/ The new Chile Investment Funds Act establishes a modern, simplified and harmonized regulatory environment for Chile domiciled funds.11 December, 2013
Its goal is to transform Chile into an exporter of financial services by turning Chile into a preferred domicile for funds with a Latam strategy. In addition, new registration requirements are imposed on portfolio managers.
Felipe Cousiño, Partner
The new Investment Funds Act (hereinafter LUF for its acronym in Spanish) was approved on November 20th by Chilean Congress. It aims to eliminate distortions and shortcomings of the current funds legislation and also to remove certain tax obstacles through a simplified tax system that grants more certainty and, at the same time, blocks some loopholes.
The LUF contains two new incentives for foreign investors. First, in replacement of the current and higher withholding rates, a withholding tax rate of 10% on capital gains and dividends will now apply. Likewise, if profits of the locally registered funds already benefit from particular tax exemptions, a pass through policy applies for foreign investors.
Secondly, net benefits, dividends and capital gains paid to foreign investors are exempted from paying the ‘10% Flat Tax’, provided the locally registered fund has invested in certain foreign assets.
The income and capital gains tax exemption for foreign investors will apply provided the following conditions are met: (a) no less than 80% of the fund’s portfolio should be invested abroad in those securities described by the LUF; and (b) said percentage should be fulfilled at least during a period of 330 continued or discontinued days in a calendar year. Capital gains from the transfer of the shares of the fund are eligible for the exemption provided these requirements were fulfilled during the 2 years preceding the transfer of title.
None of these tax exemptions apply to foreign shareholders investing in private investment funds (i.e. non-registered funds, in Spanish fondos de inversión privados or FIPs). In this case, the current 35% tax burden on capital gains and dividends (with the corporate tax credit in the latter case) will remain in force.
As to the VAT applicable to commissions owed to Fund managers at a 19% rate, it should be noted that it will not be levied on those fees charged to foreign investors.
The above exemptions (capital gains, dividends and VAT) are designed to create an incentive for foreign fund sponsors to choose Chile as a domicile for their funds with a Latam strategy and to use local asset management capabilities.
Other than the incentives that the LUF establishes in tax matters, there are several amendments to the way the funds are approved, registered and supervised, which would be interesting to highlight and comment.
In replacement of the approval process for registered closed-ended funds, the LUF creates a Public Register of Deposit of Internal Regulations of funds, that will be kept by the Chilean securities regulator (SVS), this significantly reducing time to market.
Also, the LUF allows for closed-ended funds to contemplate different series of shares, pursuant to the terms and conditions of their Internal Regulations, giving therefore to the fund managers more flexibility to manufacture funds and select the investors that they would like to target and offer their products to.
Although FIPs are not subject to the supervision of the SVS, the LUF sets forth some requirements for the non listed corporations which manage such funds, such as to be registered in the Special Register of Reporting Entities, pursuant to Article 7 of the Chilean Securities Market Law.
The LUF stipulates some limits to the investments in FIP shares regarding the funds managers and their related persons. In the same context, the LUF provides that the fund should have at least four unrelated investors, which investors may not own less than 10 % of the fund shares.
Portfolio management will become a regulated activity generally. Indeed, the LUF provides for regulation of portfolio management services, and requires that managers with a minimum number of clients and assets under management -AUMs (more than 500 clients, or 50 or more “families” and total AUMs of approx US$ 450,000) be registered in a special registry kept by the SVS, and have a permanent net equity of at least UF 10,000 (approx US$ 450,000).
The entry into force of the LUF is subject to the issuance of its implementing regulations.