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Argentina

Executive Summary

Argentina presents investment and trade opportunities, particularly in agriculture, energy, health, infrastructure, information technology, and mining. However, economic uncertainty, interventionist policies, high inflation, and persistent economic stagnation have prevented the country from maximizing its potential. Argentina fell into recession in 2018, the same year then-President Mauricio Macri signed a three-year $57 billion Stand-By Arrangement (SBA) with the International Monetary Fund (IMF). Efforts to rationalize spending contributed to Macri’s defeat by the Peronist ticket of Alberto Fernandez and former president Cristina Fernandez de Kirchner (CFK) in 2019. The new administration took office on December 10, 2019 and reversed fiscal austerity measures, suspended the IMF program, and declared public debt levels unsustainable. The COVID-19 pandemic deepened the country´s multi-year economic recession. This led the government to intensify price, capital, and foreign trade controls, rolling back some of the market driven polices of the previous administration. After recording its ninth sovereign default in May 2020, the government of Argentina restructured international law bonds for $65 billion and domestic law bonds for $42 billion. The debt restructuring provides financial relief of $37.7 billion during the period 2020-2030, lowering average interest payments from 7 percent to 3 percent. In August 2020, the government formally notified the International Monetary Fund (IMF) of its intent to renegotiate $45 billion due to the Fund from the 2018 Stand-by Arrangement. In 2020, the Argentine peso (official rate) depreciated 29 percent, inflation reached 36 percent, the poverty rate reached 42 percent, and the economy contracted 10 percent.

The Fernandez administration’s economic agenda during 2020 focused on restructuring the country’s sovereign debt and addressing the impact of the COVID-19 pandemic. The government increased taxes on foreign trade, further tightened capital controls, and initiated or renewed price control programs. The administration also expanded fiscal expenditures, which were primarily directed at mitigating the economic impact of the COVID-19 pandemic. Citing a need to preserve Argentina’s diminishing foreign exchange reserves and raise government revenues for social programs, the Fernandez administration passed a sweeping “economic emergency” law in December 2019, that included a 35 percent advance income tax plus a 30 percent tax on purchases of foreign currency and all individual expenses incurred abroad, whether in person or online.

After the first COVID-19 case was confirmed in Argentina on March 3, 2020, the country imposed a strict nationwide quarantine on March 20, which became one of the longest in the world. The confinement measures were relaxed starting in the second semester of 2020, although multiple restrictions remained in place. Hotel and lodging, travel and tourism, and entertainment activities were deeply affected and were still not fully operational as of March 2021. According to estimates from the Argentine Small and Medium-Sized Confederation´s (CAME), 90,700 retail stores and 41,200 businesses permanently closed in Argentina during 2020, accounting for more than 185,300 jobs losses. As a result of the confinement measures, economic activity dropped 10 percent during 2020 compared to 2019, reaching levels similar to the 2002 economic crisis.

The Argentine government issued a series of economic relief measures, primarily focusing on the informal workers that account for 40 percent of the labor force as well as small and medium size enterprises (SMEs). The government prohibited employers from terminating employment until April 2021 and mandated a double severance payment until December 31, 2021. The government also prohibited the suspension of utility services (water, natural gas, electricity, mobile and land line services, and internet and cable TV) for failure to pay. The government’s ninth sovereign default and self-declared insolvency has limited its access to international credit, obligating it to finance pandemic-related stimulus measures and COVID-19 vaccine purchases via money printing, which may hamper its efforts to restrain inflation and maintain a stable exchange rate in the near term. The government is expected to further expand fiscal expenditures ahead of mid-term elections in October 2021.

Both domestic and foreign companies frequently point to a high and unpredictable tax burden and rigid labor laws, which make responding to changing macroeconomic conditions more difficult, as obstacles to further investment in Argentina. In July 2020, the government passed a teleworking law which imposed restrictive regulations on remote work. The law discourages companies from granting workplace flexibility and lowering labor costs via telework. In 2019, Argentina ranked 36 out of 41 countries evaluated in the Competitiveness Ranking of the World Economic Forum (WEF), which measures how productively a country uses its available resources.

As a MERCOSUR member, Argentina signed a free trade and investment agreement with the European Union (EU) in June 2019. Argentina has not ratified the agreement yet. In May 2020, Argentina proposed slowing the pace and adjusting the negotiating parameters of MERCOSUR’s ongoing trade liberalization talks with South Korea, Canada, and other partners to help protect vulnerable populations and account for the impact of the COVID-19 pandemic.  Argentina previously ratified the WTO Trade Facilitation Agreement on January 22, 2018. Argentina and the United States continue to expand bilateral commercial and economic cooperation, specifically through the Trade and Investment Framework Agreement (TIFA), the Commercial Dialogue, and under the Growth in the Americas initiative, in order to improve and facilitate public-private ties and communication on trade, investment, energy, and infrastructure issues, including market access and intellectual property rights. More than 300 U.S. companies operate in Argentina, and the United States continues to be the top investor in Argentina with more than USD $10.7 billion (stock) of foreign direct investment as of 2019.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 78 of 175 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 126 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 80 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 10.7 billion https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 11,130 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Government of Argentina has identified its top economic priorities for 2021 as resolving its debt situation with the IMF, controlling inflation, responding to the COVID-19 pandemic by providing financial aid to the most vulnerable sectors of society. When the Fernandez administration took office in late 2019, the Ministry of Foreign Affairs, International Trade, and Worship became the lead governmental entity for investment promotion.  The Fernandez administration does not have a formal business roundtable or other dialogue established with international investors, although it does engage with domestic and international companies.

Market regulations such as capital controls, trade restrictions, and price controls enhance economic distortion that hinders the investment climate in the country.

Foreign and domestic investors generally compete under the same conditions in Argentina. The amount of foreign investment is restricted in specific sectors such as aviation and media. Foreign ownership of rural productive lands, bodies of water, and areas along borders is also restricted.

Argentina has a National Investment and Trade Promotion Agency that provides information and consultation services to investors and traders on economic and financial conditions, investment opportunities, and Argentine laws and regulations. The agency also provides matchmaking services and organizes roadshows and trade delegations. Upon the change of administration, the government placed the Agency under the direction of the Ministry of Foreign Affairs (MFA) to improve coordination between the Agency and Argentina´s foreign policy. The Under Secretary for Trade and Investment Promotion of the MFA works as a liaison between the Agency and provincial governments and regional organizations. The new administration also created the National Directorate for Investment Promotion under the Under Secretary for Trade and Investment Promotion, making the Directorate responsible for promoting Argentina as an investment destination. The Directorate´s mission also includes determining priority sectors and projects and helping Argentine companies expand internationally and/or attract international investment.

The agency’s web portal provides information on available services ( https://www.inversionycomercio.org.ar/ ). The 23 provinces and the City of Buenos Aires also have their own provincial investment and trade promotion offices.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic commercial entities in Argentina are regulated by the Commercial Partnerships Law (Law 19,550), the Argentina Civil and Commercial Code, and rules issued by the regulatory agencies. Foreign private entities can establish and own business enterprises and engage in all forms of remunerative activity in nearly all sectors.

Full foreign equity ownership of Argentine businesses is not restricted, for the most part, with exception in the air transportation and media industries. The share of foreign capital in companies that provide commercial passenger transportation within the Argentine territory is limited to 49 percent per the Aeronautic Code Law 17,285. The company must be incorporated according to Argentine law and domiciled in Buenos Aires. In the media sector, Law 25,750 establishes a limit on foreign ownership in television, radio, newspapers, journals, magazines, and publishing companies to 30 percent.

Law 26,737 (Regime for Protection of National Domain over Ownership, Possession or Tenure of Rural Land) establishes that a foreigner cannot own land that allows for the extension of existing bodies of water or that are located near a Border Security Zone. In February 2012, the government issued Decree 274/2012 further restricting foreign ownership to a maximum of 30 percent of national land and 15 percent of productive land. Foreign individuals or foreign company ownership is limited to 1,000 hectares (2,470 acres) in the most productive farming areas. In June 2016, the Government of Argentina issued Decree 820 easing the requirements for foreign land ownership by changing the percentage that defines foreign ownership of a person or company, raising it from 25 percent to 51 percent of the social capital of a legal entity. Waivers are not available.

Argentina does not maintain an investment screening mechanism for inbound foreign investment. U.S. investors are not at a disadvantage to other foreign investors or singled out for discriminatory treatment.

Other Investment Policy Reviews

Argentina was last subject to an investment policy review by the OECD in 1997 and a trade policy review by the WTO in 2013. The United Nations Conference on Trade and Development (UNCTAD) has not done an investment policy review of Argentina.

Business Facilitation

In 2019, stemming from the country’s deteriorating financial and economic situation, the Argentine government re-imposed capital controls on business and consumers, limiting their access to foreign exchange.  Strict capital controls and increases in taxes on exports and imports the Argentine government instituted at the end of 2019 have generated uncertainty in the business climate.

With the stated aim of keeping inflation under control and avoiding production shortages during the COVID-19 pandemic, the government increased market interventions in 2020, creating further market distortions that may deter investment. Argentina currently has two consumer goods price control programs, “Precios Cuidados, a voluntary program established in 2014, and “Precios Máximos, an emergency program established in March 2020. The Argentine Congress also passed the Shelves Law (No. 27,545), which regulates the supply, display, and distribution of products on supermarket shelves and virtual stores. Key articles of the Law are still pending implementing regulations. Private companies expressed concern over the final regulatory framework of the Law, which could affect their production, distribution, and marketing business model.

In August 2020, the government issued an edict freezing prices for telecommunication services (mobile and land), cable and satellite TV, and internet services until December 2020, later extending the measure into 2021. In Argentina’s high inflation environment, companies sought a 20 to 25 percent increase, however, the regulator allowed the telecom sector a five percent rate increase as of January 2021. The health sector was also subject to limits on price increases. In February 2021, the Secretary of Trade took administrative action against major consumer firms and food producers for purportedly causing supermarket shortages by withholding production and limiting distribution. Companies are currently contesting this decision. In March 2021, the Secretary of Domestic Trade issued Resolution 237/2021 establishing a national registry to monitor the production levels, distribution, and sales of private companies. If companies fail to comply, they could be subject to fines or closure. Tighter import controls imposed by the Fernandez administration have affected the business plans of private companies that need imported inputs for production. The private sector noted increased discretion on the part of trade authorities responsible for approving import licenses.

The Ministry of Production eased bureaucratic hurdles for foreign trade through the creation of a Single Window for Foreign Trade (“VUCE” for its Spanish acronym) in 2016. The VUCE centralizes the administration of all required paperwork for the import, export, and transit of goods (e.g., certificates, permits, licenses, and other authorizations and documents). The Argentine government has not fully implemented the VUCE for use across the country. Argentina subjects imports to automatic or non-automatic licenses that are managed through the Comprehensive Import Monitoring System (SIMI, or Sistema Integral de Monitoreo de Importaciones), established in December 2015 by the National Tax Agency (AFIP by its Spanish acronym) through Resolutions 5/2015 and 3823/2015. The SIMI system requires importers to submit detailed information electronically about goods to be imported into Argentina. Once the information is submitted, the relevant Argentine government agencies can review the application through the VUCE and make any observations or request additional information. The list of products subject to non-automatic licensing has been modified several times since the beginning of the SIMI system. Due to the Covid-19 pandemic, the government reclassified goods needed to combat the health emergency previously subject to non-automatic import licenses to automatic import licenses. Approximately 1,500 tariff lines are currently subject to non-automatic licenses.

The Argentine Congress approved an Entrepreneurs’ Law in March 2017, which allows for the creation of a simplified joint-stock company (SAS, or Sociedad por Acciones Simplificada) online within 24 hours of registration. However, in March 2020, the Fernandez administration annulled the 24-hour registration system. Industry groups said this hindered the entrepreneurship ecosystem by revoking one of the pillars of the Entrepreneurs´ Law.

In December 2020, the government issued the regulatory framework for the Knowledge Based-Economy Law, which was passed in October 2020. The Law establishes tax benefits for entrepreneurs until December 2029. The complete list of activities included in the tax benefit can be found at: http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do;jsessionid=56625A2FC5152F34ECE583158D581896?id=346218 .

Foreign investors seeking to set up business operations in Argentina follow the same procedures as domestic entities without prior approval and under the same conditions as local investors. To open a local branch of a foreign company in Argentina, the parent company must be legally registered in Argentina. Argentine law requires at least two equity holders, with the minority equity holder maintaining at least a five percent interest. In addition to the procedures required of a domestic company, a foreign company establishing itself in Argentina must legalize the parent company’s documents, register the incoming foreign capital with the Argentine Central Bank, and obtain a trading license.

A company must register its name with the Office of Corporations (IGJ, or Inspección General de Justicia). The IGJ website describes the registration process and some portions can be completed online ( https://www.argentina.gob.ar/justicia/igj/guia-de-tramites ). Once the IGJ registers the company, the company must request that the College of Public Notaries submit the company’s accounting books to be certified with the IGJ. The company’s legal representative must obtain a tax identification number from AFIP, register for social security, and obtain blank receipts from another agency. Companies can register with AFIP online at www.afip.gob.ar or by submitting the sworn affidavit form No. 885 to AFIP.

Details on how to register a company can be found at the Ministry of Productive Development’s website: https://www.argentina.gob.ar/produccion/crear-una-empresa . Instructions on how to obtain a tax identification code can be found at: https://www.argentina.gob.ar/obtener-el-cuit-por-internet .

The enterprise must also provide workers’ compensation insurance for its employees through the Workers’ Compensation Agency (ART, or Aseguradora de Riesgos del Trabajo). The company must register and certify its accounting of wages and salaries with the Secretariat of Labor, within the Ministry of Labor, Employment, and Social Security.

In April 2016, the Small Business Administration of the United States and the Ministry of Production of Argentina signed a Memorandum of Understanding (MOU) to set up small and medium sized business development centers (SBDCs) in Argentina.  Under the MOU, in June 2017, Argentina set up a SBDC in the province of Neuquén to provide small businesses with tools to improve their productivity and increase their growth.

The Ministry of Productive Development offers attendance-based courses and online training for businesses. The training menu can be viewed at: https://www.argentina.gob.ar/produccion/capacitacion .

Outward Investment

The National Directorate for Investment Promotion under the Under Secretary for Trade and Investment Promotion at the MFA assists Argentine companies in expanding their business overseas, in coordination with the National Investment and Trade Promotion Agency. Argentina does not have any restrictions regarding domestic entities investing overseas, nor does it incentivize outward investment.

3. Legal Regime

Transparency of the Regulatory System

The Secretary of Strategic Affairs under the Cabinet is in charge of transparency policies and the digitalization of bureaucratic processes as of December 2019.

Argentine government authorities and a number of quasi-independent regulatory entities can issue regulations and norms within their mandates. There are no informal regulatory processes managed by non-governmental organizations or private sector associations. Rulemaking has traditionally been a top-down process in Argentina, unlike in the United States where industry organizations often lead in the development of standards and technical regulations.  The Constitution establishes a procedure that allows for citizens to draft or propose legislation, which is subject to Congressional and Executive approval before being passed into law.

Ministries, regulatory agencies, and Congress are not obligated to provide a list of anticipated regulatory changes or proposals, share draft regulations with the public, or establish a timeline for public comment. They are also not required to conduct impact assessments of the proposed legislation and regulations.

All final texts of laws, regulations, resolutions, dispositions, and administrative decisions must be published in the Official Gazette ( https://www.boletinoficial.gob.ar ), as well as in the newspapers and the websites of the Ministries and agencies. These texts can also be accessed through the official website Infoleg ( http://www.infoleg.gob.ar/ ), overseen by the Ministry of Justice and Human Rights. Interested stakeholders can pursue judicial review of regulatory decisions.

In September 2016, Argentina enacted a Right to Access Public Information Law (27,275) that mandates all three governmental branches (legislative, judicial, and executive), political parties, universities, and unions that receive public funding are to provide non-classified information at the request of any citizen. The law also created the Agency for the Right to Access Public Information to oversee compliance.

During 2017, the government introduced new procurement standards including electronic procurement, formalization of procedures for costing-out projects, and transparent processes to renegotiate debts to suppliers. The government also introduced OECD recommendations on corporate governance for state-owned enterprises to promote transparency and accountability during the procurement process. The regulation may be viewed at:   http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do?id=306769 .

http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do?id=306769 .

In April 2018, Argentina passed the Business Criminal Responsibility Law (27,041) through Decree 277. The decree establishes an Anti-Corruption Office in charge of outlining and monitoring the transparency policies with which companies must comply to be eligible for public procurement.

Under the bilateral Commercial Dialogue, Argentina and the United States discuss good regulatory practices, conducting regulatory impact analyses, and improving the incorporation of public consultations in the regulatory process. Similarly, under the bilateral Digital Economy Working Group, Argentina and the United States shared best practices on promoting competition, spectrum management policy, and broadband investment and wireless infrastructure development.

The Argentine government has sought to increase public consultation in the rulemaking process; however, public consultation is non-binding and has been done in an ad-hoc fashion. In 2017, the Government of Argentina issued a series of legal instruments that seek to promote the use of tools to improve the quality of the regulatory framework. Amongst them, Decree 891/2017 for Good Practices in Simplification establishes a series of tools to improve the rulemaking process. The decree introduces tools on ex-ante and ex-post evaluation of regulation, stakeholder engagement, and administrative simplification, amongst others. Nevertheless, no formal oversight mechanism has been established to supervise the use of these tools across the line of ministries and government agencies, which make implementation difficult and severely limit the potential to adopt a whole-of-government approach to regulatory policy, according to a 2019 OECD publication on Regulatory Policy in Argentina.

Some ministries and agencies developed their own processes for public consultation by publishing drafts on their websites, directly distributing the draft to interested stakeholders for feedback, or holding public hearings.

In November 2017, the Government of Argentina launched a new website to communicate how the government spends public funds in a user-friendly format ( https://www.argentina.gob.ar/economia/transparencia/presupuesto ).

The Argentine government also made an effort to improve citizens’ understanding of the budget, through the citizen’s budget “Presupuesto Ciudadano” website: https://www.economia.gob.ar/onp/presupuesto_ciudadano/seccion6.php . The initiative aligns with the Global Initiative for Fiscal Transparency (GIFT) and UN Resolution 67/218 on promoting transparency, participation, and accountability in fiscal policy.

Argentina requires public companies to adhere to International Financial Reporting Standards (IFRS). Argentina is a member of UNCTAD’s international network of transparent investment procedures.

International Regulatory Considerations

Argentina is a founding member of MERCOSUR and has been a member of the Latin American Integration Association (ALADI for Asociación Latinoamericana de Integración) since 1980.  Once any of the decision-making bodies within MERCOSUR agrees on applying a certain regulation, each of the member countries has to incorporate it into its legislation according to its own legislative procedures. Once a regulation is incorporated in a MERCOSUR member’s legislation, the country has to notify MERCOSUR headquarters.

Argentina has been a member of the WTO since 1995, and it ratified the Trade Facilitation Agreement in January 2018. Argentina notifies technical regulations, but not proposed drafts, to the WTO Committee on Technical Barriers to Trade.  Argentina submitted itself to an OECD regulatory policy review in March 2018, which was released in March 2019.  The Fernandez administration has not actively pursued OECD accession.  Argentina participates in all 23 OECD committees.

Additionally, the Argentine Institute for Standards and Certifications (IRAM) is a member of international and regional standards bodies including the International Standardization Organization (ISO), the International Electrotechnical Commission (IEC), the Pan-American Commission on Technical Standards (COPAM), the MERCOSUR Association of Standardization (AMN), the International Certification Network (i-Qnet), the System of Conformity Assessment for Electrotechnical Equipment and Components (IECEE), and the Global Good Agricultural Practice network (GLOBALG.A.P.).

Legal System and Judicial Independence

Argentina follows a Civil Law system. In 2014, the Argentine government passed a new Civil and Commercial Code that has been in effect since August 2015. The Civil and Commercial Code provides regulations for civil and commercial liability, including ownership of real and intangible property claims. The current judicial process is lengthy and suffers from significant backlogs. In the Argentine legal system, appeals may be brought from many rulings of the lower court, including evidentiary decisions, not just final orders, which significantly slows all aspects of the system. The Justice Ministry reported in December 2018 that the expanded use of oral processes had reduced the duration of 68 percent of all civil matters to less than two years.

According to the Argentine constitution, the judiciary is a separate and equal branch of government. In practice, there are continuous instances of political interference in the judicial process. Companies have complained that courts lack transparency and reliability, and that the Argentine government has used the judicial system to pressure the private sector. Media revelations of judicial impropriety and corruption feed public perception and undermine confidence in the judiciary.

Many foreign investors prefer to rely on private or international arbitration when those options are available. Claims regarding labor practices are processed through a labor court, regulated by Law 18,345 and its subsequent amendments and implementing regulations by Decree 106/98. Contracts often include clauses designating specific judicial or arbitral recourse for dispute settlement.

Laws and Regulations on Foreign Direct Investment

According to the Foreign Direct Investment Law 21,382 and Decree 1853/93, foreign investors may invest in Argentina without prior governmental approval, under the same conditions as investors domiciled within the country. Foreign investors are free to enter into mergers, acquisitions, greenfield investments, or joint ventures. Foreign firms may also participate in publicly-financed research and development programs on a national treatment basis. Incoming foreign currency must be identified by the participating bank to the Central Bank of Argentina (www.bcra.gob.ar).

All foreign and domestic commercial entities in Argentina are regulated by the Commercial Partnerships Law (Law No. 19,550) and the rules issued by the commercial regulatory agencies. Decree 27/2018 amended Law 19,550 to eliminate regulatory barriers and reduce bureaucratic burdens, expedite and simplify processes in the public domain, and deploy existing technological tools to better focus on transparency. Full text of the decree can be found at: http://servicios.infoleg.gob.ar/infolegInternet/anexos/305000-309999/305736/norma.htm All other laws and norms concerning commercial entities are established in the Argentina Civil and Commercial Code, which can be found at: http://servicios.infoleg.gob.ar/infolegInternet/anexos/235000-239999/235975/norma.htm 

Further information about Argentina’s investment policies can be found at the following websites:

Ministry of Productive Development ( https://www.argentina.gob.ar/produccion )

Ministry of Economy ( https://www.argentina.gob.ar/economia )

The Central Bank of the Argentine Republic ( http://www.bcra.gob.ar/ )

The National Securities Exchange Commission (https://www.argentina.gob.ar/cnv)

The National Investment and Trade Promotion Agency (https://www.inversionycomercio.org.ar/)

Investors can download Argentina’s investor guide through this link: ( https://drive.google.com/file/d/0B-086VB27JBjN0x0NmM4Y09GODA/view )

Competition and Antitrust Laws

The National Commission for the Defense of Competition and the Secretariat of Domestic Trade, both within the Ministry of Productive Development, have enforcement authority of the Competition Law (Law 25,156). The law aims to promote a culture of competition in all sectors of the national economy. In May 2018, the Argentine Congress approved a new Defense of Competition Law (Law 27,442), which would have, among other things, established an independent competition agency and tribunal. The new law incorporates anti-competitive conduct regulations and a leniency program to facilitate cartel investigation. The full text of the law can be viewed at: http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do?id=310241 . The Government of Argentina, however, has thus far not taken steps to establish the independent agency or tribunal. In February 2021, a bill introducing amendments to the Defense of Competition Law was passed by the Senate and is currently under study in the Lower House. The main changes are related to the removal of the “Clemency Program,” which encourages public reports of collusive and cartel activities, and the elimination of public hearings to appoint members of the Competition Office. The private sector has expressed concern over this bill, stating these changes are contrary to transparency standards embodied in the Law.

In September 2014, Argentina amended the 1974 National Supply Law to expand the ability of the government to regulate private enterprises by setting minimum and maximum prices and profit margins for goods and services at any stage of economic activity. Private companies may be subject to fines and temporary closure if the government determines they are not complying with the law. Although the law is still in effect, the U.S. Government has not received any reports of it being applied since December 2015.  However, the Fernandez administration has expressed its potential use in response to the COVID-19 pandemic.

In March 2020, the Government of Argentina enacted the Supermarket Shelves Law (Law 27,545) that states that any single manufacturer and its associated brands cannot occupy more than 30 percent of a retailer’s shelf space devoted to any one product category.  The law’s proponents claim it will allow more space for domestic SME-produced products, encourage competition, and reduce shortages. U.S. companies have expressed concern over the pending regulations, seeking clarification about issues such as whether display space percentages would be considered per brand or per production company, as it could potentially affect a company’s production, distribution, and marketing business model.

Expropriation and Compensation

Section 17 of the Argentine Constitution affirms the right of private property and states that any expropriation must be authorized by law and compensation must be provided. The United States-Argentina BIT states that investments shall not be expropriated or nationalized except for public purposes upon prompt payment of the fair market value in compensation.

Argentina has a history of expropriations under previous administrations. The most recent expropriation occurred in March 2015 when the Argentine Congress approved the nationalization of the train and railway system. A number of companies that were privatized during the 1990s under the Menem administration were renationalized under the Kirchner administrations. Additionally, in October 2008, Argentina nationalized its private pension funds, which amounted to approximately one-third of total GDP, and transferred the funds to the government social security agency.

In May 2012, the Fernandez de Kirchner administration nationalized oil and gas company Repsol-YPF. Most of the litigation between the Government of Argentina and Repsol was settled in 2016.  An American hedge fund still holds a claim against YPF and is in litigation in U.S. courts.

Dispute Settlement

ICSID Convention and New York Convention

Argentina is signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards, which the country ratified in 1989. Argentina is also a party to the International Center for Settlement of Investment Disputes (ICSID) Convention since 1994.

There is neither specific domestic legislation providing for enforcement under the 1958 New York Convention nor legislation for the enforcement of awards under the ICSID Convention. Companies that seek recourse through Argentine courts may not simultaneously pursue recourse through international arbitration.

Investor-State Dispute Settlement

The Argentine government officially accepts the principle of international arbitration. The United States-Argentina BIT includes a chapter on Investor-State Dispute Settlement for U.S. investors.

In the past ten years, Argentina has been brought before the ICSID in 54 cases involving U.S. or other foreign investors. Argentina currently has three pending arbitration cases filed against it by U.S. investors. For more information on the cases brought by U.S. claimants against Argentina, go to: https://icsid.worldbank.org/en/Pages/cases/AdvancedSearch.aspx #.

Local courts cannot enforce arbitral awards issued against the government based on the public policy clause. There is no history of extrajudicial action against foreign investors.

Argentina is a member of the United Nations Commission on International Trade Law (UNCITRAL) and the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

Argentina is also a party to several bilateral and multilateral treaties and conventions for the enforcement and recognition of foreign judgments, which provide requirements for the enforcement of foreign judgments in Argentina, including:

Treaty of International Procedural Law, approved in the South-American Congress of Private International Law held in Montevideo in 1898, ratified by Argentina by law No. 3,192.

Treaty of International Procedural Law, approved in the South-American Congress of Private International Law held in Montevideo in 1939-1940, ratified by Dec. Ley 7771/56 (1956).

Panama Convention of 1975, CIDIP I: Inter-American Convention on International Commercial Arbitration, adopted within the Private International Law Conferences – Organization of American States, ratified by law No. 24,322 (1995).

Montevideo Convention of 1979, CIDIP II: Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards, adopted within the Private International Law Conferences – Organization of American States, ratified by law No. 22,921 (1983).

International Commercial Arbitration and Foreign Courts

Alternative dispute resolution (ADR) mechanisms can be stipulated in contracts. Argentina also has ADR mechanisms available such as the Center for Mediation and Arbitrage (CEMARC) of the Argentine Chamber of Trade. More information can be found at: http://www.intracen.org/Centro-de-Mediacion-y-Arbitraje-Comercial-de-la-Camara-Argentina-de-Comercio—CEMARC–/#sthash.RagZdv0l.dpuf .

Argentina does not have a specific law governing arbitration, but it has adopted a mediation law (Law 24.573/1995), which makes mediation mandatory prior to litigation. Some arbitration provisions are scattered throughout the Civil Code, the National Code of Civil and Commercial Procedure, the Commercial Code, and three other laws. The following methods of concluding an arbitration agreement are non-binding under Argentine law: electronic communication, fax, oral agreement, and conduct on the part of one party. Generally, all commercial matters are subject to arbitration. There are no legal restrictions on the identity and professional qualifications of arbitrators. Parties must be represented in arbitration proceedings in Argentina by attorneys who are licensed to practice locally. The grounds for annulment of arbitration awards are limited to substantial procedural violations, an ultra petita award (award outside the scope of the arbitration agreement), an award rendered after the agreed-upon time limit, and a public order violation that is not yet settled by jurisprudence when related to the merits of the award. On average, it takes around 21 weeks to enforce an arbitration award rendered in Argentina, from filing an application to a writ of execution attaching assets (assuming there is no appeal). It takes roughly 18 weeks to enforce a foreign award. The requirements for the enforcement of foreign judgments are set out in section 517 of the National Procedural Code.

No information is available as to whether the domestic courts frequently rule in cases in favor of state-owned enterprises (SOE) when SOEs are party to a dispute.

Bankruptcy Regulations

Argentina’s bankruptcy law was codified in 1995 in Law 24,522. The full text can be found at: http://www.infoleg.gov.ar/infolegInternet/anexos/25000-29999/25379/texact.htm .

Under the law, debtors are generally able to begin insolvency proceedings when they are no longer able to pay their debts as they mature. Debtors may file for both liquidation and reorganization. Creditors may file for insolvency of the debtor for liquidation only. The insolvency framework does not require approval by the creditors for the selection or appointment of the insolvency representative or for the sale of substantial assets of the debtor. The insolvency framework does not provide rights to the creditor to request information from the insolvency representative, but the creditor has the right to object to decisions by the debtor to accept or reject creditors’ claims. Bankruptcy is not criminalized; however, convictions for fraudulent bankruptcy can carry two to six years of prison time.

Financial institutions regulated by the Central Bank of Argentina (BCRA) publish monthly outstanding credit balances of their debtors; the BCRA National Center of Debtors (Central de Deudores) compiles and publishes this information. The database is available for use of financial institutions that comply with legal requirements concerning protection of personal data. The credit monitoring system only includes negative information, and the information remains on file through the person’s life. At least one local NGO that makes microcredit loans is working to make the payment history of these loans publicly accessible for the purpose of demonstrating credit history, including positive information, for those without access to bank accounts and who are outside of the Central Bank’s system. Equifax, which operates under the local name “Veraz” (or “truthfully”), also provides credit information to financial institutions and other clients, such as telecommunications service providers and other retailers that operate monthly billing or credit/layaway programs.

The World Bank’s 2020 Doing Business Report ranked Argentina 111 out of 190 countries for the effectiveness of its insolvency law, remaining unchanged compared to 2019 ranking. The report notes that it takes an average of 2.4 years and 16.5 percent of the estate to resolve bankruptcy in Argentina.

5. Protection of Property Rights

Real Property

Secured interests in property, including mortgages, are recognized in Argentina. Such interests can be easily and effectively registered. They also can be readily bought and sold. Argentina manages a national registry of real estate ownership (Registro de la Propiedad Inmueble) at http://www.dnrpi.jus.gov.ar/ . No data is available on the percent of all land that does not have clear title. There are no specific regulations regarding land lease and acquisition of residential and commercial real estate by foreign investors. Law 26,737 (Regime for Protection of National Domain over Ownership, Possession or Tenure of Rural Land) establishes the restrictions of foreign ownership on rural and productive lands, including water bodies. Foreign ownership is also restricted on land located near borders.

Legal claims may be brought to evict persons unlawfully occupying real property, even if the property is unoccupied by the lawful owner. However, these legal proceedings can be quite lengthy, and until the legal proceedings are complete, evicting squatters is problematic. The title and actual conditions of real property interests under consideration should be carefully reviewed before acquisition.

Argentine Law 26.160 prevents the eviction and confiscation of land traditionally occupied by indigenous communities in Argentina or encumbered with an indigenous land claim. Indigenous land claims can be found in the land registry. Enforcement is carried out by the National Institute of Indigenous Affairs, under the Ministry of Justice and Human Rights.

Intellectual Property Rights

The Government of Argentina adheres to some treaties and international agreements on intellectual property (IP) and belongs to the World Intellectual Property Organization and the World Trade Organization. The Argentine Congress ratified the Uruguay Round agreements, including the provisions on intellectual property, in Law 24425 in 1995.

The U.S. Trade Representative (USTR) 2021 Special 301 Report listed Argentina on the Priority Watch List. Trading partners on the Priority Watch List present the most significant concerns regarding inadequate or ineffective IP protection or enforcement or actions that otherwise limit market access for persons relying on IP protection. For a complete version of the 2020 Report, see: https://ustr.gov/sites/default/files/2020_Special_301_Report.pdf .

Argentina continues to present long-standing and well-known challenges to intellectual property (IP)-intensive industries, including those from the United States.  A key deficiency in the legal framework for patents is the unduly broad limitations on patent eligible subject matter.  Pursuant to a highly problematic 2012 Joint Resolution establishing guidelines for the examination of patents, Argentina rejects patent applications for categories of pharmaceutical inventions that are eligible for patentability in other jurisdictions, including in the United States.  Additionally, to be patentable, Argentina requires that processes for the manufacture of active compounds disclosed in a specification be reproducible and applicable on an industrial scale.  Stakeholders assert that Resolution 283/2015, introduced in September 2015, also limits the ability to patent biotechnological innovations based on living matter and natural substances.  These measures have interfered with the ability of companies investing in Argentina to protect their IP and may be inconsistent with international norms.

Another ongoing challenge to the innovative agricultural chemical and pharmaceutical sectors is inadequate protection against the unfair commercial use, as well as unauthorized disclosure, of undisclosed test or other data generated to obtain marketing approval for products in those sectors.  Finally, Argentina struggles with a substantial backlog of patent applications resulting in long delays for innovators seeking patent protection in the market.  Government-wide hiring restrictions that remain in place, going back to a hiring freeze in 2018, have resulted in a limited number of patent examiners.  Argentina did not extend the Patent Prosecution Highway signed between the National Institute of Industrial Property’s (INPI) and the U.S. Patent and Trademark Office, which expired in March 2020.

Enforcement of IP rights in Argentina continues to be a challenge, and stakeholders report widespread unfair competition from sellers of counterfeit and pirated goods and services.  La Salada in Buenos Aires remains the largest counterfeit market in Latin America and is cited in USTR’s 2020 Review of Notorious Markets for Piracy and Counterfeiting.  Argentine police generally do not take ex officio actions, prosecutions can stall and languish in excessive formalities, and, when a criminal case does reach final judgment, criminal infringers rarely receive deterrent sentences. Hard goods counterfeiting and optical disc piracy are widespread, and online piracy continues to grow due to nearly nonexistent criminal enforcement against such piracy.  As a result, IP enforcement online in Argentina consists mainly of right holders trying to convince Argentine internet service providers to agree to take down specific infringing works, as well as attempting to seek injunctions in civil cases, both of which can be time-consuming and ineffective.  Right holders also cite widespread use of unlicensed software by Argentine private enterprises and the government.

Argentina made limited progress in IP protection and enforcement in a year marked by a severe economic recession aggravated by the consequences of the confinement measures taken to mitigate the COVID-19 pandemic.  The pressing economic situation led to an increase of counterfeit products sales in informal markets once the confinement measures were relaxed in the second semester of 2020. Online sales of counterfeit products, especially apparel and footwear spiked amidst the pandemic. The Argentine Confederation of Small and Medium-Sized Enterprises noted an increase of national production of counterfeit sportswear. Flight and border crossing restrictions applied during the COVID-19 health emergency prevented purchases of counterfeit products from China, Paraguay and Bolivia.

INPI began accepting electronic filing of patent, trademark, and industrial designs applications in 2018. During 2020, the agency successfully transitioned to an all-electronic filing system.  Argentina continued to improve procedures for trademarks, with INPI reducing the time for a trademark opposition from an average of 3.5 years to one year.  On trademarks, the law provides for a fast-track option that reduces the time to register a trademark to four months.

Argentina formally created the Federal Committee to Fight Against Contraband, Falsification of Trademarks, and Designations, formalizing the work on trademark counterfeiting under the National Anti-Piracy Initiative launched in 2017.  In November 2020, Argentina and the United States held a virtual bilateral meeting under the Innovation and Creativity Forum for Economic Development, part of the U.S.-Argentina Trade and Investment Framework Agreement, to continue discussions and collaboration on IP topics of mutual interest.  The United States intends to monitor all the outstanding issues for progress and urges Argentina to continue its efforts to create a more attractive environment for investment and innovation.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ 

7. State-Owned Enterprises

The Argentine government has state-owned enterprises (SOEs) or significant stakes in mixed-capital companies in the following sectors: civil commercial aviation, water and sanitation, oil and gas, electricity generation, transport, paper production, satellite, banking, railway, shipyard, and aircraft ground handling services.

By Argentine law, a company is considered a public enterprise if the state owns 100 percent of the company’s shares. The state has majority control over a company if the state owns 51 percent of the company’s shares. The state has minority participation in a company if the state owns less than 51 percent of the company’s shares. Laws regulating SOEs and enterprises with state participation can be found at http://www.saij.gob.ar/13653-nacional-regimen-empresas-estado-lns0001871-1955-03-23/123456789-0abc-defg-g17-81000scanyel .

Through the government’s social security agency (ANSES), the Argentine government owns stakes ranging from one to 31 percent in 46 publicly listed companies. U.S. investors also own shares in some of these companies. As part of the ANSES takeover of Argentina’s private pension system in 2008, the government agreed to commit itself to being a passive investor in the companies and limit the exercise of its voting rights to 5 percent, regardless of the equity stake the social security agency owned. A list of such enterprises can be found at: http://fgs.anses.gob.ar/participacion .

State-owned enterprises purchase and supply goods and services from the private sector and foreign firms. Private enterprises may compete with SOEs under the same terms and conditions with respect to market share, products/services, and incentives. Private enterprises also have access to financing terms and conditions similar to SOEs. SOEs are subject to the same tax burden and tax rebate policies as their private sector competitors. SOEs are not currently subject to firm budget constraints under the law and have been subsidized by the central government in the past. Between 2016 and 2019, the Government of Argentina reduced subsidies in the energy, water, and transportation sectors. However, in 2019 the Government postponed its subsidy reduction program and redesigned it several times, citing pressing macroeconomic issues. During 2020 subsidies increased to maintain a tariff freeze on public services given the COVID-19 pandemic. The 2021 budget targets a reduction in subsidies in an effort to contain spending. Argentina does not have regulations that differentiate treatment of SOEs and private enterprises. Argentina has observer status under the WTO Agreement on Government Procurement and, as such, SOEs are subject to the conditions of Argentina’s observance.

Argentina does not have a specified ownership policy, guideline or governance code for how the government exercises ownership of SOEs. The country generally adheres to the OECD Guidelines on Corporate Governance of SOEs. The practices for SOEs are mainly in compliance with the policies and practices for transparency and accountability in the OECD Guidelines. In 2018, the OECD released a report evaluating the corporate governance framework for the Argentine SOE sector relative to the OECD Guidelines, which can be viewed here: http://www.oecd.org/countries/argentina/oecd-review-corporate-governance-soe-argentina.htm .

Argentina does not have a centralized ownership entity that exercises ownership rights for each of the SOEs. The general rule in Argentina is that requirements that apply to all listed companies also apply to publicly-listed SOEs.

Privatization Program

The current administration has not developed a privatization program.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $361,496 2019 $445.445 www.worldbank.org/en/country

www.indec.gob.ar

Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 N/A 2019 $10.7 billion BEA data available at https://apps.bea.gov/international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2019 N/A 2019 $561 million BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2019 N/A 2019 1.4% UNCTAD data available at

https://stats.unctad.org/handbook/EconomicTrends/Fdi.html

* Source for Host Country Data:

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 70,458 100% Total Outward 42,671 100%
United States 17,210 24.44% Uruguay 17,319 40.59%
Spain 10,481 24.43% United States 5,041 11.81%
Netherlands 6,949 9.87% Paraguay 1,908 4.47%
Brazil 3,984 5.65% Mexico 1,273 2.98%
Germany 3,467 4.92% Brazil 801 1.88%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 31,304 100% All Countries 18,978 100% All Countries 12,326 100%
United States 30,654 98% United States 18,685 98% United States 11,969 97%
Brazil 85 1% Brazil 111 1% Brazil 231 2%
Luxembourg 83 0% Luxembourg 85 0% Germany 83 1%
Germany 51 0% Canada 51 0% Chile 6 0%
Canada 27 0% Russia 11 0% Ireland 3 0%

Brazil

Executive Summary

Brazil is the second largest economy in the Western Hemisphere behind the United States, and the ninth largest economy in the world (in nominal terms), according to the World Bank.  The United Nations Conference on Trade and Development (UNCTAD) named Brazil the sixth largest destination for global Foreign Direct Investment (FDI) flows in 2019 with inflows of $72 billion, which increased 26 percent since Brazil announced its privatization plan that same year.  In recent years, Brazil received more than half of South America’s total incoming FDI and the United States is a major foreign investor in Brazil.  According to the International Monetary Fund (IMF), the United States had the second largest single-country stock of FDI by final ownership (UBO) representing 18 percent of all FDI in Brazil ($117 billion) behind only the Netherlands’ 23 percent ($147.7 billion) in 2019, the latest year with available data, while according to the Brazil Central Bank (BCB) measurements, U.S. stock was 23 percent ($145.1 billion) of all FDI in Brazil, the largest single-country stock by UBO for the same year. The Government of Brazil (GoB) prioritized attracting private investment in its infrastructure and energy sectors during 2018 and 2019.  The COVID-19 pandemic in 2020 delayed planned privatization efforts.

The Brazilian economy returned to an expansionary trend in 2017, ending the deepest and longest recession in Brazil’s modern history.  However, the global coronavirus pandemic in early 2020 returned Brazil to recession after three years of modest recovery. The country’s Gross Domestic Product (GDP) dropped 4.1 percent in 2020.  As of March 2021, analysts forecast growth of 3.29 percent for 2021.  The unemployment rate was 13.4 percent at the end of 2020.  The nominal budget deficit stood at 13.7 percent of GDP ($196.7 billion) in 2020 and is projected to end 2021 at around 4 percent depending on passage of the 2021 budget.  Brazil’s debt to GDP ratio reached a new record of 89.3 percent in 2020 with National Treasury projections of 94.5 percent by the end of 2021, while the Independent Financial Institution (IFI) of Brazil’s Senate projects 92.67 percent and the IMF estimates the ratio will finish 2021 at 92.1 percent.  The BCB lowered its target for the benchmark Selic interest rate from 4.5 percent at the end of 2019 to 2 percent at the end of 2020, and as of March 2021, the BCB anticipates the Selic rate to rise to 5 percent by the end of 2021.

President Bolsonaro took office on January 1, 2019. In late 2019, Congress passed and President Bolsonaro signed into law a much-needed pension system reform and made additional economic reforms a top priority.  Bolsonaro and his economic team have outlined an agenda of further reforms to simplify Brazil’s complex tax system and the onerous labor laws in the country, but the legislative agenda in 2020 was largely absorbed by response to the COVID-19 pandemic.  However, Brazil advanced a variety of legal and regulatory changes that contributed to its overall goal to modernize its economy

Brazil’s official investment promotion strategy prioritizes the automobile manufacturing, renewable energy, life sciences, oil and gas, and infrastructure sectors.  Foreign investors in Brazil receive the same legal treatment as local investors in most economic sectors; however, there are restrictions in the health, mass media, telecommunications, aerospace, rural property, and maritime sectors.  The Brazilian Congress is considering legislation to liberalize restrictions on foreign ownership of rural property.

Analysts contend that high transportation and labor costs, low domestic productivity, and ongoing political uncertainties hamper investment in Brazil.  Foreign investors also cite concerns over poor existing infrastructure, relatively rigid labor laws, and complex tax, local content, and regulatory requirements; all part of the extra costs of doing business in Brazil.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 94 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 124 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 62 of 129 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 81,731 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 9,130 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Brazil was the world’s sixth-largest destination for Foreign Direct Investment (FDI) in 2019, with inflows of $72 billion, according to UNCTAD.  The GoB actively encourages FDI – particularly in the automobile, renewable energy, life sciences, oil and gas, and transportation infrastructure sectors – to introduce greater innovation into Brazil’s economy and to generate economic growth. GoB investment incentives include tax exemptions and low-cost financing with no distinction made between domestic and foreign investors.  Foreign investment is restricted in the health, mass media, telecommunications, aerospace, rural property, maritime, and insurance sectors.

The Brazilian Trade and Investment Promotion Agency (Apex-Brasil) plays a leading role in attracting FDI to Brazil by working to identify business opportunities, promoting strategic events, and lending support to foreign investors willing to allocate resources to Brazil.  Apex-Brasil is not a “one-stop shop” for foreign investors, but the agency can assist in all steps of the investor’s decision-making process, to include identifying and contacting potential industry segments, sector and market analyses, and general guidelines on legal and fiscal issues.  Their services are free of charge.  The website for Apex-Brasil is: http://www.apexbrasil.com.br/en

In 2019, the Ministry of Economy created the Ombudsman’s office to provide foreign investors with a single point of contact for concerns related to FDI.  The plan seeks to eventually streamline foreign investments in Brazil by providing investors, foreign and domestic, with a simpler process for the creation of new businesses and additional investments in current companies.  Currently, the Ombudsman’s office is not operating as a single window for services, but rather as an advisory resource for FDI.

Limits on Foreign Control and Right to Private Ownership and Establishment

A 1995 constitutional amendment (EC 6/1995) eliminated distinctions between foreign and local capital, ending favorable treatment (e.g. tax incentives, preference for winning bids) for companies using only local capital.  However, constitutional law restricts foreign investment in healthcare (Law 8080/1990, altered by 13097/2015), mass media (Law 10610/2002), telecommunications (Law 12485/2011), aerospace (Law 7565/1986 a, Decree 6834/2009, updated by Law 12970/2014, Law 13133/2015, and Law 13319/2016), rural property (Law 5709/1971), maritime (Law 9432/1997, Decree 2256/1997), and insurance (Law 11371/2006).

Screening of FDI

Foreigners investing in Brazil must electronically register their investment with the Central Bank of Brazil (BCB) within 30 days of the inflow of resources to Brazil.  In cases of investments involving royalties and technology transfer, investors must register with Brazil’s patent office, the National Institute of Industrial Property (INPI).  Investors must also have a local representative in Brazil. Portfolio investors must have a Brazilian financial administrator and register with the Brazilian Securities Exchange Commission (CVM).

To enter Brazil’s insurance and reinsurance market, U.S. companies must establish a subsidiary, enter into a joint venture, acquire a local firm, or enter into a partnership with a local company.  The BCB reviews banking license applications on a case-by-case basis. Foreign interests own or control 20 of the top 50 banks in Brazil, but Santander is the only major wholly foreign-owned retail bank.

Since June 2019, foreign investors may own 100 percent of capital in Brazilian airline companies.

While 2015 and 2017 legislative and regulatory changes relaxed some restrictions on insurance and reinsurance, rules on preferential offers to local reinsurers remain unchanged.  Foreign reinsurance firms must have a representation office in Brazil to qualify as an admitted reinsurer.  Insurance and reinsurance companies must maintain an active registration with Brazil’s insurance regulator, the Superintendence of Private Insurance (SUSEP) and maintain a minimum solvency classification issued by a risk classification agency equal to Standard & Poor’s or Fitch ratings of at least BBB-.

Foreign ownership of cable TV companies is allowed, and telecom companies may offer television packages with their service.  Content quotas require every channel to air at least three and a half hours per week of Brazilian programming during primetime.  Additionally, one-third of all channels included in any TV package must be Brazilian.

The National Land Reform and Settlement Institute administers the purchase and lease of Brazilian agricultural land by foreigners.  Under the applicable rules, the area of agricultural land bought or leased by foreigners cannot account for more than 25 percent of the overall land area in a given municipal district.  Additionally, no more than 10 percent of agricultural land in any given municipal district may be owned or leased by foreign nationals from the same country.  The law also states that prior consent is needed for purchase of land in areas considered indispensable to national security and for land along the border.  The rules also make it necessary to obtain congressional approval before large plots of agricultural land can be purchased by foreign nationals, foreign companies, or Brazilian companies with majority foreign shareholding.  In December 2020, the Senate approved a bill (PL 2963/2019; source:  https://www25.senado.leg.br/web/atividade/materias/-/materia/136853) to ease restrictions on foreign land ownership; however, the Chamber of Deputies has yet to consider the bill. Brazil is not yet a signatory to the World Trade Organization (WTO) Agreement on Government Procurement (GPA), but submitted its application for accession in May 2020.  In February 2021, Brazil formalized its initial offer to start negotiations.  The submission establishes a series of thresholds above which foreign sellers will be allowed to bid for procurements.  Such thresholds differ for different procuring entities and types of procurements.  The proposal also includes procurements by some states and municipalities (with restrictions) as well as state-owned enterprises, but it excludes certain sensitive categories, such as financial services, strategic health products, and specific information technologies.  Brazil’s submission still must be negotiated with GPA members.

By statute, a Brazilian state enterprise may subcontract services to a foreign firm only if domestic expertise is unavailable.  Additionally, U.S. and other foreign firms may only bid to provide technical services where there are no qualified Brazilian firms. U.S. companies need to enter into partnerships with local firms or have operations in Brazil in order to be eligible for “margins of preference” offered to domestic firms participating in Brazil’s public sector procurement to help these firms win government tenders.  Nevertheless, foreign companies are often successful in obtaining subcontracting opportunities with large Brazilian firms that win government contracts and, since October 2020, foreign companies are allowed to participate in bids without the need for an in-country corporate presence (although establishing such a presence is mandatory if the bid is successful).  A revised Government Procurement Protocol of the trade bloc Mercosul (Mercosur in Spanish), signed in 2017, would entitle member nations Brazil, Argentina, Paraguay, and Uruguay to non-discriminatory treatment of government-procured goods, services, and public works originating from each other’s suppliers and providers.  However, none of the bloc’s members have yet ratified it, so it has not entered into force.

Other Investment Policy Reviews

The Organization for Economic Co-operation and Development’s (OECD) December 2020 Economic Forecast Summary of Brazil summarized that, despite new COVID-19 infections and fatalities remaining high, the economy started to recover across a wide range of sectors by the end of 2020.  Since the publication, Brazil’s economy is faltering due to the continuing pandemic’s financial impact.  The strong fiscal and monetary policy response managed to prevent a sharper economic contraction, cushioning the impact on household incomes and poverty.  Nonetheless, fiscal vulnerabilities have been exacerbated by these necessary policy responses and public debt has risen.  Failure to continue structural reform progress could hold back investment and future growth.  As of March 2021, forecasts are for economic recovery in 2021 and high unemployment.  The OECD report recommended reallocating some expenditures and raising spending efficiency to improve social protections, and resuming the fiscal adjustments under way before the pandemic.  The report also recommended structural reforms to enhance domestic and external competition and improve the investment climate.

The IMF’s 2020 Country Report No. 20/311 on Brazil highlighted the severe impact of the pandemic in Brazil’s economic recovery but praised the government’s response, which averted a deeper economic downturn, stabilized financial markets, and cushioned income loss for the poorest.  The IMF assessed that the lingering effects of the crisis will restrain consumption while investment will be hampered by idle capacity and high uncertainty.  The IMF projected inflation to stay below target until 2023, given significant slack in the economy, but with the sharp increase in the primary fiscal deficit, gross public debt is expected to rise to 100 percent of GDP and remain high over the medium-term.  The IMF noted that Brazil’s record low interest rate (Selic) helped the government reduce borrowing costs, but the steepening of the local currency yield curve highlighted market concerns over fiscal risks.  The WTO’s 2017 Trade Policy Review of Brazil noted the country’s open stance towards foreign investment, but also pointed to the many sector-specific limitations (see above).  All three reports highlighted the uncertainty regarding reform plans as the most significant political risk to the economy. These reports are located at the following links:

Business Facilitation

A company must register with the National Revenue Service (Receita Federal) to obtain a business license and be placed on the National Registry of Legal Entities (CNPJ).  Brazil’s Export Promotion and Investment Agency (APEX) has a mandate to facilitate foreign investment.  The agency’s services are available to all investors, foreign and domestic.  Foreign companies interested in investing in Brazil have access to many benefits and tax incentives granted by the Brazilian government at the municipal, state, and federal levels.  Most incentives target specific sectors, amounts invested, and job generation.  Brazil’s business registration website can be found at: http://receita.economia.gov.br/orientacao/tributaria/cadastros/cadastro-nacional-de-pessoas-juridicas-cnpj .

Overall, Brazil dropped in the World Bank’s Doing Business Report from 2019 to 2020; however, it improved in the following areas: registering property; starting a business; and resolving insolvency.  According to Doing Business, some Brazilian states (São Paulo and Rio de Janeiro) made starting a business easier by allowing expedited business registration and by decreasing the cost of the digital certificate.  On March 2021, the GoB enacted a Provisional Measure (MP) to simplify the opening of companies, the protection of minority investors, the facilitation of foreign trade in goods and services, and the streamlining of low-risk construction projects.  The Ministry of Economy expects the MP, together with previous actions by the government, to raise Brazil by 18 to 20 positions in the ranking.  Adopted in September 2019, the Economic Freedom Law 13.874 established the Economic Freedom Declaration of Rights and provided for free market guarantees.  The law includes several provisions to simplify regulations and establishes norms for the protection of free enterprise and free exercise of economic activity.

Through the digital transformation initiative in Brazil, foreign companies can open branches via the internet.  Since 2019, it has been easier for foreign businesspeople to request authorization from the Brazilian federal government.  After filling out the registration, creating an account, and sending the necessary documentation, they can make the request on the Brazilian government’s Portal through a legal representative.  The electronic documents will then be analyzed by the DREI (Brazilian National Department of Business Registration and Integration) team.  DREI will inform the applicant of any missing documentation via the portal and e-mail and give a 60-day period to meet the requirements.  The legal representative of the foreign company, or another third party who holds a power of attorney, may request registration through this link: https://acesso.gov.br/acesso/#/primeiro-acesso?clientDetails=eyJjbGllbnRVcmkiOiJodHRwczpcL1wvYWNlc3NvLmdvdi5iciIsImNsaWVudE5hbWUiOiJQb3J0YWwgZ292LmJyIiwiY2xpZW50VmVyaWZpZWRVc2VyIjp0cnVlfQ%3D%3D     

Regulation of foreign companies opening businesses in Brazil is governed by article 1,134 of the Brazilian Civil Code  and article 1 of DREI Normative Instruction 77/2020 .  English language general guidelines to open a foreign company in Brazil are not yet available, but the Portuguese version is available at the following link: https://www.gov.br/economia/pt-br/assuntos/drei/empresas-estrangeiras .

For foreign companies that will be a partner or shareholder of a Brazilian national company, the governing regulation is DREI Normative Instruction 81/2020 DREI Normative Instruction 81/2020.  The contact information of the DREI is drei@economia.gov.br and +55 (61) 2020-2302.

References:

Outward Investment

Brazil does not restrict domestic investors from investing abroad and Apex-Brasil supports Brazilian companies’ efforts to invest abroad under its “internationalization program”: http://www.apexbrasil.com.br/como-a-apex-brasil-pode-ajudar-na-internacionalizacao-de-sua-empresa .  Apex-Brasil frequently highlights the United States as an excellent destination for outbound investment.  Apex-Brasil and SelectUSA (the U.S. Government’s investment promotion office at the U.S. Department of Commerce) signed a memorandum of cooperation to promote bilateral investment in February 2014.

Brazil incentivizes outward investment.  Apex-Brasil organizes several initiatives aimed at promoting Brazilian investments abroad.  The Agency´s efforts comprised trade missions, business round tables, support for the participation of Brazilian companies in major international trade fairs, arranging technical visits of foreign buyers and opinion makers to learn about the Brazilian productive structure, and other select activities designed to strengthen the country’s branding abroad.

The main sectors of Brazilian investments abroad are financial services and assets (totaling 50.5 percent); holdings (11.6 percent); and oil and gas extraction (10.9 percent).  Including all sectors, $416.6 billion was invested abroad in 2019.  The regions with the largest share of Brazilian outward investments are the Caribbean (47 percent) and Europe (37.7 percent), specifically the Netherlands and Luxembourg.

Regulation on investments abroad are contained in BCB Ordinance 3,689/2013  (foreign capital in Brazil and Brazilian capital abroad): https://www.bcb.gov.br/pre/normativos/busca/downloadNormativo.asp?arquivo=/Lists/Normativos/Attachments/48812/Circ_3689_v1_O.pdf

Sale of cross-border mutual funds are only allowed to certain categories of investors, not to the general public.  International financial services companies active in Brazil submitted to Brazilian regulators in late 2020 a proposal to allow opening these mutual funds to the general public, and hope this will be approved in mid 2021.

3. Legal Regime

Transparency of the Regulatory System

In the 2020 World Bank Doing Business report, Brazil ranked 124th out of 190 countries in terms of overall ease of doing business in 2019, a decrease of 15 positions compared to the 2019 report.  According to the World Bank, it takes approximately 17 days to start a business in Brazil. Brazil is seeking to streamline the process and decrease the amount to time it takes to open a small or medium enterprise (SME) to five days through its RedeSimples Program.  Similarly, the government has reduced regulatory compliance burdens for SMEs through the continued use of the SIMPLES program, which simplifies the collection of up to eight federal, state, and municipal-level taxes into one single payment.

The 2020 World Bank study noted Brazil’s lowest score was in annual administrative burden for a medium-sized business to comply with Brazilian tax codes at an average of 1,501 hours, a significant improvement from 2019’s 1,958 hour average, but still much higher than the 160.7 hour average of OECD high-income economies.  The total tax rate for a medium-sized business is 65.1 percent of profits, compared to the average of 40.1 percent in OECD high-income economies.  Business managers often complain of not being able to understand complex — and sometimes contradictory — tax regulations, despite having large local tax and accounting departments in their companies.

Tax regulations, while burdensome and numerous, do not generally differentiate between foreign and domestic firms.  However, some investors complain that in certain instances the value-added tax collected by individual states (ICMS) favors locally based companies who export their goods.  Exporters in many states report difficulty receiving their ICMS rebates when their goods are exported.  Taxes on commercial and financial transactions are particularly burdensome, and businesses complain that these taxes hinder the international competitiveness of Brazilian-made products.

Of Brazil’s ten federal regulatory agencies, the most prominent include:

  • ANVISA, the Brazilian counterpart to the U.S. Food and Drug Administration, which has regulatory authority over the production and marketing of food, drugs, and medical devices;
  • ANATEL, the country’s telecommunications regulatory agency, which handles telecommunications as well as licensing and assigning of radio spectrum bandwidth (the Brazilian FCC counterpart);
  • ANP, the National Petroleum Agency, which regulates oil and gas contracts and oversees auctions for oil and natural gas exploration and production;
  • ANAC, Brazil’s civil aviation agency;
  • IBAMA, Brazil’s environmental licensing and enforcement agency; and
  • ANEEL, Brazil’s electricity regulator that regulates Brazil’s power sector and oversees auctions for electricity transmission, generation, and distribution contracts.

In addition to these federal regulatory agencies, Brazil has dozens of state- and municipal-level regulatory agencies.

The United States and Brazil conduct regular discussions on customs and trade facilitation, good regulatory practices, standards and conformity assessment, digital issues, and intellectual property protection.  The 18th plenary of the Commercial Dialogue took place in May 2020, and regular exchanges at the working level between U.S. Department of Commerce, Brazil’s Ministry of Economy, and other agencies and regulators occur throughout the year.

Regulatory agencies complete Regulatory Impact Analyses (RIAs) on a voluntary basis. The Senate approved a bill on Governance and Accountability (PLS 52/2013 in the Senate, and PL 6621/2016 in the Chamber) into Law 13,848 in June 2019.  Among other provisions, the law makes RIAs mandatory for regulations that affect “the general interest.”

The Chamber of Deputies, Federal Senate, and the Office of the Presidency maintain websites providing public access to both approved and proposed federal legislation.  Brazil is seeking to improve its public comment and stakeholder input process.  In 2004, the GoB opened an online “Transparency Portal” with data on funds transferred to and from federal, state, and city governments, as well as to and from foreign countries. It also includes information on civil servant salaries.

In 2020, the Department of State found that Brazil had met its minimum fiscal transparency requirements in its annual Fiscal Transparency Report.  The International Budget Partnership’s Open Budget Index ranked Brazil slightly ahead of the United States in terms of budget transparency in its most recent (2019) index.  The Brazilian government demonstrates adequate fiscal transparency in managing its federal accounts, although there is room for improvement in terms of completeness of federal budget documentation.  Brazil’s budget documents are publicly available, widely accessible, and sufficiently detailed.  They provide a relatively full picture of the GoB’s planned expenditures and revenue streams.  The information in publicly available budget documents is considered credible and reasonably accurate.

International Regulatory Considerations

Brazil is a member of Mercosul – a South American trade bloc whose full members include Argentina, Paraguay, and Uruguay.  Brazil routinely implements Mercosul common regulations.

Brazil is a member of the WTO and the government regularly notifies draft technical regulations, such as potential agricultural trade barriers, to the WTO Committee on Technical Barriers to Trade (TBT).

Legal System and Judicial Independence

Brazil has a civil legal system with state and federal courts.  Investors can seek to enforce contracts through the court system or via mediation, although both processes can be lengthy.  The Brazilian Superior Court of Justice (STJ) must accept foreign contract enforcement judgments for the judgments to be considered valid in Brazil.  Among other considerations, the foreign judgment must not contradict any prior decisions by a Brazilian court in the same dispute.  The Brazilian Civil Code regulates commercial disputes, although commercial cases involving maritime law follow an older Commercial Code which has been otherwise largely superseded.  Federal judges hear most disputes in which one of the parties is the Brazilian State, and also rule on lawsuits between a foreign state or international organization and a municipality or a person residing in Brazil.

The judicial system is generally independent.  The Supreme Federal Court (STF), charged with constitutional cases, frequently rules on politically sensitive issues.  State court judges and federal level judges below the STF are career officials selected through a meritocratic examination process.  The judicial system is backlogged, however, and disputes or trials of any sort frequently require years to arrive at a final resolution, including all available appeals.  Regulations and enforcement actions can be litigated in the court system, which contains mechanisms for appeal depending upon the level at which the case is filed.  The STF is the ultimate court of appeal on constitutional grounds; the STJ is the ultimate court of appeal for cases not involving constitutional issues.

Laws and Regulations on Foreign Direct Investment

Brazil is in the process of setting up a “one-stop shop” for international investors. According to its website:  “The Direct Investments Ombudsman (DIO) is a ‘single window’ for investors, provided by the Executive Secretariat of CAMEX.  It is responsible for receiving requests and inquiries about investments, to be answered jointly with the public agency responsible for the matter (at the Federal, State and Municipal levels) involved in each case (the Network of Focal Points).  This new structure allows for supporting the investor, by a single governmental body, in charge of responding to demands within a short time.”  Private investors have noted this is better than the prior structure, but does not yet provide all the services of a true “one-stop shop” to facilitate international investment.  The DIO’s website in English is: http://oid.economia.gov.br/en/menus/8

Competition and Antitrust Laws

The Administrative Council for Economic Defense (CADE), which falls under the purview of the Ministry of Justice, is responsible for enforcing competition laws, consumer protection, and carrying out regulatory reviews of proposed mergers and acquisitions.  CADE was reorganized in 2011 through Law 12529, combining the antitrust functions of the Ministry of Justice and the Ministry of Finance.  The law brought Brazil in line with U.S. and European merger review practices and allows CADE to perform pre-merger reviews, in contrast to the prior legal regime that had the government review mergers after the fact.  In October 2012, CADE performed Brazil’s first pre-merger review.

In 2020, CADE conducted 471 total formal investigations, of which 76 related to cases that allegedly challenged the promotion of the free market.  It approved 423 merger and/or acquisition requests and did not reject any requests.

Expropriation and Compensation

Article 5 of the Brazilian Constitution assures property rights of both Brazilians and foreigners that own property in Brazil.  The Constitution does not address nationalization or expropriation.  Decree-Law 3365 allows the government to exercise eminent domain under certain criteria that include, but are not limited to, national security, public transportation, safety, health, and urbanization projects.  In cases of eminent domain, the government compensates owners at fair market value.

There are no signs that the current federal government is contemplating expropriation actions in Brazil against foreign interests.  Brazilian courts have decided some claims regarding state-level land expropriations in U.S. citizens’ favor.  However, as states have filed appeals of these decisions, the compensation process can be lengthy and have uncertain outcomes.

Dispute Settlement

ICSID Convention and New York Convention

In 2002, Brazil ratified the 1958 Convention on the Recognition and Enforcement of Foreign Arbitration Awards.  Brazil is not a member of the World Bank’s International Center for the Settlement of Investment Disputes (ICSID).  Brazil joined the United Nations Commission on International Trade Law (UNCITRAL) in 2010, and its membership will expire in 2022.

Investor-State Dispute Settlement

Article 34 of the 1996 Brazilian Arbitration Act (Law 9307) defines a foreign arbitration judgment as any judgment rendered outside the national territory.  The law established that the Superior Court of Justice (STJ) must ratify foreign arbitration awards.  Law 9307, updated by Law 13129/2015, also stipulates that a foreign arbitration award will be recognized or executed in Brazil in conformity with the international agreements ratified by the country and, in their absence, with domestic law.  A 2001 Brazilian Federal Supreme Court (STF) ruling established that the 1996 Brazilian Arbitration Act, permitting international arbitration subject to STJ Court ratification of arbitration decisions, does not violate the Federal Constitution’s provision that “the law shall not exclude any injury or threat to a right from the consideration of the Judicial Power.”

Contract disputes in Brazil can be lengthy and complex.  Brazil has both a federal and a state court system, and jurisprudence is based on civil code and contract law.  Federal judges hear most disputes in which one of the parties is the State and rule on lawsuits between a foreign State or international organization and a municipality or a person residing in Brazil.  Five regional federal courts hear appeals of federal judges’ decisions.  The 2020 World Bank Doing Business report found that on average it took 801 days to litigate a breach of contract.

International Commercial Arbitration and Foreign Courts

Brazil ratified the 1975 Inter-American Convention on International Commercial Arbitration (Panama Convention) and the 1979 Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitration Awards (Montevideo Convention).  Law 9307/1996 amplifies Brazilian law on arbitration and provides guidance on governing principles and rights of participating parties.  Brazil developed a new Cooperation and Facilitation Investment Agreement (CFIA) model in 2015 (https://concordia.itamaraty.gov.br/ ), but it does not include ISDS mechanisms.  (See sections on bilateral investment agreements and responsible business conduct.)

Bankruptcy Regulations

Brazil’s commercial code governs most aspects of commercial association, while the civil code governs professional services corporations.  In December 2020, Brazil approved a new bankruptcy law (Law 14,112), which largely models UNCITRAL Model Law on International Commercial Arbitration, and addresses criticisms that its previous bankruptcy legislation favored holders of equity over holders of debt.  The new law facilitates judicial and extrajudicial resolution between debtors and creditors, and accelerates reorganization and liquidation processes.  Both debtors and creditors are allowed to provide reorganization plans that would eliminate non-performing activities and sell-off assets, thus avoiding bankruptcy.  The new law also establishes a framework for cross-border insolvencies that recognizes legal proceedings outside of Brazil.  The World Bank’s 2020 Doing Business Report ranks Brazil 77th out of 190 countries for ease of “resolving insolvency.”

5. Protection of Property Rights

Real Property

Brazil has a system in place for mortgage registration, but implementation is uneven and there is no standardized contract.  Foreign individuals or foreign-owned companies can purchase real estate property in Brazil.  Foreign buyers frequently arrange alternative financing in their own countries, where rates may be more attractive.  Law 9514 from 1997 helped spur the mortgage industry by establishing a legal framework for a secondary market in mortgages and streamlining the foreclosure process, but the mortgage market in Brazil is still underdeveloped, and foreigners may have difficulty obtaining mortgage financing.  Large U.S. real estate firms are, nonetheless, expanding their portfolios in Brazil.

Intellectual Property Rights

Intellectual property (IP) rights  holders in Brazil continue to face challenges.  Brazil has remained on the “Watch List” of the U.S. Trade Representative’s (USTR) Special 301 Report since 2007.  For more information, please see:  https://ustr.gov/sites/default/files/files/reports/2021/2021%20Special%20301%20Report%20(final).pdf.Brazil

Brazil has one physical market, located in Sao Paolo,  listed on USTR’s 2020 Review of Notorious Markets for Counterfeiting and Piracy.  The Rua 25 de Marco area  is reportedly a distribution center for counterfeit and pirated goods throughout Sao Paulo.  Enforcement actions in this region continue.  Authorities used these enforcement actions as a basis to take civil measures against some of the stores. For more information, please see: https://ustr.gov/sites/default/files/files/Press/Releases/2020%20Review%20of%20Notorious%20Markets%20for%20Counterfeiting%20and%20Piracy%20(final).pdf.

According to the National Forum Against Piracy, contraband, pirated, counterfeit, and stolen goods cost Brazil approximately $74 billion in 2019.  (http://www.fncp.org.br/forum/release/292 ) (Yearly average currency exchange rate: 1 USD = 3.946 R)

For additional information about treaty obligations and points of contact at local IP offices, please see the World Intellectual Property Organization (WIPO)’s country profiles: http://www.wipo.int/directory/en 

7. State-Owned Enterprises

The GoB maintains ownership interests in a variety of enterprises at both the federal and state levels.  Typically, boards responsible for state-owned enterprise (SOE) corporate governance are comprised of directors elected by the state or federal government with additional directors elected by any non-government shareholders.  Although Brazil participates in many OECD working groups, it does not follow the OECD Guidelines on Corporate Governance of SOEs.  Brazilian SOEs are prominent in the oil and gas, electricity generation and distribution, transportation, and banking sectors.  A number of these firms also see a portion of their shares publicly traded on the Brazilian and other stock exchanges.

Notable examples of majority government-owned and controlled firms include national oil and gas giant Petrobras and power conglomerate Eletrobras.  Both Petrobras and Eletrobras include non-government shareholders, are listed on both the Brazilian and American stock exchanges,  and are subject to the same accounting and audit regulations as all publicly traded Brazilian companies.

Privatization Program

Given limited public investment spending, the GoB has focused on privatizing state–owned energy, airport, road, railway, and port assets through long-term (up to 30 year) infrastructure concession agreements, although the pace of privatization efforts slowed in 2020 due to the COVID-19 pandemic.

In 2019, Petrobras sold its natural gas distribution pipeline network, started the divestment of eight oil refineries, sold its controlling stake in Brazil’s largest retail gas station chain, and is in the process of selling its shares in regional natural gas distributors.  While the pandemic resulted in a slowdown in the refinery divestments, momentum is increasing once again as of early 2021.  Since 2016, foreign companies have been allowed to conduct pre-salt exploration and production activities independently, and no longer must include Petrobras as a minority equity holder in pre-salt oil and gas operations.  Nevertheless, the 2016 law still gives Petrobras right –of first refusal in developing pre-salt offshore fields and obligates operators to share a percentage of production with the Brazilian state.  The GoB supports legislation currently in Congress to further liberalize the development of pre-salt fields by removing Petrobras’ right-of-first refusal as well as production sharing requirements.

In March 2021, Brazil approved legislation to reform Brazil’s natural gas markets, which aims to create competition by unbundling production, transportation, and distribution of natural gas, currently dominated by Petrobras and regional gas monopolies.  Creation of a truly competitive market, however, will still require lengthy state-level regulatory reform to liberalize intrastate gas distribution, in large part under state-owned distribution monopolies.

Eletrobras successfully sold its six principal, highly-indebted power distributors, and the GoB intends to privatize Eletrobras through issuance of new shares that would dilute the government’s majority stake and in early 2021 submitted a legislative proposal to Congress to advance this process.

In March 2021, the GoB included the state-owned postal service Correios in its National Divestment Plan (PND).  As in the case of Eletrobras, privatization will require further Congressional legislation.

In 2016, Brazil created the Investment Partnership Program (PPI) to accelerate the concession of public works projects to private enterprise and the privatization of some state entities.  PPI takes on priority federal concessions in road, rail, ports, airports, municipal water treatment, electricity transmission and distribution, and oil and gas exploration and production.  Since 2016, PPI has auctioned off 200 projects, collecting $35 billion in auction bonuses and securing private investment commitments of $179 billion, including 28 projects, $1.43 billion in auction bonuses, and commitments of $8.14 billion in 2020.  The full list of PPI projects is located at: https://www.ppi.gov.br/schedule-of-projects

While some subsidized financing through BNDES will be available, PPI emphasizes the use of private financing and debentures for projects.  All federal and state-level infrastructure concessions are open to foreign companies with no requirement to work with Brazilian partners.

In 2008, the Ministry of Health initiated the use of Production Development Partnerships (PDPs) to reduce the increasing dependence of Brazil’s healthcare sector on international drug production and to control costs in the public healthcare system, which provides services as an entitlement enumerated in the constitution.  The healthcare sector accounts for 9 percent of GDP, 10 percent of skilled jobs, and more than 25 percent of research and development nationally.  PDP agreements provide a framework for technology transfer and development of local production by leveraging the volume purchasing power of the Ministry of Health. In the current administration, there is increasing interest in PDPs as a cost saving measure.  U.S. companies have both competed for these procurements and at times raised concerns about the potential for PDPs to be used to subvert intellectual property protections under the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $1.43 trillion 2019 $1.84 trillion www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $145.1 billion 2018 $81.731 billion BEA data available at https://apps.bea.gov/international/
factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2019 $21.956 2019 $4.617 billion BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2019 $34.6% 2019 34.9% UNCTAD data available at https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
[Select country, scroll down to “FDI Stock”- “Inward”, scan rightward for most recent year’s “as percentage of gross domestic product”]

* Source for Host Country Data: https://www.bcb.gov.br and https://www.ipea.gov.br/portal/

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (U.S. Dollars, Billions)
Inward Direct Investment Outward Direct Investment
Total Inward 648.353 100% Total Outward 247.605 100%
The Netherlands 147.688 22.8% Cayman Islands 74.298 30%
United States 117.028 18.0% British Virgin Islands 56.184 22.7%
Spain 65.948 10.1% Bahamas 42.087 17%
Luxembourg 60.010 9.2% United States 20.177 8.1%
France 35.739 5.5% Luxembourg 10.630 4.3%
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 45,085 100% All Countries 36,161 100% All Countries 8,923 100%
United States 19,451 43% United States 15,754 44% United States 3,697 41%
Bahamas 6,631 15% Bahamas 6,573 18% Mexico 2,283 26%
Cayman Islands 4,727 10% Cayman Islands 4,378 12% Republic of Korea 863 10%
 Mexico 2,377 5% Luxembourg 2,026 6% Spain 391 4%
Luxembourg 2,211 5% Switzerland 1,433 4% Cayman Islands 349 4%

Bulgaria

Executive Summary

Bulgaria continues to be seen by many investors as an attractive low-cost investment destination, with government incentives for new investment. The country offers some of the least expensive labor in the European Union (EU) and low and flat corporate and income taxes. However, Bulgaria has the lowest labor productivity rate in EU, and in the medium term, productivity is further at risk due to a rapidly shrinking population.

The government expects to adopt the Euro in early 2024, following its joining the European Exchange Rate Mechanism (ERM II) in July 2020 and the EU’s Banking Union in October 2020. The adoption of the euro will eliminate currency risk and help reduce transaction costs with some of the country’s key European trading partners.

In 2020 Bulgaria suffered from the COVID-19 pandemic and related shutdowns, although the impact on the economy was less severe than in many other European countries. Deficit spending in 2020 was three percent of GDP, the lowest in the EU. Tourism, logistics, the service industries, and the automotive sector were particularly hard hit by the pandemic. The Bulgarian economy declined 4.2 percent in 2020, and is expected to rebound in 2021, with estimates ranging between 2.5 and 4.1 percent growth. This recovery is expected to be driven by higher wages, EU-funded post-COVID public investment funds, and export increases.

Bulgaria will receive EUR 6.2 billion over a six-year period (2021-2026) from the EU’s post-COVID recovery grant funds to improve its economy in areas including green energy, digitalization, and private sector development.

There are no legal limits on foreign ownership or control of firms. With some exceptions, foreign entities are given the same treatment as national firms and their investments are not screened or otherwise restricted.  There is strong growth in software development, technical support, and business process outsourcing. The Information Technology (IT) and back office outsourcing sectors have attracted a number of U.S. and European companies to Bulgaria, and many have established global and regional service centers in the country. The automotive sector has also attracted U.S. and foreign investors in recent years.

Foreign investors remain concerned about rule of law in Bulgaria.   Along with endemic corruption, investors cite other problems impeding investment including difficulty obtaining needed permits, unpredictability due to frequent regulatory and legislative changes, sporadic attempts to negate long-term government contracts, and an inefficient judicial system.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 69 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 61 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 37 of 129 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 756 https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2019 USD 9,750 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

There are no legal limits on foreign ownership or control of firms. With some exceptions, foreign entities are given the same treatment as national firms and their investments are not screened or otherwise restricted.

The Invest Bulgaria Agency (IBA), the government’s investment attraction body, provides information, administrative services, and incentive assessments to prospective foreign investors. Its website http://www.investbg.government.bg contains general information for foreign investors. IBA serves as a one-stop shop for foreign investors and certifies proposed investments for eligibility for administrative services.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are no limits to foreign and domestic private entities establishing and owning businesses in Bulgaria.  The Offshore Company Act lists 28 activities (including government procurement, natural resource exploitation, national park management, banking, insurance) banned for business by companies registered in offshore jurisdictions with more than 10 percent foreign participation. The law, however, allows those companies to do business if the physical owners of the parent company are Bulgarian citizens and known to the public, if the parent company’s stock is publicly traded, or if the parent company is registered in a jurisdiction with which Bulgaria enjoys a bilateral tax treaty for the avoidance of double taxation (including the United States).

Bulgaria has no specific law or coordinated mechanism in place for screening individual foreign investments.  A potential foreign investment can be scrutinized on the grounds of its potential national security risk or through the Law on the Measures against Money Laundering. As each ministry is responsible for screening investments within its purview, interagency coordination is lacking, and there are no common standards. Since the full adoption of the EU investment screening regulation in October 2020, Bulgaria has fulfilled the preliminary requirements of the EU mechanism for cooperation in prescreening new FDI.

Other Investment Policy Reviews

There have been no recent Investment Policy Reviews of Bulgaria by multilateral economic organizations.  In 2019, Organization for Economic Cooperation and Development (OECD) published reviews of Bulgaria’s healthcare sector and state-owned enterprises.  As part of Bulgaria’s Action Plan for deeper cooperation, in January 2021 OECD published an Economic Assessment of Bulgaria in which it acknowledged the successful integration of Bulgarian manufacturing firms into global production chains and sound macroeconomic policies prior to the pandemic. At the same time the report highlighted as key policy challenges Bulgaria’s high income inequality, relative poverty, and an aging and rapidly shrinking population. In February 2021 OECD published a study of Bulgarian municipalities that acknowledged solid progress in local governance standards but also noted insufficient progress in bridging regional disparities.

Business Facilitation

Bulgaria typically supports small- and medium-sized business creation and development in conjunction with EU-funded innovation and competitiveness programs and with a special emphasis on export capacity.  The state-owned Bulgarian Development Bank has committed to supporting small- and medium-sized businesses in Bulgaria, including through the post-COVID-19 recovery period.  Typically, a new business is expected to register an account with the state social security agency and, in some cases, with the local municipality as well. Electronic company registration is available at: https://portal.registryagency.bg/commercial-register. Women receive equitable treatment to men, and the Bulgarian law does not discriminate against minorities doing business.

Bulgaria dropped two places to 61st (out of 190 surveyed economies worldwide) in the World Bank’s 2020 Doing Business (DB) report, scoring lowest in the Getting Electricity category, in 151st place, and in the Starting a New Business category, in 113th place.  The relatively large number of administrative procedures for a business to complete either of these actions, along with the associated delays, contributed to the low scores in both categories.  It took an average of 23 days to start a limited liability company in Bulgaria in 2020, compared to the OECD (high income) average of 9.2 days and peer average of 11.9 days.

Outward Investment

There is no government agency for outward investment promotion, and no restrictions exist for local businesses to invest abroad.

3. Legal Regime

Transparency of the Regulatory System

In general, the regulatory environment in Bulgaria is characterized by complexity, lack of transparency, and arbitrary or weak enforcement.  These factors create incentives for public corruption.  Public procurement rules are at times tailored to match certain local business interests.  Bulgarian law lists 38 operations subject to licensing. The law requires all regulations to be justified by defined need (in terms of national security, environmental protection, or personal and material rights of citizens), and prohibits restrictions merely incidental to the stated purposes of the regulation. The law also requires the regulating authority, or the member of Parliament sponsoring the draft law containing the regulation, to perform a cost-benefit analysis of any proposed regulation. This requirement, however, is often ignored when Parliament reviews draft bills. With few exceptions, all draft bills are made available for public comment, both on the central government website and the respective agency’s website, and interested parties are given 30 days to submit their opinions. The government maintains a web platform, www.strategy.bg , on which it posts draft legislation. Тhe government posts all its decisions on pris.government.bg 

In addition, the law eliminates bureaucratic discretion in granting requests for routine economic activities and provides for silent consent (default judgement in favor of the requestor) when the government does not respond to a request in the allotted time. Local companies in which foreign partners have controlling interests may be requested to provide additional information or to meet additional mandatory requirements in order to engage in certain licensed activities, including production and export of arms and ammunition, banking and insurance, and the exploration, development, and exploitation of natural resources. The Bulgarian government licenses the export of dual-use goods and bans the export of all goods under international trade sanctions lists.  The Bulgarian government’s budget is assessed as transparent and in accordance with international standards and principles.  Central government debt and debt guarantees are published monthly, and debt obligations by individual state-owned enterprises (SOEs) are published every three months on the website of the Ministry of Finance.

International Regulatory Considerations

Bulgaria became a member of the World Trade Organization (WTO) in December 1996. Under the provisions of Article 207 of the Treaty on the Functioning of the European Union (Lisbon Treaty), common EU trade policies are exclusively the responsibility of the EU and the European Commission, which coordinates them with the 27 member states.

Legal System and Judicial Independence

The 1991 Constitution serves as the foundation of the legal system and creates an independent judicial branch comprised of judges, prosecutors, and investigators. The judiciary continues to be one of the least trusted institutions in the country, with widespread allegations of nepotism, corruption, and undue political and business influence.  Despite some recent improvements, the busiest courts in Sofia continue to suffer from serious backlogs, limited resources, and inefficient procedures that hamper the swift and fair administration of justice. Trials often take years to complete because of the inefficient procedures laid out in the criminal procedure code.

There are three levels of courts. Bulgaria’s 113 regional courts exercise jurisdiction over civil and criminal cases. Above them, 29 district courts (including the Sofia City Court and the Specialized Court for Organized Crime and High Level Corruption) serve as courts of appellate review for regional court decisions and have trial-level (first-instance) jurisdiction in serious criminal cases and in civil cases where claims exceed BGN 25,000 (USD 15,375), excluding alimony, labor disputes, and financial audit discrepancies, or in property cases where the property’s value exceeds BGN 50,000 (USD 30,750). Six appellate courts review the first-instance decisions of the district courts. The Supreme Court of Cassation is the court of last resort for criminal and civil appeals. There is a separate system of 28 specialized administrative courts which rule on the legality of local and national government decisions, with the Supreme Administrative Court serving as the court of final instance. The Constitutional Court, which is separate from the rest of the judiciary, issues final rulings on the compliance of laws with the Constitution.

Bulgaria’s legislation has been largely aligned with EU directives to provide adequate means of enforcing property and contractual rights. In practice, however, investors regularly complain about regulatory impediments, prosecutorial intervention in administrative cases, and inconsistent jurisprudence.  Overall, the government’s handling of investment disputes has been slow, interagency coordination is poor, and intervention at the highest political level is often required.

Laws and Regulations on Foreign Direct Investment

The 2004 Investment Promotion Act stipulates equal treatment of foreign and domestic investors. The law encourages investment in manufacturing and high technology, knowledge intensive services, education, and human resource development. It creates investment incentives by helping investors purchase land, providing state financing for basic infrastructure and training new staff, and facilitating tax incentives and opportunities for public-private partnerships (PPPs) with the central and local governments. The most common form of PPPs are concessions, which include the lease of government property for private use for up to 35 years for a construction and service concession and up to 25 years for other types of concession. The term of the concession may be extended by a maximum of one third of the original term.

Foreign investors must comply with the 1991 Commercial Law, which regulates commercial and company enterprise law, and the 1951 Law on Obligations and Contracts, which regulates civil transactions.

The Invest Bulgaria Agency (IBA) is the government’s investment attraction body and serves as a one-stop-shop for foreign investors. It provides information, administrative services, and incentive assessments to prospective foreign investors.

Competition and Antitrust Laws

The Commission for Protection of Competition (the “Commission”) oversees market competition and enforces the Law on the Protection of Competition (the “Competition Law”). The Competition Law, enacted in 2008, is intended to implement EU rules that promote competition. The law forbids monopolies, restrictive trade practices, abuse of market power, and certain forms of unfair competition. Monopolies can only be legally established in enumerated categories of strategic industries. In practice, the Competition Law has been applied inconsistently, and some of the Commission’s decisions are questionable and appear subject to political influence.

Expropriation and Compensation

Private real property rights are legally protected by the Bulgarian Constitution. Only in the case where a public need cannot be met by other means may the Council of Ministers or a regional governor expropriate land, in which case the owner is compensated at fair market value. Expropriation actions by the Council of Ministers, by regional authorities, or by municipal mayor can be appealed at a local administrative court. In its Bilateral Investment Treaty (BIT) with the United States, Bulgaria committed to international arbitration to judge expropriation claims and other investment disputes.

Dispute Settlement

ICSID Convention and New York Convention

Bulgaria is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York convention) and the 1961 European Convention on International Commercial Arbitration. Bulgaria is a member state to the International Centre for the Settlement of Investment Disputes (ICSID).

Investor-State Dispute Settlement

Bulgaria accepts binding international arbitration in disputes with foreign investors.  There are more than 20 arbitration institutions in Bulgaria, the Arbitration Court of the Bulgarian Chamber of Commerce and Industry (BCCI) is the oldest.

International Commercial Arbitration and Foreign Courts

Arbitral awards, both foreign and domestic, are enforced through the judicial system. The party must petition the Sofia City Court for a writ of execution and then execute the award according to the general framework for execution of judgments. Foreclosure proceedings may also be initiated.

Bulgarian law instructs courts to act on civil litigation cases within three months after a claim is filed. In practice, however, dispute settlement can take years.

Bankruptcy Regulations

The 1994 Commercial Law Chapter on Bankruptcy provides for reorganization or rehabilitation of a legal entity, maximizes asset recovery, and provides for fair and equal distribution among all creditors. The law applies to all commercial entities, except public monopolies or state-owned enterprises (SOEs). The 2015 Insurance Code regulates insurance company failures, while bank failures are regulated under the 2002 Bank Insolvency Act and the 2006 Credit Institutions Act. The 2014 bankruptcy of the country’s fourth-largest bank, Corporate Commercial bank, was a test case that showed serious deficiencies in the process of recovery and preservation of bank assets during bankruptcy proceedings.

Non-performance of a financial obligation must be adjudicated before the bankruptcy court can determine whether the debtor is insolvent. There is a presumption of insolvency when the debtor is unable to perform an executable obligation under a commercial transaction or public debt or related commercial activities, has suspended all payments, or is able to pay only the claims of certain creditors. The debtor is deemed over-indebted if its assets are insufficient to cover its short-term monetary obligations.

Bankruptcy proceedings may be initiated on two grounds: the debtor’s insolvency, or the debtor’s excessive indebtedness. Under Part IV of the Commercial Law, debtors or creditors, including state authorities such as the National Revenue Agency, can initiate bankruptcy proceedings. The debtor must declare bankruptcy within 30 days of becoming insolvent or over-indebted. Bankruptcy proceedings supersede other court proceedings initiated against the debtor except for labor cases, enforcement proceedings, and cases related to receivables securitized by third parties’ property. Such cases may be initiated even after bankruptcy proceedings begin.

Creditors must declare to the trustee all debts owed to them within one month of the start of bankruptcy proceedings. The trustee then has seven days to compile a list of debts. A rehabilitation plan must be proposed within one month after publication of the list of debts in the Commercial Register. After creditors’ approval, the court endorses the rehabilitation plan, terminates the bankruptcy proceeding, and appoints a supervisory body for overseeing the implementation of the rehabilitation plan. The court must endorse the plan within seven days and put it forward to the creditors for approval. The creditors must convene to discuss the plan within a period of 45 days. The court may renew the bankruptcy proceedings if the debtor does not fulfill its obligations under the rehabilitation plan.

The Bulgarian National Bank may revoke the operating license of an insolvent bank when the bank’s own capital is negative, and the bank has not been restructured according to the procedure defined in Article 51 in the Law on the Recovery and Resolution of Credit Institutions and Investment Firms.  The license of a bank may be withdrawn under the conditions set out in Article 36, par. 1 of the Law on Credit Institutions.

Bulgaria ranks 61 out of 190 economies in the Resolving Insolvency category of the World Bank’s Doing Business 2020 Report.

5. Protection of Property Rights

Real Property

Bulgaria assigned the rights of land use back to its original owners in early 1990s.  Restrictions still exist on ownership of agricultural land by non-EU citizens.  Companies whose shareholders are registered offshore are banned from acquiring or owning Bulgarian agricultural land.

Mortgages are recorded centrally with the Bulgarian Registry Agency, at registryagency.bg .

In the World Bank’s 2020 Doing Business report, Bulgaria climbed one place to 66th, out of 190 countries, in the category of registering property.

Intellectual Property Rights

The 1993 Copyright Act defines copyrightable work as any work of literature, art and science that is the result of creative activity, including: literary works, publications and computer programs; musical works; stage productions; films and other audiovisual works; fine arts, including applied art, design and folk artistic crafts; architectural works and spatial development plans; photographic works; and works created in a manner similar to photographic works. Under Bulgarian law, translations and reprocessing of existing works and folklore works, periodicals, encyclopedias, collections, anthologies, bibliographies, databases that include two or more works or materials are also eligible for copyright protection. The law allows rightsholders to form organizations for the collective management of rights. The law does not require registration for copyrighted works.

Bulgarian patent law has been harmonized with EU law for patents and utility model patent protection.  However, in patent procedures there have been reports of conflicts of interest and delays in decision-making and informing patent holders.  These issues, coupled with a lack of accountability of the Bulgarian Patent Office, have weakened patent protection in the country.

Bulgaria is a member of the Convention on Granting of European Patents (European Patent Convention) and a contracting state of the European Patent Office (EPO). Bulgaria has also signed the London agreement for facilitating the validation process, but has yet to amend its own law accordingly. Bulgaria is also part of the Patent Cooperation Treaty (PCT). Bulgaria grants the right to exclusive use of inventions for 20 years from the date of patent application, subject to payment of annual fees. Patent holders can also file for a supplementary protection certificate (SPC) to extend the protection duration. Innovations can also be protected as utility models (small inventions), which are registered without verification of novelty or industrial applicability. Validity of a utility model registration is four years, which can be extended for two more three-year periods.

Under Bulgarian law, new and original industrial designs can be granted certificates from the Patent Office and entered into the state register, with no required verification by the Patent office for novelty or originality.  The term of protection is 10 years, renewable for up to 25 years. Bulgaria is a contracting state of the Hague Agreement Concerning the International Deposit of Industrial Designs.

Compulsory licensing — allowing competitors to enter the market despite a valid patent — may be ordered under certain conditions, including failure to use. Disputes arising from the creation, protection, or use of inventions and utility models can be settled under administrative, civil, or arbitration procedures.

Pursuant to the 1996 Protection of New Plant Varieties and Animal Breeds Act, the Patent Office can issue a certificate protecting new plant varieties and animal breeds for between 25 and 30 years. Responding to long-standing industry concerns, the Bulgarian government included in its Drug Law a provision to provide data exclusivity (i.e., protection of confidential data submitted to the government to obtain approval to market pharmaceutical products).

Bulgaria is a member of the Lisbon Agreement for the Protection of Appellations of Origin and their International Registration.  Bulgaria enforces EU legislation for protecting geographical indications (GIs) and Traditional Specialties Guaranteed (TSG).

A new Law on Marks and Geographical Indications took effect in December 2019, updating procedures for trademark registration.  Trademarks and service marks are protected via registration with the Bulgarian Patent Office, or registration as a European Union Trademark, or an international registration under the Madrid Agreement and the Madrid Protocol that designates Bulgaria. A trademark is normally granted within ten months of application filing.  Pending applications are published to allow for objections.  Rejections can be appealed to the Patent Office’s Disputes Department. Decisions of this department can be appealed to the Sofia Administrative Court within three months. The right of exclusive use of a trademark is granted for ten years from the date of submitting the application. Extension requests must be filed during the final year of validity and can be renewed up to six months after expiration. Protection may be terminated at third-party request if a trademark is not used for a five-year period.

Trademark infringement is a significant problem in Bulgaria for U.S. cigarette and apparel producers, and smaller-scale infringement affects other U.S. products. Bulgarian legislation provides for criminal, civil, and administrative remedies against trademark violation. Bulgaria has implemented simplified border control procedure for the destruction of seized fake goods without civil or criminal trial.  In addition to civil penalties prescribed by the Trademarks and Geographical Indications Act (TGIA), the Criminal Code prohibits use of a third person’s trademark without the proprietor’s consent.  In practice, criminal convictions for trademark and copyright infringement are rare and sentencing tends to be lenient.  Legal entities cannot be held liable under the Criminal Code.

In April 2019 a new law on trade secret protection was adopted.  The law allows for civil action for trade secret infringement. There is no special court for cases related to trade secrets.

Bulgarian customs maintain a section on its official web site customs.bg instructing rightsholders of the procedure for filing IPR infringement cases. In 2020, customs received a total of 1,442 rightsholder complaints of suspected copyright infringement, acting on 1,020 of these, a 57 percent increase over 2019. Customs reported seized counterfeit goods mainly originated from Turkey, China, Hong Kong, and the United Arab Emirates.

In 2018, Bulgaria was removed from USTR’s Special 301 Watch List after demonstrating improvement in its enforcement of IPR law.  Online and broadcast piracy, however, remain a copyright enforcement issue in Bulgaria. While cyber police are generally responsive to reports of online copyright infringements, investigation of computer-based IPR crimes is slow, and very few have resulted in criminal convictions.

The 2020 Notorious Markets Report lists an online provider of pirated content which is reportedly hosted in Bulgaria.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

7. State-Owned Enterprises

Upon EU accession, Bulgaria was recognized as a market economy, in which the majority of the companies are private.  Significant state-owned enterprises (SOEs) remain, however, such as railways and the postal service.  SOEs also predominate in the healthcare, infrastructure, and energy sectors; many of these are collectively managed by the same holding company (also an SOE).  Some of the SOEs receive annual government subsidies for current and capital expenditures, regardless of their actual performance.  SOEs’ budgets and audit reports are posted on the Ministry of Finance website. The list of all SOEs can be found on:  http://www.minfin.bg/bg/page/948 .  According to the Bulgarian National Statistical Institute (NSI), there is a sizeable state-owned sector consisting of approximately 350 SOEs held by the central government and 580 by subnational governments.  In 2019, the government participation in the overall economy equalled 9.3 percent.

In 2019 Parliament approved the State Enterprise Act, introducing updated corporate standards and management practices.  The law lists timeline and criteria for SOE senior management approval.  SOEs are typically run by government elected boards.

Public and private sector companies are equally treated vis-à-vis bidding on concessions, taxation, or other government-controlled processes.  Bulgaria became party to the WTO’s Government Procurement Agreement (GPA) upon its entry into the EU in 2007.

Privatization Program

No major privatizations are currently planned in Bulgaria. Parliament must approve government proposals to privatize any company with over 50 percent government ownership.  All majority or minority state-owned properties are eligible for privatization, with the exception of those included in a specific list, including water management companies, state hospitals, and state sports facilities. The sale of specific parts of such companies follows a Council of Ministers decision or a decision of the Agency for Public Enterprises and Control, after a proposal made by the government-owned majority holder of the company. State-owned military manufacturers can be privatized with Parliamentary approval.

Municipally owned property can be privatized upon decision by a municipal council or authorized body, and upon publication of the municipal privatization list in the national gazette.

The 2010 Privatization and Post-Privatization Act created a single Privatization and Post-Privatization Agency responsible for privatization oversight.  The new State Enterprise Act in 2019 reshuffled and renamed the agency into the Agency for Public Enterprises and Control (www.appk.government.bg/bg/17).

Foreign investors can participate in privatization programs.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $68,830 N/A N/A www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $861.5 2019 $756 BEA data available at https://apps.bea.gov/international/factsheet/ 
Host country’s FDI in the United States ($M USD, stock positions) 2019 $9.1 2016 $5 BEA data available at https://www.bea.gov/international/
direct-investment-and-multinational-enterprises-comprehensive-data 
Total inbound stock of FDI as % host GDP 2019 75.6 2019 75.3 UNCTAD data available at https://stats.unctad.org/
handbook/EconomicTrends/Fdi.html  

* Source for Host Country Data:  Bulgarian National Bank

Bulgaria’s FDI flows for 2020 were USD 2.6 billion (EUR 2.1 billion), or 3.5 percent of 2020 GDP, compared to USD 1.4 billion, or 1.9 percent of GDP, in 2019.

Note: For inward investment, the Netherlands holds the top place largely because various companies, most notably Russia’s Lukoil, channel investments to Bulgaria through Dutch subsidiaries.  While official data routinely lists the United States as the 13th largest source of FDI into Bulgaria, a 2018 study by AmCham and the Institute for Market Economics, which accounted for investment flows via European subsidiaries of U.S. companies, put the United States in sixth place.  Marshall Islands is popular tax haven for Bulgarian oligarchs.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 52,026 100% Total Outward 2,966 100%
The Netherlands 9,658 18.6% Romania 316 10.7%
Austria 4,752 9.1% Marshall Islands 303 10.2%
Germany 3,549 6.8% Greece 247 8.3%
Italy 3,005 5.8% Serbia 235 7.9%
UK 2,893 5.6% Germany 234 7.9%
“0” reflects amounts rounded to +/- USD 500,000.

Bulgarian owners often use Luxembourg to incorporate companies.   An independent international media investigation in February 2021 revealed some BGN 1 billion (USD 617 million) in assets by Bulgarian-owned companies in Luxembourg.

Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 11,067 100% All Countries 2,272 100% All Countries 8,796 100%
Romania 1,309 11.8% United States 642 28.3% Romania 1,299 14.8%
United States 1,275 10.9% Luxembourg 639 28.1% United States 632 7.2%
Luxembourg 711 6.4% Ireland 230 10.1% Poland 630 7.2%
Germany 684 6.2% Germany 176 7.7% Spain 581 6.6%
Poland 638 5.8% Austria 125 5.5% Germany 508 5.8%

China

Executive Summary

In 2020, the People’s Republic of China (PRC) became the top global Foreign Direct Investment (FDI) destination. As the world’s second-largest economy, with a large consumer base and integrated supply chains, China’s economic recovery following COVID-19 reassured investors and contributed to higher FDI and portfolio investments. In 2020, China took significant steps toward implementing commitments made to the United States on a wide range of IP issues and made some modest openings in its financial sector. China also concluded key trade agreements and implemented important legislation, including the Foreign Investment Law (FIL).

China remains, however, a relatively restrictive investment environment for foreign investors due to restrictions in key economic sectors. Obstacles to investment include ownership caps and requirements to form joint venture partnerships with local Chinese firms, industrial policies such as Made in China 2025 (MIC 2025) that target development of indigenous capacity, as well as pressure on U.S. firms to transfer technology as a prerequisite to gaining market access. PRC COVID-19 visa and travel restrictions significantly affected foreign businesses operations increasing their labor and input costs. Moreover, an increasingly assertive Chinese Communist Party (CCP) and emphasis on national companies and self-reliance has heightened foreign investors’ concerns about the pace of economic reforms.

Key investment announcements and new developments in 2020 included:

On January 1, the FIL went into effect and effectively replaced previous laws governing foreign investment.

On January 15, the U.S. and China concluded the Economic and Trade Agreement between the Government of the United States of America and the Government of the People’s Republic of China (the Phase One agreement). Under the agreement, China committed to reforms in its intellectual property regime, prohibit forced transfer technology as a condition for market access, and made some openings in the financial and energy sector. China also concluded the Regional Comprehensive Economic Partnership (RCEP) agreement on November 15 and reached a political agreement with the EU on the China-EU Comprehensive Agreement on Investment (CAI) on December 30.

In mid-May, PRC leader Xi Jinping announced China’s “dual circulation” strategy, intended to make China less export-oriented and more focused on the domestic market.

On June 23, the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) announced new investment “negative lists” to guide foreign FDI.

Market openings were coupled, however, with restrictions on investment, such as the Rules on Security Reviews on Foreign InvestmentsChina’s revised investment screening mechanism.

While Chinese pronouncements of greater market access and fair treatment of foreign investment are welcome, details and effective implementation are still needed to ensure foreign investors truly experience equitable treatment.

 

Table 1: Key Metrics and Rankings

 

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 78 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 31 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 14 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2020 USD 116.2 https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2020 USD 10,410 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

Transparency of the Regulatory System

One of China’s WTO accession commitments was to establish an official journal dedicated to the publication of laws, regulations, and other measures pertaining to or affecting trade in goods, services, trade related aspects of intellectual property rights (TRIPS), and the control of foreign exchange.  Despite mandatory 30-day public comment periods, Chinese ministries continue to post only some draft administrative regulations and departmental rules online, often with a public comment period of less than 30 days. As part of the Phase One Agreement, China committed to providing at least 45 days for public comment on all proposed laws, regulations, and other measures implementing the Phase One Agreement. While China has made some progress, U.S. businesses operating in China consistently cite arbitrary legal enforcement and the lack of regulatory transparency among the top challenges of doing business in China.

In China’s state-dominated economic system, the relationships are often blurred between the CCP, the Chinese government, Chinese business (state- and private-owned), and other Chinese stakeholders.  Foreign-invested enterprises (FIEs) perceive that China prioritizes political goals, industrial policies, and a desire to protect social stability at the expense of foreign investors, fairness, and the rule of law.  The World Bank   Global Indicators of Regulatory Governance gave China a composite score of 1.75 out 5 points, attributing China’s relatively low score to stakeholders not having easily accessible and updated laws and regulations; the lack of impact assessments conducted prior to issuing new laws; and other concerns about transparency.

For accounting standards, Chinese companies use the Chinese Accounting Standards for Business Enterprises (ASBE) for all financial reporting within mainland China. Companies listed overseas or in Hong Kong may choose to use ASBE, the International Financial Reporting Standards, or Hong Kong Financial Reporting Standards.

International Regulatory Considerations

As part of its WTO accession agreement, China agreed to notify the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations.  However, China continues to issue draft technical regulations without proper notification to the TBT Committee.

Legal System and Judicial Independence

The Chinese legal system borrows heavily from continental European legal systems, but with “Chinese characteristics.”  The rules governing commercial activities are found in various laws, regulations, administrative rules, and Supreme People’s Court (SPC) judicial interpretations, among other sources. While China does not have specialized commercial courts, it has created specialized courts and tribunals for the hearing of intellectual property disputes (IP), including in Beijing, Guangzhou, Shanghai, and Hainan.  In 2020, the original IP Courts continued to be popular destinations for both Chinese and foreign-related IP civil and administrative litigation, with the IP court in Shanghai experiencing a year-on-year increase of above 100 percent. China’s constitution and laws, however, are clear that Chinese courts cannot exercise power independent of the Party.  Further, in practice, influential businesses, local governments, and regulators routinely influence courts.  U.S. companies may hesitate in challenging administrative decisions or bringing commercial disputes before local courts due to perceptions of futility or fear of government retaliation.

Laws and Regulations on Foreign Direct Investment

China’s new investment law, the FIL, came into force on January 1, 2020, replacing China’s previous foreign investment framework. The FIL provides a five-year transition period for foreign enterprises established under previous foreign investment laws, after which all foreign enterprises will be subject to the same domestic laws as Chinese companies, such as the Company Law. The FIL standardized the regulatory regimes for foreign investment by including the negative list management system, a foreign investment information reporting system, and a foreign investment security review system all under one document. The FIL also seeks to address foreign investors complaints by explicitly banning forced technology transfers, promising better IPR, and the establishment of a complaint mechanism for investors to report administrative abuses. However, foreign investors remain concerned that the FIL and its implementing regulations provide Chinese ministries and local officials significant regulatory discretion, including the ability to retaliate against foreign companies.

In December 2020, China also issued a revised investment screening mechanism under the Rules on Security Reviews on Foreign Investments without any period for public comment or prior consultation with the business community. Foreign investors complained that China’s new rules on investment screening were expansive in scope, lacked an investment threshold to trigger a review, and included green field investments – unlike most other countries. Moreover, new guidance on Neutralizing Extra-Territorial Application of Unjustified Foreign Legislation Measures, a measure often compared to “blocking statutes” from other markets, added to foreign investors’ concerns over the legal challenges they would face in trying to abide by both their host-country’s regulations and China’s. Foreign investors complained that market access in China was increasingly undermined by national security-related legislation. In 2020, the State Council and various central and local government agencies issued over 1000 substantive administrative regulations and departmental/local rules on foreign investment. While not comprehensive, a list of published and official Chinese laws and regulations is available here .

FDI Requirements for Investment Approvals

Foreign investments in industries and economic sectors that are not explicitly restricted on China’s negative lists do not require MOFCOM pre-approval.  However, investors have complained that in practice, investing in an industry not on the negative list does not guarantee a foreign investor “national treatment,” or treatment no less favorable than treatment accorded to a similarly situated domestic investor.  Foreign investors must still comply with other steps and approvals such as receiving land rights, business licenses, and other necessary permits.  When a foreign investment needs ratification from the NDRC or a local development and reform commission, that administrative body is in charge of assessing the project’s compliance with a panoply of Chinese laws and regulations.  In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and consulting agencies acting on behalf of Chinese domestic firms, creating potential conflicts of interest disadvantageous to foreign firms.

5. Protection of Property Rights

Real Property

The Chinese state owns all urban land, and only the state can issue long-term land leases to individuals and companies, including foreigners, subject to many restrictions.  Chinese property law stipulates that residential property rights renew automatically, while commercial and industrial grants renew if it does not conflict with other public interest claims. Several foreign investors have reported revocation of land use rights so that Chinese developers could pursue government-designated building projects.  Investors often complain about insufficient compensation in these cases.  In rural China, the registration system suffers from unclear ownership lines and disputed border claims, often at the expense of local farmers whom village leaders exclude in favor of “handshake deals” with commercial interests.  China’s Securities Law defines debtor and guarantor rights, including rights to mortgage certain types of property and other tangible assets, including long-term leases.  Chinese law does not prohibit foreigners from buying non-performing debt, but it must be acquired through state-owned asset management firms, and it is difficult to liquidate.

Intellectual Property Rights

China remained on the USTR Special 301 Report Priority Watch List in 2020 and was subject to continued Section 306 monitoring. Multiple Chinese physical and online markets were included in the 2020 USTR Review of Notorious Markets for Counterfeiting and Piracy. Of note, in 2020, China did take significant steps toward addressing long-standing U.S. concerns on a wide range of IP issues, from patents, to trademarks, to copyrights and trade secrets. The reforms addressed the granting and protection of IP rights as well as their enforcement, and included changes made in support of the Phase One Trade Agreement. In April 2020, China National Intellectual Property Administration (CNIPA) issued the 2020-2021 Plan for Implementing the Opinions on Strengthening IP Protection which contained 133 specific “steps” that CNIPA and other Chinese government entities intended to take in 2020 and 2021 – to strengthen IP protection and implement China’s IP-related commitments under Phase One. The 2020-2021 Implementing Plan, together with the work plans of the SPC’s and IP-related administrative organs, portended a year of aggressive IP reforms in China. The Chinese legislative, administrative, and judicial organs issued over 60 new and amended measures related to IP protection and enforcement, in both draft and final form, including amendments to core IP laws, such as the Copyright Law, the Patent Law, and the Criminal Law. Updates also included administrative measures addressing trademark and patent protection and enforcement, as well as enforcement of copyright and trade secrets.

Despite these reforms, IP rights remain subject to Chinese government policy objectives, which appear to have intensified in 2020. For U.S. companies in China, infringement remained both rampant and a low-risk “business strategy” for bad-faith actors. Further enforcement and regulatory authorities continue to signal to U.S. rights holders that application of China’s IP system remains subject to the discretion of the PRC government and its policy goals. High-level remarks by PRC leader Xi Jinping and senior leaders signaled China’s commitment to cracking down on IP infringement in the years ahead. However, they also reflected China’s vision of the IP system as an important tool for eliminating foreign ownership of critical technology and ensuring national security. While on paper China’s IP protection and enforcement mechanisms have inched closer to near parity with other foreign markets, in practice, fair, transparent, and non-discriminatory treatment will very likely continue to be denied to U.S. rights holders whose IP ownership and exploitation impede PRC industrial policy goals.

For detailed information on China’s environment for IPR protection and enforcement, please see the following reports:

7. State-Owned Enterprises

China has approximately 150,000 wholly-owned SOEs, of which 50,000 are owned by the central government, and the remainder by local or provincial governments.  SOEs, both central and local, account for 30 to 40 percent of total gross domestic product (GDP) and about 20 percent of China’s total employment.  Non-financial SOE assets totaled roughly USD30 trillion.  SOEs can be found in all sectors of the economy, from tourism to heavy industries.  State funds are spread throughout the economy and the state may also be the majority or controlling shareholder in an ostensibly private enterprise.  China’s leading SOEs benefit from preferential government policies aimed at developing bigger and stronger “national champions.” SOEs enjoy favored access to essential economic inputs (land, hydrocarbons, finance, telecoms, and electricity) and exercise considerable power in markets like steel and minerals.  SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt.  A comprehensive, published list of all Chinese SOEs does not exist.

PRC officials have indicated China intends to utilize OECD guidelines to improve the SOEs independence and professionalism, including relying on Boards of Directors that are free from political influence.  Other recent reforms have included salary caps, limits on employee benefits, and attempts to create stock incentive programs for managers who have produced mixed results.  However, analysts believe minor reforms will be ineffective if SOE administration and government policy remain intertwined, and Chinese officials make minimal progress in primarily changing the regulation and business conduct of SOEs.  SOEs continue to hold dominant shares in their respective industries, regardless of whether they are strategic, which may further restrain private investment in the economy.  Among central SOEs managed by the State-owned Assets Supervision and Administration Commission (SASAC), senior management positions are mainly filled by senior party members who report directly to the CCP, and double as the company’s party secretary.  SOE executives often outrank regulators in the CCP rank structure, which minimizes the effectiveness of regulators in implementing reforms.  The lack of management independence and the controlling ownership interest of the state make SOEs de facto arms of the government, subject to government direction and interference.  SOEs are rarely the defendant in legal disputes, and when they are, they almost always prevail.  U.S. companies often complain about the lack of transparency and objectivity in commercial disputes with SOEs.

Privatization Program

Since 2013, the PRC government has periodically announced reforms to SOEs that included selling SOE shares to outside investors or a mixed ownership model, in which private companies invest in SOEs and outside managers are hired.  The government has tried these approaches to improve SOE management structures, emphasize the use of financial benchmarks, and gradually infuse private capital into some sectors traditionally monopolized by SOEs like energy, finance, and telecommunications.  In practice, however, reforms have been gradual, as the PRC government has struggled to implement its SOE reform vision and often preferred to utilize a SOE consolidation approach.  Recently, Xi and other senior leaders have increasingly focused reform efforts on strengthening the role of the state as an investor or owner of capital, instead of the old SOE model in which the state was more directly involved in managing operations.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

 

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $14,724,435 2019 $14,343,000 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $87,880 2019 $116,200 BEA data available at https://apps.bea.gov/international/factsheet/ 
Host country’s FDI in the United States ($M USD, stock positions) 2019 $7,721,700 2019 $37,700 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data 
Total inbound stock of FDI as % host GDP 2020 $16.5% 2019 12.4% UNCTAD data available at https://unctadstat.unctad.org/wds/TableViewer/tableView.aspx  https://unctadstat.unctad.org/CountryProfile/GeneralProfile/en-GB/156/index.html 

* Source for Host Country Data:

Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $2,938,482 100% Total Outward $2,198,881 100%
China, P.R., Hong Kong $1,430,303 48.7% China, P.C., Hong Kong $1,132,549 51.5%
British Virgin Islands $316,836 10.8% Cayman Islands $259,614 11.8%
Japan $147,881 5.0% British Virgin Islands $127,297 5.8%
Singapore $102,458 3.5% United States $67,855 3.1%
Germany $67,879 2.3% Singapore $38,105 1.7%
“0” reflects amounts rounded to +/- USD 500,000.

Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Destinations (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries $645,981 100% All Countries $373,780 100% All Countries $272,201 100%
China, P. R.: Hong Kong $226,426 35% China, P. R.: Hong Kong $166,070 44% United States $68,875 25%
United States $162,830 25% United States $93,955 25% China, P. R.: Hong Kong $60,356 22%
Cayman Islands $55,086 9% Cayman Islands $36,192 10% British Virgin Islands $43,486 16%
British Virgin Islands $45,883 7% United Kingdom $11,226 3% Cayman Islands $18,894 7%
United Kingdom $21,805 3% Luxembourg $9,092 2% United Kingdom $10,579 4%

Croatia

Executive Summary

Croatia’s EU membership has enhanced its economic stability and provided new opportunities for trade and investment.  Despite having access to a substantial amount of EU funds, the Croatian economy has yet to gain the full benefits of membership in terms of growth and sustainability. Croatia will receive more than $30 billion in EU funding through 2030, which has the potential to provide a significant boost to the economy, if the government directs the funds to productive activities that stimulate job creation and growth. Croatia joined the European Exchange Rate Mechanism (ERM II) in July 2020, and the government is committed to eurozone accession by mid-2024.

The Croatian economy had experienced a five-year period of growth and stability, but the COVID-19 pandemic coupled with three devastating earthquakes that caused more than $20.3 billion worth of damage to Zagreb and central Croatia led the economy to contract by 8.4 percent in 2020.  The budget deficit reached approximately 7.4 percent in 2020. 8.4 percent in 2020. The tourism sector, which directly accounts for 12 percent of Croatia’s GDP and indirectly as much as 20 percent, achieved only 50 percent of the prior year’s revenues. The government doled out more than $1.5 billion in job-retention and economic stabilization measures. Unemployment in January 2021 was at 7.1 percent, only slightly higher than the average rate in 2019. The European Commission estimates that the Croatian economy will grow 5.3 percent in 2021 and 4.6 percent in 2022.

The economy is burdened by a large government bureaucracy, underperforming state-owned enterprises, and low regulatory transparency, all of which contribute to poor performance and relatively low levels of foreign investment. The Croatian government has taken some positive steps to reduce para-fiscal fees and taxes and to simplify procedures for opening a business. However, it has been slow to implement additional steps to reduce barriers to investment, streamline bureaucracy and public administration, and reform the judiciary. The government continues to implement economic reforms designed to create sustainable economic growth and development, to connect education to the labor market, and to sustain public finances.

The government is willing to meet at senior levels with interested investors and to assist in resolving problems.  Prime Minister Andrej Plenkovic, elected to a second consecutive term in July 2020, is a former member of the European Parliament and has signaled his commitment to wide-ranging structural reforms in line with recommendations from the EU and global financial institutions. His government is working with the World Bank and other international institutions to improve the business climate and to attract investment.  Relative strengths in the Croatian economy include low inflation, a stable exchange rate, and developed infrastructure.

Historically, the most promising sectors for investment in Croatia have been tourism, telecommunications, pharmaceuticals, healthcare, and banking. Investment opportunities are growing in Croatia’s robust IT sector, and the coming years will offer new opportunities related to energy transition. Starting in 2020, Croatia offers visas for so-called “digital nomads” to work in Croatia without having to pay local taxes in order to attract individuals with bigger spending capabilities and connections to strong IT sectors abroad.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 63 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 51 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 41 of 128 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $184 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita (USD) 2019 $28,388 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Croatia is generally open to foreign investment and the Croatian government continues to make efforts, through financial incentives, to attract foreign investors.  All investors, both foreign and domestic, are guaranteed equal treatment by law, with a handful of exceptions described below.  However, bureaucratic and political barriers remain.  Investors agree that an unpredictable regulatory framework, lack of transparency, judicial inefficiencies, lengthy administrative procedures, lack of structural reforms, and unresolved property ownership issues weigh heavily upon the investment climate.

Croatia is partnered with the World Bank on the “Croatia Business Environment Reform” project which intends to help Croatia implement various business reforms. The Ministry of Economy and Sustainable Development Directorate for Internationalization assists investors.  For more information, see:  http://investcroatia.gov.hr/ .  The Strategic Investment Act fast-tracks and streamlines bureaucratic processes for large projects valued at USD 10.7 million or more on the investor’s behalf.  Various business groups, including the American Chamber of Commerce, Foreign Investors’ Council, and the Croatian Employers’ Association, are in dialogue with the government about ways to make doing business easier and to keep investment retention as a priority.

Limits on Foreign Control and Right to Private Ownership and Establishment

Croatian law allows for all entities, both foreign and domestic, to establish and own businesses and to engage in all forms of remunerative activities.  Article 49 of the Constitution states all entrepreneurs have equal legal status.  However, the Croatian government restricts foreign ownership or control of services for a handful of strategic sectors:  inland waterways transport, maritime transport, rail transport, air to ground handling, freight-forwarding, publishing, ski instruction, and primary mandated healthcare.  Apart from these, the only regulatory requirements to market access involve occupational licensing requirements (architect, auditor, engineer, lawyer, veterinarian, etc.), about which detailed information can be found at  http://psc.hr/en/sectoral-requirements/ .  Over 90 percent of the banking sector is foreign owned.

Croatia does not have a foreign investment screening mechanism, but the government designated the Ministry of Economy and Sustainable Development Internationalization Directorate as the “National Contact Point” for reviewing direct investments and responding to requests for information from EU Member States or the European Commission, per European Union Directive 2019/452.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) last published an investment climate review for Croatia in June 2019: https://www.oecd.org/publications/oecd-investment-policy-reviews-croatia-2019-2bf079ba-en.htm .

The latest available World Bank Group “Doing Business” Economic Profile of Croatia was published in 2020: https://www.doingbusiness.org/content/dam/doingBusiness/country/c/croatia/HRV.pdf .

The European Commission’s Country Report Croatia 2020 assesses the country’s economic situation and outlook: https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1584545612721&uri=CELEX%3A52020SC0510 .

Business Facilitation

The Croatian government offers two e-government options for on-line business registration,  www.hitro.hr   and  start.gov.hr  , both of which provide 24-hour access.  Start.gov.hr provides complete business registration for a limited liability company (d.o.o.), simple limited company (j.d.o.o.) or company, without any need to physically enter a public administration office.  The procedure guarantees a short turnaround on requests and provides deadlines by which the company can expect to be registered.  The Start.gov.hr procedure eliminates fees for public notaries, proxies, seals, and stamps, and reduces court registration fees by 50 percent.  Hitro.hr also provides on-line services but maintains offices in 60 Croatian cities and towns for those who want to register their business in person.

In 2020, the Global Enterprise Registration website ( www.GER.co ) rated Croatia’s business registration process 4 out of 10, while the latest available 2020 World Bank Ease of Doing Business report ranks Croatia as 114 out of 190 countries in this category.  The government pledged to improve conditions for business registration and continues to identify areas for removing burdensome regulations and processes.   Croatia’s business facilitation mechanism provides for equitable treatment to all interested in registering a business, regardless of gender or ethnicity.

The United Nations Conference on Trade and Development (UNCTAD) provides an outline of investment facilitation proposals at  https://investmentpolicy.unctad.org/country-navigator/53/croatia .

Outward Investment

Croatian foreign direct investment totals approximately USD 24.6 million in the United States, according to Croatian National Bank figures.  The government does not promote or incentivize outward investment.  Croatia has no restrictions on domestic investors who wish to invest abroad.

3. Legal Regime

Transparency of the Regulatory System

Croatian legislation, which is harmonized with European Union legislation (acquis communautaire), affords transparent policies and fosters a climate in which all investors are treated equally. Nevertheless, bureaucracy and regulation can be complex and time-consuming, although the government is working to remove unnecessary regulations. The complete text of all legislation is published both on-line and in the National Gazette, available at:  www.nn.hr  .  There are no informal regulatory processes, and investors should rely solely on government-issued legislation to conduct business.

The Croatian Parliament promulgates national legislation, which is implemented at every level of government, although local regulations vary from county to county.  Members of Government and Members of Parliament, through working groups or caucuses, are responsible for presenting legislation.  Responsible ministries draft and present new legislation to the government for approval. When the Government approves a draft text, it is sent to Parliament for approval.  The approved act becomes official on the date defined by Parliament and when it is published in the National Gazette. Citizens maintain the right to initiate a law through their district Member of Parliament.  New legislation and changes to existing legislation which have a significant impact on citizens are made available for public commentary at https://esavjetovanja.gov.hr/ECon/Dashboard .  The Law on the Review of the Impact of Regulations defines the procedure for impact assessment, planning of legislative activities, and communication with the public, as well as the entities responsible for implementing the impact assessment procedure.

Croatia adheres to international accounting standards and abides by international practices through the Accounting Act, which is applied to all accounting businesses.  Publicly listed companies must adhere to these accounting standards by law.

Croatian courts are responsible for ensuring that laws are enforced correctly.  If an investor believes that the law or an administrative procedure is not implemented correctly, the investor may initiate a case against the government at the appropriate court.  However, judicial remedies are frequently ineffective due to delays or political influence.

The Enforcement Act defines the procedure for enforcing claims and seizures carried out by the Financial Agency (FINA), the state-owned company responsible for offering various financial services to include securing payment to claimants following a court enforced order.  FINA also has the authority to seize assets or directly settle the claim from the bank account of the person or legal entity that owes the claim. Enforcement proceedings are regulated by the Enforcement Act, last amended in 2017, and by laws regulating its execution, such as the Act on Implementation of the Enforcement over Monetary Assets, amended in 2020.  The legislation incorporates European Parliament and European Commission provisions for easily enforcing cross-border financial claims in both business and private instances.  Enforcement proceedings are conducted on the basis of enforcement title documents which specify the creditor and debtor, the subject, type, scope, and payment deadline.

More information can be found at  www.fina.hr  . Various types of regulation exist, which prescribe complicated or time-consuming procedures for businesses to implement.  Reports on public finances and public debt obligations are available to the public on the Ministry of Finance website at:  http://www.mfin.hr/en  .

Public finances and debt obligations are transparent and available on the Ministry of Finance website, in Croatian only, at  https://mfin.gov.hr/proracun-86/86  .

International Regulatory Considerations

Croatia, as an EU member, transposes all EU directives.  Domestic legislation is applied nationally and – while local regulations vary from county to county — there is no locally-based legislation that overrides national legislation.  Local governments determine zoning for construction and therefore have considerable power in commercial or residential building projects.  International accounting, arbitration, financial, and labor norms are incorporated into Croatia’s regulatory system.

Croatia has been a member of the World Trade Organization (WTO) since 2000. Croatia submits all draft technical regulations to the WTO, in coordination with the European Commission.

Legal System and Judicial Independence

The legal system in Croatia is civil and provides for ownership of property and enforcement of legal contracts.  The Commercial Company Act defines the forms of legal organization for domestic and foreign investors. It covers general commercial partnerships, limited partnerships, joint stock companies, limited liability companies and economic interest groupings.  The Obligatory Relations Act serves to enforce commercial contracts and includes the provision of goods and services in commercial agency contracts.

The Croatian constitution provides for an independent judiciary.  The judicial system consists of courts of general and specialized jurisdictions.  Core structures are the Supreme Court, County Courts, Municipal Courts, and Magistrate/Petty Crimes Courts.  Specialized courts include the Administrative Court and High and Lower Commercial Courts.  A Constitutional Court determines the constitutionality of laws and government actions and protects and enforces constitutional rights. Municipal courts are courts of first instance for civil and juvenile/criminal cases.  The High Commercial Court is located in Zagreb and has appellate review of lower commercial court decisions.  The Administrative Court has jurisdiction over the decisions of administrative bodies of all levels of government. The Supreme Court is the highest court in the country and, as such, enjoys jurisdiction over civil and criminal cases.  It hears appeals from the County Courts, High Commercial Court, and Administrative Court. Regulations and enforcement actions are appealable and adjudicated in the national court system.

On January 1, 2021 the government established a High Criminal Court, headquartered in Zagreb, which will be responsible for adjudication of second instance appeals against decisions made by County Courts in cases that involve criminal acts.

The Ministry of Justice and Public Administration continues to pursue a court reorganization plan intended to increase efficiency and reduce the backlog of judicial cases.  The World Bank approved a USD 110 million loan to Croatia for the Justice for Business Project in March 2020, specifically for the purpose of supporting ICT infrastructure upgrades, court process improvements, and other reforms that will improve justice sector services to improve the business climate.  This effort will be led by the Ministry of Justice and Public Administration, in coordination with the Economy Ministry and the Construction Ministry, from 2020 to 2024.

Reforms are underway, but significant challenges remain in relation to land registration, training court officers, providing adequate resources to meet the court case load, and reducing the backlog and length of bankruptcy procedures.  Investors often face problems with unusually protracted court procedures, lack of clarity in legal proceedings, contract enforcement, and judicial efficiency.  Croatian courts have decreased the number of civil, criminal. and commercial cases and decreased the disposition time for resolution of those cases, however there is still a significant case backlog.  The 2020 European Commission Country Report for Croatia assessed that the length of court proceedings continues to be a burden for business.

Laws and Regulations on Foreign Direct Investment

There are no specific laws aimed at foreign investment; both foreign and domestic market participants in Croatia are protected under the same legislation. The Company Act defines the forms of legal organization for domestic and foreign investors. The following entity types are permitted for foreigners: general partnerships; limited partnerships; branch offices; limited liability companies; and joint stock companies. The Obligatory Relations Act regulates commercial contracts.

The Ministry of Economy and Sustainable Development Internationalization Directorate ( https://investcroatia.gov.hr/en/ ) facilitates both foreign and domestic investment. The directorate’s website offers relevant information on business and investment legislation and includes an investment guide.

According to Croatian commercial law a number of significant or “strategic” business decisions must be approved by 75 percent of the company’s shareholders.  Minority investors with at least 25 percent ownership plus one share have what is colloquially called a “golden share,” meaning they can block or veto “strategic” decisions requiring a 75 percent vote. The law calls for minimum 75 percent shareholder approval to remove a supervisory board member, authorize a supervisory board member to make a business decision, revoke preferential shares, change company agreements, authorize mergers or liquidations, and to purchase or invest in something on behalf of the company that is worth more than 20 percent of the company’s initial capital. (Note: This list is not exhaustive.)

Competition and Anti-Trust Laws

The Competition Act defines the rules and methods for promoting and protecting competition.  In theory, competitive equality is the standard applied with respect to market access, credit, and other business operations, such as licenses and supplies.  In practice, however, state-owned enterprises (SOEs) and government-designated “strategic” firms may still receive preferential treatment. The Croatian Competition Agency is the country’s competition watchdog, determining whether anti-competitive practices exist and punishing infringements.  It has determined in the past that some subsidies to SOEs constituted unlawful state aid, however state aid issues are now handled by the Ministry of Finance.  Information on authorities of the Agency and past rulings can be found at  www.aztn.hr .  The website includes a “call to the public” inviting citizens to provide information on competition-related concerns.

Expropriation and Compensation

Croatian Law on Expropriation and Compensation gives the government broad authority to expropriate real property in economic and security-related circumstances, including eminent domain. The Law on Strategic Investments also provides for expropriation for projects that meet the criteria for “strategic” projects.  However, it includes provisions that guarantee adequate compensation, in either the form of monetary compensation or real estate of equal value to the expropriated property, in the same town or city.  The law includes an appeals mechanism to challenge expropriation decisions by means of a complaint to the Ministry of Justice and Public Administration within 15 days of the expropriation order.  The law does not describe the Ministry’s adjudication process.  Parties not pleased with the outcome of a Ministry decision can pursue administrative action against the decision, but no appeal to the decision is allowed.

Article III of the U.S.-Croatia Bilateral Investment Treaty (BIT) covers both direct and indirect expropriations.  The BIT bars all expropriations or nationalizations except those that are for a public purpose, carried out in a non-discriminatory manner, in accordance with due process of law, and subject to prompt, adequate, and effective compensation.

Dispute Settlement

ICSID Convention and New York Convention

In 1998 Croatia ratified the Washington Convention that established the International Center for the Settlement of Investment Disputes (ICSID).  Croatia is a signatory to the following international conventions regulating the mutual acceptance and enforcement of foreign arbitration: the 1923 Geneva Protocol on Arbitration Clauses; the 1927 Geneva Convention on the Execution of Foreign Arbitration Decisions; the 1958 New York Convention on the Acceptance and Execution of Foreign Arbitration Decisions; and the 1961 European Convention on International Business Arbitration.

Investor-State Dispute Settlement

The Croatian Law on Arbitration addresses both national and international proceedings in Croatia. Parties to arbitration cases are free to appoint arbitrators of any nationality or professional qualifications and Article 12 of the Law on Arbitration requires impartiality and independence of arbitrators.  Croatia recognizes binding international arbitration, which may be defined in investment agreements as a means of dispute resolution.

The Arbitration Act covers domestic arbitration, recognition and enforcement of arbitration rulings, and jurisdictional matters.  Once an arbitration decision has been reached, the judgment is executed by court order.  If no payment is made by the established deadline, the party benefiting from the decision notifies the Commercial Court, which becomes responsible for enforcing compliance. Arbitration rulings have the force of a final judgment but can be appealed within three months.

In regard to implementation of foreign arbitral awards, Article 19 of the Act on Enforcement states that judgments of foreign courts may be executed only if they “fulfill the conditions for recognition and execution as prescribed by an international agreement or the law.”  The Act on Enforcement serves to decrease the burden on the courts by passing responsibility for the collection of financial claims and seizures to the Financial Agency (FINA), which is responsible for paying claimants once the court has rendered a decision ordering enforcement.  FINA also has the authority to seize assets or directly settle the claim from the bank account of the person or legal entity that owes the claim. More information can be found at  www.fina.hr .

Article Ten of the U.S.-Croatia BIT sets forth mechanisms for the resolution of investment disputes, defined as any dispute arising out of or relating to an investment authorization, an investment agreement, or an alleged breach of rights conferred, created, or recognized by the BIT with respect to a covered investment.

Croatia has no history of extra-judicial action against foreign investors. There are currently two known cases, pending for years, regarding U.S. investor claims before Croatian courts. Both investors have also announced plans to file claims at international arbitration courts, citing the U.S.-Croatia BIT as the basis for the action.

International Commercial Arbitration and Foreign Courts

Alternative dispute resolution is implemented at the High Commercial Court, at the Zagreb Commercial Court, and at the six municipal courts around the country.  In order to reduce the backlog, non-disputed cases are passed to public notaries.

Both mediation and arbitration services are available through the Croatian Chamber of Economy. The Chamber’s permanent arbitration court has been in operation since 1965.  Arbitration is voluntary and conforms to UNCITRAL model procedures.  The Chamber of Economy’s Mediation Center has been operating since 2002 – see  http://www.hok-cba.hr/hr/center-za-mirenje-hoka  .

There are no major investment disputes currently underway involving state-owned enterprises, other than a dispute between the Croatian government and a Hungarian oil company over implementation of a purchase agreement with a Croatian oil and gas company. There is no evidence that domestic courts rule in favor of state-owned enterprises.

Bankruptcy Regulations

Croatia’s Bankruptcy Act corresponds to the EU regulation on insolvency proceedings and United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency.  All stakeholders in the bankruptcy proceeding, foreign and domestic are treated equally in terms of the Bankruptcy Act.  The last available World Bank Ease of Doing Business 2020 rating for Croatia in the category of resolving insolvency was 63 out of 190 countries.  Bankruptcy is not considered a criminal act.

The Financial Operations and Pre-Bankruptcy Settlement Act helps expedite proceedings and establish timeframes for the initiation of bankruptcy proceedings.  One of the most important provisions of pre-bankruptcy is that it allows a firm that has been unable to pay all its bills to remain open during the proceedings, thereby allowing it to continue operations and generate cash under financial supervision in hopes that it can recover financial health and avoid closure.

The Commercial Court of the county in which a bankrupt company is headquartered has exclusive jurisdiction over bankruptcy matters. A bankruptcy tribunal decides on initiating formal bankruptcy proceedings, appoints a trustee, reviews creditor complaints, approves the settlement for creditors, and decides on the closing of proceedings.  A bankruptcy judge supervises the trustee (who represents the debtor) and the operations of the creditors’ committee, which is convened to protect the interests of all creditors, oversee the trustee’s work and report back to creditors.  The Act establishes the priority of creditor claims, assigning higher priority to those related to taxes and revenues of state, local and administration budgets.  It also allows for a debtor or the trustee to petition to reorganize the firm, an alternative aimed at maximizing asset recovery and providing fair and equitable distribution among all creditors.

In April 2017, the Croatian government passed the “Law on Extraordinary Appointment of Management Boards for Companies of Systematic Importance to the Republic of Croatia,” when it became clear that Croatia’s largest corporation, Agrokor, was in crisis and would likely go bankrupt. The Law allowed the Government, in this instance, to install an Emergency Commissioner to restructure the company, which resulted in the creation of the Fortenova Group that took on the core business of the former Agrokor food and retail company.

5. Protection of Property Rights

Real Property

The right to ownership of private property is enshrined in the Croatian Constitution and in numerous acts and regulations.  A foreign natural or legal person incorporated under Croatian law is considered to be a Croatian legal person and has the right to purchase property.  The Ownership and Property Rights Act establishes procedures for foreigners to acquire property by inheritance as well as legal transactions such as purchases, deeds, and trusts.  Croatia has a well-functioning banking system, which provides mortgages, while courts and cadaster offices handle property records.

However, real property ownership can be particularly challenging in Croatia owing to unique titling issues, separate ownership of buildings and the land on which they sit, reciprocity laws, special treatment of agricultural land and coastal regions, and zoning disputes more generally.  For all of these reasons, investors should seek competent, independent legal advice in this area. The U.S. Embassy maintains a list of English-speaking attorneys ( https://hr.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys/). The Ministry of Economy Directorate for Investment, Industry and Innovation helps those seeking information about property status in Croatia.

For more information, see:  http://investcroatia.gov.hr/ .

While the cadaster offices reliably maintain records, there is a portion of property in Croatia which has changed hands without appropriate documentation for various reasons, including avoidance of paying the title transfer fees or hiding wealth.  Historically, individuals and companies spent years in court attempting to resolve improper real estate documentation.  For this reason, potential buyers should seek to verify that the seller possesses clear title to both the land and buildings (which can be titled and owned separately).

In order to acquire property by means other than inheritance or as an incorporated Croatian legal entity, foreign citizens must receive the approval from the Ministry of Justice and Public Administration.  Approval can be delayed, owing to a lengthy interagency clearance process.  While EU citizens are afforded the same rights as Croatian citizens in terms of purchasing property, the right of all other foreigners to acquire property in Croatia is based on reciprocity.

In the case of the United States, reciprocity exists on a (sub-federal) state-by-state basis.  Croatia’s Ministry of Foreign and European Affairs has confirmed the existence of positive reciprocity for real estate purchases for residents of the following states:  Alabama, Arizona, Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas Louisiana, Maine, Maryland, Massachusetts, Michigan, Missouri, Montana, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin, Wyoming.

Alternatively, for U.S. citizens from Arkansas, Hawaii, Kentucky, Minnesota, Mississippi, New Hampshire, Oklahoma and Vermont, property acquisition is only allowed with the condition of Croatian permanent residence.  Residents of other states could face longer waiting periods.  The Foreign Ministry has confirmed that Croatian nationals can purchase real estate throughout the United States without restrictions. A foreign investor, incorporated as a Croatian legal entity, may acquire and own property without ministry approval, with the caveat that the purchase by any private party of certain types of land (principally land directly adjacent to the sea or in certain geographically designated areas) can be restricted to foreign investors for purposes of national security.

Inheritance laws have led to situations in which some properties have claims by dozens of legal owners, some of whom are deceased and others who have emigrated and cannot be found.

It is also important to verify the existence of necessary building permits, as some newer structures in coastal areas have been subject to destruction at the owner’s expense and without compensation for not conforming to local zoning regulations.  Investors should be particularly wary of promises that structures built without permits will be regularized retroactively.  The Act on Legalization of Buildings and Illegal Construction is intended to resolve ambiguities regarding ownership of real estate.

Land ownership is distinct from ownership of buildings or facilities on the land.  Investors interested in acquiring companies from the Ministry of Physical Planning, Construction, and State Assets should seek legal advice to determine whether any deal also includes the right to ownership of the land on which a business is located, or merely the right to lease the land through a concession.  Property may be mortgaged. Inconsistent regulations and restrictions on coastal property ownership and construction have also provided challenges for foreign investors in the past.  Croatian law restricts construction and commercial use within 70 meters of the coastline.

When purchasing land for construction purposes, potential buyers should determine whether the property is classified as agricultural or construction land.  The Agricultural Land Act provides for additional fees for re-zoning of up to 50 percent of the value of the land that is diverted from agriculture to construction purposes.  The Agricultural Land Agency works with local governments to review potential agricultural land purchases.  The sale of privately owned farmland is treated solely as the subject of a sales agreement between the parties.  Buyers of this type of land should still proceed with caution and be aware of potentially unresolved legacy issues with land ownership.  Land in Croatia is either publicly or privately owned and cannot be transferred to squatters solely based on physical presence.

The Ministry of Justice and Public Administration and the State Geodetic Office co-manage the National Program for Resolving Land Registration and Cadaster Issues.  This program includes a One Stop Shop system, which is a single point for accessing land registry and cadaster data.  For more information see  http://www.uredjenazemlja.hr/default.aspx?id=17   where information is available in English.

Croatia is also working with the World Bank on implementation of the Integrated Land Administration System project (ILAS) to modernize the land administration and management system in order to improve the efficiency, transparency and cost effectiveness of government services.  Croatia continues to process a backlog of cases and potential investors should seek a full explanation of land ownership rights before purchasing property.

Note that Croatia’s land records are also available online (see www.pravosudje.hr  and https://www.katastar.hr/en/#/ ). Katastar.hr includes information on over 14 million pieces of land throughout the country and provides information in English.

The last published World Bank Ease of Doing Business 2020 report ranked Croatia as 38th out of 190 countries on ease of registering property, up 13 spots from the 2019 ranking of 51st.

There is no property tax in Croatia.

Intellectual Property Rights

Croatian intellectual property rights (IPR) legislation includes the Patent Act amended in January 2020, the Trademark Act, the Industrial Design Act, the Act on the Geographical Indications of Products and Services, the Act on the Protection of Layout Design of Integrated Circuits, and the Act on Copyrights and Related Rights, which was entirely rewritten in 2020.  The Law on Protecting Unpublished Information with Market Value went into force in 2018.  These acts define the process for protecting and enforcing IPR in Croatia.  Texts of these laws are available on the website of the State Intellectual Property Office at https://www.dziv.hr/en/ip-legislation/national-legislation/ ).  All of the laws are harmonized with EU legislation.  The Law on Protecting Unpublished Information with Market Value went into force in 2018.

Croatian law enforcement officials keep public records of seized counterfeit goods.  According to a 2020 report from the Customs Office, officials stopped 581 international imports related to IPR violations, that resulted in a total of 805 procedures for temporary detainment of goods for a total of 427,873 items.  Customs also issued 169 domestic violations and seized 95,933 counterfeit goods.  They initiated seven criminal proceedings against individuals involved in violation of trademark rights.  Croatian customs officials and the Ministry of Interior work together to locate and seize infringing goods.

Although some areas of IPR protection and enforcement remain problematic, Croatia is currently not included in the U.S. Trade Representative’s Special 301 Report or the Notorious Markets List.  Problem areas are piracy of digital media and counterfeiting.  Due to its geographic location, Croatia is also a transit route for various illegal products bound for other countries in the region.  There have been no problems reported with regard to registration of IPR in Croatia by American companies.  The American Chamber of Commerce maintains dialogue with the Croatian government on IPR issues.

As a WTO member, Croatia is party to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).  Croatia is also a member of the World Intellectual Property Organization (WIPO) and party to the Berne Convention, the Paris Convention, the Patent Cooperation Treaty, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty.  For a list of international conventions to which Croatia is a signatory, consult the State Intellectual Property Office’s website at  http://www.dziv.hr/hr/zakonodavstvo/medjunarodni-ugovori/ .

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at  http://www.wipo.int/directory/en/ .

7. State-Owned Enterprises

There are currently a total of 58 state-owned enterprises (SOEs) that are either wholly state-owned or in which the state has a majority stake.  The SOEs are managed through the Ministry of Physical Planning, Construction, and State Assets or the Center for Restructuring and Sale (CERP).  The Ministry of Physical Planning, Construction, and State Assets oversees 39 “special state interest” SOEs, including 19 wholly state-owned, 13 majority state-owned companies, six listed as “legal entities of special interest,” and one with less than 50 percent state ownership.  CERP oversees the other 19 SOEs, of which 11 are wholly state-owned and eight are majority state-owned.

These SOEs cover a range of sectors including infrastructure, energy, real estate, finance, transportation, and utilities.  The latest figures available, from 2019, show that SOEs employ a total of 72,256 people and have net revenues totaling USD 9.95 billion and assets of USD 46.6 billion.  The government appoints the members of SOE management and supervisory boards, making the companies very susceptible to political influence.

CERP also oversees 306 companies; of these, the state owns up to 10 percent of 220 companies, from 10 to 49 percent of 67 companies,50-99 percent of 8 companies, and 100 percent of 11 companies.  By statute, CERP must divest the state from these companies.  Lists of SOEs are published on the websites of the Ministry of Physical Planning, Construction, and State Assets at  https://imovina.gov.hr/  and on CERP’s website at  http://www.cerp.hr/ .

County and city level governments have majority ownership in approximately 500 companies, mostly utilities; however, exact data is not available.  The latest available European Commission 2020 Country Report for Croatia assesses that Croatia made slow progress in selling off holdings in non-strategic companies, and its targets are not ambitious.  The European Commission and the European Bank for Reconstruction and Development (EBRD) continue to provide support to Croatia through the Structural Reform Support Program for strengthening the functioning of state-owned enterprises and improvement of corporate governance: https://ec.europa.eu/info/funding-tenders/funding-opportunities/funding-programmes/overview-funding-programmes/structural-reform-support-programme-srsp_en . The EC notes that this project created an early warning system to allow Croatian authorities to “identify when a state-owned enterprise is having financial difficulties and to prepare and implement plans to improve financial and operational performance.”  The EC concluded “this reform will make state-owned enterprises more resilient and allow the State to act as an informed and active owner.”

The International Monetary Fund (IMF) Staff Virtual Visit with Croatia in November 2020 concluded that “streamlining the role of the state, predominantly through improved SOE governance is necessary.”

The Corporate Governance Code is available at https://zse.hr/en/corporate-governance-code/1780 .   Croatia is not a member of the OECD but adheres to OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict Affected and High-Risk Areas.

Privatization Program

Croatia continues to slowly pursue privatization of SOEs through the Ministry of Physical Planning, Construction, and State Assets and the CERP.  There are no restrictions against foreigners participating in privatization tenders.  When Croatia initiated its privatization process in the late 1990’s foreign investors purchased assets in the banking and telecommunications sectors, as well as Croatia’s largest pharmaceutical company. The bidding process is public, tenders are published online, and terms are clearly defined in tender documentation, however, problems with bureaucracy and timely judicial remedies can significantly slow progress for projects.  There is no privatization timeline; however, the government views privatization as a means to reduce the budget deficit and increase output.  The Ministry of Physical Planning, Construction, and State Assets drafted the 2021 plan for Management of State Owned Property, as part of the National Strategy for Management of State Owned Property 2019-2025 (only in Croatian: https://narodne-novine.nn.hr/clanci/sluzbeni/2019_10_96_1863.html ).

Tenders are in Croatian and can be found at  https://imovina.gov.hr/vijesti/8 .

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $58,789 2019 $64,690 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 $120.6 2019 $184 BEA data available at
https://apps.bea.gov/
international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2020 $30.12 2018 $19 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2020 67% 2020 55% UNCTAD data available at
https://unctad.org/webflyer/
world-investment-report-2021

* GDP for 2019  and FDI at www.hnb.hr. Note:  U.S. Bureau of Economic Analysis (BEA) does not have GDP or FDI data available for 2020 at time of publishing. 2018 is the last available date for Host Country FDI in the U.S.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $39,375 100% Total Outward $$5,546 100%
Austria $5,562 14.12% Bosnia Herzegovina  $1,545 27.8%
The Netherlands  $5,192 13.2% Slovenia $1,232 22.2%
Luxembourg $4,476 11.4% Serbia $1,052 18.9%
Germany $4,159 10.6% Montenegro $315 5.7%
Italy 3,416 10.3% Poland $236 4.2%
“0” reflects amounts rounded to +/- USD 500,000.

*FDI at www.hnb.hr

Table 4: Sources of Portfolio Investment
Data not available.

Egypt

Executive Summary

The Egyptian government continues to make progress on economic reforms, and while many challenges remain, Egypt’s investment climate is improving.  The country has undertaken a number of structural reforms since the flotation of the Egyptian Pound (EGP) in November 2016, and after successfully completing a set of difficult macroeconomic reforms as part of a three-year, $12-billion International Monetary Fund (IMF) program, Egypt was one of the fastest-growing emerging markets prior to the COVID-19 outbreak.  Egypt was also the only economy in the Middle East and North Africa to record positive economic growth in 2020, despite the COVID-19 pandemic. Increased investor confidence and the reactivation of Egypt’s interbank foreign exchange (FX) market have attracted foreign portfolio investment and increased foreign reserves.  The Government of Egypt (GoE) increasingly understands that attracting foreign direct investment (FDI) is key to addressing many of its economic challenges and has stated its intention to create a more conducive environment for FDI.  FDI inflows grew 11 percent between 2018 and 2019, from $8.1 to $9 billion, before falling 39 percent to $5.5 billion in 2020 amid sharp global declines in FDI due to the pandemic, according to data from the Central Bank of Egypt and the United Nations Commission on Trade and Development (UNCTAD). UNCTAD ranked Egypt as the top FDI destination in Africa between 2016 and 2020.

Egypt has passed a number of regulatory reform laws, including a new investment law in 2017; a new companies law and a bankruptcy law in 2018; and a new customs law in 2020.  These laws aim to improve Egypt’s investment and business climate and help the economy realize its full potential.  The 2017 Investment Law is designed to attract new investment and provides a framework for the government to offer investors more incentives, consolidate investment-related rules, and streamline procedures.  The 2020 Customs Law is likewise meant to streamline aspects of import and export procedures, including through a single-window system, electronic payments, and expedited clearances for authorized companies. The GoE is still developing implementation rules for the Customs Law.

The government also hopes to attract investment in several “mega projects,” including the construction of a new national administrative capital, and to promote mineral extraction opportunities.  Egypt intends to capitalize on its location bridging the Middle East, Africa, and Europe to become a regional trade and investment gateway and energy hub, and hopes to attract information and communications technology (ICT) sector investments for its digital transformation program.

Egypt is a party to more than 100 bilateral investment treaties, including with the United States.  It is a member of the World Trade Organization (WTO), the African Continental Free Trade Agreement (AfCFTA), and the Greater Arab Free Trade Area (GAFTA).  In many sectors, there is no legal difference between foreign and domestic investors. Special requirements exist for foreign investment in certain sectors, such as upstream oil and gas as well as real estate, where joint ventures are required.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 117 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 114 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 96 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, on a historical-cost basis 2019 USD 11,000 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2019 USD 2,690 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Egypt’s completion of the three-year, $12-billion IMF Extended Fund Facility between 2016 and 2019, and its associated reform package, helped stabilize Egypt’s macroeconomy, introduced important subsidy and social spending reforms, and helped restore investor confidence in the Egyptian economy.  The flotation of the Egyptian Pound (EGP) in November 2016 and the restart of Egypt’s interbank foreign exchange (FX) market as part of this program was the first major step in restoring investor confidence that immediately led to increased portfolio investment and should lead to increased FDI over the long term.  Other important reforms have included a new investment law and an industrial licensing law in 2017, a new bankruptcy law in 2018, a new customs law in 2020, and other reforms aimed at reducing regulatory overhang and improving the ease of doing business. Egypt’s government has announced plans to improve its business climate further through investment promotion, facilitation, more efficient business services, and the implementation of investor-friendly policies.

With few exceptions, Egypt does not legally discriminate between Egyptian nationals and foreigners in the formation and operation of private companies. The 1997 Investment Incentives Law was designed to encourage domestic and foreign investment in targeted economic sectors and to promote decentralization of industry away from the Nile Valley. The law allows 100 percent foreign ownership of investment projects and guarantees the right to remit income earned in Egypt and to repatriate capital.

The Tenders Law (Law 89 of 1998) requires the government to consider both price and best value in awarding contracts and to issue an explanation for refusal of a bid. However, the law contains preferences for Egyptian domestic contractors, who are accorded priority if their bids do not exceed the lowest foreign bid by more than 15 percent.

The Capital Markets Law (Law 95 of 1992) and its amendments, including the most recent in February 2018, and relevant regulations govern Egypt’s capital markets.  Foreign investors are able to buy shares on the Egyptian Stock Exchange on the same basis as local investors.

The General Authority for Investment and Free Zones (GAFI, http://gafi.gov.eg) is the principal government body that regulates and facilitates foreign investment in Egypt, and reports directly to the Prime Minister.

The Investor Service Center (ISC) is an administrative unit within GAFI that provides “one-stop-shop” services, easing the way for global investors looking for opportunities presented by Egypt’s domestic economy and the nation’s competitive advantages as an export hub for Europe, the Middle East, and Africa. This is in addition to promoting Egypt’s investment opportunities in various sectors.

The ISC provides a start-to-end service to the investor, including assistance related to company incorporation, establishment of company branches, approval of minutes of Board of Directors and General Assemblies, increases of capital, changes of activity, liquidation procedures, and other corporate-related matters. The Center also aims to issue licenses, approvals, and permits required for investment activities within 60 days from the date of request. Other services GAFI provides include:

Advice and support to help in the evaluation of Egypt as a potential investment location;

Identification of suitable locations and site selection options within Egypt;

Assistance in identifying suitable Egyptian partners; and

Aftercare and dispute settlement services. ​

The ISC plans to establish branches in each of Egypt’s Governorates by the end of 2021.  Egypt maintains ongoing communication with investors through formal business roundtables, investment promotion events (conferences and seminars), and one-on-one investment meetings.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Egyptian Companies Law does not set any limitation on the number of foreigners, neither as shareholders nor as managers/board members, except for Limited Liability Companies where the only restriction is that one of the managers must be an Egyptian national. In addition, companies are required to obtain a commercial and tax license, and pass a security clearance process.  Companies are able to operate while undergoing the often lengthy security screening process.  However, if the firm is rejected, it must cease operations and may undergo a lengthy appeals process.  Businesses have cited instances where Egyptian clients were hesitant to conclude long-term business contracts with foreign businesses that have yet to receive a security clearance. They have also expressed concern about seemingly arbitrary refusals, a lack of explanation when a security clearance is not issued, and the lengthy appeals process. Although the Government of Egypt has made progress streamlining the business registration process at GAFI, inconsistent treatment by banks and other government officials has in some cases led to registration delays.

Sector-specific limitations to investment include restrictions on foreign shareholding of companies owning lands in the Sinai Peninsula. Likewise, the Import-Export Law requires companies wishing to register in the Import Registry to be 51 percent owned and managed by Egyptians. Nevertheless, the new Investment Law does allow wholly foreign companies investing in Egypt to import goods and materials. In January 2021 the Egyptian government removed the 20-percent foreign ownership cap for international and private schools in Egypt.

The ownership of land by foreigners is complicated, in that it is governed by three laws: Law 15 of 1963, Law 143 of 1981, and Law 230 of 1996.  Land/Real Estate Law 15 of 1963 explicitly prohibits foreign individual or corporation ownership of agricultural land (defined as traditional agricultural land in the Nile Valley, Delta and Oases). Law 15/1963 stipulates that no foreigners, whether natural or juristic persons, may acquire agricultural land.  Law 143/1981 governs the acquisition and ownership of desert land. Certain limits are placed on the number of feddans (one feddan is approximately equal to one acre) that may be owned by individuals, families, cooperatives, partnerships, and corporations regardless of nationality. Partnerships are permitted to own 10,000 feddans. Joint stock companies are permitted to own 50,000 feddans.

Under Law 230/1986, non-Egyptians are allowed to own real estate (vacant or built) only under the following conditions:

  • Ownership is limited to two real estate properties in Egypt that serve as accommodation for the owner and his family (spouses and minors) in addition to the right to own real estate needed for activities licensed by the Egyptian Government.
  • The area of each real estate property does not exceed 4,000 m².
  • The real estate is not considered a historical site.

Exemption from the first and second conditions is subject to the approval of the Prime Minister. Ownership in tourist areas and new communities is subject to conditions established by the Cabinet of Ministers. Non-Egyptians owning vacant real estate in Egypt must build within a period of five years from the date their ownership is registered by a notary public. Non-Egyptians cannot sell their real estate for five years after registration of ownership, unless the Prime Minister consents to an exemption.

Other Investment Policy Reviews

In December 2020, the World Bank published a Country Private Sector Diagnostic report for Egypt, which analyzed key structural economic reforms that the Egyptian government should adopt in order to encourage private-sector-led economic growth. The report also included recommendations for the agribusiness, manufacturing, information technology, education, and healthcare sectors. https://www.ifc.org/wps/wcm/connect/publications_ext_content/ifc_external_publication_site/publications_listing_page/cpsd-egypt

https://www.ifc.org/wps/wcm/connect/publications_ext_content/ifc_external_publication_site/publications_listing_page/cpsd-egypt

The Organization for Economic Cooperation and Development (OECD) signed a declaration with Egypt on International Investment and Multinational Enterprises on July 11, 2007, at which time Egypt became the first Arab and African country to sign the OECD Declaration, marking a new stage in Egypt’s drive to attract more foreign direct investment (FDI).  On July 8, 2020, the OECD released an Investment Policy Review for Egypt that highlighted the government’s progress implementing a proactive reform agenda to improve the business climate, attract more foreign and domestic investment, and reap the benefits of openness to FDI and participation in global value chains. https://www.oecd.org/countries/egypt/egypt-continues-to-strengthen-its-institutional-and-legal-framework-for-investment.htm  

https://www.oecd.org/countries/egypt/egypt-continues-to-strengthen-its-institutional-and-legal-framework-for-investment.htm  

In January 2018 the World Trade Organization (WTO) published a comprehensive review of the Egyptian Government’s trade policies, including details of the Investment Law’s (Law 72 of 2017) main provisions. https://www.wto.org/english/tratop_e/tpr_e/s367_e.pdf 

https://www.wto.org/english/tratop_e/tpr_e/s367_e.pdf 

The United Nations Conference on Trade Development (UNCTAD) published an Information and Communications Technology (ICT) Policy Review for Egypt in 2017, in which it highlighted the potential for investments in the ICT sector to help drive economic growth and recommended specific reforms aimed at strengthening Egypt’s performance in key ICT policy areas.   https://unctad.org/en/PublicationsLibrary/dtlstict2017d3_en.pdf 

https://unctad.org/en/PublicationsLibrary/dtlstict2017d3_en.pdf   

Business Facilitation

GAFI’s ISC ( https://gafi.gov.eg/English/Howcanwehelp/OneStopShop/Pages/default.aspx ) was launched in February 2018 and provides start-to-end service to the investor, as described above.  The Investment Law (Law 72 of 2017) also introduces “Ratification Offices” to facilitate obtaining necessary approvals, permits, and licenses within 10 days of issuing a Ratification Certificate.

Investors may fulfill the technical requirements of obtaining the required licenses through these Ratification Offices, directly through the concerned authority, or through its representatives at the Investment Window at GAFI.  The Investor Service Center is required to issue licenses within 60 days from submission. Companies can also register online.  GAFI has also launched e-establishment, e-signature, and e-payment services to facilitate establishing companies.

Outward Investment

Egypt promotes and incentivizes outward investment. According to the Egyptian government’s FDI Markets database for the period from January 2003 to January 2021, outward investment featured the following:

  • Egyptian companies implemented 278 Egyptian FDI projects. The estimated total value of the projects, which employed about 49,000 workers, was $24.26 billion.
  • The following countries respectively received the largest amount of Egyptian outward investment in terms of total project value: The United Arab Emirates (UAE), Saudi Arabia, Algeria, Kenya, Jordan, Ethiopia, Germany, Libya, Morocco, and Nigeria.
  • The UAE, Saudi Arabia, and Algeria accounted for about 28 percent of the total amount.
  • Elsewedy Electric was the largest Egyptian company investing abroad, implementing 21 projects with a total investment estimated to be $2.1 billion.

Egypt does not restrict domestic investors from investing abroad.

3. Legal Regime

Transparency of the Regulatory System

The Egyptian government has made efforts to improve the transparency of government policy and to support a fair, competitive marketplace.  Nevertheless, improving government transparency and consistency has proven difficult, and reformers have faced strong resistance from entrenched bureaucratic and private interests.  Significant obstacles continue to hinder private investment, including the reportedly arbitrary imposition of bureaucratic impediments and the length of time needed to resolve them.  Nevertheless, the impetus for positive change driven by the government reform agenda augurs well for improvement in policy implementation and transparency.

Enactment of laws is the purview of the Parliament, while executive regulations are the domain of line ministries.  Under the Constitution, the president, the cabinet, and any member of parliament can present draft legislation.  After submission, parliamentary committees review and approve, including any amendments.  Upon parliamentary approval, a judicial body reviews the constitutionality of any legislation before referring it to the president for his approval.

Although notice and full drafts of legislation are typically printed in the Official Gazette (similar to the Federal Register in the United States), there is no centralized online location where the government publishes comprehensive details about regulatory decisions or their summaries, and in practice consultation with the public is limited.  In recent years, the Ministry of Trade and other government bodies have circulated draft legislation among concerned parties, including business associations and labor unions. This has been a welcome change from previous practice, but is not yet institutionalized across the government.

While Egyptian parliaments have historically held “social dialogue” sessions with concerned parties and private or civic organizations to discuss proposed legislation, it is unclear to what degree the current Parliament will adopt a more inclusive approach to social dialogue.  Many aspects of the 2016 IMF program and related economic reforms stimulated parliament to engage more broadly with the public, marking some progress in this respect.

Accounting, legal, and regulatory procedures are transparent and consistent with international norms.  The Financial Regulatory Authority (FRA) supervises and regulates all non-banking financial markets and instruments, including capital markets, futures exchanges, insurance activities, mortgage finance, financial leasing, factoring, securitization, and microfinance.  It issues rules that facilitate market efficiency and transparency. FRA has issued legislation and regulatory decisions on non-banking financial laws which govern FRA’s work and the entities under its supervision. ( http://www.fra.gov.eg/jtags/efsa_en/index_en.jsp  )

The criteria for awarding government contracts and licenses are made available when bid rounds are announced.  The process actually used to award contracts is broadly consistent with the procedural requirements set forth by law.  Further, set-aside requirements for small and medium-sized enterprise (SME) participation in GoE procurement are increasingly highlighted. The FRA publishes key laws and regulations to the following website: http://www.fra.gov.eg/content/efsa_en/efsa_pages_en/laws_efsa_en.htm  

http://www.fra.gov.eg/content/efsa_en/efsa_pages_en/laws_efsa_en.htm  

The Parliament and the independent “Administrative Control Authority” both ensure the government’s commitment to follow administrative processes at all levels of government.

The cabinet develops and submits proposed regulations to the president following discussion and consultation with the relevant ministry and informal consultation with other interest groups. Based on the recommendations provided in the proposal, including recommendations by the presidential advisors, the president issues “Presidential Decrees” that function as implementing regulations.  Presidential decrees are published in the Official Gazette for enforcement.

The degree to which ministries and government agencies responsible for drafting, implementing, or enforcing a given regulation coordinate with other stakeholders varies widely.  Although some government entities may attempt to analyze and debate proposed legislation or rules, there are no laws requiring scientific studies or quantitative regulatory impact analyses prior to finalizing or implementing new laws or regulations. Not all issued regulations are announced online, and not all public comments received by regulators are made public.

The government made its budget documents widely and easily accessible to the general public, including online.  Budget documents did not include allocations to military state-owned enterprises, nor allocations to and earnings from state-owned enterprises.  Information on government debt obligations was publicly available online, but up-to-date and clear information on state-owned enterprise debt guaranteed by the government was not available.  According to information the Central Bank has provided to the World Bank, the lack of information available about publicly guaranteed private-sector debt meant that this debt was generally recorded as private-sector non-guaranteed debt, thus potentially obscuring some contingent debt liabilities.

International Regulatory Considerations

In general, international standards are the main reference for Egyptian standards.  According to the Egyptian Organization for Standardization and Quality Control, approximately 7,000 national standards are aligned with international standards in various sectors.  In the absence of international standards, Egypt uses other references referred to in Ministerial Decrees No. 180/1996 and No. 291/2003, which stipulate that in the absence of Egyptian standards, the producers and importers may use European standards (EN), U.S. standards (ANSI), or Japanese standards (JIS).

Egypt is a member of the WTO, participates actively in various committees, and notifies technical regulations to the WTO Committee on Technical Barriers to Trade.  Egypt ratified the Trade Facilitation Agreement (TFA) in June 2017 (Presidential decree No. 149/2017), and deposited its formal notification to the WTO on June 24, 2019.  Egypt notified indicative and definitive dates for implementing Category B and C commitments on June 20, 2019, but to date has not notified dates for implementing Category A commitments.  In August 2020 the Egyptian Parliament passed a new Customs Law, Law 207 of 2020, that includes provisions for key TFA reforms, including advance rulings, separation of release, a single-window system, expedited customs procedures for authorized economic operators, post-clearance audits, and e-payments.

Legal System and Judicial Independence

Egypt’s legal system is a civil codified law system based on the French model.  If contractual disputes arise, claimants can sue for remedies through the court system or seek resolution through arbitration.  Egypt has written commercial and contractual laws. The country has a system of economic courts, specializing in private-sector disputes, which have jurisdiction over cases related to economic and commercial matters, including intellectual property disputes.  The judiciary is set up as an independent branch of the government.

Regulations and enforcement actions can be appealed through Egypt’s courts, though appellants often complain about the lengthy judicial process, which can often take years.  To enforce judgments of foreign courts in Egypt, the party seeking to enforce the judgment must obtain an exequatur (a legal document issued by governments allowing judgements to be enforced).  To apply for an exequatur, the normal procedures for initiating a lawsuit in Egypt must be satisfied. Moreover, several other conditions must be satisfied, including ensuring reciprocity between the Egyptian and foreign country’s courts, and verifying the competence of the court rendering the judgment.

Judges in Egypt enjoy a high degree of public trust, according to Egyptian lawyers and opinion polls, and are the designated monitors for general elections.  The Judiciary is proud of its independence and can point to a number of cases where a judge has made surprising decisions that run counter to the desires of the regime.  The judge’s ability to interpret the law can sometimes lead to an uneven application of justice.

Laws and Regulations on Foreign Direct Investment

No specialized court exists for foreign investments.

The 2017 Investment Law (Law 72 of 2017) as well as other FDI-related laws and regulations, are published on GAFI’s website,  https://gafi.gov.eg/English/StartaBusiness/Laws-and-Regulations/Pages/default.aspx .

In 2017 the Parliament also passed the Industrial Permits Act, which reduced the time it takes to license a new factory by mandating that the Industrial Development Authority (IDA) respond to a request for a license within 30 days of the request being filed.  As of February 2020, new regulations allow IDA regional branch directors or their designees to grant conditional licenses to industrial investors until other registration requirements are complete.

In 2016, the Import-Export Law was revised to allow companies wishing to register in the Import Registry to be 51 percent owned and managed by Egyptians; formerly the law required 100 percent Egyptian ownership and management.  In November 2016, the inter-ministerial Supreme Investment Council also announced seventeen presidential decrees designed to spur investment or resolve longstanding issues. These include:

  • Forming a “National Payments Council” that will work to restrict the handling of FX outside the banking sector;
  • Producers of agricultural crops that Egypt imports or exports will get tax exemptions;
  • Five-year tax exemptions for manufacturers of “strategic” goods that Egypt imports or exports;
  • Five-year tax exemptions for agriculture and industrial investments in Upper Egypt; and
  • Begin tendering land with utilities for industry in Upper Egypt for free as outlined by the Industrial Development Authority.

Competition and Anti-Trust Laws

The Egyptian Competition Law (ECL), Law 3 of 2005, provides the framework for the government’s competition rules and anti-trust policies. The ECL prohibits the abuse of dominant market positions, which it defines as a situation in which a company’s market share exceeds 25 percent and in which the company is able to influence market prices or volumes regardless of competitors’ actions. The ECL prohibits vertical agreements or contracts between purchasers and suppliers that are intended to restrict competition, and also forbids agreements among competitors such as price collusion, production-restriction agreements, market sharing, and anti-competitive arrangements in the tendering process. The ECL applies to all types of persons or enterprises carrying out economic activities, but includes exemptions for some government-controlled public utilities. In early 2019, the Egyptian Parliament endorsed a number of amendments to the ECL, including controls on price hikes and prices of essential products and higher penalties for violations.

In addition to the ECL, other laws cover various aspects of competition policy. The Companies Law (Law 159/1981) contains provisions on mergers and acquisitions; the Law of Supplies and Commerce (Law 17 of 1999) forbids competition-reducing activities such as collusion and hoarding; and the Telecommunications Law (Law 10 of 2003), the Intellectual Property Law (Law 82 of 2002), and the Insurance Supervision and Control Law (Law 10 of 1981) also include provisions on competition.

The Egyptian Competition Authority (ECA) is responsible for protecting competition and prohibiting the monopolistic practices defined within the ECL. The ECA has the authority to receive and investigate complaints, initiate its own investigations, and take decisions and necessary steps to stop anti-competitive practices. The ECA’s enforcement powers include conducting raids; using search warrants; requesting data and documentation; and imposing “cease and desist orders” on violators of the ECL. The ECA’s enforcement activities against government entities are limited to requesting data and documentation, as well as advocacy.

Expropriation and Compensation

Egypt’s Investment Incentives Law provides guarantees against nationalization or confiscation of investment projects under the law’s domain.  The law also provides guarantees against seizure, requisition, blocking, and placing of assets under custody or sequestration.  It offers guarantees against full or partial expropriation of real estate and investment project property.  The U.S.-Egypt Bilateral Investment Treaty also provides protection against expropriation.  Private firms are able to take cases of alleged expropriation to court, but the judicial system can take several years to resolve a case.

Dispute Settlement

ICSID Convention and New York Convention

Egypt acceded to the International Convention for the Settlement of Investment Disputes (ICSID) in 1971 and is a member of the International Center for the Settlement of Investment Disputes, which provides a framework for the arbitration of investment disputes between the government and foreign investors from another member state, provided the parties agree to such arbitration. Without prejudice to Egyptian courts, the Investment Incentives Law recognizes the right of investors to settle disputes within the framework of bilateral agreements, the ICSID, or through arbitration before the Regional Center for International Commercial Arbitration in Cairo, which applies the rules of the United Nations Commissions on International Trade Law.

Egypt adheres to the 1958 New York Convention on the Enforcement of Arbitral Awards; the 1965 Washington Convention on the Settlement of Investment Disputes between States and the Nationals of Other States; and the 1974 Convention on the Settlement of Investment Disputes between the Arab States and Nationals of Other States.  An award issued pursuant to arbitration that took place outside Egypt may be enforced in Egypt if it is either covered by one of the international conventions to which Egypt is party or it satisfies the conditions set out in Egypt’s Dispute Settlement Law 27 of 1994, which provides for the arbitration of domestic and international commercial disputes and limited challenges of arbitration awards in the Egyptian judicial system.  The Dispute Settlement Law was amended in 1997 to include disputes between public enterprises and the private sector.

To enforce judgments of foreign courts in Egypt, the party seeking to enforce the judgment must obtain an exequatur.  To apply for an exequatur, the normal procedures for initiating a lawsuit in Egypt and several other conditions must be satisfied, including ensuring reciprocity between the Egyptian and foreign country’s courts and verifying the competence of the court rendering the judgment.

Egypt has a system of economic courts specializing in private-sector disputes that have jurisdiction over cases related to economic and commercial matters, including intellectual property disputes. Despite these provisions, business and investors in Egypt’s renewable energy projects have reported significant problems resolving disputes with the Government of Egypt.

Investor-State Dispute Settlement

The U.S.-Egypt Bilateral Investment Treaty allows an investor to take a dispute directly to binding third-party arbitration.  The Egyptian courts generally endorse international arbitration clauses in commercial contracts.  For example, the Court of Cassation has, on a number of occasions, confirmed the validity of arbitration clauses included in contracts between Egyptian and foreign parties.

A new mechanism for simplified settlement of investment disputes aimed at avoiding the court system altogether has been established.  In particular, the law established a Ministerial Committee on Investment Contract Disputes, responsible for the settlement of disputes arising from investment contracts to which the State, or a public or private body affiliated therewith, is a party. This is in addition to establishing a Complaint Committee to consider challenges connected to the implementation of Egypt’s Investment Law.  Finally, the decree established a Committee for Resolution of Investment Disputes, which will review complaints or disputes between investors and the government related to the implementation of the Investment Law.  In practice, Egypt’s dispute resolution mechanisms are time-consuming but broadly effective.  Businesses have, however, reported difficulty collecting payment from the government when awarded a monetary settlement.

Over the past 10 years, there have been several investment disputes involving both U.S. persons and foreign investors.  Most of the cases have been settled, though no definitive number is available. Local courts in Egypt recognize and enforce foreign arbitral awards issued against the government.  There are no known extrajudicial actions against foreign investors in Egypt during the period of this report.

International Commercial Arbitration and Foreign Courts

Egypt allows mediation as a mechanism for alternative dispute resolution (ADR), a structured negotiation process in which an independent person known as a mediator assists the parties to identify and assess options, and negotiate an agreement to resolve their dispute.  GAFI has an Investment Disputes Settlement Center, which uses mediation as an ADR.

The Economic Court recognizes and enforces arbitral awards. Judgments of foreign courts may be recognized and enforceable under local courts under limited conditions.

In most cases, domestic courts have found in favor of state-owned enterprises (SOEs) involved in investment disputes.  In such disputes, non-government parties have often complained about the delays and discrimination in court processes.

Many foreign investors employ clauses that specify that U.S. companies employ contractual clauses that specify binding international (not local) arbitration of disputes in their commercial agreements.

Bankruptcy Regulations

Egypt passed a Bankruptcy Law (Law 11 of 2018) in January 2018, which was designed to speed up the restructuring of troubled companies and settlement of their accounts.  It also replaced the threat of imprisonment with fines in cases of bankruptcy.  As of July 2020, the Egyptian government was considering but had not yet implemented amendments to the 2018 law that would allow debtors to file for bankruptcy protection, and would give creditors the ability to determine whether debtors could continue operating, be placed under administrative control, or be forced to liquidate their assets.

In practice, the paperwork involved in liquidating a business remains convoluted and protracted; starting a business is much easier than shutting one down. Bankruptcy is frowned upon in Egyptian culture, and many businesspeople still believe they may be found criminally liable if they declare bankruptcy.

5. Protection of Property Rights

Real Property

The Egyptian legal system provides protection for real and personal property. Laws on real estate ownership are complex and titles to real property may be difficult to establish and trace. According to the World Bank’s 2020 Doing Business Report, Egypt ranks 130 of 190 for ease of registering property.

The National Title Registration Program introduced by the Ministry of State for Administrative Development has been implemented in nine areas within Cairo. This program is intended to simplify property registration and facilitate easier mortgage financing. Real estate registration fees, long considered a major impediment to development of the real estate sector, are capped at no more than 2,000 EGP ($120), irrespective of the property value.

Foreigners are limited to ownership of two residences in Egypt, and specific procedures are required for purchasing real estate in certain geographical areas.

The mortgage market is still undeveloped in Egypt, and in practice most purchases are still conducted in cash. Real Estate Finance Law 148/2001 authorized both banks and non-bank mortgage companies to issue mortgages. The law provides procedures for foreclosure on property of defaulting debtors, and amendments passed in 2004 allow for the issuance of mortgage-backed securities. According to the regulations, banks can offer financing in foreign currency of up to 80 percent of the value of a property.

Presidential Decree 17/2015 permitted the government to provide land free of charge, in certain regions only, to investors meeting certain technical and financial requirements. In order to take advantage of this provision companies must provide cash collateral for five years following commencement of either production (for industrial projects) or operation (for all other projects).

The ownership of land by foreigners is governed by three laws: Law 15/1963, Law 143/1981, and Law 230/1996. Law 15/1963 stipulates that no foreigners, whether natural or juristic persons, may acquire agricultural land. Law 143/1981 governs the acquisition and ownership of desert land. Certain limits are placed on the number of feddans (one feddan is approximately equal to one acre) that may be owned by individuals, families, cooperatives, partnerships and corporations. Partnerships are permitted to own up to 10,000 feddans. Joint stock companies are permitted to own up to 50,000 feddans.

Partnerships and joint stock companies may own desert land within these limits, even if foreign partners or shareholders are involved, provided that at least 51 percent of the capital is owned by Egyptians. Upon liquidation of the company, however, the land must revert to Egyptian ownership. Law 143 defines desert land as the land lying two kilometers outside city borders. Furthermore, non-Egyptians owning non-improved real estate in Egypt must build within a period of five years from the date their ownership is registered by a notary public. Non-Egyptians may only sell their real estate five years after registration of ownership unless the Prime Minister consents to an exemption.

Intellectual Property Rights

Egypt remains on the Special 301 Watch List in 2021. Egypt’s intellectual property rights (IPR) legislation generally meets international standards, and the government has made progress enforcing those laws, reducing patent application backlogs, and, in 2020, shut down a number of online illegal streaming websites. It has also made progress establishing protection against the unfair commercial use, as well as unauthorized disclosure, of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products. Stakeholders note continued challenges with widespread counterfeiting, biotechnology patentability criteria, patent and trademark examination criteria, and pharmaceutical-related IP issues.

Multinational pharmaceutical companies in the past have complained that local generic drug-producing companies infringe on their patents. The government has not yet established a system linking pharmaceutical marketing applications with patent licenses, and as a result permits for the sale of pharmaceuticals are generally issued without first cross-checking patent filings.

Decree 251/2020, issued in January 2020, established a ministerial committee to review petitions for compulsory patent licenses. According to Egypt’s 2002 IPR Law (Law 82 of 2002), which allows for compulsory patent licenses in some cases, the committee has the power to issue compulsory patent licenses according to a number of criteria set forth in the law; to determine financial remuneration for the original patent owners; and to approve the expropriation of the patents.

Book, music, and entertainment software piracy is prevalent in Egypt, and a significant portion of the piracy takes place online. American film studios represented by the Motion Pictures Association of America are concerned about the illegal distribution of American movies on regional satellite channels.

Eight GoE ministries have the responsibility to oversee IPR concerns: Supply and Internal Trade for trademarks; Higher Education and Research for patents; Culture for copyrights; Agriculture for plants; Communications and Information Technology for copyright of computer programs; Interior for combatting IPR violations; Customs for border enforcement; and Trade and Industry for standards and technical regulations. Article 69 of Egypt’s 2014 Constitution mandates the establishment of a “specialized agency to uphold [IPR] rights and their legal protection.” A National Committee on IPR was established to address IPR matters until a permanent body is established. All IPR stakeholders are represented in the committee, and members meet every two months to discuss issues. The National Committee on IPR is chaired by the Ministry of Foreign Affairs and reports directly to the Prime Minister.

The Egyptian Customs Authority (ECA) handles IPR enforcement at the national border and the Ministry of Interior’s Department of Investigation handles domestic cases of illegal production. The ECA cannot act unless the trademark owner files a complaint. ECA’s customs enforcement also tends to focus on protecting Egyptian goods and trademarks. The ECA is taking steps to adopt the World Customs Organization’s (WCO) Interface Public-Members platform, which allows customs officers to detect counterfeit goods by scanning a product’s barcode and checking the WCO trademark database system.

For additional information about treaty obligations and points of contact at local offices, please see WIPO’s country profiles at http://wipo.int/directory/en/.

IPR Contact at Embassy Cairo:  Christopher Leslie

Trade & Investment Officer

20-2-2797-2735

LeslieCG@state.gov 

7. State-Owned Enterprises

State and military-owned companies compete directly with private companies in many sectors of the Egyptian economy. Although Public Sector Law 203/1991 states that state-owned enterprises (SOEs) should not receive preferential treatment from the government or be accorded exemptions from legal requirements applicable to private companies, in practice SOEs and military-owned companies enjoy significant advantages, including relief from regulatory requirements. Forty percent of the banking sector’s assets are controlled by three state-owned banks (Banque Misr, Banque du Caire, and National Bank of Egypt).  SOEs and other state-controlled “economic entities” in Egypt subject to Law 203/1991 are affiliated with 10 ministries and employ 450,000 workers.  The Ministry of Public Business Sector controls 90 SOEs operating under eight holding companies that employ 209,000 workers. The most profitable sectors include tourism, real estate, and transportation. The ministry publishes a list of SOEs and holding companies on its website, http://www.mpbs.gov.eg/Arabic/Affiliates/HoldingCompanies/Pages/default.aspx and http://www.mpbs.gov.eg/Arabic/Affiliates/AffiliateCompanies/Pages/default.aspx.   In an attempt to encourage growth of the private sector, privatization of state-owned enterprises and state-owned banks accelerated under an economic reform program that took place from 1991 to 2008. Following the 2011 revolution, third parties have brought cases in court to reverse privatization deals, and in a number of these cases, Egyptian courts have ruled to reverse the privatization of several former public companies. Most of these cases are still under appeal.

In an attempt to encourage growth of the private sector, privatization of state-owned enterprises and state-owned banks accelerated under an economic reform program that took place from 1991 to 2008. Following the 2011 revolution, third parties have brought cases in court to reverse privatization deals, and in a number of these cases, Egyptian courts have ruled to reverse the privatization of several former public companies. Most of these cases are still under appeal.

The state-owned telephone company, Telecom Egypt, lost its legal monopoly on the local, long-distance, and international telecommunication sectors in 2005, but held a de facto monopoly until late 2016, when the National Telecommunications Regulatory Authority (NTRA) implemented a unified license regime that allows companies to offer both fixed line and mobile networks. The agreement allowed Telecom Egypt to enter the mobile market and the three existing mobile companies to enter the fixed-line market.  

 

OECD Guidelines on Corporate Governance of SOEs 

SOEs in Egypt are structured as individual companies controlled by boards of directors and grouped under government holding companies that are arranged by industry, including Petroleum Products & Gas, Spinning & Weaving; Metallurgical Industries; Chemical Industries; Pharmaceuticals; Food Industries; Building & Construction; Tourism, Hotels, & Cinema; Maritime & Inland Transport; Aviation; and Insurance. The holding companies are headed by boards of directors appointed by the Prime Minister with input from the relevant Minister.

Privatization Program

The Egyptian government last attempted to privatize stakes in SOEs in March 2018 with the successful public offering of a minority stake in the Eastern Tobacco Company. The government has indefinitely delayed plans for privatizing stakes in 22 other SOEs, including up to 30 percent of the shares of Banque du Caire, due to adverse market conditions and increased global volatility. Egypt’s privatization program is based on Public Enterprise Law 203/1991, which permits the sale of SOEs to foreign entities.

Law 32/2014 limits the ability of third parties to challenge privatization contracts between the Egyptian government and investors. The law was intended to reassure investors concerned by legal challenges brought against privatization deals and land sales dating back to the pre-2008 period. Court cases at the time Parliament passed the law had put many of these now-private firms, many of which are foreign-owned, in legal limbo over concerns that they may be returned to state ownership.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

 

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $319,056 2019 $335,175 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 11 2019 $11,000 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2019 $1 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data 
Total inbound stock of FDI as % host GDP N/A N/A 2019 41% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx 

* Sources for Host Country Data: Central Bank of Egypt; CAPMAS; GAFI

Table 3: Sources and Destination of FDI
Data not available.

Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, US Dollars, 2019)
Total Equity Securities Total Debt Securities
All Countries 985 100% All Countries 377 100% All Countries 608 100%
United States 242 25% International Organizations 216 57% United States 233 38%
International Organizations 216 22% Saudi Arabia 27 7% Saudi Arabia 92 15%
Saudi Arabia 120 12% Italy 23 6% United Arab Emirates 56 9%
United Arab Emirates 59 6% Switzerland 17 5% United Kingdom 46 8%
United Kingdom 50 5% Singapore 16 4% China 40 7%

Hong Kong

Executive Summary

Hong Kong became a Special Administrative Region (SAR) of the People’s Republic of China (PRC) on July 1, 1997, with its status defined in the Sino-British Joint Declaration and the Basic Law.  Under the concept of “one country, two systems,” the PRC government promised that Hong Kong will retain its political, economic, and judicial systems for 50 years after reversion.  The PRC’s imposition of the National Security Law (NSL) on June 30, 2020 undermined Hong Kong’s autonomy and introduced heightened uncertainty for foreign and local firms operating in Hong Kong.  As a result, the U.S. Government has taken measures to eliminate or suspend Hong Kong’s preferential treatment and special trade status, including suspension of most export control waivers, revocation of reciprocal shipping income tax exemption treatments, establishment of a new marking rule requiring goods made in Hong Kong to be labeled “Made in China,”  and imposition of sanctions against former and current Hong Kong government officials.

On July 16, 2021, the Department of State, along with the Department of the Treasury, the Department of Commerce, and the Department of Homeland Security, issued an advisory to U.S. businesses regarding potential risks to their operations and activities in Hong Kong.

 

Since the enactment of the NSL in Hong Kong, U.S. citizens traveling or residing in Hong Kong may be subject to increased levels of surveillance, as well as arbitrary enforcement of laws and detention for purposes other than maintaining law and order.

On economic issues, Hong Kong generally pursues a free market philosophy with minimal government intervention.  The Hong Kong government (HKG) generally welcomes foreign investment, neither offering special incentives nor imposing disincentives for foreign investors.

Hong Kong provides for no distinction in law or practice between investments by foreign-controlled companies and those controlled by local interests.  Foreign firms and individuals are able to incorporate their operations in Hong Kong, register branches of foreign operations, and set up representative offices without encountering discrimination or undue regulation.  There is no restriction on the ownership of such operations.  Company directors are not required to be citizens of, or resident in, Hong Kong.  Reporting requirements are straightforward and are not onerous.

Despite the imposition of the NSL by Beijing, significant curtailments in individual freedoms, and the end of Hong Kong’s ability to exercise the degree of autonomy it enjoyed in the past, Hong Kong remains a popular destination for U.S. investment and trade.  Even with a population of less than eight million, Hong Kong is the United States’ twelfth-largest export market, thirteenth largest for total agricultural products, and sixth-largest for high-value consumer food and beverage products.  Hong Kong’s economy, with world-class institutions and regulatory systems, is bolstered by its competitive financial and professional services, trading, logistics, and tourism sectors, although tourism suffered steep drops in 2020 due to COVID-19.  The service sector accounted for more than 90 percent of Hong Kong’s nearly USD 348 billion gross domestic product (GDP) in 2020.  Hong Kong hosts a large number of regional headquarters and regional offices.  Approximately 1,300 U.S. companies are based in Hong Kong, according to Hong Kong’s 2020 census data, with more than half regional in scope.  Finance and related services companies, such as banks, law firms, and accountancies, dominate the pack.  Seventy of the world’s 100 largest banks have operations in Hong Kong.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 11 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 3 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 11 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 81,883 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 50,800 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Hong Kong is the world’s second-largest recipient of foreign direct investment (FDI), according to the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2020, with a significant amount bound for mainland China.  The HKG’s InvestHK encourages inward investment, offering free advice and services to support companies from the planning stage through to the launch and expansion of their business.  U.S. and other foreign firms can participate in government financed and subsidized research and development programs on a national treatment basis.  Hong Kong does not discriminate against foreign investors by prohibiting, limiting, or conditioning foreign investment in a sector of the economy.

Capital gains are not taxed, nor are there withholding taxes on dividends and royalties.  Profits can be freely converted and remitted.  Foreign-owned and Hong Kong-owned company profits are taxed at the same rate – 16.5 percent.  The tax rate on the first USD 255,000 profit for all companies is currently 8.25 percent.  No preferential or discriminatory export and import policies affect foreign investors.  Domestic industries receive no direct subsidies.  Foreign investments face no disincentives, such as quotas, bonds, deposits, or other similar regulations.

According to HKG statistics, 3,983 overseas companies had regional operations registered in Hong Kong in 2020.  The United States has the largest number with 690.  Hong Kong is working to attract more start-ups as it works to develop its technology sector, and about 26 percent of start-ups in Hong Kong come from overseas.

Hong Kong’s Business Facilitation Advisory Committee is a platform for the HKG to consult the private sector on regulatory proposals and implementation of new or proposed regulations.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investors can invest in any business and own up to 100 percent of equity.  Like domestic private entities, foreign investors have the right to engage in all forms of remunerative activity.

The HKG owns virtually all land in Hong Kong, which the HKG administers by granting long-term leases without transferring title.  Foreign residents claim that a 15 percent Buyer’s Stamp Duty on all non-permanent-resident and corporate buyers discriminates against them.

The main exceptions to the HKG’s open foreign investment policy are:

Broadcasting – Voting control of free-to-air television stations by non-residents is limited to 49 percent.  There are also residency requirements for the directors of broadcasting companies.

Legal Services – Foreign lawyers at foreign law firms may only practice the law of their jurisdiction.  Foreign law firms may become “local” firms after satisfying certain residency and other requirements.  Localized firms may thereafter hire local attorneys but must do so on a 1:1 basis with foreign lawyers.  Foreign law firms can also form associations with local law firms.

Other Investment Policy Reviews

Hong Kong last conducted the Trade Policy Review in 2018 through the World Trade Organization (WTO).  https://www.wto.org/english/tratop_e/tpr_e/g380_e.pdf

Business Facilitation

The Efficiency Office under the Innovation and Technology Bureau is responsible for business facilitation initiatives aimed at improving the business regulatory environment of Hong Kong.

The e-Registry (https://www.eregistry.gov.hk/icris-ext/apps/por01a/index) is a convenient and integrated online platform provided by the Companies Registry and the Inland Revenue Department for applying for company incorporation and business registration.  Applicants, for incorporation of local companies or for registration of non-Hong Kong companies, must first register for a free user account, presenting an original identification document or a certified true copy of the identification document.  The Companies Registry normally issues the Business Registration Certificate and the Certificate of Incorporation on the same day for applications for company incorporation.  For applications for registration of a non-Hong Kong company, it issues the Business Registration Certificate and the Certificate of Registration two weeks after submission.

Outward Investment

As a free market economy, Hong Kong does not promote or incentivize outward investment, nor restrict domestic investors from investing abroad.  Mainland China and British Virgin Islands were the top two destinations for Hong Kong’s outward investments in 2019 (based on most recent data available).

3. Legal Regime

Transparency of the Regulatory System

Hong Kong’s regulations and policies typically strive to avoid distortions or impediments to the efficient mobilization and allocation of capital and to encourage competition.  Bureaucratic procedures and “red tape” are usually transparent and held to a minimum.

In amending or making any legislation, including investment laws, the HKG conducts a three-month public consultation on the issue concerned which then informs the drafting of the bill.  Lawmakers then discuss draft bills and vote.  Hong Kong’s legal, regulatory, and accounting systems are transparent and consistent with international norms.

Gazette is the official publication of the HKG.  This website https://www.gld.gov.hk/egazette/english/whatsnew/whatsnew.html is the centralized online location where laws, regulations, draft bills, notices, and tenders are published.  All public comments received by the HKG are published at the websites of relevant policy bureaus.

The Office of the Ombudsman, established in 1989 by the Ombudsman Ordinance, is Hong Kong’s independent watchdog of public governance.

Public finances are regulated by clear laws and regulations.  The Basic Law prescribes that authorities strive to achieve a fiscal balance and avoid deficits.  There is a clear commitment by the HKG to publish fiscal information under the Audit Ordinance and the Public Finance Ordinance, which prescribe deadlines for the publication of annual accounts and require the submission of annual spending estimates to the Legislative Council (LegCo).  There are few contingent liabilities of the HKG, with details of these items published about seven months after the release of the fiscal budget.  In addition, LegCo members have a responsibility to enhance budgetary transparency by urging government officials to explain the government’s rationale for the allocation of resources.  All LegCo meetings are open to the public so that the government’s responses are available to the general public.

On March 29, 2021, the Hong Kong Financial Services and Treasury Bureau submitted to Hong Kong’s Legislative Council plans to restrict the public from accessing certain information about executives in the Company Registry.  If passed, companies will be allowed immediately to withhold information on the residential addresses and identification numbers of directors and secretaries.  Corporate governance and financial experts warned that the proposal could enable fraud and further hurt the city’s status as a transparent financial hub.   Media organizations criticized the plan for undermining transparency and freedom of information.

International Regulatory Considerations

Hong Kong is an independent member of the WTO and Asia-Pacific Economic Co-operation (APEC), adopting international norms.  It notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade and was the first WTO member to ratify the Trade Facilitation Agreement (TFA).  Hong Kong has achieved a 100 percent rate of implementation commitments.

Legal System and Judicial Independence

Hong Kong’s common law system is based on the United Kingdom’s, and judges are appointed by the Chief Executive on the recommendation of the Judicial Officers Recommendation Commission.  Regulations or enforcement actions are appealable, and they are adjudicated in the court system.

Hong Kong’s commercial law covers a wide range of issues related to doing business.  Most of Hong Kong’s contract law is found in the reported decisions of the courts in Hong Kong and other common law jurisdictions.

The imposition of the NSL and pressure from the PRC authorities raised serious concerns about the longevity of Hong Kong’s judicial independence.  The NSL authorizes the mainland China judicial system, which lacks judicial independence and has a 99 percent conviction rate, to take over any national security-related case at the request of the Hong Kong government or the Office of Safeguarding National Security.  Under the NSL, the Hong Kong Chief Executive is required to establish a list of judges to handle all cases concerning national security-related offenses.  Although Hong Kong’s judiciary selects the specific judge(s) who will hear any individual case, some commentators argued that this unprecedented involvement of the Chief Executive weakens Hong Kong’s judicial independence.

Media outlets controlled by the PRC central government in both Hong Kong and mainland China repeatedly accused Hong Kong judges of bias following the acquittals of protesters accused of rioting and other crimes.  Some Hong Kong and PRC central government officials questioned the existence of the “separation of powers” in Hong Kong, including some statements that judicial independence is not enshrined in Hong Kong law and that judges should follow “guidance” from the government.

Laws and Regulations on Foreign Direct Investment

Hong Kong’s extensive body of commercial and company law generally follows that of the United Kingdom, including the common law and rules of equity.  Most statutory law is made locally.  The local court system, which is independent of the government, provides for effective enforcement of contracts, dispute settlement, and protection of rights.  Foreign and domestic companies register under the same rules and are subject to the same set of business regulations.

The Hong Kong Code on Takeovers and Mergers (1981) sets out general principles for acceptable standards of commercial behavior.

The Companies Ordinance (Chapter 622) applies to Hong Kong-incorporated companies and contains the statutory provisions governing compulsory acquisitions.  For companies incorporated in jurisdictions other than Hong Kong, relevant local company laws apply.  The Companies Ordinance requires companies to retain accurate and up to date information about significant controllers.

The Securities and Futures Ordinance (Chapter 571) contains provisions requiring shareholders to disclose interests in securities in listed companies and provides listed companies with the power to investigate ownership of interests in its shares.  It regulates the disclosure of inside information by listed companies and restricts insider dealing and other market misconduct.

Competition and Antitrust Laws

The independent Competition Commission (CC) investigates anti-competitive conduct that prevents, restricts, or distorts competition in Hong Kong.  In December 2020, the CC filed Hong Kong’s first abuse of substantial market power case in the Competition Tribunal against Linde HKO and its Germany-based parent company Linde GmbH for leveraging substantial market power in the production and supply of medical oxygen, medical nitrous oxide, Entonox, and medical air to maintain a stranglehold over the downstream maintenance market.

Expropriation and Compensation

The U.S. Consulate General is not aware of any expropriations in the recent past.  Expropriation of private property in Hong Kong may occur if it is clearly in the public interest and only for well-defined purposes such as implementation of public works projects.  Expropriations are to be conducted through negotiations, and in a non-discriminatory manner in accordance with established principles of international law.  Investors in and lenders to expropriated entities are to receive prompt, adequate, and effective compensation.  If agreement cannot be reached on the amount payable, either party can refer the claim to the Land Tribunal.

Dispute Settlement

ICSID Convention and New York Convention

The Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) apply to Hong Kong.  Hong Kong’s Arbitration Ordinance provides for enforcement of awards under the 1958 New York Convention.

Investor-State Dispute Settlement

The U.S. Consulate General is not aware of any investor-state disputes in recent years involving U.S. or other foreign investors or contractors and the HKG.  Private investment disputes are normally handled in the courts or via private mediation.  Alternatively, disputes may be referred to the Hong Kong International Arbitration Center.

International Commercial Arbitration and Foreign Courts

The HKG accepts international arbitration of investment disputes between itself and investors and has adopted the United Nations Commission on International Trade Law model law for domestic and international commercial arbitration.  It has a Memorandum of Understanding with mainland China modelled on the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) for reciprocal enforcement of arbitral awards.

Under Hong Kong’s Arbitration Ordinance emergency relief granted by an emergency arbitrator before the establishment of an arbitral tribunal, whether inside or outside Hong Kong, is enforceable.  The Arbitration Ordinance stipulates that all disputes over intellectual property rights may be resolved by arbitration.

The Mediation Ordinance details the rights and obligations of participants in mediation, especially related to confidentiality and admissibility of mediation communications in evidence.

Third party funding for arbitration and mediation came into force on February 1, 2019.

Foreign judgments in civil and commercial matters may be enforced in Hong Kong by common law or under the Foreign Judgments (Reciprocal Enforcement) Ordinance, which facilitates reciprocal recognition and enforcement of judgments based on reciprocity.  A judgment originating from a jurisdiction that does not recognize a Hong Kong judgment may still be recognized and enforced by the Hong Kong courts, provided that all the relevant requirements of common law are met.  However, a judgment will not be enforced in Hong Kong if it can be shown that either the judgment or its enforcement is contrary to Hong Kong’s public policy.

In January 2019, Hong Kong and mainland China signed a new Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the mainland and of Hong Kong to facilitate enforcement of judgments in the two jurisdictions.  The arrangement, which as of February 2021 is still pending implementing legislation, will cover the following key features: contractual and tortious disputes in general; commercial contracts, joint venture disputes, and outsourcing contracts; intellectual property rights, matrimonial or family matters; and judgments related to civil damages awarded in criminal cases.

Bankruptcy Regulations

Hong Kong’s Bankruptcy Ordinance provides the legal framework to enable i) a creditor to file a bankruptcy petition with the court against an individual, firm, or partner of a firm who owes him/her money; and ii) a debtor who is unable to repay his/her debts to file a bankruptcy petition against himself/herself with the court.  Bankruptcy offenses are subject to criminal liability.

The Companies (Winding Up and Miscellaneous Provisions) Ordinance aims to improve and modernize the corporate winding-up regime by increasing creditor protection and further enhancing the integrity of the winding-up process.

The Commercial Credit Reference Agency collates information about the indebtedness and credit history of SMEs and makes such information available to members of the Hong Kong Association of Banks and the Hong Kong Association of Deposit Taking Companies.

Hong Kong’s average duration of bankruptcy proceedings is just under ten months, ranking 45th in the world for resolving insolvency, according to the World Bank’s Doing Business 2020 rankings.

5. Protection of Property Rights

Real Property

The Basic Law ensures protection of leaseholders’ rights in long-term leases that are the basis of the SAR’s real property system.  The Basic Law also protects the lawful traditional rights and interests of the indigenous inhabitants of the New Territories.  The real estate sector, one of Hong Kong’s pillar industries, is equipped with a sound banking mortgage system.  HK ranked 51st for ease of registering property, according to the World Bank’s Doing Business 2020 rankings.

Land transactions in Hong Kong operate on a deeds registration system governed by the Land Registration Ordinance.  The Land Titles Ordinance provides greater certainty on land title and simplifies the conveyancing process.

Intellectual Property Rights

Hong Kong generally provides strong intellectual property rights (IPR) protection and enforcement and for the most part has instituted an IP regime consistent with international standards.  Hong Kong has effective IPR enforcement capacity, and a judicial system that supports enforcement efforts with an effective public outreach program that discourages IPR-infringing activities.   Despite the robustness of Hong Kong’s IP system, challenges remain, particularly in copyright infringement and effective enforcement against the heavy, bi-directional flow of counterfeit goods.

Hong Kong’s commercial and company laws provide for effective enforcement of contracts and protection of corporate rights.  Hong Kong has filed its notice of compliance with the Trade-Related Aspects of Intellectual Property Rights (TRIPs) requirements of the WTO.  The Intellectual Property Department, which includes the Trademarks and Patents Registries, is the focal point for the development of Hong Kong’s IP regime.  The Customs and Excise Department (CED) is the sole enforcement agency for intellectual property rights (IPR).  Hong Kong has acceded to the Paris Convention for the Protection of Industrial Property, the Bern Convention for the Protection of Literary and Artistic Works, and the Geneva and Paris Universal Copyright Conventions.  Hong Kong also continues to participate in the World Intellectual Property Organization as part of mainland China’s delegation; the HKG has seconded an officer from CED to INTERPOL in Lyon, France to further collaborate on IPR enforcement.

The HKG devotes significant resources to IPR enforcement.  Hong Kong courts have imposed longer jail terms than in the past for violations of Hong Kong’s Copyright Ordinance.  CED works closely with foreign customs agencies and the World Customs Organization to share best practices and to identify, disrupt, and dismantle criminal organizations engaging in IP theft that operate in multiple countries.  The government has conducted public education efforts to encourage respect for IPR.  Pirated and counterfeit products remain available on a small scale at the retail level throughout Hong Kong.

Other IPR challenges include end-use piracy of software and textbooks, internet peer-to-peer downloading, and the illicit importation and transshipment of pirated and counterfeit goods from mainland China and other places in Asia.  Hong Kong authorities have taken steps to address these challenges by strengthening collaboration with mainland Chinese authorities, prosecuting end-use software piracy, and monitoring suspect shipments at points of entry.  It has also established a task force to monitor and crack down on internet-based peer-to-peer piracy.

The Drug Office of Hong Kong imposes a drug registration requirement that requires applicants for new drug registrations to make a non-infringement patent declaration.  The Copyright Ordinance protects any original copyrighted work created or published anywhere in the world and criminalizes copying and distribution of protected works .  The Ordinance also provides rental rights for sound recordings, computer programs, films, and comic books and includes enhanced penalty provisions and other legal tools to facilitate enforcement.  The law defines possession of an infringing copy of computer programs, movies, TV dramas, and musical recordings (including visual and sound recordings) for use in business as an offense but provides no criminal liability for other categories of works.  In June 2020, an amendment bill to implement the Marrakesh Treaty came into effect.

The HKG has consulted unsuccessfully with internet service providers and content user representatives on a voluntary framework for IPR protection in the digital environment.  It has also failed to pass amendments to the Copyright Ordinance that would enhance copyright protection against online piracy.  As of February 2021, the Infringing Website List Scheme (IWLS) established by the Hong Kong Creative Industries Association to clamp down on websites that display pirated content reportedly included 137 infringing websites in the portal.  In addition, 27 HKG agencies have been assigned with an individual password for checking with the IWLS before placing digital advertisements and tenders.

The Patent Ordinance allows for granting an independent patent in Hong Kong based on patents granted by the United Kingdom and mainland China.  Patents granted in Hong Kong are independent and capable of being tested for validity, rectified, amended, revoked, and enforced in Hong Kong courts.  Hong Kong’s Original Grant Patent system, which came into operation in December 2019, takes into account the patent systems generally established in regional and international patent treaties, while maintaining the re-registration system for the granting of standard patents.

The Registered Design Ordinance is modeled on the EU design registration system.  To be registered, a design must be new, and the system requires no substantive examination.  The initial period of five years protection is extendable for four periods of five years each, up to 25 years.

Hong Kong’s trademark law is TRIPS-compatible and allows for registration of trademarks relating to services.  All trademark registrations originally filed in Hong Kong are valid for seven years and renewable for 14-year periods.  Proprietors of trademarks registered elsewhere must apply anew and satisfy all requirements of Hong Kong law.  When evidence of use is required, such use must have occurred in Hong Kong.  In June 2020, Hong Kong implemented the Madrid Protocol.  The HKG will liaise with mainland China to seek application of the Madrid Protocol to Hong Kong beginning in 2022.

Hong Kong has no specific ordinance to cover trade secrets; however, the government has a duty under the Trade Descriptions Ordinance to protect information from being disclosed to other parties.  The Trade Descriptions Ordinance prohibits false trade descriptions, forged trademarks, and misstatements regarding goods and services supplied during trade.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

7. State-Owned Enterprises

Hong Kong has several major HKG-owned enterprises classified as “statutory bodies.” Hong Kong is party to the Government Procurement Agreement (GPA) within the framework of WTO.  Annex 3 of the GPA lists as statutory bodies the Housing Authority, the Hospital Authority, the Airport Authority, the Mass Transit Railway Corporation Limited, and the Kowloon-Canton Railway Corporation, which procure in accordance with the agreement.

The HKG provides more than half the population with subsidized housing, along with most hospital and education services from childhood through the university level.  The government also owns major business enterprises, including the stock exchange, railway, and airport.

Conflicts occasionally arise between the government’s roles as owner and policymaker.  Industry observers have recommended that the government establish a separate entity to coordinate its ownership of government-held enterprises and initiate a transparent process of nomination to the boards of government-affiliated entities.  Other recommendations from the private sector include establishing a clear separation between industrial policy and the government’s ownership function and minimizing exemptions of government-affiliated enterprises from general laws.

The Competition Law exempts all but six of the statutory bodies from the law’s purview.  While the government’s private sector ownership interests do not materially impede competition in Hong Kong’s most important economic sectors, industry representatives have encouraged the government to adhere more closely to the Guidelines on Corporate Governance of State-owned Enterprises of the Organization for Economic Cooperation and Development (OECD).

Privatization Program

All major utilities in Hong Kong, except water, are owned and operated by private enterprises, usually under an agreement framework by which the HKG regulates each utility’s management.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $347,529 2019 $365,712 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $44,974 2019 $81,883 BEA data available at
https://apps.bea.gov/
international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2019 $14,679 2019 $14,110 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2019 507.5% 2019 506.5% UNCTAD data available at
https://stats.unctad.org/
handbook/EconomicTrends/Fdi.html

* Source for Host Country Data: Hong Kong Census and Statistics Department 

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 1,732,495 100% Total Outward 1,763,164 100%
British Virgin Islands 606,804 35% China, P.R.: Mainland 800,640 45%
China, P.R.: Mainland 475,641 27% British Virgin Islands 579,860 33%
Cayman Islands 152,048 9% Cayman Islands 70,492 4%
United Kingdom 139,120 8% Bermuda 55,091 3%
Bermuda 99,514 6% United Kingdom 53,858 3%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 1,830,229 100% All Countries 1,167,955 100% All Countries 662,274 100%
Cayman Islands 635,236 35% Cayman Islands 608,914 52% United States 156,543 24%
China, P.R.: Mainland 352,531 19% China, P.R.: Mainland 206,829 18% China, P.R.: Mainland 145,702 22%
United States 204,360 11% Bermuda 109,838 9% Japan 51,682 8%
Bermuda 112,021 6% United Kingdom 60,483 5% Luxembourg 42,742 6%
United Kingdom 85,496 5% United States 47,817 4% Australia 37,143 6%

India

Executive Summary

The Government of India continued to actively court foreign investment. In the wake of COVID-19, India enacted ambitious structural economic reforms, including new labor codes and landmark agricultural sector reforms, that should help attract private and foreign direct investment. In February 2021, the Finance Minister announced plans to raise $2.4 billion though an ambitious privatization program that would dramatically reduce the government’s role in the economy. In March 2021, parliament further liberalized India’s insurance sector, increasing the foreign direct investment (FDI) limits to 74 percent from 49 percent, though still requiring a majority of the Board of Directors and management personnel to be Indian nationals.

In response to the economic challenges created by COVID-19 and the resulting national lockdown, the Government of India enacted extensive social welfare and economic stimulus programs and increased spending on infrastructure and public health. The government also adopted production linked incentives to promote manufacturing in pharmaceuticals, automobiles, textiles, electronics, and other sectors. These measures helped India recover from an approximately eight percent fall in GDP between April 2020 and March 2021, with positive growth returning by January 2021.

India, however, remains a challenging place to do business. New protectionist measures, including increased tariffs, procurement rules that limit competitive choices, sanitary and phytosanitary measures not based on science, and Indian-specific standards not aligned with international standards, effectively closed off producers from global supply chains and restricted the expansion in bilateral trade.

The U.S. government continued to urge the Government of India to foster an attractive and reliable investment climate by reducing barriers to investment and minimizing bureaucratic hurdles for businesses.

 
Measure Year Index/ Rank Website Address
TI Corruption Perception Index 2020 86 of 180 https://www.transparency.org/en/countries/india
World Bank’s Doing Business Report: “Ease of Doing Business” 2019 63 of 190   https://www.doingbusiness.org/en/rankings?region=south-asia
Innovation Index 2020 48 of 131 https://www.wipo.int/global_innovation_index/en/2020
U.S. FDI in partner country (Million. USD stock positions) 2019 45,883 https://apps.bea.gov/international/factsheet/factsheet.cfm?Area=612&UUID=67171087-ee34-4983-ac05-984cc597f1f4
World Bank GNI per capita (USD) 2019 2120 https://data.worldbank.org/indicator/ny.gnp.pcap.cd

1. Openness To, and Restrictions Upon, Foreign Investment

Policies toward Foreign Direct Investment

Changes in India’s foreign investment rules are notified in two different ways: (1) Press Notes issued by the Department for Promotion of Industry and Internal Trade (DPIIT) for most sectors, and (2) legislative action for insurance, pension funds, and state-owned enterprises in the coal sector. FDI proposals in sensitive sectors, however, require the additional approval of the Home Ministry.

DPIIT, under the Ministry of Commerce and Industry, is India’s chief investment regulator and policy maker. It compiles all policies related to India’s FDI regime into a single document to make it easier for investors to understand, and this consolidated policy is updated every year. The updated policy can be accessed at: http://dipp.nic.in/foreign-directinvestment/foreigndirectinvestment-policy.  DPIIT, through the Foreign Investment Implementation Authority (FIIA), plays an active role in resolving foreign investors’ project implementation problems and disseminates information about the Indian investment climate to promote investments. The Department establishes bilateral economic cooperation agreements in the region and encourages and facilitates foreign technology collaborations with Indian companies and DPIIT oftentimes consults with lead ministries and stakeholders. There however have been multiple incidents where relevant stakeholders reported being left out of consultations.

Limits on Foreign Control and Right to Private Ownership and Establishment

In most sectors, foreign and domestic private entities can establish and own businesses and engage in remunerative activities. Several sectors of the economy continue to retain equity limits for foreign capital as well as management and control restrictions, which deter investment. For example, the 2015 Insurance Act raised FDI caps from 26 percent to 49 percent, but also mandated that insurance companies retain “Indian management and control.” In the parliament’s 2021 budget session, the Indian government approved increasing the FDI caps in the insurance sector to 74 percent from 49 percent. However, the legislation retained the “Indian management and control” rider. In the August 2020 session of parliament, the government approved reforms that opened the agriculture sector to FDI, as well as allowed direct sales of products and contract farming, though implementation of these changes was temporarily suspended in the wake of widespread protests. In 2016, India allowed up to 100 percent FDI in domestic airlines; however, the issue of substantial ownership and effective control (SOEC) rules that mandate majority control by Indian nationals have not yet been clarified. A list of investment caps is accessible at: http://dipp.nic.in/foreign-directinvestment/foreign-directinvestment-policy .

Screening of FDI

All FDI must be reviewed under either an “Automatic Route” or “Government Route” process. The Automatic Route simply requires a foreign investor to notify the Reserve Bank of India of the investment and applies in most sectors. In contrast, investments requiring review under the Government Route must obtain the approval of the ministry with jurisdiction over the appropriate sector along with the concurrence of DPIIT. The government route includes sectors deemed as strategic including defense, telecommunications, media, pharmaceuticals, and insurance. In August 2019, the government announced a new package of liberalization measures and brought a number of sectors including coal mining and contract manufacturing under the automatic route.

FDI inflows were mostly directed towards the largest metropolitan areas – Delhi, Mumbai, Bangalore, Hyderabad, Chennai – and the state of Gujarat. The services sector garnered the largest percentage of FDI. Further FDI statistics are available at: http://dipp.nic.in/publications/fdistatistics. 

Other Investment Policy Reviews

OECD’s Indian Economic Snapshot: http://www.oecd.org/economy/india-economic-snapshot/ 

WTO Trade Policy Review: https://www.wto.org/english/tratop_e/tpr_e/tp503_e.htm 

2015-2020 Government of India Foreign Trade Policy: http://dgft.gov.in/ForeignTradePolicy 

Business Facilitation

DPIIT is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view national priorities and socio- economic objectives. While individual lead ministries look after the production, distribution, development and planning aspects of specific industries allocated to them, DPIIT is responsible for overall industrial policy. It is also responsible for facilitating and increasing the FDI flows to the country.

Invest India  is the official investment promotion and facilitation agency of the Government of India, which is managed in partnership with DPIIT, state governments, and business chambers. Invest India specialists work with investors through their investment lifecycle to provide support with market entry strategies, industry analysis, partner search, and policy advocacy as required. Businesses can register online through the Ministry of Corporate Affairs website: http://www.mca.gov.in/ . After the registration, all new investments require industrial approvals and clearances from relevant authorities, including regulatory bodies and local governments. To fast-track the approval process, especially in the case of major projects, Prime Minister Modi started the Pro-Active Governance and Timely Implementation (PRAGATI initiative) – a digital, multi-modal platform to speed the government’s approval process. As of January 2020, a total of 275 project proposals worth around $173 billion across ten states were cleared through PRAGATI. Prime Minister Modi personally monitors the process to ensure compliance in meeting PRAGATI project deadlines. The government also launched an Inter-Ministerial Committee in late 2014, led by the DPIIT, to help track investment proposals that require inter-ministerial approvals. Business and government sources report this committee meets informally and on an ad hoc basis as they receive reports of stalled projects from business chambers and affected companies.

Outward Investment

The Ministry of Commerce’s India Brand Equity Foundation (IBEF) claimed in March 2020 that outbound investment from India had undergone a considerable change in recent years in terms of magnitude, geographical spread, and sectorial composition. Indian firms invest in foreign markets primarily through mergers and acquisition (M&A). According to a Care Ratings study, corporate India invested around $12.25 billion in overseas markets between April and December 2020. The investment was mostly into wholly owned subsidiaries of companies. In terms of country distribution, the dominant destinations were the Unites States ($2.36 billion), Singapore ($2.07 billion), Netherlands ($1.50 billion), British Virgin Islands ($1.37 billion), and Mauritius ($1.30 million).

3. Legal Regime

Transparency of the Regulatory System

Some government policies are written in a way that can be discriminatory to foreign investors or favor domestic industry. For example, approval in 2021 for higher FDI thresholds in the insurance sector came with a requirement of “Indian management and control.” On most occasions the rules are framed after thorough discussions by government authorities and require the approval of the cabinet and, in some cases, the Parliament as well. Policies pertaining to foreign investments are framed by DPIIT, and implementation is undertaken by lead federal ministries and sub-national counterparts. However, in some instances the rules have been framed without following any consultative process.

In 2017, India began assessing a six percent “equalization levy,” or withholding tax, on foreign online advertising platforms with the ostensible goal of “equalizing the playing field” between resident service suppliers and non-resident service suppliers. However, its provisions did not provide credit for taxes paid in other countries for services supplied in India. In February 2020, the FY 2020-21 budget included an expansion of the “equalization levy,” adding a two percent tax to the equalization levy on foreign e-commerce and digital services provider companies. Neither the original 2017 levy, nor the additional 2020 two percent tax applied to Indian firms. In February 2021, the FY 2021-22 budget included three amendments “clarifying” the 2020 equalization levy expansion that will significantly extend the scope and potential liability for U.S. digital and e-commerce firms. The changes to the levy announced in 2021 will be implemented retroactively from April 2020. The 2020 and 2021 changes were enacted without prior notification or an opportunity for public comment.

The Indian Accounting Standards were issued under the supervision and control of the Accounting Standards Board, a committee under the Institute of Chartered Accountants of India (ICAI), and has government, academic, and professional representatives. The Indian Accounting Standards are named and numbered in the same way as the corresponding International Financial Reporting Standards. The National Advisory Committee on Accounting Standards recommends these standards to the Ministry of Corporate Affairs, which all listed companies must then adopt. These can be accessed at: http://www.mca.gov.in/MinistryV2/Stand.html 

International Regulatory Considerations

India is a member of the South Asia Association for Regional Cooperation (SAARC), an eight- member regional block in South Asia. India’s regulatory systems are aligned with SAARC’s economic agreements, visa regimes, and investment rules. Dispute resolution in India has been through tribunals, which are quasi-judicial bodies. India has been a member of the WTO since 1995, and generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade; however, at times there are delays in publishing the notifications. The Governments of India and the United States cooperate in areas such as standards, trade facilitation, competition, and antidumping practices.

Legal System and Judicial Independence

India adopted its legal system from English law and the basic principles of the Common Law as applied in the UK are largely prevalent in India. However, foreign companies need to make adaptations for Indian Law and the Indian business culture when negotiating and drafting contracts in India to ensure adequate protection in case of breach of contract. The Indian judiciary provides for an integrated system of courts to administer both central and state laws. The judicial system includes the Supreme Court as the highest national court, as well as a High Court in each state or a group of states which covers a hierarchy of subordinate courts. Article 141 of the Constitution of India provides that a decision declared by the Supreme Court shall be binding on all courts within the territory of India. Apart from courts, tribunals are also vested with judicial or quasi-judicial powers by special statutes to decide controversies or disputes relating to specified areas.

Courts have maintained that the independence of the judiciary is a basic feature of the Constitution, which provides the judiciary institutional independence from the executive and legislative branches.

Indonesia

Executive Summary

Indonesia’s population of 270 million, Gross Domestic Product (GDP) over USD 1 trillion, growing middle class, abundant natural resources, and stable economy all serve as very attractive features to U.S. investors; however, a range of stakeholders note that investing in Indonesia remains challenging.  Since 2014, the Indonesian government under President Joko (“Jokowi”) Widodo, now in his second and final five-year term, has prioritized boosting infrastructure investment and human capital development to support Indonesia’s economic growth goals.  The COVID-19 pandemic has accelerated the Indonesian government’s efforts to pursue major economic reforms through the issuance of the 2020 Omnibus Law on Job Creation (Omnibus Law).  The law and its implementing regulations aim to improve Indonesia’s economic competitiveness and accelerate economic recovery by lowering corporate taxes, reforming rigid labor laws, simplifying business licenses, and reducing bureaucratic and regulatory barriers to investment.  The regulations also provide a basis to liberalize hundreds of sectors, including healthcare services, insurance, power generation, and oil and gas.  Sectoral or technical regulations may still present obstacles.  Regardless of the outcome of these positive reforms and their implementation, factors such as a decentralized decision-making process, legal and regulatory uncertainty, economic nationalism, trade protectionism, and powerful domestic vested interests in both the private and public sectors can contribute to a complex investment climate.  Other factors relevant to investors include:  government requirements, both formal and informal, to partner with Indonesian companies, and to manufacture or purchase goods and services locally; restrictions on some imports and exports; and pressure to make substantial, long-term investment commitments.  Despite recent limits placed on its authority, the Indonesian Corruption Eradication Commission (KPK) continues to investigate and prosecute corruption cases.  However, investors still cite corruption as an obstacle to pursuing opportunities in Indonesia.

Other barriers to foreign investment that have been reported include difficulties in government coordination, the slow rate of land acquisition for infrastructure projects, weak enforcement of contracts, bureaucratic inefficiency, and delays in receiving refunds for advance corporate tax overpayments from tax authorities.  Businesses also face difficulty from changes to rules at government discretion with little or no notice and opportunity for comment, and lack of stakeholder consultation in the development of laws and regulations at various levels.  Investors have noted that many new regulations are difficult to understand and often not properly communicated, including internally.  The Indonesian government is seeking to streamline the business license and import permit process, which has been plagued by complex inter-ministerial coordination in the past, through the establishment of a “one stop shop” for risk-based licenses and permits via an online single submission (OSS) system at the Indonesia Investment Coordinating Board (BKPM).

In February 2021, Indonesia introduced a priority list consisting of sectors that are open for foreign investment and eligible for investment incentives to replace the 2016 Negative Investment List.  All sectors are at least partially open to foreign investment, with the exception of seven closed sectors and sectors that are reserved for the central government.  Companies have reported that energy and mining still face significant foreign investment barriers.

Indonesia established the Indonesian Investment Authority (INA), also known as the sovereign wealth fund, upon the enactment of the Omnibus Law, aiming to attract foreign equity and long-term investment to finance infrastructure projects in sectors such as transportation, oil and gas, health, tourism, and digital technologies.

Indonesia began to abrogate its more than 60 existing Bilateral Investment Treaties (BITs) in 2014, allowing some of the agreements to expire in order to be renegotiated, including through ongoing negotiations of bilateral trade agreements.  In March 2021, Indonesia and Singapore ratified a new BIT, the first since 2014.  The United States does not have a BIT with Indonesia.

Despite the challenges that industry has reported, Indonesia continues to attract significant foreign investment.  Singapore, the Netherlands, the United States, Japan, and Malaysia were among the top sources of foreign investment in the country in 2019 (latest available full-year data).  Private consumption is the backbone of Indonesia’s economy, the largest in ASEAN, making it a promising destination for a wide range of companies, ranging from consumer products and financial services, to digital start-ups and franchisors.  Indonesia has ambitious plans to continue to improve its infrastructure with a focus on expanding access to energy, strengthening its maritime transport corridors, which includes building roads, ports, railways and airports, as well as improving agricultural production, telecommunications, and broadband networks throughout the country.  Indonesia continues to attract U.S. franchises and consumer product manufacturers.  UN agencies and the World Bank have recommended that Indonesia do more to grow financial and investor support for women-owned businesses, noting obstacles that women-owned business sometimes face in early-stage financing.

Table 1
Measure Year Index or Rank Website Address
TI Corruption Perceptions index 2020 102 of 180 https://www.transparency.org/en/cpi/2020/index/idn
World Bank’s Doing Business Report “Ease of Doing Business” 2020 73 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2020 85 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2019 $12,151 https://apps.bea.gov/iTable/iTable.cfm?ReqID=2&step=1
World Bank GNI per capita 2019 $4,050 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=ID

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Indonesia is an attractive destination for foreign direct investment (FDI) due to its young population, strong domestic demand, stable political situation, abundant natural resources, and well-regarded macroeconomic policy.  Indonesian government officials often state that they welcome increased FDI, aiming to create jobs, spur economic growth, and court foreign investors, notably focusing on infrastructure development and export-oriented manufacturing.  During the first term of President Jokowi’s administration, the government launched sixteen economic policy packages providing tax incentives in certain sectors, cutting red tape, reducing logistics costs, and creating a single submission system for business licensing applications.  Foreign investors, however, have complained about vague and conflicting regulations, bureaucratic inefficiencies, ambiguous legislation in regards to tax enforcement, poor existing infrastructure, rigid labor laws, sanctity of contract issues, and corruption.  To further improve the investment climate, the government drafted and parliament approved the Omnibus Law on Job Creation (Law No. 1/2020) in October 2020 to amend dozens of prevailing laws deemed to hamper investment.  It introduced a risk-based approach for business licensing, simplified environmental requirements and building certificates, tax reforms to ease doing business, more flexible labor regulations, and the establishment of the priority investment list.  It also streamlined the business licensing process at the regional level

The Indonesia Investment Coordinating Board, or BKPM, serves as an investment promotion agency, a regulatory body, and the agency in charge of approving planned investments in Indonesia.  As such, it is the first point of contact for foreign investors, particularly in manufacturing, industrial, and non-financial services sectors.  BKPM’s OSS system streamlines almost all business licensing and permitting processes, based on the issuance of Government Regulation No. 24/2018 on Electronic Integrated Business Licensing Services.  While the OSS system is operational, overlapping authority for permit issuance across ministries and government institutions, both at the national and subnational level, remains challenging.  The Omnibus Law on Job Creation requires local governments to integrate their license systems into the OSS.  The law allows the central government to take over local governments’ authority if local governments are not performing.  The government has provided investment incentives particularly for “pioneer” sectors (please see the section on Industrial Policies).

Limits on Foreign Control and Right to Private Ownership and Establishment

As part of the implementation of the Omnibus Law on Job Creation, the Indonesian government enacted Presidential Regulation No. 10/2021 to introduce a significant liberalization of foreign investment in Indonesia, repealing the 2016 Negative List of Investment (DNI).  In contrast to the previous regulation, the new investment list sets a default principle that all business sectors are open for investment unless stipulated otherwise.  It details the seven sectors that are closed to investment, explains that public services and defense are reserved for the central government, and outlines four categories of sectors that are open to investment: priority investment sectors that are eligible for incentives; sectors that are reserved for micro, small, and medium enterprises (MSMEs) and cooperatives or open to foreign investors who cooperate with them; sectors that are open with certain requirements (i.e., with caps on foreign ownership or special permit requirements); and sectors that are fully open for foreign investment.  Although hundreds of sectors that were previously closed or subject to foreign ownership caps are in theory open to 100 percent foreign investment, in practice technical and sectoral regulations may stipulate different or conflicting requirements that still need to be resolved.

In total, 245 business fields listed in the new Investment Priorities List, or DPI, are eligible for fiscal and non-fiscal incentives, notably pioneer industries, export-oriented manufacturing, capital intensive industries, national infrastructure projects, digital economy, labor-intensive industries, as well as research and development activities.  Restrictions on foreign ownership in telecommunications and information technology (e.g., internet providers, fixed telecommunication providers, mobile network providers), construction services, oil and gas support services, electricity, distribution, plantations, and transportation were removed.  Healthcare services including hospitals/clinics, wholesale of pharmaceutical raw materials, and finished drug manufacturing are fully open for foreign investment, which was previously capped in certain percentages.  The regulation also reduced the number of business fields that are subject to certain requirements to only 46 sectors.  Domestic sea transportation and postal services are open up to 49 percent of foreign ownership, while press, including magazines and newspapers, and broadcasting sectors are open up to 49 percent and 20 percent, respectively, but only for business expansion or capital increases.  Small plantations, industry related to special cultural heritage, and low technology industries or industries with capital less than IDR10 billion (USD 700,000) are reserved for MSMEs and cooperatives.  Foreign investors in partnership with MSMEs and cooperatives can invest in certain designated areas.  The new investment list shortened the number of restricted sectors from 20 to 7 categories including cannabis, gambling, fishing of endangered species, coral extraction, alcohol, industries using ozone-depleting materials, and chemical weapons.  In addition, while education investment is still subject to the Education Law, Government Regulation No. 40/2021 permits education and health investment as business activities in special economic zones.

In 2016, Bank Indonesia (BI) issued Regulation No. 18/2016 on the implementation of payment transaction processing.  The regulation governs all companies providing the following services: principal, issuer, acquirer, clearing, final settlement operator, and operator of funds transfer.  The BI regulation capped foreign ownership of payments companies at 20 percent, though it contained a grandfathering provision.  BI’s Regulation No. 19/2017 on the National Payment Gateway (NPG) subsequently imposed a 20 percent foreign equity cap on all companies engaging in domestic debit switching transactions.  Firms wishing to continue executing domestic debit transactions are obligated to sign partnership agreements with one of Indonesia’s four NPG switching companies.  In December 2020, BI issued umbrella Regulation No. 22/23/2020 on the Payment System, which implements BI’s 2025 Payment System Blueprint and introduces a risk-based categorization and licensing system.  The regulation will enter into force on July 1, 2021.  It allows 85 percent foreign ownership of non-bank payment services providers, although at least 51 percent of shares with voting rights must be owned by Indonesians.  The 20 percent foreign equity cap remains in place for payment system infrastructure operators who handle clearing and settlement services, and a grandfathering provision remains in effect for existing licensed payment companies.

Foreigners may purchase equity in state-owned firms through initial public offerings and the secondary market.  Capital investments in publicly listed companies through the stock exchange are generally not subject to the limitation of foreign ownership as stipulated in Presidential Regulation No. 10/2021.

Indonesia’s vast natural resources have attracted significant foreign investment and continue to offer significant prospects.  However, some companies report that a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks 64th of 76 jurisdictions in the Fraser Institute’s 2019 Mining Policy Perception Index.  In 2012, Indonesia banned the export of raw minerals, dramatically increased the divestment requirements for foreign mining companies, and required major mining companies to renegotiate their contracts of work with the government.  The full export ban did not come into effect until January 2017, when the government also issued new regulations allowing exports of copper concentrate and other specified minerals, while imposing onerous requirements.  Of note for foreign investors, provisions of the regulations require that in order to export mineral ores, companies with contracts of work must convert to mining business licenses – and thus be subject to prevailing regulations – and must commit to build smelters within the next five years.  Also, foreign-owned mining companies must gradually divest 51 percent of shares to Indonesian interests over ten years, with the price of divested shares determined based on a “fair market value” determination that does not take into account existing reserves.  In January 2020, the government banned the export of nickel ore for all mining companies, foreign and domestic, in the hopes of encouraging construction of domestic nickel smelters.  In March 2021, the Ministry of Energy and Natural Resources issued a Ministerial Decision to allow mining business licenses holders who have not reached smelter development targets to continue exporting raw mineral ores under certain conditions.  The 2020 Mining Law returned the authority to issue mining licenses to the central government.  Local governments retain only authority to issue small scale mining permits

Other Investment Policy Reviews

The latest World Trade Organization (WTO) Investment Policy Review of Indonesia was conducted in December 2020 and can be found on the WTO website: https://www.wto.org/english/tratop_e/tpr_e/tp501_e.htm

The last OECD Investment Policy Review of Indonesia, conducted in 2020, can be found on the OECD website:

https://www.oecd.org/investment/oecd-investment-policy-reviews-indonesia-2020-b56512da-en.htm

The 2019 UNCTAD Report on ASEAN Investment can be found here: https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2568

Business Facilitation

In order to conduct business in Indonesia, foreign investors must be incorporated as a foreign-owned limited liability company (PMA) through the Ministry of Law and Human Rights.  Once incorporated, a PMA must fulfill business licensing requirements through the OSS system.  In February 2021, the Indonesian government issued Government Regulation No. 5/2021 introducing a risk-based approach and streamlined business licensing process for almost all sectors.  The regulation classifies business activities into categories of low, medium, and high risk which will further determine business licensing requirements for each investment.  Low-risk business activities only require a business identity number (NIB) to start commercial and production activities.  An NIB will also serve as import identification number, customs access identifier, halal guarantee statement (for low risk), and environmental management and monitoring capability statement letter (for low risk).  Medium-risk sectors must obtain an NIB and a standard certification.  Under the regulation, a standard certificate for medium-low risk is a self-declared statement of the fulfillment of certain business standards, while a standard certificate for medium-high risk must be verified by the relevant government agency.  High-risk sectors must apply for a full business license, including an environmental impact assessment (AMDAL).  A business license remains valid as long as the business operates in compliance with Indonesian laws and regulations.  A grandfather clause applies for existing businesses that have obtained a business license.

Foreign investors are generally prohibited from investing in MSMEs in Indonesia, although the Presidential Regulation No. 10/2021 opened some opportunities for partnerships in farming, two- and three-wheeled vehicles, automotive spare parts, medical devices, ship repair, health laboratories, and jewelry/precious metals.

According to Presidential Instruction 7/2019, BKPM is responsible for issuing “investment licenses” (the term used to encompass both NIB and other business licenses) that have been delegated from all relevant ministries and government institutions to foreign entities through the OSS system, an online portal which allows foreign investors to apply for and track the status of licenses and other services online.  BKPM has also been tasked to review policies deemed unfavorable for investors.  While the OSS’s goal is to help streamline investment approvals, investments in the mining, oil and gas, and financial sectors still require licenses from related ministries and authorities.  Certain tax and land permits, among others, typically must be obtained from local government authorities.  Though Indonesian companies are only required to obtain one approval at the local level, businesses report that foreign companies often must seek additional approvals in order to establish a business.  Government Regulation No. 6/2021 requires local governments to integrate their business licenses system into the OSS system and standardizes services through a service-level agreement between the central and local governments.

Outward Investment

Indonesia’s outward investment is limited, as domestic investors tend to focus on the large domestic market.  BKPM has responsibility for promoting and facilitating outward investment, to include providing information about investment opportunities in other countries.  BKPM also uses its investment and trade promotion centers abroad to match Indonesian companies with potential investment opportunities.  The government neither restricts nor provides incentives for outward private sector investment.  The Ministry of State-Owned Enterprises (SOEs) encourages Indonesian SOEs through the SOE Go Global Program to increase their investment abroad, aiming to improve Indonesia’s supply chain and establish demand for Indonesian exports in strategic markets.  Indonesian SOEs reportedly accounted for around USD17.5 billion in outward investment in 2019.

3. Legal Regime

Transparency of the Regulatory System

Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms and agreements, but foreign investors have indicated they still encounter challenges in comparison to domestic investors and have criticized the current regulatory system for its failure to establish clear and transparent rules for all actors.  Certain laws and policies establish sectors that are either fully off-limits to foreign investors or are subject to substantive conditions.  In an effort to improve the investment climate and create jobs, Indonesia overhauled more than 70 laws and thousands of regulations through the enactment of the Omnibus Law on Job Creation.  Presidential Regulation No. 10/2021, one of 51 implementing regulations for the Omnibus Law adopted in February 2021, replaced the 2016 DNI with a new investment scheme that significantly reduced the number of sectors that are closed to foreign investment.

U.S. businesses cite regulatory uncertainty and a lack of transparency as two significant factors hindering operations.  U.S. companies note that regulatory consultation in Indonesia is inconsistent, despite the existence of Law No. 12/2011 on the Development of Laws and Regulations and its implementing Government Regulation No. 87/204, which states that the community is entitled to provide oral or written input into draft laws and regulations.  The law also sets out procedures for revoking regulations and introduces requirements for academic studies as a basis for formulating laws and regulations.  Nevertheless, the absence of a formal consultation mechanism has been reported to lead to different interpretations among policy makers of what is required.  Laws and regulations are often vague and require substantial interpretation by the implementers, leading to business uncertainty and rent-seeking opportunities.

Decentralization has introduced another layer of bureaucracy and red tape for firms to navigate.  In 2016, the Jokowi administration repealed 3,143 regional bylaws that overlapped with other regulations and impeded the ease of doing business.  However, a 2017 Constitutional Court ruling limited the Ministry of Home Affairs’ authority to revoke local regulations and allowed local governments to appeal the central government’s decision.  The Ministry continues to play a consultative function in the regulation drafting stage, providing input to standardize regional bylaws with national laws.  The Omnibus Law on Job Creation provided a legal framework to streamline regulations.  It establishes the norms, standards, procedures, criteria (NSPK) and performance requirements in administering government affairs for both the central and local governments.  Law No. 11/2020 aims to harmonize licensing requirements at the central and regional levels.  Under that law and its implementing regulations, the central government has the authority to take over regional business licensing if local governments do not meet performance requirements.  Local governments must also obtain recommendations from the Ministries of Home Affairs and Finance prior to implementing local tax regulations.

In 2017, Presidential Instruction No. 7/2017 was enacted to improve coordination among ministries in the policy-making process.  The regulation requires lead ministries to coordinate with their respective coordinating ministry before issuing a regulation.  The regulation also requires ministries to conduct a regulatory impact analysis and provide an opportunity for public consultation.  The presidential instruction did not address the frequent lack of coordination between the central and local governments.  The Omnibus Law on Job Creation enhanced the predictability of trade policy by moving the authority to issue trade regulations from the ministry-level (Ministry of Trade regulation) to the cabinet-level (government regulation).

International Regulatory Considerations

As an ASEAN member, Indonesia has successfully implemented regional initiatives, including the real-time movement of electronic import documents through the ASEAN Single Window, which reduces shipping costs, speeds customs clearance, and limits corruption opportunities.  Indonesia has committed to ratifying the ASEAN Comprehensive Investment Agreement (ACIA), ASEAN Framework Agreement on Services (AFAS), and the ASEAN Mutual Recognition Arrangement.  Notwithstanding the progress made in certain areas, the often-lengthy process of aligning national legislation has caused delays in implementation.  The complexity of interagency coordination and/or a shortage of technical capacity are among the challenges being reported.

Indonesia joined the WTO in 1995.  Indonesia’s National Standards Body (BSN) is the primary government agency to notify draft regulations to the WTO concerning technical barriers to trade (TBT) and sanitary and phytosanitary standards (SPS); however, in practice, notification is inconsistent.  In December 2017, Indonesia ratified the WTO Trade Facilitation Agreement (TFA).  Indonesia has met 88.7 percent of its commitments to the TFA provisions to date, including publication of information, consultations, advance rulings, detention and test procedures, , goods clearance, import/export formalities, and goods transit.

Indonesia is a Contracting Party to the Aircraft Protocol to the Convention of International Interests in Mobile Equipment (Cape Town Convention).  However, foreign investors bringing aircraft to Indonesia to serve the general aviation sector have faced difficulty utilizing Cape Town Convention provisions to recover aircraft leased to Indonesian companies.  Foreign owners of leased aircraft that have become the subject of contractual lease disputes with Indonesian lessees have been unable to recover their aircraft in certain circumstances.

Legal System and Judicial Independence

Indonesia’s legal system is based on civil law.  The court system consists of District Courts (primary courts of original jurisdiction), High Courts (courts of appeal), and the Supreme Court (the court of last resort).  Indonesia also has a Constitutional Court.  The Constitutional Court has the same legal standing as the Supreme Court, and its role is to review the constitutionality of legislation.  Both the Supreme and Constitutional Courts have authority to conduct judicial review.

Corruption continues to plague Indonesia’s judiciary, with graft investigations involving senior judges and court staff.  Many businesses note that the judiciary is susceptible to influence from outside parties.  Certain companies have claimed that the court system often does not provide the necessary recourse for resolving property and contractual disputes and that cases that would be adjudicated in civil courts in other jurisdictions sometimes result in criminal charges in Indonesia.

Judges are not bound by precedent and many laws are open to various interpretations.  A lack of clear land titles has plagued Indonesia for decades, although land acquisition law No. 2/2012 includes legal mechanisms designed to resolve some past land ownership issues.  The Omnibus Law on Job Creation also created a land bank to facilitate land acquisition for priority investment projects.  Government Regulation No. 27/2017 provided incentives for upstream energy development and also regulates recoverable costs from production sharing contracts.  Indonesia has also required mining companies to renegotiate their contracts of work to include higher royalties, more divestment to local partners, more local content, and domestic processing of mineral ore.

Indonesia’s commercial code, grounded in colonial Dutch law, has been updated to include provisions on bankruptcy, intellectual property rights, incorporation and dissolution of businesses, banking, and capital markets.  Application of the commercial code, including the bankruptcy provisions, remains uneven, in large part due to corruption and training deficits for judges and lawyers.

Laws and Regulations on Foreign Direct Investment

FDI in Indonesia is regulated by Law No. 25/2007 (the Investment Law).  Under the law, any form of FDI in Indonesia must be in the form of a limited liability company with minimum capital of IDR 10 billion (USD 700,000) excluding land and building and with the foreign investor holding shares in the company.  The Omnibus Law on Job Creation allows foreign investors to invest below IDR 10 billion in technology-based startups in special economic zones.  The Law also introduces a number of provisions to simplify business licensing requirements, reforms rigid labor laws, introduces tax reforms to support ease of doing business, and establishes the Indonesian Investment Authority (INA) to facilitate direct investment.  In addition, the government repealed the 2016 Negative Investment List through the issuance of Presidential Regulation No. 10/2021, introducing major reforms that removed restrictions on foreign ownership in hundreds of sectors that were previously closed or subject to foreign ownership caps.  A number of sectors remain closed to investment or are otherwise restricted.  Presidential Regulation No. 10/2021 contains a grandfather clause that clarifies that existing investments will not be affected unless treatment under the new regulation is more favorable or the investment has special rights under a bilateral agreement.  The Indonesian government also expanded business activities in special economic zones to include education and health. (See section on limits on foreign control regarding the new list of investments.)  The website of the Indonesia Investment Coordinating Board (BKPM) provides information on investment requirements and procedures:  https://nswi.bkpm.go.id/guide.  Indonesia mandates reporting obligations for all foreign investors through the OSS system as stipulated in BKPM Regulation No.6/2020.  (See section two for Indonesia’s procedures for licensing foreign investment.)

Competition and Anti-Trust Laws

The Indonesian Competition Authority (KPPU) implements and enforces the 1999 Indonesia Competition Law.  The KPPU reviews agreements, business practices and mergers that may be deemed anti-competitive, advises the government on policies that may affect competition, and issues guidelines relating to the Competition Law.  Strategic sectors such as food, finance, banking, energy, infrastructure, health, and education are KPPU’s priorities.  The Omnibus Law on Job Creation and its implementing regulation, Government Regulation No. 44/2021, removes criminal sanctions and the cap on administrative fines, which was set at a maximum of IDR 25 billion (USD 1.7 million) under the previous regulation.  Appeals of KPPU decisions must be processed through the commercial court.

Expropriation and Compensation

Indonesia’s political leadership has long championed economic nationalism, particularly concerning mineral and oil and gas reserves.  According to Law No. 25/2007 (the Investment Law), the Indonesian government is barred from nationalizing or expropriating an investor’s property rights, unless provided by law.  If the Indonesian government nationalizes or expropriates an investors’ property rights, it must provide market value compensation.

Presidential Regulation No. 77/2020 on Government Use of Patent and the Ministry of Law and Human Rights (MLHR) Regulation No. 30/2019 on Compulsory Licenses (CL) enables patent right expropriation in cases deemed in the interest of national security or due to a national emergency.  Presidential Regulation No.77/2020 allows a GOI agency or Ministry to request expropriation, while MLHR Regulation No. 30/2019 allows an individual or private party to request a CL.

Dispute Settlement

ICSID Convention and New York Convention

Indonesia is a member of the International Center for Settlement of Investment Disputes (ICSID) and the United Nations Commission on International Trade Law (UNCITRAL) through the ratification of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).  Thus, foreign arbitral awards are in theory legally recognized and enforceable in Indonesian courts; however, some investors note that these awards are not always enforced in practice.

Investor-State Dispute Settlement

Since 2004, Indonesia has faced seven known Investor-State Dispute Settlement (ISDS) arbitration cases, including those that have been settled, and discontinued cases.  In 2016, an ICSID tribunal ruled in favor of Indonesia in the arbitration case of British firm Churchill Mining.  In March 2019, the tribunal rejected an annulment request from the claimants.  In 2019, a Dutch arbitration court ruled in favor of the Indonesian government in a USD 469 million arbitration case against Indian firm Indian Metals & Ferro Alloys.  Two cases involving Newmont Nusa Tenggara under the BIT with the Netherlands and Oleovest under the BIT with Singapore were discontinued.

Indonesia recognizes binding international arbitration of investment disputes in its bilateral investment treaties (BITs).  All of Indonesia’s BITs include the arbitration under ICSID or UNCITRAL rules, except the BIT with Denmark.  However, in response to an increase in the number of arbitration cases submitted to ICSID, BKPM formed an expert team to review the current generation of BITs and formulate a new model BIT that would seek to better protect perceived national interests.  The Indonesian model BIT is reportedly reflected in newly signed investment agreements.

In spite of the cancellation of many BITs, the 2007 Investment Law still provides protection to investors through a grandfather clause.  In addition, Indonesia also has committed to ISDS provisions in regional or multilateral agreements signed by Indonesia (i.e. ASEAN Comprehensive Investment Agreement).

International Commercial Arbitration and Foreign Courts

Judicial handling of investment disputes remains mixed.  Indonesia’s legal code recognizes the right of parties to apply agreed-upon rules of arbitration.  Some arbitration, but not all, is handled by Indonesia’s domestic arbitration agency, the Indonesian National Arbitration Body.

Companies have resorted to ad hoc arbitrations in Indonesia using the UNCITRAL model law and ICSID arbitration rules.  Though U.S. firms have reported that doing business in Indonesia remains challenging, there is not a clear pattern or significant record of investment disputes involving U.S. or other foreign investors.  Companies complain that the court system in Indonesia works slowly as international arbitration awards, when enforced, may take years from original judgment to payment.

Bankruptcy Regulations

Indonesian Law No. 37/2004 on Bankruptcy and Suspension of Obligation for Payment of Debts is viewed as pro-creditor, and the law makes no distinction between domestic and foreign creditors.  As a result, foreign creditors have the same rights as all potential creditors in a bankruptcy case, as long as foreign claims are submitted in compliance with underlying regulations and procedures.  Monetary judgments in Indonesia are made in local currency.

5. Protection of Property Rights

Real Property

The Basic Agrarian Law of 1960, the predominant body of law governing land rights, recognizes the right of private ownership and provides varying degrees of land rights for Indonesian citizens, foreign nationals, Indonesian corporations, foreign corporations, and other legal entities.  Indonesia’s 1945 Constitution states that all natural resources are owned by the government for the benefit of the people.  This principle was augmented by the passage of Land Acquisition Law No. 2/2012,which was amended by the Omnibus Law on Job Creation (Law No. 11/2020), that enshrined the concept of eminent domain and established mechanisms for fair market value compensation and appeals.  The National Land Agency registers property under Government Regulation No. 18/2021, though the Ministry of Forestry administers all “forest land.”  The regulation introduced e-registration to cut bureaucracy and minimize land disputes.  Registration is not conclusive evidence of ownership, but rather strong evidence of such.  It allows foreigners domiciled in Indonesia to have housing property with land  under a “right to use” status for a maximum of 30 years, with extensions available for up to 20 additional years, as well as a “right to own” status for apartments located in special economic zones, free trade zones, and industrial areas.  The Omnibus Law on Job Creation aims to reduce uncertainty around the roles of the central and local governments, including around spatial planning and environmental and social impact assessments (AMDALs), by simplifying the licensing process through implementation of a risk-based approach.  The Omnibus Law also created a land bank to facilitate land acquisition for priority investment projects.

Intellectual Property Rights

Indonesia remains on the priority watch list in the U.S. Trade Representative’s (USTR) Special 301 Report due to the lack of adequate and effective IP protection and enforcement.  Indonesia’s patent law continues to raise serious concerns, including patentability criteria and compulsory licensing.  Counterfeiting and piracy are pervasive, IP enforcement remains weak, and there are continued market access restrictions for IP-intensive industries.  According to U.S. stakeholders, Indonesia’s failure to protect intellectual property and enforce IP rights laws has resulted in high levels of physical and online piracy.  Local industry associations have reported large amounts of pirated films, music, and software in circulation in Indonesia in recent years, causing potentially billions of dollars in losses.  Indonesian physical markets, such as Mangga Dua Market, and online markets Tokopedia and Bukalapak, were included in USTR’s Notorious Markets List in 2020.

The Omnibus Law on Job Creation amended key articles in Patent Law No. 13/2016 and the Trademark and Geographical Indications Law No. 20/2016.  While Patent Law amendments require the patent holder to exercise their patented invention locally within 36 months after the patent is granted, the new amendments provide flexibility to IP holders to meet local “working” requirements.  The new law also revokes a provision requiring patent holders to support technology transfer, investment, and employment in local manufacturing as a condition of patent protection.  The law reduces the processing time required for simple patent applications from 12 months to 6 months.

In January 2020, Indonesia ratified the Marrakesh Treaty through Presidential Regulation No. 1/2020 to facilitate access to public works for persons who are blind, visually impaired, or otherwise print-disabled.  Indonesia also ratified the Beijing Treaty on IPR protection for audiovisual performances to protect actors through Presidential Regulation No. 21/2020.  Indonesia deposited its instrument of accession to the Madrid Protocol with the World Intellectual Property Organization (WIPO) in 2017 and issued implementing regulations in 2018.  Under the new rules, applicants desiring international mark protection under the Madrid Protocol must first register their application with DGIP and be Indonesian citizens, domiciled in Indonesia, or have clear industrial or commercial interests in Indonesia.  Although the Trademark Law of 2016 expanded recognition of non-traditional marks, Indonesia still does not recognize certification marks.  In response to stakeholder concerns over a lack of consistency in the treatment of internationally well-known trademarks, the Supreme Court issued Circular Letter 1/2017, which advised Indonesian judges to recognize cancellation claims for well-known international trademarks with no time limit stipulation.

Ministry of Finance (MOF) Regulation No. 6/2019 grants  the Directorate General of Customs and Excise (DGCE) legal authority to hold shipments believed to contain imitation goods for up to two days, pending inspection.  Under Regulation No. 6/2019, rights holders are notified by DGCE (through a recordation system) when an incoming shipment is suspected of containing infringing products.  If the inspection reveals an infringement, the rights holder has four days to file a court injunction to request a shipment suspension.  Rights holders are required to provide a refundable monetary guarantee of IDR 100 million (USD 6,600) when they file a claim with the court.  If the court sides with the rights holder, then the guarantee money will be returned to the applicant.  DGCE intercepted three suspected infringement product imports in 2020 by using this recordation system, as only 17 trademarks and two copyrights are registered in the recordation system.  Despite business stakeholder concerns, the GOI retains a requirement that only companies with offices domiciled in Indonesia may use the recordation system.

Trademark, Patent, and Copyright legislation require a rights-holder complaint for investigation. DGIP and BPOM investigators lack the authority to make arrests so must rely on police cooperation for any enforcement action.

Resources for Rights Holders

Additional information regarding treaty obligations and points of contact at local IP offices, can be found at the World Intellectual Property Organization (WIPO) country profile website http://www.wipo.int/directory/en/ .  For a list of local lawyers, see: https://id.usembassy.gov/attorneys.

7. State-Owned Enterprises

Indonesia had 114 state-owned enterprises (SOEs) and 28 subsidiaries divided into 12 sectors as of December 2019.  In April 2020, the Ministry of SOEs began consolidating SOEs, with the target of reducing the total number of SOEs to 41.  As of January 2021, 20 were listed on the Indonesian stock exchange.  In addition, 14 are special purpose entities under the SOE Ministry and eight are under the Ministry of Finance.  Since mid-2016, the Indonesian government has been publicizing plans to consolidate SOEs into six holding companies based on sector of operations.  In 2017, Indonesia announced the creation of a mining holding company, PT Inalum, the first of the six planned SOE-holding companies.  The others under discussion include plantations, fertilizer, and oil and gas.  In 2020, two holding companies in pharmaceuticals and insurance were established, and three state-owned sharia banks were merged.  A holding company in tourism is being prepared with a target of completion by the end of 2021.

Since his appointment by President Jokowi in November 2019, Minister of SOEs Erick Thohir has underscored the need to reform SOEs in line with President Jokowi’s second-term economic agenda.  Thohir has noted the need to liquidate underperforming SOEs, ensure that SOEs improve their efficiency by focusing on core business operations, and introduce better corporate governance principles.  Thohir has spoken publicly about his intent to push SOEs to undertake initial public offerings (IPOs) on the Indonesian Stock Exchange.  He also encourages SOEs to increase outbound investment to support Indonesia’s supply chain in strategic markets, including through acquisition of cattle farms, phosphate mines, and salt mines.

Information regarding SOEs can be found at the SOE Ministry website (http://www.bumn.go.id/ ) (Indonesian language only).

There are also an unknown number of SOEs owned by regional or local governments.  SOEs are present in almost all sectors/industries including banking (finance), tourism (travel), agriculture, forestry, mining, construction, fishing, energy, and telecommunications (information and communications).

Indonesia is not a party to the WTO’s Government Procurement Agreement.  Private enterprises can compete with SOEs under the same terms and conditions with respect to access to markets, credit, and other business operations.  However, in reality, many sectors report that SOEs receive strong preference for government projects.  SOEs purchase some goods and services from private sector and foreign firms.  SOEs publish an annual report and are audited by the Supreme Audit Agency (BPK), the Financial and Development Supervisory Agency (BPKP), and external and internal auditors.

Privatization Program

While some state-owned enterprises have offered shares on the stock market, Indonesia does not have an active privatization program.  The government plans to capitalize the Indonesia Investment Authority (INA) with USD 4 billion in state-owned assets to attract equity investments in those assets, which may eventually be sold to investors or listed on the stock market.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $1,061 2019 $1,119 https://data.worldbank.org/
country/Indonesia
*Indonesia Statistic Agency, GDP from the host country website is converted into USD with the exchange rate 14,546 for 2020
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 $749.7 2019 $12,151 https://www.bea.gov/international/di1usdbal
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2019 $399 https://www.bea.gov/international/di1fdibal
Total inbound stock of FDI as % host GDP 2020 2.7% 2019 20.8% https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
*Indonesia Investment Coordinating Board (BKPM), January 2021

There is a discrepancy between U.S. FDI recorded by BKPM and BEA due to differing methodologies.  While BEA recorded transactions in balance of payments, BKPM relies on company realization reports.  BKPM also excludes investments in oil and gas, non-bank financial institutions, and insurance.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment 2019 Outward Direct Investment 2019
Total Inward 233,984 100% Total Outward 79,632 100%
Singapore 55,386 23.7% Singapore 31,409 39.4%
Netherlands 34,981 15.0% France 19,226 24.1%
United States 29,643 12.7%  China (PR Mainland) 18,807 23.6%
Japan 28,875 12.3% Cayman Islands 3,431 4.3%
Malaysia 13,853 5.9% Netherlands 748 0.9%
“0” reflects amounts rounded to +/- USD 500,000.
Source:  IMF Coordinated Direct Investment Survey, 2019 for inward and outward investment data.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets 2019
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 21,814 100% All Countries 7,886 100% All Countries 13,928 100%
Netherlands 6,842 31.8% United States 3,032 38.4% Netherlands 6,837 49.1%
United States 4.035 16.6% India 2,028 25.7% Luxembourg 1,903 13.7%
India 2,049 8.9% China (PR Mainland) 1,025 13.0% United States 1,003 7.2%
 Luxembourg 1,904 8.4% China (PR Hong Kong) 708 9.0% Singapore 610 4.4%
China (Mainland) 1,270 4.9% Australia 468 5.9% United Arab Emirates 578 4.2%
Source: IMF Coordinated Portfolio Investment Survey, 2019. Sources of portfolio investment are not tax havens.

The Bank of Indonesia published comparable data.

Kazakhstan

Executive Summary

Since its independence in 1991, Kazakhstan has made significant progress toward creating a market economy and has attracted significant foreign investment given abundant mineral, petroleum, and natural gas resources. As of January 1, 2021, the stock of foreign direct investment in Kazakhstan totaled USD 166.4 billion, including USD 38 billion from the United States, according to official statistics from the Kazakhstani central bank.

While Kazakhstan’s vast hydrocarbon and mineral reserves remain the backbone of the economy, the government continues to make incremental progress toward diversification.  Kazakhstan’s efforts to remove bureaucratic barriers have been moderately successful, and in 2020 Kazakhstan ranked 25 out of 190 in the World Bank’s annual Doing Business Report. The government maintains an active dialogue with foreign investors through the President’s Foreign Investors Council and the Prime Minister’s Council for Improvement of the Investment Climate.  Kazakhstan joined the World Trade Organization (WTO) in 2015.  In September 2020, President Tokayev announced a New Economic Course – a reform agenda that, if implemented, aims to improve the investment climate.

Despite institutional and legal reforms, concerns remain about corruption, bureaucracy, arbitrary law enforcement, and limited access to a skilled workforce in certain regions.  The government’s tendency to increase its regulatory role in relations with investors, to favor an import-substitution policy, to challenge the use of foreign labor, and to intervene in companies’ operations, continues to concern foreign investors.  Foreign firms cite the need for better rule-of-law, deeper investment in human capital, improved transport and logistics infrastructure, a more open and flexible trade policy, a more favorable work-permit regime, and a more customer-friendly tax administration.

In July 2018, the government of Kazakhstan officially opened the Astana International Financial Center (AIFC), an ambitious project modelled on the Dubai International Financial Center, which aims to offer foreign investors an alternative jurisdiction for operations, with tax holidays, flexible labor rules, a Common Law-based legal system, a separate court and arbitration center, and flexibility to carry out transactions in any currency.  Since 2019 the government has pursued a policy of using the AIFC as a regional investment hub to attract foreign investment to Kazakhstan. The government has recommended foreign investors use the law of the AIFC as applicable law for contracts with Kazakhstan. . In January 2021 the AIFC on behalf of Kazakhstan joined the Central Asia Investment Partnership initiated by the U.S. International Development Finance Corporation (DFC).

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 94 of 179 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 25 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 77 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) N/A N/A N/A
World Bank GNI per capita 2019 USD 8,820 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward FDI

Kazakhstan has attracted significant foreign investment since independence. As of January 1, 2021, the total stock of foreign direct investment (by the directional principle) in Kazakhstan totaled USD 166.4 billion, primarily in the oil and gas sector. International financial institutions consider Kazakhstan to be a relatively attractive destination for their operations, and international firms have established regional headquarters in Kazakhstan.

In 2017, Kazakhstan adhered to the OECD Declaration on International Investment and Multinational Enterprises, meaning it committed to certain investment standards, including the promotion of responsible business conduct..

In its Strategic Plan of Development to 2025, the government stated that bringing up the living standards of Kazakhstan’s citizens to the level of OECD countries is one of its strategic goals.

In addition to earlier approved program documents, the President adopted a National Development Plan to 2025 in February 2021. The Plan outlines objectives and parameters of a New Economic Course announced by President Tokayev in September 2020. The Course included seven priorities: a fair distribution of benefits and responsibilities, the leading role of private entrepreneurship, fair competition, productivity growth and the development of a more technologically advanced economy, human capital development, development of a green economy, and state accountability to the society. A favorable investment climate is a part of this course. To implement his program, the President established the Supreme Council for Reforms and the Agency for Strategic Planning and Reforms. The President chairs the Supreme Council for Reforms, while Sir Suma Chakrabarti, a former President of the European Bank for Reconstruction and Development will serve as Deputy Chairman.

In January 2021, the Prime Minister announced the government’s commitment to increase the share of annual FDI in GDP from 13.2 percent of GDP in 2018 to 19 percent of GDP in 2022.

The government of Kazakhstan has incrementally improved the business climate for foreign investors. Corruption, lack of rule of law and excessive bureaucracy, however, do remain serious obstacles to foreign investment.

Over the last few years, the government has undertaken a number of structural changes aimed at improving how the government attracts foreign investment. In April 2019, the Prime Minister created the Coordination Council for Attracting Foreign Investment. The Prime Minister acts as the Chair and Investment Ombudsman. In December 2018, the Investment Committee was transferred to the supervision of the Ministry of Foreign Affairs, which took charge of attracting and facilitating the activities of foreign investors. In January 2021, the Minister of Foreign Affairs received an additional title of Deputy Prime Minister due to the expanded portfolio of the Ministry. The Investment Committee at the Ministry of Foreign Affairs takes responsibility for investment climate policy issues and works with potential and current investors, while the Ministry of National Economy and the Ministry of Trade and Integration interact on investment climate matters with international organizations like the OECD, WTO, and the United Nations Conference on Trade and Development (UNCTAD). Each regional municipality designates a representative to work with investors. Specially designated front offices in Kazakhstan’s overseas embassies promote Kazakhstan as a destination for foreign investment. In addition, the Astana International Financial Center (AIFC, ) operates as a regional investment hub regarding tax, legal, and other benefits. In 2019, the government founded Kazakhstan’s Direct Investment Fund which became resident at the AIFC and aims to attract private investments for diversifying Kazakhstan’s economy. The state company KazakhInvest, located in this hub, offers investors a single window for government services.

In 2020-2021, the government attempted to improve the regulatory and institutional environment for investors. However, these changes have sometimes been associated with an over-structured system of preferences and an enhanced government role. For example, in January 2021 the Foreign Minister suggested for consideration establishment of an additional group, the Investment Command Staff (ICS) that would make decisions on granting special conditions and extending preferences for investors signing investment agreements. This Investment Command Staff is expected to consider project proposals after their verification by KazakhInvest and the Astana International Financial Center. The government maintains its dialogue with foreign investors through the Foreign Investors’ Council chaired by the President, as well as through the Council for Improving the Investment Climate chaired by the Prime Minister.

The COVID-19 pandemic and unprecedented low oil prices caused the government to amend the country’s mid-term economic development plans. In March 2020, the government approved a stimulus package of $13.7 billion, mostly oriented at maintaining the income of the population, supporting local businesses, and implementing an import-substitution policy.

Limits on Foreign Control and Right to Private Ownership and Establishment

By law, foreign and domestic private firms may establish and own certain business enterprises. While no sectors of the economy are completely closed to foreign investors, restrictions on foreign ownership exist, including a 20 percent ceiling on foreign ownership of media outlets, a 49 percent limit on domestic and international air transportation services, and a 49 percent limit on telecommunication services. Article 16 in the December 2017 Code on Subsoil and Subsoil Use (the Code) mandates that share of the national company KazAtomProm be no less than 50% in new uranium producing joint ventures.

As a result of its WTO accession, Kazakhstan formally removed the limits on foreign ownership for telecommunication companies, except for the country’s main telecommunications operator, KazakhTeleCom. Still, to acquire more than 49 percent of shares in a telecommunication company, foreign investors must obtain a government waiver. No constraints limit the participation of foreign capital in the banking and insurance sectors. Starting in December 2020, the restriction on opening branches of foreign banks and insurance companies was lifted in compliance with the country’s OECD commitments. However, the law limits the participation of offshore companies in banks and insurance companies and prohibits foreign ownership of pension funds and agricultural land. In addition, foreign citizens and companies are restricted from participating in private security businesses.

Foreign investors have complained about the irregular application of laws and regulations and interpret such behavior as efforts to extract bribes. The enforcement process, widely viewed as opaque and arbitrary, is not publicly transparent. Some investors report harassment by the tax authorities via unannounced audits, inspections, and other methods. The authorities have used criminal charges in civil litigation as pressure tactics.

Foreign Investment in the Energy & Mining Industries

Despite substantial investment in Kazakhstan’s energy sector, companies remain concerned about the risk of the government legislating or otherwise advocating for preferences for domestic companies and creating mechanisms for government intervention in foreign companies’ operations, particularly in procurement decisions.  In 2020, developments ranged from a major reduction to a full annulment of work permits for some categories of foreign workforce (see Performance and Data Localization Requirements.)   During a March 2021 virtual meeting with international oil companies, Kazakhstan’s President urged the government to ensure legal protection and stability of investments and investment preferences. He also tasked the recently established Front Office for Investors to address investor challenges and bring them to the attention of the Prime Minister’s Council.  Moreover, Kazakhstan supported the request of oil companies to remove a discriminatory approach to fines imposed on them for gas flaring.  Under the current legislation, oil companies pay gas flaring fines several times higher than those paid by other non-oil companies.

In April 2008, Kazakhstan introduced a customs duty on crude oil and gas condensate exports, this revenue goes to the government’s budget and does not reach the National Fund.  The National Fund is financed by direct taxes paid by petroleum industry companies, other fees paid by the oil industry, revenues from privatization of mining and manufacturing assets, and from disposal of agricultural land.  The customs duty on crude oil and gas condensate exports is an indirect tax that goes to the government’s budget.  Companies that pay taxes on mineral and crude oil exports are exempt from that export duty.  The government adopted a 2016 resolution that pegged the export customs duty to global oil prices – if the global oil price drops below $25 per barrel, the duty zeros.

The Code defines “strategic deposits and areas” and restricts the government’s preemptive right to acquire exploration and production contracts to these areas, which helps to reduce significantly the approvals required for non-strategic objects.  The government approves and publishes the list of strategic deposits on its website.  The latest approved list is dated June 28, 2018: https://www.primeminister.kz/ru/decisions/28062018-389.

The Code entitles the government to terminate a contract unilaterally “if actions of a subsoil user with a strategic deposit result in changes to Kazakhstan’s economic interests in a manner that threatens national security.”  The Article does not define “economic interests.”  The Code, if properly implemented, appears to streamline procedures to obtain exploration licenses and to convert exploration licenses into production licenses.  The Code, however, appears to retain burdensome government oversight over mining companies’ operations.

Kazakhstan is committed under the Paris Climate Agreement to reduce GHG emissions 15 percent from the level of base year 1990 down to 328.3 million metric tons (mmt) by 2030.  In the meantime, Kazakhstan increased emissions 27.8 percent to 401.9 mmt in the five years from 2013 to 2018. The energy sector accounted for 82.4 percent of GHG emissions, agriculture for 9 percent, and others for 5.6 percent.  The successor of the Energy Ministry for environmental issues, Ministry of Ecology, Geology, and Natural Resources, started drafting the 2050 National Low Carbon Development Strategy in October 2019. The Concept is scheduled for submission to the government in June 2021.

In November 2020, the government adopted a National Plan for Allocation of Quotas for Greenhouse Gas (GHG) Emissions for 2021. The emissions cap (a total number of emissions allowed) is set for 159.9 million. The power sector received the highest number of allowances, or 91.4 million, for 90 power plants.  The cap for the oil and gas sector is 22.2 million for 61 installations, while 24 mining installations get 7.3 million allowances, and 21 metallurgical facilities have 29.6 million.  The combined caps for the chemical and processing sectors are 9.3 million. In February 2018, the Ministry of Energy announced the creation of an online GHG emissions reporting and monitoring system.  The system is not operational, and it is likely to be launched after the Environmental Code comes into effect in July 2021.  Some companies have expressed concern that Kazakhstan’s trading system will suffer from insufficient liquidity, particularly as power consumption and oil and commodity production levels increase.

Other Investment Policy Reviews

The OECD Investment Committee presented its second Investment Policy Review of Kazakhstan in June 2017, available at: https://www.oecd.org/countries/kazakhstan/oecd-investment-policy-reviews-kazakhstan-2017-9789264269606-en.htm.

The OECD Investment Committee presented its second Investment Policy Review of Kazakhstan in June 2017, available at: https://www.oecd.org/countries/kazakhstan/oecd-investment-policy-reviews-kazakhstan-2017-9789264269606-en.htm.

The OECD review recommended Kazakhstan undertake corporate governance reforms at state-owned enterprises (SOEs), implement a more efficient tax system, further liberalize its trade policy, and introduce responsible business conduct principles and standards. The OECD Investment Committee is monitoring the country’s privatization program, that aims to decrease the SOE share in the economy to 15 percent of GDP by 2020.

In 2019, the OECD and the government launched a two-year project on improving the legal environment for business in Kazakhstan.

Business Facilitation

The 2020 World Bank’s Doing Business Index ranked Kazakhstan 25 out of 190 countries in the “Ease of Doing Business” category, and 22 out of 190 in the “Starting a Business” category. The report noted Kazakhstan made starting a business easier by registering companies for value added tax at the time of incorporation. The report noted Kazakhstan’s progress in the categories of dealing with construction permits, registering property, getting credit, and resolving insolvency. Online registration of any business is possible through the website https://egov.kz/cms/en.

In addition to a standard package of documents required for local businesses, non-residents must have Kazakhstan’s visa for a business immigrant and submit electronic copies of their IDs, as well as any certification of their companies from their country of origin. Documents should be translated and notarized. Foreign investors also have access to a “single window” service, which simplifies many business procedures. Investors may learn more about these services here: https://invest.gov.kz/invest-guide/business-starting/registration/.

According to the ‘Doing Business’ Index, it takes 4 procedures and 5 days to establish a foreign-owned limited liability company (LLC) in Kazakhstan. This is faster than the average for Eastern Europe and Central Asia and OECD high-income countries. A foreign-owned company registered in Kazakhstan is considered a domestic company for Kazakhstan currency regulation purposes. Under the law on Currency Regulation and Currency Control, residents may open bank accounts in foreign currency in Kazakhstani banks without any restrictions.

The COVID-19 pandemic triggered new measures for easing the doing business process. In 2021, the government introduced a special three-percent retail tax for 114 types of small and medium-sized businesses. Companies can switch to the new regime voluntarily. The government also introduced an investment tax credit allowing entrepreneurs to receive tax deferrals for up to three years. As a part of his new economic policy, President Tokayev stated that prosecution or tax audits against entrepreneurs should be possible only after a respective tax court ruling.

In 2020, the government approved new measures aimed to facilitate the business operations of investors and to help Kazakhstan attract up to $30 billion in additional FDI by 2025. For example, the government introduced a new notional an investment agreement (see details in Section 4) and removed a solicitation of local regional authorities for obtaining a visa for a business-immigrant.

In order to facilitate the work of foreign investors, the government has recommended to use the law of the Astana International Financial Center (AIFC) as applicable law for investment contracts with Kazakhstan and has planned some steps, including a harmonization of tax preferences of the AIFC, the International IT park Astana Hub, Astana Expo 2017 company and Nazarbayev University. Plans on the further liberalization of a visa and migration regime, and the development of international air communication with international financial centers were suspended due to the COVID-19 pandemic.

Utilizing the advantages of the Astana International Financial Center may bring positive results in attracting foreign investments. Nonetheless, there is still room for improvement in business facilitation in the rest of Kazakhstan’s territory. For example, foreign investors often complain about problems finalizing contracts, delays, and burdensome practices in licensing. The problems associated with the decriminalization of tax errors still await full resolution, despite an order to this effect issued by the General Prosecutor’s Office in January 2020. The controversial taxation of dividends of non-residents that came into force in January 2021, has additionally raised concerns of foreign investors.

Outward Investment

The government neither incentivizes nor restricts outward investment.

3. Legal Regime

Transparency of the Regulatory System

Kazakhstani law sets out basic principles for fostering competition on a non-discriminatory basis.

Kazakhstan is a unitary state, and national legislation enacted by the Parliament and President are equally effective for all regions of the country. The government, ministries, and local executive administrations in the regions (“Akimats”) issue regulations and executive acts in compliance and pursuance of laws. Kazakhstan is a member of the EAEU, and decrees of the Eurasian Economic Commission have preemptive force over national legislation. Publicly listed companies indicate that they adhere to international financial reporting standards but accounting and valuation practices are not always consistent with international best practices.

The government consults on some draft legislation with experts and the business community; draft bills are available for public comment at www.egov.kz under Open Government section, however, the comment period is only ten days, and the process occurs without broad notifications. Some bills are excluded from public comment, and the legal and regulatory process, including with respect to foreign investment, remains opaque. All laws and decrees of the President and the government are available in Kazakh and Russian on the websites of the Ministry of Justice: http://adilet.zan.kz/rus and http://zan.gov.kz/en/ .

Implementation and interpretation of commercial legislation is reported to sometimes create confusion among foreign and domestic businesses alike. In 2016, the Ministry of Health and Social Development introduced new rules on attracting foreign labor, some of which (including a Kazakh language requirement) created significant barriers for foreign investors. After active intervention by the international investment community through the Prime Minister’s Council for Improving the Investment Climate, the government canceled the most onerous requirements.

The non-transparent application of laws remains a major obstacle to expanded trade and investment. Foreign investors complain of inconsistent standards and corruption. Although the central government has enacted many progressive laws, local authorities may interpret rules in arbitrary ways with impunity.

Many foreign companies say they must defend investments from frequent decrees and legislative changes, most of which do not “grandfather in” existing investments. Penalties are often assessed for periods prior to the change in policy. One of the recent cases involves a U.S. company that has objected to the retroactive application of a new rule on an exemption on dividend taxes in Kazakhstan’s Tax Code.  Other examples from the past include foreign companies reporting that local and national authorities arbitrarily imposed high environmental fines, saying the fines were assessed to generate revenue for local and national authorities rather than for environmental protection. Government officials have acknowledged the system of environmental fines required reform and developed the new Environmental Code (Eco Code), compliant with OECD standards, in 2018.  The new Eco Code signed into law in January 2021 will come into effect on July 1, 2021.  The Eco Code mandates local authorities to have 100 percent of environmental payments spent on environmental remediation.  Oil companies have complained that the emission payment rates for pollutants when emitted from gas flaring are at least twenty times higher than when the same pollutants are emitted from other stationary sources. The Parliament is currently reviewing the amendments to the Administrative Code to make gas flaring fines for oil companies equivalent to those imposed on non-oil companies.

In 2015, President Nazarbayev announced five presidential reforms and the implementation of the “100 Steps” Modernization program. The program calls for the formation of a results-oriented public administration system, a new system of audit and performance evaluation for government agencies, and introduction of an open government system with better public access to information held by state bodies.

President Tokayev, who was elected in June 2019, stated his adherence to reforms, initiated by former President Nazarbayev, and called the government to reset approaches to reforms, including robust implementation. The New Economic Course, announced by President Tokayev in 2020, included the streamlining of the taxation system to stimulate inflow of foreign investment and the decriminalization of tax errors. In addition, Tokayev tasked the government to develop in 2021 a new bill guaranteeing the right of citizens to access information on the government’s activity. Public financial reporting, including debt obligations, and explicit liabilities, are published by the National Bank of Kazakhstan at https://nationalbank.kz/en/news/vneshniy-dolg and by the Ministry of Finance on their site: https://www.gov.kz/memleket/entities/minfin/press/article/details/17399?directionId=261&lang=ru.

However, contingent liabilities, such as exposures to state-owned enterprises, their crossholdings, and exposures to banks, are not fully captured there.

International Regulatory Considerations

Kazakhstan is part of the Eurasian Economic Union, and EAEU regulations and decisions supersede the national regulatory system.  In its economic policy Kazakhstan has declared its adherence to the WTO and OECD standards. Kazakhstan became a member of the WTO in 2015.  It notifies the WTO Committee on Technical Barriers to Trade about drafts of national technical regulations (although lapses have been noted).  Kazakhstan ratified the WTO Trade Facilitation Agreement (TFA) in May 2016, notified its Category A requirements in March 2016, and requested a five-year transition period for its Category B and C requirements.  Early in 2018, the government established an intra-agency Trade Facilitation Committee to implement its TFA commitments.  The status of the TFA implementation by Kazakhstan can be found here: https://tfadatabase.org/members/kazakhstan.

Legal System and Judicial Independence

Kazakhstan’s Civil Code establishes general commercial and contract law principles. Under the constitution, the judicial system is independent of the executive branch, although the government interferes in judiciary matters. According to Freedom House’s Nations in Transit report for 2018, the executive branch effectively dominates the judicial branch. Allegedly, pervasive corruption of the courts and the influence of the ruling elites results in low public expectations and trust in the justice system. Judicial outcomes are perceived as subject to political influence and interference. Regulations or enforcement actions can be appealed and adjudicated in the national court system. Monetary judgments are assessed in the domestic currency.

Parties of commercial contracts, including foreign investors, can seek dispute settlement in Kazakhstan’s courts or international arbitration, and Kazakhstani courts nominally enforce arbitration clauses in contracts. However, in actual fact the Government has refused to honor at least one fully litigated international arbitral decision. Any court of original jurisdiction can consider disputes between private firms as well as bankruptcy cases.

The Astana International Financial Center, which opened in July 2018, includes its own arbitration center and court based on British Common Law and independent of the Kazakhstani judiciary. The court is now led by former Deputy President of the UK Supreme Court, Lord Mance, and several other Commonwealth judges have been appointed. The government advises foreign investors to use the capacities of the AIFC arbitration center and the AIFC court more actively. Provisions on using the AIFC law as applicable law are recommended for model investment contracts between a foreign investor and the government. In February 2020, the AIFC reported that both Chevron in Kazakhstan and Tengizchevroil included the AIFC arbitration center as their preferred institution for resolution of commercial disputes in Kazakhstan.  Local lawyers have observed a growing positive influence of the high standards of AIFC court and the AIFC arbitration over the entire judicial system of Kazakhstan.

President Tokayev’s policy on a new Economic Course anticipates further judiciary reforms aimed to strengthen public trust in courts.

Laws and Regulations on Foreign Direct Investment

The following legislation affects foreign investment in Kazakhstan: the Entrepreneurial Code; the Civil Code; the Tax Code; the Customs Code of the Eurasian Economic Union; the Customs Code of Kazakhstan; the Law on Government Procurement; the Law on Currency Regulation and Currency Control, and the Constitutional Law on the Astana International Financial Center. These laws provide for non-expropriation, currency convertibility, guarantees of legal stability, transparent government procurement, and incentives for priority sectors. However, inconsistent implementation of these laws and regulations at all levels of the government, combined with a tendency for courts to favor the government, have been reported to create significant obstacles to business in Kazakhstan.

The Entrepreneurial Code outlines basic principles of doing business in Kazakhstan and the government’s relations with entrepreneurs. The Code reinstates a single investment regime for domestic and foreign investors, and in principal codifies non-discrimination for foreign investors. The Code contains incentives and preferences for government-determined priority sectors, providing customs duty exemptions and in-kind grants detailed in section 4, Industrial Policies.

The Code also provides for dispute settlement through negotiation, use of Kazakhstan’s judicial process, and international arbitration. U.S. investors have expressed concern about the Code’s narrow definition of investment disputes and its lack of clear provisions for access to international arbitration.

In 2020, Kazakhstan enacted a new provision to the Entrepreneurial Code on investment agreement between strategic investors and the government. According to the law, the investment agreement is expected to provide investors with incentives, preliminarily negotiated with the government. The government guarantees the stability of the legal regime for these investment agreements. The investment agreement is an addition to a system of investment contacts already established in Kazakhstan (see Section 4 for details).

A law on Currency Regulation and Currency Control, which came into force July 1, 2019, expands the statistical monitoring of transactions in foreign currency and facilitates the process of de-dollarization. In particular, the law treats branches of foreign companies in Kazakhstan as residents and enables the National Bank of Kazakhstan (NBK) to enhance control over cross-border transactions. The NBK approved a list of companies that keep their non-resident status; the majority of these companies are from extractive industries (see also section 6, Financial Sector).

The legal and regulatory framework offered by AIFC to businesses registering on that territory differs substantially from that of Kazakhstan. The AIFC activity has gained momentum since its establishment in 2018. More detailed information on the legal and regulatory implications of operating within AIFC can be found here: https://aifc.kz/annual-report/ and in Section 6, Financial Sector. Additionally, the government’s single window for foreign investors, providing information to potential investors, business registration, and links to relevant legislation, can be found here: https://invest.gov.kz/invest-guide/.

Competition and Antitrust Laws

The Entrepreneurial Code regulates competition-related issues such as cartel agreements and unfair competition. In 2020, in order to enhance an anti-monopoly policy, the President ordered the transfer of the functions on protection of competition to a newly created Agency for Protection and Development of Competition that operates under his direct supervision. The Agency is responsible for reviewing transactions in terms of competition-related concerns. Regulation of natural monopolies remained with the Ministry of National Economy. In order to be responsive to public opinion, the Agency for Protection and Development of Competition has established various consultative bodies, including the Open Space, the Council on Identifying and Removal of Barriers for Entering Markets, the Public Council, and the Exchange Committee. Foreign companies may participate in the Council on Identifying and Removal of barriers for Entering Markets.

Expropriation and Compensation

The bilateral investment treaty between the United States and Kazakhstan requires the government to provide compensation in the event of expropriation. The Entrepreneurial Code allows the state to nationalize or requisition property in emergency cases but fails to provide clear criteria for expropriation or to require prompt and adequate compensation at fair market value.

The Mission is aware of cases where owners of flourishing and developed businesses have been forced to sell their businesses to companies affiliated with high-ranking and powerful individuals.

Dispute Settlement

ICSID Convention and New York Convention

Kazakhstan has been a member of the International Center for the Settlement of Investment Disputes (ICSID) since December 2001 and ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1995. By law, any international award rendered by the ICSID, a tribunal applying the rules of the UN Commission on International Trade Law Arbitration, Stockholm Chamber of Commerce, London Court of International Arbitration, or Arbitration Commission at the Kazakhstan Chamber of Commerce and Industry is enforceable in Kazakhstan. However, the government does not always honor such awards.

Investor-State Dispute Settlement

The government is a signatory to bilateral investment agreements with 47 countries, the Energy Charter Treaty, and one multilateral investment agreement with EAEU partners. These agreements recognize international arbitration of investment disputes. The United States and Kazakhstan signed a Bilateral Investment Treaty in 1994.

Kazakhstan is legally obligated to recognize arbitral awards, yet does not always honor this fact.

In January 2021, Kazakhstan’s Ministry of Justice reported that in 2020, Kazakhstan was involved in 25 arbitration proceedings, including 15 in international arbitration courts.  A number of investment disputes involving foreign companies have arisen in the past several years linked to alleged violations of environmental regulations, tax laws, transfer pricing laws, and investment clauses. Some disputes relate to alleged illegal extensions of exploration schedules by subsurface users, as production-sharing agreements with the government usually make costs incurred during this period fully reimbursable. Some disputes involve hundreds of millions of dollars. Problems arise in the enforcement of judgments, and ample opportunity exists for influencing judicial outcomes given the relative lack of judicial independence.

To encourage foreign investment, the government has developed dispute resolution mechanisms aimed at enabling aggrieved investors to seek redress without requiring them to litigate their claims. The government established an Investment Ombudsman in 2013, billed as being able to resolve foreign investors’ grievances by intervening in inter-governmental disagreements that affect investors. However, investors who have entered such settlement discussions in good faith report that the government pursued criminal litigation just as the parties were closing in on a deal (after the investors had devoted significant time and resources toward achieving a settlement).

The Entrepreneurial Code defines an investment dispute as “a dispute ensuing from the contractual obligations between investors and state bodies in connection with investment activities of the investor,” and states such disputes may be settled by negotiation, litigation or international arbitration. Investment disputes between the government and investors fall to the Nur-Sultan City Court; disputes between the government and large investor are in the exclusive competence of a special investment panel at the Supreme Court of Kazakhstan. Amendments to legislation on the court system the Parliament adopted in March 2021 will change this system once implemented. Starting from July 1, 2021, the Special Economic Court and the Special Administrative Court of Nur-Sultan City will be the courts of first instance for investment disputes between the government and investors. The Nur-Sultan City Court and the Judicial Chamber on administrative cases of the Supreme Court will serve as the first court of appeal.

International Commercial Arbitration and Foreign Courts

The Law on Mediation offers alternative (non-litigated) dispute resolutions for two private parties. The Law on Arbitration defines rules and principles of domestic arbitration. As of April 2020, Kazakhstan had 18 local arbitration bodies unified under the Arbitration Chamber of Kazakhstan. Please see: https://palata.org/about/. The government noted that the Law on Arbitration brought the national arbitration legislation into compliance with the United Nations Commission on International Trade Law (UNCITRAL) Model Law, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and the European Convention on International Commercial Arbitration. Local courts recognize and enforce court rulings of CIS countries. Judgement of other foreign state courts are recognized and enforceable by local courts when Kazakhstan has a bilateral agreement on mutual judicial assistance with the respective country or applies a principle of reciprocity.

When SOEs are involved in investment disputes, domestic courts usually find in the SOE’s favor. By law, investment disputes with private commercial entities, employees, or SOEs are in the jurisdiction of local courts. According to the European Bank for Reconstruction and Development’s 2014 Judicial Decision Assessment, judges in local courts lacked experience with commercial law and tended to apply general principles of laws and Civil Code provisions with which they are more familiar, rather than relevant provisions of commercial legislation. President Tokayev has recognized that that the judicial system lacks specialists in taxation, subsoil use, intellectual property rights and corporate law.

Even when investment disputes are resolved in accordance with contractual conditions, the resolution process can be slow and require considerable time and resources. Many investors therefore elect to handle investment disputes privately, in an extrajudicial way.

Bankruptcy Regulations

Kazakhstan’s 2014 Bankruptcy and Rehabilitation Law (The Bankruptcy Law) protects the rights of creditors during insolvency proceedings, including access to information about the debtor, the right to vote against reorganization plans, and the right to challenge bankruptcy commissions’ decisions affecting their rights. Bankruptcy is not criminalized, unless the court determines the bankruptcy was premeditated, or rehabilitation measures are wrongful. The Bankruptcy Law improves the insolvency process by permitting accelerated business reorganization proceedings, extending the period for rehabilitation or reorganization, and expanding the powers of (and making more stringent the qualification requirements to become) insolvency administrators. The law also eases bureaucratic requirements for bankruptcy filings, gives creditors a greater say in continuing operations, introduces a time limit for adopting rehabilitation or reorganization plans, and adds court supervision requirements. Amendments to the law accepted in 2019-2020 introduced a number of changes. Among them are a more specified definition of premeditated bankruptcy; a requirement to prove a sustained insolvency when filing a claim on bankruptcy; a possibility for the bank-agent to file a request for bankruptcy on behalf of a syndicate of creditors; a possibility for individual entrepreneurs to apply for a rehabilitation procedure to reinstate its solvency, and an option to be liquidated without filing bankruptcy in the absence of income, property, and business operations.

5. Protection of Property Rights

Real Property

With certain sectoral exceptions, private entities, both foreign and domestic, have the right to establish and own business enterprises, buy and sell business interests, and engage in all forms of commercial activity.

Secured interests in property (fixed and non-fixed) are recognized under the Civil Code and the Land Code. All property and lease rights for real estate must be registered with the Ministry of Justice through its local service centers. According to the World Bank’s Doing Business Report, Kazakhstan ranks 24 out of 190 countries in ease of registering property.

Under Kazakhstan’s constitution, agricultural land and certain other natural resources may be owned or leased only by Kazakhstani citizens. The Land Code: (a) allows citizens and Kazakhstani companies to own agricultural and urban land, including commercial and non-commercial buildings, complexes, and dwellings; (b) permits foreigners to own land to build industrial and non-industrial facilities, including dwellings, with the exception of agricultural lands and land located in border zones; (c) authorizes the government to monitor proper use of leased agricultural lands, the results of which may affect the status of land-lease contracts; (d) forbids private ownership of: land used for national defense and national security purposes, specially protected nature reserves, forests, reservoirs, glaciers, swamps, designated public areas within urban or rural settlements, except land plots occupied by private building and premises, main railways and public roads, land reserved for future national parks, subsoil use and power facilities, and social infrastructure. The government maintains the land inventory and constantly updates its electronic data base, though the inventory data is not exhaustive. The government has also set up rules for withdrawing land plots that have been improperly or never used.

In 2015, the government proposed Land Code amendments that would allow foreigners to rent agricultural lands for up to 25 years. Mass protests in the spring of 2016 led the government to introduce a moratorium on these provisions until December 31, 2021. The moratorium is also effective on other related articles of the Land Code that regulate private ownership rights on agricultural lands. In March 2021, President Tokayev initiated changes in the legislation to ban both the sale and lease of agricultural lands to foreigners. On March 17, the Mazhilis, the lower Chamber of the Parliament, started to consider the amended legislation, according to which, foreigners, persons without citizenship, foreign legal entities and legal entities with foreign participation, international organizations, scientific centers with foreign participation, and repatriated Kazakhs cannot own and take in temporary use agricultural lands. The amendments are expected to be adopted in the first half of 2021.

Intellectual Property Rights

The legal structure for intellectual property rights (IPR) protection is relatively strong; however, enforcement needs further improvement. Kazakhstan is not currently included in the United States Trade Representative (USTR) Special 301 Report. To facilitate its accession to the World Trade Organization (WTO) and attract foreign investment, Kazakhstan continues to improve its legal regime for protecting IPR. The Civil Code and various laws protect U.S. IPR. Kazakhstan has ratified 18 of the 24 treaties endorsed by the World Intellectual Property Organization (WIPO): https://wipolex.wipo.int/en/treaties/ShowResults?country_id=97C.

Kazakhstan’s IPR legislation has improved. The Criminal Code sets out punishments for violations of copyright, rights for inventions, useful models, industrial patterns, selected inventions, and integrated circuit topographies. The law authorizes the government to target internet piracy and shut down websites unlawfully sharing copyrighted material, provided that the rights holders had registered their copyrighted material with Kazakhstan’s IPR Committee. Despite these efforts, U.S. companies and associated business groups have alleged that 73 percent of software used in Kazakhstan is pirated, including in government agencies, and have criticized the government’s enforcement efforts.

To comply with OECD IPR standards, in 2018 Kazakhstan accepted amendments to its IPR legislation. The law set up a more convenient, one-tier system of IPR registration and provided rights holders the opportunity for pre-trial dispute settlement through the Appeals Council at the Ministry of Justice. In addition, the law included IPR protection as one of the government procurement principles that should be strictly followed by government organizations. Currently, the Parliament is considering a new bill on IPR issues. The bill introduces a notion of geographical indication, a short-term (up to three years) protection of unregistered industrial designs, an “opposition” system for challenging requests for registration of trademarks, geographical indications, and appellation of origin of goods. Also, the bill is expected to make copyright collective organizations more transparent and effective and to improve regulation of patent attorneys’ activity. In 2020, Kazakhstan ratified the Protocol on Protection of Industrial Designs of the Eurasian Patent Convention from September 1994 and signed the Agreement of the Eurasian Economic Union on trademarks, service marks, and appellation of origin of goods.

Kazakhstan’s authorities conduct nationwide campaigns called “Counterfeit”, “Hi-Tech” and “Anti-Fraud” that are aimed at detecting and ceasing IPR infringements and increasing public awareness about IP issues.  In 2020, these campaigns resulted in the seizing of 4.8 thousand units of counterfeit goods. The Ministry of Justice and law enforcement agencies regularly report the results of their inspections. However, the moratorium on inspections of small and medium-sized businesses that came into force in December 2019 reduced significantly the number of IPR-related inspections in 2020.

In 2020, the Ministry of Internal Affairs initiated 14 criminal cases for copyright violations and seven administrative cases, imposing penalties of USD 5,300. In addition, regional authorities reportedly seized 3,800 units of counterfeit goods worth around USD 4,000 and identified 24 foreign websites, selling pirated software. On the border, customs officials suspended the release of counterfeited goods in the amount of USD 20.1 million.

In 2020, the government agency on investigation of economic crimes identified and closed one illegal plant that produced counterfeited pharmaceuticals. Criminals fabricated packages using known trademarks and altered the expiry dates of the drugs. Although Kazakhstan continues to make progress to comply with WTO requirements and OECD standards, foreign companies complain of inadequate IPR protection. Judges, customs officials, and police officers also lack IPR expertise, which exacerbates weak IPR enforcement.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at https://www.wipo.int/directory/en/details.jsp?country_code=KZ.

7. State-Owned Enterprises

According to the National Statistical Bureau, as of January 1, 2021, the government owns 25,386 state-owned enterprises (SOEs), including all forms of SOEs, from small veterinary inspection offices, kindergardens, regional departments for the protection of competition, and regional hospitals, to large national companies controlling energy, transport, agricultural finance, and product development.

A list of SOEs is available at: https://gr5.gosreestr.kz/p/ru/gr-search/search-objects.

SOEs plays a leading role in the country’s economy. According to the 2017 OECD Investment Policy Review, SOE assets amount to USD 48-64 billion, approximately 30-40 percent of GDP; net income was approximately USD 2 billion. In order to stop an expansion of the quasi-sovereign sector, President Tokayev introduced in 2019 a moratorium on establishing new parastatal companies that will be in effect until the end of 2021. A bill on improving the business climate adopted by Parliament in April 2020 disincentivizes the establishment of new parastatal companies.

In pursuance of his New Economic Course, President Tokayev proposed in September 2020 the creation of a unified information portal that would consolidate all information about the activity of quasi-sovereign companies (SOEs), including their financial statements. If this portal is established, it would improve transparency of the quasi-sovereign sector significantly. Portfolio investors are also required to have corporate governance standards and independent boards.

Despite these positive developments, the number of SOEs in the economy remains large. The preferential status of parastatal companies is also unchanged; for example, parastatals enjoy greater access to subsidies and government support.

The National Welfare Fund Samruk-Kazyna (SK) is Kazakhstan’s largest national holding company, and manages key SOEs in the oil and gas, energy, mining, transportation, and communication sectors. At the end of 2018, SK had 317 subsidiaries and employed around 300,000 people. By some estimates, SK controls around half of Kazakhstan’s economy, and is the nation’s largest buyer of goods and services. In 2019, SK reported USD 61 billion in assets and USD 3 billion in consolidated net profit. Created in 2008, SK’s official purpose is to facilitate economic diversification and to increase effective corporate governance.

In 2018, First President Nazarbayev approved a new SK strategy which declared effective management of its companies, restructuration and diversification of assets and investment projects, and compliance with principles of sustainable development as priority goals. SK stated its adherence to international standards of SOE management and its willingness to separate the role of the state as a main owner from its regulator’s role. To follow a new strategy, early in 2020, the SK removed the Prime Minister from the Board and elected four independent directors, one of whom became the Chair of the Board. Thus, the government is now represented by three members on the Board- an Aide to the President, the Minister of National Economy, and the CEO of Samruk-Kazyna. Regardless of these positive moves, in reality political influence continues to dominate SK. First President Nazarbayev is the life-long Chair of the Managing Council of SK, with the right to take strategically important decisions on SK activity. SK has special rights, such as the ability to conclude large transactions among members of its holdings without public notification. SK enjoys a pre-emptive right to buy strategic facilities and assets and is exempt from government procurement procedures. Critically, the government can transfer state-owned property to SK, easing the transfer of state property to private owners. More information is available at http://sk.kz/ .

Regardless of these positive moves, in reality political influence continues to dominate SK. First President Nazarbayev is the life-long Chair of the Managing Council of SK, with the right to take strategically important decisions on SK activity. SK has special rights, such as the ability to conclude large transactions among members of its holdings without public notification. SK enjoys a pre-emptive right to buy strategic facilities and assets and is exempt from government procurement procedures. Critically, the government can transfer state-owned property to SK, easing the transfer of state property to private owners. More information is available at http://sk.kz/ .

In addition to SK, the government created the national managing holding company Baiterek in 2013 to provide financial and investment support to non-extractive industries and to drive economic diversification. Baiterek is comprised of the Development Bank of Kazakhstan, the Investment Fund of Kazakhstan, the Housing and Construction Savings Bank – Otbassy Bank, the National Mortgage Company, KazakhExport, the Entrepreneurship Development Fund Damu and other financial and development institutions. In 2021, following the President’s request, Baiterek joined the other quasi-sovereign holding company – KazAgro. Thus, the financing of the agricultural sector will now be in the portfolio of Baiterek. Unlike SK, the Prime Minister remains Chairof the Baiterek Board, assisted by several cabinet ministers and independent directors. As of the end of September 2020, Baiterek had USD 14.3 billion in assets and earned USD 133.5 million in net profit. Please see https://www.baiterek.gov.kz/en .

Another significant SOE is the national holding company Zerde, which is charged with creating modern information and communication infrastructure, using new technologies, and stimulating investments in the communication sector (http://zerde.gov.kz/ ).

Officially, private enterprises compete with public enterprises under the same terms and conditions. In some cases, SOEs enjoy better access to natural resources, credit, and licenses than private entities.

In its 2017 Investment Review, the OECD recommended Kazakhstani authorities identify new ways to ensure that all corporate governance standards applicable to private companies apply to SOEs. Samruk-Kazyna adopted a new Corporate Governance Code in 2015. The Code, which applies to all SK subsidiaries, specified the role of the government as ultimate shareholder, underlined the role of the Board of directors and risk management, and called for transparency and accountability.

Privatization Program

Kazakhstan has stated the aim to decrease the SOE share in the economy to 15 percent by 2020, in line with OECD averages. The goal has not yet been reached, but the government continues a large-scale privatization campaign. According to a government report, 93 percent of the 2016-2020 plan has been implemented. In 2020, the government enacted a new comprehensive privatization program for 2021-2025. The government’s reports on both campaigns are available at: https://privatization.gosreestr.kz/.

As of March 30, 2021, out of 1,748 organizations planned for privatization, 729 had been sold for USD 1.7 billion. The government sells small, state owned and municipal enterprises through electronic auctions. The public bidding process is established by law. By law and in practice, foreign investors may participate in privatization projects. However, foreign investors may experience challenges in navigating the process.

SK has an important role in the privatization campaign and as of March 2021 had sold full or partial stakes in 88 subsidiaries of large national companies operating in the energy, mining, transportation, and service sectors. 53 subsidiaries have been liquidated or reorganized. In June 2020, SK completed the privatization of 25 percent of KazAtomProm by selling the remaining 6.28 percent of common shares via a dual-listed IPO on the London Exchange and the Astana International Stock Exchange. Although the pandemic affected the preliminary privatization timelines, SK plans to offer institutional investors non-controlling shares in eight national companies via initial public offerings (IPOs), secondary public offerings (SPO) and sale to strategic investors. These companies are: state oil company KazMunaiGas, Air Astana, national telecom operator Kazakhtelecom, railway operator Kazakhstan Temir Zholy, KazPost, and Samruk–Energy, Tau-Ken Samruk and Qazaq Air.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $181,666 2019 $181,666 https://data.worldbank.org/
country/kazakhstan?view=chart 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) Jan 1, 2021 $37,939 N/A N/A
Host country’s FDI in the United States ($M USD, stock positions) Jan1, 2021 $193.2 N/A N/A
Total inbound stock of FDI as % host GDP 2019 88.7 % 2019 83.3% UNCTAD data available at https://unctad.org/system/
files/non-official-document/
wir20_fs_kz_en.pdf 

* Source for Host Country Data: *The National Statistical Bureau and The National Bank of Kazakhstan.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data (2019)
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 149,370 100% Total Outward 15,606 100%
The Netherlands 59,897 40.1% The Netherlands 15,081 96.6%
United States 36,510 24.4% Russia 1,597 10.2%
France 13,321 8.9% Cayman Islands 1,095 7%
China, P.R.: Main land 7,649 5.12% Luxembourg 633 4.1%
Japan 5,909 4% Cyprus 567 3.6%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets (2019)
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 70,358 100% All Countries Amount14,688 100% All Countries 55,670 100%
United States 36,316 52% United States 8,675 59% United States 27,642 50%
United Kingdom 4,626 7% United Kingdom 1,321 9% International Organizations 3,459 6%
Japan 3,859 5% Japan 1,041 7% United Kingdom 3,305 6%
International Organizations 3,459 5% Switzerland 451 3% Korea, Rep.of 3,095 6%
Korea, Rep.of 3,096 4% France 437 3% Japan 2,817 5%

Malaysia

Executive Summary

Malaysia continues to focus on economic recovery following its deepest recession in 20 years, brought on by the COVID-19 pandemic and restrictions on domestic travel and business operations intended to curb the spread of the virus. Under Prime Minister Muhyiddin Yassin, the government has spent an estimated USD 82 billion in stimulus measures since the start of the pandemic. Despite these setbacks, Malaysia’s economy is expected to rebound in 2021, buoyed by manufacturing export sector growth and public initiatives to increase digital investments and construction activity. Malaysia’s finance ministry and central bank have noted the pace of the recovery will also be impacted by the government’s vaccine rollout, which has experienced delays.

On April 21, the government announced the National Investment Aspirations, a framework intended to reform Malaysia’s investment policies. Among the goals of the new investment framework are to expand and integrate Malaysia’s linkages with regional and global supply chains and further develop economic clusters tied to key sectors, including advanced manufacturing and technology (broadly referred to in Malaysia as the electrical and electronics, or E&E, sector). On February 19, the government announced the MyDigital initiative, intended to add 500,000 jobs and grow Malaysia’s digital economy to nearly one-quarter of GDP by 2030.

On January 12, Prime Minister Muhyiddin announced a six-month state of emergency intended to strengthen the government’s ability to respond to the pandemic. However, the resulting suspension of parliament has also contributed to political uncertainty in Malaysia since a change in government in March 2020, the second in a two-year period.

The Malaysian government has traditionally encouraged foreign direct investment (FDI), and the Prime Minister and other cabinet ministers have signaled their openness to foreign investment since taking office. In its 2021 budget, the government proposed tax incentives which include extensions of existing relocation incentives for the manufacturing sector (including a zero-percent tax rate for new companies or a 100-percent investment tax allowance for five years) and extensions of existing tax incentives for certain industrial sectors.

The business climate in Malaysia is generally conducive to U.S. investment. Increased transparency and structural reforms that will prevent future corrupt practices could make Malaysia a more attractive destination for FDI in the long run. The largest U.S. investments are in the oil and gas sector, manufacturing, technology, and financial services. Firms with significant investment in Malaysia’s oil and gas and petrochemical sectors include ExxonMobil, Caltex, ConocoPhillips, Hess Oil, Halliburton, Dow Chemical, and Eastman Chemicals. Major semiconductor manufacturers, including ON Semiconductor, Texas Instruments, Intel, and others have substantial operations in Malaysia, as do electronics manufacturers Western Digital, Honeywell, and Motorola.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 57 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 12 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 33 of 130 https://www.globalinnovationindex.org/analysis-indicator
U.S.  FDI in partner country (historical stock positions) 2019 USD 10.8 billion https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 11,230 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Historically, the Malaysian government has welcomed FDI as an integral component of its economic development. Over the last decade, the gradual liberalization of the economy and influx of FDI has led to the creation of new jobs and businesses and fueled Malaysia’s export-oriented growth strategy. The Malaysian economy is highly dependent on trade. According to World Bank data, the value of Malaysia’s imports and exports of goods and services as a share of GDP held steady at roughly 130 percent in 2018, more than double the global average.

In October 2019, the government introduced measures in its 2020 budget designed to streamline and further incentivize foreign investment, with special emphasis on investments being redirected from China as a result of shifting global supply chains. The Malaysian government established the China Special Channel for the purpose of attracting these investments, an initiative being managed by InvestKL, an investment promotion agency under the Ministry of International Trade and Industry. The government also established the National Committee on Investment, an investment approval body jointly chaired by the Minister of Finance and the Minister of International Trade and Industry, to expedite the regulatory process with respect to approving new investments.

In its 2021 budget, the government proposed a slew of tax incentives which include extensions of existing relocation incentives for the manufacturing sector (including a 0 percent tax rate for new companies or a 100 percent investment tax allowance for five years) and extensions of existing tax incentives for certain industrial sectors. In light of the pandemic, manufacturers of pharmaceutical products, particularly those involved with COVID-19 vaccine supply chains, investing in Malaysia will be given income tax rates of zero percent to 10 percent for the first 10 years; with 10 percent rates for the subsequent 10 years.

Malaysia has various national, regional, and municipal investment promotion agencies, including the Malaysian Investment Development Authority (MIDA) and InvestKL. These agencies can assist with business strategy consultations, area familiarization, talent management programs, networking, and other post-investment services.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities can establish and own business enterprises and engage in all forms of remunerative activity, with some exceptions. Although Malaysia has taken steps to liberalize policies concerning foreign investment, there continue to exist requirements for local equity participation within specific sectors. In 2009, Malaysia repealed Foreign Investment Committee (FIC) guidelines that limited transactions for acquisitions of interests, mergers, and takeovers of local companies by foreign parties. However, certain business sectors, including logistics, industrial training, and distributive trade, are required to limit foreign equity participation when applying for operating licenses, permits and approvals. Due to residual economic policies, this limitation most commonly manifests as a 70-30 equity split between foreign investors (maximum 70 percent) and Bumiputera (i.e., ethnic Malays and indigenous peoples) entities (minimum 30 percent).

Foreign investment in services, whether in sectors with no foreign equity caps or controlled sub-sectors, remain subject to review and approval by ministries and agencies with jurisdiction over the relevant sectors. A key function of this review and approval process is to determine whether proposed investments meet the government’s qualifications for the various incentives in place to promote economic development goals. The Ministerial Functions Act grants relevant ministries broad discretionary powers over the approval of investment projects. Investors in industries targeted by the Malaysian government can often negotiate favorable terms with the ministries or agencies responsible for regulating that industry. This can include assistance in navigating a complex web of regulations and policies, some of which can be waived on a case-by-case basis. Foreign investors in non-targeted industries tend to receive less government assistance in obtaining the necessary approvals from various regulatory bodies and therefore can face greater bureaucratic obstacles.

Finance

Malaysia’s 2011-2020 Financial Sector Blueprint has produced partial liberalization within the financial services sector; however, it does not contain specific market-opening commitments or timelines. For example, the services liberalization program that started in 2009 raised the limit of foreign ownership in insurance companies to 70 percent. However, Bank Negara Malaysia (BNM), Malaysia’s central bank, would allow a greater foreign ownership stake if the investment is determined to facilitate the consolidation of the industry. The latest Blueprint helped to codify this case-by-case approach. Under the Financial Services Act passed in late 2012, issuance of new licenses will be guided by prudential criteria and the “best interests of Malaysia,” which may include consideration of the financial strength, business record, experience, character and integrity of the prospective foreign investor, soundness and feasibility of the business plan for the institution in Malaysia, transparency and complexity of the group structure, and the extent of supervision of the foreign investor in its home country. In determining the “best interests of Malaysia,” BNM may consider the contribution of the investment in promoting new high value-added economic activities, addressing demand for financial services where there are gaps, enhancing trade and investment linkages, and providing high-skilled employment opportunities. BNM, however, has never defined criteria for the “best interests of Malaysia” test, and no firms have qualified.

While there has been no policy change in terms of the 70 percent foreign ownership cap for insurance companies, the government did agree to let one foreign owned insurer maintain a 100 percent equity stake after that firm made a contribution to a health insurance scheme aimed at providing health coverage to lower-income Malaysians.

BNM currently allows foreign banks to open four additional branches throughout Malaysia, subject to restrictions, which include designating where the branches can be set up (i.e., in market centers, semi-urban areas and non-urban areas). The policies do not allow foreign banks to set up new branches within 1.5 km of an existing local bank. BNM also has conditioned foreign banks’ ability to offer certain services on commitments to undertake certain back-office activities in Malaysia.

Information & Communication

In 2012, Malaysia authorized up to 100 percent foreign equity participation among application service providers, network service providers, and network facilities providers. An exception to this is national telecommunications firm Telekom Malaysia, which has an aggregate foreign share cap of 30 percent, or five percent for individual investors.

Manufacturing Industries

Malaysia permits up to 100 percent foreign equity participation for new manufacturing investments by licensed manufacturers. However, foreign companies can face difficulties obtaining a manufacturing license and often resort to incorporating a local subsidiary for this purpose.

Oil and Gas

Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is controlled by Petroleum Nasional Berhad (PETRONAS), a wholly state-owned company and the sole entity with legal title to Malaysian crude oil and gas deposits. Foreign participation tends to take the form of production sharing contracts (PSCs). PETRONAS regularly requires its PSC partners to work with Malaysian firms for many tenders. Non-Malaysian firms are permitted to participate in oil services in partnership with local firms and are restricted to a 49 percent equity stake if the foreign party is the principal shareholder. PETRONAS sets the terms of upstream projects with foreign participation on a case-by-case basis.

Other Investment Policy Reviews

Malaysia’s most recent Organization for Economic Cooperation and Development (OECD) investment review occurred in 2013. Although the review underscored the generally positive direction of economic reforms and efforts at liberalization, the recommendations emphasized the need for greater service sector liberalization, stronger intellectual property protections, enhanced guidance and support from Malaysia’s Investment Development Authority (MIDA), and continued corporate governance reforms.

Malaysia also conducted a WTO Trade Policy Review in February 2018, which incorporated a general overview of the country’s investment policies. The WTO’s review noted the Malaysian government’s action to institute incentives to encourage investment as well as a number of agencies to guide prospective investors. Beyond attracting investment, Malaysia had made measurable progress on reforms to facilitate increased commercial activity. Among the new trade and investment-related laws that entered into force during the review period were: the Companies Act, which introduced provisions to simplify the procedures to start a company, to reduce the cost of doing business, as well as to reform corporate insolvency mechanisms; the introduction of the goods and services tax (GST) to replace the sales tax; the Malaysian Aviation Commission Act, pursuant to which the Malaysian Aviation Commission was established; and various amendments to the Food Regulations. Since the WTO Trade Policy Review, however, the new government has already eliminated the GST, and has revived the Sales and Services Tax, which was implemented on September 1, 2018.

Business Facilitation

The principal law governing foreign investors’ entry and practice in the Malaysian economy is the Companies Act of 2016 (CA), which entered into force on January 31, 2017 and replaced the Companies Act of 1965. Incorporation requirements under the new CA have been further simplified and are the same for domestic and foreign sole proprietorships, partnerships, as well as privately held and publicly traded corporations. According to the World Bank’s Doing Business Report 2019, Malaysia streamlined the process of obtaining a building permit and made it faster to obtain construction permits; eliminated the site visit requirement for new commercial electricity connections, making getting electricity easier for businesses; implemented an online single window platform to carry out property searches and simplified the property transfer process; and introduced electronic forms and enhanced risk-based inspection system for cross-border trade and improved the infrastructure and port operation system at Port Klang, the largest port in Malaysia, thereby facilitating international trade; and made resolving insolvency easier by introducing the reorganization procedure. These changes led to a significant improvement of Malaysia’s ranking per the Doing Business Report, from 24 to 15 in one year.

In addition to registering with the Companies Commission of Malaysia, business entities must file: 1) Memorandum and Articles of Association (i.e., company charter); 2) a Declaration of Compliance (i.e., compliance with provisions of the Companies Act); and 3) a Statutory Declaration (i.e., no bankruptcies, no convictions). The registration and business establishment process takes two weeks to complete, on average. GST was repealed in May of 2018 and a new sales and services tax (SST) took effect on September 1, 2018.

Beyond these requirements, foreign investors must obtain licenses. Under the Industrial Coordination Act of 1975, an investor seeking to engage in manufacturing will need a license if the business claims capital of RM2.5 million (approximately USD 641,000) or employs at least 75 full-time staff. The Malaysian government’s guidelines for approving manufacturing investments, and by extension, manufacturing licenses, are generally based on capital-to-employee ratios. Projects below a threshold of RM55,000 (approximately USD 14,100) of capital per employee are deemed labor-intensive and will generally not qualify. Manufacturing investors seeking to expand or diversify their operations need to apply through MIDA.

Manufacturing investors whose companies have annual revenue below RM50 million (approximately USD 12.8 million) or with fewer than 200 full-time employees meet the definition of small and medium size enterprises (SMEs) and will generally be eligible for government SME incentives. Companies in the services or other sectors that have revenue below RM20 million (approximately USD 5.1 million) or fewer than 75 full-time employees also meet the SME definition.

Outward Investment

While the Malaysian government does not promote or incentivize outward investment, a number of government-linked companies, pension funds, and investment companies do have investments overseas. These companies include the sovereign wealth fund of the Government of Malaysia, Khazanah Nasional Berhad; KWAP, Malaysia’s largest public services pension fund; and the Employees’ Provident Fund of Malaysia. Government-owned oil and gas firm Petronas also has investments in several regions outside Asia.

3. Legal Regime

Transparency of the Regulatory System

In July 2013, the Malaysian government accelerated its efforts to modernize the regulatory processes in the country by releasing the National Policy on Development and Implementation of Regulations (NPDIR), a roadmap to achieving Good Regulatory Practice (GRP). Under the NPDIR, the federal government formalized a comprehensive approach to improve the efficiency and transparency of the country’s regulatory framework. The benefits to the private sector thus far have included a streamlining of project approval requirements and fees (to the point that Malaysia ranked 2nd in the World Bank’s 2020 Doing Business report on ease of “dealing with construction permits”), a greater role in the lawmaking process, and improved standardization and transparency in all phases of regulatory proceedings. The main components of the policy are: 1) the requirement of a Regulatory Impact Assessment (RIA) (a cost-benefit analysis of all newly proposed regulations) with each new piece of regulation; and 2) the formalization of a public consultation process to take the views of stakeholders into account while formulating new legislation. Under the NPDIR, the government has committed to reviewing all new regulations every five years to determine which ones need to be adjusted or eliminated.

In furtherance of the NPDIR, the Malaysian government published four circulars in 2013 and 2014 to explain the methodology and implementation of their new strategy. These four documents laid out a clear framework toward increasing accountability, standardization, and transparency, as well as explaining enforcement and compliance mechanisms to be established. Throughout its various agencies, the government of Malaysia has taken steps to actualize these circulars. Ministries and agencies use their respective websites to publish the text and or summaries of proposed regulations prior to enactment, albeit with varying levels of consistency. Further, Malaysia’s procurement principles include adherence to open and fair competition, public accountability, transparency, and value for money.

Despite these efforts to foster inclusion, fairness, and transparency, considerable room for improvement exists. The Malaysian government’s 2018 Report on Modernization (sic) of Regulations emphasized the need to “Establish an accountability mechanism for the implementation of regulatory reviews by the government.” Many foreign investors echo this lack of accountability and criticize the opacity in the government decision-making process. One major area of concern for foreign investors remains government procurement policy, as non-Malaysian companies claim to have lost bids against Bumiputera-owned (ethnic Malay) companies despite offering better products at lower costs. Such results are due to the government’s preference policy to facilitate greater Bumiputera participation in the private sector. This preference policy is manifested through set-aside contracts for Bumiputera suppliers and contractors, and through the use of preferential price margins to increase the competitiveness of Bumiputera bidders.

Malaysia has a three-tiered system of legislation: federal-level (parliament), state-level, and local-level. Federal and state-level legislation derive their authority from the Malaysian Constitution, specifically Articles 73-79. Parliament has the exclusive power to make laws over matters including trade, commerce and industry, and financial matters. Parliament can delegate its authority to administrative agencies, states, and local bodies through Acts. States have the power to make laws concerning land, local government, and Islamic courts. Local legislative bodies derive their authority from Acts promulgated by parliament, most notably the Local Government Act of 1976. Local authorities can issue by-laws concerning local taxation and land use. For foreign investors, parliament is the most relevant legislating body, as it governs issues related to trade, and in instances of conflict, Article 75 of the Constitution states that federal laws will supersede state laws.

It is also important to note the role of the administrative state in the promulgation of new laws and regulations in Malaysia. Pursuant to the Interpretation Act of 1948 and 1967, “Any proclamation, rule, regulation, order, notification, bye-law, or other instrument made under any Act, Enactment, Ordinance or other lawful authority and having legislative effect.” Thus, the various ministries and agencies can be delegated lawmaking authority by an Act of a legislature with the legal right to make laws.

The Malaysian Accounting Standards Board (MASB) introduced the Malaysian Financial Reporting Standards (MFRS) framework, which came into effect on January 1, 2012. The MFRS framework is fully compliant with the International Financial Reporting Standards (IFRS) framework; this compliance serves to enhance the credibility and transparency of financial reporting in Malaysia.

The Malaysian Institute of Accountants’ (MIA) Auditing and Assurance Standards Board (AASB) reviews standards and technical pronouncements issued by the International Auditing and Assurance Standards Board (IAASB), which sets International Standards on Auditing (ISAs) that have been adopted in more than 110 jurisdictions.

In theory, pieces of legislation are to be made available for public comment through a multi-stage system of rulemaking. The Malaysia Productivity Corporation (MPC) published the Guideline on Public Consultation Procedures in 2014 (the “Guideline”), which clarifies the roles of government and stakeholders in the consultation process and provides the guiding principles for Malaysia’s public consultation approach. As in the case of foreign investment, the consultation procedures usually fall under the purview of the Malaysian Securities Commission (SC), the Bursa Malaysia (Malaysia’s stock exchange), or BNM. The SC, for example, keeps public consultation papers on its website, easily accessible by stakeholders. These papers generally contain the rationale for the proposed regulations, as well as potential impacts, and provide a list of questions for stakeholders to explain their views to regulators.

The public is also engaged in the public consultation process through the increased role of PEMUDAH (the Special Task Force to Facilitate Business), which was founded in 2007 to serve as a bridge between government, businesses, and civil society organizations. PEMUDAH promotes the understanding of regulatory requirements that impact economic activities, by addressing unfair treatment resulting from inconsistencies in enforcement and implementation. It also plays an advocacy role in various points in the regulatory implementation process; provides recommendations from the private sector to regulators before new regulations are implemented, and monitors enactment of existing pieces of regulation.

Despite the Guideline, and significant steps taken to reduce the regulatory burden on industry, obstacles remain. There are frequent inconsistencies between different ministries in their implementation of the public consultation procedures, as well as in their respective interpretations of how regulations are to be applied. Adding to the difficulty is the complicated relationship between state-level and federal-level legislation, which can overlap on a range of issues and lead to inefficiencies for investors.

The CLJ Law website publishes the full text of Malaysian bills and amendments from 2013 onward: https://www.cljlaw.com/?page=latestmybill&year=2020 . In 2019 Malaysia in association with the World Bank, created a website that contains all ongoing pieces of legislation and allows public comment thereon. The website, called the Uniform Public Consultation Portal (http://upc.mpc.gov.my/csp/sys/bi/%25cspapp.bi.index.cls?home=1 ), does not contain legislation that was completed or implemented before 2019, but is a positive move toward standardizing and emphasizing the public consultation process. The website is user-friendly and allows searching by due date, implementing agency, and phase of consultation.

Malaysia has a multi-faceted approach to ensuring governmental compliance with regulatory requirements. The most important enforcement mechanism is access to judicial review. The WEF 2019 Report lists Malaysia as the 12th ranked country in efficiency of the legal framework in challenging regulations. Through ease in accessing administrative and judicial courts, aggrieved parties in Malaysia are able to compel action by the regulator.

Besides the legal route, aggrieved parties can also seek recourse through the various agency-led enforcement mechanisms. The central bank has a dedicated “Complaints Unit,” which deals with consumer complaints against banking institutions. The Bank lists enforcement options as “a public or private reprimand; an order to comply; an administrative and civic penalty; restitution to customer; or prosecution. By contrast, the Inland Revenue Board of Malaysia (tax agency) has the Special Commissioners of Income Tax, to which taxpayers may file appeals concerning judgments and new regulations. The Malaysian Companies Commission (which regulates laws relating to companies registered in Malaysia) is also engaged in enforcement proceedings, as is the Malaysian Securities Commission. On matters of procurement, aggrieved bidders may complain to the Public Complaints Bureau, the Malaysian Anti-Corruption Commission, the Malaysian Competition Commission, or the National Audit Department.

International Regulatory Considerations

Malaysia is one of 10 Member States that constitute the Association of Southeast Asian Nations (ASEAN). On December 31, 2015, the ASEAN Economic Community formally came into existence. ASEAN’s economic policy leaders meet regularly to discuss promoting greater economic integration within the 10-country bloc. Although already robust, Member States have prioritized steps to facilitate a greater flow of goods, services, and capital. No regional regulatory system is in place. As a member of the WTO, Malaysia provides notification of all draft technical regulations to the Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

Malaysia’s legal system consists of written laws, such as the federal and state constitutions and laws passed by parliament and state legislatures, and unwritten laws derived from court cases and local customs. The Contract Law of 1950 still guides the enforcement of contracts and resolution of disputes. States generally control property laws for residences but through such programs as the Multimedia Super Corridor, Free Commercial Zones, and Free Industrial Zones, the federal government has substantial reach into a range of geographic areas as a means of encouraging foreign investment and facilitating ownership of commercial and industrial property.

Malaysia has taken measures to increase the efficacy of the courts to improve its reputation as an international business hub. Other than the usual criminal and civil branches of the legal system, there are dedicated courts for issues such as intellectual property (IP) and labor.

Certain foreign judgments are enforceable in Malaysia by virtue of the Reciprocal Enforcement of Judgments Act 1958 (REJA). However, before a foreign judgment can be enforceable, it must be registered. The registration of foreign judgments is only possible if the judgment was given by a Superior Court from a country listed in the First Schedule of the REJA: the United Kingdom, Hong Kong Special Administrative Region of the People’s Republic of China, Singapore, New Zealand, Republic of Sri Lanka, India, and Brunei. If the judgment is not from a country listed in the First Schedule to the REJA, the only method of enforcement at common law is by securing a Malaysian judgment. This involves suing on the judgment in the local Courts as an action in debt.

To register a foreign judgment under the REJA, the judgment creditor has to apply for the same within six years after the date of the foreign judgment. Any foreign judgment coming under the REJA shall be registered unless it has been wholly satisfied, or it could not be enforced by execution in the country of the original Court.

Post is not aware of instances in which political figures or government authorities have interfered in judiciary proceedings involving commercial matters.

Laws and Regulations on Foreign Direct Investment

The e Malaysia Investment Development Authority (MIDA). Under the purview of the Ministry of International Trade and Industry (MITI) has the task to attract foreign investment and serve as a focal point for legal and regulatory questions. Other regional bodies providing support to investors include: Invest Kuala Lumpur, Invest Penang, Invest Selangor, the Sabah Economic Development and Investment Authority (SEDIA), and the Sarawak Economic Development Corporation, among others.

Competition and Antitrust Laws

On April 21, 2010, the Parliament of Malaysia passed the Competition Commission Act 2010 and the Competition Act 2010 which took effect on January 1, 2012. The Competition Act prohibits cartels and abuses of a dominant market position but does not create any pre-transaction review of mergers or acquisitions. Violations are punishable by fines, as well as imprisonment for individual violations. Malaysia’s Competition Commission has responsibility for determining whether a company’s “conduct” constitutes an abuse of dominant market position or otherwise distorts or restricts competition. As a matter of law, the Competition Commission does not have separate standards for foreign and domestic companies. Commission membership consists of senior officials from the Ministry of International Trade and Industry (MITI), the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC), the Ministry of Finance, and, on a rotating basis, representatives from academia and the private sector.

In addition to the Competition Commission, the Acts established a Competition Appeals Tribunal (CAT) to hear all appeals of Commission decisions. In the largest case to date, the Commission imposed a fine of RM10 million on Malaysia Airlines and Air Asia in September 2013 for colluding to divide shares of the air transport services market. The airlines filed an appeal in March 2014. In February 2016, the CAT ruled in favor of the airlines in its first-ever decision and ordered the penalty to be set aside and refunded to both airlines.

Expropriation and Compensation

The Embassy is not aware of any cases of uncompensated expropriation of U.S.-held assets, or confiscatory tax collection practices, by the Malaysian government. The government’s stated policy is that all investors, both foreign and domestic, are entitled to fair compensation in the event that their private property is required for public purposes. Should the investor and the government disagree on the amount of compensation, the issue is then referred to the Malaysian judicial system.

Dispute Settlement

ICSID Convention and New York Convention

Malaysia signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) on October 22, 1965, coming into force on October 14, 1966. In addition, it is a contracting state of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards since November 5, 1985.

Malaysia adopted the following measures to make the two conventions effective in its territory:

The Convention on the Settlement of Investment Disputes Act, 1966 (Act of Parliament 14 of 1966); the Notification on entry into force of the Convention on the Settlement of Investment Disputes Act, 1966 (Notification No. 96 of March 10, 1966); and the Arbitration (Amendment) Act, 1980 (Act A 478 of 1980).

Although the domestic legal system is accessible to foreign investors, filing a case generally requires any non-Malaysian citizen to make a large deposit before pursuing a case in the Malaysian courts. Post is unaware of any U.S. investors’ recent complaints of political interference in any judicial proceedings.

Investor-State Dispute Settlement

Malaysia’s investment agreements contain provisions allowing for international arbitration of investment disputes. Malaysia does not have a Bilateral Investment Treaty with the United States.

Post has little data concerning the Malaysian government’s general handling of investment disputes. In 2004, a U.S. investor filed a case against the directors of the firm, who constituted the majority shareholders. The case involves allegations by the U.S. investor of embezzlement by the other directors, and its resolution is unknown.

The Malaysian government has been involved in three ICSID cases — in 1994, 1999, and 2005. The first case was settled out of court. The second, filed under the Malaysia-Belgo-Luxembourg Investment Guarantee Agreement (IGA), was concluded in 2000 in Malaysia’s favor. The 2005 case, filed under the Malaysia-UK Bilateral Investment Treaty, was concluded in 2007 in favor of the investor. However, the judgment against Malaysia was ultimately dismissed on jurisdictional grounds, namely that ICSID was not the appropriate forum to settle the dispute because the transaction in question was not deemed an investment since it did not materially contribute to Malaysia’s development. Nevertheless, Malaysian courts recognize arbitral awards issued against the government. There is no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Malaysia’s Arbitration Act of 2005 applies to both international and domestic arbitration. Although its provisions largely reflect those of the UN Commission on International Trade Law (UNCITRAL) Model Law, there are some notable differences, including the requirement that parties in domestic arbitration must choose Malaysian law as the applicable law. Although an arbitration agreement may be concluded by email or fax, it must be in writing: Malaysia does not recognize oral agreements or conduct as constituting binding arbitration agreements.

Many firms choose to include mandatory arbitration clauses in their contracts. The government actively promotes use of the Kuala Lumpur Regional Center for Arbitration ( http://www.rcakl.org.my ), established under the auspices of the Asian-African Legal Consultative Committee to offer international arbitration, mediation, and conciliation for trade disputes. The KLRCA is the only recognized center for arbitration in Malaysia. Arbitration held in a foreign jurisdiction under the rules of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 or under the United Nations Commission on International trade Law Arbitration Rules 1976 and the Rules of the Regional Centre for Arbitration at Kuala Lumpur can be enforceable in Malaysia.

Bankruptcy Regulations

Malaysia’s Department of Insolvency (MDI) is the lead agency implementing the Insolvency Act of 1967, previously known as the Bankruptcy Act of 1967. On October 6, 2017, the Bankruptcy Bill 2016 came into force, changing the name of the previous Act, and amending certain terms and conditions. The most significant changes in the amendment include — (1) a social guarantor can no longer be made bankrupt; (2) there is now a stricter requirement for personal service for bankruptcy notice and petition; (3) introduction of the voluntary arrangement as an alternative to bankruptcy; (4) a higher bankruptcy threshold from RM30,000 to RM50,000; (5) introduction of the automatic discharge of bankruptcy; (6) no objection to four categories of bankruptcy for applying a discharge under section 33A (discharge of bankrupt by Certificate of Director General of Insolvency); (7) introduction of single bankruptcy order as a result of the abolishment of the current two-tier order system, i.e. receiving and adjudication orders; (8) creation of the Insolvency Assistance fund.

The distribution of proceeds from the liquidation of a bankrupt company’s assets generally adheres to the “priority matters and persons” identified by the Companies Act of 2016. After the bankruptcy process legal costs are covered, recipients of proceeds are: employees, secured creditors (i.e., creditors of real assets), unsecured creditors (i.e., creditors of financial instruments), and shareholders. Bankruptcy is not criminalized in Malaysia. The country ranks 40th on the World Bank Group’s Doing Business 2020 Rankings for Ease of Resolving Insolvency.

5. Protection of Property Rights

Real Property

Land administration is shared among federal, state, and local government. State governments have their own rules about land ownership, including foreign ownership. Malaysian law affords strong protections to real property owners. Real property titles are recorded in public records and attorneys review transfer documentation to ensure efficacy of a title transfer. There is no title insurance available in Malaysia. Malaysian courts protect property ownership rights. Foreign investors are allowed to borrow using real property as collateral. Foreign and domestic lenders are able to record mortgages with competent authorities and execute foreclosure in the event of loan default. Malaysia ranks 33rd (ranked 29th in 2019) in ease of registering property according to the Doing Business 2020 report, right behind Austria and ahead of Finland, thanks to changes it made to its registration procedures.

Intellectual Property Rights

Malaysia is not currently listed in the Office of the United States Trade Representative (USTR) Special 301 Report. Its Petaling Street Market is listed in 2020 Review of Notorious Markets for Counterfeiting and Piracy (the Notorious Markets List). The overhaul of IPR protections that began in 2019 under the previous government continued in 2020 despite political uncertainty. Following Malaysia’s 2019 Trademarks Act, which brought protections in line with the Madrid Protocol, Malaysia amended its 1987 Copyright Act as part of an ongoing review of its IPR framework. New trademark provisions came into force on July 1, 2020 to strengthen copyright protection by creating an alternative avenue for dispute resolution by tribunal. Malaysia continues to assess its Copyright Act and has indicated it is considering additional amendments to further strengthen IPR protections. There is not yet an official determination of whether Malaysia will ratify the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP); therefore, it remains unclear whether these legislative amendments will incorporate the IP-related provisions of the CPTPP.

Malaysia has a mixed but improving record of IPR enforcement, particularly for online services that stream illegal sports content. The Malaysian Communications and Multimedia Commission proactively combats illegal streaming sites that provide content in violation of copyright laws and acts against owners of non-certified Android TV boxes being used to stream illegal content. Malaysian enforcement authorities registered their first case related to infringing streaming devices under the Copyright Act, which was brought to court on February 8. Malaysia also increased its blocking of illegal streaming sites by over 900 percent over the past three years.

Despite Malaysia’s success in improving IPR enforcement, key issues remain. There is relatively widespread availability of pirated and counterfeit products in Malaysia and there are concerns that the Royal Malaysian Customs Department (RMC) is not always effectively identifying counterfeit goods in transit.

Malaysia’s 2017 compulsory license for U.S. Gilead Sciences’ sofosbuvir, a major intellectual property-related concern in recent years, expired in 2020. Malaysia has not indicated it intends to renew the compulsory license or a government manufacturing contract for the drug, both of which expired in October 2020. Malaysia has now registered Gilead’s sofosbuvir product, Sovaldi, for local use and offers fast-track registration with the Ministry of Health for new products under Gilead’s voluntary license program. Two Indian-manufactured sofosbuvir generics granted voluntary license agreements by Gilead Sciences have already made use of this registration program with Malaysia’s Drug Control Authority.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

7. State-Owned Enterprises

State-owned enterprises which in Malaysia are called government-linked companies (GLCs), play a very significant role in the Malaysian economy. Such enterprises have been used to spearhead infrastructure and industrial projects. A 2017 analysis by the University of Malaya estimated that the government owns approximately 42 percent of the value of firms listed on the Bursa Malaysia through its seven Government-Linked Investment Corporations (GLICs), including a majority stake in a number of companies. Only a minority portion of stock is available for trading for some of the largest publicly listed local companies. Khazanah, often considered the government’s sovereign wealth fund, owns stakes in companies competing in many of the country’s major industries including aerospace, construction, energy, finance, information & communication, and marine technologies. The Prime Minister chairs Khazanah’s Board of Directors. PETRONAS, the state-owned oil and gas company, is Malaysia’s only Fortune Global 500 firm.

As part of its Government Linked Companies (GLC) Transformation Program, the Malaysian Government embarked on a two-pronged strategy to reduce its shares across a range of companies and to make those companies more competitive through improved corporate governance. The Transformation Program pushes for more independent and professionalized board membership, but the OECD noted in 2018 that in practice shareholder oversight is lax and government officials exert influence over corporate boards.

Among the notable divestments of recent years, Khazanah offloaded its stake in the national car company Proton to DRB-Hicom Bhd in 2012. In 2013, Khazanah divested its holdings in telecommunications services giant Time Engineering Bhd. Khazanah’s annual report for 2017 noted only that the fund had completed 12 divestments that produced a gain of RM 2.5 billion (USD 625 million). In 2018, Khazanah partially divested its shares in IHH Healthcare Berhad, saw two successful IPOs, and issued USUSD 321 million in exchangeable sukuk. However, significant losses at domestic companies including at Axiata, Telekom Malaysia, Tenaga Nasional, IHH Healthcare Berhad, CIMB Bank, and Malaysia Airports led to the pre-tax loss of USD 1.52 billion the company experienced in 2018. In April 2019, Khazanah sold 1.5 percent of its stake in Tenaga Nasional on Bursa Malaysia, after which Khazanah still owned 27.27 percent of the national electric company. In its annual review for 2020, Khazanah posted lower divestment gains of RM2.7 billion (USD675 million) compared to RM9.9 billion (USD2.25 billion) in 2019.

Reference: https://www.khazanah.com.my/news_press_releases/khazanah-annual-review-2021/ 

GLCs with publicly traded shares must produce audited financial statements every year. These SOEs must also submit filings related to changes in the organization’s management. The SOEs that do not offer publicly traded shares are required to submit annual reports to the Companies Commission. The requirement for publicly reporting the financial standing and scope of activities of SOEs has increased their transparency. It is also consistent with the OECD’s guideline for Transparency and Disclosure. Moreover, many SOEs prioritize operations that maximize their earnings.

The close relationships SOEs have with senior government officials, however, blur the line between strictly commercial activity pursued for its own sake and activity that has been directed to advance a policy interest. For example, Petroliam Nasional Berhad (PETRONAS) is both an SOE in the oil and gas sector and the regulator of the industry. Malaysia Airlines (MAS), in which the government previously held 70 percent but now holds 100 percent, required periodic infusions of resources from the government to maintain the large numbers of company’s staff and senior executives.

The Ministry of Finance holds significant minority stakes in five companies including a 50% stake in the financial guarantee insurer Danajamin Nasional Berhad. The government also holds a golden share in 32 companies from key industries such as aerospace, marine technology, energy industries and ports. The Ministry of Finance maintains a list of 70 companies directly controlled by the Minister of Finance Incorporated, known as MOF Inc, the largest Government Linked Investment Company (GLIC). The seven GLICs in Malaysia are also listed. However, a comprehensive list of the more than 200 GLCs that are controlled by these seven investment companies is not readily available. For more information, please visit: https://www.mof.gov.my/index.php/en/profile/divisions/government-investment-companies. Links to the sources of regulation and authorities can be found here:

With formal and informal ties between board members and government, Malaysian SOEs (GLCs) may have access to capital and financial protection from bankruptcy as well as reduced pressure to deliver profits to government shareholders. The legal framework establishing GLCs under Malaysian law specifically seeks economic opportunity for Bumiputera entrepreneurs. There is some empirical evidence, published by the Asian Development Bank, that SOEs crowd out private investment in Malaysia.

Malaysia participates in OECD corporate governance engagements and continues to work on full adherence to the OECD Guidelines on Corporate Governance for SOEs through its Government Linked Companies (GLC) Transformation Program. The National Resource Governance Institute’s Resource Governance Index rates Malaysia as weak on governance of its oil and gas sector; however, Malaysia also ranks as 27th among 89 rated countries, in the top third.

Privatization Program

In several key sectors, including transportation, agriculture, utilities, financial services, manufacturing, and construction, Government Linked Corporations (GLCs) continue to dominate the market. However, the Malaysian Government remains publicly committed to the continued, eventual privatization, though it has not set a timeline for the process and faces substantial political pressure to preserve the roles of the GLCs. The Malaysian Government established the Public-Private Partnership Unit (UKAS) in 2009 to provide guidance and administrative support to businesses interested in privatization projects as well as large-scale government procurement projects. UKAS, which used to be a part of the Office of the Prime Minister, is now under the Ministry of Finance. UKAS oversees transactions ranging from contracts and concessions to sales and transfers of ownership from the public sector to the private sector.

Foreign investors may participate in privatization programs, but foreign ownership is limited to 25 percent of the privatized entity’s equity. The National Development Policy confers preferential treatment to the Bumiputera, which are entitled to at least 30 percent of the privatized entity’s equity.

The privatization process is formally subject to public bidding. However, the lack of transparency has led to criticism that the government’s decisions tend to favor individuals and businesses with close ties to high-ranking officials.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S.  FDI in Host Country/Economy
Host Country Statistical source USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) N/A N/A 2019 $364,700 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S.  FDI in partner country ($M USD, stock positions) N/A N/A 2019 $10,849 BEA data available at https://apps.bea.gov/international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2019 $981 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP N/A N/A 2019 46.3% UNCTAD data available at
https://unctad.org/topic/investment/world-investment-report 
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 168,981 100% Total Outward 118,604 100%
Singapore 35,086 21% Singapore 23,653 20%
China, P.R. Hong Kong 21,438 13% Indonesia 11,532 10%
Japan 18, 382 11% Cayman Islands 8,682 7%
The Netherlands 14, 227 8% United Kingdom 7,330 6%
United States 10,398 6% United States 4,750 4%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 108,626 100% All Countries 85,176 100% All Countries 23,450 100%
United States 21,594 20% United States 17,974 21% United States 3,620 15%
Singapore 11,275 10% Singapore 9,313 11% Cayman Islands 2,038 9%
China, P.R Hong Kong 6,904 6% China, P.R Hong Kong 6,181 7% Singapore 1,962 8%
United Kingdom 6,769 6% China, P.R. Mainland 5,420 6% Australia 1,646 7%
China, P.R. Mainland 6,625 6% United Kingdom 5,363 6% Indonesia 1,458 6%

Morocco

Executive Summary

Morocco enjoys political stability, a geographically strategic location, and robust infrastructure, which have contributed to its emergence as a regional manufacturing and export base for international companies. Morocco actively encourages and facilitates foreign investment, particularly in export sectors like manufacturing, through positive macro-economic policies, trade liberalization, investment incentives, and structural reforms. Morocco’s overarching economic development plan seeks to transform the country into a regional business hub by leveraging its unique status as a multilingual, cosmopolitan nation situated at the tri-regional focal point of Sub-Saharan Africa, the Middle East, and Europe. The Government of Morocco implements strategies aimed at boosting employment, attracting foreign investment, and raising performance and output in key revenue-earning sectors, such as the automotive and aerospace industries. Morocco continues to make major investments in renewable energy, boasting a 4 GW current capacity, 5 GW under construction, and an additional 6 GW in the planning phase.

According to the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2020 , Morocco attracted the eighth most foreign direct investment (FDI) in Africa. Following a record year in 2018 where Morocco attracted $3.6 billion in FDI, inbound FDI dropped by 55 percent to $1.6 billion in 2019. Despite the global COVID-19 pandemic, FDI inflows to Morocco remained largely stable totaling $1.7 billion in 2020, according to the Moroccan Foreign Exchange Office, a slight increase of one percent from the previous year. France, the UAE, and Spain hold a majority of FDI stocks. Manufacturing has the highest share of FDI stocks, followed by real estate, trade, tourism, and transportation. Morocco continues to orient itself as the “gateway to Africa” for international investors following Morocco’s return to the African Union in January 2017 and the launch of the African Continental Free Trade Area (CFTA) in March 2018, which entered into force in 2021. In June 2019, Morocco opened an extension of the Tangier-Med commercial shipping port, making it the largest in the Mediterranean and the largest in Africa. Tangier is connected to Morocco’s political capital in Rabat and commercial hub in Casablanca by Africa’s first high-speed train service. Morocco continues to climb in the World Bank’s Doing Business index, rising to 53rd place in 2020, rising on the list by 75 places over the last decade. Despite the significant improvements in its business environment and infrastructure, high rates of unemployment, weak intellectual property rights protections, inefficient government bureaucracy, and the slow pace of regulatory reform remain challenges.

Morocco has ratified 72 investment treaties for the promotion and protection of investments and 62 economic agreements – including with the United States and most EU nations – that aim to eliminate the double taxation of income or gains. Morocco is the only country on the African continent with a Free Trade Agreement (FTA) with the United States, eliminating tariffs on more than 95 percent of qualifying consumer and industrial goods. The Government of Morocco plans to phase out tariffs for some products through 2030. The FTA supports Morocco’s goals to develop as a regional financial and trade hub, providing opportunities for the localization of services and the finishing and re-export of goods to markets in Africa, Europe, and the Middle East. Since the U.S.-Morocco FTA came into effect bilateral trade in goods has grown nearly five-fold. The U.S. and Moroccan governments work closely to increase trade and investment through high-level consultations, bilateral dialogue, and other forums to inform U.S. businesses of investment opportunities and strengthen business-to-business ties.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 86 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 53 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 75 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $406 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 $3,190 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Morocco actively encourages foreign investment through macro-economic policies, trade liberalization, structural reforms, infrastructure improvements, and incentives for investors. Law 18-95 of October 1995, constituting the Investment Charter , is the foundational Moroccan text governing investment and applies to both domestic and foreign investment (direct and portfolio). The Ministry of Industry recently announced the second Industrial Acceleration Plan (PAI) to run from 2021-2025, which aims to build on the progress made in the previous 2014-2020 PAI and expand industrial development throughout all Moroccan regions. The PAI is based on establishing “ecosystems” that integrate value chains and supplier relationships between large companies and small- and medium-sized enterprises. Moroccan legislation governing FDI applies equally to Moroccan and foreign legal entities, with the exception of certain protected sectors.

Morocco’s Investment and Export Development Agency (AMDIE) is the national agency responsible for the development and promotion of investments and exports. Following the reform to the law  governing the country’s Regional Investment Centers (CRIs) in 2019, each of the 12 regions is empowered to lead their own investment promotion efforts. The CRI websites  aggregate relevant information for interested investors and include investment maps, procedures for creating a business, production costs, applicable laws and regulations, and general business climate information, among other investment services. The websites vary by region, with some functioning better than others. AMDIE and the 12 CRIs work together throughout the phases of investment at the national and regional level. For example, AMDIE and the CRIs coordinate contact between investors and partners. Regional investment commissions examine investment applications and send recommendations to AMDIE. The inter-ministerial investment committee, for which AMDIE acts as the secretariat, approves any investment agreement or contract which requires financial contribution from the government. AMDIE also provides an “after care” service to support investments and assist in resolving issues that may arise.

Further information about Morocco’s investment laws and procedures is available on AMDIE’s newly launched website  or through the individual websites of each of the CRIs. For information on agricultural investments, visit the Agricultural Development Agency website  or the National Agency for the Development of Aquaculture website .

When Morocco acceded to the OECD Declaration on International Investment and Multinational Enterprises in November 2009, Morocco guaranteed national treatment of foreign investors. The only exception to this national treatment of foreign investors is in those sectors closed to foreign investment (noted below), which Morocco delineated upon accession to the Declaration. The National Contact Point for Responsible Business Conduct ( NCP ), whose presidency and secretariat are held by AMDIE, is the lead agency responsible for the adherence to this declaration.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities may establish and own business enterprises, barring certain restrictions by sector. While the U.S. Mission is unaware of any economy-wide limits on foreign ownership, Morocco places a 49 percent cap on foreign investment in air and maritime transport companies and maritime fisheries. Morocco currently prohibits foreigners from owning agricultural land, though they can lease it for up to 99 years; however, new regulation to open agricultural land to foreign ownership is forthcoming. The Moroccan government holds a monopoly on phosphate extraction through the 95 percent state-owned Office Cherifien des Phosphates (OCP). The Moroccan state also has a discretionary right to limit all foreign majority stakes in the capital of large national banks but apparently has never exercised that right. The Moroccan Central Bank (Bank Al-Maghrib) may use regulatory discretion in issuing authorizations for the establishment of domestic and foreign-owned banks. In the oil and gas sector, the National Agency for Hydrocarbons and Mines (ONHYM) retains a compulsory share of 25 percent of any exploration license or development permit. As established in the 1995 Investment Charter, there is no requirement for prior approval of FDI, and formalities related to investing in Morocco do not pose a meaningful barrier to investment. The U.S. Mission is not aware of instances in which the Moroccan government refused foreign investors for national security, economic, or other national policy reasons, nor is it aware of any U.S. investors disadvantaged or singled out by ownership or control mechanisms, sector restrictions, or investment screening mechanisms, relative to other foreign investors.

Other Investment Policy Reviews

The last third-party investment policy review of Morocco was the World Trade Organization (WTO) 2016 Trade Policy Review  (TPR), which found that the trade reforms implemented since the prior TPR in 2009 contributed to the economy’s continued growth by stimulating competition in domestic markets, encouraging innovation, creating new jobs, and contributing to growth diversification.

Business Facilitation

In the World Bank’s 2020 Doing Business Report , Morocco ranks 53 out of 190 economies, rising seven places since the 2019 report. Since 2012, Morocco has implemented reforms that facilitate business registration, such as eliminating the need to file a declaration of business incorporation with the Ministry of Labor, reducing company registration fees, and eliminating minimum capital requirements for limited liability companies. Morocco maintains a business registration website that is accessible through the various Regional Investment Centers (CRI ).

Foreign companies may utilize the online business registration mechanism. Foreign companies, with the exception of French companies, are required to provide an apostilled Arabic translated copy of their articles of association and an extract of the registry of commerce in its country of origin. Moreover, foreign companies must report the incorporation of the subsidiary a posteriori to the Foreign Exchange Office (Office de Changes) to facilitate repatriation of funds abroad such as profits and dividends. According to the World Bank, the process of registering a business in Morocco takes an average of nine days, significantly less than the Middle East and North Africa regional average of 20 days. Morocco does not require that the business owner deposit any paid-in minimum capital.

In January 2019, the electronic creation of businesses law 18-17 was published, but as of April 2021 the new process is not yet operational. The new system will allow for the creation of businesses online via an electronic platform managed by the Moroccan Office of Industrial and Commercial Property (OMPIC). All procedures related to the creation, registration, and publication of company data will be carried out via this platform, which is expected to launch by the end of 2021. A new national commission will monitor the implementation of the procedures. The Simplification of Administrative Procedures Law 55-19, passed in 2020, aims to streamline administrative processes by identifying and standardizing document requirements, eliminating unnecessary steps, and making the process fully digital via the National Administration Portal, which is expected to launch in Spring 2021.

The business facilitation mechanisms provide for equitable treatment of women and underrepresented minorities in the economy. Notably, according to the World Bank, the procedure, length of time, and cost to register a new business is equal for men and women in Morocco. The U.S. Mission is unaware of any official assistance provided to women and underrepresented minorities through the business registration mechanisms. In cooperation with the Moroccan government, civil society, and the private sector, there have been several initiatives aimed at improving gender quality in the workplace and access to the workplace for foreign migrants, particularly those from sub-Saharan Africa.

Outward Investment

The Government of Morocco prioritizes investment in Africa. The African Development Bank ranks Morocco as the second biggest African investor in Sub-Saharan Africa, after South Africa, and the largest African investor in West Africa. According to the Department of Studies and Financial Forecasts, under the Ministry of Economy, Finance, and Administration Reform, $640 million, or 47 percent of Morocco’s total outward FDI, was invested in the African continent in 2019. The U.S. Mission is not aware of a standalone outward investment promotion agency, although AMDIE’s mission includes supporting Moroccans seeking to invest outside of the country for the purpose of boosting Moroccan exports. Nor is the U.S. Mission aware of any restrictions for domestic investors attempting to invest abroad. However, under the Moroccan investment code, repatriation of funds is limited to “convertible” Moroccan Dirham accounts. Morocco’s Foreign Exchange Office (“Office des Changes,” OC) implemented several changes for 2020 that slightly liberalize the country’s foreign exchange regulations. Moroccans going abroad for tourism can now exchange up to $4,700 in foreign currency per year, with the possibility to attain further allowances indexed to their income tax filings. Business travelers can also obtain larger amounts of foreign currency, provided their company has properly filed and paid corporate income taxes. Another new provision permits banks to use foreign currency accounts to finance investments in Morocco’s Industrial Acceleration Zones.

3. Legal Regime

Transparency of the Regulatory System

Morocco is a constitutional monarchy with an elected parliament and a mixed legal system of civil law based primarily on French law, with some influences from Islamic law. Legislative acts are subject to judicial review by the Constitutional Court excluding royal decrees (Dahirs) issued by the King, which have the force of law. Legislative power in Morocco is vested in both the government and the two chambers of Parliament, the Chamber of Representatives (Majlis Al-Nuwab) and the Chamber of Councilors (Majlis Al Mustashareen). The principal sources of commercial legislation in Morocco are the Code of Obligations and Contracts of 1913 and Law No. 15-95 establishing the Commercial Code. The Competition Council and the National Authority for Detecting, Preventing, and Fighting Corruption (INPPLC) have responsibility for improving public governance and advocating for further market liberalization. All levels of regulations exist (local, state, national, and supra-national). The most relevant regulations for foreign businesses depend on the sector in question. Ministries develop their own regulations and draft laws, including those related to investment, through their administrative departments, with approval by the respective minister. Each regulation and draft law is made available for public comment. Key regulatory actions are published in their entirety in Arabic and usually French in the official bulletin on the website  of the General Secretariat of the Government. Once published, the law is final. Public enterprises and establishments can adopt their own specific regulations provided they comply with regulations regarding competition and transparency.

Morocco’s regulatory enforcement mechanisms depend on the sector in question, and enforcement is legally reviewable. The National Telecommunications Regulatory Agency (ANRT), for example, is the public body responsible for the control and regulation of the telecommunications sector. The agency regulates telecommunications by participating in the development of the legislative and regulatory framework. Morocco does not have specific regulatory impact assessment guidelines, nor are impact assessments required by law. Morocco does not have a specialized government body tasked with reviewing and monitoring regulatory impact assessments conducted by other individual agencies or government bodies.

The U.S. Mission is not aware of any informal regulatory processes managed by nongovernmental organizations or private sector associations. The Moroccan Ministry of Finance posts quarterly statistics   (compiled in accordance with IMF recommendations) on public finance and debt on their website. A report on public debt is published on the Ministry of Economy and Finance’s website and is used as part of the budget bill formulation and voting processes. The fiscal year 2021 debt report was published on December 18, 2020.

International Regulatory Considerations

Morocco joined the WTO in 1995 and reports technical regulations that could affect trade with other member countries to the WTO. Morocco is a signatory to the Trade Facilitation Agreement   and has a 91.2 percent implementation rate of TFA requirements. European standards are widely referenced in Morocco’s regulatory system. In some cases, U.S. or international standards, guidelines, and recommendations are also accepted.

Legal System and Judicial Independence

The Moroccan legal system is a hybrid of civil law (French system) and some Islamic law, regulated by the Decree of Obligations and Contracts of 1913 as amended, the 1996 Code of Commerce, and Law No. 53-95 on Commercial Courts. These courts also have sole competence to entertain industrial property disputes, as provided for in Law No. 17-97 on the Protection of Industrial Property, irrespective of the legal status of the parties. According to the European Bank for Reconstruction and Development’s 2015 Morocco Commercial Law Assessment Report , Royal Decree No. 1-97-65 (1997) established commercial court jurisdiction over commercial cases including insolvency. Although this led to some improvement in the handling of commercial disputes, the lack of training for judges on general commercial matters remains a key challenge to effective commercial dispute resolution in the country. In general, litigation procedures are time consuming and resource-intensive, and there is no legal requirement with respect to case publishing. Disputes may be brought before one of eight Commercial Courts located in Morocco’s main cities and one of three Commercial Courts of Appeal located in Casablanca, Fes, and Marrakech. There are other special courts such as the Military and Administrative Courts. Title VII of the Constitution provides that the judiciary shall be independent from the legislative and executive branches of government. The 2011 Constitution also authorized the creation of the Supreme Judicial Council, headed by the King, which has the authority to hire, dismiss, and promote judges. Enforcement actions are appealable at the Courts of Appeal, which hear appeals against decisions from the court of first instance.

Laws and Regulations on Foreign Direct Investment

The principal sources of commercial legislation in Morocco are the 1913 Royal Decree of Obligations and Contracts, as amended; Law No. 18-95 that established the 1995 Investment Charter; the 1996 Code of Commerce; and Law No. 53-95 on Commercial Courts. These courts have sole competence to hear industrial property disputes, as provided for in Law No. 17-97 on the Protection of Industrial Property, irrespective of the legal status of the parties. Morocco’s CRIs and AMDIE provide users with various investment-related information on key sectors, procedural information, calls for tenders, and resources for business creation. Their websites are infrequently updated.

Competition and Antitrust Laws

Morocco’s Competition Law No. 06-99 on Free Pricing and Competition outlines the authority of the Competition Council  as an independent executive body with investigatory powers. Together with the INPPLC, the Competition Council is one of the main actors charged with improving public governance and advocating for further market liberalization. Law No. 20-13, adopted on August 7, 2014, amended the powers of the Competition Council to bring them in line with the 2011 Constitution. The Competition Council’s responsibilities include making decisions on anti-competition practices and controlling concentrations, with powers of investigation and sanction; providing opinions in official consultations by government authorities; and publishing reviews and studies on the state of competition.

In February 2020, the Moroccan telecommunications regulator, National Telecommunications Regulatory Agency (ANRT), issued a $340 million fine against Maroc Telecom for abusing its dominant position in the market. Maroc Telecom is majority owned by Etisalat, based in the United Arab Emirates (UAE), and is minority owned by the Moroccan government. ANRT ruled in favor of rival telecoms operator INWI, which is majority-owned by Morocco’s royal holding company and is minority-owned by Kuwait’s sovereign wealth fund and a private Kuwaiti company, which had filed the complaint with ANRT.

Following reported mishandling of an investigation into the alleged collusion by oil distribution companies, King Mohammed VI convened an ad hoc committee to investigate the Competition Council’s dysfunctions. In March 2021, the king appointed a new council president, and parliament adopted a new bill strengthening the Competition Council by improving its legal framework and increasing transparency.

Expropriation and Compensation

Expropriation may only occur in the public interest for public use by a state entity, although in the past, private entities that are public service “concessionaires” mixed economy companies, or general interest companies have also been granted expropriation rights. Article 3 of Law No. 7-81 (May 1982) on expropriation, the associated Royal Decree of May 6, 1982, and Decree No. 2-82-328 of April 16, 1983 regulate government authority to expropriate property. The process of expropriation has two phases: in the administrative phase, the State declares public interest in expropriating specific land and verifies ownership, titles, and appraised value of the land. If the State and owner can come to agreement on the value, the expropriation is complete. If the owner appeals, the judicial phase begins, whereby the property is taken, a judge oversees the transfer of the property, and payment compensation is made to the owner based on the judgment. The U.S. Mission is not aware of any recent, confirmed instances of private property being expropriated for other than public purposes (eminent domain), or in a manner that is discriminatory or not in accordance with established principles of international law.

Dispute Settlement

ICSID Convention and New York Convention

Morocco is a member of the International Center for Settlement of Investment Disputes (ICSID) and signed its convention in June 1967. Morocco is a party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Law No. 08-05 provides for enforcement of awards made under these conventions.

Investor-State Dispute Settlement

Morocco is signatory to over 70 bilateral treaties recognizing binding international arbitration of trade disputes, including one with the United States. Law No. 08-05 established a system of conventional arbitration and mediation, while allowing parties to apply the Code of Civil Procedure in their dispute resolution. Foreign investors commonly rely on international arbitration to resolve contractual disputes. Commercial courts recognize and enforce foreign arbitration awards. Generally, investor rights are backed by a transparent, impartial procedure for dispute settlement. There have been no claims brought by foreign investors under the investment chapter of the U.S.-Morocco Free Trade Agreement since it came into effect in 2006. The U.S. Mission is not aware of any investment disputes over the last year involving U.S. investors.

Morocco officially recognizes foreign arbitration awards issued against the government. Domestic arbitration awards are also enforceable subject to an enforcement order issued by the President of the Commercial Court, who verifies that no elements of the award violate public order or the defense rights of the parties. As Morocco is a member of the New York Convention, international awards are also enforceable in accordance with the provisions of the convention. Morocco is also a member of the Washington Convention for the International Centre for Settlement of Investment Disputes (ICSID), and as such agrees to enforce and uphold ICSID arbitral awards. The U.S. Mission is not aware of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Morocco has a national commission on Alternative Dispute Resolution with a mandate to regulate mediation training centers and develop mediator certification systems. Morocco seeks to position itself as a regional center for arbitration in Africa, but the capacity of local courts remains a limiting factor. To remedy this shortcoming, the Moroccan government established the Center of Arbitration and Mediation in Rabat, and the Casablanca Finance City Authority established the Casablanca International Mediation and Arbitration Center, which now see a majority of investment disputes. The U.S. Mission is aware of several investment disputes and has advocated on behalf of U.S. companies to resolve the disputes.

Bankruptcy Regulations

Morocco’s bankruptcy law is based on French law. Commercial courts have jurisdiction over all cases related to insolvency, as set forth in Royal Decree No. 1-97-65 (1997). The Commercial Court in the debtor’s place of business holds jurisdiction in insolvency cases. The law gives secured debtors priority claim on assets and proceeds over unsecured debtors, who in turn have priority over equity shareholders. Bankruptcy is not criminalized. The World Bank’s 2020 Doing Business report ranked Morocco 73 out of 190 economies in “Resolving Insolvency”. The GOM revised the national insolvency code in March of 2018, but further reform is needed.

5. Protection of Property Rights

Real Property

Morocco permits foreign individuals and foreign companies to own land, except agricultural land. Recently passed Land Reform bill 62-19, which will open rural land acquisition to joint ventures and limited partnerships, is awaiting implementation. Foreigners may acquire agricultural land to carry out an investment or other economic project that is not agricultural in nature, subject to first obtaining a certificate of non-agricultural use from the authorities. Morocco has a formal registration system maintained by the National Agency for Real Estate Conservation, Property Registries, and Cartography (ANCFCC), which issues titles of land ownership. Approximately 30 percent of land is registered in the formal system, and almost all of that is in urban areas. In addition to the formal registration system, there are customary documents called moulkiya issued by traditional notaries called adouls. While not providing the same level of certainty as a title, a moulkiya can provide some level of security of ownership. Morocco also recognizes prescriptive rights whereby an occupant of a land under the moulkiya system (not lands duly registered with ANCFCC) can establish ownership of that land upon fulfillment of all the legal requirements, including occupation of the land for a certain period (10 years if the occupant and the landlord are not related and 40 years if the occupant is a family member). There are other specific legal regimes applicable to some types of lands, among which:

  • Collective lands: lands which are owned collectively by some tribes, whose members only benefit from rights of usufruct;
  • Public lands: lands which are owned by the Moroccan State;
  • Guich lands: lands which are owned by the Moroccan State, but whose usufruct rights are vested upon some tribes;
  • Habous lands: lands which are owned by a party (the State, a certain family, a religious or charity organization, etc.) subsequent to a donation, and the usufruct rights of which are vested upon such party (usually with the obligation to allocate the proceeds to a specific use or to use the property in a certain way).

Morocco’s rating for “Registering Property” regressed over the past year, with a ranking of 81 out of 190 countries worldwide in the World Bank’s Doing Business 2020 report. Despite reducing the time it takes to obtain a non-encumbrance certificate, Morocco made property registration less transparent by not publishing statistics on the number of property transactions and land disputes for the previous calendar year, resulting in a lower score than in 2019.

Intellectual Property Rights

The Ministry of Industry, Trade, Investment, and the Digital Economy oversees the Moroccan Office of Industrial and Commercial Property (OMPIC), which serves as a registry for patents and trademarks in the industrial and commercial sectors. The Ministry of Communications oversees the Moroccan Copyright Office (BMDA), which registers copyrights for literary and artistic works (including software), enforces copyright protection, and coordinates with Moroccan and international partners to combat piracy.

In 2020, OMPIC launched its second strategic plan, Strategic Vision 2025, following the conclusion of its 2016-2020 strategic plan. The new 2025 plan has three pillars: the creation of an environment conducive to entrepreneurship, creativity, and innovation; the establishment of an effective system for the protection and defense of intellectual property rights; and the implementation of economic and regional actions to enhance intangible assets and market-oriented research and development. In 2016 OMPIC partnered with the European Patent Office and developed an agreement  for validating European patents in Morocco, and now receives roughly 80 percent of total applications via this channel. In 2020, OMPIC recorded a 25 percent increase of the patent applications filed domestically.

In 2016, the Ministry of Communication and World Intellectual Property Organization (WIPO) signed an MOU to expand cooperation to ensure the protection of intellectual property rights in Morocco. The memorandum committed both parties to improving the judicial and operational dimensions of Morocco’s copyright enforcement. Following this MOU, in 2016, BMDA launched WIPOCOS, a database for collective royalty management organizations or societies, developed by WIPO. Despite these positive changes, BMDA’s current focus on redefining its legal mandate and relationship with other copyright offices worldwide has appeared to lessen its enforcement capacity.

Law No. 23-13 on Intellectual Property Rights increased penalties for violation of those rights and better defines civil and criminal jurisdiction and legal remedies. It also set in motion an accreditation system for patent attorneys to better systematize and regulate the practice of patent law. Law No. 34-05, amending and supplementing Law No. 2-00 on Copyright and Related Rights includes 15 items (Articles 61 to 65) devoted to punitive measures against piracy and other copyright offenses. These range from civil and criminal penalties to the seizure and destruction of seized copies. Judges’ authority in sentencing and criminal procedures is proscribed, with little power to issue harsher sentences that would serve as stronger deterrents.

Moroccan authorities express a commitment to cracking down on all types of counterfeiting, but due to resource constraints, focus enforcement efforts on the most problematic areas, specifically those with public safety and/or significant economic impacts. In 2017, BMDA brought approximately a dozen court cases against copyright infringers and collected $6.1 million in copyright collections. In 2018, Morocco’s customs authorities seized $62.7 million worth of counterfeit items. In 2018, Morocco also created a National Customs Brigade charged with countering the illicit trafficking of counterfeit goods and narcotics.

In 2015, Morocco and the European Union concluded an agreement on the protection of Geographic Indications (GIs), which is pending ratification by both the Moroccan and European parliaments. Should it enter into force, the agreement would grant Moroccan GIs sui generis. The U.S. government continues to urge Morocco to pursue a transparent and substantive assessment process for the EU GIs in a manner consistent with Morocco’s existing obligations, including those under the U.S.-Morocco Free Trade Agreement.

Morocco is not listed in USTR’s most recent Special 301 Report or notorious markets reports.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/. For assistance, please refer to the U.S. Embassy local lawyers’ list, as well as to the regional U.S. IP Attaché .

Resources for Intellectual Property Rights Holders:

Peter Mehravari
Patent Attorney
Intellectual Property Attaché for the Middle East & North Africa
U.S. Embassy Abu Dhabi | U.S. Department of Commerce U.S. Patent & Trademark Office
Tel: +965 2259 1455
Peter.Mehravari@trade.gov 

7. State-Owned Enterprises

Boards of directors (in single-tier boards) or supervisory boards (in dual-tier boards) oversee Moroccan SOEs. The Financial Control Act and the Limited Liability Companies Act govern these bodies. The Ministry of Economy and Finance’s Department of Public Enterprises and Privatization monitors SOE governance. Pursuant to Law No. 69-00, SOE annual accounts are publicly available. Under Law No. 62-99, or the Financial Jurisdictions Code, the Court of Accounts and the Regional Courts of Accounts audit the management of a number of public enterprises. As of March 2021, the Moroccan Treasury held a direct share in 225 state-owned enterprises (SOEs) and 43 companies. A list of SOEs is available on the Ministry of Finance’s website .

Several sectors remain under public monopoly, managed either directly by public institutions (rail transport, some postal services, and airport services) or by municipalities (wholesale distribution of fruit and vegetables, fish, and slaughterhouses). The Office Cherifien des Phosphates (OCP), a public limited company that is 95 percent held by the Moroccan government, is a world-leading exporter of phosphate and derived products. Morocco has opened several traditional government activities using delegated-management or concession arrangements to private domestic or foreign operators, which are generally subject to tendering procedures. Examples include water and electricity distribution, construction and operation of motorways, and the management of non-hazardous wastes. In some cases, SOEs continue to control the infrastructure while allowing private-sector competition through concessions. SOEs benefit from budgetary transfers from the state treasury for investment expenditures.

Morocco established the Moroccan National Commission on Corporate Governance in 2007. It prepared the first Moroccan Code of Good Corporate Governance Practices in 2008. In 2011, the Commission drafted a code dedicated to SOEs, drawing on the OECD Guidelines on Corporate Governance of SOEs. The code, which came into effect in 2012, aims to enhance SOEs’ overall performance. It requires greater use of standardized public procurement and accounting rules, outside audits, the inclusion of independent directors, board evaluations, greater transparency, and better disclosure. The Moroccan government prioritizes a number of governance-related initiatives including an initiative to help SOEs contribute to the emergence of regional development clusters. The government is also attempting to improve the use of multi-year contracts with major SOEs as a tool to enhance performance and transparency.

Privatization Program

The government relaunched Morocco’s privatization program in the 2019 budget. Parliament enacted the updated annex to Law 38-89 (which authorizes the transfer of publicly held shares to the private sector) in February 2019 through publication in the official bulletin, including the list of entities to be privatized. The state still holds significant shares in the main telecommunications companies, banks, and insurance companies, as well as railway and air transport companies. In 2020, King Mohamed VI called for a sweeping reform to address the structural deficiencies of SOEs, after which the Ministry of Economy, Finance and Administration Reform announced plans to consolidate SOEs with overlapping missions, dissolve unproductive SOEs, and reorganize others to increase efficiencies. The government also authorized the establishment of the Mohammed VI Investment Fund, a public-limited company with initial capital of $4.7 billion to fund growth-generating projects through PPPs. The fund will contribute capital directly to large public and private companies operating in areas considered priorities. Public and private institutions will be able to collectively hold up to 49 percent of the Fund’s shares once the fund is fully operational.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $119,913 2019 $119,700 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $3,331 2019 $406 BEA data available at
https://apps.bea.gov/
international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2018 $385 2019 $-21 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2018 55.3% 2019 56.2% UNCTAD data available at
https://stats.unctad.org/handbook/
EconomicTrends/Fdi.html    

* Source for Host Country Data: Moroccan GDP data from Bank Al-Maghrib, all other statistics from the Moroccan Exchange Office.  Conflicts in host country and international statistics are likely due to methodological differences

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 63,904 100% Total Outward 5,398 100%
France 20,052 31.4% Ivory Coast 742 13.7%
UAE 13,383 20.9% Luxembourg 490 9.1%
Spain 5,378 8.4% France 323 6%
Switzerland 3,530 5.5% Mauritius 235 5%
United States 3,331 5.2% Egypt 186 3.5%
“0” reflects amounts rounded to +/- USD 500,000.

Table 4: Sources of Portfolio Investment
Data not available.

Peru

Executive Summary

The government of Peru (GOP)’s sound fiscal management and support of macroeconomic fundamentals contributed to the country’s region-leading economic growth since 2002. However, the COVID-19 pandemic caused a severe economic contraction of over 11 percent in 2020. In response, the GOP implemented a $39.5 billion stimulus plan in July 2020, which amounted to 19 percent of GDP. To finance the increased spending, the annual deficit grew to 8.9 percent of GDP in 2020, but the Ministry of Economy and Finance (MEF) projects that it will stabilize to 4.8 percent of GDP in 2021. GOP’s debt as a percentage of GDP increased from 26.8 percent in 2019 to 35 percent in 2020. Peru’s COVID-19 response and the perseverance of its macroeconomic stability led the IMF to project that Peru will grow its GDP by 8.5 percent in 2021, the highest growth forecast in the region. Net international reserves remained strong at $73.9 billion and inflation averaged 1.8 percent in 2020. Private sector investment comprised more than two-thirds of Peru’s total investment in 2020.

Peru fosters an open investment environment, which includes strong protections for contractual rights and property. Peru is well integrated in the global economy including with the United States-Peru Trade Promotion Agreement (PTPA), which entered into force in 2009. Through its investment promotion agency ProInversion, Peru seeks foreign investment in its infrastructure sector and free trade zones. Prospective investors would benefit from seeking local legal counsel in navigating Peru’s complex bureaucracy.

Corruption, social conflict, and congressional populist measures negatively affects Peru’s investment climate. Transparency International ranked Peru 94th out of 180 countries in its 2020 Corruption Perceptions Index. In 2020, Peru’s health minister and foreign minister resigned after admitting they irregularly received Sinopharm trial vaccines, along with former president Vizcarra. Social conflicts also adversely affect the investment climate. According to the Ombudsman, there were 145 active social conflicts in Peru as of January 2021 of which 66 were in the mining sector. Citing, in part, a recent congressional passage of populist measures, and the possibility of future executive-legislative tension, Fitch Ratings revised the rating outlook on Peru’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to negative from stable in December of 2020.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 94 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 76 of 190 https://www.doingbusiness.org/en/doingbusiness 
Global Innovation Index 2020 76 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $7,470 https://www.bea.gov/international/di1usdbal 
World Bank GNI per capita 2019 $6,740 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Peru seeks to attract investment – both foreign and domestic – in nearly all sectors.. Peru reported $2 billion in Foreign Direct Investment (FDI) in 2020 and seeks increased investment for 2021. It has prioritized $6 billion in public-private partnership projects in transportation infrastructure, electricity, education, broadband expansion, gas distribution, health, and sanitation.

Peru’s Constitution of 1993grants national treatment for foreign investors and permits foreign investment in almost all economic sectors. Under the Peruvian Constitution, foreign investors have the same rights as national investors to benefit from investment incentives, such as tax exemptions. In addition to the Constitution of 1993, Peru has several laws governing FDI including the Foreign Investment Promotion Law (Legislative Decree (DL) 662 of September 1991) and the Framework Law for Private Investment Growth (DL 757 of November 1991). Other important laws include the Private Investment in State-Owned Enterprises Promotion Law (DL 674) and the Private Investment in Public Services Infrastructure Promotion Law (DL 758). Article 6 of Supreme Decree No. 162-92-EF (the implementing regulations of DLs 662 and 757) authorized private investment in all industries except within natural protected areas and weapons manufacturing.

Peru and the United States benefit from the United States-Peru Free Trade Agreement (PTPA), which entered into force on February 1, 2009. The PTPA established a secure, predictable legal framework for U.S. investors in Peru. The PTPA protects all forms of investment. U.S. investors enjoy the right to establish, acquire, and operate investments in Peru on an equal footing with local investors in almost all circumstances. https://ustr.gov/trade-agreements/free-trade-agreements/peru-tpa

The GOP created the investment promotion agency ProInversion in 2002 to manage privatizations and concessions of state-owned enterprises and natural resource-based industries. The agency currently manages private concession processes in the energy, education, transportation, health, sanitation, and telecommunication sectors, and organizes international roadshow events to attract investors. Major recent and upcoming concessions include ports, water treatment plants, power generation facilities, mining projects, electrical transmission lines, oil and gas distribution, and telecommunications. Project opportunities are available on ProInversion’s website: https://www.proyectosapp.pe/default.aspx?ARE=1&PFL=0&sec=30. Companies are required to register all foreign investments with ProInversion.

The National Competitiveness Plan 2019 – 2030 outlines Peru’s economic growth strategy for the next decade and seeks to close the country’s $110 billion infrastructure gap. The plan was supplemented by a National Infrastructure Plan in July 2019, which identified 52 infrastructure projects keyed to critical sectors. Priority projects include two Lima metro lines, an expansion of Jorge Chavez International Airport, and multiple energy projects including electricity transmission lines. Peru reported in February 2021 that the energy projects had advanced significantly while many transport and agricultural projects suffered significant delays. Of note, the Ministry of Transportation prioritized the Fourth Metro Line and Central Highway, each multi-billion dollar projects, which were not included in the National Infrastructure Plan. Peru maintains an investment research portal to promote these infrastructure investment opportunities: https://www.mef.gob.pe/es/aplicativos-invierte-pe?id=5455

Although Peruvian administrations since the 1990s have supported private investments, Peru occasionally passes measures that some observers regard as a contravention of its open, free market orientation. In December 2011, Peru signed into law a 10-year moratorium on the entry of live genetically modified organisms (GMOs) for cultivation. In December 2020, the moratorium was extended an additional 15 years and will now remain enforced until 2035. Peru also implemented two sets of rules for importing pesticides, one for commercial importers, which requires importers to file a full dossier with technical information, and another for end-user farmers, which only requires a written affidavit.

Peru reformed its agricultural labor laws in 2020 impacting labor costs and tax incentives that could adversely affect investors in Peru’s agricultural sector. The U.S. Department of Agriculture estimated U.S. direct investment in the agriculture sector to reach $1.3 billion in 2021.

Limits on Foreign Control and Right to Private Ownership and Establishment

Peru’s Constitution (Article 6 under Supreme Decree No. 162-92-EF) authorizes foreign investors to carry out economic activity provided that investors comply with all constitutional precepts, laws, and treaties. Exceptions exist, including exclusion of foreign investment activities in natural protected reserves and military weapons manufacturing. Peruvian law requires majority Peruvian ownership in media; air, land and maritime transportation infrastructure; and private security surveillance services. Foreign interests cannot “acquire or possess under any title, mines, lands, forests, waters, or fuel or energy sources” within 50 kilometers of Peru’s international borders. However, foreigners can obtain concessions in these areas and in certain cases the GOP may grant a waiver. The GOP does not screen, review, or approve foreign direct investment outside of those sectors that require a governmental waiver.

Other Investment Policy Reviews

The World Trade Organization (WTO) published a Trade Policy Review (HYPERLINK “https://www.wto.org/english/tratop_e/tpr_e/tp493_e.htm” https://www.wto.org/english/tratop_e/tpr_e/tp493_e.htm) on Peru in October 2019. The WTO commented that foreign investors received the same legal treatment as local investors in general, although Peru restricted foreign investment on property at the country’s borders, and in air transport and broadcasting. The report highlighted the government’s ongoing efforts to promote public-private partnerships (PPPs) and strengthen the PPP legal framework with Organization for Economic Cooperation and Development (OECD) principles. The report noted that Peru maintained a regime open to domestic and foreign investment that fostered competition and equal treatment.

Peru aspires to become a member of the OECD and launched an OECD Country Program in 2014, comprising policy reviews and capacity building projects. The OECD published the Initial Assessment of its Multi-Dimensional Review in 2015 (https://www.oecd.org/countries/peru/multi-dimensional-review-of-peru-9789264243279-en.htm), finding that, in spite of economic growth, Peru “still faces structural challenges to escape the middle-income trap and consolidate its emerging middle class.” In every year since this study was published, Peru has enacted and implemented dozens of reforms to modernize its governance practices in line with OECD recommendations. Recent OECD studies on Peru include: Investing in Youth (April 2019), Digital Government (June 2019), Pension Systems (September 2019), Transport Regulation (February 2020), and Tax Transparency (April 2020). Peru has adhered to 45 of OECD’s 248 existing legal instruments, but its accession roadmap remains unclear.

Peru has not had a third-party investment policy review through the OECD or UNCTAD in the past three years.

Business Facilitation

The GOP does not have a regulatory system to facilitate business operations but the Institute for the Protection of Intellectual Property, Consumer Protection, and Competition (INDECOPI) reviews the enactment of new regulations by government entities that can place burdens on business operations. INDECOPI has the authority to block any new business regulation. INDECOPI also has a Commission for Elimination of Bureaucratic Barriers : https://www.indecopi.gob.pe/web/eliminacion-de-barreras-burocraticas/presentacion.

Peru allows foreign business ownership, provided that a company has at least two shareholders and that its legal representative is a Peruvian resident. Businesses must reserve a company name through the national registry, SUNARP, and prepare a deed of incorporation through a Citizen and Business Services Portal (https://www.serviciosalciudadano.gob.pe/). After a deed is signed, businesses must file with a public notary, pay notary fees of up to one percent of a company’s capital, and submit the deed to the Public Registry. The company’s legal representative must obtain a certificate of registration and tax identification number from the national tax authority SUNAT (www.sunat.gob.pe). Finally, the company must obtain a license from the municipality of the jurisdiction in which it is located. Depending on the core business, companies might need to obtain further government approvals such as: sanitary, environmental, or educational authorizations.

Outward Investment

The GOP promotes outward investment by Peruvian entities through the Ministry of Foreign Trade and Tourism (MINCETUR). Trade Commission Offices of Peru (OCEX), under the supervision of Peru’s export promotion agency (PromPeru), are located in numerous countries, including the United States, and promote the export of Peruvian goods and services and inward foreign investment. The GOP does not restrict domestic investors from investing abroad.

3. Legal Regime

Transparency of the Regulatory System

Laws and regulations most relevant to foreign investors are enacted and implemented at the national level. Most ministries and agencies make draft regulations available for public comment. El Peruano, the state’s official gazette, publishes regulations at the national, regional, and municipal level. Ministries generally maintain current regulations on their websites. Rule-making and regulatory authority also exists through executive agencies specific to different sectors. The Supervisory Agency for Forest Resources and Wildlife (OSINFOR), the Supervisory Agency for Energy and Mining (OSINERGMIN), and the Supervisory Agency for Telecommunications (OSIPTEL), all of which report directly to the President of the Council of Ministers, can enact new regulations that affect investments in the economic sectors they manage. These agencies also have the right to enforce regulations with fines. Regulation is generally reviewed on the basis of scientific and data-driven assessments, but public comments are not always received or made public.

Accounting, legal, and regulatory standards are consistent with international norms. Peru’s Accounting Standards Council endorses the use of IFRS standards by private entities. Public finances and debt obligations, including explicit and contingent liabilities, are transparent and publicly available at the Ministry of Economy and Finance website: https://www.mef.gob.pe/es/estadisticas-sp-18642/deuda-del-sector-publico.

International Regulatory Considerations

Peru is a member of regional economic blocs. Under the Pacific Alliance, Peru looks to harmonize regulations and reduce barriers to trade with other members: Chile, Colombia, and Mexico. Peru is a member of the Andean Community (CAN), which issues supranational regulations – based on consensus of its members – that supersede domestic provisions.

Peru follows international food standard bodies, including: CODEX Alimentarius, World Organization for Animal Health (OIE), and International Plant Protection Convention (IPPC) guidelines for Sanitary and Phytosanitary (SPS) standards. When CODEX does not have limits or standards established for a product, Peru defaults to the U.S. maximum residue level or standard. Peru’s system is more aligned with the U.S. regulatory system and standards than with its other trading partners. Peru notifies all agricultural-related technical regulations to the World Trade Organization (WTO) Technical Barriers to Trade (TBT) committee.

Legal System and Judicial Independence

Peru uses a civil law system. Peru’s civil code includes a contract section and a general corporations law that regulates companies. Peru’s civil court resolves conflicts between companies. Companies can also access conflict resolution services in civil courts for conflicts and litigation for which a legal claim has been filed. Litigation processes in Peruvian courts are slow.

Peru has an independent judiciary. The executive branch does not interfere with the judiciary as a matter of policy. Regulations and enforcement actions are appealable through administrative process and the court system. Peru is in the process of reforming its justice system. The National Justice Board (Junta Nacional de Justicia), which began operating in January 2020, supervises the selection processes, appointments, evaluations, and disciplinary actions for judges.

Laws and Regulations on Foreign Direct Investment

Peru has a stable and attractive legal framework used to promote private investment. The 1993 Peruvian Constitution includes provisions that establish principles to ensure a favorable legal framework for private investment, particularly for foreign investment. A key principle is equal treatment to domestic and foreign investment. Some of the main private investment regulations include:

  • Legislative Decree 662 that approves foreign investment legal stability regulations,
  • Legislative Decree 757 that approves the private investment growth framework law, and
  • Supreme Decree 162-92-EF that approves private investment guarantee mechanism regulations

Peru’s legal system is available to investors. All laws relevant to foreign investment along with pertinent explanations and forms can be found on the ProInversion website: https://www.proinversion.gob.pe/modulos/LAN/landing.aspx?are=1&pfl=1&lan=9&tit=institucional .

Competition and Antitrust Laws

INDECOPI is the GOP agency responsible for reviewing competition-related concerns of a domestic nature. Congress published a mergers and acquisitions (M&A) control law in January 2021. The law requires INDECOPI to review and approve M&As involving companies, including multinationals, that have combined annual sales or gross earnings over $146 million in Peru and if the value of the sales or annual gross earnings in Peru of two or more of the companies involved in the proposed M&A operation exceed $22 million each.

A legislative decree issued in September 2018 (DL 1444) modified the public procurement law to allow government agencies to use government-to-government (G2G) agreements to facilitate procurement processes.  The GOP sees this G2G procurement model as a method for expediting priority infrastructure projects in a manner that is more transparent and less susceptible to corruption. The USG, however, does not have a mechanism to support Peru’s G2G contracts and the U.S. Embassy has raised concerns with the GOP that its use limits U.S. firms’ participation in infrastructure solicitations. Peru expanded the use of G2G agreements in 2020 to include large infrastructure projects including a $1.6 billion general reconstruction initiative (related to damages caused by the El Nino event of 2017) and a $5 billion Lima metro line project.

Expropriation and Compensation

The Peruvian Constitution states that Peru can only expropriate private property based on public interest, such as public works projects or for national security. Article 70 of the Constitution states that the State can only expropriate through a judicial process, prior mandate of the law, and after payment of compensation, which must include compensation for possible damage. Peruvian law bases compensation for expropriation on fair market value. Article 70 also guarantees the inviolability of private property.

Illegal expropriation of foreign investment has been alleged in the extractive industry. A U.S. company alleged indirect expropriation due to changes in regulatory standards. Landowners have also alleged indirect expropriation due to government inaction and corruption in “land-grab” cases that have, at times, been linked to local government endorsed projects.

Dispute Settlement

ICSID Convention and New York Convention, and PTPA

Peru is a party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and to the International Center for the Settlement of Investment Disputes (ICSID convention). Disputes between foreign investors and the GOP regarding pre-existing contracts must still enter national courts, unless otherwise permitted, such as through provisions found in the PTPA. In addition, investors who enter into a juridical stability agreement may submit disputes with the government to national or international arbitration if stipulated in the agreement. Several private organizations – including the American Chamber of Commerce, the Lima Chamber of Commerce, and the Catholic University – operate private arbitration centers. The quality of such centers varies and investors should choose arbitration venues carefully.

The PTPA includes a chapter on dispute settlement, which applies to implementation of the Agreement’s core obligations, including labor and environment provisions. Dispute panel procedures set high standards of openness and transparency through the following measures: open public hearings, public release of legal submissions by parties, admission of special labor or environment expertise for disputes in these areas, and opportunities for interested third parties to submit views. The Agreement emphasizes compliance through consultation and trade-enhancing remedies and encourages arbitration and other alternative dispute resolution measures.

Investor-State Dispute Settlement

The PTPA provides investor-state claim mechanisms. It does not require that an investor exhaust local judicial or administrative remedies before a claim is filed. The investor may submit a claim under various arbitral mechanisms, including the Convention on the Settlement of Investment Disputes (ICSID Convention) and ICSID Rules of Procedure, the ICSID Additional Facility Rules, the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, or, if the disputants agree, any other arbitration institution or rules. Peru has paid previous arbitral awards; however, a U.S. court found in one case that Peru altered its tax code prior to payment, thus reducing interest payments.

In February 2016, a U.S. investor filed a Notice of Intent to pursue international arbitration against the GOP for violation of the U.S.-Peru Trade Promotion Agreement. The investor, which refiled its claim in August 2016, holds agrarian land reform bonds that it argues the GOP has undervalued.

In September 2019, a U.S. investor filed an arbitration claim against the GOP over alleged interference over environmental permitting and contractual issues for a hydro power project.

In February 2020, a claimant filed an arbitration claim against Peru for violation of the U.S.-Peru Trade Promotion Agreement regarding a tax and royalty dispute between its mining subsidiary and Peru’s tax authority SUNAT.

There is no recent history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

The 1993 Constitution allows disputes among foreign investors and the government or state-controlled enterprises to be submitted to international arbitration.

Bankruptcy Regulations

Peru has a creditor rights hierarchy similar to that established under U.S. bankruptcy law, and monetary judgments are usually made in the currency stipulated in the contract. However, administrative bankruptcy procedures are slow and subject to judicial intervention. Compounding this difficulty are occasional laws passed to protect specific debtors from action by creditors that would force them into bankruptcy or liquidation. In August 2016, the GOP extended the period for bankruptcy from one to two years. Peru does not criminalize bankruptcy. World Bank’s 2020 Doing Business Report ranked Peru 90 of 190 countries for ease of “resolving insolvency.”

5. Protection of Property Rights

Real Property

World Bank’s 2020 Doing Business Report ranked Peru 55 of 190 for ease of “registering property.” Peru enforces property rights and interests.  Mortgages and liens exist, and the recording system is reliable, performed by SUNARP, the National Superintendency of Public Records. Foreigners and/or non-resident investors cannot own land within 50 km of a border.

Intellectual Property Rights

Peru is listed on the Watch List in the United States Trade Representative’s (USTR’s) 2021 Special 301 Report, and the Polvos Azules market is included on USTR’s the 2020 Notorious Markets List. The primary reasons for Watch List inclusion are the long-standing implementation issues with the intellectual property provisions of the PTPA, particularly with respect to establishing statutory damages for copyright infringement and trademark counterfeiting.

Peru’s legal framework provides for easy registration of trademarks, and inventors have been able to patent their inventions since 1994. Peruvian law does not provide pipeline protection for patents or protection from parallel imports. Peru’s Copyright Law is generally consistent with the World Trade Organization’s (WTO) Agreement on Trade-Related Aspects of Intellectual Property (TRIPS).

Peruvian law provides the same protections for U.S. companies as Peruvian companies in all intellectual property rights (IPR) categories under the PTPA and other international commitments such as the World Intellectual Property Organization (WIPO) and the World Trade Organization Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Peru joined the Global Patent Prosecution Highway Agreement (GPPH) with Japan effective in 2019. Peru is reinforcing its Patent Support System with the adoption of the WIPO Technology and Innovation Support Center (TISC) Program.

INDECOPI is a reliable partner for the U.S. government, the private sector, and civil society, having made good faith efforts to decrease the trademark and patent registration backlog and filing time. Although INDECOPI is the GOP agency charged with promoting and defending intellectual property rights, IPR enforcement also involves other GOP agencies and offices, including: the Public Ministry (Fiscalia), the Peruvian National Police (PNP), the Tax and Customs Authority (SUNAT), the Ministry of Production (PRODUCE), the Judiciary, and the Ministry of Health’s (MINSA’s) Directorate General for Medicines (DIGEMID).

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles: https://www.wipo.int/directory/en/.

7. State-Owned Enterprises

Peru wholly owns 35 state-owned enterprises (SOEs), 34 of which are under the parastatal conglomerate FONAFE. The list of SOEs under FONAFE can be found here: https://www.fonafe.gob.pe/empresasdelacorporacion . FONAFE appoints an independent board of directors for each SOE using a transparent selection process. There is no notable third-party analysis on SOEs’ ties to the government. The largest SOE is PetroPeru which refines oil, operates Peru’s main oil pipeline, and maintains a stake in select concessions. SOE ownership practices are generally consistent with OECD guidelines.

Privatization Program

The GOP initiated an extensive privatization program in 1991, in which foreign investors were encouraged to participate. Since 2000, the GOP has promoted multi-year concessions as a means of attracting investment in major projects, including a 30-year concession to a private group (Lima Airport Partners) to operate the Lima airport in 2000 and a 30-year concession to Dubai Ports World to improve and operate a new container terminal in the Port of Callao in 2006.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $203,527 2019 $226,848 https://data.worldbank.org/country/peru 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 $2,776 2019 $7,470 BEA data available at
https://www.bea.gov/international/di1usdbal 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2019 $209 BEA data available at
https://www.bea.gov/international/di1fdibal 
Total inbound stock of FDI as % host GDP N/A N/A 2019 50.1% UNCTAD data available at
https://unctad.org/en/pages/diae/
world%20investment%20report/
country-fact-sheets.aspx 

* Source for Host Country Data: Peru’s Central Bank of Reserve , ProInversion .

Table 3: Sources and Destination of FDI
Data not available.

Table 4: Sources of Portfolio Investment
Data not available.

Philippines

Executive Summary

Despite challenges posed by the COVID-19 pandemic, the Philippines is committed to improving its overall investment climate.  Sovereign credit ratings remain at investment grade based on the country’s sound macroeconomic fundamentals.  Foreign direct investment (FDI), however, still remains relatively low when compared to the Association of Southeast Asian Nations (ASEAN) figures; the Philippines ranks sixth out of ten ASEAN countries for total FDI in 2020.  FDI declined by almost 25 percent in 2020 to USD 6.5 billion from USD 8.7 billion in 2019, according to the Bangko Sentral ng Pilipinas (the Philippine’s Central Bank), mainly due to the disruptive impact of the pandemic on global supply chains and weak business outlook that affected investors’ decisions.  The majority of FDI investments included manufacturing, real estate, and financial/insurance activities.  (https://www.bsp.gov.ph/SitePages/MediaAndResearch/MediaDisp.aspx?ItemId=5704)

Foreign ownership limitations in many sectors of the economy constrain investments.  Poor infrastructure, high power costs, slow broadband connections, regulatory inconsistencies, and corruption are major disincentives to investment.  The Philippines’ complex, slow, and sometimes corrupt judicial system inhibits the timely and fair resolution of commercial disputes. Traffic in major cities and congestion in the ports remain a regular cost of business.  Recently passed tax reform legislation (Corporate Recovery and Tax Incentives for Enterprises — CREATE) will reduce the corporate income tax from ASEAN’s highest rate of 30 percent to 25 percent in 2020 and eventually to 20 percent by 2025.  CREATE could be positive for business investment, although some foreign investors have concerns about the performance-based and time-bound nature of the incentives scheme adopted in the measure.

The Philippines continues to address investment constraints.  In late 2018, President Rodrigo Duterte updated the Foreign Investment Negative List (FINL), which enumerates investment areas where foreign ownership or investment is banned or limited.  The latest FINL allows 40 percent foreign participation in construction and repair of locally funded public works, up from 25 percent.  The FINL, however, is limited in scope since it cannot change prior laws relating to foreign investments, such as Constitutional provisions which bar investment in mass media, utilities, and natural resource extraction.

There are currently several pending pieces of legislation, such as amendments to the Public Service Act, the Retail Trade Liberalization Act, and the Foreign Investment Act, all of which would have a large impact on investment within the country.  The Public Service Act would provide a clearer definition of “public utility” companies, in which foreign investment is limited to 40 percent according to the 1987 Constitution.  This amendment would lift foreign ownership restrictions in key areas such as telecommunications and energy, leaving restrictions only on distribution and transmission of electricity, and maintenance of waterworks and sewerage systems.  The Retail Trade Liberalization Act aims to boost foreign direct investment in the retail sector by changing capital thresholds to reduce the minimum investment per store requirement for foreign-owned retail trade businesses from USD 830,000 to USD 200,000.  It also would reduce the quantity of locally manufactured products foreign-owned stores are required to carry.  The Foreign Investment Act would ease restrictions on foreigners practicing their professions in the Philippines and give them better access to investment areas that are currently reserved primarily for Philippine nationals, particularly in sectors within education, technology, and retail.

While the Philippine bureaucracy can be slow and opaque in its processes, the business environment is notably better within the special economic zones, particularly those available for export businesses operated by the Philippine Economic Zone Authority (PEZA), known for its regulatory transparency, no red-tape policy, and one-stop shop services for investors.  Finally, the Philippines plans to spend more than USD 82.6 billion through 2022 to upgrade its infrastructure with the Administration’s aggressive Build, Build, Build program; many projects are already underway.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 115 of 179 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 95 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 50 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 9,940 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 3,850 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Philippines seeks foreign investment to generate employment, promote economic development, and contribute to inclusive and sustained growth.  The Board of Investments (BOI) and Philippine Economic Zone Authority (PEZA) are the country’s lead investment promotion agencies (IPAs).  They provide incentives and special investment packages to investors. Noteworthy advantages of the Philippine investment landscape include free trade zones, including economic zones, and a large, educated, English-speaking, and relatively low-cost Filipino workforce.  Philippine law treats foreign investors the same as their domestic counterparts, except in sectors reserved for Filipinos by the Philippine Constitution and the Foreign Investment Act (see details under Limits on Foreign Control section).  Additional information regarding investment policies and incentives are available on the BOI (http://boi.gov.ph) and PEZA (http://www.peza.gov.ph) websites.

Restrictions on foreign ownership, inadequate public investment in infrastructure, and lack of transparency in procurement tenders hinder foreign investment.  The Philippines’ regulatory regime remains ambiguous in many sectors of the economy, and corruption is a significant problem.  Large, family-owned conglomerates, including San Miguel, Ayala, Aboitiz Equity Ventures, and SM Investments, dominate the economic landscape, crowding out other smaller businesses.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreigners are prohibited from fully owning land under the 1987 Constitution, although the 1993 Investors’ Lease Act allows foreign investors to lease a contiguous parcel of up to 1,000 hectares (2,471 acres) for a maximum of 75 years.  Dual citizens are permitted to own land.

The 1991 Foreign Investment Act (FIA) requires the publishing every two years of the Foreign Investment Negative List (FINL), which outlines sectors in which foreign investment is restricted.  The latest FINL was released in October 2018 and will be updated once the Strategic Investment Priorities Plan (SIPP) is drafted.  The FINL bans foreign ownership/participation in the following investment activities:  mass media (except recording and internet businesses); small-scale mining; private security agencies; utilization of marine resources; cockpits; manufacturing of firecrackers and pyrotechnic devices; and manufacturing and distribution of nuclear, biological, chemical and radiological weapons, and anti-personnel mines.  With the exception of the practices of law, radiologic and x-ray technology, and marine deck and marine engine officers, other laws and regulations on professions allow foreigners to practice in the Philippines if their country permits reciprocity for Philippine citizens, these include medicine, pharmacy, nursing, dentistry, accountancy, architecture, engineering, criminology, teaching, chemistry, environmental planning, geology, forestry, interior design, landscape architecture, and customs brokerage.  In practice, however, language exams, onerous registration processes, and other barriers prevent this from taking place.

The Philippines limits foreign ownership to 40 percent in the manufacturing of explosives, firearms, and military hardware; private radio communication networks; natural resource exploration, development, and utilization (with exceptions); educational institutions (with some exceptions); operation and management of public utilities; operation of commercial deep sea fishing vessels; Philippine government procurement contracts (40 percent for supply of goods and commodities); contracts for the construction and repair of locally funded public works (with some exceptions); ownership of private lands; and rice and corn production and processing (with some exceptions).  Other areas that carry varying foreign ownership ceilings include the following: private employee recruitment firms (25 percent) and advertising agencies (30 percent).

Retail trade enterprises with capital of less than USD 2.5 million, or less than USD 250,000, for retailers of luxury goods, are reserved for Filipinos.  The Philippines allows up to full foreign ownership of insurance adjustment, lending, financing, or investment companies; however, foreign investors are prohibited from owning stock in such enterprises, unless the investor’s home country affords the same reciprocal rights to Filipino investors.

Foreign banks are allowed to establish branches or own up to 100 percent of the voting stock of locally incorporated subsidiaries if they can meet certain requirements.  However, a foreign bank cannot open more than six branches in the Philippines.  A minimum of 60 percent of the total assets of the Philippine banking system should, at all times, remain controlled by majority Philippine-owned banks.  Ownership caps apply to foreign non-bank investors, whose aggregate share should not exceed 40 percent of the total voting stock in a domestic commercial bank and 60 percent of the voting stock in a thrift/rural bank.

Other Investment Policy Reviews

The World Trade Organization (WTO) and the Organization for Economic Co-operation and Development (OECD) conducted a Trade Policy Review of the Philippines in March 2018 and an Investment Policy Review of the Philippines in 2016, respectively.  The reviews are available online at the WTO website (https://www.wto.org/english/tratop_e/tpr_e/tp468_e.htm) and OECD website (http://www.oecd.org/daf/oecd-investment-policy-reviews-philippines-2016-9789264254510-en.htm).

Business Facilitation

Business registration in the Philippines is cumbersome due to multiple agencies involved in the process.  It takes an average of 33 days to start a business in Quezon City in Metro Manila, according to the 2020 World Bank’s Ease of Doing Business report.  The Duterte Administrations’ landmark law, Republic Act No. 11032 or the Ease of Doing Business and Efficient Government Service Delivery Act of 2018 sought to address the issues through the amendment of the Anti-Red Tape Act of 2007 (https://www.officialgazette.gov.ph/2018/05/28/republic-act-no-11032/).  It legislates standardized deadlines for government transactions, a single business application form, a one-stop-shop, automation of business permits processing, a zero-contact policy, and a central business databank.  Implementing rules and regulations for the Act was signed in 2019 (http://arta.gov.ph/pages/IRR.html).  It created an Anti-Red Tape Authority (ARTA) under the Office of the President that oversees national policy on anti-red tape issues and implements reforms to improve competitiveness rankings.  It also monitors compliance of agencies and issue notices to erring and non-compliant government employees and officials.  ARTA is governed by a council that includes the Secretaries of Trade and Industry, Finance, Interior and Local Governments, and Information and Communications Technology.  The Department of Trade and Industry serves as interim Secretariat for ARTA.  Since this landmark legislation, the Philippines jumped 29 notches in the World Bank’s 2020 Doing Business Report ranking 95th from its previous 124th rank with the ARTA pushing for the full adoption of an online application system as an efficient alternative to on-site application procedures, issue online permits, and use e-signatures in the processing of government transactions.

The Revised Corporation Code, a business-friendly amendment that encourages entrepreneurship, improves the ease of business and promotes good corporate governance.  This new law amends part of the four-decade-old Corporation Code and allows for existing and future companies to hold a perpetual status of incorporation, compared to the previous 50-year term limit which required renewal.  More importantly, the amendments allow for the formation of one-person corporations, providing more flexibility to conduct business; the old code required all incorporation to have at least five stockholders and provided less protection from liabilities.

Outward Investment

There are no restrictions on outward portfolio investments for Philippine residents, defined to include non-Filipino citizens who have been residing in the country for at least one year; foreign-controlled entities organized under Philippine laws; and branches, subsidiaries, or affiliates of foreign enterprises organized under foreign laws operating in the country.  However, outward investments funded by foreign exchange purchases above USD 60 million or its equivalent per investor per year, require prior notification to the Central Bank.

3. Legal Regime

Transparency of the Regulatory System

Proposed Philippine laws must undergo public comment and review.  Government agencies are required to craft implementing rules and regulations (IRRs) through public consultation meetings within the government and with private sector representatives after laws are passed.  New regulations must be published in newspapers or in the government’s official gazette, available online, before taking effect (https://www.gov.ph/).  The 2016 Executive Order on Freedom of Information (FOI) mandates full public disclosure and transparency of government operations, with certain exceptions.  The public may request copies of official records through the FOI website (https://www.foi.gov.ph/).  Government offices in the Executive Branch are expected to come up with their respective agencies’ implementation guidelines.  The order is criticized for its long list of exceptions, rendering the policy less effective.

Stakeholders report regulatory enforcement in the Philippines is generally weak, inconsistent, and unpredictable.  Many U.S. investors describe business registration, customs, immigration, and visa procedures as burdensome and frustrating.  Regulatory agencies are generally not statutorily independent but are attached to cabinet departments or the Office of the President and, therefore, are subject to political pressure.  Issues in the judicial system also affect regulatory enforcement.

International Regulatory Considerations

The Philippines is a member of the World Trade Organization (WTO) and provides notice of draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).  (http://tbtims.wto.org/en/Notifications/Search?ProductsCoveredHSCodes=&ProductsCoveredICSCodes=&DoSearch=True&ExpandSearchMoreFields=False&NotifyingMember=Philippines&DocumentSymbol=&DistributionDateFrom=&DistributionDateTo=&SearchTerm=&ProductsCovered=&DescriptionOfContent=&CommentPeriod=&FinalDateForCommentsFrom=&FinalDateForCommentsTo=&ProposedDateOfAdoptionFrom=&ProposedDateOfAdoptionTo=&ProposedDateOfEntryIntoForceFrom=&ProposedDateOfEntryIntoForceTo=).

The Philippines continues to fulfill required regulatory reforms under the ASEAN Economic Community (AEC).  The Philippines officially joined live operations of the ASEAN Single Window (ASW) on December 30, 2019.  The country’s National Single Window (NSW) now issues an electronic Certificate of Origin via the TRADENET.gov.ph platform, and the NSW is connected to the ASW, allowing for customs efficiencies and better transparency.

The Philippines passed the Customs Modernization and Tariff Act in 2016, which enables the country to largely comply with the WTO Agreement on Trade Facilitation.  However, the various implementing rules and regulations to execute specific provisions have not been completed by the Department of Finance and the Bureau of Customs as of April 2020.

Legal System and Judicial Independence

The Philippines has a mixed legal system of civil, common, Islamic, and customary laws, along with commercial and contractual laws.

The Philippine judicial system is a separate and largely independent branch of the government, made up of the Supreme Court and lower courts.  The Supreme Court is the highest court and sole constitutional body.  More information is available on the court’s website (http://sc.judiciary.gov.ph/).  The lower courts consist of:  (a) trial courts with limited jurisdictions (i.e., Municipal Trial Courts, Metropolitan Trial Courts, etc.); (b) Regional Trial Courts (RTCs); (c) Shari’ah District Courts (Muslim courts); and (d) Court of Appeals (appellate courts).  Special courts include the “Sandiganbayan” (anti-graft court for public officials) and the Court of Tax Appeals.  Several RTCs have been designated as Special Commercial Courts (SCC) to hear intellectual property (IP) cases, with four SCCs authorized to issue writs of search and seizure on IP violations, enforceable nationwide.  In addition, nearly any case can be appealed to appellate courts, including the Supreme Court, increasing caseloads and further clogging the judicial system.

Foreign investors describe the inefficiency and uncertainty of the judicial system as a significant disincentive to investment.  Many investors decline to file dispute cases in court because of slow and complex litigation processes and corruption among some personnel.  The courts are not considered impartial or fair.  Stakeholders also report an inexperienced judiciary when confronted with complex issues such as technology, science, and intellectual property cases.  The Philippines ranked 152nd out of 190 economies, and 18th among 25 economies from East Asia and the Pacific, in the World Bank’s 2020 Ease of Doing Business report in terms of enforcing contracts.

Laws and Regulations on Foreign Direct Investment

The Fiscal Incentives Review Board (FIRB) is the ultimate governing body that oversees the administration and grant of tax incentives by investments promotions agencies (IPAs).  It also determines the target performance metrics used as conditions to avail of tax incentives and reviews, approve, and cancels incentives for investments above  USD 20 million as endorsed by IPAs.  The BOI regulates and promotes investment into the Philippines that caters to the domestic market.  The Strategic Investment Priorities Plan (SIPP), identified by the National Economic and Development Authority (NEDA) and administered by the BOI, identifies preferred economic activities approved by the President.  Government agencies are encouraged to adopt policies and implement programs consistent with the SIPP.

The Foreign Investment Act (FIA) requires the publishing of the Foreign Investment Negative List (FINL) that outlines sectors in which foreign investment is restricted.  The FINL consists of two parts:  Part A details sectors in which foreign equity participation is restricted by the Philippine Constitution or laws; and Part B lists areas in which foreign ownership is limited for reasons of national security, defense, public health, morals, and/or the protection of small and medium enterprises (SMEs).

The 1995 Special Economic Zone Act allows PEZAs to regulate and promote investments in export-oriented manufacturing and service facilities inside special economic zones, including grants of fiscal and non-fiscal incentives.

Further information about investing in the Philippines is available at BOI website (http://boi.gov.ph/) and PEZA website (http://www.peza.gov.ph).

Competition and Antitrust Laws

The 2015 Philippine competition law established the Philippine Competition Commission (PCC), an independent body mandated to resolve complaints on issues such as price fixing and bid rigging, to stop mergers that would restrict competition.  More information is available on PCC website (http://phcc.gov.ph/#content).  The Department of Justice (https://www.doj.gov.ph/) prosecutes criminal offenses involving violations of competition laws.

Expropriation and Compensation

Philippine law allows expropriation of private property for public use or in the interest of national welfare or defense in return for fair market value compensation.  In the event of expropriation, foreign investors have the right to receive compensation in the currency in which the investment was originally made and to remit it at the equivalent exchange rate.  However, the process of agreeing on a mutually acceptable price can be protracted in Philippine courts.  No recent cases of expropriation involve U.S. companies in the Philippines.

The 2016 Right-of-Way Act facilitates acquisition of right-of-way sites for national government infrastructure projects and outlines procedures in providing “just compensation” to owners of expropriated real properties to expedite implementation of government infrastructure programs.

Dispute Settlement

ICSID Convention and New York Convention

The Philippines is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the New York Convention.

Investor-State Dispute Settlement

The Philippines is signatory to various bilateral investment treaties that recognize international arbitration of investment disputes.  Since 2002, the Philippines has been respondent to five investment dispute cases filed before the ICSID.  Details of cases involving the Philippines are available on the ICSID website (https://icsid.worldbank.org/en/).

International Commercial Arbitration and Foreign Courts

Investment disputes can take years to resolve due to systemic problems in Philippine courts.  Lack of resources, understaffing, and corruption make the already complex court processes protracted and expensive.  Several laws on alternative dispute resolution (ADR) mechanisms (i.e., arbitration, mediation, negotiation, and conciliation) were approved to decongest clogged court dockets.  Public-Private Partnership (PPP) infrastructure contracts are required to include ADR provisions to make resolving disputes less expensive and time-consuming.

A separate action must be filed for foreign judgments to be recognized or enforced under Philippine law.  Philippine law does not recognize or enforce foreign judgments that run counter to existing laws, particularly those relating to public order, public policy, and good customary practices.  Foreign arbitral awards are enforceable upon application in writing to the regional trial court with jurisdiction.  The petition may be filed any time after receipt of the award.

Bankruptcy Regulations

The 2010 Philippine bankruptcy and insolvency law provides a predictable framework for rehabilitation and liquidation of distressed companies, although an examination of some reported cases suggests uneven implementation.  Rehabilitation may be initiated by debtors or creditors under court-supervised, pre-negotiated, or out-of-court proceedings.  The law sets conditions for voluntary (debtor-initiated) and involuntary (creditor-initiated) liquidation.  It also recognizes cross-border insolvency proceedings in accordance with the United Nations Conference on Trade and Development (UNCTAD) Model Law on Cross-Border Insolvency, allowing courts to recognize proceedings in a foreign jurisdiction involving a foreign entity with assets in the Philippines.  Regional trial courts designated by the Supreme Court have jurisdiction over insolvency and bankruptcy cases.  The Philippines ranked 65th out of 190 economies, and ninth among 25 economies from East Asia and the Pacific, in the World Bank’s 2020 Ease of Doing Business report in terms of resolving insolvency and bankruptcy cases.

5. Protection of Property Rights

Real Property

The Philippines recognizes and protects property rights, but the enforcement of laws is weak and fragmented.  The Land Registration Authority and the Register of Deeds (http://www.lra.gov.ph/), which facilitate the registration and transfer of property titles, are responsible for land administration, with more information available on their websites.  Property registration processes are tedious and costly.  Multiple agencies are involved in property administration, which results in overlapping procedures for land valuation and titling processes.  Record management is weak due to a lack of funds and trained personnel.  Corruption is also prevalent among land administration personnel and the court system is slow to resolve land disputes.  The Philippines ranked 120th out of 190 economies in terms of ease of property registration in the World Bank’s 2020 Ease of Doing Business report.

Intellectual Property Rights

The Philippines is not listed on the United States Trade Representative’s (USTR) Special 301 Watch List.  The country has a generally robust intellectual property rights (IPR) regime in place, although enforcement is irregular and inconsistent.  The total estimated value of counterfeit goods reported seized in 2020 was USD180 million, lower than 2019’s USD 460 million.  The closure of commercial establishments and a strict three-month lockdown due to the COVID-19 pandemic,impacted enforcement activities.  The sale of imported counterfeit goods in local markets has visibly decreased, though the amount of counterfeit goods sold online has dramatically increased due to the shift of most businesses to online activities.

The Intellectual Property (IP) Code provides a legal framework for IPR protection, particularly in key areas of patents, trademarks, and copyrights.  The Intellectual Property Office of the Philippines (IPOPHL) is the implementing agency of the IP Code, with more information available on its website (https://www.ipophil.gov.ph/).  The Philippines generally has strong patent and trademark laws.  IPOPHL’s IP Enforcement Office (IEO) reviews IPR-related complaints and visits establishments reportedly engaged in IPR-related violations.  However, weak border protection, corruption, limited enforcement capacity by the government, and lack of clear procedures continue to weaken enforcement.  In addition, IP owners still must assume most enforcement and storage costs when counterfeit goods are seized.

Enforcement actions are often not followed by successful prosecutions.  The slow and capricious judicial system keeps most IP owners from pursuing cases in court.  IP infringement is not considered a major crime in the Philippines and takes a lower priority in court proceedings, especially as the courts become more crowded out with criminal cases deemed more serious, which receive higher priority.  Many IP owners opt for out-of-court settlements (such as ADR) rather than filing a lawsuit that may take years to resolve in the unpredictable Philippine courts.

The IPOPHL has jurisdiction to resolve certain disputes concerning alleged infringement and licensing through its Arbitration and Mediation Center.

For additional information about treaty obligations and points of contact at the local IP offices, see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Resources for Rights Holders

Contacts at Mission:

Douglas Fowler, Economic Officer
Karen Ang, Economic Specialist
Economic Section, U.S. Embassy Manila
Telephone: (+632) 5301.2000
Email: ManilaEcon@state.gov

A list of local lawyers can be found on the U.S. Embassy’s website:  https://ph.usembassy.gov/u-s-citizen-services/attorneys/.

7. State-Owned Enterprises

State-owned enterprises, known in the Philippines as government-owned and controlled corporations (GOCC), are predominantly in the finance, power, transport, infrastructure, communications, land and water resources, social services, housing, and support services sectors.  There were 133 operational and functioning GOCCs as of end-2020; a list is available on the Governance Commission for GOCC [GCG] website (https://gcg.gov.ph).  The government corporate sector has a combined asset of USD 300 billion and liability of  USD 210 billion (or net assets/equity worth about USD 9 billion) as of end-2019.  Its total income increased by 3.3 percent to  USD 33 billion during the year, while total expense rose by 0.6 percent to USD 24 billion; these result in a profit of USD 9 billion.  GOCCs are required to remit at least 50 percent of their annual net earnings (e.g., cash, stock, or property dividends) to the national government.

Private and state-owned enterprises generally compete equally.  The Government Service Insurance System (GSIS) is the only agency, with limited exceptions, allowed to provide coverage for the government’s insurance risks and interests, including those in build-operate-transfer (BOT) projects and privatized government corporations.  Since the national government acts as the main guarantor of loans, stakeholders report GOCCs often have an advantage in obtaining financing from government financial institutions and private banks.  Most GOCCs are not statutorily independent, thus could potentially be subject to political interference.

OECD Guidelines on Corporate Governance of SOEs

The Philippines is not an OECD member country.  The 2011 GOCC Governance Act addresses problems experienced by GOCCs, including poor financial performance, weak governance structures, and unauthorized allowances.  The law allows unrestricted access to GOCC account books and requires strict compliance with accounting and financial disclosure standards; establishes the power to privatize, abolish, or restructure GOCCs without legislative action; and sets performance standards and limits on compensation and allowances.  The GCG formulates and implements GOCC policies.  GOCC board members are limited to one-year term and subject to reappointment based on a performance rating set by GCG, with final approval by the Philippine President.

Privatization Program

The Philippine Government’s privatization program is managed by the Privatization Management Office (PMO) under the Department of Finance (DOF).  The privatization of government assets undergoes a public bidding process.  Apart from restrictions stipulated in FINL, no regulations discriminate against foreign buyers and the bidding process appears to be transparent.  Additional information is available on the PMO website (http://www.pmo.gov.ph/index.htm).

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($B USD) 2020 $362.2 2019 $36.8 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 N/A 2019 6,940 BEA data available at
https://apps.bea.gov/
international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2020 N/A 2019 $474 BEA data available at
https://apps.bea.gov/
international/factsheet/
Total inbound stock of FDI as % host GDP 2020 N/A 2019 1.4% UNCTAD data available at
https://stats.unctad.org/
handbook/EconomicTrends/Fdi.html

* Host Country Statistical Sources:
Philippine Statistical Authority (http://psa.gov.ph/nap-press-release/data-charts)
Bangko Sentral ng Pilipinas (http://www.bsp.gov.ph/statistics/efs_ext2.asp#FCDU)

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data, as of end-2019
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 52,995 100% Total Outward 9,970 100%
Japan 5,690 30% Singapore 5,033 50%
Netherlands 12,707 24% India 1,499 15%
United States 6,940 13% China 1,064 11%
Hong Kong 4,210 8% Netherlands 719 7%
Canada 2,398 5% United States 474 5%
“0” reflects amounts rounded to +/- USD 500,000.

The Philippine Central Bank does not publish or post inward and outward FDI stock broken down by country.  Total stock figures are reported under the “International Investment Position” data that the Central Bank publishes and submits to the International Monetary Fund’s Dissemination Standards Bulletin Board (DSBB).  As of the third quarter of 2020, inward direct investment (i.e. liabilities) is USD 95 billion, while outward direct investment (i.e., assets) is USD 61 billion.

Table 4: Sources of Portfolio Investment
Portfolio Investment Assets, as of end-2019
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 19,798 100% All Countries 2,242 100% All Countries 17,556 100%
United States 7,522 38% United States 581 26% United States 6,941 40%
Indonesia 3,169 16% Luxembourg 572 26% Indonesia 3,168 18%
Hong Kong 882 4% Ireland 527 24% Cayman Islands 807 5%
Cayman Islands 818 4% Hong Kong 338 15% Hong Kong 544 3%
Luxembourg 575 3% British Virgin Islands 68 3% China 467 3%

The Philippine Central Bank disaggregates data into equity and debt securities but does not publish or post the stock of portfolio investments assets broken down by country.  Total foreign portfolio investment stock figures are reported under the “International Investment Position” data that Central Bank publishes and submits to the International Monetary Fund’s Dissemination Standards Bulletin Board (DSBB).  As of third quarter 2020, outward portfolio investment (i.e., assets) was USD 30.9 billion, of which USD 3.9 billion was in equity investments and USD 27 billion was in debt securities.

Romania

Executive Summary

Romania welcomes all forms of foreign investment. The government provides national treatment for foreign investors and does not differentiate treatment due to source of capital. Romania’s strategic location, membership in the European Union, relatively well-educated workforce, competitive wages, and abundant natural resources make it a desirable location for firms seeking to access European, Central Asian, and Near East markets. U.S. investors have found opportunities in the information technology, automotive, telecommunications, energy, services, manufacturing, consumer products, insurance, and banking sectors.

The investment climate in Romania remains a mixed picture, and potential investors should undertake due diligence when considering any investment. The European Commission’s 2020 European Semester Country Report for Romania points to persistent legislative instability, unpredictable decision-making, low institutional quality, and corruption as factors eroding investor confidence. The report also noted that important legislation was adopted without proper stakeholder consultation and often lacked impact assessments. Frequent reorganizations of public institutions also contribute to the significant degree of instability.

Prior government efforts to undermine prosecutors and weaken judicial independence had shaken investor confidence in anti-corruption efforts. Political rhetoric had taken an increasingly nationalist tone, with some political leaders occasionally accusing foreign companies of not paying taxes, taking advantage of workers and resources, and sponsoring anti-government protests. President Iohannis was reelected in November 2019 with a pro-business stance. The December 2020 parliamentary elections resulted in a pro-investment, center right coalition government with a parliamentary majority, providing increased political stability. The coalition has repeatedly voiced its support for rule of law and reform.

The government’s sale of minority stakes in state-owned enterprises (SOEs) in key sectors, such as energy generation and exploitation, has stalled since 2014. A bill passed in 2020 instituted a two-year ban on the sale of state assets and state equity in SOEs. The Government of Romania (GOR) is in the process of drafting legislation that will terminate the ban. Successive governments have weakened enforcement of the state-owned enterprise (SOE) corporate governance code by resorting to appointments of short-term interim managers to bypass the leadership requirements outlined in the corporate governance code. Instability in the management of SOEs hinders the ability to plan and invest.

Consultations with stakeholders and impact assessments are required before enactment of legislation. However, this requirement has been unevenly followed, and public entities generally do not conduct impact assessments. Frequent government changes have led to rapidly changing policies and priorities that serve to complicate the business climate. Romania has made significant strides to combat corruption, but it remains an ongoing challenge.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 69 of 175 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 55 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 46 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country historical stock positions) 2019 $3.46B https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2019 $12,630 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Romania actively seeks foreign direct investment and offers a market of around 19.5 million consumers, a relatively well-educated workforce at competitive wages, a strategic location, and abundant natural resources. To date, favored areas for U.S. investment include IT and telecommunications, energy, services, manufacturing – especially in the automotive sector, consumer products, insurance, and banking. InvestRomania, part of the Ministry of Economy, is the government’s lead agency for promoting and facilitating foreign investment in Romania. InvestRomania offers assistance and advisory services free of charge to foreign investors and international companies for project implementation and opening new offices or manufacturing facilities.

Romania’s accession to the European Union (EU) on January 1, 2007 helped solidify institutional reform. However, legislative and regulatory unpredictability, lack of regulatory impact assessments, and low institutional capacity continue to negatively impact the investment climate. As in any foreign country, prospective U.S. investors should exercise careful due diligence, including consultation with competent legal counsel, when considering an investment in Romania. Governments in Romania have repeatedly allowed political interests or budgetary imperatives to supersede accepted business practices in ways harmful to investor interests.

The energy sector has suffered from unanticipated changes. In 2018, offshore natural gas companies benefited from a streamlined permitting process but were hit with a windfall profit tax that previously applied only to onshore gas production. Additionally, in February 2018, legislation changed the reference price for natural gas royalties from the Romanian market price to the Vienna Central European Gas Hub (CEGH) price, resulting in a significant increase in royalties. The GOR liberalized the natural gas market on July 1, 2020, and the electricity market as of January 1, 2021, for both household and non-household consumers.

In March 2021, the Parliament passed a bill reinforcing the government’s authority to vet the transfer of a petroleum agreement to a company from a non-EU country to determine if it is deemed to pose a threat to Romania’s national security. Transfer of a petroleum agreement must be approved through a government decision (GD).

Investments involving public authorities can be more complicated than investments or joint ventures with private Romanian companies. Large deals involving the government – particularly public-private partnerships and privatizations of key state-owned enterprises (SOE) – can be stymied by vested political and economic interests or bogged down due to a lack of coordination between government ministries.

In 2020, Romania capped the claw back tax in an effort to ease the burden on pharmaceutical companies. Designed to recoup drug reimbursement costs that exceeded budgeted amounts, the tax had increased up to 27.65 percent in 2019. In May 2020, President Klaus Iohannis signed off on a revised and differentiated claw back tax, capped at 25 percent for innovative medicines, 20 percent for generic medicines, and 15 percent for locally produced medicines. The claw back tax is one factor that continues to negatively impact the availability of drugs in the Romanian marketplace.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities are free to establish and own business enterprises, and to engage in all forms of remunerative activity. Romanian legislation and regulation provide national treatment for foreign investors, guarantee free access to domestic markets, and allow foreign investors to participate in privatizations. There is no limit on foreign participation in commercial enterprises. Foreign investors are entitled to establish wholly foreign-owned enterprises in Romania (although joint ventures are more typical), and to convert and repatriate 100 percent of after-tax profits.

Romania has established legal parameters to resolve contract disputes expeditiously. Mergers and acquisitions are subject to review by the Competition Council. According to the Competition Law, the Competition Council notifies Romania’s Supreme Defense Council regarding any merger or acquisition of stocks or assets which could impact national security. The Supreme Defense Council then reviews these referred mergers and acquisitions for potential threats to national security. To date, the Supreme Defense Council has not blocked any merger or acquisition. The Romanian capital account was fully liberalized in 2006, prior to gaining EU membership in 2007. Foreign firms are allowed to participate in the management and administration of investments, as well as to assign their contractual obligations and rights to other Romanian or foreign investors.

Other Investment Policy Reviews

Romania has not undergone any third-party investment policy reviews through multilateral organizations in over ten years. The Heritage Foundation’s 2021 Economic Freedom Report saw Romania’s score fall slightly due to an increase in the country’s fiscal deficit. Romania scored best in the Tax Burden category due to its low income and corporate tax rates. Romania’s economy had been rising through the ranks of the “moderately free” – a classification given by the report – over the past decade and will need to improve the following to continue its ascent: Improving the judicial system, strengthening anti-corruption efforts, removing rigidities in the labor market, and further modernizing the financial sector.

According to the World Bank, economic growth rates have increased, but the benefits have not been felt by all Romanians. Progress on implementing reforms and improving the business environment has been uneven. The World Bank’s 2020 Doing Business Report and Doing Business in the European Union Report indicate that Romania ranks below the EU average in the ease of starting a business.

Business Facilitation

The National Trade Registry has an online service available in Romanian at https://portal.onrc.ro/ONRCPortalWeb/ONRCPortal.portal  . Romania has a foreign trade department and an investment promotion department within the Ministry of Economy. InvestRomania offers assistance and advisory services free of charge to foreign investors and international companies for project implementation and opening new offices or manufacturing facilities. More information is available at http://www.investromania.gov.ro/web/ .

According to the World Bank, it takes six procedures and 20 days to establish a foreign-owned limited liability company (LLC) in Romania, compared to the regional average for Europe and Central Asia of 5.2 procedures and 11.9 days. In addition to the procedures required of a domestic company, a foreign parent company establishing a subsidiary in Romania must authenticate and translate its documents. Foreign companies do not need to seek investment approval. A Trade Registry judge must hold a public hearing on the company’s application for registration within five days of submission of the required documentation. Registration documents can be submitted and the status of the registration request monitored online.

Companies in Romania are free to open and maintain bank accounts in any foreign currency, although, in practice, Romanian banks offer services only in Romanian lei (RON) and certain hard currencies (euros and U.S. dollars). The minimum capital requirement for domestic and foreign LLCs is RON 200 (USD 49). Areas for improvement include making all registration documents available to download online in English. Currently, only a portion are available online, and they are only in Romanian.

Romania defines microenterprises as having less than nine employees, small enterprises as having less than 50 employees, and medium-sized enterprises as having less than 250 employees. Regardless of ownership, microenterprises and SMEs enjoy “de minimis” and other state aid schemes from EU funds or from the state budget. Business facilitation mechanisms provide for equitable treatment of women in the economy.

Outward Investment

There are no restrictions or incentives on outward investment.

3. Legal Regime

Transparency of the Regulatory System

Romanian law requires consultations with stakeholders, including the private sector, and a 30-day comment period on legislation or regulation affecting the business environment (the “Sunshine Law”). Some draft pieces of legislation pending with the government are available in Romanian at  http://www.sgg.ro/acte-normative/ . Proposed items for cabinet meetings are not always publicized in advance or in full. As a general rule, the agenda of cabinet meetings should include links to the draft pieces of legislation (government decisions, ordinances, emergency ordinances, or memoranda) slated for government decision, but this is not always the case. Legislation pending with the parliament is available at http://www.cdep.ro/pls/proiecte/upl_pck.home  for the Chamber of Deputies and at https://www.senat.ro/legis/lista.aspx   for the Senate. The Chamber of Deputies is the decision-making body for economic legislation.

Foreign investors point to the excessive time required to secure necessary zoning permits, environmental approvals, property titles, licenses, and utility hook-ups.

The Sunshine Law (Law 52/2003 on Transparency in Public Administration) requires public authorities to allow the public to comment on draft legislation and sets the general timeframe for stakeholders to provide input; however, comments received are not published. The Sunshine Law’s public consultation timelines do not have enforceable penalties or sanctions, and thus public authorities can bypass its provisions without harm. In some cases, public authorities have set deadlines much shorter than the standards set forth in the law or passed a piece of legislation before the deadline for public input expired.

International Regulatory Considerations

As an EU member state since 2007, Romanian legislation is largely driven by the EU acquis, the body of EU legislation. European Commission (EC) regulations are directly applicable, while implementation of directives at the national level is done through the national legislation. Romania’s regulatory system incorporates European standards. Romania has been a World Trade Organization (WTO) member since January 1995 and a member of the General Agreement on Tariffs and Trade (GATT) since November 1971. Technical regulation notifications submitted by the EU are valid for all Member States. The EU signed the Trade Facilitation Agreement (TFA) in October 2015. Romania has implemented all TFA requirements.

Legal System and Judicial Independence

Romania recognizes property and contractual rights, but enforcement through the judicial process can be lengthy, costly, and difficult. Foreign companies engaged in trade or investment in Romania often express concern about the Romanian courts’ lack of expertise in commercial issues. There are no specialized commercial courts, but there are specialized civil courts. Judges generally have limited experience in the functioning of a market economy, international business methods, intellectual property rights, or the application of Romanian commercial and competition laws. As stipulated in the Constitution, the judicial system is independent from the executive branch and generally considered procedurally competent, fair, and reliable. Affected parties can challenge regulations and enforcement actions in court. Such challenges are adjudicated in the national court system.

Inconsistency and a lack of predictability in the jurisprudence of the courts or in the interpretation of the laws remains a major concern for foreign and domestic investors and for wider society. Even when court judgments are favorable, enforcement of judgments is inconsistent and can lead to lengthy appeals. Failure to implement court orders or cases where the public administration unjustifiably challenges court decisions constitute obstacles to the binding nature of court decisions.

Mediation as a tool to resolve disputes is gradually becoming more common in Romania, and a certifying body, the Mediation Council, sets standards and practices. The professional association, the Union of Mediation Centers in Romania, is the umbrella organization for mediators throughout the county. Court-sanctioned and private mediation is available at recognized mediation centers in every county seat.

There is no legal mechanism for court-ordered mediation in Romania, but judges can encourage litigants to use mediation to resolve their cases. If litigants opt for mediation, they must present their proposed resolution to a judge upon completion of the mediation process. The judge must then approve the agreement.

Laws and Regulations on Foreign Direct Investment

Since Romania became a member of the European Union in 2007, the country has worked assiduously to create an EU-compatible legal framework consistent with a market economy and investment promotion. At the same time, implementation of these laws and regulations frequently lags or is inconsistent, and lack of legislative predictability undermines Romania’s appeal as an investment destination.

Romania’s legal framework for foreign investment is encompassed within a substantial body of law largely enacted in the late 1990s. It is subject to frequent revision. Major changes to the Civil Code were enacted in October 2011, including replacing the Commercial Code, consolidating provisions applicable to companies and contracts into a single piece of legislation, and harmonizing Romanian legislation with international practices. The Civil Procedure Code, which provides detailed procedural guidance for implementing the new Civil Code, came into force in February 2013. Fiscal legislation is revised frequently, often without scientific or data-driven assessment of the impact the changes may have on the economy.

Given the state of flux of legal developments, investors are strongly encouraged to engage local counsel to navigate the various laws, decrees, and regulations, as several pieces of investor-relevant legislation have been challenged in both local courts and the Constitutional Court. There have been few hostile takeover attempts reported in Romania. Romanian law has not focused on limiting potential mergers or acquisitions. There are no Romanian laws prohibiting or restricting private firms’ free association with foreign investors.

Competition and Antitrust Laws

Romania has extensively revised its competition legislation, bringing it closer to the EU Acquis Communautaire and best corporate practices. A new law on unfair competition came into effect in August 2014. Companies with a market share below 40 percent are no longer considered to have a dominant market position, thus avoiding a full investigation by the Romanian Competition Council (RCC), saving considerable time and money for all parties involved. Resale price maintenance and market and client sharing are still prohibited, regardless of the size of either party’s market share. The authorization fee for mergers or takeovers ranges between EUR 10,000 (USD 11,944) and EUR 50,000 (USD 59,720). The Fiscal Procedure Code requires companies that challenge an RCC ruling to front a deposit while awaiting a court decision on the merits of the complaint.

Romania’s Public Procurement Directives outline general procurements of goods and equipment, utilities procurement (“sectorial procurement”), works and services concessions, and remedies and appeals. An extensive body of secondary and tertiary legislation accompanies the four 2016 laws and has been subject to repeated revisions. Separate legislation governs defense and security procurements. In a positive move, this body of legislation moved away from the previous approach of using lowest price as the only public procurement selection criterion. Under the laws, an authority can use price, cost, quality-price ratio, or quality-cost ratio. The new laws also allow bidders to provide a simple form (the European Single Procurement Document) to participate in the award procedures. Only the winner must later submit full documentation.

The public procurement laws stipulate that challenges regarding procedure or an award can be filed with the National Complaint Council (NCC) or the courts. Disputes regarding execution, amendment, or termination of public procurement contracts can be subject to arbitration. The new laws also stipulate that a bidder has to notify the contracting authority before challenging either the award or procedure. Not fulfilling this notification requirement results in the NCC or court rejecting the challenge.

The EC’s 2020 European Semester Country Report for Romania notes that despite improved implementation, public procurement remains inefficient. According to the report, 97 percent of businesses think corruption is widespread in Romania, and 87 percent say it is widespread in public procurement managed by national authorities.

Expropriation and Compensation

The law on direct investment includes a guarantee against nationalization and expropriation or other equivalent actions. The law allows investors to select the court or arbitration body of their choice to settle disputes. Several cases involving investment property nationalized during the Communist era remain unresolved. In doing due diligence, prospective investors should ensure that a thorough title search is done to ensure there are no pending restitution claims against the land or assets.

Dispute Settlement

ICSID Convention and New York Convention

Romania is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Romania is also a party to the European Convention on International Commercial Arbitration concluded in Geneva in 1961 and is a member of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID). Romania’s 1975 Decree 62 provides for legal enforcement of awards under the ICSID Convention.

Investor-State Dispute Settlement

Romania is a signatory to the New York Convention, the European Convention on International Commercial Arbitration (Geneva), and the Settlement of Investment Disputes between States and Nationals of Other States (ICSID). There have been 17 ICSID cases in total against Romania. Three of them involved U.S. investors. The arbitral tribunal ruled in favor of Romania in two of them. Eight investor-state arbitration cases against Romania are currently pending with the International Center for Settlement of Investment Disputes (ICSID). Local courts recognize and enforce foreign arbitral awards against the government. There is no history of extrajudicial action against investors.

International Commercial Arbitration and Foreign Courts

Romania increasingly recognizes the importance of investor-state dispute settlement and has provided assurances that the rule of law will be enforced. Many agreements involving international companies and Romanian counterparts provide for the resolution of disputes through third-party arbitration. Local courts recognize and enforce foreign arbitral awards and judgments of foreign courts. There are no statistics on the percentage of cases in which Romanian courts ruled against state-owned enterprises (SOEs).

Romanian law and practice recognize applications to other internationally known arbitration institutions, such as the International Chamber of Commerce (ICC) Paris Court of Arbitration and the United Nations Commission on International Trade Law (UNCITRAL). Romania has an International Commerce Arbitration Court administered by the Chamber of Commerce and Industry of Romania. Additionally, in November 2016, the American Chamber of Commerce in Romania (AmCham Romania) established the Bucharest International Arbitration Court (BIAC). This new arbitration center focuses on business and commercial disputes involving foreign investors and multinationals active in Romania.

According to the World Bank 2020 Doing Business Report, it takes on average 512 days to enforce a contract, from the moment the plaintiff files the lawsuit until actual payment. Associated costs can total around 27 percent of the claim. Arbitration awards are enforceable through Romanian courts under circumstances similar to those in other Western countries, although legal proceedings can be protracted.

Bankruptcy Regulations

Romania’s bankruptcy law contains provisions for liquidation and reorganization that are generally consistent with Western legal standards. These laws usually emphasize enterprise restructuring and job preservation. To mitigate the time and financial cost of bankruptcies, Romanian legislation provides for administrative liquidation as an alternative to bankruptcy. However, investors and creditors have complained that liquidators sometimes lack the incentive to expedite liquidation proceedings and that, in some cases, their decisions have served vested outside interests. Both state-owned and private companies tend to opt for judicial reorganization to avoid bankruptcy.

In December 2009, the debt settlement mechanism Company Voluntary Agreements (CVAs) was introduced as a means for creditors and debtors to establish partial debt service schedules without resorting to bankruptcy proceedings. The global economic crisis did, however, prompt Romania to shorten insolvency proceedings in 2011.

According to the World Bank’s Doing Business Report, resolving insolvency in Romania takes 3.3 years on average, compared to 2.3 years in Europe and Central Asia, and costs 10.5 percent of the debtor’s estate, with the most likely outcome being a piecemeal sale of the company. The average recovery rate is 34.4 cents on the dollar. Globally, Romania stands at 56 in the ranking of 190 economies on the ease of resolving insolvency.

5. Protection of Property Rights

Real Property

The Romanian Constitution, adopted in December 1991 and revised in 2003, guarantees the right to ownership of private property. Mineral and airspace rights, and similar rights, are excluded from private ownership. Under the revised Constitution, foreign citizens can gain land ownership through inheritance. With EU accession, citizens of EU member states can own land in Romania, subject to reciprocity in their home country.

Companies owning foreign capital may acquire land or property needed to fulfill or develop company goals. If the company is dissolved or liquidated, the land must be sold within one year of closure and may only be sold to a buyer(s) with the legal right to purchase such assets. Investors can purchase shares in agricultural companies that lease land in the public domain from the State Land Agency, however, legislation passed in Fall 2020 imposed additional restrictions and limitations on the purchase of agricultural land by foreign investors.

The 2006 legislation that regulates the establishment of specialized mortgage banks also makes possible a secondary mortgage market by regulating mortgage bond issuance mechanisms. Commercial banks, specialized mortgage banks, and non-bank mortgage credit institutions offer mortgage loans. Romania’s mortgage market is now almost entirely private. The state-owned national savings bank (CEC Bank) also offers mortgage loans. Since 2000, the Electronic Archives of Security Interests in Movable Property (AEGRM) has overseen the filing of transactions regarding mortgages, assimilated operations, or other collateral provided by the law as well as their advertising. Most urban land has clear title, and the National Cadaster Agency (NCA) is slowly working to identify property owners and register land titles. According to the National Cadaster Plan, 2023 is the deadline for full registration of lands and buildings in the registry. According to NCA data, 1.9 million hectares of land and 37.7 percent of the estimated real estate assets (buildings) were registered in the cadaster registry as of March 2020.

Romania has made marginal improvement in implementing digital records of real estate assets, including land. The 2020 World Bank Doing Business Report ranks Romania 46 for the ease of registering property. The cadaster property registry is far from complete, and the lack of accurate and complete information for land ownership continues to be a challenge for private investors ‎and SOEs alike.

Intellectual Property Rights

Romania remains on the Watch List of the U.S. Trade Representative’s Special 301 Report in 2021, it reportedly hosts an infringing website included in the 2020 Notorious Markets List. The United States continues to welcome the participation of the Romanian government on intellectual property rights (IPR)-related trainings and in international enforcement operations, as well as the continued working-level cooperation between stakeholders and law enforcement authorities. Internet piracy remains the most serious type of IPR infringement, and the technical sophistication of online piracy continues to increase. The shift of counterfeit goods trade from physical marketplaces to online networks, or social media marketplaces, has created new challengers for IPR enforcement. Low penalties for IPR crimes and the treatment of IPR violations without “social harm” often impede effective enforcement and prosecution. To increase the odds of IPR cases being brought to trial, law enforcement authorities have attempted to bundle charges of fraud, tax evasion, and organized crime activities with IPR violations, but frequently authorities forego IPR enforcement and focus on tax evasion. The government is taking additional steps to improve IPR enforcement coordination among public agencies and strengthen cooperation with private sector stakeholders.

Romania is a signatory to international conventions concerning IPR, including the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), and has enacted legislation protecting patents, trademarks, and copyrights. Romania passed broad IPR protection enforcement provisions as required by the WTO, yet gaps remain in enforcement. Romania has signed the Internet Convention to protect online authorship. In January 2020, Romania passed a law to enhance the transparency of collective rights management of copyrights, and in July 2020 passed legislation to implement the EU Trademark Directive. The new legislation introduced a series of changes, including removal of requirements for graphic representation of trademarks and allowing for registration of sound marks, multimedia marks, and holograms. To increase transparency, the law included provisions to clarify dates of completed trademark registration and their entry into force.

Romania is both a transit and destination country for counterfeit goods. China is the top country of origin for counterfeit goods. Customs officers can seize counterfeit products ex-officio and destroy them upon inspection and declaration by the rights holder. The government is responsible for paying for the storage and destruction of the counterfeit goods. The National Customs Directorate reported the seizure of 1.65 million pieces of counterfeit goods worth USD 9.35 million in 2020, compared to 6.11 million pieces worth USD 6.84 million in 2019. Customs authorities closely coordinate their efforts with the European Commission’s Anti-Fraud Office (OLAF), the European Observatory on Infringements of Intellectual Property Rights, and other stakeholders to increase trans-border cooperation in line with the EU’s IPR action plan.

Patents

Romania is a party to the World Intellectual Property Organization (WIPO) Patent Cooperation Treaty and the Paris Convention. Romanian patent legislation generally meets international standards with foreign investors accorded equal treatment with Romanian citizens under the law. Patents are valid for 20 years. Romania has been party to the European Patent Convention since 2002. Patent applications can be filed online. Since 2014, Romania has also enforced a distinct law regulating employee inventions. The right to file a patent belongs to the employer for up to two years following the departure of the employee.

Trademarks

Romania is party to the Madrid Agreement, the Singapore Treaty, and the Trademark Law Treaty. In 1998, Romania passed a trademark and geographical indications law, which was amended in 2010 to make it fully consistent with equivalent EU legislation at that time. The EU has since adopted a new Trademark Directive (EU Directive 2436/2015) that was to be implemented by all EU member states by January 2019. Law 84/1998 transposing the EU Directive 2015/2436 of the European Parliament and of the Council relating to Trademarks and Geographic Indications was approved by Parliament and came in force in July 2020.

Copyrights

Romania is a member of the Berne Convention, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty. The Romanian Copyright Office (ORDA) was established in 1996 and promotes and monitors copyright legislation. The General Prosecutor’s Office (GPO) provides national coordination of IPR enforcement. Many magistrates still tend to view copyright piracy as a “victimless crime” and this attitude has resulted in weak enforcement of copyright law.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

7. State-Owned Enterprises

According to the World Bank, there are approximately 1,200 state-owned enterprises (SOEs) in Romania, of which around 300 are majority-owned by the Romanian government.  There is no published list of all SOEs since some are subordinated to the national government and some to local authorities. SOEs are governed by executive boards under the supervision of administration boards. Implementation of the Corporate Governance Code (Law 111/2016) remains incomplete and uneven.

SOEs are required by law to publish an annual report. Majority state-owned companies that are publicly listed, as well as state-owned banks, are required to be independently audited. Many SOEs are currently managed by interim boards, often with politically appointed members that lack sector and business expertise. The EC’s 2020 European Semester Country Report for Romania noted that the Corporate Governance Law is still only loosely applied. The appointment of interim boards has become standard practice. Administrative offences carry symbolic penalties, which do not change behavior. The operational and financial results of most state-owned enterprises deteriorated in 2019 and 2020.

Privatization Program

Privatization has stalled since 2014. The government has repeatedly postponed IPOs for hydropower producer Hidroelectrica, though its sale is currently slated for end-2021 pending repeal of the ban on the sales of state equities

As a member of the EU, Romania is required to notify the EC’s General Directorate for Competition regarding significant privatizations and related state aid. Prospective investors should seek assistance from legal counsel to ensure compliance with relevant legislation. The state aid schemes aim to enhance regional development and job creation through financial support for new jobs or investment in new manufacturing assets. The Ministry of Finance issues public calls for applications under the schemes. The government’s failure to consult with, and then formally notify, the EC properly has resulted in delays and complications in some previous privatizations.

Private enterprises compete with public enterprises under the same terms and conditions with respect to market access and credit. Energy production, transportation, and mining are majority state-owned sectors, and the government retains majority equity in electricity and natural gas transmission. The Ministry of Energy has authority over energy generation assets and natural gas production. According to the EU’s Third Energy Package directives, the same entity cannot control generation, production and/or supply activities, and at the same time control or exercise any right over a transmission system operator (TSO). Consequently, natural gas carrier Transgaz and national electricity carrier Transelectrica are under the Government’s General Secretariat. The Ministry of Infrastructure has authority over the entities in the transportation sector, including rail carrier CFR Marfa, national air carrier Tarom, and the Constanta Port Administration. There are currently no plans to privatize companies in the transportation sector.

Romanian law allows for the inclusion of confidentiality clauses in privatization and public-private partnership contracts to protect business proprietary and other information. However, in certain high-profile privatizations, parliament has compelled the public disclosure of such provisions.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) (USD) 2020 $250B 2020 $257B www.worldbank.org/en/country  https://insse.ro/cms/ 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country (stock positions, USD) 2020 $5.87B 2019 $3.46B BEA data available at https://apps.bea.gov/international/factsheet/  National Office of the Trade Register National Bank of Romania
Host country’s FDI in the United States (stock positions, USD) N/A N/A 2019 $38M BEA data available at ttps://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data 
Total inbound stock of FDI as %host GDP N/A N/A 2019 2.5% UNCTAD data available at https://stats.unctad.org/handbook/EconomicTrends/Fdi.html 

* Source for Host Country Data:

National Statistics Institute: https://insse.ro/cms/ 

National Bank of Romania: https://www.bnr.ro/

National Office of the Trade Register: https://www.onrc.ro/ 

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 99,050 100% Total Outward N/A
Netherlands 23,012 23.2% Country #1 N/A
Austria 12,461 12.6% Country #2 N/A
Germany 12,219 12.3% Country #3 N/A
Italy 8,146 8.2% Country #4 N/A
Cyprus* 6,161 6.2% Country #5 N/A
“0” reflects amounts rounded to +/- USD 500,000.*The National Bank of Romania estimates the United States to be #5 when methodology is altered to account for investments made by foreign subsidiaries of origin country companies.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (US Dollars, Millions)
Total Equity Securities Total Debt Securities
All Countries 6,137 100% All Countries 1,839 100% All Countries 4,298 100%
Luxembourg 1,346 22% Luxembourg 851 46% International Organizations 859 20%
International Organizations 859 14% Austria 198 11% U.S. 666 15%
U.S. 769 13% Ireland 165 9% Luxembourg 495 12%
Austria 674 11% Germany 141 8% Austria 476 11%
Netherlands 397 6% Netherlands 129 7% France 286 7%

Singapore

Executive Summary

Singapore maintains an open, heavily trade-dependent economy. The economy is supported through unprecedented government spending and strong supply chains in key sectors, despite the COVID-19 pandemic. The government’s predominantly open investment policies support a free market economy while actively managing and sustaining Singapore’s economic development. U.S. companies regularly cite transparency, business-friendly laws, tax structure, customs facilitation, intellectual property protection, and well-developed infrastructure as attractive investment climate features. The World Bank’s Doing Business 2020 report ranked Singapore second overall in “ease of doing business,” while the World Economic Forum ranked Singapore as the most competitive economy globally. Singapore actively enforces its robust anti-corruption laws and typically ranks as the least corrupt country in Asia. In addition, Transparency International’s 2020 Corruption Perception Index placed Singapore as the third-least corrupt nation globally. The U.S.-Singapore Free Trade Agreement (USSFTA), which came into force in 2004, expanded U.S. market access in goods, services, investment, and government procurement, enhanced intellectual property protection, and provided for cooperation in promoting labor rights and environmental protections.

Singapore has a diversified economy that attracts substantial foreign investment in manufacturing (petrochemical, electronics, pharmaceuticals, machinery, and equipment) and services (financial, trade, and business). The government actively promotes the country as a research and development (R&D) and innovation center for businesses by offering tax incentives, research grants, and partnership opportunities with domestic research agencies. U.S. direct investment in Singapore in 2019 totaled USD 288 billion, primarily in non-bank holding companies, manufacturing, finance, and insurance. Singapore received more than double the U.S. FDI invested in any other Asian nation. The investment outlook was positive due to Singapore’s proximity to Southeast Asia’s developing economies. Singapore remains a regional hub for thousands of multinational companies and continues to maintain its reputation as a world leader in dispute resolution, financing, and project facilitation for regional infrastructure development. In 2020, U.S. companies pledged USD 6.9 billion in future investments (over half of all-investment commitments) in the country’s manufacturing and services sectors.

Singapore is poised to attract future foreign investments in digital innovation, pharmaceutical manufacturing, sustainable development, and cybersecurity. The Government of Singapore (hereafter, “the government”) is investing heavily in automation, artificial intelligence, and integrated systems under its Smart Nation banner and seeks to establish itself as a regional hub for these technologies. Singapore is also a well-established hub for medical research and device manufacturing.

Singapore relies heavily on foreign workers who make up more than 20 percent of the workforce. The COVID-19 pandemic was initially concentrated in dormitories for low-wage foreign workers in the construction and marine industries, which resulted in strict quarantine measures that brought the construction sector to a near standstill. The government tightened foreign labor policies in 2020 to encourage firms to improve productivity and employ more Singaporean workers, and lowered most companies’ quotas for mid- and low-skilled foreign workers. Cuts, which primarily target the service sector and foreign workers’ dependents, were taken despite industry concerns about skills gaps. During the COVID-19 pandemic, the government has introduced more programs to partially subsidize wages and the cost to firms of recruiting, hiring, and training local workers

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 3 of 178 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 2 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2020 8 of 131 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2019 287,951 https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2019 59,590 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Singapore maintains a heavily trade-dependent economy characterized by an open investment regime, with some licensing restrictions in the financial services, professional services, and media sectors. The government was committed to maintaining a free market, but also actively plans Singapore’s economic development, including through a network of state wholly-owned and majority-owned enterprises (SOEs). As of March 31, 2021, the top three Singapore-listed SOEs accounted for 12.3 percent of total capitalization of the Singapore Exchange (SGX). Some observers have criticized the dominant role of SOEs in the domestic economy, arguing that they have displaced or suppressed private sector entrepreneurship and investment.

Singapore’s legal framework and public policies are generally favorable toward foreign investors. Foreign investors are not required to enter joint ventures or cede management control to local interests, and local and foreign investors are subject to the same basic laws. Apart from regulatory requirements in some sectors (See also: Limits on National Treatment and Other Restrictions), eligibility for various incentive schemes depends on investment proposals meeting the criteria set by relevant government agencies. Singapore places no restrictions on reinvestment or repatriation of earnings or capital. The judicial system, which includes international arbitration and mediation centers and a commercial court, upholds the sanctity of contracts, and decisions are generally considered to be transparent and effectively enforced.

The Economic Development Board (EDB) is the lead promotion agency that facilitates foreign investment into Singapore ( https:www.edb.gov.sg ). EDB undertakes investment promotion and industry development and works with foreign and local businesses by providing information and facilitating introductions and access to government incentives for local and international investments. The government maintains close engagement with investors through the EDB, which provides feedback to other government agencies to ensure that infrastructure and public services remain efficient and cost-competitive. The EDB maintains 18 international offices, including Chicago, Houston, New York, San Francisco, and Washington D.C.

Exceptions to Singapore’s general openness to foreign investment exist in sectors considered critical to national security, including telecommunications, broadcasting, domestic news media, financial services, legal and accounting services, ports, airports, and property ownership. Under Singaporean law, articles of incorporation may include shareholding limits that restrict ownership in such entities by foreign persons.

Telecommunications 

Since 2000, the Singapore telecommunications market has been fully liberalized. This move has allowed foreign and domestic companies seeking to provide facilities-based (e.g., fixed line or mobile networks) or services-based (e.g., local and international calls and data services over leased networks) telecommunications services to apply for licenses to operate and deploy telecommunication systems and services. Singapore Telecommunications (Singtel) – majority owned by Temasek, a state-owned investment company with the Minister for Finance as its sole shareholder – faces competition in all market segments. However, its main competitors, M1 and StarHub, are also SOEs. In April 2019, Australian company TPG Telecom began rolling out telecommunications services.  Approximately 30 mobile virtual network operator services (MVNOs) have also entered the market. The four Singapore telecommunications companies compete primarily on MVNO partnerships and voice and data plans.

As of April 2021, Singapore has 76 facilities-based operators offering telecommunications services. Since 2007, Singtel has been exempted from dominant licensee obligations for the residential and commercial portions of the retail international telephone services. Singtel is also exempted from dominant licensee obligations for wholesale international telephone services, international managed data, international intellectual property transit, leased satellite bandwidth (including VSAT, DVB-IP, satellite TV Downlink, and Satellite IPLC), terrestrial international private leased circuit, and backhaul services. The Infocomm Media Development Authority (IMDA) granted Singtel’s exemption after assessing the market for these services had effective competition. IMDA operates as both the regulatory agency and the investment promotion agency for the country’s telecommunications sector. IMDA conducts public consultations on major policy reviews and provides decisions on policy changes to relevant companies.

To facilitate the 5th generation mobile network (5G) technology and service trials, IMDA waived frequency fees for companies interested in conducting 5G trials for equipment testing, research, and assessment of commercial potential. In April 2020, IMDA granted rights to build nationwide 5G networks to Singtel and a joint venture between StarHub and M1. IMDA announced a goal of full 5G coverage by the end of 2025.  These three companies, along with TPG Telecom, are also now permitted to launch smaller, specialized 5G networks to support specialized applications, such as manufacturing and port operations.  Singapore’s government did not hold a traditional spectrum auction, instead charging a moderate, flat fee to operate the networks and evaluating proposals from the MVNOs based on their ability to provide effective coverage, meet regulatory requirements, invest significant financial resources, and address cybersecurity and network resilience concerns. The announcement emphasized the importance of the winning MVNOs using multiple vendors, to ensure security and resilience.  Singapore has committed to being one of the first countries to make 5G services broadly available, and its tightly managed 5G-rollout process continues apace, despite COVID-19.  The government views this as a necessity for a country that prides itself on innovation, even as these private firms worry that the commercial potential does not yet justify the extensive upfront investment necessary to develop new networks.

Media  

The local free-to-air broadcasting, cable, and newspaper sectors are effectively closed to foreign firms. Section 44 of the Broadcasting Act restricts foreign equity ownership of companies broadcasting in Singapore to 49 percent or less, although the act does allow for exceptions. Individuals cannot hold shares that would make up more than five percent of the total votes in a broadcasting company without the government’s prior approval. The Newspaper and Printing Presses Act restricts equity ownership (local or foreign) of newspaper companies to less than five percent per shareholder and requires that directors be Singapore citizens. Newspaper companies must issue two classes of shares, ordinary and management, with the latter available only to Singapore citizens or corporations approved by the government. Holders of management shares have an effective veto over selected board decisions.

Singapore regulates content across all major media outlets through IMDA. The government controls the distribution, importation, and sale of media sources and has curtailed or banned the circulation of some foreign publications. Singapore’s leaders have also brought defamation suits against foreign publishers and local government critics, which have resulted in the foreign publishers issuing apologies and paying damages. Several dozen publications remain prohibited under the Undesirable Publications Act, which restricts the import, sale, and circulation of publications that the government considers contrary to public interest. Examples include pornographic magazines, publications by banned religious groups, and publications containing extremist religious views. Following a routine review in 2015, the IMDA predecessor, Media Development Authority, lifted a ban on 240 publications, ranging from decades-old anti-colonial and communist material to adult interest content.

Singaporeans generally face few restrictions on the internet, which is readily accessible. The government, however, subjected all internet content to similar rules and standards as traditional media, as defined by the IMDA’s Internet Code of Practice. Internet service providers are required to ensure that content complies with the code. The IMDA licenses the internet service providers through which local users are required to route their internet connections. However, the IMDA has blocked various websites containing objectionable material, such as pornography and racist and religious-hatred sites. Online news websites that report regularly on Singapore and have a significant reach are individually licensed, which requires adherence to requirements to remove prohibited content within 24 hours of notification from IMDA. Some view this regulation as a way to censor online critics of the government.

In April 2019, the government introduced legislation in Parliament to counter “deliberate online falsehoods.” The legislation, called the Protection from Online Falsehoods and Manipulation Act (POFMA) entered into force on October 2, 2019, requires online platforms to publish correction notifications or remove online information that government ministers classify as factually false or misleading, and which they deem likely to threaten national security, diminish public confidence in the government, incite feelings of ill will between people, or influence an election. Non-compliance is punishable by fines and/or imprisonment and the government can use stricter measures such as disabling access to end-users in Singapore and forcing online platforms to disallow persons in question from using its services in Singapore. Opposition politicians, bloggers, and alternative news websites have been the target of the majority of POFMA cases thus far and many of them used U.S. social media platforms. Besides those individuals, U.S. social media companies were issued most POFMA correction orders and complied with them. U.S. media and social media sites continue to operate in Singapore, but a few major players have ceased running political ads after the government announced that it would impose penalties on sites or individuals that spread “misinformation,” as determined by the government.

Pay-Television 

Mediacorp TV is the only free-to-air TV broadcaster and is 100 percent owned by the government via Temasek Holdings (Temasek). Mediacorp reported that its free-to-air channels are viewed weekly by 80 percent of residents. Local pay-TV providers are StarHub and Singtel, which are both partially owned by Temasek or its subsidiaries. Local free-to-air radio broadcasters are Mediacorp Radio Singapore, which is also owned by Temasek Holdings, SPH Radio, owned by the publicly held Singapore Press Holdings, and So Drama! Entertainment, owned by the Singapore Ministry of Defense. BBC World Services is the only foreign free-to-air radio broadcaster in Singapore.

To rectify the high degree of content fragmentation in the Singapore pay-TV market and shift the focus of competition from an exclusivity-centric strategy to other aspects such as service differentiation and competitive packaging, the IMDA implemented cross-carriage measures in 2011, requiring pay-TV companies designated by IMDA to be Receiving Qualified Licensees (RQL) – currently Singtel and StarHub – to cross-carry content subject to exclusive carriage provisions. Correspondingly, Supplying Qualified Licensees (SQLs) with an exclusive contract for a channel are required to carry that content on other RQL pay-TV companies. In February 2019, the IMDA proposed to continue the current cross-carriage measures. The Motion Picture Association (MPA) has expressed concern this measure restricts copyright exclusivity. Content providers consider the measures an unnecessary interference in a competitive market that denies content holders the ability to negotiate freely in the marketplace, and an interference with their ability to manage and protect their intellectual property. More common content is now available across the different pay-TV platforms, and the operators are beginning to differentiate themselves by originating their own content, offering subscribed content online via personal and tablet computers, and delivering content via fiber networks.

Streaming services have entered the market, which MPA has found leads to a significant reduction in intellectual property infringements. StarHub and Singtel have both partnered with multiple content providers, including U.S. companies, to provide streaming content in Singapore and around the region.

Banking and Finance 

The Monetary Authority of Singapore (MAS) regulates all banking activities as provided for under the Banking Act. Singapore maintains legal distinctions between foreign and local banks and the type of license (i.e., full service, wholesale, and offshore banks) held by foreign commercial banks. As of April 2021, 30 foreign full-service licensees and 90 wholesale banks operated in Singapore. An additional 24 merchant banks are licensed to conduct corporate finance, investment banking, and other fee-based activities. Offshore and wholesale banks are not allowed to operate Singapore dollar retail banking activities. Only full banks and “Qualifying Full Banks” (QFBs) can operate Singapore dollar retail banking activities but are subject to restrictions on their number of places of business, ATMs, and ATM networks. Additional QFB licenses may be granted to a subset of full banks, which provide greater branching privileges and greater access to the retail market than other full banks. As of April 2021, there are 10 banks operating QFB licenses. China Construction Bank received the most recent QFB award in December 2020.

Following a series of public consultations conducted by MAS over a three year period, the Banking Act 2020 came into operation on February 14, 2020. The amendments include, among other things, the removal of the Domestic Banking Unit (DBU) and Asian Currency Unit (ACU) divide, consolidation of the regulatory framework of merchant banks, expansion of the grounds for revoking bank licenses and strengthening oversight of banks’ outsourcing arrangements. Newly granted digital banking licenses under foreign ownership apply only to wholesale transactions.

The government initiated a banking liberalization program in 1999 to ease restrictions on foreign banks and has supplemented this with phased-in provisions under the USSFTA, including removal of a 40 percent ceiling on foreign ownership of local banks and a 20 percent aggregate foreign shareholding limit on finance companies. The minister in charge of MAS must approve the merger or takeover of a local bank or financial holding company, as well as the acquisition of voting shares in such institutions above specific thresholds of 5, 12, or 20 percent of shareholdings.

Although Singapore’s government has lifted the formal ceilings on foreign ownership of local banks and finance companies, the approval for controllers of local banks ensures that this control rests with individuals or groups whose interests are aligned with the long-term interests of the Singapore economy and Singapore’s national interests. Of the 30 full-service licenses granted to foreign banks, three have gone to U.S. banks. U.S. financial institutions enjoy phased-in benefits under the USSFTA. Since 2006, only one U.S.-licensed full-service banks has obtained QFB status. U.S. and foreign full-service banks with QFB status can freely relocate existing branches and share ATMs among themselves. They can also provide electronic funds transfer and point-of-sale debit services and accept services related to Singapore’s compulsory pension fund. In 2007, Singapore lifted the quota on new licenses for U.S. wholesale banks.

Locally and non-locally incorporated subsidiaries of U.S. full-service banks with QFB status can apply for access to local ATM networks. However, no U.S. bank has come to a commercial agreement to gain such access. Despite liberalization, U.S. and other foreign banks in the domestic retail-banking sector still face barriers. Under the enhanced QFB program launched in 2012, MAS requires QFBs it deems systemically significant to incorporate locally. If those locally incorporated entities are deemed “significantly rooted” in Singapore, with a majority of Singaporean or permanent resident members, Singapore may grant approval for an additional 25 places of business, of which up to ten may be branches. Local retail banks do not face similar constraints on customer service locations or access to the local ATM network. As noted above, U.S. banks are not subject to quotas on service locations under the terms of the USSFTA.

Credit card holders from U.S. banks incorporated in Singapore cannot access their accounts through the local ATM networks. They are also unable to access their accounts for cash withdrawals, transfers, or bill payments at ATMs operated by banks other than those operated by their own bank or at foreign banks’ shared ATM network. Nevertheless, full-service foreign banks have made significant inroads in other retail banking areas, with substantial market share in products like credit cards and personal and housing loans.

In January 2019, MAS announced the passage of the Payment Services Bill after soliciting public feedback. The bill requires more payment services such as digital payment tokens, dealing in virtual currency, and merchant acquisition, to be licensed and regulated by MAS. In order to reduce the risk of misuse for illicit purposes, the new law also limits the amount of funds that can be held in or transferred out of a personal payment account (e.g., mobile wallets) in a year. Regulations are tailored to the type of activity preformed and addresses issues related to terrorism financing, money laundering, and cyber risks. In December 2020, MAS granted four digital bank licenses: two to Sea Limited and a Grab/Singtel consortium for full retail banking and two to Ant Group and the Greenland consortium (a China-based conglomerate).

Singapore has no trading restrictions on foreign-owned stockbrokers. There is no cap on the aggregate investment by foreigners regarding the paid-up capital of dealers that are members of the SGX. Direct registration of foreign mutual funds is allowed provided MAS approves the prospectus and the fund. The USSFTA relaxed conditions foreign asset managers must meet in order to offer products under the government-managed compulsory pension fund (Central Provident Fund Investment Scheme).

Legal Services 

The Legal Services Regulatory Authority (LSRA) under the Ministry of Law oversees the regulation, licensing, and compliance of all law practice entities and the registration of foreign lawyers in Singapore. Foreign law firms with a licensed Foreign Law Practice (FLP) may offer the full range of legal services in foreign law and international law, but cannot practice Singapore law except in the context of international commercial arbitration. U.S. and foreign attorneys are allowed to represent parties in arbitration without the need for a Singapore attorney to be present. To offer Singapore law, FLPs require either a Qualifying Foreign Law Practice (QFLP) license, a Joint Law Venture (JLV) with a Singapore Law Practice (SLP), or a Formal Law Alliance (FLA) with a SLP. The vast majority of Singapore’s 130 foreign law firms operate FLPs, while QFLPs and JLVs each number in the single digits.

The QFLP licenses allow foreign law firms to practice in permitted areas of Singapore law, which excludes constitutional and administrative law, conveyancing, criminal law, family law, succession law, and trust law. As of December 2020, there are nine QFLPs in Singapore, including five U.S. firms. In January 2019, the Ministry of Law announced the deferral to 2020 of the decision to renew the licenses of five QFLPs, which were set to expire in 2019, so the government can better assess their contribution to Singapore along with the other four firms whose licenses were also extended to 2020. Decisions on the renewal considers the firms’ quantitative and qualitative performance such as the value of work that the Singapore office will generate, the extent to which the Singapore office will function as the firm’s headquarter for the region, the firm’s contributions to Singapore, and the firm’s proposal for the new license period.

A JLV is a collaboration between a Foreign Law Practice and Singapore Law Practice, which may be constituted as a partnership or company. The director of legal services in the LSRA will consider all the relevant circumstances including the proposed structure and its overall suitability to achieve the objectives for which Joint Law Ventures are permitted to be established. There is no clear indication on the percentage of shares that each JLV partner may hold in the JLV.

Law degrees from designated U.S., British, Australian, and New Zealand universities are recognized for purposes of admission to practice law in Singapore. Under the USSFTA, Singapore recognizes law degrees from Harvard University, Columbia University, New York University, and the University of Michigan. Singapore will admit to the Singapore Bar law school graduates of those designated universities who are Singapore citizens or permanent residents, and ranked among the top 70 percent of their graduating class or have obtained lower-second class honors (under the British system).

Engineering and Architectural Services 

Engineering and architectural firms can be 100 percent foreign-owned. Engineers and architects are required to register with the Professional Engineers Board and the Board of Architects, respectively, to practice in Singapore. All applicants (both local and foreign) must have at least four years of practical experience in engineering, of which two are acquired in Singapore. Alternatively, students can attend two years of practical training in architectural works and pass written and/or oral examinations set by the respective board.

Accounting and Tax Services 

Many major international accounting firms operate in Singapore. Registration as a public accountant under the Accountants Act is required to provide public accountancy services (i.e., the audit and reporting on financial statements and other acts that are required by any written law to be done by a public accountant) in Singapore, although registration as a public accountant is not required to provide other accountancy services, such as accounting, tax, and corporate advisory work. All accounting entities that provide public accountancy services must be approved under the Accountants Act and their supply of public accountancy services in Singapore must be under the control and management of partners or directors who are public accountants ordinarily resident in Singapore. In addition, if the accounting entity firm has two partners or directors, at least one of them must be a public accountant. If the business entity has more than two accounting partners or directors, two-thirds of the partners or directors must be public accountants.

Energy 

Singapore further liberalized its gas market with the amendment of the Gas Act and implementation of a Gas Network Code in 2008, which were designed to give gas retailers and importers direct access to the onshore gas pipeline infrastructure. However, key parts of the local gas market, such as town gas retailing and gas transportation through pipelines remain controlled by incumbent Singaporean firms. Singapore has sought to grow its supply of liquefied natural gas (LNG), and BG Singapore Gas Marketing Pte Ltd (acquired by Royal Dutch Shell in February 2016) was appointed in 2008 as the first aggregator with an exclusive franchise to import LNG to be sold in its re-gasified form in Singapore. In October 2017, Shell Eastern Trading Pte Ltd and Pavilion Gase Pte Ltd were awarded import licenses to market up to 1 million tons per annum or for three years, whichever occurs first. This also marked the conclusion of the first exclusive franchise awarded to BG Singapore Gas Marketing Pte Ltd.

Beginning in November 2018 and concluding in May 2019, Singapore launched an open electricity market (OEM). Previously, Singapore Power was the only electricity retailer. As of October 2019, 40 percent of resident consumers had switched to a new electricity retailer and were saving between 20 and 30 percent on their monthly bills.  During the second half of 2020, the government significantly reduced tariffs for household consumption and encouraged consumer OEM adoption. To participate in OEM, licensed retailers must satisfy additional credit, technical, and financial requirements set by Energy Market Authority in order to sell electricity to households and small businesses. There are two types of electricity retailers: Market Participant Retailers (MPRs) and Non-Market Participant Retailers (NMPRs). MPRs have to be registered with the Energy Market Company (EMC) to purchase electricity from the National Electricity Market of Singapore (NEMS) to sell to contestable consumers. NMPRs need not register with EMC to participate in the NEMS since they will purchase electricity indirectly from the NEMS through the Market Support Services Licensee (MSSL). As of April 2020, there were 12 retailers in the market, including foreign and local entities.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and local entities may readily establish, operate, and dispose of their own enterprises in Singapore subject to certain requirements. A foreigner who wants to incorporate a company in Singapore is required to appoint a local resident director; foreigners may continue to reside outside of Singapore. Foreigners who wish to incorporate a company and be present in Singapore to manage its operations are strongly advised to seek approval from the Ministry of Manpower (MOM) before incorporation. Except for representative offices (where foreign firms maintain a local representative but do not conduct commercial transactions in Singapore) there are no restrictions on carrying out remunerative activities. As of October 2017, foreign companies may seek to transfer their place of registration and be registered as companies limited by shares in Singapore under Part XA (Transfer of Registration) of the Companies Act ( https://sso.agc.gov.sg/Act/CoA1967 ). Such transferred foreign companies are subject to the same requirements as locally incorporated companies.

All businesses in Singapore must be registered with the Accounting and Corporate Regulatory Authority (ACRA). Foreign investors can operate their businesses in one of the following forms: sole proprietorship, partnership, limited partnership, limited liability partnership, incorporated company, foreign company branch or representative office. Stricter disclosure requirements were passed in March 2017 requiring foreign company branches registered in Singapore to maintain public registers of their members. All companies incorporated in Singapore, foreign companies, and limited liability partnerships registered in Singapore are also required to maintain beneficial ownership in the form of a register of controllers (generally individuals or legal entities with more than 25 percent interest or control of the companies and foreign companies) aimed at preventing money laundering.

While there is currently no cross-sectional screening process for foreign investments, investors are required to seek approval from specific sector regulators for investments in certain firms. These sectors include energy, telecommunications, broadcasting, the domestic news media, financial services, legal services, public accounting services, ports and airports, and property ownership. Under Singapore law, Articles of Incorporation may include shareholding limits that restrict ownership in corporations by foreign persons.

Singapore does not maintain a formalized investment screening mechanism for inbound foreign investment. There are no reports of U.S. investors being especially disadvantaged or singled out relative to other foreign investors.

Other Investment Policy Reviews

Singapore underwent a trade policy review with the World Trade Organization (WTO) in July 2016, after which no major policy recommendations were raised. (https://www.wto.org/english/thewto_e/countries_e/singapore_e.htm )

The OECD and United Nations Industrial Development Organization (UNIDO) released a joint report in February 2019 on the ASEAN-OECD Investment Program. The program aims to foster dialogue and experience sharing between OECD countries and Southeast Asian economies on issues relating to the business and investment climate. The program is implemented through regional policy dialogue, country investment policy reviews, and training seminars. (http://www.oecd.org/investment/countryreviews.htm )

The OECD released a Transfer Pricing Country Profile for Singapore in June 2018. The country profiles focus on countries’ domestic legislation regarding key transfer pricing principles, including the arm’s length principle, transfer pricing methods, comparability analysis, intangible property, intra-group services, cost contribution agreements, transfer pricing documentation, administrative approaches to avoiding and resolving disputes, safe harbors and other implementation measures. (https://www.oecd.org/tax/transfer-pricing/transfer-pricing-country-profile-singapore.pdf)

The OECD released a peer review report in March 2018 on Singapore’s implementation of internationally agreed tax standards under Action Plan 14 of the base erosion and profit shifting (BEPS) project. Action 14 strengthens the effectiveness and efficiency of the mutual agreement procedure, a cross-border tax dispute resolution mechanism. (http://www.oecd.org/corruption-integrity/reports/singapore-2018-peer-review-report-transparency-exchange-information-aci.html )

As of April 2021, the United Nations Conference on Trade and Development (UNCTAD) has not conducted a policy review of Singapore’s intellectual property rights regime. (http://unctad.org/en/Pages/DIAE/Investment%20Policy%20Reviews/Investment-Policy-Reviews.aspx )

Business Facilitation

Singapore’s online business registration process is clear and efficient and allows foreign companies to register branches. All businesses must be registered with ACRA through Bizfile, its online registration and information retrieval portal ( https://www.bizfile.gov.sg/),  including any individual, firm or corporation that carries out business for a foreign company. Applications are typically processed immediately after the application fee is paid, but could take between 14 to 60 days, if the application is referred to another agency for approval or review. The process of establishing a foreign-owned limited liability company in Singapore is among the fastest in the world.

ACRA ( www.acra.gov.sg ) provides a single window for business registration. Additional regulatory approvals (e.g., licensing or visa requirements) are obtained via individual applications to the respective ministries or statutory boards. Further information and business support on registering a branch of a foreign company is available through the EDB ( https://www.edb.gov.sg/en/how-we-help/setting-up.html ) and GuideMeSingapore, a corporate services firm Hawskford ( https://www.guidemesingapore.com /).

Foreign companies may lease or buy privately or publicly held land in Singapore, though there are some restrictions on foreign property ownership. Foreign companies are free to open and maintain bank accounts in foreign currency. There is no minimum paid-in capital requirement, but at least one subscriber share must be issued for valid consideration at incorporation.

Business facilitation processes provide for fair and equal treatment of women and minorities, and there are no mechanisms that provide special assistance to women and minorities.

Outward Investment

Singapore places no restrictions on domestic investors investing abroad. The government promotes outward investment through Enterprise Singapore, a statutory board under the Ministry of Trade and Industry. It provides market information, business contacts, and financial assistance and grants for internationalizing companies. While it has a global reach and runs overseas centers in major cities across the world, a large share of its overseas centers are located in major trading and investment partners and regional markets like China, India, the United States, and ASEAN.

3. Legal Regime

Transparency of the Regulatory System

The government establishes clear rules that foster competition. The USSFTA enhances transparency by requiring regulatory authorities to consult with interested parties before issuing regulations, and to provide advance notice and comment periods for proposed rules, as well as to publish all regulations. Singapore’s legal, regulatory, and accounting systems are transparent and consistent with international norms.

Rule-making authority is vested in the parliament to pass laws that determine the regulatory scope, purpose, rights and powers of the regulator and the legal framework for the industry. Regulatory authority is vested in government ministries or in statutory boards, which are organizations that have been given autonomy to perform an operational function by legal statutes passed as acts of parliament, and report to a specific ministry. Local laws give regulatory bodies wide discretion to modify regulations and impose new conditions, but in practice agencies use this positively to adapt incentives or other services on a case-by-case basis to meet the needs of foreign as well as domestic companies. Acts of parliament also confer certain powers on a minister or other similar persons or authorities to make rules or regulations in order to put the act into practice; these rules are known as subsidiary legislation.  National-level regulations are the most relevant for foreign businesses. Singapore, being a city-state, has no local or state regulatory layers.

Before a ministry instructs the Attorney-General’s Chambers (AGC) to draft a new bill or make an amendment to a bill, the ministry has to seek in-principle approval from the cabinet for the proposed bill. The AGC legislation division advises and helps vet or draft bills in conjunction with policymakers from relevant ministries.  Public and private consultations are often requested for proposed draft legislative amendments. Thereafter, the cabinet’s approval is required before the bill can be introduced in parliament.  All bills passed by parliament (with some exceptions) must be forwarded to the Presidential Council for Minority Rights for scrutiny, and thereafter presented to the President for assent. Only after the President has assented to the bill does it become law.

While ministries or regulatory agencies do conduct internal impact assessments of proposed regulations, there are no criteria used for determining which proposed regulations are subjected to an impact assessment, and there are no specific regulatory impact assessment guidelines. There is no independent agency tasked with reviewing and monitoring regulatory impact assessments and distributing findings to the public. The Ministry of Finance publishes a biennial Singapore Public Sector Outcomes Review (http://www.mof.gov.sg/Resources/Singapore-Public-Sector-Outcomes-Review-SPOR ), focusing on broad outcomes and indicators rather than policy evaluation. Results of scientific studies or quantitative analysis conducted in review of policies and regulations are not made publicly available.

Industry self-regulation occurs in several areas, including advertising and corporate governance.  Advertising Standards Authority of Singapore (ASAS) (https://asas.org.sg/), an advisory council under the Consumers Association of Singapore, administers the Singapore Code of Advertising Practice, which focuses on ensuring that advertisements are legal, decent, and truthful. Listed companies are required under the Singapore Exchange (SGX) Listing Rules to describe in their annual reports their corporate governance practices with specific reference to the principles and provisions of the Code. Listed companies must comply with the principles of the Code, and, if their practices vary from any provisions of the Code, they must note the reason for the variation and explain how the practices they have adopted are consistent with the intent of the relevant principle. The SGX plays the role of a self-regulatory organization (SRO) in listings, market surveillance, and member supervision to uphold the integrity of the market and ensure participants’ adherence to trading and clearing rules. There have been no reports of discriminatory practices aimed at foreign investors.

Singapore’s legal and accounting procedures are transparent and consistent with international norms and rank similar to the U.S. in international comparisons (http://worldjusticeproject.org/rule-of-law-index ). The prescribed accounting standards for Singapore-incorporated companies applying to be or are listed in the public market, Singapore Exchange, are known as Singapore Financial Reporting Standards (SFRS(I)), which are identical to those of the International Accounting Standards Board (IASB). Non-listed Singapore-incorporated companies can voluntarily apply for SFRS(I). Otherwise, they are required to comply with Singapore Financial Reporting Standards (SFRS), which are also aligned with those of IASB. For the use of foreign accounting standards, the companies are required to seek approval of the Accounting and Corporate Regulatory Authority (ACRA).

For foreign companies with primary listings on the Singapore Exchange, the SGX Listing Rules allow the use of alternative standards such as International Financial Reporting Standards (IFRS) or the U.S. Generally Accepted Accounting Principles (U.S. GAAP). Accounts prepared in accordance with IFRS or U.S. GAAP need not be reconciled to SFRS(1). Companies with secondary listings on the Singapore Exchange need only reconcile their accounts to SFRS(I), IFRS, or U.S. GAAP.

Notices of proposed legislation to be considered by parliament are published, including the text of the laws, the dates of the readings, and whether or not the laws eventually pass. The government has established a centralized Internet portal (www.reach.gov.sg ) to solicit feedback on selected draft legislation and regulations, a process that is being used with increasing frequency. There is no stipulated consultative period.  Results of consultations are usually consolidated and published on relevant websites. As noted in the “Openness to Foreign Investment” section, some U.S. companies, in particular in the telecommunications and media sectors, are concerned about the government’s lack of transparency in its regulatory and rule-making process.  However, many U.S. firms report they have opportunities to weigh in on pending legislation that affects their industries.  These mechanisms also apply to investment laws and regulations.

The Parliament of Singapore website (https://www.parliament.gov.sg/parliamentary-business/bills-introduced ) publishes a database of all bills introduced, read, and passed in Parliament in chronological order as of 2006. The contents are the actual draft texts of the proposed legislation/legislative amendments. All statutes are also publicly available in the Singapore Statutes Online website (https://sso.agc.gov.sg ). However, there is no centralized online location where key regulatory actions are published. Regulatory actions are published separately on websites of Statutory Boards.

Enforcement of regulatory offences is governed by both acts of parliament and subsidiary legislation. Enforcement powers of government statutory bodies are typically enshrined in the act of Parliament constituting that statutory body. There is accountability to Parliament for enforcement action through question time, where members of parliament may raise questions with the ministers on their respective ministries’ responsibilities.

Singapore’s judicial system and courts serve as the oversight mechanism in respect of executive action (such as the enforcement of regulatory offences) and dispense justice based on law. The Supreme Court, which is made up of the Court of Appeal and the High Court, hears both civil and criminal matters. The Chief Justice heads the Judiciary. The President appoints the Chief Justice, the Judges of Appeal and the Judges of the High Court if she, acting at her discretion, concurs with the advice of the Prime Minister.

No systemic regulatory reforms or enforcement reforms relevant to foreign investors were announced in 2020. The Monetary Authority of Singapore focuses enforcement efforts on timely disclosure of corporate information, business conduct of financial advisors, compliance with anti-money laundering/combatting the financing of terrorism requirements, deterring stock market abuse, and insider trading. In March 2019, MAS published its inaugural Enforcement Report detailing enforcement measures and publishes recent enforcement actions on its website (https://www.mas.gov.sg/regulation/enforcement/enforcement-actions ).

International Regulatory Considerations

Singapore was the 2018 chair of the Association of Southeast Asian Nations (ASEAN). ASEAN is working towards the 2025 ASEAN Economic Community (AEC) Blueprint aimed at achieving a single market and production base, with a free flow of goods, services, and investment within the region. While ASEAN is working towards regulatory harmonization, there are no regional regulatory systems in place; instead, ASEAN agreements and regulations are enacted through each ASEAN Member State’s domestic regulatory system.  While Singapore has expressed interest in driving intra-regional trade, the dynamics of ASEAN economies are convergent.

The WTO’s 2016 trade policy review notes that Singapore’s guiding principle for standardization is to align national standards with international standards, and Singapore is an elected member of the International Organization of Standardization (ISO) and International Electrotechnical Commission (IEC) Councils. Singapore encourages the direct use of international standards whenever possible. Singapore standards (SS) are developed when there is no appropriate international standard equivalent, or when there is a need to customize standards to meet domestic requirements. At the end of 2015, Singapore had a stock of 553 SS, about 40 percent of which were references to international standards. Enterprise Singapore, the Singapore Food Agency, and the Ministry of Trade and Industry are the three national enquiry points under the TBT Agreement. There are no known reports of omissions in reporting to TBT.

A non-exhaustive list of major international norms and standards referenced or incorporated into the country’s regulatory systems include Base Erosion and Profit Shifting (BEPS) project, Common Reporting Standards (CRS), Basel III, EU Dual-Use Export Control Regulation, Exchange of Information on Request, 27 International Labor Organization (ILO) conventions on labor rights and governance, UN conventions, and WTO agreements.

Singapore is signatory to the Trade Facilitation Agreement (TFA). The WTO reports that Singapore has fully implemented the TFA (https://www.tfadatabase.org/members/singapore ).

Legal System and Judicial Independence

Singapore’s legal system has its roots in English common law and practice and is enforced by courts of law. The current judicial process is procedurally competent, fair, and reliable. In the 2020 Rule of Law Index by World Justice Project, it is ranked overall twelfth in the world, first on order and security, third on regulatory enforcement, third in absence of corruption, sixth on civil and criminal justice, twenty-ninth on constraints on government powers, twenty-sixth on open government, and thirty-second on fundamental rights. Singapore’s legal procedures are ranked first in the world in the World Bank’s 2020 Ease of Doing Business sub-indicator on contract enforcement which measures speed, cost, and quality of judicial processes to resolve a commercial dispute. The judicial system remains independent of the executive branch and the executive does not interfere in judiciary matters.

Laws and Regulations on Foreign Direct Investment

Singapore strives to promote an efficient, business-friendly regulatory environment. Tax, labor, banking and finance, industrial health and safety, arbitration, wage, and training rules and regulations are formulated and reviewed with the interests of both foreign investors and local enterprises in mind. Starting in 2005, a Rules Review Panel, comprising senior civil servants, began overseeing a review of all rules and regulations; this process will be repeated every five years. A Pro-Enterprise Panel of high-level public sector and private sector representatives examines feedback from businesses on regulatory issues and provides recommendations to the government. (https://www.mti.gov.sg/PEP/About)

The Cybersecurity Act, which came into force in August 2018, establishes a comprehensive regulatory framework for cybersecurity. The Act provides the Commissioner of Cyber Security with powers to investigate, prevent, and assess the potential impact of cyber security incidents and threats in Singapore.  These can include requiring persons and organizations to provide requested information, requiring the owner of a computer system to take any action to assist with cyber investigations, directing organizations to remediate cyber incidents, and, if safeguards have been met, authorizing officers to enter premises, and installing software and take possession of computer systems to prevent serious cyber-attacks in the event of severe threat. The Act also establishes a framework for the designation and regulation of Critical Information Infrastructure (CII). Requirements for CII owners include a mandatory incident reporting regime, regular audits and risk assessments, and participation in national cyber security stress tests. In addition, the Act will establish a regulatory regime for cyber security service providers and required licensing for penetration testing and managed security operations center (SOC) monitoring services. U.S. business chambers have expressed concern about the effects of licensing and regularly burdens on compliance costs, insufficient checks and balances on the investigatory powers of the authorities, and the absence of a multidirectional cyber threat sharing framework that includes protections from liability. Under the law, additional measures, such as the Cybersecurity Labelling Scheme, continue to be introduced.  Authorities stres