| Criteria | Score
(4-0) | Rationale |
| Laws on VC/PE fund formation and operation | 4 | Chile has the strongest laws in region. There are two types of closed funds, fondos privados, where institutional investors cannot participate, and fondos públicos, where they can. The process of opening a fondos público vis-à-vis the Superintendency of Banks and Financial Institutions can sometimes be a bit slow and costly. It is possible to set up regional funds that use Chile as a "platform." Law 18,815 of 1989 allowed the emergence of the first risk-capital funds (fondos de inversión de desarrollo de empresas—FIDEs). In the Law on Public Share Offers and Corporate Governance (Ley de OPAS), of December 2000, the authorities made it easier for venture-capital firms to raise funds by enabling them to issue bonds both locally and abroad, and also eliminated the prohibition on the size of the stakes in firms that FIDEs could take. (January 2007 and November 2005 interviews; EIU, Country Finance 2006). |
| Tax treatment of VC/PE funds & investments | 3 | Corporate tax rates are straightforward and generally low, ranging from 17-35%, depending on the share of profits that are re-invested and distributed. Capital gains and losses are taxed as regular corporate income, though exchanges of highly traded local securities are exempt. However, a continued major hurdle is that foreign participation in funds is subject to both capital gains tax as well as value added tax charged on fund administrator commissions. Dividends from local corporations are not taxable for shareholders (including other firms owing shares in them) because they were taxed upon distribution, but dividends paid to non-resident individuals and firms are taxable as corporate income. Although the state development agency CORFO provides some support for technology-intensive firms and for SMEs more generally, incentives are in many ways restricted by sector and size of firm. A capital market reform package pending in the congress at end-2006, and with uncertain prospects of passage, would boost the seed-capital and venture-capital industry by exempting from income tax the capital gains by “angel investors” and risk-capital funds derived from investments in companies with annual sales up to US$6m (January 2007 and November 2005 interviews; EIU, Country Finance 2006). |
| Protection of minority shareholder rights | 2 | Minority rights for traded firms (sociedades anónimas abiertas) were strengthened under the 2002 Ley de OPAS, particularly in mergers and acquisitions; minorities of less than 10% can request outside inspections of transactions but still have weak rights to mount legal challenges. The previous and current governments have sought to strengthen minority rights further, but much remains to be done particularly with respect to non-listed firms, where the issue in practice is dealt with through shareholder agreements. A capital markets reform package pending in the congress at end-2006 would allow companies to issue warrants and tighten protection of minority shareholders (in traded firms) by banning voting rights to holders of subscribed but unpaid shares (January 2007 interview; EIU, Country Finance 2006; World Bank Doing Business 2006). |
| Restrictions on institutional investors (pension funds, insurance firms) investing in VC/PE | 3 | There is fairly wide freedom for institutional investors, but non-regulatory factors limit their participation in recent practice. A law in 2000 extended the ability of pension funds to invest in VC/PE fund (FIDE) debt; the 2002 reforms enabled them to invest up to 2.5% of assets in VC/PE investments. A 2001 law enabled mutual fund management and insurance firms to invest in FIDEs. |
| Protection of intellectual property rights | 3 | EIU Risk Briefing score. A law approved by Congress on December 1st 2004 to strengthen the protection of registered trademarks, patents, utility models and industrial designs against piracy was enacted in March 2005 as Law 19,996. It came into operation on December 1st 2005. The legal framework is adequate, though enforcement is sometimes deficient. (January 2007 interview; EIU, Country Commerce 2006). |
| Bankruptcy procedures/creditors' rights/partner liability in cases of an invested company's bankruptcy | 3 | The bankruptcy law of 2005 facilitates extra-judicial accords with creditors; if 50% of them agree to terms proposed by troubled firm, a 90-day suspension of liquidation is granted to allow time to work out full terms. Also firms, especially SMEs, may ask courts to call a creditors' meetings and name an expert facilitator to help negotiate a debt restructuring; they need 2/3 approval of shareholders to do so. Although improved, and though partner liability is limited by law, the system remains less than ideal. For instance, it remains almost impossible in practice for restructuring firms to obtain fresh injections of capital given the lack of priority in repayment accorded to such lenders or investors. An IDB study from 2005 ranks Chile above average in strength of creditor rights. (January 2007 interview; World Bank, Doing Business 2006; EIU, Country Report 2005; Diario Estrategia 2005) |
| Capital markets development and feasibility of exits (ie, local IPOs) | 3 | Average of three EIU Risk Briefing scores. Growing liquidity and rising stock prices have prompted renewed interest in share issues and many new listings, including those of four of the largest retailers in the country. Demand for new issues is strong but liquidity remains a constraint, and will tighten further if renewed lackluster stockmarket performance prompts a return to the trend of delisting that prevailed in 1998-2002. Potential investors in Chilean stocks should consider ADRs, which are more marketable. Companies trying to raise funds through the capital markets should consider using the excellent credit terms available in the banking sector. Market capitalization permits IPO exits only for large firms, not for SMEs. |
| Registration/reserve requirements on inward investments | 3 | A simplified procedure created in 2000 enables foreign portfolio investors to obtain a Chilean tax ID number from their locally registered custodial bank or broker. There is no reserve requirements, and the previous one-year minimum stay required for most investments has been lifted (EIU, Country Finance 2006). |
| Corporate governance requirements | 3 | The 2000 Ley de OPAS enables formation of audit committees, strengthens management responsibility for ensuring fair market prices for transactions, sets limits for stock options and purchase of own shares, and establishes other corporative governance norms--all for listed firms. The World Bank's Doing Business scores Chile high on disclosure and board review requirements. There have been periodic discussions of a national corporate governance code that would encompass non-listed firms as well, but no concrete action. The pending capital markets reform package would strengthen the legal standing of shareholder agreements on corporate governance issues, if approved (January 2007 interview; EIU, Country Finance 2006). |
| Strength of the judicial system | 3 | EIU Risk Briefing score. There is little risk of interference in the judicial process, whether from government or private interest groups. Contract rights are generally upheld and recognized. The judicial process is usually efficient. Neither the courts nor the government tend to favor domestic companies over foreign ones, and there has been no expropriation of foreign assets. Intellectual and private property rights are guaranteed and protected by law, though enforcement can be slow and expensive. Although the judicial system is slow, the law permits the use of private, alternative dispute resolution mechanisms (January 2007interview). |
| Perceived corruption | 3 | EIU Risk Briefing score. The government is working to reduce red tape and minimize any remaining investment restrictions. Low corruption levels will be reduced further with a civil service reform aimed at increasing accountability and transparency. Strong institutional traditions mean that public officials are generally held accountable for their actions: Chile has a good quality bureaucracy with good implementation capabilities. |
| Quality of local accounting industry/use of international standards | 3 | Chilean standards are converging toward international standards, and international accounting firms are present. The EIU's Risk Briefing ranks integrity of accounting practices as medium-high. In practice, there are often two sets of standards, as listed firms use IAFRS while non-traded firms often use multiple or parallel systems of accounting standards and investors must review their books with great care before entering deals (October 2005 and January 2007 interviews; IASPLUS). |