNAGEOMIN (State of Chile), for an amount equivalent to the present value of the total cost of performance of the closure and post-closure measures. This guarantee is constituted progressively during the estimated useful life of the mine: a minimum of 20% the first year, and the rest distributed in the first 2/3 of the useful life (if < 20 years) or in a maximum term of 15 years (if useful life >= 20 years). SERNAGEOMIN can trigger this guarantee in case of non-compliance with the Closure Plan by the company.

Oversight: SERNAGEOMIN is the competent authority to approve Closure Plans, oversee compliance during operation and post-closure, and administer financial guarantees. It conducts periodic audits of the closure plans.

Comparison Table: EIA vs. EIS for Mining Projects

The following table clarifies the procedural and content differences between the two environmental assessment instruments:

Criteria Environmental Impact Assessment (EIA) Environmental Impact Statement (DIA)
When Applicable Projects with effects, characteristics or circumstances of Art. 11 Law 19,300 Projects listed in Art. 10 of Law 19,300 that do NOT generate Art. 11 effects.
Deadline Baseline Evaluation 120 working days 60 working days
Maximum Extension Period 60 working days 30 working days
Citizen Participation (PAC) Mandatory (60 working days) Only if it generates “environmental burdens” and is requested
Indigenous Consultation (ILO Conv. 169) Applies if there is significant impact on indigenous peoples Not formally applicable within the DIA
Additional Key Content Detailed Baseline, Impact Prediction/Assessment, Mitigation/Remedial/Com-pensation Measures Plan, Environmental Variables Follow-up Plan Demonstration of regulatory compliance and PAS
Final Resolution Environmental Qualification Resolution (RCA) Environmental Qualification Resolution (RCA)
Appeal Administrative Claim Before the Committee of Ministers Before the Executive Director of SEA

Source: Compilation based on Law 19,300, DS 40/2012 (SEIA Regulation).

Obtaining environmental and sectorial authorizations represents one of the greatest challenges for the development of mining projects in Chile, making up what is often referred to as the "permitology". The processing of the SEIA (either EIA or DIA), the approval of the Closure Plan by SERNAGEOMIN, obtaining water rights from the DGA, and other specific permits (land use, construction, sanitary, etc.) make up a complex and sequential framework that can significantly extend the timeframes foreseen for the start-up of a project. Interaction with multiple agencies, legal deadlines, possible requests for clarifications, rectifications or additions (ICSARA) during the evaluation, and the possible litigation of administrative decisions, introduce uncertainty and additional costs. There is currently a bill being discussed in Congress on a proposed Framework Law on Sectoral Authorizations which seeks precisely to streamline and provide greater certainty to these processes, recognizing "permitology" as a critical factor for the country's competitiveness.

On the other hand, the Mine Closure Law 20,551 marked a paradigm shift by integrating closure as a planned and financed stage from the beginning of the life cycle of the mining project. It is no longer conceived as an isolated action at the end of the operation, but as a process that must be considered in the design and executed progressively during the useful life. The requirement of an approved Closure Plan prior to operation and the obligation to provide financial guarantees to cover the estimated costs oblige companies to internalize post-operational environmental and safety costs in the project's economy from its initial phases. This contrasts with the past, where the lack of comprehensive regulation often resulted in the abandonment of sites and the generation of environmental liabilities for which the State was ultimately responsible. This integration implies that engineering and operational decisions (such as the design of dumps, tailings dams, or mining methods) must evaluate their implications for final closure, influencing the costs and long-term sustainability of the activity.

VI. Large Mining Tax Regime

Large international mining companies operating in Chile are subject to a tax regime that combines general taxes applicable to all companies with a specific tax designed to tax mining income. Proper understanding and compliance with this regime is critical to the financial viability of projects.

General Taxes:

First Category Tax (Impuesto de Primera Categoría, IDPC): This is the corporate tax levied on corporate profits. Mining companies are subject to the current general rate, which is currently 27%. This tax is levied on the Net Taxable Income (RLI), determined in accordance with the rules contained in the Income Tax Law (LIR), which allows deducting the expenses necessary to produce the income

Final Taxes (Additional or Global Complementary Tax): These taxes are levied on profits once they are withdrawn or distributed by the company to its owners or shareholders.

  • If the owner is an individual resident in Chile, the profits are taxed with the Global Complementary Tax, which has progressive rates.
  • If the owner is a person or entity without domicile or residence in Chile (the typical case of parent companies of international companies), the distributed profits are subject to the Additional Tax, whose general rate is 35%.
  • Chile operates a semi-integrated tax system. This means that the IDPC paid by the company can be partially used as a credit against final taxes by the owners at the time of the distribution of profits. Depending on the structure and use of the credits, the final total tax burden on profits distributed abroad can reach up to 44.45% in certain scenarios except when there is a double taxation convention in place).

Specific Tax on Mining Activities (Mining Royalty - Law No. 21,591):

This is the most distinctive component of the mining tax regime. Law No. 21,591, as amended by Law No. 21,647, established a new mining royalty that came into effect on January 1, 2024, replacing the previous regime (originally established by Law No. 20,026). Although it is legally configured as a "specific tax", its conceptual justification is linked to the idea of a compensation or royalty that the exploiter pays to the State for the extraction of non-renewable natural resources that originally belong to the whole nation. It seeks to capture a part of the economic rent generated by the exploitation of these resources. The "explotadores mineros" (natural or legal persons that extract concessionable mineral substances and sell them) whose annual sales exceed the equivalent value of 12,000 metric tons of fine copper (TMCF) are subject to the royalty. The law establishes differentiated application brackets, but the most relevant regime for large international companies is the one applicable to those whose annual sales exceed 50,000 TMCF.

Other Relevant Taxes and Payments:

Annual Mining Licenses: As indicated above, these are annual payments per hectare of concession, necessary to maintain the validity of the concessions (amparo). They are collected by the General Treasury of the Republic (TGR).

Green Tax (Law 20,780): Taxes emissions from fixed sources (boilers, turbines) of particulate matter, NOx, SO2 and CO2. Although it is not exclusive to mining, large operations (smelters, associated thermoelectric plants) may be affected.

Payment for Environmental Permits: Some regulations may require payments associated with obtaining or monitoring permits.

VII. Community Relations and Indigenous Consultation

The operation of large-scale mining in Chile is not only framed by technical, economic and environmental regulations, but also interacts deeply with the social environment, especially with the local communities and indigenous peoples present in the territories where the projects are located. The management of these relationships is today a determining factor for the viability and sustainability of the activity.

Importance of the Social License to Operate (SLO):

Beyond strict compliance with the law and obtaining formal permits, the long-term viability of a mining project increasingly depends on obtaining and maintaining what is known as a "Social License to Operate" (SLO). This concept, although it does not have a precise legal definition, refers to the acceptance, approval or at least tolerance of the project by local communities, indigenous peoples and other relevant stakeholders in the area of influence.

SLO is built through relationships of trust, transparent dialogue, adequate management of socio-environmental impacts and the perception that the project generates shared benefits. Its absence or loss can result in socio-environmental conflicts, active opposition to the project, significant delays due to protests or litigation of permits, and, in extreme cases, the stoppage of operations or the unfeasibility of future expansions. For this reason, large international mining companies dedicate significant resources and efforts to develop community engagement strategies, social investment programs, grievance and complaint management mechanisms, and transparent communication about their operations and impacts, seeking to build and maintain this SLO throughout the project life cycle.

Legal Framework for Indigenous Consultation:

A specific and legally binding component of the relationship with local stakeholders is the consultation of indigenous peoples, based on international treaties ratified by Chile:

ILO Convention No. 169 concerning Indigenous and Tribal Peoples in Independent Countries: Ratified by Chile in 2008 and in force since 2009, this international treaty is part of the Chilean legal system with supra-legal or even constitutional hierarchy for some interpreters.

Supreme Decree No. 66 of 2013 of the Ministry of Social Development and Family: This is the regulation that establishes the general administrative procedure to carry out the prior consultation of indigenous peoples in Chile, in compliance with ILO Convention 169. It defines the stages of the process, the referential deadlines, the participating subjects and the responsibilities of the State bodies.

Specific Application in the SEIA: Law 19,300 and the SEIA Regulations explicitly incorporate the obligation to carry out indigenous consultation within the environmental assessment process, discussed above.

VIII. Water Rights

Water is a scarce and strategic natural resource in a large part of Chilean territory, especially in the northern and central areas where mining activity is concentrated. Obtaining and managing the rights to use water are, therefore, critical and highly regulated aspects for any mining operation. Its regulatory framework is contained in:

Water Code (Decree with Force of Law No. 1,122 of 1981): This is the fundamental legal body that regulates the constitution, exercise, protection and extinction of the rights of use of land water, both surface and groundwater. Historically, it established a regime based on the assignment of private property rights over the use of water, separated from land ownership, and allowed the existence of a water rights market. There have been two important reforms to the water legislation (Law No. 20,017 of 2005 and Law No. 21,435 of 2022). After a long process, this law introduced substantial modifications to the 1981 Code. Its main axes seek to reinforce the character of water as a national asset for public use, prioritize human consumption and sanitation, explicitly incorporate environmental sustainability and the protection of ecosystems (aquifers, glaciers) as limitations to the exercise of rights, strengthen the powers of the authority (DGA) to manage the resource (especially in situations of scarcity), and increase legal security through the regularization and registration of existing rights.

Water management has become one of the most critical and conditioning factors for the mining industry in Chile. The combination of natural water scarcity in the main mining areas and a regulatory framework (reformed by Law 21.435) that now explicitly prioritizes human consumption and environmental sustainability over productive uses, significantly increases the pressure on mining companies. Obtaining new inland water rights is increasingly difficult, and existing rights face increased regulations and possible restrictions, especially in drought situations. This forces large mining companies to make substantial investments in water efficiency (reduction of consumption, recirculation of water in processes) and in the development of alternative sources, mainly the use of seawater, either direct or desalinated. Desalination, although technologically feasible, involves high investment costs (plants, impulsion systems to carry water to high altitude sites) and operating costs (energy), impacting the cost structure of the projects. Strategic water management is, therefore, a central axis not only for regulatory compliance, but also for the operational viability and long- term sustainability of mining in Chile.

In addition, the administrative management of water rights has become more complex.

Conclusion

The operation of large international mining companies in Chile takes place within a complex and multifaceted legal-regulatory framework, ranging from constitutional principles to specific technical regulations. The fundamental pillars of this framework include:

  • A constitutional and legal regime that recognizes the State's original dominion over mineral resources, but grants strong property rights over mining concessions to private holders.
  • A system of judicially granted concessions (exploration and exploitation), with differentiated durations and protection requirements (payment of licenses), recently tightened to promote effective activity.
  • A framework for foreign investment (Law 20.848) that guarantees basic rights such as capital remittance and non-discrimination, administered by InvestChile, but no longer offers the general tax invariability of the past.
  • A robust Environmental Impact Assessment System (SEIA) and a Mine Closure Law that require preventive and integrated environmental management throughout the project life cycle, including the provision of financial guarantees.
  • A tax regime that combines general income taxes with a specific and progressive mining royalty on sales and operating profitability, with a cap on the total tax burden.
  • An increasing relevance of community relations and the social license to operate, together with the legal obligation to carry out Indigenous Consultation under the standards of ILO Convention 169.
  • A reformed Water Code that emphasizes the character of a national public good, prioritizes human consumption and sustainability, and grants greater management and oversight powers to the DGA, in a context of critical water scarcity for the sector.
  • Labor regulations that combine general rules with systems of exceptional agreed working hours, and a comprehensive Mining Safety Regulation that is rigorously supervised by SERNAGEOMIN.