1 Legislative and regulatory framework
1.1 In broad terms, which legislative and regulatory provisions govern alternative investment funds in your jurisdiction?
Alternative investment funds (AIFs) are governed by the Single Funds Act (20,172) and by Supreme Decree 129/2014 of the Ministry of Finance (‘Funds Regulation'). In addition, the Comisión para el Mercado Financiero (CMF), which regulates and supervises the Chilean financial markets, is granted powers to regulate the fund industry through general regulations.
1.2 Do any special regimes or provisions apply to specific types of alternative investment funds?
With the promulgation of the Single Funds Act, previous laws that governed specific types of investment funds were repealed. As a result, all investment funds, including AIFs, are currently subject to the Single Funds Act.
Under the Single Funds Act, AIFs may be structured as private investment funds (‘private AIFs') or public investment funds (‘public AIFs'). Private AIFs must have fewer than 50 investors; otherwise, they are public AIFs. A much more onerous regulatory regime applies to public AIFs. In addition, public AIFs are subject to a different regime depending on whether they are structured as closed-ended funds or open-ended funds. (Although open-ended funds are more likely to be the structure of choice for hedge funds, Chile does not have a developed hedge fund industry.) For these purposes, a closed-ended fund is a fund that does not permit on-demand redemption of its units in full or that, while permitting such redemption, it defers repayment for 180 days or more. Where applicable, the responses to this Q&A will distinguish between these various categories of AIFs.
AIF structured as public AIFs must be managed by fund management companies authorised by the CMF (‘authorised FMs'); whereas AIFs structured as private AIFs may be managed either by authorised FMs or by private fund management companies (‘private FMs').Where applicable, the responses to this Q&A will distinguish between these two categories of FMs.
For the sake of completeness, a fund with fewer than 50 investors may also be structured as a private company without being regulated by the Single Funds Act. However, this structure will not benefit from the tax treatment available under the Single Funds Act. Corporate structures fall outside the scope of this Q&A and are mentioned only for comparison purposes.
1.3 Do the legislative and regulatory provisions governing alternative investment funds have extra-territorial reach?
The Single Funds Act and the Funds Regulation only apply to AIFs managed by authorised FMs or private FMs, in each case established in Chile. However, foreign AIFs and their managers should be mindful of the marketing rules applicable to foreign investment funds in Chile and the regulatory restrictions applicable to certain Chilean institutional investors investing in AIFs.
1.4 Are any bilateral, multilateral or supranational instruments in effect in your jurisdiction of relevance to alternative investment funds?
Chile is a party to bilateral and multilateral free trade agreements with many countries and economic blocs. Where such free trade agreements cover trade in financial services, they also set out the specific commitments adopted by Chile in that sector. Broadly speaking, Chile's specific commitments in the financial service sector include permitting foreign investors to provide fund management services through a commercial presence/right of establishment, on terms no less favourable than those accorded to domestic financial service suppliers. Such access and treatment are subject to the restrictions and limitations set out in the relevant agreement. Investments by foreign investors in units issued by Chilean AIFs also enjoy certain protections under applicable free trade agreements or other bilateral investment treaties, subject to the conditions and limitations set out therein. Chile also adheres to international practices regarding the exchange of information on financial investments held by non-resident investors, as further described in question 8.4.
1.5 Which bodies are responsible for regulating alternative investment funds in your jurisdiction? What powers do they have?
Public AIFs: Public AIFs and their authorised FMs are regulated and supervised by the CMF. The CMF exercises its rule-making powers through general regulations. Pursuant to its supervisory powers, the CMF may request all necessary information from authorised FMs to assess:
- their solvency;
- the performance of their asset management function; and
- the state of affairs of their investments.
In addition, the CMF may revoke the authorisation granted to an authorised FM (see question 4) where there has been a serious breach of law or where an investigation reveals that the authorised FM's business has been carried out in a fraudulent or negligent manner.
Private AIFs: Private AIFs are neither regulated nor supervised by the CMF and are subject to de minimis regulation in the Single Funds Act. However, the manager of an AIF (whether an authorised FM or a private FM – see question 2.6) must provide the CMF with certain information relating to the private AIFs it manages, in the manner and in the frequency set out by the CMF. See question 7.2 for further details.
1.6 To what extent do the regulators cooperate with their counterparts in other jurisdictions?
The CMF is a party to memoranda of understanding to foster cooperation and exchange of information with several foreign regulators. At a multilateral level, the CMF has endorsed the Multilateral Memorandum of Understanding of the International Organization of Securities Commissions ("IOSCO").
2 Form and structure
2.1 What types of alternative investment funds are typically found in your jurisdiction?
The most common types of AIFs available in Chile are private equity funds, private debt funds, real estate funds and infrastructure funds.
2.2 How are these alternative investment funds typically structured?
The Single Funds Act established a sui generis legal structure: the investment fund, defined as a pool of assets without legal personality and formed by the contributions made by investors, whose management is entrusted to an authorised FM or to a private FM. In exchange for their contribution, participants receive units in the fund, which grant them economic and voting rights.
As mentioned in question 1.2, AIFs may be structured as public AIFs or private AIFs. Public AIFs have 50 investors or more. Public AIFs are supervised by the Comisión para el Mercado Financiero (CMF) and are deemed issuers of securities. They are therefore subject to a stricter regulatory regime than that applicable to their private counterparts. AIFs can also be structured as private companies, although whenever the minimum requirements to incorporate a private AIF can be met, the corporate structure is not used. As described in question 8, in light of the tax regime granted to public AIFs and private AIFs, they are the most efficient structures to organise collective investments in Chile.
2.3 What are the advantages and disadvantages of these different types of structures?
The main advantage of public AIFs and private AIFs when compared to the usual corporate structure lies in their tax treatment. Pursuant to the Single Funds Act, public AIFs and private AIFs are tax transparent vehicles. Therefore, their income is not subject to income tax. Also, provided that investors meet certain additional criteria, profits stemming from public AIFs and private AIFs may benefit from further tax relief. See question 8 below for further detail.
Public AIFs are subject to several restrictions affecting their investment policy, indebtedness and management. Where public AIFs are distributed exclusively among qualified investors, however, the legal restrictions on investment policy and indebtedness operate only by default; their internal bylaws may enable them to operate more flexibly. ‘Qualified investors' include:
- institutional investors – that is, banks, financial companies, insurance companies, local reinsurance companies, fund managers authorised by law and any other institutions that qualify as such as determined by the CMF;
- banks, insurance and reinsurance companies, fund managers and securities intermediaries, in each case organised outside Chile and, in the case of securities intermediaries, when acting for their own account or for the account of clients, provided that such clients are not Chilean citizens, Chilean residents or in transit in Chile;
- local securities dealers;
- local dealers of agricultural products;
- Chilean or foreign individuals or legal entities that, at the time of making the investment, hold financial investments in securities which can be offered to the public in Chile or abroad in an amount not less than 10,000 Unidades de Fomento (UF);
- Chilean or foreign individuals or legal entities that have delegated their investment decision to a qualified investor pursuant to a portfolio management agreement and provided that:
- the authority to participate in private placements is expressly set out in such agreement; and
- the qualified investor informs the client of the transactions carried out pursuant to such authority with a frequency set out in such agreement;
- Chilean or foreign legal entities in respect of which investment decisions are made by a qualified investor; and
- Chilean or foreign individuals or legal entities that, at the time of making the investment, (i) hold financial investments in securities which can be offered to the public in Chile or abroad in an amount not less than 2,000 UF and (ii) meet any of the following criteria:
- own assets in an amount equal to or greater than 100,000 UF;
- during the past four months, have entered into at least 20 transactions in the securities market, each for an amount equal to or greater than 1,000 UF; or
- broadly, have sufficient knowledge to understand the risks associated with participating in the securities market.
Private AIFs are not bound by the legal and regulatory restrictions affecting public AIFs and enjoy a greater degree of flexibility. The greatest disadvantage of private AIFs, however, lies in the need to keep a minimum number of participants to remain within the fund tax status regime, as further explained in questions 8.5 and 9.2.
The UF is an inflation-indexed monetary unit of common use in Chile. At the time of writing, 1 UF equals approximately $35.
2.4 What are the most widely used alternative investment funds structures used in your jurisdiction?
2.5 Is there a preferred alternative fund structure for particular investment strategies (ie, hedge fund/private credit/private equity)?
Yes. Because private AIFs enable a greater degree of flexibility when it comes to defining the investment objectives and the general operation of a fund, AIFs typically follow this path. Legal and regulatory restrictions applicable to public AIFs render them unsuitable to pursue certain high-risk investment strategies.
2.6 Are alternative investment funds required to have a local administrator appointed?
Public AIFs: Pursuant to the Single Funds Act, public AIFs must be managed by an authorised FM, which must be regulated and supervised by the CMF.
Private AIFs: According to the Single Funds Act, the management of a private AIF must be entrusted either to an authorised FM or to a private FM, but in the latter case, only to the extent it is enrolled on the register of reporting entities held by the CMF.
2.7 Are alternative investment funds required to appoint a local custodian to hold assets? If yes, what legal protections are in place to protect the alternative investment fund's assets?
Public AIFs: Public AIFs must appoint a local custodian to hold only those assets issued locally, by non-dematerialised means, and held by local central securities depositary. Dematerialised instruments issued by local entities that manage the book entries themselves are excluded from this requirement.
Public AIFs investing in offshore assets must entrust their custody to a local or foreign entity:
- whose main business line is the custody of securities or banking;
- which is under the ongoing supervision of a regulatory body equivalent to the CMF;
- which has minimum equity equivalent to 30,000 UF (approximately $1.15 million); and
- which has at least five years of experience as a provider of depositary and custody of securities.
Private AIFs: No.
2.8 Is it possible for an alternative investment fund to redomicile to your jurisdiction? If yes, what considerations are required and what are the steps involved?
3.1 Must alternative investment funds be authorised or licensed in your jurisdiction?
Public AIFs: No. However, the deposit of the AIF's bylaws with the Comisión para el Mercado Financiero (CMF) is a prerequisite to the marketing of its units. The CMF has set out the minimum content of funds' bylaws in General Regulation 365. Bylaws must be drafted in Spanish.
Private AIFs: No, but the units of the fund may not be marketed or otherwise be offered to the public.
3.2 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
Public AIFs: See question 3.1. Also, within one year of the deposit of the AIF's bylaws with the CMF, the AIF must have a minimum capital of 10,000 UF (approximately $350,000) and have at least 50 investors. If these requirements are not met by the end of the one-year period, the authorised FM or private FM (as applicable) must notify the CMF. The CMF has discretion to extend this deadline for another year. If these requirements are not met by the end of the extension (or, where no extension is granted, by the end of the initial one-year period), the CMF shall order the liquidation of the AIF.
Private AIFs: None, but the units of the fund may not be marketed or otherwise be offered to the public.
3.3 What is the process for obtaining authorisation of alternative investment funds and how long does this usually take?
Public AIFs: AIFs need not be formally authorised, but their authorised FMs must deposit the AIF's bylaws with the Bylaws Deposit Registry kept by the CMF. The fund units of an AIF may be marketed only on the business day following that of the deposit of the bylaws with the registry. The authorised FM has 180 days from the deposit of the bylaws to start marketing the AIF.
Private AIFs: Not applicable.
4 Management and advisory relationships
4.1 How are alternative investment fund managers and advisers typically structured in your jurisdiction?
General: As outlined in question 1.2, AIFs structured as public AIFs must be managed by authorised FMs, whereas those structured as private AIFs may be managed either by authorised FMs or by private FMs.
Authorised FMs: Authorised FMs, must be formed as special corporations (sociedades anónimas especiales) in accordance with the Corporations Act (18,046). Authorised FMs are authorised, regulated and supervised by the CMF.
Private FMs: Private FMs must be formed as private corporations in accordance with the Corporations Act.
4.2 What are the advantages and disadvantages of these different types of structures?
Authorised FMs: Special corporations are subject to the rules applicable to public corporations (sociedades anónimas abiertas) and have a restricted object: their sole purpose must be the management of investment for the account of clients. However, the Single Funds Act empowers the Comisión para el Mercado Financiero (CMF) to expand the object of authorised FMs through general regulations. In General Regulation 383, the CMF authorised these fund managers to carry out certain ancillary activities, including (but not limited to) insurance brokerage, distribution of investment funds issued by third parties, investment advice and management of foreign funds.
Private FMs: Private FMs must be enrolled on the register of reporting entities held by the CMF. Private FMs are subject to a much lighter regulatory regime as compared to authorised FMs, but cannot manage public AIFs or any other public non-AIFs (e.g. mutual funds).
4.3 Must alternative investment fund managers be authorised or licensed in your jurisdiction?
Authorised FMs: Yes. Authorised FMs must be authorised by the CMF.
Private FMs: No, but they must be enrolled on the register of reporting entities held by the CMF.
4.4 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
Authorised FMs: Authorised FMs must satisfy the following criteria to obtain authorisation:
- be incorporated as special corporations (see question 4.1);
- include in their name the words ‘Administradora General de Fondos';
- have a minimum capital of 10,000 UF (approximately $350,000); and
- have policies, procedures and controls to adequately protect the interests of investors and the assets of the fund.
In addition, the authorisation of authorised FMs is subject to the following condition subsequent: within one year of authorisation by the CMF (and thereafter on an ongoing basis), the authorised FM must have at least one fund meeting the conditions set out in question 3.2.
Private FMs: Private FMs must be enrolled on the register of reporting entities held by the CMF in accordance with the Securities Market Act (18,045). The enrolment is subject to meeting the requirements set out in General Regulation 284.
4.5 What is the process for obtaining authorisation and how long does this usually take?
Authorised FMs: As special companies, authorised FMs must:
- be formed through the execution of a public deed;
- obtain a resolution from the CMF in which it authorises the authorised FM's existence;
- register an abstract from the CMF resolution in the commercial register; and
- publish the abstract in the Official Gazette within 60 days of the date of the CMF resolution.
On average, these steps take approximately six to eight months.
Private FMs: As private companies, private FMs must:
- be formed through the execution of a public deed;
- register an abstract from the public deed in the commercial register; and
- publish the abstract in the Official Gazette within 60 days of the date of the public deed.
Further, private FMs must be enrolled on the register of reporting entities held by the CMF. On average, these steps take approximately six months.
4.6 What other requirements or restrictions apply to alternative investment fund managers and advisers in your jurisdiction?
Authorised FMs: Authorised FMs must provide a guarantee in favour of each Public AIF they manage. Initially, this guarantee will be for 10,000 UF (approximately $350,000). The guarantee shall become effective on the day the authorised FM deposits the relevant fund's bylaws with the CMF and will remain in force until the dissolution of the relevant fund. The guarantee may be cash, a performance bond or an insurance policy. In the event that the guarantee is not provided, the authorised FM and its directors shall be jointly and severally liable for any losses caused to the investors of the respective fund. The amount of the guarantee is reset yearly in accordance with the size of the fund.
The Single Funds Act sets out prohibitions and restrictions on certain transactions between:
- the authorised FM and the public AIF; and
- parties connected with the authorised FM and the public AIF.
Where applicable, the Single Funds Act sets out the requirements that must be met for the transactions to be permitted. Where public AIFs are distributed exclusively among qualified investors, however, their internal bylaws may enable them to operate more flexibly.
One year after the creation of a private AIF, neither the authorised FM nor its connected persons may hold – collectively – units which represent more than 20% of the assets of the private AIF managed by it.
Private FMs: One year after the creation of a private AIF, neither the private FM nor its connected persons may hold – collectively – units which represent more than 20% of the assets of the private AIF managed by it.
The private FM must provide the CMF with periodic information regarding the private AIFs it manages (see question 7.2).
4.7 Can an alternative investment fund manager impose restrictions on the issue, redemption or transfer of interests in the funds under management?
Authorised FMs: Yes. Authorised FMs may impose restrictions on the issue, redemption or transfer of fund units in the bylaws of a public AIF or private AIF. In the case of public AIFs, where redemptions are restricted or prohibited, the bylaws must explicitly state so.
Notwithstanding the provisions set out in the relevant bylaws, no investor may hold fund units which represent more than 35% of the value of a public AIF. Authorised FMs must refuse any transfer requests in breach of this percentage and must ensure that no issuance of units results in an investor exceeding such limit. The fund units held in excess of the 35% limit will lack voting rights and will not count towards any quorum. The foregoing limitation does not apply to institutional investors (ie, banks, financial companies, insurance companies, local reinsurance companies, fund managers authorised by law and any other institutions that qualify as such as determined by the CMF), but is without prejudice to special laws which may impose stricter concentration limits on investments made by certain classes of institutional investor.
In the event of a capital increase, a public AIF must offer the new fund units to those investors which appear on its register of investors on a day which is five business days before issuance of the units (‘cut-off date'). The offer must be made at least once, for a term agreed by the investors at a general meeting and must be made pro rata to the investors' holdings as of the cut-off date. This pre-emption right is waivable and transferable, and may be disapplied by unanimity at the same general meeting where the capital increase was agreed.
Private FMs: Yes. Private FMs may impose restrictions on the issue, redemption or transfer of fund units in the bylaws of the relevant private AIF.
4.8 Are there any requirements regarding the ownership of alternative investment fund managers? If so, please provide details.
Authorised FMs: No. However, authorised FMs which are subsidiaries of banks supervised by the CMF may not invest in certain asset classes set out by the CMF.
Private FMs: No.
4.9 Can alternative investment fund managers delegate to third-party investment managers or investment advisers? If yes, please provide details of any specific requirements.
Authorised FMs: Whether authorised FMs may delegate their services to third parties is left to the bylaws of each AIF (public or private). Nevertheless, where the authorised FM delegates the management of all of part of the assets of a public AIF to a third-party manager, the Single Funds Act provides that the costs associated with such delegation must be borne by the authorised FM, not the public AIF. The authorised FM shall remain liable notwithstanding such delegation.
Private FMs: Whether private FMs may delegate services to third parties is left to the bylaws of each private AIF.
4.10 Can alternative investment fund manager provide investment management services to clients other than alternative investment funds? If yes, do any additional requirements apply?
Authorised FMs: Authorised FMs may manage public AIFs or private AIFs. Authorised FM may also manage other types of funds regulated by the Single Funds Act. This is because the authorisation granted by the CMF is a general one. This is evidenced in the proposition ‘General Fund Manager' (‘Administradora General de Fondos'), which forms part of the name of each authorised FM. Authorised FMs may also provide investment management services as this is explicitly permitted by the Single Funds Act.
Private FMs: Private FMs may only manage private AIFs other private funds regulated by the Single Funds Act. Private FMs may provide investment management services if they are enrolled on the asset management register kept by the CMF.
5.1 Is the marketing of alternative investment funds subject to authorisation in your jurisdiction?
General: In Chile, marketing activities that do not qualify as a public offer are unregulated. However, the Securities Market Act defines ‘public offer' in very broad terms, as any offer addressed to the public or to a certain sector or specific group of the public. Thus, whether a fund offering qualifies as public is something that needs to be determined according to the factual circumstances of each case.
Securities offerings that do not meet the public offer test are private offerings, and are therefore excluded from the remit of the Securities Market Act; this constitutes a common practice in Chile. The CMF has set out the conditions that an offer must meet in order not to be a public offer of securities in General Regulation 336. We recommend a close examination of the terms of any securities offer, to avoid falling within the scope of the public offer regime.
Public AIFs: Units of a public AIF may be marketed only commencing on the business day following the deposit of the bylaws of the AIF with the Comisión para el Mercado Financiero (CMF). The units shall be deemed publicly offered securities for all legal purposes.
Private AIFs: It is not possible to make a public offering of units of a private AIF. Moreover, the Single Funds Act prohibits the marketing and promotion of fund management services concerning private AIFs.
Foreign AIFs: For further details on marketing foreign investment funds in Chile please see "Brief Guide to Marketing of Foreign Investment Funds in Chile" available at https://www.mondaq.com/Government-Public-Sector/882010/A-Brief-Guide-To-Marketing-Foreign-Investment-Funds-In-Chile.
5.2 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
See question 5.1
5.3 What is the process for obtaining authorisation and how long does this usually take?
See question 5.1
5.4 To whom can alternative investment funds be marketed?
Public AIFs: Public AIFs can be marketed among the general public.
Private AIFs: Private AIFs must be marketed through private offers in compliance with General Regulation 336, which sets out the conditions that an offer must meet in order not to be a public offer of securities.
Foreign AIFs: Please see "Brief Guide to Marketing of Foreign Investment Funds in Chile" available at https://www.mondaq.com/Government-Public-Sector/882010/A-Brief-Guide-To-Marketing-Foreign-Investment-Funds-In-Chile for further details.
5.5 What are the content criteria that marketing materials for alternative investment funds must satisfy?
Public AIFs: The marketing of fund units must comply with the disclosure requirements imposed by the CMF. The CMF mandates that authorised FMs provide investors with an information document setting out the key characteristics of the fund to enable them to make an informed decision. The information document must contain the following information:
- identification of the AIF;
- the series of the AIF (if any);
- the AIF's main purpose;
- the profile of investors suitable to invest in the AIF;
- risks associated with the investments;
- tax benefits;
- historical performance;
- summary of fees and expenses;
- redemption and duration of the AIF;
- the AIF's supervisory entity (ie, the CMF); and
- further information about the AIF.
Private AIFs: The marketing of units in a private AIF must comply with Regulation 336, which sets out the conditions that an offer must meet in order not to be a public offer of securities. In addition, any communication issued in respect of the private AIF must explicitly set out that the fund is not regulated or supervised by the CMF.
Foreign AIFs: Please see our "Brief Guide to Marketing of Foreign Investment Funds in Chile" available at https://www.mondaq.com/Government-Public-Sector/882010/A-Brief-Guide-To-Marketing-Foreign-Investment-Funds-In-Chile for further details.
In addition, any communication issued by the authorised FM or by the private FM in respect of the private AIF must explicitly set out that the fund is not regulated or supervised by the CMF.
5.6 What other requirements or restrictions apply to marketing materials for alternative investment funds?
See question 5.5.
5.7 Can alternative fund managers from other jurisdictions market alternative investment funds in your jurisdiction without authorisation?
Please see our "Brief Guide to Marketing of Foreign Investment Funds in Chile" available at https://www.mondaq.com/Government-Public-Sector/882010/A-Brief-Guide-To-Marketing-Foreign-Investment-Funds-In-Chile for further details.
5.8 Is the appointment of local marketing entities required in your jurisdiction?
Unregistered securities: No. A foreign AIF does not need to appoint a local marketing entity to offer its unregistered securities to Chilean investors; a foreign AIF can offer them directly on a cross-border basis, without the need for a licence. It is advisable that any such marketing relies on the private offer safe harbour set out in General Regulation 336.
Registered securities: No. A foreign AIF does not need to appoint a local marketing entity to offer its registered securities to Chilean investors; a foreign AIF can place them directly on a cross-border basis, without the need for a licence, provided compliance with registration, information, and reporting requirements applicable to registered securities under domestic laws and regulations.
Please see our "Brief Guide to Marketing of Foreign Investment Funds in Chile" available at https://www.mondaq.com/Government-Public-Sector/882010/A-Brief-Guide-To-Marketing-Foreign-Investment-Funds-In-Chile for further details.
5.9 Is it possible to market alternative investment funds to retail investors in your jurisdiction? If so, are there specific requirements?
Public AIFs: Marketing among retail investors will likely be characterised as a public offer of securities. As such, it is permitted solely for AIFs structured as public AIFs, provided their bylaws have been deposited with the CMF.
Private AIFs: See above.
Foreign AIF: Marketing among retail investors will likely be characterised as a public offer of securities. As such, it is permitted solely upon registration of the shares/units of the foreign AIF with the CMF.
6 Investment process
6.1 Do any investment or borrowing restrictions apply to the portfolios of alternative investment funds?
Public AIFs: Investment restrictions apply to public AIFs. They mostly relate to investments that may trigger conflicts of interest. Also, public AIFs targeted at investors other than qualified investors are subject to additional restrictions aimed to favour liquidity and portfolio diversification.
Whether a public AIF may incur in indebtedness and, if so, to what extent is left to the bylaws of the AIF.
Private AIFs: There are no investment or borrowing restrictions set out in the Public Funds Act or in the Funds Regulation. Both matters are left to the bylaws of the AIF.
6.2 Are there any specific legal or regulatory requirements regarding investments in particular assets?
No. However, public AIFs and private AIFs may not directly hold certain asset classes such as real estate, mining and water rights, intellectual and industrial property rights and vehicles.
7 Reporting, governance and risk management
7.1 What key disclosure requirements apply to alternative investment funds in your jurisdiction?
Public AIFs: The authorised FM must inform the investors and the general public in a truthful, comprehensive and timely manner about the characteristics of the funds it manages and about any facts or material information relating to it or the funds under its management.
Private AIFs: See question 5.5.
7.2 What key reporting requirements apply to alternative investment funds in your jurisdiction?
Public AIFs: Authorised FMs must notify:
- the CMF if, within one year of the deposit of the AIF's bylaws with the CMF, the AIF does not have:
- a minimum capital of 10,000 UF (approximately $350,000); or
- at least 50 investors;
- the CMF if, within one year of its authorisation and anytime thereafter, the authorised FM has no funds with:
- a minimum capital of 10,000 UF (approximately $350,000); or
- at least 50 investors;
- the CMF and the investors of any amendments made to the AIF's bylaws or any other documentation deposited with the CMF; and
- the CMF and the investors of any capital reduction caused by operation of Article 43 of the Single Funds Act regarding the holding of fund units of their own issuance in excess of the amount permitted by law.
Private AIFs: Authorised FMs and private FMs must provide the CMF with the following information:
- identification of the AIF and its participants;
- amounts contributed to the AIF; and
- the value of the AIF's assets.
In addition, the CMF is empowered to request any information it deems necessary:
- to verify whether the AIF meets the conditions for regulation;
- to ascertain its compliance with the obligation not to make public offers; and
- to supervise the transactions that it enters into with public AIFs where such funds are managed by the same FM.
Authorised FMs and private FMs must notify the CMF if on any day their investors reach 50 or more.
7.3 What key governance requirements apply to alternative investment funds in your jurisdiction?
Public AIFs: AIFs structured as closed-ended investment funds must have a surveillance committee comprised of representatives of the investors in the AIF and who are not connected with the authorised FM. The tasks of the surveillance committee are, broadly:
- to ensure that the authorised FM complies with the terms of the AIF's bylaws;
- to verify the accuracy of the information provided to investors; and
- to propose the replacement of the authorised FM to the extraordinary general meeting of investors.
AIFs structured as closed-ended investment funds must call ordinary and extraordinary general meetings of investors. Ordinary general meetings must be held yearly within five months of the tax year-end. Ordinary general meetings may only consider matters set out in Article 73 of the Single Funds Act and, in general, any matter which is not the subject of an extraordinary general meeting. Extraordinary general meetings may be held at any time to consider the matters set out in Article 74 of the Single Funds Act. Such matters include:
- modifications to the AIF's bylaws;
- the replacement of the authorised FM;
- agreements to increases or reductions of capital;
- agreements regarding the modification or merger of the AIF with other funds;
- agreements regarding the early dissolution of the AIF; and
- any other matters which the bylaws stipulate as requiring an extraordinary general meeting.
The bylaws of each AIF must have a voting policy which specifies the parameters to be followed by the authorised FM when exercising the right to vote in connection with the investments it holds for the account of the AIF.
Private AIFs: Any key governance requirements will be set out in the bylaws of the relevant AIF.
7.4 What key risk management requirements apply to alternative investment funds in your jurisdiction?
Public AIFs: The bylaws of the AIF must contain the following policies, among other things:
- Investment policy: The types of instruments and assets in which the AIF may invest. Where applicable, the investment policy sets out the risk rating of the instruments, eligible counterparties and markets in which it may participate, including any limits.
- Liquidity policy: The rules that the authorised FM must follow to ensure that it has the necessary resources to meet the obligations of the fund.
Indebtedness policy: The rules to be followed by the authorised FM regarding
itsobligations to third parties and the corresponding limits.
- Diversification policy: The rules to be followed by the authorised FM in relation to the maximum degree of concentration in an instrument, types of instruments or specific markets, and their respective weights.
Private AIFs: Any key risk management requirements will be set out in the bylaws of the relevant AIF.
8.1 How are alternative investment funds treated for tax purposes in your jurisdiction?
Public AIFs and private AIFs are tax transparent vehicles. As a result, they do not pay entity-level income taxes. However, all AIFs must obtain a tax identification number from the Chilean Internal Revenue Service (Servicio de Impuestos Internos (SII)). Authorised FMs and private FMs must account and report to the SII capital contributions, distributions and tax credits corresponding to participants in AIFs.
8.2 How are alternative investment fund managers and advisers treated for tax purposes in your jurisdiction?
Management fees and performance fees charged by authorised FMs or private FMs are taxed as compensation for services and are subject to value added tax. At the time of writing, the VAT rate in Chile is 19%.
Fees charged by advisers are also taxed as compensation for services and subject to VAT.
Fees from investments made by participants without a domicile or residence in Chile are nevertheless VAT exempt.
8.3 How are alternative investment fund investors treated for tax purposes in your jurisdiction?
Earnings by participants in an AIF are subject to income tax according to their particular tax status. Individuals and legal entities whose domicile or residence is in Chile are liable to taxation on their income from any source, whether in the country or overseas. Non-residents are subject to taxation only in connection with income that originates in Chile. In general, income is considered to originate in Chile when it arises from assets located or activities undertaken in Chile.
Participants in AIFs, whether organised as public AIFs or private AIFs, are subject to tax on distributions of the underlying income and gains of the fund. Although allocations of the underlying income and gains are periodically reflected in the net asset value of the fund units, capital appreciation of investments in AIFs is not taxed until the disposal of the fund units.
The Single Fund Act promoted foreign investments in Chilean AIFs by granting certain benefits to non-resident investors. Distributions of income and gains which non-residents participants receive from a Chilean AIF are subject to a single income tax at a rate of 10%, rather than the general income tax rate applicable to non-residents (35%). These distributions may even be tax exempt if the relevant AIF invests primarily in securities issued or assets located abroad and certain other regulatory requirements are met.
8.4 What effect do international laws such as the US Foreign Account Tax Compliance Act and international standards such as the Common Reporting Standard have in your jurisdiction?
Chile has committed and implemented procedures to follow the standards established in the US Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS).
In connection with FATCA, Chile has an Intergovernmental Agreement with the United States of America for Cooperation to Facilitate the Implementation of FATCA (IGA). Specifically, Chile has subscribed to IGA Model 2, which directs local financial institutions and their branches (FFIs) to enter into agreements with the US Internal Revenue Service (IRS) and make direct disclosure of their US accountholders. Pursuant to the IGA, local FFIs may be required to withhold on payments to recalcitrant accountholders (as defined in section 1471(d)(6) of the US IRS Code) and non-participating FFIs. The IGA also regulates the functions and obligations of the SII has and its interaction and collaboration duties with the IRS.
The CRS became fully effective in 2018. Chile signed the Convention on Mutual Administrative Assistance in Tax Matters in 2013 and primary legislation to implement the CRS was introduced in late 2017, enabling the SII to obtain information from FIIs on the holdings of non-residents. In September 2018 the necessary legal and regulatory framework for the introduction of the automatic exchange of financial accounts information entered into force, and FFIs must now submit yearly to the SII details on financial accounts held by non-residents.
8.5 What preferred tax strategies are typically adopted in the alternative investment fund context?
Since public AIFs and private AIFs do not pay entity-level income tax, when structuring an AIF, the main concern is to fulfil all requirements needed for the vehicle to qualify for and preserve the investment tax status. This is particularly relevant for private AIFs, as the Single Funds Act imposes corporate tax on all private AIFs that fail to comply with the fund tax status requirements.
9 Trends and predictions
9.1 How would you describe the alternative investment fund landscape and prevailing trends in your
According to the Chilean Investment Fund Association, during 2018 and Q1 2019, the largest growth in the investment funds industry was in the alternative investment fund (AIF) segment. As of May 2019, the assets under management of AIFs reached $12.756 billion, representing a growth of 11.5% when contrasted with the 2018 year-end. To a large degree, this growth is attributable to a relaxation of investment restrictions applicable to Chilean pension funds, which used to limit their direct investments in AIFs to a minimum.
In 2017, new regulations on pension funds' investment policies came into force in Chile, which authorised them to invest in private equity, private debt, infrastructure and privately traded assets. Although the new regulations covered direct participation in investment funds and co-investment, it is the investment fund industry which has seen greatest expansion. Hedge funds are not explicitly covered by the 2017 regulations and it remains unclear whether the Pension Funds Regulator will include them in the permitted investments category.
Chilean pension funds collectively manage over $200 billion in assets and, since 2017, have created specialised investment teams working to identify investment opportunities. So far, nearly 70% of pension funds' investments in AIFs are held in participations in funds operating in the United States, the United Kingdom and continental Europe.
9.2 Are any new legal or regulatory developments anticipated which will impact on alternative investment funds or alternative investment fund managers in your jurisdiction?
Public AIFs: It is not expected that the Chilean regulation on public AIFs will significantly diverge from the existing structure.
Private AIFs: Yes. On 8 of November 2019, the Ministry of Finance released a tax reform framework bill which proposes to increase the investor diversification rule applicable to private AIFs in order to qualify for investment fund tax status. Currently, the Single Funds Act requires private AIFs to have a minimum of four unrelated participants, with no less than 10% of the units issued by the fund to be eligible for investment fund tax status. The new rule would require these funds to have a minimum of eight unrelated participants, each with no more than 20% of the issued units. This bill is currently being discussed at the Chilean Congress.
9.3 Do you envisage any particular industry strategy of attracting particular interest in the next 12 months?
During 2019, an increase in investments in infrastructure funds and private debt funds was observed. However, the outlook for 2020 remains unclear, in light of possible constitutional and socio-economic reforms.
10 Tips and traps
10.1 What are your top tips for the smooth establishment and management of an alternative investment fund in your jurisdiction, and what specific challenges would you note?
The investment fund is a sui generis structure. Some of its features resemble those of a corporation, but in other aspects it seems closer to a trust. This can be confusing for international managers (and for international investors) which are used to AIFs being organised as limited partnerships or corporate structures. Limited partnership is not an available option, as Chilean law does not recognise its existence. Although available as a choice, corporations are subject to entity-level taxation (at rates from 25% to 27%), which renders them highly inefficient to manage collective investments.
In addition, since a significant number of the structural and operational aspects of public AIFs are regulated, the bylaws of public AIFs are brief when compared to the legal documentation of their international counterparts. This also explains the absence of an agreement between the AIF and the fund manager. Although certain investors (mainly institutional investors) seek contractual commitments from AIF managers, those agreements are relatively simple and are intended to facilitate compliance with specific regulations relating to those investors – most commonly, investments limits.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.