Alternative Funds 2024 Comparisons

Prior to 2016, the investment in alternative funds (AF) was mostly domestic, carried out indirectly through local fund vehicles (“feeder funds”).

As of 2016, Chilean legislation considered ways in which it might be possible for Chilean pension funds to invest directly in AF. However, unlike other jurisdictions, Chile does not have unique regulation in this area, as it is not the asset itself, but the capacity of the investor, that defines the regulation of alternative asset investments.

For example, pension funds are allowed to invest directly in AF, but to do so they must comply with a number of legal requirements set out in the Decree Law 3500, the Pension Funds Compendium and their Regulations.

Unlike Chilean pension funds, local insurance and reinsurance companies, although they operate in a similar way to pension funds, cannot invest directly in AF, but must do so through investment in a local fund dedicated to investing in such assets.

Therefore, in order to determine how investors can invest in AF, and how the law applies to them, one must first analyse their capacity and from there have a clearer understanding of the requirements they would have to meet in order to invest in this type of asset.

Notwithstanding the foregoing, regardless of the investors, all AFs must be managed by an entity specifically created for this purpose, which will have the obligation to manage their assets and be responsible for their profitability.

See 2.10 Anticipated Changes regarding the decision taken by the Central Bank of Chile in respect of the alternative investment threshold allowed for the pension fund regime, which aims to improve the profitability and increase the allocation of pension funds to alternative assets; 3.11 Anticipated Changes regarding the potential indirect diminishment of the number of active private fund managers in the country; and 4.11 Anticipated Changes regarding a new Tax Reform proposal from President Boric.

In Chile, the distinction between mutual funds (MF) and investment funds does not take into account whether the types of assets in which these funds invest are traditional, alternative, or a combination of the two. Nor does it take into account the investment strategy of the fund manager. Consequently, investments in alternative assets in Chile may be structured through any of the legal structures permitted by law.

As mentioned, investment funds are governed by the LUF, which a decade ago provided a systematised, coherent, and unified regulatory framework for the various types of investment funds permitted within the Chilean jurisdiction. The LUF is complemented by its Rules, contained in Decree No 129. Additionally, significant attention must be given to the role performed by the Financial Market Commission (CMF), in terms of its legal mandate to issue regulations for the application and enforcement of laws and regulations and, in general, to issue any other norms that, in accordance with the law, are incumbent upon it for the regulation of the financial market. Similarly, the CMF shall be responsible for the administrative interpretation of the laws, regulations and other rules governing the persons, entities or activities under its supervision, and may set rules, issue instructions and issue orders for their application and compliance. Through these previously mentioned regulations, among others that the CMF is authorised to enact, it has established a comprehensive regulatory framework pertaining to investment funds. An exception to this rule is what is observed in respect to Chilean Pension Funds, which remain regulated separately in terms of both their structure and the investments they are allowed to make, which are set out in various legal bodies, including Decree Law 3500, the Compendium of Pension System Regulations, the Compendium of Central Bank Financial Regulations, the Pension Funds Investment Regime, and other regulations issued by the Chilean Pensions Supervisor or any governmental authority with regulatory jurisdiction in specific aspects of the applicable legislation (collectively all of the foregoing, hereinafter “Chilean Pension Regulations”).

The primary classification of investment funds established by the LUF is based on whether investors’ shares are redeemable. If the units are redeemable and the redemption is carried out within ten days of the request, the fund is considered to be an MF. If the units are redeemable but the redemption is carried out between 11 and 179 days after the request, the fund is considered to be a redeemable investment fund. Finally, if the redemption takes place in 180 days or more, the fund is considered to be a non-redeemable investment fund. This initial classification has significant implications for the structure of the fund, the operational burden and the frequency of regulatory reporting.

Chilean regulation differentiates between a private investment fund (FIP), which must have a minimum of eight investors and a maximum of 49 (who cannot belong to the same family, as stipulated in the LUF), and the public investment fund (FI), which must have a minimum of 50 investors. The primary consequence of this classification pertains to the level of supervision the CMF will exercise over the FI.

Among the main advantages of structuring investments in alternative assets through an FIP is the flexibility of its Reglamento Interno (“by-laws”), the low cost of maintaining the structure, the minimal regulatory compliance required of its fund manager (as this term is defined in 2.3 Disclosure/Reporting Requirements), and the speed of its set-up process. However, due to the maximum limit of 49 investors, it is difficult to diversify participation among a sufficient number of investors unless the fund is targeted at large domestic, foreign qualified or institutional investors. Attracting such investors may be difficult as the FIP is not subject to the direct supervision of the CMF.

By structuring investments in alternative assets through an FI, the oversight role of the CMF provides greater security to investors through the regulatory controls imposed on them. Although the minimum number of investors for this type of fund is 50, this requirement does not apply if an institutional investor (either local or foreign) is included. This type of investment fund is slower to set up and more expensive to maintain, mainly because of the operational and regulatory requirements.

Investments made in Chilean investment funds are materialised in “units”; the equivalent of participating shares in a typical limited partnership/general partnership structure. These units represent the investor’s participation in the fund. The investor’s liability is limited to the amount of its contribution.

The LUF prohibits investment funds, either FI or FIP, from investing directly in operating businesses or other assets generally considered to be alternative, such as forestry, agribusiness and infrastructure. In these cases, the use of a local or foreign special purpose vehicle (SPV) is mandatory.

The incorporation time for an alternative investment fund can vary significantly depending on whether it is structured as an FI or an FIP.

The process of setting up an alternative investment fund is led by the fund manager, who must be legally incorporated and domiciled in Chile.

Once the fund manager has finalised the draft of the respective fund’s by-laws, the board of directors of the fund must pass a resolution approving them.

• For FIs, there is an additional requirement whereby the fund manager must deposit the approved by-laws, along with a dossier of supplementary documents concerning the newly created fund, in the Public Registry of Funds administered by the CMF. The CMF has the authority to raise objections to the supporting documentation or specific aspects of the by-laws.
• Pursuant to Article 46 of the LUF, the fund manager must deposit the by-laws of the investment fund and all additional documents as specified in NCG No 365 of the CMF (“NCG 365”), following the instructions and specific forms available on the CMF’s online portal.
• The incorporation process for an FIP is relatively straightforward and expeditious. Conversely, for FIs, the drafting of by-laws requires extensive analysis and adjustment to comply with the provisions established in the LUF and NCG 365. The drafting of the necessary documents for the CMF deposit can require several hours of professional work and may require the intervention of third parties to produce documentation (eg, custodians, independent valuators, external auditors, etc). Additionally, the fund manager must submit a similar set of documents to Chile’s Internal Tax Revenue Service web portal to obtain a Tax Identification Number for the investment fund, which adds between three and five working days to the set-up process.

Regarding the nature of the assets in which they invest, there are no specific disclosure requirements for alternative investment funds.

Pursuant to paragraph 3 of the LUF and NCG No 386 of the CMF and NCG No 461 of the CMF, fund managers are required to disclose information concerning their managed funds. The extent and scope of such disclosure depends on the type of fund manager.

For FIs, the fund manager/Administradora General de Fondos (which in Chile corresponds to a certain type of fund manager, hereinafter, “AGF”) must ensure the truthful, sufficient, and timely disclosure of information regarding the fund’s main characteristics (as set forth in its by-laws), financial statements, investor’s registry, and corporate governance. All specific details must be provided concerning the disclosure of different series of units pertaining to a fund. Recently, the fulfilment of certain environmental, social, and governance (ESG) standards has also been included within the disclosure requirements for AGFs.

From a procedural perspective, such disclosure is initially provided to the CMF through the SEIL web portal. The CMF then makes it accessible to the general public. Additionally, the fund manager must provide access to the documents submitted to the CMF through its own website and maintain printed copies of some of these documents in their offices, which shall be available to FI investors. None of these disclosure requirements are mandatory for FIPs.

However, Administradoras de Fondos de Inversión (which in Chile corresponds to private investment fund managers, hereinafter, “AFI”, and together with AGFs, “fund managers”) are still required to comply with the obligation to register in the CMF’s Special Registry of Reporting Entities. This status as a reporting entity imposes fewer reporting obligations compared to those applicable to AGFs. In addition to providing their corporate information and supporting legal documents, AFIs must fulfill the obligation to submit updated information to the CMF regarding the FIPs under their administration on a quarterly basis. The background information included in this submission encompasses the name and valid tax identification number of each fund, a detailed list of its investors, and the valuation of its assets and liabilities, including a description of the accounting methods used in such valuation.

No specific tax incentives are granted to alternative investment funds. Benefits are granted to investment funds regardless of the type of assets in which they invest. The main benefit is the exemption from corporate tax at the fund level. However, as mentioned in 2.2 Regulatory Regime for Funds, investment funds cannot directly engage in activities or hold assets that are typically considered alternative investments, so an SPV portfolio company must be interposed between such activities or assets and the fund. The SPV will be fully subject to the general tax regime and will therefore be subject to corporate tax rates.

Both FIs and FIPs may defer taxation until distributions are made to investors. Pursuant to Article 80 of the LUF, mandatory distributions of at least 30% of accrued profits must be made on an annual basis.

Once distributions are made to investors, different tax consequences will arise depending on the intrinsic characteristics of the investors and in some cases, if the distribution was made by an FI or an FIP.

• Resident individuals – natural persons as investors of an FI will be deemed final taxpayers and thus subject to a personal income tax on fund distributions, called Impuesto Global Complementario (IGC) at a 0% to 40% progressive rate. These final taxpayers are allowed to use 65% of the Corporate Tax levied at the SPV level, as a credit against their due IGC.
• Resident entities – local corporate entities receiving fund distributions will not be deemed as final taxpayers and thus, will not be subject to Corporate Income Tax on these distributions.
• Non-resident investors – distributions made to non-resident investors (either natural persons or corporate entities) by FIPs will be subject to a withholding tax (Impuesto Adicional) at a 35% rate. These foreign taxpayers are allowed to use 65% of the Corporate Tax levied at the SPV level, as a credit against the aforementioned withholding tax. If such dividend was paid by an FI, there is no withholding tax applicable. Instead, a Sole Tax (Impuesto Único) established by the LUF will be levied at a 10% tax rate (no tax credit for Corporate Tax levied at SPC level applies).
• Institutional investors – distributions made to Chilean Pension Funds are not subject to taxation.

Taxation of sales and redemptions regarding units of an FI are deemed capital gains. In general, they are subject to income tax, be it corporate income tax or IGC, notwithstanding the following exceptions.

• When these redemptions are a consequence of the fund’s liquidation, income tax will not apply.
• It will also not apply when redemptions derive from a capital decrease.
• Redemptions made by a non-resident investors will be levied with the Sole Tax (Impuesto Único) established by LUF (10% rate)

The taxation of sales and redemptions in respect of units in an FIP are also deemed to be capital gains subject to income tax, be it corporate tax or IGC. Nevertheless, if such redemptions are made by a non-resident investor, they will be subject to a withholding tax at a rate of 35% (with the possibility of using 65% of the corporate tax levied at the level of the SPV as a credit against the withholding tax).

In addition, non-resident investors in both FIs and FIPs may be granted a full tax exemption on dividends or capital gains derived from redemptions and sales of units, provided that at least 80% of the fund’s investment portfolio consists of foreign assets or securities issued by an entity domiciled in another jurisdiction.

As mentioned in 1.1 General Overview of Jurisdiction, there is no single piece of legislation for investment funds in alternative assets. Nevertheless, there are some regulations that apply to specific investors in this matter, as is the case of AFPs, where the Decree Law 3.500 states in Article 45, letter j that they may enter into loan contracts and may also invest in operations or contracts whose purpose is the loan or borrowing of financial instruments of domestic issuers that belong to the pension fund and that comply with the regulations issued by the Superintendence of Pension Funds.

There are no specific rules in Chilean legislation aimed at regulating investments in non-traditional alternative assets. However, with respect to FIs, certain prohibitions are established regarding some investment instruments, such as direct investments in real estate, mining, water rights, industrial or intellectual property rights and vehicles of any kind; nor may they directly develop industrial, commercial, real estate, agricultural, mining, exploration, exploitation or extraction of goods of any kind, brokerage, insurance or reinsurance activities or any other undertaking or business that implies the direct development of a commercial, professional, industrial or construction activity by the fund and, in general, any activity directly developed by the fund other than investment and its complementary activities.

Thus, although local legislation does not explicitly regulate non-traditional assets in alternative funds, there are some rules that seek to restrict some investors from investing in certain instruments.

The use of subsidiaries for investment purposes or to implement certain strategies will depend on the structure of the fund. There is no unique legislation on investment funds in alternative assets. Thus, a study of the quality of the investors and the instrument in which they want to invest will define whether a subsidiary/SPV will be needed, or not.

For example, AFPs can invest directly in alternative investment funds, so the use of an SPV will not always be necessary for that case, but for local insurance and reinsurance companies, an SPV will be necessary for their purposes, since they cannot invest directly in foreign alternative investment funds.

Therefore, to determine whether a subsidiary will be necessary to invest in alternative assets, it will first be necessary to know the investor that will be involved in the operation, just as it will be necessary to know which asset they will invest in.

As previously mentioned, and as a general rule, the LUF prohibits investment funds from investing directly in real estate, mining properties, water rights, industrial or intellectual property rights and vehicles of any kind or the direct development of any commercial, professional, industrial or construction activity by the fund and in general of any activity developed directly by the fund other than investing and its complementary activities.

As a general rule, Chilean legislation establishes that the fund manager must be local, though certain exceptions may apply. For example, in the case of FIs, regulated by the LUF, Article 4 (a) establishes that they must be companies that are established and exist in accordance with the provisions of Article 126 of Law No 18.046, which is a local law that regulates the constitution of a type of Chilean company called Sociedad Anónima, which when its sole and exclusive activity is to manage funds, takes the name of Administradora General de Fondos (General Fund Administrator, or AGF, as previously defined in 2.3 Disclosure/Reporting Requirements).

The same applies to FIPs, which also must have a local investment manager, as they are regulated by their by-laws, but also by the LUF, which is established in its Article 90, in the same manner as Article 4 (a), previously described, for this type of fund.

Finally, and unlike the investment manager of the FIs and FIPs, the directors and general managers of the AGF may be foreign individuals or companies, since the provisions of Law 18,046 authorises this.

The original organisational framework established by the LUF in 2014 vested in the fund manager all the responsibilities and operational capabilities necessary for the functioning of an investment fund. Exceptionally, the fund manager must appoint a custodian regulated by the CMF when the asset class in which the fund invests requires such a service. In addition, it is required to appoint a fund auditor from among those registered in the CMF Register of External Auditing Entities.

Pursuant to CMF Circular Letters No 657 of 2011 and No 592 of 2010, if the fund’s by-laws permit payment in kind (of units), the fund manager must appoint an independent valuator. A similar appointment must be made for the valuation of alternative assets.

As fund service providers have become more specialised, fund managers have increasingly outsourced a wider range of services, including compliance services, IT providers, investment brochure or prospectus design services, and investor services platforms, which are generally not subject to licensing or authorisation.

It is important to note that despite the outsourcing of these tasks and services, the fund manager’s liability for the management of the fund is non-delegable, as stated in Article 15 of the LUF. Consequently, clauses that limit the fund manager’s liability for the actions of outsourced service providers are not enforceable against third parties.

Undoubtedly, the most important reform within the fund industry was the decision taken by the Central Bank of Chile in April regarding the alternative investment threshold allowed for the pension fund regime. This decision aims to improve the profitability and increase the allocation of pension funds to alternative assets. The alternative investment industry in Chile is predicting an increased appetite for real estate, private equity, private debt and infrastructure investment funds, especially given the gradual increase in the limits for pension funds to invest in alternative assets.

Please refer to 2.8 Rules Concerning Service Providers.

There is no specific legal structure imposed by local regulations for fund managers who are solely focused on managing alternative assets through investment funds.

The legal structure is determined exclusively by whether the fund manager will oversee the management of a FI or an FIP. In both cases, the fund manager must be domiciled in Chile.

FI management is the responsibility of a specific type of regulated, closely-held stock corporation (Sociedad Anónima Especial), which requires prior authorisation from the CMF and is subject to ongoing supervision. These are special corporations whose sole purpose is the management and administration of third-party funds. The Law of Stock Corporations, the LUF and the regulation of the CMF establish complex authorisation requirements for this type of corporation, which is referred to as an AGF. Substantial reporting requirements, minimum capital requirements and ongoing personnel accreditation monitoring are also applicable to AGFs.

FIPs may be managed by an AGF but can also be managed by a softly regulated, closely-held corporation known as a Sociedad Administradora de Fondos de Inversion, as mentioned in 2.3 Disclosure/Reporting Requirements.

In the absence of a unified regulatory framework governing investment funds in Chile, it is necessary to consider the specific characteristics of the fund in question in order to ascertain the manner in which the law applies to its managers.

With respect to FIs and FIPs, the relevant fund managers are bound by the provisions of the LUF. In particular, Article 15 and subsequent articles address the question of the liability of the aforementioned entities.

Accordingly, Article 15 of the aforementioned legislation stipulates that the responsibility for the administrative function is non-delegable, although managers may confer special powers or enter into contracts for external services for the execution of certain acts, businesses or activities that are necessary for the fulfilment of the business.

Similarly, a fiduciary duty is imposed on fund managers in accordance with Article 17 of LUF, which stipulates that “The manager, its directors, managers, administrators and principal executives must undertake all necessary actions with the care and diligence that would be exercised by a reasonable person in a similar position, with a view to ensuring the achievement of the objectives set out in the internal regulations of the fund in relation to the profitability and security of its investments”. The administration of each fund must be conducted exclusively for the benefit of the fund itself. Furthermore, all transactions related to the acquisition and disposal of assets on behalf of the fund must be made in the fund’s best interest.

Ultimately, Article 18 of LUF establishes a responsibility to inform both investors and the general public of the specific characteristics of the funds that are under management, as well as any series of quotas that may exist, and any essential facts or information that is related to the fund manager or the funds that are managed.

In light of the aforementioned considerations, it is evident that Chilean legislation is particularly rigorous in its approach to the protection of the interests of investors and the general public. This is clear not only in the manner in which the duties and responsibilities of the fund manager are defined, but also in the establishment of sanctions for non-compliance. In this regard, Article 19 of LUF states that the CMF may revoke the authorisation for the existence of a fund manager in cases of serious infringement of the legal rules governing the funds and their managers, or when the investigations carried out show that the administration has been fraudulent or manifestly negligent.

There are no specific tax incentives granted to fund managers, irrespective of whether they focus exclusively on alternative funds or manage any other type of investment fund. Consequently, fund managers are subject to the general corporate income tax regime. In essence, under Chilean tax legislation, fund managers are regarded as service providers. Consequently, the tax reform enacted on 1 January 2023 through Law 21.420 provides that management fees payable by the fund to these companies shall be subject to VAT, currently levied at a rate of 19%. Nevertheless, Chile’s Fund Law permits a particular VAT exemption for management fees, limited to the extent and proportion that represent the participating shares of non-resident fund investors. To illustrate the foregoing, if an investment fund has 100 participating shares and half of them are subscribed and paid by a non-resident investor, the management fees payable by the fund to the fund manager will be subject to VAT only for the half subscribed and paid by the non-resident investor. In the event that an investment fund is wholly owned by a non-resident investor, the management fees payable to the fund manager will be exempt from VAT. It should be noted that this exemption is applicable solely to FI (public funds).

There are no provisions in our legislation granting exemption to ensure that alternative funds with a manager in Chile do not have a permanent establishment or other taxable presence in the jurisdiction, besides the general rules applicable to taxable entities and individuals.

The structure of carried interest may be either a fee or a capital distribution. In the first case, the carry will be subject to a VAT charge at the standard rate of 19%, whereas in the second, it will be exempt from VAT. Such structuring rarely focuses on tax implications alone; rather, on consideration of the fund’s strategy, AUM, term, and asset class. Chilean funds focusing on alternative assets develop a wide variety of mechanisms to structure carried interest.

The original organisational framework established by the LUF in 2014 conferred upon the fund manager the full range of responsibilities and operational capabilities required for an investment fund to function effectively. In the event that the asset class in which the fund invests requires a custodian, the fund manager is required to appoint one that is regulated by the CMF. Furthermore, the appointment of a fund auditor is mandatory, and this individual must be registered in the CMF Register of External Auditing Entities.

In accordance with the provisions set forth in CMF Circular Letters No 657 of 2011 and No 592 of 2010, in instances where the fund’s by-laws permit the payment in kind (of units), the fund manager is obliged to appoint an independent valuator. A comparable appointment must be made for the valuation of alternative assets.

As fund service providers have become increasingly specialised, fund managers have outsourced a broader range of services. These include compliance services, IT providers, investment brochures or prospectus design services, and investor services platforms, which are generally not subject to licensing or authorisation.

It is crucial to emphasise that despite the outsourcing of these responsibilities, the fund manager remains ultimately liable for the management of the fund, as explicitly stated in Article 15 of the LUF. Consequently, clauses that seek to limit the responsibility of the fund manager for the actions of outsourced service providers are not enforceable against third parties.

Although there is no single regulation on investment funds in Chile, the LUF establishes certain requirements that FI managers must comply with to be able to act as such.

According to Article 4 of LUF, fund managers managing FIs must comply with the following requirements.

• Their formation and continued existence is contingent upon the stipulations set forth in Article 126 of Law No 18,046. In the event of any discrepancy or ambiguity, the provisions set forth in Articles 127, 128, and 129 of the same law shall prevail.
• The aforementioned entities shall include in their nomenclature the designation Administradora General de Fondos, which is translated into English as “General Fund Manager.”
• They must permanently maintain a net worth of not less than the equivalent of 10,000 Unidades de Fomento. This must be substantiated and calculated in accordance with the regulations prescribed by the Superintendency.
• Operations may only commence once accreditation has been granted by the CMF, indicating satisfaction with the demonstration that legal requirements have been met and that the policies, procedures and controls required by the CMF have been implemented. These must be sufficient to safeguard the interests of participants and the resources of the funds in question.
• Following a period of one year from the date of authorisation, the fund manager is required to have at least one fund that complies with the conditions related to the net worth and the requisite number of participants. Furthermore, this condition must be maintained on an ongoing basis. In the event of non-compliance, the fund manager shall be dissolved and liquidated.

Additionally, Chilean legislation imposes other substance, operational and labour law requirements which must be met as they would by any other commercial entity, such as a registered office space in the country and maximum percentages of foreigners hired as employees. Furthermore, Chilean legislation imposes additional requirements pertaining to substance, operations and labour law, which must be fulfilled by any commercial entity, including the provision of a registered office within the country and the adherence to maximum percentages of foreign employees.

Under Chilean law, there is no special rule expressly regulating that in the event of a sale, change of control or merger of a fund manager as such, a formality or the authorisation of the investors must be previously complied with.

However, since fund managers are Corporations, according to Chilean law, they must comply with local legislation to merge, sell or change control in their capacity as such.

Notwithstanding the foregoing, and with the purpose of safeguarding the interest of the investors, it could happen that the regulations of an investment fund establish within their provisions certain formalities for the case where a manager merges, sells or changes control, such as for example requiring the authorisation of the investors’ assembly.

The CMF has promulgated general regulations pertaining to the utilisation of AI, algorithms and technological instruments for the aforementioned purposes. The recently enacted Fintech Law, which took effect on 4 January 2023, has introduced expanded provisions pertaining to the deployment of AI and algorithmic decision-making in the domain of fund management and investment decisions. However, these provisions have yet to be fully interpreted by the CMF.

It is anticipated that there will be no further changes in legislation affecting fund managers over the course of the next 12 months. Nevertheless, in light of the anticipated enactment of tax reforms during the remaining two years of President Gabriel Boric’s tenure, which are likely to eliminate all tax deferral benefits available for private investment funds, it is plausible that the number of active private fund managers in the country may be indirectly diminished.

Alternative funds have historically been a popular investment option among private qualified investors, both local and foreign, whose investments have been structured through either FIs or FIPs. In recent times, insurance companies and other local and foreign institutional investors have made significant capital commitments to long-term financial instruments focused on alternative assets (eg, commercial real estate and agriculture). In response to this trend, large-scale fund managers have sought to cater to retail investors seeking exposure to alternative assets, given their superior performance compared to traditional financial instruments and the lower management fees associated with alternative funds due to their reduced operational requirements.

It is indeed the case that side letters are permitted under Chilean legislation. However, any such side letters must not contravene the express terms of the fund’s by-laws.

There is no restriction on the type of investors besides the regulatory constraints imposed to local pension funds.

There are no specific regulations governing the marketing of alternative funds. Fund managers are obliged to comply with the general rules set out in the LUF. MF and FIs are subject to the regulations governing the issuance of securities, whereas FIPs are permitted to conduct a private offering only. In this regard, the LUF explicitly prohibits the public offering of FIP units, the promotion of their profitability, and the promotion of private fund management services. Moreover, any communication or information pertaining to an FIP must explicitly state that these funds are not subject to regulation or supervision by the CMF.

The regulations pertaining to the marketing of securities are applicable to both MF and FIs, given that their units are required to have been previously registered with the CMF. In accordance with NCG 365, the fund manager is obliged to furnish target investors with the following information:

• the fund’s by-laws, as previously deposited in the CMF Register of Fund By-laws;
• the general subscription agreement of the fund manager;
• the specific subscription agreement for the marketed fund;
• the informative brochure (prospectus) of the fund, issued in accordance with CMF guidelines. This document allows for an informed investment decision based on the fund’s historical revenues, the fund’s investment thesis, the fund’s particular risks, the portfolio composition, etc; and
• financial statements submitted by the fund manager to the CMF.

The utilisation of placement agents is a prevalent practice. Such entities are required to comply with the regulations pertaining to investment advisory services as set forth by the CMF. Typically, public fund managers have personnel dedicated to this role, as they are required to obtain and maintain ongoing accreditation in technical and commercial knowledge regarding investment funds and financial regulations. Additionally, this function may be undertaken by portfolio managers, who are required to register with the CMF and adhere to its specific regulations when the size of their portfolios and the number of clients exceed the limits set forth in the Fund Law.

Investors in alternative investment funds are not granted a specific tax incentive scheme. As a general rule, tax benefits to fund investors are mainly granted in the form of tax deferrals. Both FIs and FIPs are allowed to defer taxation until distributions are made to investors. Pursuant to Article 80 of LUF, mandatory distributions of at least 30% of accrued profits must be made on an annual basis.

Once distributions are made to investors, different tax consequences will arise depending on the intrinsic characteristics of the investors and, in some cases, if the distribution was either made by a FI or a FIP.

• Resident individuals – natural persons as investors of an FI will be deemed final taxpayers. Thus, they will be subject to a personal income tax on such fund distributions, called Impuesto Global Complementario (IGC) at a progressive rate (from 0% to 40%). These final taxpayers are allowed to use 65% of the corporate tax levied at the SPV level, as a credit against their due IGC.
• Resident entities – local corporate entities receiving fund distributions will not be deemed as final taxpayers and therefore will not be subject to corporate income tax on those distributions.
• Non-resident investors – distributions made to non-resident investors (either natural persons or corporate entities) by FIPs will be subject to a withholding tax (Impuesto Adicional) at a 35% rate. These foreign taxpayers are allowed to use 65% of the corporate tax levied at the SPV level as a credit against the aforementioned withholding tax. If such dividend was paid by an FI, there is no withholding tax applicable. Instead, a sole tax (Impuesto Único), established by the LUF, will be levied at a flat 10% tax rate (no tax credit for corporate tax levied at SPC level applies).
• Institutional investors – distributions made to Chilean Pension Funds are not subject to taxation.

Taxation of sales and redemptions regarding units of an FI are deemed capital gains. In general, they are subject to income tax, be it corporate income tax or IGC, notwithstanding the following exceptions.

• When the redemptions are a consequence of the fund’s liquidation, income tax will not apply.
• It will also not apply when redemptions derive from a capital decrease.
• Redemptions made by a non-resident investor will be levied with the sole tax (Impuesto Único) established by LUF (at a flat 10% rate).

Taxation of sales and redemptions regarding units of an FIP are also deemed capital gains, subject to income tax, be it corporate income tax or IGC. Notwithstanding, if such redemptions are made by a non-resident investor it will be levied with a withholding tax at a 35% rate (allowing the use of 65% of the corporate tax levied at the SPV level, as a credit against the withholding tax).

Additionally, a full tax exemption on dividends or capital gains derived from redemptions and sales of units can be granted to non-resident investors in both FIs and FIPs provided that at least 80% of the Fund’s investment portfolio is comprised of assets located abroad or securities issued by an entity domiciled in a different jurisdiction.

Double taxation treaties are available for individuals and entities that are considered to be taxpayers in accordance with Chilean legislation. As per the LUF, investment funds are explicitly excluded from the category of Chilean taxpayers.

Chile’s FATCA regime has been fully in force since 2024, following the same requirements and procedures set forth in IGA Model 2. CRS rules have been implemented since 2017 with no material changes or deviation from Model CAA.

In Circular Letter 2.325 of 2022, the CMF updated Chile’s AML and KYC regime in accordance with the latest 40 recommendations issued by the Financial Action Task Force (FATF). These recommendations focus on the identification of final beneficiaries and customer due diligence, which is determined under a risk-based approach. The scope of responsibilities of the Unidad de Análisis Financiero (UAF), the local governmental entity in charge of AML/KYC surveillance, has been expanded in order to facilitate the faster detection of terrorist financing activities. The aforementioned Circular Letter has direct implications for the ongoing obligations of fund managers and their reporting requirements to the CMF and UAF. Additionally, there is a continuous necessity to furnish employees with pertinent updates on KYC and AML legislation and practices.

On 8 May 2024, the CMF published General Rule No 570 (NCG 570), which revised and clarified the data security and privacy obligations applicable to all investment fund managers. In accordance with this regulation, administrators are obliged to implement policies and procedures designed to safeguard the confidentiality of information provided by their clients in relation to investment advisory services and/or order execution. This is to ensure strict compliance with relevant legal provisions, particularly those established under Law No 19,628 on the Protection of Private Life.

These policies and procedures must include obtaining explicit client consent for the use of their personal information, in accordance with Law No 19,628, while ensuring the protection of such data from unauthorised access and disclosure. Moreover, administrators must implement measures to safeguard personal privacy and confidential information. In instances where risk management functions are carried out by a business group, it is essential to ensure that the client’s information is not utilised for purposes other than those expressly consented to by the client.

On 26 August 2024, the Chamber of Deputies gave its definitive approval to a bill amending Law No 19,628 on Personal Data Protection. The bill will now be sent to the President for approval, and it may subsequently be subjected to a constitutional review by the Constitutional Court. It is anticipated that this legislative amendment will serve to further reinforce the regulatory framework that governs the protection of personal data, while simultaneously imposing additional compliance obligations on those responsible for the management of investment funds.

As previously discussed, alternative investment funds are not subject to a specific tax regime that provides tax incentives. In 2021, at the outset of his presidency, President Gabriel Boric introduced a Tax Reform Bill that sought to abolish all tax benefits for Private Investment Funds. This development heightened uncertainty in the sector. However, the bill failed to garner sufficient support during the legislative process. In 2024, a new Tax Reform proposal from President Boric has made further progress in Congress, though no amendments have yet been introduced regarding the LUF. Nevertheless, the recently enacted Fintech Law has the potential to impact investment funds, as it includes provisions that modify the LUF. This will require interpretation and guidance from the CMF.