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Austria

Executive Summary

Austria has a well-developed market economy that welcomes foreign direct investment, particularly in technology and R&D.  The country benefits from a skilled labor force, and a high standard of living, with its capital Vienna consistently placing at the top of global quality-of-life rankings.  

With more than 50 percent of its GDP attributed to exports, Austria’s economy is closely tied to other EU economies, especially Germany’s, its largest trading partner, followed by the U.S.  The economy features a large service sector and an advanced industrial sector specialized in high-quality component parts, especially for vehicles. The agricultural sector is small but highly developed.

Austria’s economy grew from 2017-18.  GDP increased by 2.7 percent in 2018, leading to a decrease in the unemployment rate to 4.8 percent. However, positive momentum has slowed since then, with GDP growth forecast to reach only 1.7 percent in 2019 and 1.6 percent in 2020.

The country’s location between Western European industrialized nations and growth markets in Central, Eastern, and Southeastern Europe (CESEE) has led to a high degree of economic, social, and political integration with fellow European Union (EU) member states and the CESEE.

Some 300 U.S. companies have investments in Austria, and many have expanded their original investment over time.  U.S. Foreign Direct Investment into Austria totaled approximately EUR 14.5 billion (USD 16.5 billion) in 2018, according to the Austrian National Bank, and U.S. companies support over 20,000 jobs in Austria.  Altogether, Austria offers a stable and attractive climate for foreign investors.

The most positive aspects of Austria’s investment climate include:

  • Relatively high political stability;
  • Harmonious labor-management relations and low incidence of labor unrest;
  • Highly skilled labor across sectors;
  • High levels of productivity and international competitiveness;
  • Excellent quality of life through high levels of personal security and high-quality health, telecommunications, and energy infrastructure.

Negative aspects of Austria’s investment climate include:

  • A high overall tax burden;
  • A large public sector and a complex regulatory system with extensive bureaucracy;
  • Low-to-moderate innovation dynamics.

Key sectors that have historically attracted significant investment in Austria:

  • Automotive;
  • Pharmaceuticals;
  • Financial.

Key issue to watch:

  • Austria’s government has announced a comprehensive tax-reform plan for the coming years. This plan includes lowering the corporate tax rate from 25 percent to around 20 percent in 2022, reducing personal income tax in 2021, and increasing the permissible amount of hours worked per week from 50 to 60.  The government is hoping to increase Austria’s attractiveness as a business location by reducing bureaucracy, reducing labor market protections and lowering non-wage labor costs.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 14 of 175 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 26 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 21 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $7,800 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2018 $45,440 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Austrian government welcomes foreign direct investment, particularly when such investments have the potential to create new jobs, support advanced technology fields, promote capital-intensive industries, and enhance links to research and development.

There are no specific legal, practical or market access restrictions on foreign investment.  American investors have not complained of discriminatory laws against foreign investors. Corporate taxes are relatively low (25 percent flat tax), and the government plans to reduce them further in a tax reform to be implemented by 2022. U.S. citizens and investors have reported that it is difficult to establish and maintain banking services since the U.S.-Austria Foreign Account Tax Compliance Act (FATCA) Agreement went into force in 2014, as some Austrian banks have been reluctant to take on this reporting burden.

Potential investors should also factor in Austria’s lengthy environmental impact assessments in their investment decision-making.  The requirement that over 50 percent of energy providers must be publicly-owned creates a potential additional burden for investments in the energy sector.  Strict liability and co-existence regulations in the agriculture sector restrict research and virtually outlaw the cultivation, marketing, or distribution of biotechnology crops.

Austria’s national investment promotion company, the Austrian Business Agency (ABA), is the first point of contact for foreign companies aiming to establish their own business in Austria.  It provides comprehensive information about Austria as a business location, identifies suitable sites for greenfield investments, and consults in setting up a company. ABA provides its services free of charge.

Austrian agencies do not press investors to keep investments in the country, but the Federal Economic Chamber (WKO), and the American Chamber of Commerce in Austria (Amcham) carry out annual polls among their members to measure their satisfaction with the business climate, thus providing early warning to the government of problems investors have identified.

Limits on Foreign Control and Right to Private Ownership and Establishment

There is no principal limitation on establishing and owning a business in Austria. A local managing director must be appointed to any newly-started enterprise.  For non-EU citizens to establish and own a business, the Austrian Foreigner’s Law mandates a residence permit that includes the right to run a business. Many Austrian trades are regulated, and the right to run a business in many trades sectors is only granted when certain preconditions are met, such as certificates of competence, and recognition of foreign education.  There are no limitations on ownership of private businesses. Austria maintains an investment screening process for takeovers of 25 percent or more in the sectors of national security and public services such as energy and water supply, telecommunications, and education services, where the Austrian government retains the right of approval. The screening process has been rarely used since its introduction in 2012, but could pose a de facto barrier, particularly in the energy sector. In April 2019, the EU Regulation on establishing a framework for the screening of foreign direct investments into the Union entered into force.  It creates a cooperation mechanism through which EU countries and the EU Commission will exchange information and raise concerns related to specific investments which could potentially threaten the security of EU countries.

Other Investment Policy Reviews

Not applicable.

Business Facilitation

While the World Bank ranks Austria as the 26th best country in 2019 with regard to “ease of doing business” (www.doingbusiness.org), starting a business takes time and requires many procedural steps (Austria ranked 118 in this category in 2019).

In order to register a new company, or open a subsidiary in Austria, a company must first be listed on the Austrian Companies’ Register at a local court.  The next step is to seek confirmation of registration from the Austrian Federal Economic Chamber (WKO) establishing that the company is really a new business.  The investor must then notarize the “declaration of establishment,” deposit a minimum capital requirement with an Austrian bank, register with the tax office, register with the district trade authority, register employees for social security, and register with the municipality where the business will be located.  Finally, membership in the WKO is mandatory for all businesses in Austria.

For companies with sole proprietorship, it is possible under certain conditions to use an online registration process via government websites in German to either found or register a company: https://www.usp.gv.at/Portal.Node/usp/public/content/gruendung/egruendung/269403.html  or www.gisa.gv.at/online-gewerbeanmeldung . It is advisable to seek information from ABA or the WKO before applying to register a firm.

The website of the ABA contains further details and contact information, and is intended to serve as a first point of contact for foreign investors in Austria: https://investinaustria.at/en/starting-business/ .

According to the World Bank, the average time to set up a company in Austria is 21 days, well above the EU average of 12.5 days.

Outward Investment

The Austrian government encourages outward investment.  There is no special focus on specific countries, but the United States is seen as an attractive target country given the U.S. position as the second biggest market for Austrian exports.  Advantage Austria, the “Austrian Foreign Trade Service” is a special section of the WKO that promotes Austrian exports and also supports Austrian companies establishing an overseas presence. Advantage Austria operates six offices in the United States in Washington, DC, New York, Chicago, Atlanta, Los Angeles, and San Francisco.  The Ministry for Digital and Economic Affairs and the WKO run a joint program called “Go International,” providing services to Austrian companies that are considering investing for the first time in foreign countries. The program provides grants in form of contributions to “market access costs,” and also provides “soft subsidies,” such as counselling, legal advice, and marketing support.

2. Bilateral Investment Agreements and Taxation Treaties

There is no current investment agreement between the United States and Austria.  Austria has Bilateral Investment Treaties (BITs) in force with: Albania, Algeria, Argentina, Armenia, Azerbaijan, Bangladesh, Belarus, Belize, Bosnia and Herzegovina, Bulgaria, Chile, China, Croatia, Cuba, Czech Republic, Egypt, Estonia, Ethiopia, Georgia, Guatemala, Hong Kong, Hungary, Iran, Jordan, Kazakhstan, Republic of Korea, Kuwait, Latvia, Lebanon, Libya, Lithuania, North Macedonia, Malaysia, Malta, Mexico, Moldova, Mongolia, Montenegro, Morocco, Namibia, Oman, Paraguay, Philippines, Poland, Romania, Russia, Saudi Arabia, Serbia, Slovakia, Slovenia, Tajikistan, Tunisia, Turkey, Ukraine, United Arab Emirates, Uzbekistan, Vietnam, and Yemen.  BITs with Cambodia, Kyrgyzstan, Nigeria, and Zimbabwe have been signed, but have not yet entered into force.

On March 16, 2018, the European Court of Justice determined that arbitration clauses in Member State BITs are incompatible with EU law; subsequently, Austria agreed with the EU Commission to terminate its 12 bilateral intra-EU BITS (as did the other Member States), but negotiations on the date of termination are ongoing.

Austria and the United States are parties to a bilateral double taxation convention covering income and corporate taxes, which went into effect in January 1998.  Another bilateral double taxation convention (covering estates, inheritances, gifts and generation-skipping transfers) has been in effect since 1982 (amended in 1999).  Austria and the United States signed the Foreign Account Tax Compliance Act (FATCA) Agreement on April 29, 2014, covering U.S. citizen account holders in Austria. The FATCA Agreement went into force December 9, 2014.

Austria has 90 additional double taxation treaties in force with other countries.

Two other Austrian agreements, with Switzerland and Liechtenstein, on cooperation in the areas of taxation and financial markets (which entered into force in January and April 2013 respectively) cover the treatment of anonymous accounts from Austrian citizens in those countries.

3. Legal Regime

Transparency of the Regulatory System

Austria’s legal, regulatory, and accounting systems are transparent and consistent with international norms.

Federal ministries generally publish draft laws and regulations, including investment laws, for public comment prior to their adoption by Austria’s cabinet and/or Parliament.  Relevant stakeholders such as the “Social Partners” (Economic Chamber, Agricultural Chamber, Labor Chamber, and Trade Union Association), the Industrial Association, and research institutions are invited to provide comments and suggestions for improvement, which may be taken into account before adoption of laws.  However, over the past year, the government has increasingly moved towards excluding outside parties from its decision-making process by either ignoring suggestions provided, or by making the time period for commenting unreasonably short. Austria’s nine provinces can also adopt laws relevant to investments; their review processes are generally less extensive, but local laws are less important for investments than federal laws.  The judicial system is independent from the executive branch, thus helping ensure the government follows administrative processes.

Draft legislation by ministries (“Ministerialentwürfe”) and resulting government draft laws and parliamentary initiatives (“Regierungsvorlagen und Gesetzesinitiativen”) can be accessed through the website of the Austrian Parliament:  https://www.parlament.gv.at/PAKT/  (all in German).  The parliament also publishes a history of all law-making processes. All final Austrian laws can be accessed through a government data base, partly in English: https://www.ris.bka.gv.at/defaultEn.aspx 

The government has simplified the process for issuing business licenses and permits.  It can take up to three months to receive a business permit but the business may commence operations as soon as all the relevant documentation has been submitted and verified.

Austrian regulations governing accounting provide U.S. investors with internationally standardized financial information.  In line with EU regulations, listed companies must prepare their consolidated financial statements according to the International Financial Reporting Standards (IAS/IFRS) system.

International Regulatory Considerations

Austria is a member of the EU.  As such, its laws must comply with EU legislation and the country is therefore subject to European Court of Justice (ECJ) jurisdiction.  Austria is a member of the WTO and largely follows WTO requirements. Austria has ratified the Trade Facilitation Agreement (TFA), but has not taken specific actions to implement it.

Legal System and Judicial Independence

The Austrian legal system is based on Roman law.  The constitution establishes a hierarchy, according to which each legislative act (law, regulation, decision, and fines) must have its legal basis in a higher legislative instrument.  The full text of each legislative act is available online for reference. All final Austrian laws can be accessed through a government data base, partly in English: https://www.ris.bka.gv.at/defaultEn.aspx .

Commercial matters fall within the competence of ordinary regional courts except in Vienna, which has a specialized Commercial Court.  The Commercial Court also has nationwide competence for trademark, design, model, and patent matters. There is no special treatment of foreign investors and the executive does not interfere in judicial matters.

The system provides an effective means for protecting property and contractual rights of nationals and foreigners.  Sensitive cases must be reported to the Minister of Justice, which can issue instructions for addressing them. Austria’s civil courts enforce property and contractual rights and do not discriminate against foreign investors. Austria allows for court decisions to be appealed, first to a Regional Court and in the last instance, to the Supreme Court.

Laws and Regulations on Foreign Direct Investment

There is no discrimination against foreign investors, but businesses are required to follow numerous local regulations.  Although there is no requirement for participation by Austrian citizens in ownership or management of a foreign firm, at least one manager must meet Austrian residency and other legal requirements.  Expatriates are allowed to deduct certain expenses (costs associated with moving, maintaining a double residence, education of children) from Austrian-earned income.

The “Law to Support Investments in Municipalities” (published in the Federal Law Gazette, 74/2017, available online in German only on the federal legal information system www.ris.bka.gv.at ), allows federal funding of up to 25 percent of the total investment amount of a project to “modernize” a municipality.

Austria has restrictions on investments into industries that could affect national security, critical infrastructure or public services.  The government has to approve any foreign acquisition of a 25 percent or higher stake in any of these industries.

Competition and Anti-Trust Laws

Austria’s Anti-Trust Act (ATA) is in line with European Union anti-trust regulations, which take precedence over national regulations in cases concerning Austria and other EU member states.  The Austrian Anti-Trust Act prohibits cartels, anticompetitive practices, and the abuse of a dominant market position. The independent Federal Competition Authority (FCA) and the Federal Antitrust Prosecutor (FAP) are responsible for administering anti-trust laws.  The FCA can conduct investigations and request information from firms. The FAP is subject to instructions issued by the Justice Ministry and can bring actions before Austria’s Cartel Court. Additionally, the Commission on Competition may issue expert opinions on competition policy and give recommendations on notified mergers.  The most recent amendment to the ATA was in May, 2017. This amendment facilitated enforcing private damage claims, strengthened merger control, and enabled appeals against verdicts from the Cartel Court.

Companies must inform the FCA of mergers and acquisitions (M&A).  Special M&A regulations apply to media enterprises, such as a lower threshold above which the ATA applies, and the requirement that media diversity must be maintained.  A cartel court is competent to rule on referrals from the FCA or the FCP. For violations of anti-trust regulations, the cartel court can impose fines of up to the equivalent of 10 percent of a company’s annual worldwide sales.  The independent energy regulator E-Control separately examines antitrust concerns in the energy sector, but must also submit cases to the cartel court.

Austria’s Takeover Law applies to friendly and hostile takeovers of corporations headquartered in Austria and listed on the Vienna Stock Exchange.  The law protects investors against unfair practices, since any shareholder obtaining a controlling stake in a corporation (30 percent or more in direct or indirect control of a company’s voting shares) must offer to buy out smaller shareholders at a defined fair market price.  The law also includes provisions for shareholders who passively obtain a controlling stake in a company. The law prohibits defensive action to frustrate bids. The Shareholder Exclusion Act allows a primary shareholder with at least 90 percent of capital stock to force out minority shareholders.  An independent takeover commission at the Vienna Stock Exchange oversees compliance with these laws.

Expropriation and Compensation

According to the European Convention of Human Rights (applicable in Austria) and the Austrian Civil Code, property ownership is guaranteed in Austria.  Expropriation of private property in Austria is rare and may be undertaken by federal or provincial government authorities only on the basis of special legal authorization “in the public interest” in such instances as land use planning, and infrastructure project preparations.  The government can initiate such a procedure only in the absence of any other alternatives for satisfying the public interest; when the action is exclusively in the public interest; and when the owner receives just compensation. In 2017-18, the government expropriated Hitler’s birth house in order to prevent it from becoming a place of pilgrimage for neo-Nazis, paying the former owner €1.5 million (USD 1.8 million) in compensation. The expropriation process is non-discriminatory toward foreigners, including U.S. firms.  There is no indication that further expropriations will take place in the foreseeable future.

Dispute Settlement

ICSID Convention and New York Convention

Austria is a member of both the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning local courts must enforce foreign arbitration awards in Austria. There is no specific domestic legislation in this regard, but local courts must enforce arbitration decisions where the affected companies have their business locations.

Investor-State Dispute Settlement

Austria is a member of the UN Commission on International Trade Law (UNCITRAL). Its arbitration law largely conforms to the UNCITRAL model law. The main divergence is that an award may only be set aside if the arbitral procedure is not in accordance with Austrian public policy.

Austria does not have a BIT or FTA with the United States. There is no special domestic arbitration body.

In 2015, the Austrian government was sued, for the first time ever, by the offshore parent company of the Austrian Meinl Bank, Far East.  The case was brought before the ICSID in New York because of alleged damages arising from domestic prosecution in Austria; the ICSID dismissed the case in November 2017.

International Commercial Arbitration and Foreign Courts

The Vienna International Arbitral Center of the Austrian Federal Economic Chamber acts as Austria’s main arbitration institution.  Legislation is modeled after the UNCITRAL model law (see above). The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NYC) overrides most of Austria’s domestic provisions, where applicable, and Austrian courts are consistent in applying it.

Bankruptcy Regulations

The Austrian Insolvency Act contains provisions for business reorganization and bankruptcy proceedings.  Reorganization requires a restructuring plan and the debtor to be able to cover costs or advance some of the costs up to a maximum of €4,000 (USD 4,520).  The plan must offer creditors at least 20 percent of what is owed, payable within two years of the date the debtor’s obligation is determined. The plan must be approved by a majority of all creditors and a majority of creditors holding at least 50 percent of all claims.  Bankruptcy proceedings take place in court and are opened upon application of the debtor or a creditor; the court appoints a receiver for winding down the business and distributes proceeds to the creditors. Bankruptcy is not criminalized, provided the affected person performed all his documentation and reporting obligations in accordance with the law.

Austria’s major commercial association for the protection of creditors in cases of bankruptcy is the “KSV 1870 Group”,www.ksv.at , which also carries out credit assessments of all companies located in Austria. Other European-wide credit bureaus, particularly “CRIF” and “Bisnode”, also monitor the Austrian market.

7. State-Owned Enterprises

Austria has two major wholly state-owned enterprises (SOEs):  The OeBB (Austrian Federal Railways) and Asfinag (highway financing, building, maintenance and administration).  Other government industry holding companies are bundled in the government holding company OeBAG (new website under construction): http://www.oebib.gv.at/en/ 

The government reformed its holding company in 2018, changing its name from OeBIB to OeBAG, incorporating energy provider Verbund AG and the state-owned real estate holding company BIG into its portfolio and increasing its oversight powers.  Under the new regulation, the government will gain direct representation in the supervisory boards of its companies (commensurate with its ownership stake), and the new holding company will be given the power to buy and sell company shares, as well as purchase minority stakes in strategically relevant companies.  Such purchases will be subject to approval from a newly-established audit committee consisting of government-nominated independent economic experts.

OeBAG holds a 53 percent stake in the Post Office, 51 percent in energy company Verbund, 33 percent in the gambling group Casinos Austria, 31.5 percent in the energy company OMV, 28 percent in the Telekom Austria Group, and a few other minor ventures.  Local governments own the majority of utilities, Vienna International Airport, and more than half of Austria’s 268 hospitals and clinics.

Private enterprises in Austria can generally compete with public enterprises under the same terms and conditions with respect to market access, credit, and other such business operations as licenses and supplies. While most SOEs must finance themselves under terms similar to private enterprises, some large SOEs (such as OeBB) benefit from state-subsidized pension systems.  As a member of the EU, Austria is also a party to the Government Procurement Agreement (GPA) of the WTO, which indirectly also covers the SOEs (since they are entities monitored by the Austrian Court of Auditors).

The five major OeBAG companies (Postal Service, Verbund AG, Casinos Austria, OMV, Telekom Austria), are listed on the Vienna stock exchange. In these cases, senior management does not directly report to a minister, but to an oversight board.  However, the government often appoints management and board members, who usually have strong political affiliations.

The Austrian Foreign Trade Act (FTA) requires advance approval by the Austrian Ministry for Digital and Economic Affairs for foreign acquisitions of a relevant stake (25 percent) in enterprises in certain strategic industries (with sales over EUR 700,000 per year), comprising a wide range of sectors.    Strategic sectors include not only internal and external security services, but also public order and safety, procurement, and crisis services. The latter include hospitals, ambulance and emergency medical services; fire fighters and civil protection services; energy and gas supply; water supply; telecoms; railways; road traffic; universities; schools of various types; and pre-schooling institutions.

Privatization Program

The government has not privatized any public enterprises since 2007.  Austrian public opinion is skeptical regarding further privatization. The current government consisting of the center-right People’s Party (OVP) and right-populist Freedom Party (FPO) is decidedly more pro-market than the previous government, but there is no plan for further privatization.

In prior privatizations, foreign and domestic investors received equal treatment.  Despite a historical government preference for maintaining blocking minority rights for domestic shareholders, foreign investors have successfully gained full control of enterprises in several strategic sectors of the Austrian economy, including in telecommunications, banking, steel, and infrastructure.

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; World Bank; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Austria Gross Domestic Product (GDP) ($M USD) 2018 $455,586 2017 $416,596 https://data.worldbank.org/country/austria?view=chart  
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or international Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in Austria ($M USD, stock positions) 2018 $16,493 2017 $7,819 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2018 $12,646 2017 $12,303 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 51.5% 2017 48.5% UNCTAD data available at

https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

*Statistics Austria (GDP):
http://www.statistik.at/web_de/statistiken/wirtschaft/volkswirtschaftliche_
gesamtrechnungen/bruttoinlandsprodukt_und_hauptaggregate/jahresdaten/019505.html
 

Austrian National Bank (Investments)

https://www.oenb.at/isaweb/report.do?lang=EN&report=9.3.31 

Differences between Austrian and U.S. statistics can arise from different allocations of investments to countries (headquarters versus subsidiaries) and different survey methods


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 $246,359 100% Total Outward $291,090 100%
Germany $55,214 22% Netherlands $35,917 12%
Russia $30.333 12% Germany $31,453 11%
Netherlands $27.933 11% Luxembourg $15,302 5%
Luxembourg $22.006 9% Czech Republic $14,881 5%
Switzerland $11.805 5% United States $11,178 4%
“0” reflects amounts rounded to +/- USD 500,000.

Austria’s domestic investment figures show significant lower numbers for the Netherlands and Luxembourg. Special Purpose Entities (SPEs) may be used to avoid corporate taxes.

Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity and Investment Fund Shares Total Debt Securities
All Countries $348,992 100% All Countries $138,369 100% All Countries $210,623 100%
Germany $54,228 15% Luxembourg $46,238 33% Germany $26,126 12%
Luxembourg $53,862 15% Germany $28,103 20% France $23,711 11%
United States $33,122 9% United States $14,434 10% United States $18,689 9%
France $31.227 9% Ireland $13,864 10% Spain $15,180 7%
Ireland $19,476 6% France $7,516 5% Netherlands $15,119 7%

Belgium

Executive Summary

The Belgian economy is expected to grow 1.3 percent in 2019, primarily driven by domestic demand and net exports. Private consumption growth was slower than in surrounding countries, mainly caused by higher inflation. Low energy prices and interest rates, and a favorable euro/dollar exchange rate continue to stimulate economic growth and fuel exports, especially given Belgium’s unique position as a logistical hub and gateway to Europe.  Since June 2015, the Belgian government has undertaken a series of measures to reduce the tax burden on labor and to increase Belgium’s economic competitiveness and attractiveness to foreign investment. The July 2017 decision to lower the corporate tax rate from 35 to 25 percent is expected to make a further improve the investment climate.

Belgium boasts an open market well connected to the major economies of the world. As a logistical gateway to Europe, host to the EU institutions and a central location closely tied to the major European economies (Germany in particular), Belgium is an attractive market and location for U.S. investors. Foreign and domestic investors are expected to take advantage of improved credit opportunities and increased consumer and business confidence. Finally, Belgium is a highly-developed, long-time economic partner of the United States that benefits from an extremely well-educated workforce, world-renowned research centers, and the infrastructure to support a broad range of economic activities. Brexit, however, creates uncertainties and it is hard to predict what the impact will be on the Belgian economy.

To fully realize Belgium’s employment potential, it will be critical to address the fragmentation of the labor market. Jobs growth accelerated in 2017 and 2018, driven by the cyclical recovery and the positive impact of past reforms. Older workers account for much of the employment increase, whereas progress has been more limited in integrating vulnerable groups—especially immigrants born outside the EU, the young, and the low-skilled. Moreover, large regional disparities in unemployment rates persist, and there is a significant skills mismatch in several key sectors.

Belgium has a dynamic economy and continues to attract significant levels of investment in chemicals, petrochemicals, plastic and composites; environmental technologies; food processing and packaging; health technologies; information and communication; and textiles, apparel and sporting goods, among other sectors.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 17 of 180 https://www.transparency.org/country/BEL
World Bank’s Doing Business Report 2018 45 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 25 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $54,954 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 USD 41.790 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Belgium has traditionally maintained an open economy that is highly dependent on international trade.  Since WWII, foreign investment has played a vital role in the Belgian economy, providing technology and employment.  It is a key economic policy of the government to make Belgium a more attractive destination to foreign investment. Though the federal government regulates important elements of foreign direct investment such as salaries and labor conditions, it is primarily the responsibility of the regions to attract FDI.  Flanders Investment and Trade (FIT), Wallonia Foreign Trade and Investment Agency (AWEX), and Brussels Invest and Export are the three investment promotion agencies who seek to attract FDI to Flanders, Wallonia and the Brussels Capital Region, respectively.

The regional investment promotion agencies have focused their industrial strategy on key sectors including aerospace and defense; agribusiness, automotive and ground transportation; architecture and engineering; chemicals, petrochemicals, plastics and composites; environmental technologies; food processing and packaging; health technologies; information and communication; and services.

Foreign corporations account for about one-third of the top 3,000 corporations in Belgium.  According to Graydon, a Belgian company specializing in commercial and marketing information, there are currently more than one million companies registered in Belgium. The federal government and the regions do not have specific policies that prioritize investment retention or maintain an ongoing dialogue with investors.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are currently no limits on foreign ownership or control in Belgium.  There are no distinctions between Belgian and foreign companies when establishing or owning a business or setting up a remunerative activity.

Other Investment Policy Reviews

Over the past 3 years, the country has not been the subject of third-party investment policy reviews (IPRs) through a multilateral organization such as the OECD, WTO, or UNCTAD.

Business Facilitation

In order to set up a business in Belgium, one must:

  1. Deposit at least 20 percent of the initial capital with a Belgian credit institution and obtain a standard certification confirming that the amount is held in a blocked capital account;
  2. Deposit a financial plan with a notary, sign the deed of incorporation and the by-laws in the presence of a notary, who authenticates the documents and registers the deed of incorporation.  The authentication act must be drawn up in either French, Dutch or German (Belgium’s three official languages);
  3. Register with one of the Registers of legal entities, VAT and social security at a centralized company docket and obtain a company number.

In most cases, the business registration process can be completed within one week.

https://www.business.belgium.be/en/managing_your_business/setting_up_your_business  

http://procedures.business.belgium.be/en/procedures-iframe/?_ga=2.174982369.210217559.1555582522-1537979373.1536327711  

Based on the number of employees, the projected annual turnover and the shareholder class, a company will qualify as a small or medium-sized enterprise (SME) according to the meaning of the Promotion of Independent Enterprise Act of February 10, 1998.  For a small or medium-sized enterprise, registration will only be possible once a certificate of competence has been obtained. The person in charge of the daily management of the company must prove his or her knowledge of business management, with diplomas and/or practical experience. In the Global Enterprise Register, Belgium currently scores 7 out of 10 for ease of setting up a limited liability company.

Business facilitation agencies provide for equitable treatment of women and underrepresented minorities in the economy.

The three Belgian regions each have their own investment promotion agency, whose services are available to all foreign investors.

Outward Investment

The Belgian governments do not promote outward investment as such.  There are also no restrictions to certain countries or sectors, other than those where Belgium applies UN resolutions.

2. Bilateral Investment Agreements and Taxation Treaties

Belgium has no specific investment agreement with the United States; investment-related issues are covered in the 1951 Treaty of Friendship, Enterprise and Navigation.  Belgium has bilateral investment treaties in force with Albania, Algeria, Argentina, Armenia, Bangladesh, Bolivia, Burkina Faso, Burundi, Chile, China, Democratic Republic of the Congo, Egypt, El Salvador, Philippines, Gabon, Georgia, Hong Kong, India, Indonesia, Yemen, Cameroon, Kazakhstan, Kuwait, Korea, Lebanon, Lithuania, Macedonia, Morocco, Mexico, Moldavia, Mongolia, Ukraine, Uzbekistan, Paraguay, Rwanda, Saudi Arabia, Singapore, South Africa, Sri-Lanka, Thailand, Tunisia, Uruguay, Russia, Venezuela, and Vietnam.

Additionally, Belgium and Luxembourg have jointly signed (as The Belgium Luxembourg Economic Union – BLEU) but not yet unimplemented agreements with Liberia, Mauritania, and Thailand.  Belgium and Luxembourg also have joint investment treaties with Poland and Russia, but these are not BLEU agreements. All these agreements provide for mutual protection of investments.

Belgium does have a bilateral taxation treaty with the United States, the last version of which dates from 2006 but which has been augmented with various MOUs since then.  In January 2016, the European Commission ruled that Belgium had to reclaim more than USD 900 million from companies that had benefitted from “excess profit” rulings. The scheme had reduced the corporate tax base of the companies by between 50% and 90% to discount for excess profits that allegedly resulted from being part of a multinational group. However, in a February 14, 2019 ruling, the EU General Court decided that the excess profit ruling was not a State-aid scheme. Observers note that the ruling is based on a procedural defect from the European Commission, and highlight that the General Court did not per se validate the excess profit ruling. The European Commission has two months and ten days to appeal the ruling.

3. Legal Regime

Transparency of the Regulatory System

The Belgian government has adopted a generally transparent competition policy.  The government has implemented tax, labor, health, safety, and other laws and policies to avoid distortions or impediments to the efficient mobilization and allocation of investment, comparable to those in other EU member states.  Draft bills are never made available for public comment, but have to go through an independent court for vetting and consistency. Nevertheless, foreign and domestic investors in some sectors face stringent regulations designed to protect small- and medium-sized enterprises.  Many companies in Belgium also try to limit their number of employees to 49, the threshold above which certain employee committees must be set up, such as for safety and trade union interests.

Recognizing the need to streamline administrative procedures in many areas, in 2015 the federal government set up a special task force to simplify official procedures.  It also agreed to streamline laws regarding the telecommunications sector into one comprehensive volume after new entrants in this sector had complained about a lack of transparency.  Additionally the government beefed up its Competition Policy Authority with a number of academic experts and additional resources. Traditionally, scientific studies or quantitative analysis conducted on the impact of regulations are made publicly available for comment. However, not all public comments received by regulators are made public.

Accounting standards are regulated by the Belgian law of January 30, 2001, and balance sheet and profit and loss statements are identical with international accounting norms. Cash flow positions and reporting changes in non-borrowed capital formation are not required.  However, contrary to IAS/IFRS standards, Belgian accounting rules do require an extensive annual policy report.

Belgium publishes all its relevant legislation and administrative guidelines in an official Gazette, called Le Moniteur Belge (www.moniteur.be  ). The American Chamber of Commerce has called attention to the adverse impact of cumbersome procedures and unnecessary red tape on foreign investors, although foreign companies do not appear to be impacted more than Belgian firms.

International Regulatory Considerations

Belgium is a founding member of the EU, whose directives are enforced.  On May 25, 2018 Belgium implemented the General Data Protection Regulation (GDPR) (EU) 2016/679, an EU regulation on data protection and privacy for all individuals within the European Union.

Through the European Union, Belgium is a member of the WTO, and notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).

Legal System and Judicial Independence

Belgium’s (civil) legal system is independent of the government and is a means for resolving commercial disputes or protecting property rights.  Belgium has a wide-ranging codified law system since 1830. There are specialized commercial courts which apply the existing commercial and contractual laws. As in many countries, the Belgian courts labor under a growing caseload, and backlogs cause delays. There are several levels of appeal.

Laws and Regulations on Foreign Direct Investment

Payments and transfers within Belgium and with foreign countries require no prior authorization. Transactions may be executed in euros as well as in other currencies.

Belgium has no debt-to-equity requirements.  Dividends may be remitted freely except in cases in which distribution would reduce net assets to less than paid-up capital.  No further withholding tax or other tax is due on repatriation of the original investment or on the profits of a branch, either during active operations or upon the closing of the branch.

Since there are three different regional Investment Authorities, the links to their respective websites are given below.

Competition and Anti-Trust Laws

The contact address for competition-related concerns:

Federal Competition Authority
City Atrium, 6th floor
Vooruitgangsstraat 50
1210 Brussels
tel: +32 2 277 5272
fax: +32 2 277 5323
email: info@bma-abc.be
We
bsite: www.bma-abc.be

Expropriation and Compensation

There are no outstanding expropriation or nationalization cases in Belgium with U.S. investors. There is no pattern of discrimination against foreign investment in Belgium.

When the Belgian government uses its eminent domain powers to acquire property compulsorily for a public purpose, adequate compensation is paid to the property owners. Recourse to the courts is available if necessary.  The only expropriations that occurred during the last decade were related to infrastructure projects such as port expansion, roads, and railroads.

Dispute Settlement

ICSID Convention and New York Convention

Belgium is a member of the International Center for the Settlement of Investment Disputes (ICSID) and regularly includes provision for ICSID arbitration in investment agreements.

Investor-State Dispute Settlement

The government accepts binding international arbitration of disputes between foreign investors and the state. There have been no investment disputes involving a U.S. person within the past 10 years.  Local courts are expected to enforce foreign arbitral awards issued against the government. To date, there has been no evidence of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

  1. Alternative Dispute Resolution is not mandatory by law and is therefore not commonly used in disputes, except for matters where the determination by an expert is sought, whether appointed by the parties in agreement or in accordance with a contractual clause or appointed by the court in the context of dispute resolution.
  2. Belgium has no domestic arbitration bodies.
  3. Local courts recognize and enforce foreign arbitral awards. Judgments of foreign courts are recognized and enforceable under the local courts.
  4. There are no reports or complaints targeting Court proceedings involving SOEs or alleged favoritism for them.

Bankruptcy Regulations

Belgian bankruptcy law is governed by the Bankruptcy Act of 1997 and is under the jurisdiction of the commercial courts.  The commercial court appoints a judge-auditor to preside over the bankruptcy proceeding and whose primary task is to supervise the management and liquidation of the bankrupt estate, in particular with respect to the claims of the employees.  Belgian bankruptcy law recognizes several classes of preferred or secured creditors. A person who has been declared bankrupt may subsequently start a new business unless the person is found guilty of certain criminal offences that are directly related to the bankruptcy.  The Business Continuity Act of 2009 provides the possibility for companies in financial difficulty to enter into a judicial reorganization. These proceedings are to some extent similar to Chapter 11 as the aim is to facilitate business recovery. In the World Bank’s Doing Business Report, Belgium ranks number 8 (out of 198) for the ease of resolving insolvency.

7. State-Owned Enterprises

Belgium does not have any State Owned Enterprises (SOEs) that exercise delegated government powers.  Private enterprises are allowed to compete with public enterprises under the same terms and conditions, but since the EU started to liberalize network industries such as electricity, gas, water, telecoms and railways, there have been regular complaints in Belgium about unfair competition from the former state monopolists.  Complaints have ranged from lower salaries (railways) to lower VAT rates (gas and electricity) to regulators with a conflict of interest (telecom). Although these complaints have now largely subsided, many of these former monopolies are now market leaders in their sector, due mainly to their ability to charge high access costs to networks fully amortized years ago. However, former telecom monopolist Proximus still features on the EU’s list of companies receiving state aid.  Belgium has about 80,000 employees working in SOEs, mainly in the railways, telecoms and general utility sectors. There are also several regional-owned enterprises where the regions often have a controlling majority: for a full listing on the companies located in Wallonia, see www.actionnariatwallon.be  .  There is no equivalent website for companies located in Flanders or in Brussels. Details on the shareholders of the Bel20 (benchmark stock market index of Euronext Brussels) can be found on http://www.gresea.be/Qui-sont-les-actionnaires-du-BEL-20  .

Privatization Program

Belgium currently has no ongoing privatization programs.  There are ongoing discussions about the possible privatization of the state-owned bank Belfius and the government share in telecom operator Proximus, in which the government needs to weigh of the benefits of a one-time sale against the recurring stream of dividends generated by these holdings.  There are no indications that foreign investors would be excluded from these eventual privatizations.

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) 2017 $485 2017 $492,000 https://data.worldbank.org/country/belgium  
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2017 $55,000 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2017 $103,000 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 2017 122.5% UNCTAD data available at

https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx    

* Source for Host Country Data:
GDP: https://stat.nbb.be/Index.aspx?ThemeTreeId=41&lang=fr#  
National Bank of Belgium offers different statistics, but it does not match the BEA stats. https://stat.nbb.be/Index.aspx?DataSetCode=INVDIR  


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 582,571 100% Total Outward 689,726 100%
Netherlands 166,767 28.6% Netherlands 247,827 35.9%
Luxembourg 154,808 26.5% Luxembourg 184,845 26.8%
France 148,682 25.5% UK 131,719 19.1%
Switzerland 55,845 9.5% France 45,175 6.5%
Japan 16,404 2.8% Germany 13,245 1.9%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

New link: http://data.imf.org/CPIS   

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 830,102 100% All Countries 426,482 100% All Countries 403,620 100%
Luxembourg  248,149 29.9% Luxembourg 209,411 49.1% France 74,216 18.4%
France 141,086 17% France 66,870 15.7% Netherlands 48,685 12.1%
Netherlands 67,411 8.1% United States 30,333 7.1% Luxembourg 38,738 9.6%
Germany 56,359 6.7% Germany 29,758 7% Spain 27,172 6.7%
U.S 54,123 6.5% Ireland 23,993 5.6% Germany 26,600 6.6%

Bulgaria

Executive Summary

Bulgaria is still seen by many investors as an attractive investment destination with government incentives for new investment. Bulgaria continues to offer some of the least expensive labor in EU, with low and flat corporate and income taxes. 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, business process outsourcing, and building services for technical maintenance. The 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. U.S. and foreign investors have also been attracted to the automotive sector in recent years, and USD 120 million was invested in the sector overall in 2018. EU multi-year funds support economic growth in the form of grants for selected infrastructure projects.

There are, however, emerging challenges. A shortage of skilled labor, due to out-migration and an aging population, is becoming more pronounced and driving labor cost increases in selected sectors.  Foreign investors remain concerned about rule of law in Bulgaria. Corruption is endemic, particularly on large infrastructure projects and in the energy sector. Investors cite other problems impeding investment, such as unpredictability due to frequent regulatory and legislative changes and a slow judicial system.  As of early 2019, there are questions as to the government’s commitment to upholding its contracts, including with major U.S. investors. In another example, a U.S. company has faced extended regulatory obstacles in its attempts to enter the energy market. 

Foreign Direct Investment (FDI) has continued to decline, remaining far below peak levels in the wake of Bulgaria’s entry into the EU in 2007.  Structural funds from the European Union have helped sustained growth, filling in the gaps left by the declining FDI.

Bulgaria’s economy grew by 3.1 percent in 2018, driven mainly by domestic consumption, government procurement, EU funds and, to a lesser extent, exports.  Official unemployment dropped to 5.2 percent in 2018, and the economy is near its full-employment level. The shortage of skilled labor in many sectors has led to wage increases far above gains in labor productivity, putting pressure on Bulgaria’s competitiveness.  The wage gains have driven inflation up to 2.8 percent in 2018, putting an end to a three-year deflationary period between 2015 and 2017.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 77 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 59 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 37 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $848 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $7,860 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

At present, there are no general limits on foreign ownership or control of firms, nor is there screening or restricting of foreign investment in Bulgaria.  However, while Bulgaria generally affords national treatment to foreign investors, there are reports of discrimination against U.S. investors by government officials.  Two major U.S. investors in Bulgaria have been subjected to open criticism by government officials as “American” companies responsible for high energy costs in Bulgaria.  The government continues to threaten to have the companies’ long-term contracts abrogated. In another case, a U.S. company has faced bureaucratic hurdles in its efforts to compete in the energy sector with a monopolistic state-owned Russian incumbent.  More often, investors cite general problems with corruption, rule of law, frequently changing legislation, and uneven law enforcement. Transparency International’s (TI) Corruption Perception Index for 2018 ranked Bulgaria 77th out of 180 surveyed countries, down six places from last year’s 71st, and scoring 42 on a 100-point scale, well below the EU average of 66.  The Invest Bulgaria Agency (IBA), the government’s investment promotion body, provides information, administrative services, and incentive assessments to prospective foreign investors. Its website http://www.investbg.government.bg/en   contains general information for foreign investors.

Limits on Foreign Control and Right to Private Ownership and Establishment

With a few exceptions, there are no limits for foreign and domestic private entities to establish and own a business in Bulgaria. The Offshore Company Act lists 28 activities (including government procurement, natural resource exploitation, national park management, banking, insurance) banned for 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 treaty for the avoidance of double taxation (including the United States).  Despite the EU creation of a national security investment review framework, Bulgaria currently has no specific law or established mechanism in place for screening individual foreign investments for potential national security risks. Nonetheless, investments can be scrutinized on an ad hoc basis or through the Law on the Measures against Money Laundering.

Other Investment Policy Reviews

Reviews of Bulgaria’s investment climate by the Organization for Economic Cooperation and Development (OECD) can be found at this website: https://www.oecd.org/development/bulgaria-strengthens-its-co-operation-with-the-oecd-via-an-action-plan.htm   

The United Nations Conference on Trade and Development (UNCTAD) has this report: https://unctadstat.unctad.org/CountryProfile/GeneralProfile/en-GB/100/index.html   

Business Facilitation

Bulgaria typically supports small and medium business creation and development in conjunction with EU-funded innovation and competitiveness programs and with a special emphasis on export promotion and small- and medium-sized enterprise (SME) development. 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://public.brra.bg/Internal/Registration.ra?0   . Women receive equitable treatment to men, and the Bulgarian law protects minorities from discrimination.

Bulgaria ranked overall 59th (out of 190 surveyed economies worldwide) in the World Bank’s 2019 Doing Business report; 99th in Starting a New Business, and 147th place in the ‘Getting Electricity’ category. 

Outward Investment

There is no government agency for outward investment promotion; no restrictions exist for any local business to invest abroad.

2. Bilateral Investment Agreements and Taxation Treaties

Bulgaria has a Bilateral Investment Treaty (BIT) with the United States, which obligates the parties to uphold national treatment and includes provisions for investor-State dispute settlement through international arbitral bodies. The BIT also includes a side letter on protections for intellectual property rights. Upon Bulgaria’s joining the EU, Bulgaria and the United States exchanged notes in 2003 to make Bulgaria’s obligations under the BIT compatible with its EU obligations, and finalized the process in January 2007.

As of 2019, Bulgaria also has bilateral investment treaties signed with the following countries: Albania, Algeria, Argentina, Armenia, Austria, Azerbaijan (not in force), Bahrain (not in force), Belarus, Belgium, China, Croatia, Cuba, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Georgia, Germany, Ghana (not in force), Greece, Hungary, India (terminated), Indonesia (terminated), Iran, Israel, Italy (terminated), Jordan, Kazakhstan, Kuwait, Latvia, Lebanon, Libya, Lithuania, Luxembourg, Northern Macedonia, Malta, Moldova, Mongolia (not in force), Montenegro, Morocco, Nigeria (not in force), North Korea (not in force), Oman, Pakistan (not in force), Poland, Portugal, Romania, Russia, San Marino, Serbia, Singapore, Slovakia, Slovenia, South Korea, Spain, Sudan (not in force), Sweden, Switzerland, Syria, Thailand, The Netherlands, Tunisia, Turkey, Ukraine, United Kingdom and Northern Ireland, Uzbekistan, Vietnam, and Yemen.

Bulgaria has a bilateral tax treaty with the United States. As of 2019, Bulgaria has signed bilateral double taxation treaties with the United States and the following countries: Albania, Algeria, Armenia, Austria, Azerbaijan, Bahrain Belarus, Belgium, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Jordan, Kazakhstan, Kuwait, Latvia, Lebanon, Lithuania, Luxembourg, Macedonia, Malta, Moldova, Mongolia, Montenegro, Morocco, North Korea, Norway, Poland, Portugal, Qatar, Romania, Russia, Serbia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Syria, Thailand, The Netherlands Turkey, Ukraine, United Arab Emirates, United Kingdom and Northern Ireland, Uzbekistan, Vietnam, and Zimbabwe.

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. 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 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 relevant 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. 

In addition, the law eliminates bureaucratic discretion in granting requests for routine economic activities, and provides for silent consent 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.  Bulgarian government licenses exports of dual-use goods and bans the export all goods under international trade sanctions lists. The Bulgarian government’s budget is assessed as transparent and in accordance with international standards and principles. Data on government debt is publicly available but data on the debt accrued by state-owned companies is not. 

International Regulatory Considerations

Bulgaria became a member of the World Trade Organization 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 competence 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 the least trusted institution in the country, with widespread allegations of corruption and undue political and business influence. The busiest courts in Sofia suffer from serious backlogs, limited resources, and inefficient procedures that hamper the swift and fair administration of justice.

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 14,500), excluding alimony, labor disputes, and financial audit discrepancies, or in property cases where the property’s value exceeds BGN 50,000 (USD 29,000).  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 that 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 has adequate means of enforcing property and contractual rights under local legislation. In practice, however, the government’s handling of investment disputes has been slow, and intervention at the highest level is often required.  Investors sometimes perceive that jurisprudence is inconsistent, and that national legislation is used to deter competition by foreign investors.

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, as well as in education and human resource development.  It creates 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 government.  The most common PPPs are in the form of concessions, which include the lease of government property for private use for up to 35 years.

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

InvestBulgaria’s official web site http://www.investbg.government.bg/en   is a useful source of information on Bulgaria’s economy, investment law, and statistics for prospective foreign investors.

Competition and Anti-Trust 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.  Monopolies can only be established in enumerated categories of strategic industries.  The law forbids restrictive trade practices, abuse of market power, and certain forms of unfair competition.   In practice, the Competition Law has been applied inconsistently, and the Competition Commission has been seen as lacking impartiality.

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, the Council of Ministers or a regional governor may expropriate land, provided that the owner is compensated at fair market value. Expropriation actions by the Council of Ministers or by regional authorities can be appealed at a local administrative court. The U.S.-Bulgaria Bilateral Investment Treaty (BIT) commits both parties to prompt, adequate, and effective compensation in the event of expropriation.

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 of the World Bank-based International Centre for the Settlement of Investment Disputes (ICSID).

Investor-State Dispute Settlement

Bulgaria accepts binding international arbitration in disputes with foreign investors.  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.

International Commercial Arbitration and Foreign Courts

There are more than 20 arbitration institutions in Bulgaria, with the Arbitration Court of the Bulgarian Chamber of Commerce and Industry (BCCI) being the oldest.  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 several months and up to a few years.

Bankruptcy Regulations

The 1994 Commercial Code 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 Code, 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.  In the World Bank’s 2019 Doing Business Report, Bulgaria ranked 59th for ease of “resolving insolvency,” ahead of three EU peers (Luxembourg, Greece, and Malta).

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 for railways and for the postal service. SOEs also predominate in the healthcare, infrastructure, and energy sectors; many of these are collectively managed by a common holding company (also an SOE).  Bulgaria’s roughly 220 SOEs account for about five percent of employment in the country, and their revenues amount to about 13.5 percent of the GDP. 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/948   

The law treats equally public and private sector companies 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.  All majority or minority state-owned properties are eligible for privatization, with the exception of those included in a specific list of public interest companies, including water management companies, state hospitals, and state sports facilities. 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. Foreign companies may participate in privatization tenders. The 2010 Privatization and Post-Privatization Act created a single Privatization and Post-Privatization Agency http://www.priv.government.bg/   responsible for privatization oversight.

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) 2017 $58,221 2016 $53,241 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $848 2017 $848 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2017 $29 N/A N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 91.5% 2016 79.4% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

* Source for Host Country Data: Bulgarian National Bank (BNB). For comparative purposes, data inside the table draws from the U.S./international source provided in the last column.


Table 3: Sources and Destination of FDI

The official FDI data in 2018 is broadly consistent with the IMF dollar-adjusted data.  The data for the Netherlands are heavily influenced by investment by non-Dutch companies (particularly Russian) incorporated in the country.  Distortions such as this substantially overstate the actual role of some countries as sources of FDI and understate that of the United States.  A recent study, based on beneficial owner analysis, placed the United States as historically the sixth-largest source country for FDI in Bulgaria, significantly above its nominal ranking at #13.  According to the same analysis, the United States is historically the largest non-EU source of FDI in Bulgaria.

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 $49,604 100% N/A N/A N/A
Netherlands $8,594 17.3% N/A N/A N/A
Austria $4,756 9.2% N/A N/A N/A
Germany $3,358 6.8% N/A N/A N/A
Italy $2,995 6.0% N/A N/A N/A
United Kingdom $2,730 5.5% N/A N/A N/A
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Bulgarian companies’ tendency to seek tax advantages by using offshore entities impacts the data below, particularly in the case of Luxembourg

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $8,858 100% All Countries $2,247 100% All Countries $6,611 100%
United States $936 10.6% Luxembourg $679 30.2% Romania $865 13.1%
Luxembourg $887 10.0% United States $500 22.2% Hungary $479 7.2%
Romania $872 9.8% Germany $277 12.3% Poland $466 7.0%
Czech Rep $532 6.0% France $223 9.9% Czech Rep $459 6.9%
France $519 5.9% Ireland $164 7.3% United States $436 6.6%

Croatia

Executive Summary

Croatia became a member of the EU in 2013, which enhanced its economic stability and provided some new opportunities for trade and investment. Croatia is slowly accessing a substantial amount of available EU funds, but many direct benefits of EU entry are still to come.  The Croatian government pledged to take legislative and administrative steps to reduce barriers to investment, streamline bureaucracy and public administration, and program EU funds more efficiently but promised reforms in some areas, to date, have been halting in the face of opposition from vested interest groups.  

The government is willing to meet at senior levels with interested investors and to assist in resolving problems.  Prime Minister Andrej Plenkovic 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.  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, and banking.

However, the Croatian economy continues to be defined by a large government bureaucracy, underperforming state-owned enterprises, and low regulatory transparency, all of which contributes to poor performance and relatively low levels of foreign investment.  Following a decade of growth from the end of the war in 1995, investment activity in Croatia slowed substantially in 2008 and remained under historic levels despite the economy’s emergence from recession at the end of 2015, relatively robust growth in 2016, and continued growth in 2017.  The banking system weathered the global financial crisis well but was saddled with financial costs related to the government-mandated conversion of Swiss Franc loans into euros in 2015.

In the last two years, the government implemented a number of financial incentives and measures designed to attract investment and support entrepreneurship.  However, these incentives are no corrective for profound deficiencies in the investment climate which include difficulty in establishing property ownership owing to incomplete public property records and an inefficient, sometimes unpredictable, judicial system that contributes to slow resolution of legal disputes.  Investors continue to face high “para-fiscal” fees, rigid labor laws, and slow and complex permitting procedures for most investments.  

The government maintains a budget deficit well within EU-recommended levels.  In January 2019, the government announced the fourth economic reform package of PM Plenkovic’s tenure.  This package aims to cut red tape, decrease the administrative burden on start-ups and established businesses, and generally stimulate economic growth.  Although the government continues to make incremental improvements to the business environment, its primary focus remains on preventing job losses from state-owned enterprises and “strategic” sectors.  In the last year, the government privatized a formerly state-owned fertilizer company by providing state guarantees equivalent to the total amount of private capital invested and is attempting to shore up the financial viability of two major shipbuilding companies. 

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 60 of 176 https://www.transparency.org/cpi2018#results 
World Bank’s Doing Business Report 2019 58 of 190 http://www.doingbusiness.org/en/data/exploreeconomies/croatia/ 
Global Innovation Index 2018 41 of 128 https://www.globalinnovationindex.org/gii-2018-report 
U.S. FDI in partner country ($M USD, stock positions) 2016 $199 Host government, Croatian National Bank http://www.hnb.hr/en/statistics/statistical-data/

rest-of-the-world/foreign-direct-investments

World Bank GNI per capita 2018 60 of 176 https://www.transparency.org/cpi2018#results 

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, such as 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, excessive duration of administrative procedures, lack of structural reforms, and unresolved property ownership issues weigh heavily upon the investment climate. 

The Agency for Investment and Competitiveness (AIK) — previously a stand-alone Croatian government agency providing investors with various services intended to help with implementation of investment projects — became part of the Ministry of Economy, Entrepreneurship and Crafts at the start of 2019.  The Ministry’s Directorate for Investment, Industry and Innovation has assumed the assistance role previously offered by AIK. For more information, see: investcroatia.gov.hr. The Strategic Investment Act helps investors streamline large projects by gathering all necessary information the investor needs to implement the project and then fast-tracking the necessary procedures for implementation of the project, including acquiring permits and help with location. 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 national security-sensitive sectors:  inland waterways transport, maritime transport, rail transport, air ground-handling, freight-forwarding, publishing, education, and ski instruction. Apart from these, the only blocks to market access involve routine professional requirements (architect, auditor, engineer, lawyer, and veterinarian).  Over 90 percent of the banking sector is foreign-owned. 

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) 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 World Bank Group published a “Doing Business” Economic Profile of Croatia in 2018: http://www.doingbusiness.org/en/data/exploreeconomies/croatia

Business Facilitation

The Croatian e-government initiative “Hitro.hr” (www.hitro.hr  ) provides for 24-hour access to on-line business registration. Additionally, Hitro.hr offices are located in more than 60 Croatian cities and towns. In order to begin business activities, a company needs to register with the State Statistics Bureau to obtain a company identification number, then with a Notary Public, the Commercial Court, Tax Administration, and Health and Pension agencies.  This process can take from one to three days, depending on the efficiency of the local Commercial court, which processes the registration. Private sector participants have complained that the process can take as long as 60 days.  

In 2018, the Global Enterprise Agency rated Croatia’s business registration process 4 out of 10, while the World Bank Ease of Doing Business report ranks Croatia as 123 out of 190 countries.  The government has pledged to improve conditions for business registration. Croatia’s business facilitation mechanism provides for equitable treatment to all interested in registering a business, regardless of gender or ethnicity.

Outward Investment

Croatians have invested some USD 4 million in the United States.  Croatia has no restrictions on domestic investors who wish to invest abroad.

2. Bilateral Investment Agreements and Taxation Treaties

Croatia has signed investment protection treaties or agreements with the following countries:

Albania, Argentina, Austria, Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Cambodia, Canada, Chile, China, Cuba, Czech Republic, Denmark, Egypt, Finland, France, Greece, Germany, Hungary, India, Indonesia, Iran, Israel, Italy, Jordan, Kuwait, Latvia, Libya, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Moldova, Mongolia, Morocco, Netherlands, Oman, Poland, Portugal, Qatar, Romania, Russia, San Marino, Serbia, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Thailand, Turkey, Ukraine, United Kingdom, United States, Zimbabwe.

The U.S.-Croatian Bilateral Investment Treaty (BIT), has been in force since 2001. The full text of this and all other BITs can be found at:  https://investmentpolicy.unctad.org/international-investment-agreements/countries/51/croatia   

Bilateral Taxation Treaties

Croatia and the United States do not share a bilateral tax treaty.. As an EU member, Croatia avoids double taxation with the other 27 member states and has dual taxation agreements with the following countries:

Albania, Armenia, Azerbaijan, Belorussia, Bosnia and Herzegovina, Canada, Chile, China, Georgia, India, Indonesia, Iran, Iceland, Israel, Jordan, Kosovo, Kuwait, Macedonia, Malaysia, Montenegro, Morocco, Mauritius, Moldova, Oman, Qatar, Russia, San Marino, South Africa, South Korea, Syria, Serbia, Switzerland, Turkmenistan, Turkey, Ukraine, and the United Arab Emirates.

Recent changes to the Croatian tax regime reduced income and corporate tax rates. The government has committed to simplifying the tax system to facilitate business operations and more investment. The government offers a binding tax opinion procedure to investors that guarantees a fixed tax rate for a certain period of time and thus eliminates the risk of unanticipated changes to tax law that can affect investment costs. For detailed information, see: http://www.porezna-uprava.hr/bi/Stranice/Obvezuju percentC4 percent87a-mi percentC5 percentA1ljenja.aspx  

Croatia has a number of so-called non-tax “para-fiscal” or administrative fees, including, for example, levies for use of radio frequencies, monument upkeep, use of water, and use of forests, paid to relevant ministries.  The Ministry of Economy has identified 3,076 various rules and obligations that a business faces. At the beginning of 2019, the government announced the “Action Plan for Removing Administrative Fees” and pledged to relieve a total of approximately USD 100 million worth of fees during the year.  The business community is currently working with the Ministry of Economy to identify which fees to eliminate.

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.  All legislation is published both on-line and in in the National Gazette, available at: www.nn.hr.

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. 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 debate. 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.  There are no informal regulatory processes, and investors should rely solely on government issued legislation to conduct business.

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. The Enforcement Act was amended in August 2017 and has incorporated EU Parliament and Council provisions for making cross-border financial claims easily enforced in both business and private instances.  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  

International Regulatory Considerations

Croatia, as an EU member, transpose 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.

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 all civil and criminal cases. It hears appeals from the County, High Commercial, and Administrative Courts. Regulations and enforcement actions are appealable and adjudicated in the national court system.

The Ministry of Justice continues to pursue a court reorganization plan intended to increase efficiency and reduce the backlog of judicial cases.  While these reforms are underway, significant challenges remain in relation to reforming the land registry, training court officers, providing adequate resources to meet the 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.  On average, Croatian courts resolve roughly the same number of cases that they receive each year, but there is a significant backlog (of sometimes tens of thousands of cases) which carries over from year to year.   

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, Entrepreneurship, and Crafts Directorate for Investment, Industry, and Innovation (investcroatia.gov.hr) facilitates both foreign and domestic investment and is available to all interested investors for assistance. Their 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. 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 under various 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 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 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 several 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 regarding U.S. investor claims before Croatian courts. The cases are in regard to privatization within the real estate sector and have been pending for years.

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  

The World Bank Ease of Doing Business 2016 report commended Croatia for making enforcing contracts easier by introducing an electronic system to handle public sales of movable assets and by streamlining the enforcement process as a whole.  

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 World Bank Ease of Doing Business 2018 rating for Croatia in the category of resolving insolvency was 59 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.

7. State-Owned Enterprises

There are currently a total of 65 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 State Owned Property or the Center for Restructuring and Sale (CERP). In 2018, the government established an official list of 39 “special state interest” SOEs overseen by the Ministry of State Owned Property, including 19 wholly state-owned and 20 majority state-owned companies.  CERP oversees the other 26 SOEs, of which 12 are wholly state-owned and 14 are majority state-owned.  

These SOEs cover a range of sectors including infrastructure, energy, real estate, finances, transportation and utilities. The latest figures available, from December 31, 2017, show that SOEs employ a total of 73,790 people and have net revenues totaling USD 9.1 billion, while assets total USD 38.7 billion.  The government appoints the members of SOE management and supervisory boards, making the companies very susceptible to political influence. 

CERP also oversees 374 companies; of these, the state owns from ten to 49 percent of 88 companies, and under ten percent of the remaining 260 companies. By statute, CERP must divest the state from these companies. Lists of SOEs are published on the websites of the Ministry of State Owned 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 European Bank for Reconstruction and Development (EBRD) concluded in a report on Croatian SOEs published in 2018 that a way to improve corporate governance and reduce political influence is to appoint professional boards with independent members. The International Monetary Fund Staff Concluding Statement of the 2018 IMF Article IV Mission from December 2018 noted that SOEs’ revenue-generating capacity is low, and that loss-making SOEs are a drain on the state budget.  SOEs competing on the domestic market do not receive market based advantages from the host government.  

The Zagreb Stock exchange is currently working with the EBRD on reviewing and revising the Croatian Corporate Governance Code, which is expected to be finished in August 2019. 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 State Owned Assets and the Center for Reconstruction and Sales. There are no restrictions against foreigners participating in privatization tenders. The banking sector, telecommunications, and Croatia’s largest pharmaceutical company were purchased by foreign investors when Croatia initiated its privatization process in the late 1990’s. The bidding process is public 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 State Owned Assets identified completing the privatization of state-owned assets and improving the management of SOE’s as its priorities in its 2018-2020 strategy.  This strategy is available (only in Croatian) at: https://imovina.gov.hr/UserDocsImages/dokumenti/Izvjesca/Strateski percent20plan percent20MIDIM percent202018.-2020.pdf 

All tenders are published internationally and there are no restrictions on foreign investor participation in privatization. The bidding process is public. 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) 2018 $60,892 2018 $60,805 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $138 N/A N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2018 $56.7 N/A N/A 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 65.15% N/A N/A 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”]

*GDP at www.dzs.hr   for 2018, FDI at www.hnb.hr    for Q1-Q3 2018 Note: World Bank and U.S. Bureau of Economic Analysis do not have GDP or FDI data available for 2018 at time of publishing.


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 $39,675 100% Total Outward $7,722 100%
The Netherlands $6,856 20.4% The Netherlands $3,212 41.6%
Austria $4,326 12.9% Bosnia Herzegovina $1,448 18.8%
Italy $3,612 10.8% Slovenia $1,151 14.9%
Germany $3,215 9.6% Serbia $946 12.2%
Luxembourg $2,756 8.2% Montenegro $302 3.9%
“0” reflects amounts rounded to +/- USD 500,000.

*FDI at www.hnb.hr    for Q1-Q3 2018


Table 4: Sources of Portfolio Investment

Data not available.

Cyprus

Executive Summary

Cyprus is situated at the crossroads of three continents – Europe, Africa, and Asia – as such it occupies a strategic place in the Eastern Mediterranean region.  Cyprus is a member of the European Union (EU) and the government’s attitude towards foreign direct investment (FDI) is positive. The Cyprus Investment Promotion Agency (CIPA) aggressively promotes investment in its traditional sectors of shipping, tourism, banking, financial and professional services.  Newer sectors continue to provide opportunities for FDI, especially in energy, film production, investment funds, education, research & development, and information technology. CIPA also focuses heavily on the promotion of company headquartering in Cyprus. However, the island’s divided status remains an impediment to attracting comprehensive island-wide FDI investment from the United States.

The discovery of significant amounts of hydrocarbons in Cyprus’ Exclusive Economic Zone (and in the surrounding Eastern Mediterranean region) continues to generate excitement within the government and private sector, and fosters realization that additional FDI is required for Cyprus to fully realize its potential in hydrocarbons development.  U.S. energy companies Noble Energy’s and ExxonMobil’s exploration and eventual commercialization of Cypriot natural gas present an opportunity for additional U.S. FDI in energy services and associated sectors. Cyprus can also serve as an energy services hub for hydrocarbons projects in the Eastern Mediterranean region – a safe and secure base with shipping and air connectivity, and an EU-connected banking and financial sector conducive to regional projects.  Cyprus – with EU financial support – is the project base and hub for the EuroAsia Interconnector undersea electrical cable which will connect Israel, Cyprus, and Greece to the EU grid, and another similar project connecting Africa through Cyprus to the EU. Other energy projects – within Cyprus and connecting the region – involve pipelines and LNG import and export infrastructure. Both CIPA and the Ministry of Energy, Commerce, and Industry (MECI) prioritize, and help facilitate investment in the energy and energy-related services sectors.

Cyprus established the “Cyprus Filming Scheme” in 2018, which provides a range of financial and tax incentives for film producers to choose Cyprus as a filming destination, in addition to its variety of historic, dramatic, and attractive landscapes.  The first permit given under this scheme was for a U.S. film production, set to begin in 2019. Incentives include cash rebates on eligible expenditures, tax credits, tax allowance for Small to Medium Enterprises (SMEs) investing in film production infrastructure and technological equipment, and VAT refunds on qualifying production expenditures.  Film production companies can apply and receive an approved permit within sixty days of submitting an online application. Categories include feature films, television series or films, digital or analogue animation, creative documentaries, transmedia and crossmedia productions, and reality programs, which directly or indirectly promote Cyprus and its culture.  (http://film.investcyprus.org.cy/)

Cyprus’ sovereign debt regained investment grade rating in 2018, following years of economic recovery after the 2013 financial crisis.  Cyprus has taken steps in 2018 to address recognized regulatory shortcomings in combatting illicit finance in its international banking and financial services sector, tightening controls over non-resident shell companies and bank accounts.  Judicial reform is still needed to address inefficiencies and delays in contract enforcement and commercial litigation. Commercial banks are slowly addressing the high rate of non-performing loans (NPLs), which declined from 42 percent of gross loans in 2017 to 32 percent in 2018.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 38 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 57 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 29 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $1,700  http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $23,720 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

Area Administered by Turkish Cypriots

Since 1974, the southern part of Cyprus has been under the control of the Government of the Republic of Cyprus. The northern part, administered by Turkish Cypriots, proclaimed itself the “Turkish Republic of Northern Cyprus” (“TRNC”) in 1983.  The United States does not recognize the “TRNC” as a government, nor does any country other than Turkey. A substantial number of Turkish troops remain in the northern part of the island.  A buffer zone, or “green line,” patrolled by the UN Peacekeeping Force in Cyprus (UNFICYP), separates the two parts. U.S. citizens can travel to the northern part; U.S. companies can invest and do business in the northern part, but should be aware of legal complications and risks inherently due to the lack international recognition and absence of any political settlement.

Turkish Cypriot businesses are interested in working with American companies in the fields of agriculture, hospitality, renewable energy, and retail franchising.  Significant Turkish aid and investment flows to the “TRNC.” The single greatest catalyst for island-wide Cypriot economic growth and prosperity lies in the efforts of both communities to achieve a political settlement.

1. Openness To, and Restrictions Upon, Foreign Investment

Republic of Cyprus

The ROC has a favorable attitude towards FDI and welcomes U.S. investors.  There is no discrimination against U.S. investment; however there are some ownership limitations and licensing restrictions set by law on non-EU investment in certain sectors, such as private land ownership, media, construction, etc. (see Limits on Foreign Control, below).  The ROC promotes foreign direct investment (FDI) through a dedicated agency, the Cyprus Investment Promotion Agency (CIPA). CIPA’s Invest Cyprus program is the ROC’s dedicated partner tasked to attract and facilitate FDI in key economic sectors of shipping, education, real estate, tourism and hospitality, energy, investment funds, filming, and innovation and startups. (https://www.investcyprus.org.cy/about/invest-cyprus  ).  InvestCyprus is the first point of contact for investors, and provides detailed information on the legal, tax and business regulatory framework.  The ROC and CIPA also promote an ongoing dialogue with investors through a series of promotion seminars each year and a robust Cyprus Chamber of Commerce and Industry (CCCI) with country-specific bilateral chambers dedicated to promoting FDI.

For more information:

Cyprus Investment Promotion Agency, InvestCyprus
9 Makariou III Avenue
Severis Building, 4th Floor
1965 Nicosia, Cyprus
Telephone: +357 22 441133
Fax: +357 22 441134
Email: info@investcyprus.org.cy
Website: https://www.investcyprus.org.cy  

One-Stop-Shop & Point of Single Contact

Ministry of  Energy, Commerce, and Industry (MECI)
13-15 Andreas Araouzos
1421 Nicosia, Cyprus
Telephone: +357 22 409318 or 321
Fax: +357 22 409432
Email 1: onestopshop@mcit.gov.cy
Email 2: psccyprus@mcit.gov.cy
Website: www.businessincyprus.gov.cy  

Area Administered by Turkish Cypriots

Turkish Cypriots welcome FDI and are eager to attract investments, particularly those that will lead to the transfer of advanced technology and technical skills.  Priority is also given to investments in export-oriented industries. There are no laws or practices that discriminate against FDI. The “Turkish Cypriot Investment Development Agency (YAGA)” is a one-stop shop for all investors.  “YAGA’s” investment consultants provide consultancy services, guidance on the legal framework, sector specific advice and information about investor incentives.

“Turkish Cypriot Development Agency” (“YAGA”)
Tel: +90 392 – 22 82317
Website: http://www.investinnorthcyprus.org  

Limits on Foreign Control and Right to Private Ownership and Establishment

Republic of Cyprus

The ROC does not have a mandatory foreign investment screening mechanism that grants approval, other than sector-specific licenses granted by relevant ministries.  CIPA does grant approvals for investment under an incentive scheme, e.g., the film production scheme. CIPA often refers projects for review to other agencies. Separately, the ROC’s residency and citizenship investment program is regulated by law, with interagency approvals after a due diligence process.

The following restrictions apply to investing in the ROC:

Non-EU entities (persons and companies) may purchase only two real estate properties for private use (two holiday homes or a holiday home and a shop or office).  This restriction does not apply if the investment property is purchased through a domestic company or as a corporation elsewhere in the EU.

Non-EU entities also cannot invest in the production, transfer, and provision of electrical energy.  Additionally, the Council of Ministers may refuse granting a license for investment in hydrocarbons prospecting, exploration, and exploitation to a third-country national or company if that third country does not provide similar treatment to Cyprus or other EU member states.

Individual non-EU investors may not own more than five percent of a local television or radio station, and total non-EU ownership of a local TV or radio station is restricted to a maximum of 25 percent.

The right to register as a building contractor in Cyprus is reserved for citizens of EU member states.  Non-EU entities are not allowed to own a majority stake in a local construction company. Non-EU physical persons or legal entities may bid on specific construction projects but only after obtaining a special license by the Council of Ministers.

Non-EU entities cannot invest in private tertiary education institutions.

The provision of healthcare services on the island is also subject to certain restrictions, applying equally to all non-residents.

Finally, the Central Bank of Cyprus’ prior approval is necessary before any individual person or entity, whether Cypriot or foreign, can acquire more than 9.99 percent of a bank incorporated in Cyprus.

Area Administered by Turkish Cypriots

According to the “Registrar of Companies Office,” foreign ownership of construction companies is capped at 49 percent.  Currently, the travel agency sector is closed to foreign investment. Registered foreign investors may buy property for investment purposes but are limited to one parcel or property.  Foreign natural persons also have the option of forming private liability companies, and foreign investors can form mutual partnerships with one or more foreign or domestic investors.

Other Investment Policy Reviews

Republic of Cyprus

The ROC has been a member of World Trade Organization (WTO) since July 30, 1995.  As of May 1, 2004, the Republic of Cyprus is a member state of the EU. Cyprus has not undergone investment policy reviews by the Organization for Economic Cooperation and Development (OECD) or United Nations Committee on Trade and Development (UNCTAD).  The WTO published a Trade Policy Review on the EU28, including Cyprus, in July 2015. The text is available at: https://www.wto.org/english/tratop_e/tpr_e/tp417_e.htm  .

Area Administered by Turkish Cypriots

There have not been any third-party investment policy reviews.

Business Facilitation

Republic of Cyprus

The Ministry of Energy, Commerce and Industry (MECI) provides a “One Stop Shop” business facilitation service.  The One-Stop-Shop offers assistance with the logistics of registering a business in Cyprus to all investors, regardless of origin and size.  MECI’s Department of the Registrar of Companies and Official Receiver (DRCOR) provides the following services: Registration of domestic and overseas companies, partnerships, and business names; bankruptcies and liquidations; and trademarks, patents, and intellectual property matters.

Domestic and foreign investors may establish any of the following legal entities or businesses in the ROC:

  • Companies (private or public);
  • General or limited partnerships;
  • Business/trade name;
  • European Company (SE); and
  • Branches of overseas companies.

The registration process takes approximately two working days and involves completing an application for approval/change of name, followed by the steps outlined in the following link: http://www.businessincyprus.gov.cy/mcit/psc/psc.nsf/All/A2E29870C32D7F17C2257857002E18C9?OpenDocument  .

At the end of 2018, there were a total of 216,239 companies registered in the ROC, 14,526 of which had been registered in 2018 (for more statistics on company registrations, please see: http://www.mcit.gov.cy/mcit/drcor/drcor.nsf/company_statistics_en/company_statistics_en?OpenDocument  ).

In addition to registering a business, foreign investors, like domestic business owners, are required to obtain all permits that may be necessary under Cypriot law.  At a minimum, they must obtain residence and employment permits, register for social insurance, and register with the tax authorities for both income tax and Valued Added Tax (VAT).  In order to use any building or premises for business, including commerce, industry, or any other income-earning activity, one also needs to obtain a municipal license. Additionally, town planning or building permits are required for building new offices, or converting existing buildings.  There are also many sector-specific procedures. Information on all of the above procedures is available online at: http://www.businessincyprus.gov.cy/mcit/psc/psc.nsf/eke08_en/eke08_en?OpenDocument  .

The World Bank’s 2019 Doing Business report (http://www.doingbusiness.org/rankings  ) ranked Cyprus 57th out of 190 countries for ease of doing business.  Among the ten sub-categories that make up this index, Cyprus performed best in the areas of resolving insolvency (26/190) and protecting minority investors (38/190), and worst in the areas of enforcing contracts (138/190) and dealing with construction permits (126/190).  Cyprus has generally backtracked in most areas compared to 2018, including getting credit and paying taxes, causing it to slip in the overall ranking. However, using another metric, the Global Competitiveness Index, issued by the World Economic Forum, Cyprus climbed 19 spots in the 2017-2018 edition, ranking 64th out of 137 countries.  The two most problematic factors for doing business in Cyprus, according to that report were providing access to financing and an inefficient government bureaucracy.

The Republic of Cyprus follows the EU definition of micro-, small- and medium-sized enterprises (MSMEs), and foreign-owned MSMEs are free to take advantage of programs in Cyprus designed to help such companies, including the following:

Additionally, foreign investors can take advantage of the services and expertise of the Cyprus Investment Promotion Agency (CIPA), an agency registered under the companies’ law and funded mainly by the state, dedicated to attracting investment.

CIPA
9A Makarios III Ave
Severis Bldg., 4th Flr.
1065 Nicosia
Telephone: +357-22-441133
Fax: +357-22-441134
Email: info@investcyprus.org.cy
Website: http://www.investcyprus.org.cy/  

Area Administered by Turkish Cypriots

Information available on the “Registrar of Companies’” website is available only in Turkish: http://www.rkmmd.gov.ct.tr/  .  An online registration process for domestic or foreign companies does not exist and registration needs to be completed in person.

The “YAGA” was established by Turkish Cypriot authorities with the aim of it becoming a one-stop-shop for both local and foreign investors interested in investing in the “TRNC.”  Its website (http://www.yaga.gov.ct.tr/  ) provides explanations and guides in English on how to register a company in the area administrated by Turkish Cypriots.

As of March 2019, the “Registrar of Companies Office” statistics indicated there were 20,648 registered companies, of which 15,483 were Turkish Cypriot majority-owned limited liability companies; 418 foreign companies; and 456 offshore companies.  In addition, there were 2003 limited partnership companies owned only by Turkish Cypriots.

The area administered by Turkish Cypriots defines MSMEs as entities having less than 250 employees.  There are several grant programs financed through Turkish aid and EU aid targeting MSMEs.

The Turkish Cypriot Chamber of Commerce (KTTO) publishes an annual Competitiveness Report on the Turkish Cypriot economy, based on the World Economic Forum’s methodology.  KTTO’s 2017-2018 report ranked northern Cyprus 109 among 137 economies, dropping five places from its ranking in 2016.

For more information and requirements on establishing a company, obtaining licenses, and doing business visit:

“Turkish Cypriot Development Agency” (“YAGA”)
Telephone: +90 392 – 22 82317
Website: http://www.yaga.gov.ct.tr/  

Turkish Cypriot Chamber of Commerce (KTTO)
Telephone: +90 392 – 228 37 60 / 228 36 45
http://www.ktto.net/english/index.asp  Fax: +90 392 – 227 07 82

Outward Investment

Republic of Cyprus

The ROC does not restrict outward investment, other than in compliance with international obligations, like specific UN Security Council Resolutions.  In terms of programs to encourage investment, businessmen in Cyprus have access to several EU programs promoting entrepreneurship, such as the European Commission’s Investment Plan for Europe (EC IPE), known as the “Juncker Plan” for projects over € 15 million (USD 16.6 million) or the Erasmus program for Young Entrepreneurs, in addition to the European Investment Bank’s guarantee facilities for SMEs for projects under € 4 million (USD 4.4 million).

Area Administered by Turkish Cypriots

Turkish Cypriot “officials” do not incentivize or promote outward investment. The Turkish Cypriot authorities do not restrict domestic investors.

2. Bilateral Investment Agreements and Taxation Treaties

Republic of Cyprus

Cyprus is a party to 27 bilateral investment treaties (BITs) listed here: https://investmentpolicyhub.unctad.org/IIA/CountryBits/54#iiaInnerMenu  

The ROC does not have a BIT with the United States, but it does have a bilateral agreement relating to Investments Guarantees, which came into force in 1963 through the exchange of notes.  This agreement is listed as item 16 in the ROC’s list of bilateral treaties between the ROC and the United States: http://www.olc.gov.cy/olc/olc.nsf/all/D2F8E99BBA5B2FD5C22575D700359092/USD file/UNITED percent20STATES.pdf?openelement  .

For additional reference on bilateral agreements in effect, please refer to the Department of State’s Treaties in Force: https://www.state.gov/treaties-in-force/.

The United States and the ROC entered into a Tax Convention in 1985, which remains in force today as per: https://www.irs.gov/businesses/international-businesses/cyprus-tax-treaty-documents  .

An agreement between the United States and the Republic of Cyprus on the Foreign Account Tax Compliance Act (FATCA) entered into full effect January 4, 2017.

Additionally, Cyprus has signed bilateral double tax treaties with 65 countries: http://mof.gov.cy/en/taxation-investment-policy/double-taxation-agreements/double-taxation-treeties  .

Area Administered by Turkish Cypriots

The “TRNC” has bilateral investment treaties and taxation treaties only with Turkey.  Some of these agreements between Turkey and the “TRNC” include prevention of double taxation on income tax and loss of tax; trade and economic cooperation; investment; and economic and financial cooperation.

3. Legal Regime

Transparency of the Regulatory System

Republic of Cyprus

The ROC achieved a score of 4 out of 6 in the World Bank’s composite Global Indicators of Regulatory Governance score (based on data collected December 2015 to April 2016) designed to explore good regulatory practices in three core areas: publication of proposed regulations, consultation around their content, and the use of regulatory impact assessments.  For more information, please see: http://rulemaking.worldbank.org/en/data/explorecountries/cyprus  .

U.S. companies competing for ROC government tenders have noted concerns about opaque rules and possible bias by technical committees responsible for preparing specifications and reviewing tender submissions.  Overall, however, procedures and regulations are transparent and applied in practice by the government without bias towards foreign investors. The ROC actively promotes good governance and transparency as part of its administrative reform action plan: http://www.reform.gov.cy/en/  .

In line with the above plan and EU requirements, the ROC launched in 2016 the National Open Data Portal (www.data.gov.cy  ) to increase transparency in government services.  Government agencies are now required to post on this portal publicly-available information, data, records, on the entire spectrum of their activities, for use, including commercial use, by the public.  The number of data sets available through this portal has been growing rapidly in recent months.

Several agencies and non-governmental organizations (NGOs) share competency on fostering competition and transparency, including the ROC Commission for the Protection of Competition (www.competition.gov.cy  ), the Competition and Consumer Protection Service, under MECI (http://www.consumer.gov.cy/mcit/cyco/cyconsumer.nsf/page03_en/page03_en?OpenDocument  ), the Cyprus Consumers Association (www.cyprusconsumers.org.cy  ), and the Cyprus Securities and Exchange Commission (www.cysec.gov.cy  ).

Most laws and regulations are published only in Greek and obtaining official English translations can be difficult.  When passing new legislation or regulations, Cypriot authorities follow the EU acquis communautaire.  A formal procedure of public notice and comment is not required in Cyprus, except for specific types of laws.  In general, the ROC will seek stakeholder feedback directly. Draft legislation must be published in the Official Gazette before it is debated in the House to allow stakeholders an opportunity to submit comments.  The ROC House of Representatives typically invites specific stakeholders to offer their feedback when debating bills. Draft regulations, on the other hand, need not be published in the Official Gazette prior to being approved.

In an effort to contribute to global tax transparency, the ROC has adopted the Standard of Automatic Exchange of Information developed by the Organization for Economic Co-Operation and Development (OECD) known as Common Reporting Standard (CRS).  Since January 1, 2016, the ROC Tax Department requires all financial institutions to confirm their clients’ jurisdiction(s) of Tax Residence and Respective Tax Identification Number, if applicable. Additionally, the ROC has signed the U.S. Foreign Account Tax Compliance Act (FATCA), allowing Cypriot tax authorities to share information with U.S. counterparts.

Public finances and debt obligations are published as part of the annual budget process.

Area Administered by Turkish Cypriots

The level of transparency for “lawmaking” and adoption of “regulations” in the “TRNC” lags behind U.S. or EU standards.  There are no informal regulatory processes managed by nongovernmental organizations or private sector associations. Draft legislation or regulations are made available for public comment for 21 days after the legislation is sent to “parliament.”  Almost all legislation and regulations are published only in Turkish.

International Regulatory Considerations

Republic of Cyprus

As an EU member state since May 1, 2004, the Republic of Cyprus must ensure compliance with the acquis communautaire — the body of common rights and obligations that is binding on all EU members.  The acquis is constantly evolving and comprises of Treaties, international agreements, legislation, declarations, resolutions, and other legal instruments.  EU legislation, for its part, is subdivided into:

  • Regulations, which are directly applicable to member states and require no further action to have legal effect;
  • Directives, which are addressed to and are binding on member states, but the member state may choose the method by which to implement the directive.  Generally, a member state must enact national legislation to comply with a directive;
  • Decisions, which are binding on those parties to whom they are addressed;
  • Recommendations and opinions, which have no binding force.

When there is conflict between European law and the law of any member state, European law prevails; the norms of national law have to be set aside, under the principle of EU law primacy or supremacy.

Legal System and Judicial Independence

Republic of Cyprus

Cyprus is a common law jurisdiction and its legal system is based on English Common Law, in both substantive and procedural matters.  Cyprus inherited many elements of its legal system from the United Kingdom, including the presumption of innocence, the right to due process, the right to appeal, and the right to a fair public trial.  Courts in Cyprus possess the necessary powers to enforce compliance by parties who fail to obey judgments and orders made against them. Public confidence in the integrity of the Cypriot legal system remains strong, although long delays in courts, and the perceived failure of the system collectively to punish those responsible for the island’s financial troubles have tended to undermine this trust in recent years.  The Council of Europe’s GRECO called for judicial reforms to build confidence and trust (see: https://www.coe.int/en/web/greco/-/cyprus-makes-promising-moves-to-fight-corruption-but-many-results-yet-to-materialise-says-anti-corruption-group  ).

International disputes are resolved through litigation in Cypriot courts or by alternative dispute resolution methods such as mediation or arbitration.  Businesses often complain of court gridlock and judgments on cases generally taking years to be issued, and even more for claims involving property foreclosure.

Area Administered by Turkish Cypriots

Investors should note the EU’s acquis communautaire is suspended in the area administered by the Turkish Cypriots.

The “TRNC” is a common law jurisdiction.  Judicial power other than the “Supreme Court” is exercised by the “Heavy Penalty Courts,” “District Courts,” and “Family Courts.”  Turkish Cypriots inherited many elements of their legal system from the British colonial rule before 1960, including the right to appeal and the right to a fair public trial.  There is a high level of public confidence in the judicial system in the area administrated by Turkish Cypriots. The judicial process is procedurally competent, fair, and reliable.

Foreign investors can make use of all the rights guaranteed to Turkish Cypriots.  Commercial courts and alternative dispute resolution mechanisms are not available in the “TRNC.”  The resolution of commercial or investment disputes through the “judicial system” can take several years.  The Turkish Cypriot administration has trade and industry “law” and contractual “law.” The Turkish Cypriot administration has several trade and economic cooperation agreements with Turkey.  For more information about “legislation,” visit http://www.yaga.gov.ct.tr  .

Laws and Regulations on Foreign Direct Investment

Republic of Cyprus

Below are links to various publications and laws affecting incoming foreign investment:

Area Administered by Turkish Cypriots

Visit the “YAGA” website, for more information about laws and regulations on FDI: http://www.yaga.gov.ct.tr  .

Competition and Anti-Trust Laws

Republic of Cyprus

The oversight agency for competition is the Commission for the Protection of Competition: www.competition.gov.cy  

Area Administered by Turkish Cypriots

The oversight “agency” for competition is the “Competition Board:”  http://www.rekabet.gov.ct.tr/  .

Expropriation and Compensation

Republic of Cyprus

Private property may, in exceptional instances, be expropriated for public purposes, in a non-discriminatory manner, and in accordance with established principles of international law.  The expropriation process entitles investors to proper compensation, whether through mutual agreement, arbitration, or the local courts. Foreign investors may claim damages resulting from an act of illegal expropriation by means other than litigation.  Investors and lenders to expropriated entities receive compensation in the currency in which the investment was made. In the event of any delay in the payment of compensation, the Government is also liable for the payment of interest based on the prevailing six-month LIBOR for the relevant currency.

The 2013 “Bail-In” of Bank Depositors:  Following the 2013 financial crisis and as part of the Memorandum of Understanding between the Republic of Cyprus and international lenders (European Commission, European Central Bank and the IMF), depositors in two Cypriot banks were forced to exchange some of their deposits into equity shares in the banks.  This “haircut” sparked 3,000 lawsuits against the ROC and the banks. Some of these lawsuits have been rejected by EU courts, while most remain unresolved. Additionally, recipients of this “haircut” have filed a class- action suit against various European bodies at the General Court of the European Union, while similar disputes are still pending before the World Bank’s International Centre for Settlement of Investment Disputes and the Paris-based International Chamber of Commerce (ICC) International Court of Arbitration.  The ROC set up a solidarity fund in 2017, aimed at helping depositors who lost money in the “haircut,” although it is still unclear how this will work in practice. In September of 2016, the European Court of Justice (ECJ) ruled that adoption of the Memorandum of Understanding (MOU) was not an unlawful act, and dismissed actions for compensation. European Central Bank in its 2017 annual report noted that it did not expect any losses from four lawsuits filed against it and other EU bodies by depositors, shareholders and bondholders of Cypriot banks.

Area Administered by Turkish Cypriots

Private property may be expropriated for public purposes. The expropriation process entitles investors to proper compensation. Foreign investors may claim damages resulting from an act of illegal expropriation by means other than litigation.

In expropriation cases involving private owners, they are first notified, the property is then inspected, and, if an agreement is reached regarding the amount, then the owner is compensated.  In cases where the owner declines the compensation package, the case relegated to local “courts” for a final decision.

Dispute Settlement

Republic of Cyprus

ICSID Convention and New York Convention

The ROC is a member state to the Convention on the International Centre for the Settlement of Investment Disputes (ICSID Convention), and a signatory to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.

Investor-State Dispute Settlement

There have been no reports of investment disputes in Cyprus involving U.S. persons over the past 10 years, and there is no history of extrajudicial action against foreign investors.  Local courts recognize and enforce foreign arbitral awards issued against the government.

International Commercial Arbitration and Foreign Courts

Cyprus offers several different means of Alternative Dispute Resolution (ADR).  However, recourse to ADR is not common. Some of the entities offering ADR are the following:

Additionally, the ROC Ministry of Justice and Public Order maintains a publicly-available Register of Mediators for both commercial and civil disputes: http://www.mjpo.gov.cy/mjpo/mjpo.nsf/All/64BC1F595AB40EB6C22579AD00346FE2?OpenDocument&highlight=mediation  .

EU citizens and businesses can also use SOLVIT, a free, online service, to resolve problems pertaining to internal EU market issues, like visa and residence rights, pension rights, and VAT refunds, within 10 weeks from the day the problem is reported: http://ec.europa.eu/solvit/what-is-solvit/  .

Under the Arbitration Law of Cyprus, if the parties are unable to reach a settlement an arbitrator can be appointed.  Arbitration rulings are fully enforceable and the court may settle an arbitral award in the same way as a judgment. Mediation is not fully enforceable, unless the settlement agreement explicitly stipulates that the parties can apply to court for enforcement.  The ROC honors the enforcement of foreign court judgments and foreign arbitration awards. Domestic legislation on binding international arbitration is modeled after internationally-accepted regulations, such as the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration, which the ROC adopted in 1985.  Cyprus’ bilateral investment treaties with several countries also include dispute settlement provisions (see Section 3, Bilateral Investment Agreements).

Area Administered by Turkish Cypriots

Investor-State Dispute Settlement

Foreign investors can make use of all the rights guaranteed to Turkish Cypriots.  Alternative dispute resolution mechanisms are not available in the “TRNC.” The resolution of commercial or investment disputes through the “judicial system” can take several years.

Bankruptcy Regulations

Republic of Cyprus

In 2015 the ROC parliament approved a new package of insolvency laws to overhaul existing bankruptcy procedures and help resolve the island’s very high levels of NPLs.  Bankruptcy procedures can be initiated by a creditor through compulsory liquidation or by the debtor through voluntary liquidation. The court can impose debt rescheduling, in cases where aggregate liabilities do not exceed €350,000 (USD 385,000) and individuals with minimal assets and income may apply to the court via the Insolvency Service for a debt relief order of up to €25,000 (USD 27,500).  Discharge from bankruptcy is automatic after three years, provided all debtor assets are sold and the proceeds distributed to creditors. Fraudulent alienation of assets prior to bankruptcy and non-disclosure of assets draws criminal sanctions under the new legislation. Cypriot authorities are closely monitoring implementation of the new insolvency framework. In March 2018, the government and political parties agreed to set up a committee of experts to forge a new national strategy on how best to deal with the persistent problem of NPLs.  NPLs decreased considerably in 2018 mainly due to the collapse of the Cyprus Cooperative Bank (CCB), which transferred bad assets from the banking system to a separate public entity. NPLs declined from 42 percent of gross loans at the end of 2017 to 32 percent at the end of November 2018.

The World Bank’s 2019 Doing Business report ranked Cyprus 26th from the top among 190 countries in terms of the ease with which it resolves insolvency.  For additional information, please see: http://www.doingbusiness.org/data/exploreeconomies/cyprus#resolving-insolvency  .

Area Administered by Turkish Cypriots

In 2013, the “TRNC” passed a debt restructuring “law” aimed at providing incentives to restructure debts and NPLs separately.  Turkish Cypriots also have a bankruptcy “law” that defines “collecting power;” conditions under which a creditor can file a bankruptcy application; and the debtor’s bankruptcy application, and agreement plans.  In December 2018, NPLs had reached USD 187 million (1.045 billion Turkish Lira).

7. State-Owned Enterprises

Republic of Cyprus

The ROC maintains exclusive or majority-owned stakes in more than 40 SOEs, and is making slow progress towards privatizing some of them (see sections on Privatization and OECD Guidelines on Corporate Governance of SOEs).  There is no comprehensive list of all SOEs available but the most significant are the following: Electricity Authority of Cyprus, Cyprus Telecommunications Authority, Cyprus Sports Organization, Cyprus Ports Authority, Cyprus Broadcasting Corporation, Cyprus Theatrical Organization, and Cyprus Agricultural Payments Organization.  These SOEs operate in a competitive environment (domestically and internationally) and are increasingly responsive to market conditions. The state-owned EAC monopoly on electricity generation and distribution ended in 2014, although competition still remains difficult given the small market size. As an EU Member State, Cyprus is a party to the WTO Government Procurement Agreement (GPA).

OECD Guidelines on Corporate Governance are not mandatory for ROC SOEs, although some of the larger SOEs have started adopting elements of corporate governance best practices in their operating procedures.  Each of the SOEs is subject to dedicated legislation. Most are governed by a board of directors, typically appointed by the government at the start of its term, and for the duration of its term in office. SOE board chairs are typically technocrats, affiliated with the ruling party.  Representatives of labor unions and minority shareholders contribute to decision making. Although they enjoy a fair amount of independence, they report to the relevant minister. SOEs are required by law to publish annual reports and submit their books to the Auditor General.

Area Administered by Turkish Cypriots

In the area administrated by Turkish Cypriots, there are several “state-owned enterprises” and “semi-state-owned enterprises,” usually common utilities and essential services.

In the Turkish Cypriot administered area, the below-listed institutions are known as “public economic enterprises” (POEs), “semi-public enterprises” and “public institutions,” which aim to provide common utilities and essential services.

Some of these organizations include:

  • Turkish Cypriot Electricity Board (KIBTEK);
  • BRTK – State Television and Radio Broadcasting Corporation;
  • Cyprus Turkish News Agency;
  • Turkish Cypriot Milk Industry;
  • Cypruvex Ltd. – Citrus Facility;
  • EMU – Eastern Mediterranean Foundation Board;
  • Agricultural Products Corporation;
  • Turkish Cypriot Tobacco Products Corporation;
  • Turkish Cypriot Alcoholic Products LTD;
  • Coastal Safety and Salvage Services LTD; and
  • Turkish Cypriot Development Bank.

Privatization Program

Republic of Cyprus

The ROC has made limited progress towards privatizations, despite earlier commitments to international creditors in 2013 to raise € 1.4 billion (USD 1.5 billion) from privatizations by 2018.  In July 2017, opposition parties passed legislation abolishing the Privatizations Unit, an independent body established March 2014. Despite this setback, the current administration, remains committed to pursuing privatizations in piecemeal fashion.  The port of Larnaca remains on track for privatization in 2019, while the state lottery is also expected to be sold. The government continues efforts to find long-term investors to lease state-owned properties in the Troodos area, and forge a strategic plan on how to handle the Cyprus Stock Exchange.  A bill providing the transfer of Cyprus Telecommunications Authority (CyTA) commercial activities to a private legal entity, with the government retaining majority ownership has been pending since March 2018.

In December 2015, under the threat of strikes, the government reversed earlier plans to privatize the Electricity Authority of Cyprus (EAC), although it is still pushing ahead with unbundling the EAC’s generation and transmission operations into separate legal entities

Area Administered by Turkish Cypriots

The airport at Ercan and K-Pet Petroleum Corporation have been converted into public-private partnerships.  The concept of privatization continues to be controversial in the Turkish Cypriot community.

In March 2015, Turkish Cypriot authorities signed a public-private partnership agreement with Turkey regarding the management and operation of the water obtained from an underwater pipeline funded by Turkey.  Within the area administrated by Turkish Cypriot s, there has also been discussion about privatizing the electricity authority “KIBTEK”, Turkish Cypriot telecommunications operations, and the sea ports.

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) 2017 $21,724 2017 $22,054 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 -$183 2017 $1,650 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2017 $170 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 2017 1,061.2% UNCTAD data available at 
https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx    

* Source for Host Country Data: Central Bank of Cyprus


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data, end-2017
From Top Five Sources/To Top Five Destinations (U.S. Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $232,315 100% Total Outward $221,966 100%
Luxembourg $63,037 27% Russian Fed. $38,854 17%
Russian Fed. $40,320 17% Netherlands $11,514 5%
Netherlands $16,503 7% United Kingdom $9,389 4%
Germany $12,107 5% Luxembourg $8,679 4%
British Virgin Islands $5,585 2% Norway $1,519 1%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets, June 2018
Top Five Partners (Millions, U.S. Dollars)
Total Equity Securities Total Debt Securities
All Countries $21,187 100% All Countries $8,565 100% All Countries $12,622 100%
Russian Fed. $5,010 24% Russian Fed. $4,236 49% Luxembourg $1,123 9%
Ireland $2,298 11% Ireland $1,458 17% Ireland $840 7%
Luxembourg $2,262 11% Luxembourg $1,139 13% Russian Fed. $773 6%
United States $950 4% United States $440 5% Netherlands $653 5%
Netherlands $714 3% Ukraine $139 2% Germany $466 4%

Czech Republic

Executive Summary

The Czech Republic is a medium-sized, open, export-driven economy with 80 percent of its GDP based on exports, mostly from the automotive and engineering industries.  According to the Czech Statistical Office, most of the country’s exports go to the European Union (EU), with 32.4 percent going to Germany alone. The United States is the Czech Republic’s largest non-EU export partner.  The Czech banking sector remains healthy. The country has strong, stable growth, with 2.9 percent GDP growth in 2018.

The Czech National Bank ended its foreign exchange intervention in the Czech crown (CZK) in April 2017, which had kept the crown at 27 to the euro (EUR).  Since then, the CZK has appreciated to CZK25.8 per EUR and CZK22.9 per USD as of March 2019. The crown is fully convertible, and all international transfers of investment-related profits and royalties can be carried out freely.  While the Czech Republic meets the Maastricht criteria for adoption of the EUR and agreed to join the Eurozone under the country’s EU accession agreement, the Czech government has said it will not seek to join the common currency in the next few years and the possibility remains widely unpopular among Czech voters.

The Czech Republic fully complies with EU and the Organization for Economic Co-operation and Development (OECD) standards for labor laws and equal treatment of foreign and domestic investors.  Labor laws are comparable with those of most developed nations. While wages continue to trail those in neighboring Western European countries (Czech wages are roughly one-third of comparable German wages), they have risen about 7 to 8 percent annually over the past two years, according to the Czech Statistical Office, although pressure on wages in competitive industries like IT has been much higher.  The country is now facing a labor shortage as most companies struggle to find workers with the unemployment rate solidly below 3 percent – the lowest rate in the EU. The 1992 U.S.-Czech Bilateral Investment Treaty, signed with the former Czechoslovakia, provides for international arbitration of investor–state disputes.

Great strides have been taken since the fall of communism to open the market to competition and privatization, but the Czech Republic still lacks sufficient enforcement of anti-trust violations.  The Czech Republic is committed to improving transparency and reducing corruption. The Czech government enforces intellectual property rights (IPR) protections.

There are few restrictions on foreign investment except in certain sectors that require access to sensitive information.   The government is currently in the process of drafting legislation to create a mechanism to screen foreign investments for national security concerns.  The Czech Republic has taken strides to diversify its traditional investments in engineering into new fields of research and development and innovative technologies.  EU structural funding has enabled the country to open a number of world-class scientific and high-tech research centers. EU member states are the largest investors in the Czech Republic.


Table 1:  Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 38 of 180 https://www.transparency.org/cpi2018
World Bank’s Doing Business Report “Ease of Doing Business” 2018 35 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 27 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in Partner Country (M USD, stock positions) 2017 $5,406 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $18,160 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Czech government actively seeks to attract foreign investment via policies that make the country an attractive destination for companies to locate, operate, and expand.  Act No. 72/2000 allows the Czech government to give investment incentives to investors who make new investments or expand their existing investments in the country. CzechInvest, the government investment promotion agency that operates under the Ministry of Industry and Trade, negotiates on behalf of the Czech government with foreign investors.  In addition, CzechInvest provides: assistance during implementation of investment projects, consulting services for foreign investors entering the Czech market, support for suppliers, and assistance for the development of innovative start-up firms. There are no laws or practices that discriminate against foreign investors.

The Czech Republic is a recipient of substantial foreign direct investment (FDI).  Total foreign investment in the Czech Republic (equity capital + reinvested earnings + other capital) equaled USD 156 billion at the end of 2017, compared to USD 121.9 billion in 2016.  The increased activity of foreign investors reflects the solid state of the Czech economy and recovery in Europe. Of these, CzechInvest negotiated 106 new investment projects by foreign investors in the Czech Republic in 2017, worth USD 2.9 billion.

As a medium-sized, open, export-driven economy, the Czech market is strongly dependent on foreign demand, especially from the EU.  In 2018, 84.1 percent of Czech exports went to fellow EU member states, with 65.5 percent of this volume shipped to the EU and 32.4 percent to Germany, the Czech Republic’s largest trading partner according to the Czech Statistical Office.  The global economic crisis pulled the Czech Republic into its longest historical recession and highlighted its sensitivity to economic developments in the EU. Since emerging from recession in 2013, the economy has enjoyed some of the highest GDP growth rates of the European Union.  GDP growth reached 4.4 percent in 2017 and 2.9 percent in 2018. Growth estimates are smaller for 2019 at 2.6 percent, given uncertainty surrounding Brexit and the possibility of increasing international trade tariffs. Some experts predict a hard Brexit could cost the Czech economy 1.1 percent of GDP and 40,000 jobs.

The Czech Republic has no plans to adopt the EUR and instead has taken a delayed approach to adopting the Eurozone’s common currency.  Economic difficulties in the Eurozone during the global downturn weakened public support for the country’s adoption of the EUR, as did the Greek crisis, and the current government opposes setting a target date for accession.

Some unfinished elements in the economic transition, such as the slow pace of legislative and judicial reforms, have posed obstacles to investment, competitiveness, and company restructuring.  The Czech government has harmonized its laws with EU legislation and the acquis communautaire.  This effort involved positive reforms of the judicial system, civil administration, financial markets regulation, intellectual property rights protection, and in many other areas important to investors.

While there have been many success stories involving American and other foreign investors, a handful have experienced problems, mainly in heavily regulated sectors of the economy, such as media.  The slow pace of the courts is often compounded by judges’ lack of familiarity with commercial or intellectual property law.

Both foreign and domestic businesses voice concerns about corruption.  Other long-term economic challenges include dealing with an aging population and diversifying the economy away from an over-reliance on manufacturing and shared services toward a more high-tech, services-based, knowledge economy.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign individuals or entities can operate a business under the same conditions as Czechs.  Some areas, such as banking, financial services, insurance, or defense equipment have certain limitations or registration requirements, and foreign entities need to register their permanent branches in the Czech Commercial Register.  Some professionals, such as architects, physicians, lawyers, auditors, and tax advisors, must register for membership in the appropriate professional chamber. In general, licensing and membership requirements apply equally to foreign and domestic professionals.

As of 2012, U.S. and other non-EU nationals can purchase real property, including agricultural land, in the Czech Republic without restrictions.  Czech legal entities, including 100 percent foreign-owned subsidiaries, may own real estate without any limitations. The right of foreign and domestic private entities to establish and own business enterprises is guaranteed by law.  Enterprises are permitted to engage in any legal activity with the previously noted limitations in sensitive sectors. Laws on auditing, accounting, and bankruptcy are in force, including the use of international accounting standards (IAS).

The government does not differentiate between foreign investors from different countries.

In response to the European Commission’s September 2017 investment screening proposal, the Czech Republic is currently in the process of drafting legislation to create a mechanism to screen foreign investments for national security concerns.  The legislation would require government review before foreign investments in sensitive sectors like defense and critical infrastructure. Investments in certain other sectors could also require review within five years of a transaction if new advancements in technology mean foreign ownership could pose a national security risk.

The U.S.-Czech Bilateral Investment Treaty contains specific guarantees of national treatment and Most Favored Nation treatment for U.S. investors in all areas of the economy other than insurance and real estate (see the section on the Bilateral Investment Treaty below).  U.S. investors are not disadvantaged or singled out by the Czech government.

Other Investment Policy Reviews

In the past three years, the government has not undergone any third-party investment policy reviews through a multilateral organization.

Business Facilitation

Individuals have a number of bureaucratic requirements to set up a business or operate as a freelancer or contractor.  The Ministry of Industry and Trade provides an electronic guide on obtaining a business license, presenting step-by-step assistance, including links to related legislation and statistical data, and specifying authorities with whom to work (such as business registration, tax administration, social security, and municipal authorities), available at: https://www.mpo.cz/en/business/licensed-trades/guide-to-licensed-trades/  .  The Ministry of Industry and Trade has also established regional information points to provide consultancy services related to doing business in the Czech Republic and EU.  A list of contact points is available at: http://www.businessinfo.cz/en/psc.html  .

The time required to start a business was 25 days in 2018, which is slightly above the world average of 20.1 days.  The Czech Republic’s Business Register is publicly accessible and provides details on business entities. An application for an entry into the Business Register can be submitted in a hard copy, via a direct entry by a public notary, or electronically, subject to meeting online registration criteria requirements.  The Business Register is publically available at: https://or.justice.cz/ias/ui/rejstrik  .  The Czech Republic’s Trade Register is an online information system that collects and provides information on entities facilitating small trade and craft-oriented business activities, as specifically determined by related legislation.  It is available online at: http://www.rzp.cz/eng/index.html  .

Outward Investment

The volume of outward investment is lower than incoming FDI.  According to the latest data from the Czech National Bank, outward Czech outward investments amounted only to USD 32.4 billion in 2017, compared to inward investments of USD 156 billion.  However, outward investment activity has increased 78 percent since 2014. According to the Export Guarantee and Insurance Corporation (EGAP), Czech companies increasingly invest abroad to get closer to their customers, save on transport costs, and shorten delivery times.  The Czech government does not incentivize outward investment. As part of EU sanctions, there is a total ban on EU investment in North Korea as of 2017.

2. Bilateral Investment Agreements and Taxation Treaties

The Czech Republic and the United States have a bilateral investment treaty (BIT).  The government of Czechoslovakia signed the original BIT with the United States in 1992, and the Czech Republic adopted this treaty in 1993, after the split with Slovakia.  The Czechs amended the treaty in 2003, along with other new EU entrants that had U.S. BITs, following negotiations with the European Commission about conflicts within the EU acquis communautaire.

Several dozen other countries have signed and ratified investment agreements with the Czech Republic, and some are in the process of ratification.  The full list of agreements, including ratification dates, can be found on the Ministry of Finance website in Czech only at: http://www.mfcr.cz/cs/legislativa/dohody-o-podpore-a-ochrane-investic/prehled-platnych-dohod-o-podpore-a-ochra  .  The list of all BITs between the Czech Republic and other countries is available in English at:  https://investmentpolicyhub.unctad.org/IIA/CountryBits/55  .

A bilateral U.S.-Czech Convention on Avoidance of Double Taxation has been in force since 1993.  In 2007, the U.S. and Czech governments signed a bilateral Totalization Agreement that exempts Americans working in the Czech Republic from paying into both the Czech and U.S. social security systems.  The agreement took effect January 1, 2009. In 2013, the U.S. and Czech governments signed a Supplementary Totalization Agreement amending the original agreement to reflect new Czech legislation on health insurance.  In 2014, the United States and the Czech Republic signed an Agreement on Improvement of International Tax Compliance and to implement the Foreign Account Tax Compliance Act (FATCA).

3. Legal Regime

Transparency of the Regulatory System

Tax, labor, environment, health and safety, and other laws generally do not distort or impede investment.  Policy frameworks are consistent with a market economy. Fair market competition is overseen by the Office for the Protection of Competition (UOHS) (http://www.uohs.cz/en/homepage.html  ).  UOHS is a central administrative body entirely independent in its decision-making practice.  The office is mandated to create conditions for support and protection of competition and to supervise public procurement and state aid.

All laws and regulations in the Czech Republic are published before they enter into force.  Opportunities for prior consultation on pending regulations exist, and all interested parties, including foreign entities, can participate.  A biannual governmental plan of legislative and non-legislative work is available online, along with information on draft laws and regulations (often only in the Czech language).  Business associations, consumer groups, and other non-governmental organizations, including the American Chamber of Commerce, can submit comments on laws and regulations. Laws on auditing, accounting, and bankruptcy are in force.  These laws include the use of international accounting standards (IAS) for consolidated corporate groups. According to the latest Open Budget Survey, the Czech Republic scores 61 out of 100 countries in terms of public financial transparency.  The Czech government provides the public with substantial budget information, and the legislature adequately oversees the planning and implementation of the budget cycle. However, the survey recommends that the government include comparisons between borrowing estimates and actual results in the Year-End Report.

International Regulatory Considerations

Membership in the EU requires the Czech Republic to adopt EU laws and regulations, including rulings by the European Court of Justice (ECJ).

Czechoslovakia (the predecessor to the Czech Republic) was a founding member of the GATT in 1947, and a member of the World Trade Organization (WTO).  Since the country’s entry into the EU in 2004, the European Commission – an independent body representing all EU members –oversees Czech interests in the WTO.

Legal System and Judicial Independence

The Czech Commercial Code and Civil Code are largely based on the German legal system, which follows a continental legal system where the principle areas of law and procedures are codified.  The commercial code details rules pertaining to legal entities and is analogous to corporate law in the United States. The civil code deals primarily with contractual relationships among parties.

The Czech Civil Code, Act. No. 89/2012 Coll. and the Act on Business Corporations, Act No. 90/2012 Coll. (Corporations Act) govern business and investment activities.  The Act on Business Corporations introduced substantial changes to Czech corporate law such as supervision over the performance of a company’s management team, decision-making process, and remuneration and damage liability.  Detailed provisions for mergers and time limits on decisions by the authorities on registration of companies are covered, as well as protection of creditors and minority shareholders.

The judiciary is independent, but decisions may vary from court to court.  The reason for diverse legislative approaches may well be the fact that the new civil code did not only rewrite the system, but also introduced new terminology.  Consequently, the two substantive laws, the Penal Code and the Civil Code, have been adopted without a new procedural law to explain how the laws should be applied, which would allow courts to proceed according to clearly outlined jurisdictional guidelines.  Regulations and enforcement actions are appealable and the judicial process is procedurally competent, fair, and reliable.

Laws and Regulations on Foreign Direct Investment

The Foreign Direct Investment agenda is governed by the Civil Code and by the Act on Business Corporations.

The Czech Ministry of Industry and Trade maintains a “doing business” website at http://www.businessinfo.cz/en/   which aids foreign companies in establishing and managing a foreign-owned business in the Czech Republic, including navigating the legal requirements, licensing, and operating in the EU market.

Competition and Anti-Trust Laws

The Office for the Protection of Competition (UOHS) is the central authority responsible for creating conditions that favor and protect competition.  UOHS also supervises public procurement and monitors state aid programs. UOHS is led by a chairperson who is appointed by the president of the Czech Republic for a six-year term.

Expropriation and Compensation

Government acquisition of property is done only for public purposes in a non-discriminatory manner and in full compliance with international law.  The process of tracing the history of property and land acquisition by potential investors can be complex and time-consuming, but it is necessary to ensure clear title.  Investors participating in privatization of state-owned companies are protected from restitution claims through a binding contract with the government.

Dispute Settlement

ICSID Convention and New York Convention

The Czech Republic is a signatory and contracting state to the Convention on the Settlement of Investment Disputes between States and Nations of Other States (ICSID Convention).  It also has ratified the convention on the Recognition and Enforcement of Arbitral Awards (New York Convention of 1958), which obligates local courts to enforce a foreign arbitral award if it meets the legal criteria.

Investor-State Dispute Settlement

In 1993, the Czech Republic became a member state to the ICSID Convention.  The 1993 U.S.-Czech Bilateral Investment Treaty contains provisions regarding the settling of disputes through international arbitration.  In the past 10 years, 30 investment disputes have involved a foreign investor. Of these, 17 have been resolved, 16 where the court ruled in favor of the Czech Republic and one where the parties settled out of court.

International Commercial Arbitration and Foreign Courts

Mediation is an option in nearly every area of law including family law, commercial law, and criminal law.  Mediators can be contracted between the parties to the dispute and found through such sources as the Czech Mediators Association, the Czech Bar Association, or the Union for Arbitration and Mediation Procedures of the Czech Republic.  A number of other non-governmental organizations (NGOs) and entities work in the area of mediation. Directive 2008/52/EC allows those involved in a dispute to request that a written agreement arising from mediation be made enforceable.  The results of mediation may be taken into account by the public prosecutor and the court in their decision in a given case. The local courts recognize and enforce foreign arbitral awards issued against the government.

Bankruptcy Regulations

A significant amendment to the bankruptcy law came into force on June 1, 2017.  The amendment includes provisions prohibiting insolvency tourism, restriction of voting rights of the creditors from the debtor’s group, provisions against “bullying” insolvency petitions, and stricter rules for documenting the existence of a claim when filing a creditor’s insolvency petitions.  It also sets penalties for bankruptcy administrators of up to CZK5 million (USD 200,000) for serious administrative violations such as failure to state the address of the bankruptcy administrator where the administrator actually executes his activities. Moving up 10 spots from 2018, the Czech Republic ranked fifteenth in the 2019 edition of the World Bank’s Doing Business Report for ease of resolving insolvency.

7. State-Owned Enterprises

The Ministry of Finance administers ownership rights of state-owned enterprises (SOEs).  Potential conflicts of interest are covered by existing Act No. 159/2006 on Conflicts of Interest, and newly adopted Act No. 14/2017 on Amendments to the Act on Conflict of Interest.  Legislation on the civil service, which took effect January 1, 2015, established measures to prevent political influence over public administration, including operation of SOEs.

Private enterprises are generally allowed to compete with public enterprises under the same terms and conditions with respect to access to markets, credit, government contracts and other business operations.  SOEs purchase or supply goods or services from private sector/foreign firms. SOEs are subject to the same domestic accounting standards, rules, and taxation policies as their private competitors, and are not given any material advantages compared to private entities.  State-owned or majority state-owned companies are present in several (strategic) fields, including the energy, postal service, information & communication, and transport sectors.

SOEs are usually structured as joint-stock companies.  They do not report directly to government ministries, but are managed by a board of directors (statutory body) and a supervisory board that generally includes representatives of the government and trade unions (representing employees, both union and non-union, as required by law).  Like privately owned joint-stock companies, the SOEs are fully responsible for their obligations toward third parties, although shareholders are not personally liable for a company’s obligations. SOEs are required by law to publish an annual report, disclose their accounting books, and submit to an independent audit.  Private enterprises and SOEs carry out procurement in accordance with the Act on Public Procurement No. 134/2016, and its addendum No. 147/2017, which is fully harmonized with the existing EU legislation on public procurement.

The Czech Republic has 16 wholly-owned SOEs and four majority-owned SOEs.  Wholly-owned SOEs employ roughly 29,000 people, have USD 6 billion in annual income, and own more than USD 9.8 billion in assets.  There is not a unified, published list of all companies with some percentage of state ownership, but information can be found on individual ministry websites or by directly contacting the ministry who manages the company.

As an OECD member, the Czech Republic promotes the OECD Principles of Corporate Governance and the affiliated Guidelines on Corporate Governance for SOEs.  SOEs are subject to the same legislation as private enterprises regarding their commercial activities.

Privatization Program

According to the Ministry of Finance, as a result of several waves of privatization of formerly state-owned companies since 1989, over 90 percent of the Czech economy is now in private hands.  Privatization programs have generally been open to foreign investors. In fact, most major state-owned companies were privatized with foreign participation. The government evaluates all investment offers for state enterprises.  Many complainants have alleged non-transparent or unfair practices in connection with past privatizations. No privatization program is currently underway.

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) 2017 $215,861  2017 $215,726 http://data.worldbank.org/country/czech-republic  
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) 2017 $1,284 2017 $5,406 http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Host Country’s FDI in the United States (M USD, stock positions) 2017 $85 2017 N/A https://apps.bea.gov/international/factsheet/factsheet.cfm?Area=364  
Total Inbound Stock of FDI as % host GDP 2017 65.8% 2017 78.3% https://data.oecd.org/fdi/fdi-stocks.htm  

*Sources:  Czech Statistical Office (www.czso.cz  ), Czech National Bank (https://www.cnb.cz/cnb/obiee_pzi  ).

As of 2015, the Czech National Bank records cross-border equity capital stocks for quoted shares (in line with the ESA 2010 and BPM6 international manuals) at market value instead of book value, rather than valuing FDI as the sum of historical flows, which is the methodology used by the United States.  As a result, while the 2014 figure for total U.S. FDI stock was listed at USD 4.388 billion under the sum of historical flows method, under the new methodology, it is valued at USD 1.567 billion. This explains the large discrepancy between U.S. and Czech figures for 2017.


Table 3:  Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data – 2017
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $149,556 100% Total Outward $26,708 100%
Netherlands $30,997 21% Netherlands $8,625 32%
Germany $25,304 17% Cyprus $4,920 18%
Luxembourg $16,990 11% Slovakia $3,718 14%
Austria $16,551 11% Luxembourg $3,514 13%
France $11,625 8% Romania $1,222 5%
“0” reflects amounts rounded to +/- USD 500,000.

The IMF rankings for the top five sources of FDI stock are consistent with data from the Czech National Bank.  IMF rankings for destinations of FDI stock vary – the Czech National Bank lists Luxembourg second, Cyprus third, and Slovakia fourth (as opposed to IMF data, which places Cyprus second, Slovakia third, and Luxembourg fourth).   IMF and Czech National Bank figures for inward direct investment vary by up to 4 percent and figures for outward direct investment vary by up to 6 percent. These statistical distortions are much smaller than previous years as a result of the global adoption of the recently revised OECD Benchmark Definition for FDI, which is designed to discount investment flows from special purpose entities.

The top sources of and destinations of Czech FDI represent a combination of major EU trading partners and favored tax havens.  The leading country for both inward and outward direct investment flows is the Netherlands. In the early 1990s, the Netherlands became a popular place for corporate registration for domestic and foreign businesses active in the Czech Republic.  In recent years, the main rationale for registering a business in the Netherlands is favorable corporate income taxes, stimulating rapid development of offshore corporate structures in the Czech Republic. While the tax haven effect has dissipated (corporate income tax rates in the Czech Republic and Netherlands are nearly equal), the Netherlands remains a popular country for large corporations.  Luxembourg attracts Czech businesses for the same reason. Among other FDI partner countries, Cyprus offers one of the lowest corporate income tax rates in the EU (currently 12.5 percent), and tax exemption of dividends.


Table 4:  Sources of Portfolio Investment

Portfolio Investment Assets – 2017
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $36,519 100% All Countries $19,732 100% All Countries $16,787 100%
Luxembourg $6,819 19% Luxembourg $5,899 30% Slovakia $2,538 15%
Austria $4,498 12% Belgium $3,036 15% Netherlands $2,310 14%
United States $3,368 9% United

States

$2,280 12% Austria $2,249 13%
Slovakia $3,241 9% Austria $2,248 11% Poland $2,005 12%
Belgium $3,108 9% Ireland $1,305 7% United States $1,088 6%

The Czech National Bank does not provide its own statistical data on portfolio investments by individual countries, but provides a reference to IMF data on its website.  As far as portfolio investment assets for all countries, the 2017 IMF results are consistent with the Czech National Bank’s data.

Denmark

Executive Summary

Denmark is regarded by many independent observers as one the world’s most attractive business environments and is characterized by political, economic, and regulatory stability. It is a member of the European Union (EU) and Danish legislation and regulations conform to EU standards on virtually all issues. It maintains a fixed exchange rate policy, with the Danish Krone linked closely to the Euro. Denmark is a social welfare state with a thoroughly modern market economy reliant on free trade in goods and services. It is a net exporter of food, fossil fuels, chemicals and wind power, but depends on raw material imports for its manufacturing sector. Within the EU, Denmark is among the strongest supporters of liberal trade policy. Transparency International regularly ranks Denmark as having among the world’s lowest levels of perceived public sector corruption.

The Danish economy is enjoying a solid upswing. GDP growth averaged 2.0 percent annually over the last three years (2016 – 2018) and 2.3 percent 2015 – 2017.  GDP grew 1.4 percent in 2018 but 2.6 percent Q4 2017 – Q4 2018. The Danish Government estimates that growth will continue at 1.7 percent in 2019 and 1.6 percent in 2020. . Employment is at a historical high with a labor force of 2,776,036, and unemployment at 3.7 percent at the start of 2019.  Danish companies are performing well, and their willingness to invest in order to meet market demand is high. With the current low unemployment, the risk of labor bottleneck issues is increasing in certain sectors, mainly construction, where demand for skilled labor outstrips supply. Danish consumers enjoy increased purchasing power due to increased employment, low interest rates, and positive real wage trends. Observers believe the economy is at full capacity and that economic growth will continue in coming years, although as the competition for economic resources intensifies, it will likely become increasingly difficult to maintain growth rates at this level.

Denmark is an open economy, highly reliant on international trade, with exports accounting for about 55 percent of GDP.  Developments in its major trading partners – Germany, Sweden, the United States and the UK – have substantial impact on Danish national accounts. Gross unemployment, a national definition, was 3.7 percent at the start of 2019, and is forecast to remain subdued in coming years. The OECD Harmonized Unemployment Rate was 5.0 percent in February 2019.

Denmark is a major international development assistance donor, having contributed DKK 16.3 billion (USD 2.6 billion) in 2018, with 68 percent of Danish assistance being bilateral and 32 percent multilateral. Denmark is one of six countries meeting the UN requirement of ODA contribution of 0.7 percent of GNI. Danish assistance in 2017 amounted to 0.74 percent of GNI.

The entrepreneurial climate, including female-led entrepreneurship, is strong; Denmark is a relatively large contributor to the World Bank’s Women Entrepreneurship Finance Facility with a USD 10.6 million contribution.

Underlying macroeconomic conditions in Denmark are sound, with an attractive investment climate. Denmark is strategically situated to link continental Europe with the Nordic and Baltic countries. Transport and communications infrastructures are efficient. Denmark is among world leaders in high-tech industries such as information technology, life sciences, clean energy technologies, and shipping.

Note:  Separate reports on the investment climates for Greenland and for the Faroe Islands can be found at the end of this report.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 1 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 3 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 8 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $13,873 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $55,220 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

A small country with an open economy, Denmark is highly dependent on foreign trade, with exports comprising the largest component (55 percent) of GDP. Danish trade and investment policies are liberal. In general, investment policies are forward-looking, aimed at fostering and developing businesses, especially in high-growth sectors. The Economist Intelligence Unit (EIU) ranks Denmark second globally and first regionally on its business environment ranking. The EIU characterizes Denmark’s business environment as among the most attractive in the world, reflecting a sound macroeconomic framework, excellent infrastructure, low bureaucracy and a friendly policy towards private enterprise and competition. Principal concerns include a high personal tax burden, low productivity growth and uncertainties relating to Brexit, as the UK is a close trading partner that shares many of Denmark’s policy goals within the EU. Overall, however, operating conditions for companies should remain broadly favorable. Denmark scores top marks in various categories, including the political and institutional environment, macroeconomic stability, foreign investment policy, private enterprise policy, financing, and infrastructure.

As of January 2019, the EIU rated Denmark an “AA” country on its Country Risk Service, with a stable outlook. Sovereign risk rated “AA,” and political risk “AAA.” Denmark ranked tenth out of 140 on the World Economic Forum’s 2018 Global Competitiveness Report, third on the World Bank’s 2019 Doing Business ranking, and fifth on the EIU 2018 Democracy Index. “The Big Three” credit rating agencies Standard & Poor’s, Moody’s, and Fitch Group all score Denmark AAA.

“Invest in Denmark,” an agency of the Ministry of Foreign Affairs and part of the Danish Trade Council, provides detailed information to potential investors. The website for the agency is www.investindk.com  .

Corporate tax records of all companies, associations and foundations, which pay taxes in Denmark, were made public beginning in December 2012 and are updated annually. The corporate tax rate is 22 percent.

Limits on Foreign Control and Right to Private Ownership and Establishment

As an EU member state, Denmark is bound by EU rules on free movement of goods, capital, persons and certain services. Denmark welcomes foreign investment and does not distinguish between EU and other investors. There are no additional permits required by foreign investors, nor any reported bias against foreign companies from municipal or national authorities.

Denmark’s central and regional governments actively encourage foreign investment on a national-treatment basis, with relatively few limits on foreign control. A foreign or domestic private entity may freely establish, own, and dispose of a business enterprise in Denmark. The capital requirement for establishing a corporation (A/S) or Limited Partnership (P/S) is DKK 400,000 (approx. USD  63,317) and for establishing a private limited liability company (ApS) DKK 40,000 (approx. USD 6,331.

As of 15 April, it is no longer possible to set up an “Entrepreneurial Company” (IVS). The company type was intended to allow entrepreneurs a cheap and simple way to incorporate with limited liability, with a starting capital of only DKK1 (USD 0.16). Due to repeated instances of fraud and unintended use of the IVS, it has been abolished. Simultaneously, the capital requirements to set up a Private Limited Company were lowered, bringing Denmark more in line with other Scandinavian countries, and to ensure it will continue to be cheap and simple to establish limited liability companies in Denmark. Currently there are approx. 45,000 IVS in existence. These companies have a deadline of 2 years to re-register as Private Limited Companies (ApS), with a minimum capital of DKK 40,000. If they fail to re-register, they will be forcibly dissolved.  No restrictions apply regarding the residency of directors and managers.

Since October 2004, any private entity may establish a European public limited company (SE company) in Denmark. The legal framework of an SE company is subject to Danish corporate law, but it is possible to change the nationality of the company without liquidation and re-founding. An SE company must be registered at the Danish Business Authority if the official address of the company is in Denmark. The minimum capital requirement is EUR 120,000 (approx. USD 135,000).

Danish professional certification and/or local Danish experience are required to provide professional services in Denmark. In some instances, Denmark may accept an equivalent professional certification from other EU or Nordic countries on a reciprocal basis. EU-wide residency requirements apply to the provision of legal and accountancy services.

Ownership restrictions are applied in the following sectors:

  • Hydrocarbon exploration: Requires 20 percent Danish government participation on a “non-carried interest” basis.
  • Defense materials: The law governing foreign ownership of Danish defense companies (L538 of May 26, 2010) stipulates that the Minister of Justice has to approve foreign ownership of more than 40 percent of the equity or more than 20 percent of the voting rights, or if foreign interests gain a controlling share in a defense company doing business in Denmark. This approval is generally granted unless there are security or other foreign policy considerations weighing against approval.
  • Maritime: There are foreign (non-EU resident) ownership requirements on Danish-flagged vessels other than those owned by an enterprise incorporated in Denmark. Ships owned by Danish citizens, Danish partnerships or Danish limited liability companies are eligible for registration in the Danish International Ships Register (DIS). Ships owned by EU or European Economic Area (EEA) entities with a genuine link to Denmark are also eligible for registration, and foreign companies with a significant Danish interest can register a ship in the DIS.
  • Aviation: For an airline to be established in Denmark it must have majority ownership and be effectively controlled by an EU state or a national of an EU state, unless otherwise provided for through an international agreement to which the EU is a signatory.
  • Securities Trading: Non-resident financial institutions may engage in securities trading on the Copenhagen Stock Exchange only through subsidiaries incorporated in Denmark.
  • Real Estate: Purchases of designated vacation properties, or ‘summer houses’, are restricted to citizens of Denmark. Such properties cannot be inhabited year-round, and are located in municipally designated ‘summer house area’ zones, typically near coastlines. EU citizens and companies from EU member states can purchase any type of real estate, except vacation properties, without prior authorization from the authorities. Companies and individuals from non-EU countries that have been present/resident in Denmark for at least five years in total and are currently resident in Denmark can also purchase real estate, except vacation properties, without prior authorization. Non-EU companies or individuals that do not meet these requirements can only purchase real estate with the permission of the Danish Ministry of Justice. Permission is freely given to people with a Danish residency permit, except with regard to purchases of vacation properties.

Other Investment Policy Reviews

The most recent UNCTAD review of Denmark occurred in March 2013, available here: http://unctad.org/en/PublicationsLibrary/webdiaeia2013d2_en.pdf . There is no specific mention of Denmark in the latest WTO Trade Policy Review of the European Union, revised in October 2017.

An EU Commission Staff Working Paper on the investment environment in Denmark is available here: https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/european-semester/european-semester-your-country/denmark_en   while a 2015 private sector investment and taxation review by Deloitte can be found here: http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-denmarkguide-2015.pdf .

Denmark ranked first out of 175 in Transparency International’s 2018 Corruption Perceptions Index. It received a ranking of 3 out of 190 for “Ease of Doing Business” in the World Bank’s 2019 Doing Business Report, placing it first in Europe. In the World Economic Forum’s Global Competitiveness report for 2018, Denmark was ranked 10 out of 140 countries.

The World Intellectual Property Organization’s (WIPO) Global Innovation Index ranked Denmark 8 out of 126 in 2018

Business Facilitation

The Danish Business Authority (DBA) is responsible for business registrations in Denmark. As a part of the Danish Business Authority, “Business in Denmark” provides information on relevant Danish rules and online registrations to foreign companies in English. The Danish business registration website is www.virk.dk  . It is the main digital tool for licensing and registering companies in Denmark and offers a business registration processes that is clear and complete.

Registration of sole proprietorships and partnerships is free of charge, while there is a fee for registration of other business types: DKK 670 (USD 106) if the registration is done digitally and DKK 2150 (USD 340) if the registration form is sent by e-mail or post.

The process for establishing a new business is distinct from that of registration. The Ministry of Foreign Affairs “Invest in Denmark” program provides a step-by-step guide to establishing a business, along with other relevant resources which can be found here: www.investindk.com/Downloads  .The services are free of charge and available to all investors, regardless of country of origin.

Processing time for establishing a new business varies depending on the chosen business entity. Establishing a Danish Limited Liability Company (Anpartsselskab – ApS), for example, generally takes four to six weeks for a standard application. Establishing a sole proprietorship (Enkeltmandsvirksomhed) is simpler, with processing generally taking about one week.

Those providing temporary services in Denmark must provide their company details to the Registry of Foreign Service Providers (RUT). The website (www.virk.dk  ) provides English guidance on how to register a service with RUT. A digital employee’s signature, referred to as a NemID, is required for those wishing to register a foreign company in Denmark. A CPR number (a 10-digit personal identification number) and valid ID are needed to obtain a NemID, though not Danish citizenship.

In the Danish Financial Statements Act no. 1580 of 10 January 2015 section 7(2), small enterprises are defined as enterprises with fewer than 50 employees and whose annual turnover does not exceed DKK 89 million (approx. USD 13.6 million) or annual balance sheet total does not exceed DKK 44 million (approx. USD 6.7 million). Medium-sized enterprises are defined as enterprises with fewer than 250 employees and either have an annual turnover that does not exceed DKK 313 million (approx. USD 47.5 million) or annual balance sheet total does not exceed DKK 156 million (approx. USD 23.7 million).

Outward Investment

Danish companies are not restricted from investing abroad, and Danish outward investment has exceeded inward investments for more than a decade.

2. Bilateral Investment Agreements and Taxation Treaties

The United States and Denmark have shared a Friendship, Commerce, and Navigation Treaty since 1961 that, among other things, ensures National Treatment, Most-Favored Nation status, transparency of the regulatory process, and competitive equality with state-owned enterprises. Denmark has concluded investment protection agreements with the following 47 countries (including Hong Kong): Albania, Algeria, Argentina, Bangladesh, Belarus, Bosnia and Herzegovina, Bulgaria, Chile, China, Croatia, Egypt, Ethiopia, Ghana, Hungary, Indonesia, Kuwait, Laos, Latvia, Lithuania, Macedonia, Malaysia, Mexico, Mongolia, Montenegro, Morocco, Mozambique, Nicaragua, North Korea, Pakistan, Peru, the Philippines, Russia, Serbia, Slovakia, Slovenia, South Korea, Sri Lanka, Tanzania, Tunisia, Turkey, Uganda, Ukraine, Venezuela, Vietnam, and Zimbabwe.  Denmark has signed investment protection agreements with Brazil, Cuba, Kyrgyzstan and Paraguay, but these currently await ratification. There has been little change to the status of these investment protection agreements since the enactment of the European Union’s Lisbon Treaty, which moved competency to the EU Commission.

The U.S.-Danish Bilateral Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income has been in force since 2000. In May 2006, an amending protocol was signed; the most important aspect relates to the elimination of withholding tax on cross-border dividend payments. On November 19, 2012, the United States and Denmark signed an Intergovernmental Agreement (IGA) to implement the Foreign Account Tax Compliance Act (FATCA).

3. Legal Regime

Transparency of the Regulatory System

The judicial system is extremely well-regarded and considered fair. The legal system is independent of the legislative branch of the government and is based on a centuries-old legal tradition. It includes written and consistently applied commercial and bankruptcy laws. Secured interests in property are recognized and enforced. The World Economic Forum’s (WEF) 2018 Global Competitiveness Report, which ranks Denmark as the world’s tenth most competitive economy and fifth among EU member states, characterizes it as having among the best functioning and most transparent institutions in the world. Denmark ranks high on specific WEF indices related to macroeconomic stability (1st), labor market (5th), business dynamism (12th), ICT adoption (8th) and innovative capabilities (12th).

In an effort to facilitate business administration, Denmark maintains only two “legislative days” per year—January 1st and July 1st—the only days on which new laws and regulations affecting the business sector can come into effect. Danish laws and policies granting national treatment to foreign investments are designed to increase FDI in Denmark. Denmark consistently applies high standards with regard to health, environment, safety, and labor laws. Danish corporate law is generally in conformity with current EU legislation. The legal, regulatory and accounting systems are relatively transparent and in accordance with international standards. Bureaucratic procedures are streamlined and transparent, and proposed laws and regulations are published in draft form for public comment. Public finances and debt obligations are transparent.

As of December 19, 2012, the Ministry of Taxation made all companies’ corporate tax records public, and it updates and publicizes them annually. The publication is intended to increase transparency and public scrutiny of corporate tax payments. Greenland and the Faroe Islands retain autonomy with regards to tax policy.

The government uses transparent policies and effective laws to foster competition and establish “clear rules of the game,” consistent with international norms and applicable equally to Danish and foreign entities. The Danish Competition and Consumer Authority work to make markets well-functioning so businesses compete efficiently on all parameters. The Authority is a government agency under the Danish Ministry of Industry, Business and Financial Affairs. It enforces the Danish Competition Act. The purpose of the Act and Danish consumer legislation is to promote efficient resource allocation in society, to prevent the restriction of efficient competition, to create a level playing field for enterprises and to protect consumers.

Publicly listed companies in Denmark must adhere to the Danish Financial Statements Act when preparing their annual reports. The accounting principles are International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) and Danish Generally Accepted Accounting Principles (GAAP). Financial statements must be prepared annually. The Danish Financial Statements Act covers all businesses.

Private limited companies, public limited companies and corporate funds are obliged to prepare financial statements in accordance with which accounting class the company should follow based on size, as follows:

  • Small businesses (Class B): Total assets of DKK 44 million (USD 6.7 million), net revenue of DKK 89 million (USD 13.5 million), average number of full-time employees during the financial year of 50.
  • Medium-sized enterprises (Class C medium): Total assets of DKK 156 million (USD 23.7 million), net revenue of DKK 313 million (USD 47.5 million), average number of full-time employees during the financial year of 250.
  • Large companies (Class C large): Companies that are neither small nor medium companies.

According to the Danish Financial Statements Act, personally owned businesses, personally owned general partnerships (multiple owners) and general funds are characterized as Class A and thus have no requirement to prepare financial statements unless the owner voluntarily chooses to do so.

All government draft proposed regulations are published at the portal for public hearings, “Høringsportalen” (www.hoeringsportalen.dk  ), to solicit inputs from interested parties. After receiving feedback and possibly undergoing amendments, proposed regulations are published at the Danish Parliament’s website (www.ft.dk). Final regulations are published at www.lovtidende.dk   and www.ft.dk  . All ministries and agencies are required to publish proposed regulations. Denmark has a World Bank composite score of “4.75” for the Global Indicators of Regulatory Governance, on a 0 – 5 scale. With respect to governance, the World Bank suggests the following areas for improvement:

  • Affected parties cannot request reconsideration or appeal adopted regulations to the relevant administrative agency;
  • There is no existing requirement that regulations be periodically reviewed to see whether they are still needed or should be revised.

International Regulatory Considerations

Denmark adheres to the WTO Agreement on Trade-Related Investment Measures (TRIMs); no inconsistencies have been reported.

Legal System and Judicial Independence

Since the adoption of the Danish constitution in 1849, decision-making power in Denmark has been divided into the legislative, executive and judicial branches. The principle of a three-way separation of power and the independence of courts of law help ensure democracy and the legal rights of the country’s citizens. The district courts, the high courts and the Supreme Court represent the three basic levels of the Danish legal system, but the legal system also comprises a range of other institutions with special functions.

For further information please see:

http://www.domstol.dk/om/publikationer/HtmlPublikationer/Profil/Profilbrochure percent20- percent20UK/index.html  .

Laws and Regulations on Foreign Direct Investment

The government agency “Invest in Denmark” is part of the Danish Trade Council and is situated within the Ministry of Foreign Affairs. The agency provides detailed information to potential investors. The website for the agency is www.investindk.com  . The Faroese government promotes Faroese trade and investment through its website https://www.faroeislands.fo/economy-business/  . For more information regarding investment potential in Greenland, please see Greenland Holding at www.venture.gl   or the Greenland Tourism & Business Council at https://visitgreenland.com/  .

As an EU member state, Denmark is bound by EU rules on the free movement of goods, capital, persons and certain services. Denmark welcomes foreign investment and does not distinguish between EU and other investors. There are no additional permits required of foreign investors, nor any reported biases against foreign companies from municipal or national authorities.

A new EU investment screening framework encouraging member states to screen foreign investments in strategic sectors is expected to lead to national foreign investment screening legislation, effective in 2020.

Competition and Anti-Trust Laws

The Danish Competition and Consumer Authority (CCA) reviews transactions for competition-related concerns. According to the Danish Competition Act, the CCA requires notification of mergers and takeovers if the combined turnover of the participating companies exceeds DKK 50 million (approx. USD 7.6 million). However, notification is not required if one of the participating companies has turnover of less than DKK 10 million (approx. USD 1.5 million). If the combined turnover of the merging companies exceeds DKK 900 million (approx. USD 137 million) and at least two of the merging companies each have turnover exceeding DKK 100 million (approx. USD 15.1 million) or if one of the merging companies has domestic annual turnover exceeding DKK 3.8 billion (approx. USD 577 million) and at least one of the merging companies has global annual turnover exceeding DKK 3.8 billion (approx. USD 577 million), the merger or takeover is also subject to approval by the CCA. Large scale mergers also require approval from EU Competition authorities.

Expropriation and Compensation

By law, private property can only be expropriated for public purposes, in a non-discriminatory manner, with reasonable compensation, and in accordance with established principles of international law. There have been no recent expropriations of significance in Denmark and there is no reason to expect significant expropriations in the near future.

Dispute Settlement

ICSID Convention and New York Convention

Investor-State Dispute Settlement

International Commercial Arbitration and Foreign Courts

There have been no major disputes over investment in Denmark in recent years. Denmark has been a member of the World Bank-based International Center for the Settlement of Investment Disputes (ICSID) since 1968. ICSID offices have also been extended to the Faroe Islands and Greenland. Denmark is a party to the 1958 (New York) Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning local courts must enforce international arbitration awards that meet certain criteria. Subsequent Danish legislation makes international arbitration of investment disputes binding in Denmark. Denmark declared in 1976 that the New York Convention applies to the Faroe Islands and Greenland. Denmark is a party to the 1961 European Convention on International Commercial Arbitration and to the 1962 Agreement relating to the application of this Convention. Denmark adopted the UNCITRAL Model Law on International Commercial Arbitration in 1985.

Bankruptcy Regulations

Monetary judgments under the bankruptcy law are made in freely convertible Danish Kroner. The bankruptcy law addresses creditors’ claims against a bankruptcy in the following order: (1) costs and debt accrued during the treatment of the bankruptcy; (2) costs, including the court tax, relating to attempts to find a solution other than bankruptcy; (3) wage claims and holiday pay; (4) excise taxes owed to the government; and (5) all other claims. In the World Bank’s 2019 Doing Business Report, Denmark ranks 6th in “resolving insolvency.”

7. State-Owned Enterprises

Denmark is party to the Government Procurement Agreement (GPA) within the framework of the World Trade Organization (WTO). State owned entities (SOEs) hold dominant positions in rail, energy, utility and broadcast media in Denmark. Large scale public procurement must go through public tender in accordance with EU legislation. Competition from SOEs is not considered a barrier to foreign investment in Denmark. As an OECD member, Denmark promotes and upholds the OECD Corporate Governance Principals and subsidiary SOE Guidelines.

Privatization Program

Denmark has no current plans to privatize its SOEs.

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) 2017 $330,250 2017 $324,872 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $11,068 2017 $13,873 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2017 $20,136 2017 $17,974 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 33.8% 2017 35.4% 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:
http://www.dst.dk/en/Statistik/emner/nationalregnskab-og-offentlige-finanser/aarligt-nationalregnskab   (or www.statbank.dk  ).


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 $151,800 100% Total Outward $235,040 100%
Sweden $25,233 17% UK $29,929 13%
Netherlands $22,270 15% Sweden $29,900 13%
France $17,636 12% Germany $26,227 11%
Luxembourg $15,390 10% Switzerland $21,232 9%
United Kingdom $13,446 9% United States $16,183 7%
“0” reflects amounts rounded to +/- USD 500,000.

Source: IMF: http://data.imf.org/?sk=40313609-F037-48C1-84B1-E1F1CE54D6D5&sId=1482186404325  


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $477,399 100% All Countries $275,761 100% All Countries $201,638 100%
U.S.A. $143,069 30% U.S.A. $104,272 38% Germany $47,222 23%
Germany $58,002 12% Luxembourg $32,105 12% United States $38,797 19%
Luxembourg $36,405 8% UK $18,457 7% Sweden $15,483 8%
UK $27,265 6% Ireland $16,259 6% France $12,286 6%
Sweden $25,947 5% Japan $11,186 4% Netherlands $10,043 5%

Source: IMF: http://data.imf.org/regular.aspx?key=60587804  

Estonia

Executive Summary

Estonia is a safe and dynamic country for investment, with a business climate very similar to the United States. As a member of the EU, the Government of Estonia (GOE) maintains liberal policies in order to attract investments and export-oriented companies. Creating favorable conditions for foreign direct investment (FDI) and openness to foreign trade has been the foundation of Estonia’s economic strategy. The overall freedom to conduct business in Estonia is well protected under a transparent regulatory environment.

Estonia is among the leading countries in Eastern and Central Europe regarding FDI per capita. At the end of 2018, Estonia had attracted in total USD 25 billion (stock) of investment, of which 30 percent was made into the financial sector, 17 percent into real estate, 13 percent into manufacturing and 12 percent into wholesale and retail trade.

Estonia’s government has not set limitations on foreign ownership and foreign investors are treated on an equal footing with local investors. There are no investment incentives available to foreign investors.

While some corruption exists, it has not been a major problem faced by foreign investors.

The Estonian income tax system, with its flat rate of 21 percent, is considered one of the simplest tax regimes in the world. Deferral of corporate taxation payment shifts the time of taxation from the moment of earning the profits to that of their distribution. Undistributed profits are not subject to income taxation, regardless of whether these are reinvested or merely retained.

Estonia offers key opportunities for businesses in a number of economic sectors like information and communication technology (ICT), chemicals, wood processing, and biotechnology. Estonia has strong trade ties with Finland, Sweden and Germany.

Estonia suffers a shortage of labor, both skilled and unskilled.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 18 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report “Ease of Doing Business” 2018 16 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 24 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in Partner Country ($M USD, stock positions) 2018 $364  http://statistika.eestipank.ee/#/et/p/146/r/2293/2122
World Bank GNI per capita 2017 $18,190 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Estonia is open for FDI and foreign investors are treated on an equal footing with local investors.

The Estonian Investment Agency (EIA), a part of Enterprise Estonia, is a government agency promoting foreign investments in Estonia and assisting international companies in finding business opportunities in Estonia. EIA offers comprehensive, one-stop investment consultancy services, free of charge. The agency’s goal is to increase awareness of business opportunities in Estonia and promote the image of Estonia as an attractive country for investments. More info: http://www.investinestonia.com/en/estonian-investment-agency/about-the-agency  

Limits on Foreign Control and Right to Private Ownership and Establishment

Estonia’s government has not set limitations on foreign ownership. Licenses are required for foreign investors to enter the following sectors: mining, energy, gas and water supply, railroad and transport, waterways, ports, dams and other water-related structures and telecommunications and communication networks. The Estonian Financial Supervision Authority issues licenses for foreign interests seeking to invest in or establish a bank. Additionally, the Estonian Competition Authority reviews transactions for anti-competition concerns. Government review and licensing have proven to be routine and non-discriminatory.

Estonia’s government does not currently screen foreign investment. As a member of the EU, the Government of Estonia (GOE) maintains liberal policies in order to attract investment and export-oriented companies. Creating favorable conditions for FDI and openness to foreign trade has been the foundation of Estonia’s economic strategy. Existing requirements are not intended to restrict foreign ownership but rather to regulate it and establish clear ownership responsibilities.

Other Investment Policy Reviews

Over the past three years, the government has not undergone any third-party investment policy reviews (IPRs) through a multilateral organization such as the Organization for Economic Co-operation and Development (OECD), the World Trade Organization (WTO), or the United Nations Conference on Trade and Development (UNCTAD).

Business Facilitation

The World Bank’s Ease of Doing Business report ranks Estonia in 16th place out of 190 countries on the ease of Starting a Business. Economic freedom, ease of doing business, per capita investments, the record-low national debt, euro zone membership, and low corruption scores – all these factors play a role in fostering a good climate for business facilitation.

In Estonia there are two ways to register your business:

  • Electronic registration via the e-Commercial Register’s Company Registration Portal (takes between 5 minutes and 1 business day)
  • Through a notary (takes 2-3 business days)

Access to the Register: https://www.eesti.ee/en/doing-business/establishing-a-company/comparison-of-each-form-of-business/  

On July 1, 2014, an amended Taxation Act establishing the employment register entered into force, requiring all natural and legal employers to register the persons employed by them with the Estonian Tax and Customs Board.

The company must register itself as a value-added tax payer if the taxable turnover of the company, excluding imports of goods, exceeds EUR 40,000 as calculated from the beginning of the calendar year.

There are certain areas of activity (like construction, electrical works, fire safety, financial services, security services, etc.) in which business operation requires an additional registration in the Register of Economic Activities (MTR), but this can be done after registration of the company in the Commercial Register: https://mtr.mkm.ee/  

International institutions and organizations give Estonia’s economic policies high marks. The Wall Street Journal/Heritage Foundation’s 2019 Index of Economic Freedom ranked Estonia 15th in the world. The index is a composite of scores in monetary policy, banking and finance, black markets, wages and prices. Estonia scores highly on this scale for investment freedom, fiscal freedom, financial freedom, property rights, business freedom, and monetary freedom.

The World Bank DB 2019 Starting a Business Score also ranks Estonia 15th in the world http://www.doingbusiness.org/en/data/exploreeconomies/estonia#DB_sb  

Outward Investment

Estonia does not restrict domestic investors from investing abroad nor does it promote outward investment. Estonia companies have invested abroad about USD 8 billion, mostly into EU countries. The main sectors for outward investments are services, manufacturing, real estate and financial.

2. Bilateral Investment Agreements and Taxation Treaties

BITs or FTAs:

Estonian BITs with third countries are available at the following link: http://investmentpolicyhub.unctad.org/IIA/CountryBits/66#iiaInnerMenu  

Bilateral Taxation Treaties:

A Bilateral Taxation Treaty with the U.S. came into force on January 1, 2000. The United States and Estonia signed a Foreign Account Tax Compliance Act (FATCA) agreement in April 2014.

List of agreements with the United States can be found at: http://www.vm.ee/en/countries/united-states-america?display=relations#agreements  

3. Legal Regime

Transparency of the Regulatory System

The Government of Estonia has set transparent policies and effective laws to foster competition and establish “clear rules of the game.” Despite these measures, due to the small size of Estonia’s commercial community, instances of favoritism are not uncommon.

Accounting, legal, and regulatory procedures are transparent and consistent with international norms. Financial statements should be prepared in accordance with either:

  • accounting principles generally accepted in Estonia; or
  • International Financial Reporting Standards (IFRS) as adopted by the EU.

Listed companies and financial institutions are required to prepare financial statements in accordance with IFRS as adopted by the EU.

The Estonian Generally Accepted Accounting Principles (GAAP) are written by the Estonian Accounting Standards Board (EASB).  Estonian GAAP, effective since 2013, is based on IFRS for Small and Medium-sized Entities (IFRS for SMEs) with limited differences from IFRS for SMEs with regard to accounting policies as well as disclosure requirements. More info: https://investinestonia.com/business-in-estonia/establishing-company/accounting-requirements/  

The Minister of Justice has responsibility for promoting regulatory reform. The Legislative Quality Division of the Ministry of Justice provides an oversight and coordination function for

Regulatory Impact Analysis (RIA) and evaluations with regards to primary legislation. For government strategies, EU negotiations and subordinate regulations, oversight responsibilities lie within the Government Office.

The government of Estonia has placed a strong focus on accessibility and transparency of regulatory policy by making use of online tools. There is an up-to-date database of all primary and subordinate regulations (https://www.riigiteataja.ee/en/  ) in an easily searchable format. An online information system tracks all legislative developments, and makes available RIAs and documents of legislative intent (http://eelnoud.valitsus.ee/main  ). Estonia also established the website www.osale.ee  , an interactive website of all ongoing consultations where every member of the public can submit comments and review comments made by others. Regulations are reviewed on the basis of scientific and data-driven assessments.

Estonia, an OECD member country, has committed at the highest political level to an explicit whole-of-government policy for regulatory quality and has established sufficient regulatory oversight. Estonia scores the same as the United States on the World Bank`s Global Indicators of Regulatory Governance on whether governments publish or consult with public about proposed regulations: http://rulemaking.worldbank.org/en/data/explorecountries/estonia    Estonia’s widely-praised e-governance solutions and other bureaucratic procedures are generally far more streamlined and transparent than those of other countries in the region and are among the easiest to use globally. In addition, Estonia’s budget and debt obligations are widely and easily accessible to the general public on the Ministry of Finance website.

International Regulatory Considerations

Estonia is a member of the EU.  An EU regulation is a legal act of the European Union that becomes immediately enforceable as law in all member states simultaneously. Regulations can be distinguished from directives which, at least in principle, need to be transposed into national law. Regulations can be adopted by means of a variety of legislative procedures depending on their subject matter. European Standards are under the responsibility of the European Standardization Organizations (CEN, CENELEC, ETSI) and can be used to support EU legislation and policies.

Estonia has been a member of WTO since 13 November 1999.  More on Estonian information exchange with WTO Committee on Technical Barriers to Trade (TBT): https://www.evs.ee/Tootedjateenused/WTOteatised/tabid/101/language/en-US/Default.aspx  

Estonia is a signatory to the Trade Facilitation Agreement (TFA) since 2015.

Legal System and Judicial Independence

Estonia’s judiciary is independent and insulated from government influence. The legal system in Estonia is based on the Continental European civil law model and has been influenced by the German legal system. In contrast to common law countries, Estonia has detailed codifications.

Estonian law is divided into private and public law. Generally, private law consists of civil law and commercial law. Public law consists of international law, constitutional law, administrative law, criminal law, financial law and procedural law.

Estonian arbitral tribunals can decide in cases of civil matters that have not previously been settled in court. More on Estonian court system: https://www.riigikohus.ee/en   Arbitration is usually employed because it is less time consuming and cheaper than court settlements. The following disputes can be settled in arbitral tribunals:

  • Labor disputes
  • Lease disputes
  • Consumer complaints arguments
  • Insurance conflicts
  • Public procurement disputes
  • Commercial and industrial disputes

The Court of Arbitration of the Estonian Chamber of Commerce and Industry serves as a permanent arbitration court to settle disputes arising from private law relationships, including foreign trade and other international business relations. More info: https://www.koda.ee/en/about-chamber/court-arbitration  

Recognition of court rulings of EU Member States is regulated by EU legislation. More: http://www.europarl.europa.eu/RegData/etudes/STUD/2015/509988/IPOL_STU(2015)509988_EN.pdf 

Laws and Regulations on Foreign Direct Investment

Estonia is part of the Continental European legal system (civil law system). The most important sources of law are legal instruments such as the Constitution, European Union law, international agreements and Acts and Regulations. Major laws affecting incoming foreign investment include: the Commercial Code, Taxation Act, Income Tax Act, Value Added Tax Act, Social Tax Act, Unemployment Insurance Payment Act. More information is available at https://www.riigiteataja.ee/en/  .  An overview of the investment-related regulations can be found: http://www.investinestonia.com/en/investment-guide/legal-framework  

Competition and Anti-Trust Laws

The Estonian Competition Authority reviews transactions for anti-competition concerns. Government review and licensing have proven to be routine and non-discriminatory.

More info on specific competition cases: http://www.konkurentsiamet.ee/?lang=en  

Expropriation and Compensation

Private property rights are observed in Estonia. The government has the right to expropriate for public interest related to policing the borders, public ports and airports, public streets and roads, supply to public water catchments, etc. Compensation is offered based on market value. Cases of expropriation are extremely rare in Estonia, and the Embassy is not aware of any expropriation cases involving discrimination against foreign owners.

Dispute Settlement

ICSID Convention and New York Convention

Estonia has been a member of the International Center for the Settlement of Investment Disputes (ICSID) since 1992 and a member of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards since 1993, meaning local courts are obliged to enforce international arbitration awards that meet certain criteria

Investor-State Dispute Settlement

The Embassy is not aware of any claims under Estonia’s Bilateral Investment Treaty (BIT) with the United States. Investment disputes concerning U.S. or other foreign investors in Estonia are rare.

In October 2014, AS Tallinna Vesi and its shareholder United Utilities (Tallinn) B.V., registered in the Kingdom of The Netherlands, commenced international arbitration proceedings against the Republic of Estonia for breach of the Agreement on the Encouragement and Reciprocal Protection of Investments between the Kingdom of The Netherlands and the Republic of Estonia. The decision in the matter is expected in May 2019. More info: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB%2f14%2f24  

International Commercial Arbitration and Foreign Courts

The Arbitration Court of the Estonian Chamber of Commerce and Industry is a permanent arbitration court which settles disputes arising from contractual and other civil law relationships, including foreign trade and other international economic relations. More info: http://www.lawyersestonia.com/arbitration-in-estonia  

Recognition of court rulings of EU Member States is regulated by EU legislation. More: http://www.europarl.europa.eu/RegData/etudes/STUD/2015/509988/IPOL_STU(2015)509988_EN.pdf 

Local courts recognize and enforce foreign arbitral awards. The Embassy is not aware of any investment disputes involving SOEs.

Bankruptcy Regulations

Bankruptcy is not criminalized in Estonia.  Bankruptcy procedures in Estonia fall under the regulations of Bankruptcy Act that came into force in February 1997. The Estonian Bankruptcy Act focuses on the protection of the debtors and creditors’ rights. According to the Act, bankruptcy proceedings in Estonia can be compulsory, in which case a court will decide to commence the procedures for debt collection, or voluntarily by company reorganization. More info on bankruptcy procedures: http://www.lawyersestonia.com/bankruptcy-procedures-in-estonia  

The detailed information about the creditor’s rights: https://www.riigiteataja.ee/en/eli/ee/Riigikogu/act/504072016002/consolide  

More info from World Bank’s Doing Business Report on Estonian ranking for ease of “resolving insolvency” http://www.doingbusiness.org/data/exploreeconomies/estonia#resolving-insolvency  

7. State-Owned Enterprises

In Estonia SOEs are primarily engaged in the provision of services of strategic importance.

In early 2019, the Republic of Estonia held an interest in 30 companies of which 27 were solely owned by the state. The largest SOE`s are Eesti Energia (electricity production), Elering (electricity TSO), Estonian Railways, Tallinn Airport, Port of Tallinn.

The full list of SOEs is available at: https://www.eesti.ee/eng/contacts/riigi_osalusega_ariuhingud_1/riigi_osalusega_ariuhingud_2  

SOEs have assets worth about 6.6 billion euros and they employ about 13,000 people.

Public enterprises operate on the same legal basis as private enterprises. Until recently SOEs had politically-appointed boards but today board members are appointed by an independent committee. SOEs are governed by the different ministries.

Competition and public procurement of SOEs is subject to EU law.  All SOEs have audited accounts. Large SOEs’ audits are publicly available on their websites.  The activities of the SOEs are also audited by the National Audit Office of Estonia, which conducts assessments and provides recommendations directly to the Parliament.

Privatization Program

Estonia’s privatization program is largely complete. Only a small number of enterprises remain wholly state-owned. There have been recent discussions on the political level about the possible listing of additional SOEs, such as Port of Tallinn and part of Eesti Energia.

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) 2018 $30,329   2018 $29,527 https://www.imf.org/external/datamapper/NGDPD@WEO/OEMDC/ADVEC/WEOWORLD/EST  
Foreign Direct Investment Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in Partner Country ($M USD, stock positions) 2018 $364 2017 $72 http://statistika.eestipank.ee/?lng=en#treeMenu/MAKSEBIL_JA_INVPOS/146  
BEA data available at https://www.bea.gov/international/di1usdbal _multinational_companies_comprehensive_data.htm 
Host Country’s FDI in the United States ($M USD, stock positions) 2018 $132 2018 N/A http://statistika.eestipank.ee/?lng=en#treeMenu/MAKSEBIL_JA_INVPOS/146  
BEA data available at https://www.bea.gov/international/di1fdibal   
Total Inbound Stock of FDI as % host GDP 2018 83% 2017 98.8% https://unctad.org/sections/dite_dir/docs/wir2018/wir18_fs_ee_en.pdf 


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 $25,130 100% Total Outward $8,209 100%
Sweden $6,389 25% Lithuania $1,726 21%
Finland $5,817 23% Latvia $1,695 20.6%
Netherlands $1,838 7% Cyprus $1,316 16%
Luxembourg $1,475 5% Finland $771 9%
Lithuania $1,026 4% Russia $304 4%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 14,342 100% All Countries 3,998 100% All Countries 10,344 100%
International Organizations 4,987 35% Luxembourg 930 23% International Organizations 4,987 48
Luxembourg 2,225 16% U.S. 675 17% Luxembourg 1,295 12.5%
U.S 972 7% Ireland 628 16% France 543 5%
France 793 6% Finland 353 9% Lithuania 451 4%
Ireland  655 4.5% France 249 6% Germany 405 4%

Source: Bank of Estonia, IMF http://data.imf.org/regular.aspx?key=60587804  

Finland

Executive Summary

Finland is a Nordic country located north of the Baltic States bordering Russia, Sweden, and Norway, possessing a stable and modern economy, including a world-class investment climate.  It is a member of the European Union and part of the euro area. The country has a highly skilled, educated and multilingual labor force, with strong expertise in Information Communications Technology (ICT), shipbuilding, forestry, and renewable energy.  

Key challenges for foreign investors include a rigid labor market and bureaucratic red tape in starting certain businesses, although in June 2016 the Government enacted a Competitiveness Pact that aims to reduce labor costs, increase hours worked, and introduce more flexibility into the wage bargaining system.  An aging population and the shrinking working-age population are the most pressing issues that could limit growth opportunities for Finland.

Finland’s center-right government, headed by Prime Minister Juha Sipila, resigned in early March after failing to push through an overhaul of social and health care programs, the reform package known as SOTE.  The Sipila government intended the package to address the needs of an aging population while improving efficiency and reducing public spending by EUR 3 billion, about USD 3.4 billion, by 2029.

At the end of 2017, the total stock of FDI in Finland totaled USD 83.0 billion, of which equity accounted for USD 78.9 billion and the value of debt capital for USD 4.1 billion.  By country, Sweden contributes the biggest stock of foreign direct investment in Finland USD 29.3 billion (35 percent), followed by the Netherlands USD 16.5 billion (20 percent), Luxembourg USD 14.1 billion (17 percent), and Denmark USD 6.3 billion (8 percent).  According to a joint research conducted by Rhodium Group and Mercator Institute for China, investments from China increased approximately USD 282 million in 2017 and USD 236 million in 2018, totaling USD 8.6 billion.

The GOF has taken steps to attract additional investment by cutting the corporate tax rate from 24.5 percent to 20 percent in 2014, simplifying the residence permit system for foreign experts, and creating a network called Business Finland that promotes foreign investment and the country’s international image.  This one-stop shop brings together the services of a variety of state-funded agencies. Both foreign and domestic companies can benefit from GOF investment incentives, research and development support, and innovation systems.

The U.S. Embassy in Helsinki, through the Foreign Commercial Service and Political/Economic Sections, is a strong partner for U.S. businesses that wish to connect to the Finnish market.  Finnish companies are very active in the fields of information technology, energy, biotech, and clean technology, sectors that the government has selected – along with Arctic expertise – as priorities in their innovation policy.  With excellent transportation links to the Nordic-Baltic region and Russia, Finland can be a good hub for establishing regional operations.

The Finnish MyData initiative is a relatively new human-centric system that is designed to ensure that access to personal data remains under the control of the individual instead of organizations (such as businesses or the government, among others).  This initiative may impact foreign digital service companies, depending on how it is ultimately developed and implemented.

On January 1, 2018, Finpro, the Finnish trade promotion organization, and Tekes, the Finnish Funding Agency for Innovation, united to become Business Finland, which is now the single operator helping Finnish SMEs go international, encouraging foreign direct investment in Finland, and promoting tourism.  Business Finland has around 600 staff, nearly 40 offices abroad, and operates 20 regional offices in Finland. Business Finland is part of the Team Finland network and its website is https://www.businessfinland.fi/en/do-business-with-finland/home/.  Invest in Finland is the official investment promotion agency, and is part of Business Finland.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 3 of 180 https://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 17 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 7 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $3,318 https://apps.bea.gov/international/factsheet/factsheet.cfm?Area=306
World Bank GNI per capita 2017 $44,580 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Finnish government is open to foreign direct investment.  There are no general regulatory limitations relating to acquisitions.  A mixture of domestic and EU competition rules govern mergers and acquisitions.  Finland does not preclude foreign investment, but some tax policies may make it unattractive to investors.  Finnish tax authorities treat the movement of ownership of shares in a Finnish company into a foreign company as a taxable event, though Finland complies with EU directives that require it to allow such transactions based in other EU member states without taxing them.

Finland does not grant foreign-owned firms any special treatment like tax holidays or other subsidies that are not available to other firms.  Instead, Finland relies on policies that seek to offer both domestic and international firms better operating conditions, an educated labor force, and well-functioning infrastructure.  Companies benefit from preferential trade arrangements through Finland’s membership in the EU and World Trade Organization (WTO), in addition to the protection offered by Finland’s bilateral investment treaties with sixty-seven countries.  The corporate income tax rate is 20 percent.

On January 1, 2018, Finpro, the Finnish trade promotion organization, and Tekes, the Finnish Funding Agency for Innovation, united to become Business Finland.  Business Finland is now the single operator helping Finnish SMEs go international, encouraging foreign direct investment in Finland, and promoting tourism. Business Finland supports the Government’s objectives to spread the Finnish innovation system and double SME export volumes by 2020.  Business Finland has around 600 staff, nearly 40 offices abroad, and operates 20 regional offices in Finland. Business Finland is part of the Team Finland network and its website is https://www.businessfinland.fi/en/do-business-with-finland/home/  .  Invest in Finland is the official investment promotion agency, and is part of Business Finland.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Regulation of the European Parliament and the Council on establishing a framework for the national security screening of high risk foreign investments into the Union entered into force on April 10, 2019.  At the moment, 14 Member States, including Finland, have national screening systems in place. Although there are differences in their form and scope, they all aim to maintain security and public order at the national level.  Numerous Member States are currently updating their screening systems or adopting new systems.

The law that governs foreign investments is the Act on the Monitoring of Foreign Corporate Acquisitions in Finland (172/2012).  The Ministry of Employment and the Economy (TEM) monitors and confirms foreign corporate acquisitions. TEM decides whether an acquisition conflicts with “vital national interests” including securing national defense, as well as safeguarding public order and security.  If TEM finds that a key national interest is jeopardized, it must refer the matter to the Council of State, which may refuse to approve the acquisition.

In the civilian sector, TEM primarily monitors transactions related to Finnish enterprises considered critical to maintaining functions fundamental to society, such as energy, communications, or food supply.  Monitoring only applies to foreign owners domiciled outside the EU and European Free Trade Association (EFTA). More information is at https://www.finlex.fi/fi/laki/alkup/2012/20120172   (Available only in Finnish and Swedish).

For defense acquisitions, monitoring applies to all foreign owners, who must apply for prior approval.  “Defense” includes all entities that supply or have supplied goods or services to the Finnish Ministry of Defense, the Finnish Defense Forces, the Finnish Border Guard, as well as entities dealing in dual-use goods.  The substantive elements in evaluating the application are identical to those applied to other corporate acquisitions.

On February 26, 2019, the Finnish Parliament approved a law (HE 253/2018) that requires non-EU/ETA foreign individuals or entities to receive Defense Ministry permission before they purchase land in Finland.  Even companies registered in Finland, but whose decision-making bodies are at least of one-tenth non-EU/ETA origin will have to seek a permit. The law, which is set to take effect in 2020, states that non-EU/ETA property purchasers can still buy residential housing and condominiums without restrictions.

Right to private ownership

Private ownership is normal in Finland, and in most fields of business participation by foreign companies or individuals is unrestricted.  When the government privatizes state-owned enterprises, both private and foreign participation is allowed except in enterprises operating in sectors related to national security.

National Security Screening of FDI

TEM is the authority responsible for monitoring and confirming corporate acquisitions.  Filing an application/notification is voluntary, but the Ministry may request information connected to a foreigner’s corporate acquisition.  The law does not specify a time limit for filing, and a foreign owner may file either before or after the transaction. A transaction is considered approved if the Ministry does not request additional information, initiate further proceedings within six weeks, or refuse to confirm the transaction within three months.  The Ministry cannot render opinions before an application is filed. It is, however, possible for investors to contact the Ministry for guidance beforehand. There is no official template for the notification, but it must include information on the monitored entity’s pre-and post-transaction ownership structure and the acquiring entity’s ownership structure.  If known, an acquiring entity must also state its intentions relating to the monitored entity. There are no fees.

Other Investment Policy Reviews

Finland has been a member of the WTO and the EU since 1995.  The WTO conducted its Trade Policy Review of the European Union (including Finland) in May 2017:  https://www.wto.org/english/tratop_e/tpr_e/tp457_e.htm  .  The Organization for Economic Cooperation and Development (OECD) 2018 economic survey for Finland can be found here:  http://www.oecd.org/eco/surveys/economic-survey-finland.htm  .  The Research Institute of the Finnish Economy (ETLA) regularly publishes reviews of different sectors and factors that may affect investment:  https://www.etla.fi/en/publications/dp1267-en/  .

Business Facilitation

All businesses in Finland must be publicly registered at the Finnish Trade Register.  Businesses must also notify the Register of any changes to registration information and most must submit their financial statements (annual accounts) to the register.  The website is: https://www.prh.fi/en/kaupparekisteri.html  .  The Business Information System BIS (“YTJ” in Finnish, https://www.prh.fi/en/kaupparekisteri/rekisterointipalvelut/ytj.html  ) is an online service enabling investors to start a business or organization, report changes, close down a business, or conduct searches.

Permits, licenses, and notifications required depend on whether the foreign entrepreneur originates from a Nordic country, the European Union, or elsewhere.  The type of company also affects the permits required, which can include the registration of the right to residency, residence permits for an employee or self-employed person, and registration in the Finnish Population Information System.  A foreigner may need a permit from the Finnish Patent and Registration Office to serve as a partner in a partnership or administrative body of a company. For more information: https://www.suomi.fi/company/responsibilities-and-obligations/permits-and-obligations  .  Improvements made in 2016 to the residence permit system for foreign experts, defined as those with special expertise, a university degree, and who earn at least EUR 3,000 gross per month, should help attract experts to Finland.  An online permit application (https://enterfinland.fi/eServices  ) available since November 2016 has made it easier for family members to acquire a residence permit.

The practice of some trades in Finland requires only notification or registration with the authorities.  Other trades, however, require a separate license; companies should confirm requirements with Finnish authorities.  Entrepreneurs must take out pension insurance for their employees, and certain fields obligate additional insurance.  All businesses have a statutory obligation to maintain financial accounts, and, with the exception of small companies, businesses must appoint an external auditor.

Finland is the 17th best country in the world for doing business, according to the World Bank Group’s 2019 Doing Business Index; it ranked 43rd on “Starting a Business”  (http://www.doingbusiness.org/data/exploreeconomies/finland  ).  According to a 2016 study (FDI Attractiveness Scoreboard) by the European Commission, Finland is the most attractive EU country for FDI in terms of the political, regulatory and legal environment.

Gender inequality is low in Finland, which ranks fourth in the 2018 World Economic Forum Global Gender Gap Index.  The employment gap between men and women aged 15-64 is the third lowest in the OECD. According to the World Economic Forum, Finland’s Economic Participation and Opportunity gender gap widened slightly in 2018 due to a decreasing share of women among legislators, senior officials and managers.  However, Finland is currently one of the top-ranked countries that have reached parity in Educational Attainment.

Outward Investment

Business Finland, part of the Team Finland network, helps Finnish SMEs go international, encourages foreign direct investment in Finland, and promotes tourism.  Business Finland has a staff of around 600 persons and nearly 40 offices abroad. It operates 20 regional offices in Finland and focuses on agro technology, cleantech, connectivity, ecommerce, education, ICT and digitalization, mining, and mobility as a service.  While many of Business Finland’s programs are export-oriented, they also seek to offer business and network opportunities. More info here:  https://www.businessfinland.fi/en/do-business-with-finland/home/  .  In 2018, the Ministry of Education and Culture launched the Team Finland Knowledge network to enhance international education and research cooperation and the export of Finnish educational expertise.  North America will be one of the initial focus regions.

2. Bilateral Investment Agreements and Taxation Treaties

Finland does not share a bilateral investment treaty (BIT) agreement or FTA with the United States.  Finland has concluded BITs with: Albania, Algeria, Argentina, Armenia, Azerbaijan, Belarus, Bosnia-Herzegovina, Bulgaria, Chile, China, Croatia, the Czech Republic, Dominican Republic, Egypt, El Salvador, Ecuador, Estonia, Ethiopia, Georgia, Guatemala, Hong Kong, Hungary, India, Indonesia, Iran, Jordan, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Latvia, Lebanon, Lithuania, Macedonia, Malaysia, Mauritius, Mexico, Moldova, Mongolia, Montenegro, Morocco, Mozambique, Namibia, Nepal, Nigeria, Oman, Panama, Peru, Philippines, Poland, Qatar, Romania, Russia, Slovakia, Slovenia, South Africa, Sri Lanka, Tanzania, Thailand, Tunisia, Turkey, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Vietnam and Zambia.  A full list of Finland investment agreements, including copies of the actual documents, is at https://investmentpolicyhubold.unctad.org/IIA/CountryBits/71   and https://issuu.com/ulkoministerio/docs/maailmanmarkkinat_2018-2019     (in Finnish).  As an EU member state, Finland is also a signatory to any treaty or agreement, including free trade agreements, signed by the European Union.  Finland is a signatory to the WTO Trade Facilitation Agreement (TFA), which entered into force on 22 February 2017.

Finland and the United States signed a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital (TIAS 12101) that entered into force in 1990.  In 2014 the two countries signed an intergovernmental agreement to implement the U.S. Foreign Account Tax Compliance Act (FATCA) which fights tax evasion and fraud. The Finnish tax administration guidance regarding FATCA is at:  https://www.vero.fi/en/businesses-and-corporations/about-corporate-taxes/financial-sector/fatca-crs-and-dac2/   and https://www.vero.fi/syventavat-vero-ohjeet/ohje-hakusivu/48528/verohallinnon-ohje-suomen-ja-yhdysvaltain-v percentC3 percentA4list percentC3 percentA4-verotietojen-vaihtoa-koskevan-fatca-sopimuksen-soveltamiseksi/   (available only in Finnish and Swedish).  

For the full text of the FATCA agreement, see:  https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/FATCA-Agreement-Finland-3-5-2014.pdf .

For a list of Finland’s bilateral tax agreements, see:  https://www.vero.fi/en/detailed-guidance/guidance/49062/tax_treatie/  .

The salary and fringe benefits paid to qualifying foreign employees living in Finland for more than six months are taxed at a flat rate of 35 percent, for a maximum assignment period of 48 months in Finland.  For detailed tax guidance, see the Finnish Tax Administration’s website: https://www.vero.fi/en/detailed-guidance/guidance/49113/taxation-of-employees-from-other-countries2/#3.1-foreign-key-employees-(provisional-act)   and the Finnish Foundation for Share Promotion’s Tax Guide for Investors (2015):  http://www.porssisaatio.fi/wp-content/uploads/2015/08/vero_opas_2015_eng_final_web.pdf .

In April 2018, Business Finland introduced a Startup visa to recruit more international talent and innovative companies to the fast-growing Finnish startup ecosystem.  Business Finland must first provide a favorable assessment of a proposed application before the Startup visa application is sent to the Finnish Immigration Service. Business Finland evaluates whether the business model, team and resources show potential for rapid international growth.  After the assessment, the applicant will receive an Eligibility Statement to be attached to the Startup visa application. The visa can initially be issued for a maximum of two years, after which it can be renewed. The visa does not involve investments from the Finnish government or financial support.  For more information see: https://www.businessfinland.fi/en/do-business-with-finland/work-in-finland/startup-permit/  

3. Legal Regime

Transparency of the Regulatory System

The Securities Market Act (SMA) contains regulations on corporate disclosure procedures and requirements, responsibility for flagging share ownership, insider regulations and offenses, the issuing and marketing of securities, and trading.  The clearing of securities trades is subject to licensing and is supervised by the Financial Supervision Authority.  The SMA is at https://www.finlex.fi/en/laki/kaannokset/2012/en20120746_20130258.pdf .

See the Financial Supervisory Authority’s overview of regulations for listed companies here:  https://www.finanssivalvonta.fi/en/capital-markets/issuers-and-investors/regulation-of-listed-companies/  .  Finland is currently not a member of the UNCTAD Business Facilitation Program https://businessfacilitation.org/  .

The Act on the Openness of Public Documents establishes the openness of all records in the possession of officials of the state, municipalities, registered religious communities, and corporations that perform legally mandated public duties, such as pension funds and public utilities.  Exceptions can only be made by law or by an executive order for reasons such as national security. For more information, see the Ministry of Justice’s page on Openness: https://oikeusministerio.fi/en/act-on-the-openness-of-government-activities  .  The Act on the Openness of Government Activities can be found here:

https://www.finlex.fi/en/laki/kaannokset/1999/en19990621  .

Finland ranks third on The World Justice Project (WJP) Rule of Law Index (2019) regarding constraints on government powers, absence of corruption, open government, fundamental rights, order and security, regulatory enforcement, civil justice and criminal justice.  For more, see: https://worldjusticeproject.org/our-work/research-and-data/wjp-rule-law-index-2019  .  Finland ranks fourth on World Bank’s Global Indicators of Regulatory Governance:  http://rulemaking.worldbank.org/en/data/explorecountries/finland  .

International Regulatory Considerations

Finland respects EU common rules and expects other Member States to do the same.  The Government seeks to constructively combine national and joint European interests in Finland’s EU policy, and seeks better and lighter regulation that incorporates flexibility for SMEs.  The Government will not increase burdens detrimental to competitiveness during its national implementation of EU acts.

Finland, as a member of the WTO, is required under the Agreement on Technical Barriers to Trade (TBT Agreement) to report to the WTO all proposed technical regulations that could affect trade with other Member countries.  In 2019, Finland submitted 22 notifications of technical regulations and conformity assessment procedures to the WTO, and has submitted 97 notifications since 1995. Finland is a signatory to the WTO Trade Facilitation Agreement (TFA), which entered into force on February 22, 2017.

Legal System and Judicial Independence

Finland has a civil law system.  European Community (EC) law is directly applicable in Finland and takes precedence over national legislation.  The Market Court is a special court for rulings in commercial law, competition, and public procurement cases, and may issue injunctions and penalties against the illegal restriction of competition.  It also governs mergers and acquisitions and may overturn public procurement decisions and require compensatory payments. The Court has jurisdiction over disputes regarding whether goods or services have been marketed unfairly.  The Court also hears industrial and civil IPR cases.

A working group set up to reform the Competition Act concluded in March 2017 that the Act should be further amended with regard to inspections, sanctions and information exchange between authorities, among others.  In March 2019, the Finnish parliament approved an amendment to the Competition Act to enact those changes. The amendment is set to enter into force on January 1, 2020.For more information see the Competition Act (No. 948/2011) at:  https://www.finlex.fi/fi/laki/kaannokset/2011/en20110948.pdf .

Laws and Regulations on Foreign Direct Investment

A non- European Economic Area (EEA) resident (persons or companies) operating in Finland must obtain a license or a notification when starting a business in a regulated industry.  A comprehensive list of regulated industries can be found at: https://www.suomi.fi/company/responsibilities-and-obligations/permits-and-obligations  .  

See also the Ministry of Employment and the Economy’s Regulated Trade guidelines:  https://tem.fi/en/regulation-of-business-operations  .  The autonomously governed Aland Islands, however are an exception.  Right of domicile is acquired at birth if it is possessed by either parent. Property ownership and the right to conduct business are limited to those with the right of domicile in the Aland Islands.  The Aland Government can occasionally, grant exemptions from the requirement of right of domicile for those wishing to acquire real property or conduct a business in Aland. This does not prevent people from settling in, or trading with, the Aland Islands.  Provided they are Finnish citizens, immigrants who have lived in Aland for five years and have adequate Swedish may apply for domicile and the Aland Government can grant exemptions.

The Competition Act allows the government to block mergers where the result would harm market competition.  The Finnish Competition and Consumer Authority (FCCA) issued guidelines in 2011: https://www.kkv.fi/en/facts-and-advice/competition-affairs/merger-control/  .

EnterpriseFinland/Suomi.fi (https://www.suomi.fi/company/  ) is a free online service offering information and services for starting, growing and developing a company.  Users may also ask for advice through the My Enterprise Finland website: https://oma.yrityssuomi.fi/en.  Finnish legislation is available in the free online databank Finlex in Finnish, where some English translations can also be found:  https://www.finlex.fi/en/laki/kaannokset/  .

Competition and Anti-Trust Laws

The Finnish Competition and Consumer Authority FCCA protects competition by intervening in cases regarding restrictive practices, such as cartels and abuse of dominant position, and violations of the Competition Act and the Treaty on the Functioning of the European Union (TFEU).  Investigations occur on the FCCA’s initiative and on the basis of complaints. Where necessary, the FCCA makes proposals to the Market Court regarding penalties. In international competition matters, the FCCA’s key stakeholders are the European Commission (DG Competition), the OECD Competition Committee, the Nordic competition authorities and the International Competition Network (ICN).  FCCA rulings and decisions can be found in the archive in Finnish. More information at: https://www.kkv.fi/en/facts-and-advice/competition-affairs/  .

Expropriation and Compensation

Finnish law protects private property rights.  Citizen property is protected by the Constitution which includes basic provisions in the event of expropriation.  Private property is only expropriated for public purposes (eminent domain), in a non-discriminatory manner, with reasonable compensation, and in accordance with established international law.  Expropriation is usually based on a permit given by the government or on a confirmed plan and is performed by the District Survey Office. Compensation is awarded at full market price, but may exclude the rise in value due only to planning decisions.

Besides normal expropriation according to the Expropriation Act, a municipality or the State has the right to expropriate land for planning purposes.  Expropriation is mainly for acquiring land for common needs, such as street areas, parks and civic buildings. The method is rarely used: less than one percent of land acquired by the municipalities is expropriated.  Credendo Group ranks Finland’s expropriation risk as low (1), on a scale from 1 to 7: https://www.credendo.com/country-risk/finland  .

Dispute Settlement

ICSID Convention and New York Convention

In 1969, Finland became a member state to the World Bank-based International Center for Settlement of Investment Disputes (ICSID; Washington Convention).  Finland is a signatory to the Convention of the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).

Investor-State Dispute Settlement

The Finnish Arbitration Act (967/1992) is applied without distinction to both domestic and international arbitration.  Sections 1 to 50 apply to arbitration in Finland and Sections 51 to 55 to arbitration agreements providing for arbitration abroad and the recognition and enforcement of foreign arbitral awards in Finland.  Of 160 international parties in 2018, three were from the United States. There have been no reported investment disputes in Finland in recent years.

International Commercial Arbitration and Foreign Courts

Finland has a long tradition of institutional arbitration and its legal framework dates back to 1928.  Today, arbitration procedures are governed by the 1992 Arbitration Act (as amended), which largely mirrors the UNCITRAL Model Law on International Commercial Arbitration of 1985 (with amendments, as adopted in 2006).  The UNCITRAL Model law has not yet, however, been implemented into Finnish Law. In response to the Finland Chamber of Commerce’s request that the government adopt the Model Law in March 2018, the Ministry of Justice is currently investigating whether amendments to the current Finnish Arbitration Act from 1992 are necessary.  The Finland Chamber of Commerce continues to urge that Finland make the Act fully consistent with the Model Law, arguing it would increase Finland’s attractiveness as a venue for international arbitration.

Finland’s Act on Mediation in Civil Disputes and Certification of Settlements by Courts (394/2011) aims to facilitate alternative dispute resolution (ADR) and promote amicable settlements by encouraging mediation, and applies to settlements concluded in other EU member states:  https://www.finlex.fi/en/laki/kaannokset/2011/en20110394.pdf .  In June 2016, the Finland Chamber of Commerce launched its Mediation Rules under which FAI, the Institute of the Finland Chamber of Commerce, will administer mediations:  https://arbitration.fi/mediation/mediation_rules/  .

Any dispute in a civil or commercial matter, international or domestic, which can be settled by agreement may be referred to arbitration.  Arbitration is frequently used to settle commercial disputes and is usually faster than court proceedings. An arbitral award is final and binding.  FAI promotes the settlement of disputes through arbitration, commonly using the “FAI Rules”: https://arbitration.fi/arbitration/rules/  .  In 2015, a Guide to the Finnish Arbitration FAI Rules was published:  https://arbitration.fi/2015/01/15/guide-finnish-arbitration-rules-published/  .  The Institute appoints arbitrators both to domestic and international arbitration proceedings, and administers domestic and international arbitrations governed by its rules.  It also appoints arbitrators in ad hoc cases when the arbitration agreement so provides, and acts as appointing authority under the UNCITRAL Arbitration Rules. The Finnish Arbitration Act (967/1992) states that foreign nationals can act as arbitrators.  For more information see: https://arbitration.fi/arbitration/   and https://www.finlex.fi/fi/laki/kaannokset/1992/en19920967.pdf .

Finland signed the UN Convention on Transparency in Treaty-based Investor-State Arbitration (“Mauritius Convention”) in March 2015.  Under the new rules, all documents and hearings are open to the public, interested parties may submit statements, and protection for confidential information has been strengthened.

Bankruptcy Regulations

The Bankruptcy Act includes provisions on the prerequisites for initiating bankruptcy, bankruptcy proceedings, claims in bankruptcy, administration and the management and sales of assets:  https://www.finlex.fi/en/laki/kaannokset/2004/en20040120.pdf .  Companies bankrupt elsewhere may file for bankruptcy in Finland if they have Finnish assets.  Finland has consistently applied its commercial and bankruptcy laws, with secured interests in property recognized and enforced.

The Reorganization of Enterprises Act (1993/47), https://www.finlex.fi/fi/laki/kaannokset/1993/en19930047  , establishes a legal framework for reorganization with the aim to provide an alternative to bankruptcy proceedings.  The Act excludes credit and insurance institutions and certain other financial institutions. Recognition of restructuring or insolvency processes initiated outside of the EU requires an exequatur from a Finnish court.

The bankruptcy ombudsman, https://www.konkurssiasiamies.fi/en/index.html  , supervises the administration of bankruptcy estates in Finland.  The Act on the Supervision of the Administration of Bankruptcy Estates dictates related Finnish law:  https://www.konkurssiasiamies.fi/material/attachments/konkurssiasiamies/
konkurssiasiamiehentoimistonliitteet/6JZrLGPN1/Act_on_the_Supervision_
of_the_Administration_of_Bankruptcy_Estates.pdf
 
.

Finland can be considered creditor-friendly; enforcement of liabilities through bankruptcy proceedings as well as execution outside bankruptcy proceedings are both effective.  Bankruptcy proceedings are creditor-driven, with no formal powers granted to the debtor and its shareholders. The rights of a secured creditor are also quite extensive. According to the 2019 World Bank’s Doing Business Report, Finland ranks second out of 190 countries for the ease of resolving insolvency:  http://www.doingbusiness.org/data/exploretopics/resolving-insolvency  .

7. State-Owned Enterprises

State Owned Enterprises (SOEs) in Finland are active in chemicals, petrochemicals, plastics and composites; energy and mining; environmental technologies; food processing and packaging; industrial equipment and supplies; marine technology; media and entertainment; metal manufacturing and products; services; and travel.  The Ownership Steering Act (1368/2007) regulates the administration of state-owned companies: https://www.finlex.fi/en/laki/kaannokset/2007/en20071368  .  In general, SOEs are open to competition except where they have a monopoly position, namely in alcohol retail and gambling.  The Ownership Steering Department in the Prime Minister’s Office has ownership steering responsibility for Finnish SOEs, and is responsible for Solidium.

The GOF, directly or through Solidium, is a significant owner in 16 companies listed on the Helsinki stock exchange.  The market value of all State shareholdings was approximately USD 32.1 billion as of April 2019. More info can be found here:  https://vnk.fi/en/value-of-state-holdings  .  The GOF has majority ownership of shares in two listed companies (Finnair and Fortum) and owns shares in 33 commercial companies:  https://vnk.fi/en/state-shareholdings-and-parliamentary-authorisations   (April 2019).  The business development company Vake was established in 2016, and became fully operational in 2018.  Vake’s role is to manage the State shareholdings under its control and to create conditions for reform.  More information can be found here: https://vake.fi/enhome  .

Finnish state ownership steering complies with the OECD Principles of Corporate Governance.

The Parliamentary Advisory Council in the Prime Minister’s Office serves in an advisory capacity regarding SOE policy; it does not make recommendations regarding the actual business in which the individual companies are engaged.  The government has proposed changing its ownership levels in several companies and increasing the number of companies steered by the Prime Minister’s Office. The Government has also proposed to lower the limit for retaining a strategic interest to 33.4 percent.  

Finland opened domestic rail freight to competition in early 2007, and in July 2016, Fenniarail Oy, the first private rail operator on the Finnish market, began operations.  Passenger rail transport services will be opened to competition in stages, starting with local rail services in southern Finland. The government’s stated objective was to complete the local rail service tendering process and commence operations in June 2021.  The ensuing transport systems are scheduled to be operational by 2026. Three wholly state-owned enterprises will be separated from Finnish State Railways (VR) to create a level playing field for all operators: a rolling stock company, a maintenance company, and a real estate company.  The Finnish Ministry of Transport and Communications and VR have negotiated a rail traffic service purchase agreement covering long-distance services as well as commuter services outside the Helsinki Region. The agreement is valid until December 31, 2019, and affords the VR Group exclusive rights for passenger rail services.

Cross-border transportation between Finland and Russia was opened to competition in December 2016.  Trains to and from Russia can be operated by any railroad with permission to operate in the EU. This was earlier VR’s exclusive domain.  Fenniarail Oy has an agreement with VR regarding information exchange between authorities in Finland and Russia, approvals of rail wagons on the Finnish rail network and the safety of rail wagons.  The agreement was signed in January 2017 for an initial trial period.

Privatization Program

Parliament makes all decisions identifying the companies in which the State may relinquish sole ownership (100 percent of the votes) or control (minimum of 50.1 percent of the votes), while the Government decides on the actual sale.  The State has privatized companies by selling shares to Finnish and foreign institutional investors, through both public offerings and directly to employees. Sales of direct holdings of the State totaled USD 1.72 billion from 2010 to 2019.  Solidium’s share sales totaled some USD 6.53 billion from June 2009 – April 2019. Proceeds are primarily used for repayment of central government debt, with a smaller proportion to strengthen the economy and promote growth. The Government issued a new resolution on state-ownership policy in May 2016, seeking to ensure that corporate assets held by the State are put to more efficient use to boost economic growth and employment.

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) 2017 $253,000 2017 $252,000 www.worldbank.org/en/country  
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2017 $3,318 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2017 $1,745 2017 $8,741 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 32.8% 2017 36.7% UNCTAD data available at

https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

* Source for Host Country Data: Statistics Finland, published October 31, 2018.


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 $86,643 100% Total Outward $129,866 100%
Sweden $31,135 35.9% Netherlands $38,073 29.3%
Netherlands $17,482 20.2% Sweden $32,381 24.9%
Luxembourg $14,952 17.3% Ireland $12,143 9.4%
Denmark $6,677 7.7% France $3,873 3.0%
Germany $2,601 3.0% Luxembourg $3,370 2.6%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All

Countries

$372,766 100% All

Countries

$222,430 100% All Countries $150,336 100%
United States $65,172 17.5% Ireland $49,117 22.1% Sweden $17,668 11.8%
Ireland $54,346 14.6% Luxembourg $41,528 18.7% Germany $16,165 10.8%
Luxembourg $47,105 12.6% Sweden $15,917 7.2% France $13,519 9.0%
Sweden $33,584 9.0% Cayman Islands $15,818 7.1% Netherlands $11,165 7.4%
Germany $22,628 6.1% Germany $6,463 2.9% Norway $6,127 4.1%

France and Monaco

Executive Summary

Please see the end of this report for a summary of the investment climate of Monaco.

France welcomes foreign investment and has a stable business climate that attracts investors from around the world. The French government devotes significant resources to attracting foreign investment through policy incentives, marketing, overseas trade promotion offices, and investor support mechanisms. France has an educated population, first-rate universities, and a talented workforce. It has a modern business culture, sophisticated financial markets, strong intellectual property protections, and innovative business leaders. The country is known for its world-class infrastructure, including high-speed passenger rail, maritime ports, extensive roadway networks, public transportation, and efficient intermodal connections. High-speed (3G/4G) telephony is nearly ubiquitous.

In 2018, France was the ninth largest global market for foreign direct investment (FDI) inflows with a year-on-year increase of 2 percent. In total, there are more than 28,000 foreign-owned companies doing business in France. It is the home to 29 of the world’s 500 largest companies. The World Economic Forum ranked France 17th in terms of global competitiveness in 2018. The United States is the seventh largest foreign investor in France. Around 4,600 U.S. companies in France, of all sizes, employ over 460,000 French citizens.

Following the election of French President Emmanuel Macron in May 2017, the French government implemented significant labor market and tax reforms. By relaxing the rules on companies to hire and fire employees and by offering investment incentives, Macron has buoyed business confidence in France. According to the 2018 American Chamber of Commerce in France – Bain Barometer Survey on the attitudes of U.S. investors in France, 86 percent of American investors surveyed found Macron’s reforms to be substantial and good for improving France’s investment prospects and image in the United States. From mid-November 2018, Macron faced weekly “Yellow Vest” protests over the high cost of living, taxes and social exclusion. Among U.S. investors in France, 62 percent said the current social climate was a “nuisance” for U.S. companies operating in France. Nevertheless, 42 percent of U.S. firms still plan to hire new employees in France over the next two to three years. Investors in technology, in particular, found the climate for development of digital technologies and other innovations to be attractive in France.

France’s GDP growth was 1.5 percent in 2018, down sharply from 2.7 percent in 2017. The budget deficit decreased to 2.6 percent of GDP in 2018. However, the OECD forecasts the budget deficit to reach 3.3 percent of GDP in 2019, due to the cost of the government’s €10.3 billion (USD 11.72 billion) emergency package to address the economic and social needs of middle-class and retired workers in response to the “Yellow Vest” protest movement. France’s public debt ratio, at 98.7 percent of GDP, remains one of the highest in the Euro-Zone.

Key issues to watch in 2019 include: 1) whether President Macron is able to maintain the pace of economic reform, and 2) opportunities and challenges resulting from Brexit.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 21 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 32 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 16 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 USD 85,572 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 USD 37,970 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

France welcomes foreign investment. In the current economic climate, the French government sees foreign investment as a means to create additional jobs and stimulate growth. Investment regulations are simple, and a range of financial incentives are available to foreign investors, who report they find France’s skilled and productive labor force, good infrastructure, technology, and central location in Europe attractive. France’s membership in the European Union (EU) and the Eurozone facilitates the efficient movement of people, services, capital, and goods. However, notwithstanding French efforts at economic and tax reform, market liberalization, and attracting foreign investment, perceived disincentives to investing in France include the relatively high tax environment. Labor market fluidity is improving due to labor market reforms introduced by the Macron Administration, but it is still rigid compared to some OECD economies.

Limits on Foreign Control and Right to Private Ownership and Establishment

France is among the least restrictive countries for foreign investment. With a few exceptions in certain specified sectors, there are no statutory limits on foreign ownership of companies. Foreign entities have the right to establish and own business enterprises, and engage in all forms of remunerative activity.

France does maintain a national security review mechanism. French law stipulates that control by acquisition of a domiciled company or subsidiary operating in certain sectors deemed crucial to France’s national interests relating to public order, public security and national defense are subject to prior notification, screening, and approval by the Economy and Finance Minister. Other sectors requiring approval include energy infrastructure; transportation networks; public water supplies; electronic communication networks; public health protection; and installations vital to national security. In 2018, four additional categories – semiconductors, data storage, artificial intelligence and robotics – were added to the list requiring a national security review. For all listed sectors, France can block foreign takeovers of French companies according to the provisions of the Montebourg Decree.

In 2018, the government held equity positions in approximately 81 firms. Most of the positions were relatively small, but did include provisions, which prevent foreign takeover of these firms. Exceptions, where the government had large holdings included, among others, Aeroports de Paris (50.6 percent), Engie, and Renault. In January 2018, the government sold 4.0 percent of its holding in Engie, lowering its stake to 23.64 percent of the energy company. The government also sold 5.0 percent of its stake in Renault, resulting in its ownership of 15.01 percent of the automaker.

Other Investment Policy Reviews

Given the level of development and stability of the investment climate, France has not recently been the subject of international organizations’ investment policy reviews. The OECD Economic Forecast for France (November 2018) can be found here: http://www.oecd.org/economy/france-economic-forecast-summary.htm  .

Business Facilitation

Business France is a government agency established with the purpose to promote new foreign investment, expansion, technology partnerships, and financial investment. Business France provides services to help investors understand regulatory, tax, and employment policies as well as state and local investment incentives, and government support programs. Business France also helps companies find project finance and potential equity acquisitions. Business France recently unveiled a website in English to help prospective businesses considering the French market (https://www.businessfrance.fr/en/invest-in-France  ).

In addition, France’s public investment bank, Bpifrance, assists foreign businesses to find local investors when setting up a subsidiary in France. It also supports foreign startups in France through the government’s French Tech Ticket program, which provides them with funding, a resident’s permit, and incubation facilities. Both business facilitation mechanisms provide for equitable treatment of women and minorities.

President Macron has made innovation one of his priorities with a EUR 10 billion fund that is being financed through privatizations of State-owned enterprises. France’s priority sectors for investment include: aeronautics, agro-foods, digital, nuclear, rail, auto, chemicals and materials, forestry, eco-industries, shipbuilding, health, luxury, and extractive industries. In the near-term, the French government intends to focus on driverless vehicles, batteries, the high-speed train of the future, nano-electronics, renewable energy, and health industries.

Business France and Bpifrance are particularly interested in attracting foreign investment in the tech sector. The French government has developed a brand “French Tech” to promote France as a location for start-ups and high-growth digital companies. In addition to offices in 17 French cities, French Tech offices have been established in cities including New York, San Francisco, Los Angeles, Shanghai, Hong Kong, Vietnam, Moscow, Berlin, and 14 others.

The website Guichet Enterprises (https://www.guichet-entreprises.fr/fr/  ) is designed to be a one-stop website for registering a business. The site is available in both French and English although some fact sheets on regulated industries are only available in French on the website.

Outward Investment

French firms invest more in the United States than in any other country and support approximately 678,000 American jobs. Total French investment in the United States reached USD 275.5 billion in 2018. France was our eighth-largest trading partner with approximately USD 128 billion in bilateral trade in 2018. The business promotion agency Business France also assists French firms with outward investment. There is no restriction on outward investment.

2. Bilateral Investment Agreements and Taxation Treaties

Investments in France by other EU member states are governed by the provisions of the Treaty of Rome and by European Union Law. France has Bilateral Investment Treaties (BITs) with 96 countries:  Albania, Algeria, Argentina, Armenia, Azerbaijan, Bahrain, Bangladesh, Bosnia and Herzegovina, Bulgaria, Cambodia, Chile, China, the Democratic Republic of the Congo, Costa Rica, Croatia, Cuba, Czech Republic, Djibouti, Dominican Republic, Ecuador, Egypt, El Salvador, Equatorial Guinea, Estonia, Ethiopia, Georgia, Guatemala, Haiti, Honduras, Hong Kong, Hungary, India, Iran, Israel, Jamaica, Jordan, Kazakhstan, Korea (South), Kuwait, Kyrgyz Republic, Laos, Latvia, Lebanon, Liberia, Libya, Lithuania, North Macedonia (FYROM), Madagascar, Malaysia, Malta, Mexico, Moldova, Mongolia, Montenegro, Morocco, Mozambique, Namibia, Nepal, Nicaragua, Nigeria, Oman, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Qatar, Romania, Russian Federation, Saudi Arabia, Senegal, Serbia, Seychelles, Singapore, Slovakia, Slovenia, Sri Lanka, Sudan, Tajikistan, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Venezuela, Vietnam, Yemen, and Zambia.

Bilateral Investment Treaties between France and the following countries have been signed but are not in force:  Belarus, Brazil, Chad, Colombia, Ghana, Iraq, Kenya, and Zimbabwe. France previously had BITs with Mauritius and Syria; new BITs with these two countries have been signed but have not yet entered into force.

UNCTAD maintains the most current list of ratified and non-ratified BITs, including links to each document:http://investmentpolicyhub.unctad.org/IIA/CountryBits/72#iiaInnerMenu.  

The United States and France have enjoyed a Navigation and Commerce Treaty since 1822, which guarantees national treatment of U.S. citizens. Since 1994, a Convention between the Government of the United States of America and the Government of the French Republic continues to be in force for the avoidance of double taxation and the prevention of fiscal evasion.

The Macron government temporarily raised corporate taxes in 2017 after the country’s Constitutional Court ordered the state to pay back 10 billion euros (USD 11.6 billion) in unlawful taxes on investor dividends. From a nominal corporate tax rate of 33.3 percent in 2016, the temporary corporate tax rate rose to 38.3 percent in 2017 for companies with turnover in excess of 1.0 billion euros and to 43.3 percent for those with revenues in excess of 3.0 billion euros.

In early 2019 the government demonstrated its intent to lower corporate taxes over the medium term. The 2018 tax law reduces corporate tax on profits over 500,000 euros (USD 596,000) to 31 percent for 2019, 28 percent in 2020, 26.5 percent in 2021 and 25 percent in 2022.

France has tax agreements with 127 countries:  Albania, Algeria, Andorra, Argentina, Armenia, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Belarus, Belgium, Benin, Bolivia, Bosnia and Herzegovina, Botswana, Brazil, Bulgaria, Burkina Faso, Cameroon, Canada, Cambodia, Central African Republic, Chile, China, Cyprus, the Democratic Republic of the Congo, Croatia, Czech Republic, Denmark, Ecuador, Egypt, Equatorial Guinea, Estonia, Ethiopia, Finland, Gabon, Georgia, Ghana, Greece, Guinea, Hong Kong, Hungary, India, Indonesia, Iran, Ireland, Island, Ivory Coast, Israel, Italia, Jamaica, Japan, Jordan, Kazakhstan, Kenya, Korea (South), Kosovo, Kuwait, Kyrgyz Republic, Latvia, Lebanon, Libya, Lithuania, Luxemburg, Macedonia (FYRM), Madagascar, Malaysia, Malawi, Mali, Malta, Mauritania, Mauritius Island, Mayotte, Mexico, Monaco, Mongolia, Montenegro, Morocco, Namibia, Netherlands, New Zealand, New Caledonia, Niger, Nigeria, Norway, Oman, Pakistan, Panama, Philippines, Poland, French Polynesia, Portugal, Qatar, Quebec, Romania, Russian Federation, Saudi Arabia, Saint-Martin, Saint Pierre and Miquelon, Senegal, Serbia, Singapore, South Africa, Spain, Slovakia, Slovenia, Sri Lanka, Sweden, Switzerland, Syria, Tajikistan, Taiwan, Thailand, Togo, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United Kingdom, Uruguay, Uzbekistan, Venezuela, Vietnam, Zambia, and Zimbabwe.  A bilateral tax agreement between France and Colombia has been signed but is not in force. Ref:https://www.impots.gouv.fr/portail/les-conventions-internationales  

3. Legal Regime

Transparency of the Regulatory System

France’s government has made considerable progress in the last decade on the transparency and accessibility of its regulatory system. The French government generally engages in industry and public consultation before drafting legislation or rulemaking through a regular but variable process directed by the relevant ministry. However, the text of draft legislation is not always publicly available before parliamentary approval. U.S. firms may also find it useful to become members of industry associations, which can play an influential role in developing government policies. Even “observer” status can offer insight into new investment opportunities and greater access to government-sponsored projects.

To increase transparency in the French legislative process, all ministries are required to attach an impact assessment to their draft bills. The Prime Minister’s Secretariat General (SGG for Secretariat General du Gouvernement) is responsible for ensuring that impact studies are undertaken in the early stages of the drafting process. The State Council (Conseil d’Etat), which must be consulted on all draft laws and regulations, may reject a draft bill if the impact assessment is inadequate.

After experimenting with new online consultations, the Macron Administration is regularly using this means to achieve consensus on its major reform bills. These consultations are often open to professionals as well as citizens at large. Another Macron innovation is to impose regular impact assessments after a bill has been implemented to ensure its maximum efficiency, revising, as necessary, provisions that do not work in favor of those that do. Finally, the Macron Administration aims to make all regulations and laws available online by 2022.

Over past decades, major reforms have extended the investigative and decision-making powers of France’s Competition Authority. As a result, the Authority has completed 50 enforcement investigations by end of 2016, with 14 decisions leading to sanctions of 203 million EUR (USD 251 million). The Authority publishes its methodology for calculating fines imposed on companies charged with abuse of a dominant position. It issues specific guidance on competition law compliance, and government ministers, companies, consumer organizations and trade associations now have the right to petition the authority to investigate anti-competitive practices. While the Authority alone examines the impact of mergers on competition, the Minister of the Economy retains the power to request a new investigation or reverse a merger transaction decision for reasons of industrial development, competitiveness, or saving jobs.

France’s budget documents are comprehensive and cover all expenditures of the central government. An annex to the budget also provides estimates of cost sharing contributions, though these are not included in the budget estimates. In its spring report each year, the National Economic Commission outlines the deficits for the two previous years, the current year, and the year ahead, including consolidated figures on taxes, debt, and expenditures. Since 1999, the budget accounts have also included contingent liabilities from government guarantees and pension liabilities. The government publishes its debt data promptly on the French Treasury’s website and in other documents. Data on nonnegotiable debt is available 15 days after the end of the month, and data on negotiable debt is available 35 days after the end of the month. Annual data on debt guaranteed by the state is published in summary in the CGAF Report and in detail in the Compte de la dette publique. More information can be found at:

https://www.imf.org/external/np/rosc/fra/fiscal.htm  

International Regulatory Considerations

France is a founding member of the European Union, created in 1957. As such, France incorporates EU laws and regulatory norms into its domestic law. France has been a World Trade Organization (WTO) member since 1995 and a member of GATT since 1948. While developing new draft regulations, the French government submits a copy to the WTO for review to ensure the prospective legislation is consistent with its WTO obligations. France ratified the Trade Facilitation Agreement in October 2015 and has implemented all of its TFA commitments.

Legal System and Judicial Independence

French law is codified into what is sometimes referred to as the Napoleonic Code, but is officially the Code Civil des Francais, or French Civil Code. Private law governs interactions between individuals (e.g., civil, commercial, and employment law) and public law governs the relationship between the government and the people (e.g., criminal, administrative, and constitutional law).

France has an administrative court system to challenge a decision by local governments and the national government; the State Council (Conseil d’Etat) is the appellate court. France enforces foreign legal decisions such as judgments, rulings, and arbitral awards through the procedure of exequatur introduced before the Tribunal de Grande Instance (TGI), which is the court of original jurisdiction in the French legal system.

France’s Commercial Tribunal (Tribunal de Commerce or TDC) specializes in commercial litigation. Magistrates of the commercial tribunals are lay judges, who are well known in the business community and have experience in the sectors they represent. Decisions by the commercial courts can be appealed before the Court of Appeals. France’s judicial system is procedurally competent, fair, and reliable and is independent of the government.

The judiciary – although its members are state employees – is independent of the executive branch. The judicial process in France is known to be competent, fair, thorough, and time-consuming. There is a right of appeal. The Appellate Court (cour d’appel) re-examines judgments rendered in civil, commercial, employment or criminal law cases. It re-examines the legal basis of judgments, checking for errors in due process and reexamines case facts. It may either confirm or set aside the judgment of the lower court, in whole or in part. Decisions of the Appellate Court may be appealed to the Highest Court in France (cour de cassation).

Laws and Regulations on Foreign Direct Investment

Foreign and domestic private entities have the right to establish and own business enterprises and engage in all sorts of remunerative activities. U.S. investment in France is subject to the provisions of the Convention of Establishment between the United States of America and France, which was signed in 1959 and remains in force. The rights it provides U.S. nationals and companies include: rights equivalent to those of French nationals in all commercial activities (excluding communications, air transportation, water transportation, banking, the exploitation of natural resources, the production of electricity, and professions of a scientific, literary, artistic, and educational nature, as well as certain regulated professions like doctors and lawyers). Treatment equivalent to that of French or third-country nationals is provided with respect to transfer of funds between France and the United States. Property is protected from expropriation except for public purposes; in that case it is accompanied by payment that is just, realizable and prompt.

Potential investors can find relevant investment information and links to laws and investment regulations at http://www.businessfrance.fr/  .

Competition and Anti-Trust Laws

Major reforms have extended the investigative and decision-making powers of France’s Competition Authority. The Authority publishes its methodology for calculating fines imposed on companies charged with abuse of a dominant position. It issues specific guidance on competition law compliance. Government ministers, companies, consumer organizations and trade associations have the right to petition the authority to investigate anti-competitive practices. While the Authority alone examines the impact of mergers on competition, the Minister of the Economy retains the power to request a new investigation or reverse a merger transaction decision for reasons of industrial development, competitiveness, or saving jobs.

A new law on Economic Growth, Activity and Equal Opportunities (known as the “Macron Law”), adopted in August 2016, vested the Competition Authority with the power to review mergers and alliances between retailers ex-ante (beforehand). The law provides that all contracts binding a retail business to a distribution network shall expire at the same time. This enables the retailer to switch to another distribution network more easily. Furthermore, distributors are prohibited from restricting a retailer’s commercial activity via post-contract terms. The civil fine incurred for restrictive practices can now amount to up to five percent of the business’s revenue earned in France.

France’s Competition Authority launches regular in-depth investigations into various sectors of the economy, which may lead to formal investigations and fines. On March 6, 2018, the Authority announced that after a two-year examination of the French online advertising market, it may open a full inquiry into the overwhelmingly dominant position of Google and Facebook in internet advertising markets.

Expropriation and Compensation

Government cannot legally expropriate property to build public infrastructure without fair market compensation. There have been no expropriations of note during the reporting period.

Dispute Settlement

ICSID Convention and New York Convention

France is a member of the World Bank-based International Centre for Settlement of Investment Disputes (ICSID) Convention and a signatory to the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) which means local courts are obligated to enforce international arbitral awards under this system. The International Chamber of Commerce’s International Court of Arbitration (ICA) has been based in Paris since 1923.

France was one of the first countries to enact a modern arbitration law in 1980-1981. In 2011, the French Ministry of Justice issued Decree 2011-48, which introduced further international best practices into French arbitration procedural law. As a result of that decree, parties are free to agree orally to settle their disputes through arbitration, subject to standards of due process and a newly enacted principle of procedural efficiency and fairness.

International Commercial Arbitration and Foreign Courts

French law provides conditions for the recognition and the enforcement of foreign arbitral awards in relation to the New York Convention. The provisions of French law are contained in the Code of Civil Procedure and the Code of Civil Enforcement Procedures. The French Civil Code envisions several mechanisms of alternative dispute resolution (ADR) including out-of-court arbitration and conciliation where a judicial conciliator puts an end to a dispute. France is a member of UNCITRAL. Local courts recognize and enforce foreign arbitral awards as mentioned above. The recognition of judgments of foreign courts by French courts is possible, but judgements must be accompanied by the issuance of an exequatur – a legal document issued by a sovereign authority that permits the exercise or enforcement of a foreign judgement.

Investor-State Dispute Settlement

The President of the Tribunal de Grande Instance (High Civil Court of First Instance) of Paris has the authority to issue orders related to ad-hoc international arbitration. Paris is the seat of the International Chamber of Commerce’s International Court of Arbitration, composed of representatives from 90 countries, that handles investment as well as commercial disputes.

France does not have a bilateral investment treaty with the United States.  The European Commission directly negotiates on behalf of the EU on foreign direct investment since it is part of the EU Common Commercial Policy. In 2015, the EU agreed to pursue an investment court approach to investor-State dispute settlement. While this model is included in the Comprehensive Economic and Trade Agreement (CETA) with Canada and the EU-Vietnam FTA, no actual court has yet been established in any form or context; no disputes have been brought under these post-2015 treaties.

Bankruptcy Regulations

France has extensive and detailed bankruptcy laws and regulations. Any creditor, regardless of the amount owed, may file suit in bankruptcy court against a debtor. Foreign creditors, equity shareholders and foreign contract holders have the same rights as their French counterparts. Monetary judgments by French courts on firms established in France are generally made in euros. Not bankruptcy itself, but bankruptcy fraud – the misstatement by a debtor of his financial position in the context of a bankruptcy – is criminalized. Under France’s bankruptcy code managers and other entities responsible for the bankruptcy of a French company are prevented from escaping liability by shielding their assets (Law 2012-346). France has adopted a law that enables debtors to implement a restructuring plan with financial creditors only, without affecting trade creditors. France’s Commercial Code incorporates European Directive 2014/59/EU establishing a framework for the recovery and resolution of claims on insolvent credit institutions and investment firms. In the World Bank’s 2019 Doing Business Index, France was ranked 32nd of 190 on ease of resolving insolvency.

The Bank of France, the country’s only credit monitor, maintains files on persons having written unfunded checks, having declared bankruptcy, or having participated in fraudulent activities. Commercial credit reporting agencies do not exist in France.

7. State-Owned Enterprises

The 12 listed entities in which the French State maintains stakes are Aeroports de Paris (50.63 percent), Airbus Group (11.03 percent), Air France-KLM (14.29 percent), CNP Assurances (holds 1.11 percent; controls 66 percent), Dexia (5.73 percent), EDF (83.66 percent), ENGIE (23.64 percent), Orange (a direct 13.39 percent stake and a 9.60 percent stake through Bpifrance), Renault (15.1 percent), Safran (10.81 percent of shares and 21.9 percent of voting rights), and Thales 25.71 percent). Unlisted companies owned by the State include SNCF (rail), RATP (public transport), CDC (Caisse des depots et consignations) and La Banque Postale (bank). In all, the government has majority and minority stakes in 81 firms, in a variety of sectors.

Private enterprises have the same access to financing as SOEs, including from state-owned banks or other state-owned investment vehicles. SOEs are subject to the same tax burden and tax rebate policies as their private sector competitors. SOEs may get subsidies and other financial resources from the government.

France, as a member of the European Union, is party to the Agreement on Government Procurement (GPA) within the framework of the World Trade Organization. Companies owned or controlled by the state behave largely like other companies in France and are subject to the same laws and tax code. The Boards of SOEs operate according to accepted French corporate governance principles as set out in the (private sector) AFEP-MEDEF Code of Corporate Governance. SOEs are required by law to publish an annual report, and the French Court of Audit conducts financial audits on all entities in which the state holds a majority interest. The French government appoints representatives to the Boards of Directors of all companies in which it holds significant numbers of shares, and manages its portfolio through a special unit attached to the Ministry for the Economy and Finance Ministry, the shareholding agency APE (Agence de Participations de l’Etat). A recent APE annual report highlighted the government’s strategy to keep a sufficient level of control in strategically important companies while scaling back its shareholdings in traditional industrial sectors to invest in fast-growing companies in key sectors for economic growth.

Privatization Program

The government has partially privatized many large companies, including Air France, Orange, Renault, PSA, and ENGIE in order to create a 10 billion EUR fund for innovation and research. However, the government continues to maintain a strong presence in some sectors, particularly power, public transport, and defense industries.

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) 2017 $2,592,818 2018 $3,067,826 https://data.oecd.org/gdp/gross-domestic-product-gdp.htm#indicator-chart  
Foreign Direct Investment Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $62,367 2017 $85,572 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2017 $219,687 2018 $301,540 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 36.1 2017 36.1% UNCTAD data available at

https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

 

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 874,521 100% Total Outward 1,451,663 100%
Luxembourg 178,033 20% United States 253,822 17%
Netherlands 111,158 13% Belgium 178,663 12%
United Kingdom 107,815 12% Netherlands 158,588 11%
Switzerland 88,826 10% United Kingdom 134,746 9%
Germany 81,986 9% Germany 84,543 6%
“0” reflects amounts rounded to +/- USD 500,000.

 

Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $2,887,607 100% All Countries $931,712 100% All Countries $1,995,895 100%
Luxembourg $481,706 17% Luxembourg $287,781 31% Netherlands $234,696 12%
United States $307,540 11% United States $107,912 12% Italy $211,644 11%
Netherlands $293,559 10% Germany $92,519 10% United Kingdom $205,513 11%
United Kingdom $269,065 9% Ireland $71,831 8% United States $199,628 10%
Italy $246,658 9% United Kingdom $63,552 7% Luxembourg $193,924 10%

Germany

Executive Summary

As Europe’s largest economy, Germany is a major destination for foreign direct investment (FDI) and has accumulated a vast stock of FDI over time.  Germany is consistently ranked by business consultancies and the UN Conference on Trade and Development (UNCTAD) as one of the most attractive investment destinations based on its reliable infrastructure, highly skilled workforce, positive social climate, stable legal environment, and world-class research and development.

The United States is the leading source of non-European foreign investment in Germany.  Foreign investment in Germany was broadly stable during the period 2013-2016 (the most recent data available) and mainly originated from other European countries, the United States, and Japan.  FDI from emerging economies (particularly China) grew substantially over 2013-2016, albeit from a low level.

German legal, regulatory, and accounting systems can be complex and burdensome, but are generally transparent and consistent with developed-market norms.  Businesses enjoy considerable freedom within a well-regulated environment. Foreign and domestic investors are treated equally when it comes to investment incentives or the establishment and protection of real and intellectual property.  Foreign investors can fully rely on the legal system, which is efficient and sophisticated. At the same time, this system requires investors to closely track their legal obligations. New investors should ensure they have the necessary legal expertise, either in-house or outside counsel, to meet all requirements.

Germany has effective capital markets and relies heavily on its modern banking system.  Majority state-owned enterprises are generally limited to public utilities such as municipal water, energy, and national rail transportation.  The primary objectives of government policy are to create jobs and foster economic growth. Labor unions are powerful and play a generally constructive role in collective bargaining agreements, as well as on companies’ work councils.

German authorities continue efforts to fight money laundering and corruption.  The government supports responsible business conduct and German SMEs are increasingly aware of the need for due diligence.

The German government amended domestic investment screening provisions, effective June 2017, clarifying the scope for review and giving the government more time to conduct reviews, in reaction to an increasing number of acquisitions of German companies by foreign investors, particularly from China.  The amended provisions provide a clearer definition of sectors in which foreign investment can pose a “threat to public order and security,” including operators of critical infrastructure, developers of software to run critical infrastructure, telecommunications operators or companies involved in telecom surveillance, cloud computing network operators and service providers, and telematics companies.  All non-EU entities are now required to notify Federal Ministry for Economic Affairs and Energy in writing of any acquisition of or significant investment in a German company active in these sectors. The new rules also extend the time to assess a cross-sector foreign investment from two to four months, and for investments in sensitive sectors, from one to three months, and introduce the possibility of retroactively initiating assessments for a period of five years after the conclusion of an acquisition.  Indirect acquisitions such as those through a Germany- or EU-based affiliate company are now also explicitly subject to the new rules. In 2018, the government further lowered the threshold for the screening of investments, allowing authorities to screen acquisitions by foreign entities of at least 10 percent of voting rights of German companies that operate critical infrastructure (down from 25 percent), as well as companies providing services related to critical infrastructure.  The amendment also added media companies to the list of sensitive businesses to which the lower threshold applies. German authorities strongly supported the European Union’s new framework to coordinate national security screening of foreign investments, which entered into force in April 2019.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 11 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 24 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 9 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 136 billion USD https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2017 43,490 USD http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Germany has an open and welcoming attitude towards FDI.  The 1956 U.S.-Federal Republic of Germany Treaty of Friendship, Commerce and Navigation affords U.S. investors national treatment and provides for the free movement of capital between the United States and Germany. As an OECD member, Germany adheres to the OECD National Treatment Instrument and the OECD Codes of Liberalization of Capital Movements and of Invisible Operations.  The Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance provide the legal basis for the Federal Ministry for Economic Affairs and Energy to review acquisitions of domestic companies by foreign buyers, to assess whether these transactions pose a risk to the public order or national security (for example, when the investment pertains to critical infrastructure).  For many decades, Germany has experienced significant inbound investment, which is widely recognized as a considerable contributor to Germany’s growth and prosperity. The German government and industry actively encourage foreign investment. U.S. investment continues to account for a significant share of Germany’s FDI. The investment-related challenges foreign companies face are generally the same as for domestic firms, for example, high marginal income tax rates and labor laws that complicate hiring and dismissals.

Limits on Foreign Control and Right to Private Ownership and Establishment

Under German law, a foreign-owned company registered in the Federal Republic of Germany as a GmbH (limited liability company) or an AG (joint stock company) is treated the same as a German-owned company.  There are no special nationality requirements for directors or shareholders.

However, Germany does prohibit the foreign provision of employee placement services, such as providing temporary office support, domestic help, or executive search services.

While Germany’s Foreign Economic Law permits national security screening of inbound direct investment in individual transactions, in practice no investments have been blocked to date.  Growing Chinese investment activities and acquisitions of German businesses in recent years – including of Mittelstand (mid-sized) industrial market leaders – led German authorities to amend domestic investment screening provisions in 2017, clarifying their scope and giving authorities more time to conduct reviews.  The government further lowered the threshold for the screening of acquisitions in critical infrastructure and sensitive sectors in 2018, to 10 percent of voting rights of a German company. The amendment also added media companies to the list of sensitive sectors to which the lower threshold applies, to prevent foreign actors from engaging in disinformation.  In a prominent case in 2016, the German government withdrew its approval and announced a re-examination of the acquisition of German semi-conductor producer Aixtron by China’s Fujian Grand Chip Investment Fund based on national security concerns.

Other Investment Policy Reviews

The World Bank Group’s “Doing Business 2019” and Economist Intelligence Unit both provide additional information on Germany investment climate.  The American Chamber of Commerce in Germany publishes results of an annual survey of U.S. investors in Germany on business and investment sentiment (“AmCham Germany Transatlantic Business Barometer”).

Business Facilitation

Before engaging in commercial activities, companies and business operators must register in public directories, the two most significant of which are the commercial register (Handelsregister) and the trade office register (Gewerberegister).

Applications for registration at the commercial register, which is publically available under www.handelsregister.de  , are electronically filed in publicly certified form through a notary.  The commercial register provides information about all relevant relationships between merchants and commercial companies, including names of partners and managing directors, capital stock, liability limitations, and insolvency proceedings.  Registration costs vary depending on the size of the company.

Germany Trade and Invest (GTAI), the country’s economic development agency, can assist in the registration processes (https://www.gtai.de/GTAI/Navigation/EN/Invest/Investment-guide/Establishing-a-company/business-registration.html  ) and advise investors, including micro-, small-, and medium-sized enterprises (MSMEs), on how to obtain incentives.

In the EU, MSMEs are defined as follows:

  • Micro-enterprises:  less than 10 employees and less than €2 million annual turnover or less than €2 million in balance sheet total.
  • Small-enterprises:  less than 50 employees and less than €10 million annual turnover or less than €10 million in balance sheet total.
  • Medium-sized enterprises:  less than 250 employees and less than €50 million annual turnover or less than €43 million in balance sheet total.

Outward Investment

The Federal Government provides guarantees for investments by German-based companies in developing and emerging economies and countries in transition in order to insure them against political risks.  In order to receive guarantees, the investment must have adequate legal protection in the host country. The Federal Government does not insure against commercial risks.

2. Bilateral Investment Agreements and Taxation Treaties

Germany does not have a bilateral investment treaty (BIT) with the United States. However, a Friendship, Commerce and Navigation (FCN) treaty dating from 1956 contains many BIT-relevant provisions including national treatment, most-favored nation, free capital flows, and full protection and security.

Germany has bilateral investment treaties in force with 126 countries and territories.  Treaties with former sovereign entities (including Czechoslovakia, the Soviet Union, Sudan, and Yugoslavia) continue to apply in an additional seven cases.  These are indicated with an asterisk (*) and have not been taken into account in regard to the total number of treaties. Treaties are in force with the following states, territories, or former sovereign entities.  For a full list of treaties containing investment provisions that are currently in force, see the UNCTAD Navigator at http://investmentpolicyhub.unctad.org/IIA/CountryBits/78#iiaInnerMenu  .

Afghanistan; Albania; Algeria; Angola; Antigua and Barbuda; Argentina; Armenia; Azerbaijan; Bahrain; Bangladesh; Barbados; Belarus; Benin; Bosnia and Herzegovina; Botswana; Brunei; Bulgaria; Burkina Faso; Burundi; Cambodia; Cameroon; Cape Verde; Central African Republic; Chad; Chile; China (People’s Republic); Congo (Republic); Congo (Democratic Republic); Costa Rica; Croatia; Cuba; Czechoslovakia; Czech Republic*; Dominica; Egypt; El Salvador; Estonia; Eswatini; Ethiopia; Gabon; Georgia; Ghana; Greece; Guatemala; Guinea; Guyana; Haiti; Honduras; Hong Kong; Hungary; Iran; Ivory Coast; Jamaica; Jordan; Kazakhstan; Kenya; Republic of Korea; Kosovo*; Kuwait; Kyrgyzstan; Laos; Latvia; Lebanon; Lesotho; Liberia; Libya; Lithuania; Madagascar; Malaysia; Mali; Malta; Mauritania; Mauritius; Mexico; Moldova; Mongolia; Montenegro*; Morocco; Mozambique; Namibia; Nepal; Nicaragua; Niger; Nigeria; North Macedonia; Oman; Pakistan; Palestinian Territories; Panama; Papua New Guinea; Paraguay; Peru; Philippines; Poland; Portugal; Qatar; Romania; Russia*; Rwanda; Saudi Arabia; Senegal; Serbia*; Sierra Leone; Singapore; Slovak Republic*; Slovenia; Somalia; South Sudan*; Soviet Union; Sri Lanka; St. Lucia; St. Vincent and the Grenadines; Sudan; Syria; Tajikistan; Tanzania; Thailand; Togo; Trinidad & Tobago; Tunisia; Turkey; Turkmenistan; Uganda; Ukraine; United Arab Emirates; Uruguay; Uzbekistan; Venezuela; Vietnam; Yemen; Yugoslavia; Zambia; and Zimbabwe.

A BIT with Bolivia was terminated in May 2014, a BIT with South Africa was terminated in October 2014, BITs with India and Indonesia were terminated in June 2017, and a BIT with Ecuador was terminated in May 2018.  The current BIT with Poland will be terminated in October 2019.

Germany has ratified treaties with the following countries and territories that have not yet entered into force:

Country Signed Temporarily Applicable
Brazil 09/21/1995 No
Congo (Republic) 11/22/2010 *
Iraq 12/04/2010 No
Israel 06/24/1976 Yes
Pakistan 12/01/2009 *
Timor-Leste 08/10/2005 No
Panama* 01/25/2011 *
(*) Previous treaties apply

Bilateral Taxation Treaties:

Taxation of U.S. firms within Germany is governed by the “Convention for the Avoidance of Double Taxation with Respect to Taxes on Income.” This treaty has been in effect since 1989 and was extended in 1991 to the territory of the former German Democratic Republic. With respect to income taxes, both countries agreed to grant credit for their respective federal income taxes on taxes paid on profits by enterprises located in each other’s territory.  A Protocol of 2006 updates the existing tax treaty and includes several changes, including a zero-rate provision for subsidiary-parent dividends, a more restrictive limitation on benefits provision, and a mandatory binding arbitration provision. In 2013, Germany and the United States signed an agreement on legal and administrative cooperation and information exchange with regard to the U.S. Foreign Account Tax Compliance Act. (Full document at https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Internationales_
Steuerrecht/Staatenbezogene_Informationen/Laender_A_Z/Verein_Staaten/2013-10-15-USA-Abkommen-FATCA.html
 
).

As of January 2019, Germany had bilateral tax treaties with a total of 96 countries, including with the United States, and, regarding inheritance taxes, with 6 countries.  It has special bilateral treaties with respect to income and assets by shipping and aerospace companies with 10 countries and has treaties relating to the exchange of information and administrative assistance with 27 countries.  Germany has initiated and/or is renegotiating new income and wealth tax treaties with 64 countries, special bilateral treaties with respect to income and assets by shipping and aerospace companies with 2 countries, and information exchange and administrative assistance treaties with 7 countries.

3. Legal Regime

Transparency of the Regulatory System

Germany has transparent and effective laws and policies to promote competition, including antitrust laws.  The legal, regulatory and accounting systems are complex but transparent and consistent with international norms.

Formally, the public consultation by the federal government is regulated by the Joint Rules of Procedure, which specify that ministries must consult early and extensively with a range of stakeholders on all new legislative proposals.  In practice, laws and regulations in Germany are routinely published in draft, and public comments are solicited. According to the Joint Procedural Rules, ministries should consult the concerned industries’ associations (rather than single companies), consumer organizations, environmental, and other NGOs.  The consultation period generally takes two to eight weeks.

The German Institute for Standardization (DIN) is open to foreign members.

International Regulatory Considerations

As a member of the European Union, Germany must observe and implement directives and regulations adopted by the EU.  EU regulations are binding and enter into force as immediately applicable law. Directives, on the other hand, constitute a type of framework law that is to be implemented by the Member States in their respective legislative processes, which is regularly observed in Germany.

EU Member States must implement directives within a specified period of time.  Should a deadline not be met, the Member State may suffer the initiation of an infringement procedure, which could result in high fines.  Germany has a set of rules that prescribe how to break down any payment of fines devolving on the Federal Government and the federal states (Länder).  Both bear part of the costs depending on their responsibility within legislation and the respective part they played in non-compliance.

The federal states have a say over European affairs through the Bundesrat (upper chamber of parliament).  The Federal Government is required to instruct the Bundesrat at an early stage on all EU plans that are relevant for the federal states.

The federal government notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT) through the Federal Ministry of Economic Affairs and Energy.

Legal System and Judicial Independence

German law is both predictable and reliable.  Companies can effectively enforce property and contractual rights.  Germany’s well-established enforcement laws and official enforcement services ensure that investors can assert their rights.  German courts are fully available to foreign investors in an investment dispute.

The judicial system is independent, and the federal government does not interfere in the court system.  The legislature sets the systemic and structural parameters, while lawyers and civil law notaries use the law to shape and organize specific situations.  Judges are highly competent. International studies and empirical data have attested that Germany offers an efficient court system committed to due process and the rule of law.

In Germany, most important legal issues and matters are governed by comprehensive legislation in the form of statutes, codes and regulations.  Primary legislation in the area of business law includes:

  • the Civil Code (Bürgerliches Gesetzbuch, abbreviated as BGB), which contains general rules on the formation, performance and enforcement of contracts and on the basic types of contractual agreements for legal transactions between private entities;
  • the Commercial Code (Handelsgesetzbuch, abbreviated as HGB), which contains special rules concerning transactions among businesses and commercial partnerships;
  • the Private Limited Companies Act (GmbH-Gesetz) and the Public Limited Companies Act (Aktiengesetz), covering the two most common corporate structures in Germany – the ‘GmbH’ and the ‘Aktiengesellschaft’; and
  • the Act on Unfair Competition (Gesetz gegen den unlauteren Wettbewerb, abbreviated as UWG), which prohibits misleading advertising and unfair business practices.

Germany has specialized courts for administrative law, labor law, social law, and finance and tax law.  In 2019, the first German district court for civil matters (in Frankfurt) introduced the possibility to hear international trade disputes in English.  Other federal states are currently discussing plans to introduce these specialized chambers as well. The Federal Patent Court hears cases on patents, trademarks, and utility rights which are related to decisions by the German Patent and Trademarks Office.  Both the German Patent Office (Deutsches Patentamt) and the European Patent Office are headquartered in Munich.

Laws and Regulations on Foreign Direct Investment

The Federal Ministry for Economic Affairs and Energy may review acquisitions of domestic companies by foreign buyers in cases where investors seek to acquire at least 25 percent of the voting rights to assess whether these transactions pose a risk to the public order or national security of the Federal Republic of Germany.  In the case of acquisitions of critical infrastructure and companies in sensitive sectors, the threshold for triggering an investment review by the government is 10 percent. The Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance provide the legal basis for screening investments. To our knowledge, the Federal Ministry for Economic Affairs and Energy had not prohibited any acquisitions as of April 2019.

There is no requirement for investors to obtain approval for any acquisition, but they must notify the Federal Ministry for Economic Affairs and Energy if the target company operates critical infrastructure.  In that case, or if the company provides services related to critical infrastructure or is a media company, the threshold for initiating an investment review is the acquisition of at least 10 percent of voting rights.  The Federal Ministry for Economic Affairs and Energy may launch a review within three months after obtaining knowledge of the acquisition; the review must be concluded within four months after receipt of the full set of relevant documents.  An investor may also request a binding certificate of non-objection from the Federal Ministry for Economic Affairs and Energy in advance of the planned acquisition to obtain legal certainty at an early stage. If the Federal Ministry for Economic Affairs and Energy does not open an in-depth review within two months from the receipt of the request, the certificate shall be deemed as granted.

Special rules apply for the acquisition of companies that operate in sensitive security areas, including defense and IT security.  In contrast to the cross-sectoral rules, the sensitive acquisitions must be notified in written form including basic information of the planned acquisition, the buyer, the domestic company that is subject of the acquisition and the respective fields of business.  The Federal Ministry for Economic Affairs and Energy may open a formal review procedure within three months after receiving notification, or the acquisition shall be deemed as approved. If a review procedure is opened, the buyer is required to submit further documents.  The acquisition may be restricted or prohibited within three months after the full set of documents has been submitted.

The German government amended domestic investment screening provisions, effective June 2017, clarifying the scope for review and giving the government more time to conduct reviews, in reaction to an increasing number of acquisitions of German companies by foreign investors, particularly from China.  The amended provisions provide a clearer definition of sectors in which foreign investment can pose a “threat to public order and security,” including operators of critical infrastructure, developers of software to run critical infrastructure, telecommunications operators or companies involved in telecom surveillance, cloud computing network operators and service providers, and telematics companies.  All non-EU entities are now required to notify Federal Ministry for Economic Affairs and Energy in writing of any acquisition of or significant investment in a German company active in the above sectors. The new rules also extend the time to assess a cross-sector foreign investment from two to four months, and for investments in sensitive sectors, from one to three months, and introduce the possibility of retroactively initiating assessments for a period of five years after the conclusion of an acquisition. Indirect acquisitions such as those through a Germany- or EU-based affiliate company are now also explicitly subject to the new rules.  In 2018, the government further lowered the threshold for the screening of investments, allowing authorities to screen acquisitions by foreign entities of at least 10 percent of voting rights of German companies that operate critical infrastructure (down from 25 percent), as well as companies providing services related to critical infrastructure. The amendment also added media companies to the list of sensitive businesses to which the lower threshold applies, to prevent foreign actors to engage in disinformation.

Any decisions resulting from review procedures are subject to judicial review by the administrative courts.  The German Economic Development Agency (GTAI) provides extensive information for investors, including about the legal framework, labor-related issues and incentive programs, on their website: http://www.gtai.de/GTAI/Navigation/EN/Invest/investment-guide.html.

Competition and Anti-Trust Laws

German government ensures competition on a level playing field on the basis of two main legal codes:

The Law against Limiting Competition is the legal basis for the fight against cartels, merger control, and monitoring abuse.  State and Federal cartel authorities are in charge of enforcing anti-trust law. In exceptional cases, the Minister for Economics and Energy can provide a permit under specific conditions.  The last case was a merger of two retailers (Kaisers/Tengelmann and Edeka) to which a ministerial permit was granted in March 2016. A July 2017 amendment to the Cartel Law expanded the reach of the Federal Cartel Authority (FCA) to include internet and data-based business models; as a result, the FCA investigated Facebook’s data collection practices regarding potential abuse of market power.  A February 2019 decision affirming abuse by the FCA has been challenged by Facebook at a regional court.  In November 2018, the FCA initiated an investigation of Amazon over potential abuse of market power; a decision was pending as of April 2019.

The Law against Unfair Competition (amended last in 2016) can be invoked in regional courts.

Expropriation and Compensation

German law provides that private property can be expropriated for public purposes only in a non-discriminatory manner and in accordance with established principles of constitutional and international law.  There is due process and transparency of purpose, and investors and lenders to expropriated entities receive prompt, adequate, and effective compensation.

The Berlin state government is currently reviewing a petition for a referendum submitted by a citizens’ initiative which calls for the expropriation of residential apartments owned by large corporations.  At least one party in the governing coalition officially supports the proposal, whereas the others remain undecided. Certain long-running expropriation cases date back to the Nazi and communist regimes. During the 2008-9 global financial crisis, the parliament adopted a law allowing emergency expropriation if the insolvency of a bank would endanger the financial system, but the measure expired without having been used.

Dispute Settlement

ICSID Convention and New York Convention

Germany is a member of both the International Center for the Settlement of Investment Disputes (ICSID) and New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning local courts must enforce international arbitration awards under certain conditions.

Investor-State Dispute Settlement

Investment disputes involving U.S. or other foreign investors in Germany are extremely rare. According to the UNCTAD database of treaty-based investor dispute settlement cases, Germany has been challenged a handful of times, none of which involved U.S. investors.  

International Commercial Arbitration and Foreign Courts

Germany has a domestic arbitration body called the German Institution for Dispute Settlement. ”Book 10” of the German Code of Civil Procedure addresses arbitration proceedings. The International Chamber of Commerce has an office in Berlin. In addition, chambers of commerce and industry offer arbitration services.

Bankruptcy Regulations

German insolvency law, as enshrined in the Insolvency Code, supports and promotes restructuring.  If a business or the owner of a business becomes insolvent, or a business is over-indebted, insolvency proceedings can be initiated by filing for insolvency; legal persons are obliged to do so.  Insolvency itself is not a crime, but deliberately late filing for insolvency is.

Under a regular insolvency procedure, the insolvent business is generally broken up in order to release as much money as possible through the sale of individual items or rights or parts of the company.  Proceeds can then be paid out to the creditors in the insolvency proceedings. The distribution of the monies to the creditors follows the detailed instructions of the Insolvency Code.

Equal treatment of creditors is enshrined in the Insolvency Code.  Some creditors have the right to claim property back. Post-adjudication preferred creditors are served out of insolvency assets during the insolvency procedure.  Ordinary creditors are served on the basis of quotas from the remaining insolvency assets. Secondary creditors, including shareholder loans, are only served if insolvency assets remain after all others have been served.  Germany ranks fourth in the global ranking of “Resolving Insolvency” in the World Bank’s Doing Business Report, with a recovery rate of 80.4 cents on the dollar.

7. State-Owned Enterprises

The formal term for state-owned enterprises (SOEs) in Germany translates as “public funds, institutions, or companies,” and refers to entities whose budget and administration are separate from those of the government, but in which the government has more than 50 percent of the capital shares or voting rights.  Appropriations for SOEs are included in public budgets, and SOEs can take two forms, either public or private law entities. Public law entities are recognized as legal personalities whose goal, tasks, and organization are established and defined via specific acts of legislation, with the best-known example being the publicly-owned promotional bank KfW (Kreditanstalt für Wiederaufbau).  The government can also resort to ownership or participation in an entity governed by private law if the following conditions are met: doing so fulfills an important state interest, there is no better or more economical alternative, the financial responsibility of the federal government is limited, the government has appropriate supervisory influence, yearly reports are published, and such control is approved by the Federal Finance Ministry and the ministry responsible for the subject matter.

Government oversight of SOEs is decentralized and handled by the ministry with the appropriate technical area of expertise.  The primary goal of such involvement is promoting public interests rather than generating profits. The government is required to close its ownership stake in a private entity if tasks change or technological progress provides more effective alternatives, though certain areas, particularly science and culture, remain permanent core government obligations.  German SOEs are subject to the same taxes and the same value added tax rebate policies as their private sector competitors. There are no laws or rules that seek to ensure a primary or leading role for SOEs in certain sectors or industries. Private enterprises have the same access to financing as SOEs, including access to state-owned banks such as KfW.

The Federal Statistics Office maintains a database of SOEs from all three levels of government (federal, state, and municipal) listing a total of 16,833 entities for 2016, or 0.5 percent of the total 3.5 million companies in Germany.  SOEs in 2016 had €547 billion in revenue and €529 billion in expenditures. Almost 40 percent of SOEs’ revenue was generated by water and energy suppliers, 13 percent by health and social services, and 12 percent by transportation-related entities.  Measured by number of companies rather than size, 88 percent of SOEs are owned by municipalities, 10 percent are owned by Germany’s 16 states, and 2 percent are owned by the federal government.

The Federal Finance Ministry is required to publish a detailed annual report on public funds, institutions, and companies in which the federal government has direct participation (including a minority share), or an indirect participation greater than 25 percent and with a nominal capital share worth more than €50,000.  The federal government held a direct participation in 106 companies and an indirect participation in 469 companies at the end of 2016, most prominently Deutsche Bahn (100 percent share), Deutsche Telekom (32 percent share), and Deutsche Post (21 percent share). Federal government ownership is concentrated in the areas of science, infrastructure, administration/increasing efficiency, economic development, defense, development policy, culture.  As the result of federal financial assistance packages from the federally-controlled Financial Market Stability Fund during the global financial crisis of 2008-9, the federal government still has a partial stake in several commercial banks, including a 15.6 percent share in Commerzbank, Germany’s second largest commercial bank. The 2017 annual report (with 2016 data) can be found here:

https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Bundesvermoegen/
Privatisierungs_und_Beteiligungspolitik/Beteiligungspolitik/Beteiligungsberichte/beteiligungsbericht-des-bundes-2017.pdf?__blob=publicationFile&v=7
 

Publicly-owned banks also constitute one of the three pillars of Germany’s banking system (cooperative and commercial banks are the other two).  Germany’s savings banks are mainly owned by the municipalities, while the so-called Landesbanken are typically owned by regional savings bank associations and the state governments.  There are also many state-owned promotional/development banks which have taken on larger governmental roles in financing infrastructure. This increased role removes expenditures from public budgets, particularly helpful in light of Germany’s balanced budget rules, which go into effect for the states in 2020.

A longstanding, prominent case of a partially state-owned enterprise is automotive manufacturer Volkswagen, in which the state of Lower Saxony owns the fourth-largest share in the company at 12.7 percent share, but controls 20 percent of the voting rights.  The so-called Volkswagen Law, passed in 1960, limited individual shareholder’s voting rights in Volkswagen to a maximum of 20 percent regardless of the actual number of shares owned, so that Lower Saxony could veto any takeover attempts. In 2005, the European Commission successfully sued Germany at the European Court of Justice (ECJ), claiming the law impeded the free flow of capital.  The law was subsequently amended to remove the cap on voting rights, but Lower Saxony’s 20 percent share of voting rights was maintained, preserving its ability to block hostile takeovers.

The wholly federal government-owned railway company, Deutsche Bahn, was cleared by the European Commission in 2013 of allegations of abusing its dominant market position after Deutsche Bahn implemented a new, competitive pricing system.  A similar case brought by the German Federal Cartel Office against Deutsche Bahn was terminated in May 2016 after the company implemented a new pricing system.

Privatization Program

Germany does not have any privatization programs at this time.  German authorities treat foreigners equally in privatizations.

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) 2018 €3,386,000 million 2017 $3,677,439 https://data.worldbank.org/country/germany?view=chart  
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2016 €54,810 2017 $136,128 BEA data available at https://apps.bea.gov/international/factsheet/  
Host country’s FDI in the United States ($M USD, stock positions) 2016 €223,813 million 2017 $405,552 BEA data available at https://apps.bea.gov/international/factsheet/  
Total inbound stock of FDI as % host GDP 2016 €21.7Amt 2017 27.2% UNCTAD data available athttps://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx    

* Source for Host Country Data: Federal Statistical Office DESTATIS, Bundesbank; http://www.bundesbank.de   (German Central Bank, 2017 data to be published in April 2019, only available in €)


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 $950,837 100% Total Outward $1,606,120 100%
Netherlands $181,080 19.0% United States $267,769 16.7%
Luxembourg $164,449 17.3% Netherlands $202,022 12.6%
United States $93,572 9.8% Luxembourg $191,449 11.9%
United Kingdom $83,299 8.8% United Kingdom $149,184 9.3%
Switzerland $79,499 8.4% France $90,077 5.6%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $12,173,972 100% All Countries $1,266,593 100% All Countries $2,192,351 100%
Luxembourg $680,807 5.6% Luxembourg $566,381 44.7% France $317,050 14.5%
France $416,561 3.4% United States $161,234 12.7% United States $250,607 11.4%
United States $411,841 3.4% Ireland $113,430 9.0% Netherlands $232,576 10.6%
Netherlands $277,569 2.3% France $99,512 7.9% United Kingdom $153,672 7.0%
United Kingdom $211,076 1.7% United Kingdom $57,404 4.5% Italy $139,334 6.4%

Greece

Executive Summary

In August 2018, after eight years of austerity measures and reforms under three economic adjustment programs, Greece exited its final, third international bailout program agreement, taking a significant step back to economic normalcy.  Growth reached an estimated 2.1percent in 2018, up from 1.4percent in 2017.  The government exceeded its 2018 primary fiscal balance target of 3.5percent of GDP, and Greek authorities successfully drew on international capital markets for the first time since 2014.  Major challenges remain, however.  At the end of 2018, Greece’s public debt was EUR348.94 billion, or more than 183percent of GDP, the highest debt-to-GDP ratio in the European Union (EU) by a considerable margin, and the state is required to maintain high primary budget surplus for many years.  Unemployment rates remain the highest in the EU at 18.5percent in January 2019, and nearly 40percent youth unemployment.

In August 2018, the European Stability Mechanism (ESM) released a final EUR15 billion loan tranche to Greece under the framework of its third bailout program.  Of this, Greece earmarkedEUR3.3 billion to prepay expensive IMF debt from its earlier bailout programs.  The government allocated the balance of the disbursement, along with additional state resources, to create a liquidity buffer for Greece while it returns to full market access.  The total buffer, estimated atEUR26 billion, should be sufficient to cover the country’s financing needs until at least the end of 2020.  Greece remains subject to enhanced supervision by Eurozone creditors, and the government has committed to meet annual primary budget surplus of 3.5percent of GDP through 2022 and 2.2percent afterwards.

Capital controls, which the Greek finance ministry introduced in June 2015, were gradually eased following a recovery in private deposits.  The finance ministry lifted nearly all capital controls on cash withdrawals and the movement of capital in October 2018.  The ministry also raised the ceiling of capital withdrawals from banks abroad toEUR5,000 per month, as well as the allowable transfer amount from Greece to other countries fromEUR3,000 toEUR10,000.

In November 2015, as part of the implementation of the August 2015 ESM agreement, Greece recapitalized its four major banks for the third time in five years.  This recapitalization included the participation of large U.S. and foreign hedge funds.  The banking system of Greece remains saddled with the largest ratio of non-performing loans in the EU, which constrains the domestic financial sector’s ability to finance the national economy.  As a result, businesses, particularly small and medium enterprises, still struggle to obtain domestic financing to support operations due to inflated risk premiums in the sector.  In an effort to tackle the issue, and as a requirement of the agreement with the ESM, Greece has established a secondary market for its non-performing loans (NPLs).  According to the Bank of Greece, Greek banks managed to bring down the total volume of NPLs from a peak of EUR 107.2 billion in 2016 to EUR 84.7 billion at the end of 2018.  In 2018, Greek banks closed eight sales totaling a book value ofEUR13.9 billion.  In addition to sales, the banks have exploited other ways to manage bad loans.  For example, Alpha Bank, National Bank of Greece, Eurobank, and Piraeus entered into a servicing agreement with Italian servicer for the management of common non-performing exposures (NPE) of more than 300 Greek SMEs totalingEUR1.8 billion.  Greece’s secondary market for NPL servicers now includes 15 companies including: : Sepal (an Alpha Bank-Aktua joint venture), FPS (a Eurobank subsidiary), Pillarstone, Independent Portfolio Management, B2Kapital, UCI Hellas, Resolute Asset Management, Thea Artemis, PQH, Qquant Master Servicer, and DV01 Asset Management.  At least ten more licensees are pending approval by the Bank of Greece.  A limited number of other companies have submitted applications and are awaiting approval.

In previous years, concerns over economic and political stability within Greece essentially froze most new investment and caused some existing investors to scale down or withdraw entirely from the Greek market.  The success in the privatization of Greece’s 14 regional airports, investment in the tourism sector, and the construction of the Trans-Adriatic Pipeline (TAP) demonstrated the opportunities that have existed in Greece even during the height of the economic crisis.  Greece’s return to economic growth in 2017 and 2018 has generated new investor interest in the country.  In January 2019, Greece successfully raisedEUR2.5 billion in a five-year bond sale at a yield of 3.6percent.  Officials are expecting another bond sale seeking to raiseEUR5-7 billion euros.

Table 1 Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 67 of 180 https://www.transparency.org/country/GRC
World Bank’s Doing Business Report “Ease of Doing Business” 2019 72 of 190 http://www.doingbusiness.org/data/exploreeconomies/greece
Global Innovation Index 2018 42  of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $1,200 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $18,090 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Greek government continues to state its desire to increase foreign investment, though the country remains a challenging climate for investment, both foreign and domestic.  Despite the most recent EUR86 billion bailout agreement signed in August 2015 between the Greek government and its international creditors, under the auspices of the ESM, economic uncertainty remains widespread, though sentiment has been broadly improving since 2017.

Numerous additional structural reforms, undertaken as part of the country’s 2015-2018 international bailout program, aim to welcome and facilitate foreign investment, and the government has publicly messaged its dedication to attracting foreign investment.  The Trans Adriatic Pipeline (TAP) is one example of the government’s commitment in this area.  In November 2015, the Greek government and TAP investors agreed on measures and began construction on the largest investment project since the start of the financial crisis, with the pipeline set to begin operations in 2020.  Nevertheless, many structural reforms have created greater challenges to investors and established businesses in Greece.  The country has undergone one of the most significant fiscal consolidations in modern history, with broad and deep cuts to public expenditures and significant increases in labor and social security tax rates, which have offset improved labor market competitiveness achieved through significant wage devaluation.  Moreover, corruption and burdensome bureaucracy continue to create barriers to market entry for new firms, permitting incumbents to maintain oligopolies in different sectors, and creating scope for arbitrary decisions and rent seeking by public servants.

Limits on Foreign Control and Right to Private Ownership and Establishment

As a member of the EU and the European Monetary Union (the “Eurozone”), Greece is required to meet EU and Eurozone investment regulations.  Foreign and domestic private entities have the legal right to establish and own businesses in Greece; however, the country places restrictions on foreign equity ownership higher than the average imposed on the other 17 high-income OECD economies.  The government has undertaken EU-mandated reforms in its energy sector, opening much of it up to foreign equity ownership.  Restrictions exist on land purchases in border regions and on certain islands because of national security considerations.  Foreign investors can buy or sell shares on the Athens Stock Exchange on the same basis as local investors.

Other Investment Policy Reviews

The government has not undergone an investment policy review by the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), or United Nations Committee on Trade and Development (UNCTAD), or cooperated with any other international institution to produce a public report on the general investment climate.  Nonetheless, in March 2018, the OECD published an economic survey describing the state of the economy and addressing foreign direct investment concerns.  The government has sought the OECD’s counsel and technical assistance to carry out select reforms from the recommendations and develop additional reforms in line with the government’s emphasis on the social welfare state.

Business Facilitation

Greece’s business registration entity GEMI (General Commercial Register) has the basic responsibility for digitizing and automating the registration and monitoring procedures of commercial enterprises.  More information about GEMI can be found at http://www.businessportal.gr/home/index_en .  The online business registration process is relatively clear, and although foreign companies can use it, the registration steps are currently available only in Greek.  In general, a company must register with the business chamber, tax registry, social security, and local municipality.  Business creation without a notary can be done for specific cases (small/personal businesses, etc.).  For the establishment of larger companies, a notary is mandatory.

The country has investment promotion agencies to facilitate foreign investments.  “Enterprise Greece” is the official agency of the Greek state.  Under the supervision of the Ministry of Economy and Development, it is responsible for promoting investment in Greece, exports from Greece, and with making Greece more attractive as an international business partner.  Enterprise Greece provides the full spectrum of services related to international business relationships and domestic business development for the international market.  Enterprise Greece offers an Investor Ombudsman program for investment projects exceedingEUR2 million.  The Ombudsman is available to assist with specific bureaucratic obstacles, delays, disputes or other difficulties that impede an investment project.  As reported by some business, Enterprise Greece, even with its ombudsman service for investments, is not very effective at moving investments projects forward.

The General Secretariat for Strategic and Private Investments streamlines the licensing procedure for strategic investments, aiming to make the process easier and more attractive to investors.

Greece has adopted the following EU definition regarding micro, small, and medium size enterprises:

Micro Enterprises:  Fewer than 10 employees and an annual turnover or balance sheet belowEUR2 million.

Small Enterprises:  Fewer than 50 employees and an annual turnover or balance sheet belowEUR10 million.

Medium-Sized Enterprises:  Fewer than 250 employees and annual turnover belowEUR50 million or balance sheet belowEUR43 million.

Outward Investment

The Greek government does not have any known outward investment incentive programs.  Ongoing capital controls, though partially lifted, still impose restrictions or additional procedures for any entity seeking to remove pre-existing large sums of cash from Greek financial institutions.

Enterprise Greece supports the international expansion of Greek companies.  While no incentives are offered, Enterprise Greece has been supportive of Greek companies attending the U.S. Government’s Annual SelectUSA Investment Summit, which promotes inbound investment to the United States, and similar industry trade events internationally.

2. Bilateral Investment Agreements and Taxation Treaties

Greece and the United States signed the 1954 Treaty of Friendship, Commerce, and Navigation, which provides certain investment protection, such as acquisition and protection of property and impairment of legally acquired rights or interests.

Greece has Bilateral Investment Treaties (BITs) with:

1 Albania
2 Algeria
3 Argentina*
4 Armenia
5 Azerbaijan
6 Bosnia and Herzegovina
7 Bulgaria
8 Chile
9 China
10 Congo*
11 Croatia
12 Cuba
13 Cyprus
14 Czech Republic
15 Egypt
16 Estonia
17 Georgia
18 Germany
19 Hungary
20 Iran
21 Jordan
22 Kazakhstan*
23 Korea
24 Kuwait*
25 Latvia
26 Lebanon
27 Lithuania
28 Mexico
29 Moldova
30 Montenegro
31 Morocco
32 Poland
33 Romania
34 Russian Federation
35 Serbia
36 Slovakia
37 Slovenia
38 South Africa
39 Syrian
40 Tunisia
41 Turkey
42 Ukraine
43 United Arab Emirates
44 Uzbekistan
45 Viet Nam

*Signed, but not in force

Bilateral Taxation Treaties:

Greece and the United States signed a Treaty for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income in 1950.  Greece does not have a bilateral Free Trade Agreement (FTA) with the United States, but an EU member state it is party to all U.S.-EU agreements.  Greece reached an agreement in substance on November 30, 2014 on the terms of an intergovernmental agreement with the United States to implement the Foreign Account Tax Compliance Act (FATCA), which was signed January 2017.

3. Legal Regime

Transparency of the Regulatory System

As an EU member, Greece is required to have transparent policies and laws for fostering competition.  Foreign companies consider the complexity of government regulations and procedures and their inconsistent implementation to be a significant impediment to investing and operating in Greece.  Occasionally, foreign companies report cases where there are multiple laws governing the same issue, resulting in confusion over which law is applicable.  Under its bailout programs, the Greek government committed to widespread reforms to simplify the legal framework for investment, including eliminating bureaucratic obstacles, redundancies, and undue regulations.  The fast track law, passed in December 2010, aimed to simplify the licensing and approval process for “strategic” investments, i.e. large-scale investments that will have a significant impact on the national economy (see paragraph 1.3, Laws/Regulations of FDI).  In 2013, Greece’s parliament passed Investment Law 4146/2013 to simplify the regulatory system and stimulate investment.  This law provides additional incentives, beyond those in the fast track law, available to domestic and foreign investors, dependent on the sector and the location of the investment.

Greece’s tax regime has lacked stability during the economic crisis, presenting additional obstacles to investment, both foreign and domestic.  Foreign firms are not subject to discrimination in taxation.  Numerous changes to tax laws and regulations since the beginning of the economic crisis injected uncertainty into Greece’s tax regime.  As part of Greece’s August 2015 bailout agreement, the government converted the Ministry of Finance’s Directorate-General for Public Revenue into a fully independent tax agency effective January 2017, with a broad mandate to increase collection and develop further reforms to the tax code aimed at reducing evasion and increasing the coverage of the Greek tax regime.

Foreign investment is not legally prohibited or otherwise restricted.  Proposed laws and regulations are published in draft form for public comment before Parliament takes up consideration of the legislation.  The laws in force are accessible on a unified website managed by the government and printed in an official gazette.  Greece introduced International Financial Reporting Standards for listed companies in 2005 in accordance with EU directives.  These rules improved the transparency and accountability of publicly traded companies.

Greece is not one of the 29 countries listed on www.businessfacilitation.org .

International Regulatory Considerations

Citizens of other EU member state countries may work freely in Greece.  Citizens of non-EU countries may work in Greece after receiving residence and work permits.  There are no discriminatory or preferential export/import policies affecting foreign investors, as EU regulations govern import and export policy, and increasingly, many other aspects of investment policy in Greece.

Greece has been a World Trade Organization (WTO) member since January 1, 1995, and a member of the General Agreement on Tariffs and Trade (GATT) since March 1, 1950.  Greece complies with WTO Trade-Related Investment Measures (TRIMs) requirements.  There are no performance requirements for establishing, maintaining, or expanding an investment.  Performance requirements may come into play, however, when an investor wants to take advantage of certain investment incentives offered by the government.  Greece has not enacted measures that are inconsistent with TRIMs requirements, and the Embassy is not aware of any measures alleged to violate Greece’s WTO TRIMs obligations.  Trade policy falls within the competence and jurisdiction of the European Commission Directorate General for Trade and is generally not subject to regulation by member state national authorities.

Legal System and Judicial Independence

Although Greece has an independent judiciary, the court system is an extremely time-consuming and unwieldy means for enforcing property and contractual rights.  According to the “Enforcing Contracts Indicator” of the OECD’s ‘Doing Business 2019” survey, Greece ranks 132nd among 190 countries in terms of the speed of delivery of justice, requiring 1,580 days (more than four years) on average to resolve a dispute, compared to the OECD high-income countries’ average of 582.4 days.  The government committed, as part of its three bailout packages, to reforms intended to expedite the processing of commercial cases through the court system.  In July 2015, the government adopted significant reforms to the code of civil procedure (law 4335/2015).  These reforms aimed to accelerate judicial proceedings in support of contract enforcement and investment climate stability, and entered into force in January 2016.  Foreign companies report, however, that Greek courts do not consistently provide fast and effective recourse.  Problems with judicial corruption reportedly still exist.  Commercial and contractual laws accord with international norms.

Laws and Regulations on Foreign Direct Investment

In August 2017, the Greek government passed Law 4487, which aims to create the legal framework for enhancing film production (movies, TV shows, and gaming software) through investment incentives.  In particular, a film production company can receive (in the form of state subsidy) 25percent (fixed) of their expenses.  The expenses can include salaries, copyright payments, renting a studio, equipment, transportation etc.  The subsidy is tax-free and the investment (film production) should be budgeted overEUR100,000.  Beneficiaries are either companies based in Greece or foreign companies that have an affiliated company in the country.

Investments in Greece operate under two main laws:  the new Investment Law (4399/2016) that addresses small-scale investments and Law 4146/2013 that addresses strategic investments.  In particular;

– Law 4399/2016, entitled “Statutory framework to the establishment of Private Investments Aid Schemes for the regional and economic development of the country” passed in June 2016.  Its key objectives include the creation of new jobs, the increase of extroversion, the reindustrialization of the country, and the attraction of FDI.  The law provides aids (as incentives) for companies that invest fromEUR50,000 (Social Cooperative Companies) up toEUR500,000 (large sized companies) as well as tax breaks.  The Greek government provides funds to cover part of the eligible expenses of the investment plan; the amount of the subsidy is determined based on the region and the business size.  Qualified companies are exempt from paying income tax on their pre-tax profits for all their activities.  There is a fixed corporate income tax rate and fast licensing procedures.  Eligible economic activities are manufacturing, shipbuilding, transportation/infrastructure, tourism, and energy.

– Law 4146/2013, entitled the “Creation of a Business-Friendly Environment for Strategic and Private Investments” is the other primary investment incentive law currently in force.  The law aims to modernize and improve the institutional framework for private investments, raise liquidity, accelerate investment procedures, and increase transparency.  It seeks to provide an efficient institutional framework for all investors and speed the approval processes for pending and approved investment projects.  The law created a general directorate for private investments within the Ministry of Economy (formerly the Ministry of Development) and reduced the value of investments considered strategic.  The law also provides tax exemptions and incentives to investors and allows foreign nationals from non-EU countries who buy property in Greece worth overEUR250,000 (USD285,000) to obtain five-year renewable residence permits for themselves and their families.  In March 2019, the Greek government brought a bill to parliament expanding the eligibility criteria of the existing program.  The new provisions granted non-EU nationals a 5 year residency permit provided that they invest at leastEUR400,000 in Greek companies or buy and hold Greek bonds through a Greek bank entity.  The law created a central licensing authority aimed at establishing a one-stop-shop service to accelerate implementation of major investments.  More about this law can be found online at http://www.enterprisegreece.gov.gr/en/doing-business/investment-incentives-law  and at

http://www.enterprisegreece.gov.gr/files/investment_law/EN_INTERNET.PDF 

– Law 3908/2011 is gradually being phased out by law 4146 (above).

– Law 3919/2011 aims to liberalize more than 150 currently regulated or closed-shop professions.  The implementation of this law continued in 2013 and 2014.

– Law 3982/2011 reduced the complexity of the licensing system for manufacturing activities and technical professions and modernized certain qualification and certification requirements to lower barriers to entry.

– Law 4014/2011 simplified the environmental licensing process.

– Law 3894/2010 (also known as fast track) allows Enterprise Greece to expedite licensing procedures for qualifying investments in the following sectors: industry, energy, tourism, transportation, telecommunications, health services, waste management, or high-end technology/innovation.  To qualify, investments must meet one of the following conditions:

  • exceed EUR100 million;
  • exceed EUR15 million in the industrial sector, operating in industrial zones;
  • exceed EUR40 million and concurrently create at least 120 new jobs; or
  • create150 new jobs, regardless of the monetary value of the investment.

More about fast track licensing of strategic investments can be found online at http://www.enterprisegreece.gov.gr/en/strategic-investments/legal-framework 

Other investment laws include:

– Law 3389/2005 introduced the use of public-private partnerships (PPP).  This law aimed to facilitate PPPs in the service and construction sectors by creating a market-friendly regulatory environment.

–  Law 3426/2005 completed Greece’s harmonization with EU Directive 2003/54/EC and provided for the gradual deregulation of the electricity market.  Law 3175/2003 harmonized Greek legislation with the requirements of EU Directive 2003/54/EC on common rules for the internal electricity market.  Law 2773/99 initially opened up 34percent of the Greek energy market, in compliance with EU Directive 96/92 concerning regulation of the internal electricity market.

– Law 3427/2005, which amended Law 89/67, provides special tax treatment for offshore operations of foreign companies established in Greece.  Special tax treatment is offered only to operations in countries that comply with OECD tax standards.  The most up-to-date list of countries in compliance can be found at http://www.oecd.org/dataoecd/50/0/43606256.pdf 

– Law 2364/95 and supporting amendments governs investment in the natural gas market in Greece.

– Law 2289/95, which amended Law 468/76, allows private (both foreign and domestic) participation in oil exploration and development.

– Law 2246/94 and supporting amendments opened Greece’s telecommunications market to foreign investment.

– Legislative Decree 2687 of 1953, in conjunction with Article 112 of the Constitution, gives approved foreign “productive investments” (primarily manufacturing and tourism enterprises) property rights, preferential tax treatment, and work permits for foreign managerial and technical staff.  The Decree also provides a constitutional guarantee against unilateral changes in the terms of a foreign investor’s agreement with the government, but the guarantee does not cover changes in the tax regime.

Competition and Anti-Trust Laws

Under Articles 101-109 of the Treaty on the Functioning of the EU, the European Commission (EC), together with member state national competition authorities, directly enforces EU competition rules.  The European Commission Directorate-General for Competition carries out this mandate in member states, including Greece.  Greece’s competition policy authority rests with the Hellenic Competition Commission, in consultation with the Ministry of Economy.  The Hellenic Competition Commission protects the proper functioning of the market and ensures the enforcement of the rules on competition.  It acts as an independent authority and has administrative and financial autonomy.

Expropriation and Compensation

Private property may be expropriated for public purposes, but the law requires this be done in a nondiscriminatory manner and with prompt, adequate, and effective compensation.  Due process and transparency are mandatory, and investors and lenders receive compensation in accordance with international norms.  There have been no expropriation actions involving the real property of foreign investors in recent history, although legal proceedings over expropriation claims initiated, in one instance, over a decade ago, continue to work through the judicial system.

Dispute Settlement

ICSID Convention and New York Convention

Greece is a member of both the International Center for the Settlement of Investment Disputes (ICSID) and the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York convention).

Investor-State Dispute Settlement

The Embassy is aware of a few ongoing investment disputes dating from more than ten years ago.  Greece accepts binding international arbitration of investment disputes between foreign investors and the Greek government, and foreign firms have found satisfaction through arbitration.  International arbitration and European Court of Justice Judgments supersede local court decisions.  The judicial system provides for civil court arbitration proceedings for investment and trade disputes.  Although an investment agreement could be made subject to a foreign legal jurisdiction, this is not common, particularly if one of the contracting parties is the Greek government.  Foreign court judgments are accepted and enforced, albeit slowly, by the local courts.

In an effort to create a more investor-friendly environment, the government established in 2017 an Investor’s Ombudsman service.  The Ombudsman is authorized to mediate disputes that arise between investors and the government during the licensing procedure.  Investors can employ the Ombudsman, housed within Enterprise Greece, with projects exceedingEUR2 million in value.  More info on the Ombudsman service can be found here: http://www.enterprisegreece.gov.gr/en/ombudsman/investor-ombudsman .

International Commercial Arbitration and Foreign Courts

As noted above, Greece’s independent judiciary is both time-consuming and unwieldy as a means for enforcing property and contractual rights.  The government has committed to implementing significant reforms to the judicial system, aimed at speeding up adjudications and improving dispute resolution for investors.

Bankruptcy Regulations

Bankruptcy laws in Greece meet international norms.  Under Greek bankruptcy law 3588/2007, private creditors receive compensation after claims from the government and insurance funds have been satisfied.  Monetary judgments are usually made in euros unless explicitly stipulated otherwise.  Greece has a reliable system of recording security interests in property.  According to the World Bank’s 2019 Doing Business report, resolving insolvency in Greece takes 3.5 years on average and costs 9percent of the debtor’s estate.  The recovery rate is 33.2 cents on the dollar.  Greece ranks 62 of 190 economies surveyed for ease of resolving insolvency in the Doing Business report (from 57 in 2018).

7. State-Owned Enterprises

Greek state-owned enterprises (SOEs) are active in utilities, transportation, energy, media, health, and the defense industry.  A private non-government affiliated website maintains an online list of SOEs.  The uniform legal definition of an SOE is a company/organization that belongs to or is controlled and managed by the state.  Most Greek SOEs are structured under the auspices of the Hellenic Corporation for Assets and Participations (HCAP), an independent holding company for state assets mandated by Greece’s most recent bailout and formally launched in 2016.  HCAP’s supervisory board is independent from the Greek state and is appointed in part by Greece’s creditor institutions.  Some SOEs are still supervised by the Finance Ministry’s Special Secretariat for Public Enterprises and Organizations, established by Law 3429/2005.  Private companies previously were unable to enter the market in sectors where the SOE functioned as a monopoly, for example, water, sewage, or urban transportation.  However, several of these SOEs are planned to privatize as a requirement of the country’s bailout programs, intended to liberalize markets and raise revenues for the state.

Official government statements on privatization since 2015 have sometimes led to confusion among investors.  Some senior officials have declared their opposition to previously approved privatization projects, while other officials have maintained the stance that the government remains committed to the sale of SOEs.  Under the bailout agreement, Greece has moved forward with the deregulation of the electricity market.  In sectors opened to private investment, such as the telecommunications market, private enterprises compete with public enterprises under the same nominal terms and conditions with respect to access to markets, credit, and other business operations, such as licenses and supplies.  Some private sector competitors to SOEs report the government has provided preferential treatment to SOEs in obtaining licenses and leases.  The government actively seeks to end many of these state monopolies and introduce private competition as part of its overall reform of the Greek economy.  Greece – as a member of the EU – participates in the Government Procurement Agreement within the framework of the WTO.  SOEs purchase goods and services from private sector and foreign firms through public tenders.  SOEs are subject to budget constraints, with salary cuts imposed in the past few years on public sector jobs.

Privatization Program

The Hellenic Republic Asset Development Fund (HRADF, or TAIPED, as it is known in Greek), an independent non-governmental privatization fund, was established in 2011 under Greece’s bailout program to manage the sale or concession of major government assets, to raise substantial state revenue, and to bring in new technology and expertise for the commercial development of these assets.  These include listed and unlisted state-owned companies, infrastructure, and commercially valuable buildings and land.  Foreign and domestic investor participation in the privatization program has generally not been subject to restrictions, although the economic environment during the crisis has challenged the domestic private sector’s ability to raise funds to purchase firms slated for privatization.

The August 2015 ESM bailout agreement required Greece to consolidate the HRADF, the Hellenic Financial Stability Fund (HFSF), the Public Properties Company (ETAD) and a new entity that will manage other state-owned enterprises (SOEs) into the Hellenic Corporation of Assets and Participations (or HCAP), was formed by Law 4389/2016.  In March 2017, HCAP received short- and long-term guidelines from the Minister of Finance, and in September 2017, it received strategic guidelines from the Greek state (HCAP’s sole shareholder).

Privatizations are subject to a public bidding process, which is easy to understand, non-discriminatory, and transparent.  Notable privatizations completed in 2018 include the transfer of the 66percent of Greece’s gas transmission system operator DESFA to Senfluga Energy Infrastructure Holdings, sale of  67percent of the shares of Thessaloniki Port Authority (OLTh), the sale of the remaining 5percent of the largest telecommunications provider (OTE) shares to Deutsche Telecom, and rolling stock maintenance and railroad availability services company Rosco.  In February 2019, the government concluded the 20-year extension of the concession agreement of the Athens International Airport (AIA), worth 1.4 billion euros, and is planning to sell remaining 30percent share in AIA in the upcoming months.  The government plans to privatize 10 regional ports and several marinas across Greece, including Heraklion, Elefsina, and Alexandroupolis.  In addition, the Hellenic Gaming commission announced a tender for a casino licenses slated to run at Hellenikon, an 8 billion euro project to develop Athens former airport into a multi-purpose complex.  Currently, the privatization of Public Power Corporation’s (PPC) two lignite powered units in Melitis and Megalopoli, natural gas company DEPA and the Egnatia motorway in northern Greece (Greece’s biggest highway) are ongoing.

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) 2017 $215,600    2016 $192,600

 

http://www.statistics.gr/en/the-greek-economy 

https://data.worldbank.org/country/greece 

 

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) 2017 $917 2018 $95

 

https://www.bankofgreece.gr/Pages/en/other/AdvSearch.aspx?k=foreign%20direct%20investment 

https://www.bea.gov/international/di1usdbal.htm _multinational_companies_comprehensive_data.htm 

Host country’s FDI in the United States ($M USD, stock positions) 2016 $2,900b

 

2018 Greece is not on the FDI list for 2018mn https://www.bankofgreece.gr/BogDocumentEn/FDI%20_WEB1_ABROAD_BYCOUNTRY.xls 

https://bea.gov/international/di1fdibal.htm 

 

Total inbound stock of FDI as % host GDP 2017 $37,700

 

2017 16.8% of GDP https://data.oecd.org/fdi/fdi-stocks.htm 

 


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 32,536 100% Total Outward 19.354 100%
Germany 7,175 21.9% Cyprus 5.056 26.12%
Luxembourg 6,870 21.1% United States 2,541 13.1%
Netherlands 6.101 18.7.6% Netherlands 2.359 12.1%
Switzerland 3,381 10.3% China: Hong Kong 2.316 11.9%
France 1.782 5.4% Romania 1.880 9.7%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 118.893 100% All Countries 10.587 100% All Countries 108.306 100%
Luxembourg 42.186 35.4% Luxembourg 7.171 67.73% Luxembourg 35.015 32.3%
United Kingdom 10.535 8.8% Ireland 1.447 13.6% United Kingdom 10.407 9.6%
Italy 8.566 7.2% France 463 4.3% Italy 8.558 7.9%
Spain 7.753 6.5% United States 413 3.9% Spain 7.739 7.1%
France 3.792 3.1% Netherlands 182 1.7% France 3.330 3.07%

Hungary

Executive Summary

With a population of 9.8 million, Hungary has an open economy and GDP of approximately USD 156 billion.  Hungary has been a member of the European Union (EU) since 2004, and fellow member states are its most important trade and investment partners.  Macroeconomic indicators are generally strong: the economy grew by 4.9 percent in 2018 and likely will grow by 3.5 percent in 2019. The government has kept the deficit below 2.5 percent of GDP since 2013 and has lowered public debt from more than 80 percent of GDP in 2010 to 71 percent in 2018.  Ratings agencies upgraded Hungary’s sovereign debt to two notches above investment grade in 2019.

Hungary’s central location and high-quality infrastructure have made it an attractive destination for Foreign Direct Investment (FDI).  Between 1989 and 2017, Hungary received approximately USD 98 billion in FDI, mainly in the banking, automotive, software development, and life sciences sectors.  The EU accounts for 89 percent of all in-bound FDI. The United States is the largest non-EU investor. The Government of Hungary (GOH) actively encourages investments in manufacturing and high-value added sectors, including research and development centers and service centers.  To promote investment, the GOH lowered the corporate tax rate to 9 percent in 2017 and the labor tax to 19.5 percent in 2018, which is among the lowest rates in the EU. Hungary’s Value Added Tax (VAT) however, is the highest in Europe at 27 percent.

Despite these advantages, Hungary’s regional economic competitiveness has declined in recent years.  Since early 2016, multinationals have identified shortages of qualified labor, specifically technicians and engineers, as the largest obstacle to investment in Hungary.  In certain industries, such as finance, energy, telecommunication, pharmaceuticals, and retail, unpredictable sector-specific tax and regulatory policies have favored national and government-linked companies.   Additionally, persistent corruption and cronyism continue to plague the public sector. Since 2010, According to Transparency International’s (TI) Corruption Perceptions Index, Hungary placed 64st worldwide and 26th out of 28 EU member states in 2018.  In 2016, the GOH withdrew from the Open Government Partnership (OGP), a transparency-focused international organization, after refusing to address the organization’s concerns about transparency and good governance. Both foreign and domestic investors are reporting pressure to sell their businesses to government-affiliated investors.  Those who refuse to sell often face increased tax audits or spurious regulatory and court challenges. Additionally, some executives in Hungarian subsidiaries of U.S. multinationals have noted that the GOH’s strong anti-migrant rhetoric and actions have negatively affected board members’ views of Hungary, making it more difficult for the subsidiaries to obtain approval for new investments.

Analysts remain concerned that the GOH may intervene in certain priority sectors to unfairly promote domestic ownership at the expense of foreign investors.  In September 2016, PM Viktor Orban announced that at least half of the banking, media, energy, and retail sectors should be in Hungarian hands. Through various tax changes, analysts say the GOH pushed several foreign owned banks out of Hungary and increased Hungarian ownership in the banking sector to approximately 50 percent, up from 40 percent in 2010.  In the energy sector, foreign-owned company share of total revenue fell from 70 percent in 2010 to below 50 percent by the end of 2018. Foreign media ownership also has reduced drastically in recent years as GOH-friendly businesses have consolidated control of Hungary’s media environment. The number of media outlets owned by GOH-allies increased from around 30 in 2015 to nearly 500 in 2018.  In November 2018, the owners of 476 pro-GOH media outlets, comprising 85 percent of all media, donated those outlets to the Central European Press and Media Foundation (KESMA) run by (ruling) Fidesz party insiders. PM Orban exempted KESMA from scrutiny by Hungary’s media and competition authorities. Despite threats to impose new regulations and taxes for the retail sector that would disproportionately impact multinational firms, foreign retail chains continue to maintain a large presence in Hungary.  Finally, the GOH has identified tourism as a priority industry and government-allied firms have begun to invest heavily in the sector.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 64 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 53 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 33 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $7,100 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $12,870 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Hungary maintains an open economy and its high-quality infrastructure and central location are features that make it an attractive destination for investment.  Attracting FDI is an important priority for the GOH, especially in manufacturing and export-oriented sectors. According to some reports, in other sectors, including banking and energy, however, government policies have resulted in some foreign investors selling their stakes to the government or state-owned enterprises.  Hungary was a leading destination for FDI in Central and Eastern Europe in the mid-nineties and the mid-two-thousands, with annual FDI reaching over USD 6 billion in 2005. The pace of FDI inflows slowed in subsequent years as a result of the 2008 global financial crisis and increasing competition for investment from other countries in the region.  In 2017, net annual FDI amounted to USD 5.6 billion while total gross FDI amounted to USD 98 billion.

As a block, the EU accounts for approximately 89 percent of all FDI in Hungary in terms of direct investors and 62 percent in terms of ultimate controlling parent investor.  Germany is the largest investor, followed by the United States, Austria, France, the United Kingdom, Italy, Japan, the Netherlands, and China. The majority of U.S. investment falls within automotive, software development, and life sciences sectors.  Approximately 450 U.S. companies maintain a presence in Hungary.

The GOH actively seeks foreign investment and has implemented a number of tax changes to increase Hungary’s regional competitiveness and attract investment, including a reduction of the personal income tax rate to 15 percent in 2016, reducing the business income tax rate to 9 percent in 2017, and the gradual reduction of the employer-paid welfare contribution from 27 percent in 2016 to 19.5 percent in 2018.  As of 2016, the GOH streamlined the National Tax and Customs authority (NAV) procedure to offer fast-track VAT refund to customers categorized as “low risk” based on their internal controls and previous tax record.

Many foreign companies have expressed displeasure with the unpredictability of Hungary’s tax regime, its retroactive nature, slow response times, and the volume of legal and tax changes.  According to the European Commission (EC), a series of progressively-tiered taxes implemented in 2014 disproportionately penalized foreign businesses in the telecommunications, tobacco, retail, media, and advertisement industries, while simultaneously favoring Hungarian companies.  Following EC infringement procedures, the GOH phased out most discriminative tax rates by 2015 and replaced them with flat taxes.

In 2017, the GOH passed a regulation that gives the government preemptive rights to purchase real estate in World Heritage areas.  The rule has been used to block the purchase of real estate by foreign investors in the most desirable areas of Budapest.

A 2014 law required retail companies with over USD 53 million in annual sales to close if they report two consecutive years of losses.  Retail businesses claimed the GOH specifically set the threshold to target large foreign retail chains.  The EC determined that the law was discriminatory and launched an infringement procedure in 2016, which resulted in the GOH repealing the controversial legislation in November 2018.

The GOH publicly declared that reducing foreign bank market share in the Hungarian financial sector is a priority.  Accordingly, GOH initiatives over the past several years have targeted the banking sector and reduced foreign participation from about 70 percent before the financial crisis in 2008 to just over 50 percent by the end of 2018.  In addition to the 2010 bank tax and the 2012 financial transaction tax levied on all cash withdrawals, regulations between 2012-2015 obligated banks to retroactively compensate borrowers for interest rate increases on foreign currency denominated mortgage loans, even though these increases were spelled out in the original contract with the customer, and were permitted by Hungarian law.

While the pharmaceutical industry is competitive and profitable in Hungary, multinational companies complain of numerous financial and procedural obstacles, including high taxes on pharmaceutical products and operations, prescription directives that limit a doctor’s choice of drugs, and obscure tender procedures that negatively affect the competitiveness of certain drugs.  Pharmaceutical firms have also taken issue with GOH moves to weigh the cost of pharmaceutical procurement as more important than efficacy when issuing tenders for public procurement.

The Hungarian Investment Promotion Agency (HIPA), under the authority of the Ministry of Foreign Affairs and Trade, encourages and supports inbound FDI.  HIPA offers company and sector-specific consultancy, recommends locations for investment, acts as a mediator between large international companies and Hungarian firms to facilitate supplier relationships, organizes supplier training, and maintains active contact with trade associations.  Its services are available to all investors. For more information, see: https://hipa.hu/main  

Foreign investors generally report a productive dialogue with the government, both individually and through business organizations.  The American Chamber of Commerce enjoys an ongoing high-level dialogue with the GOH and the government has adopted many AmCham policy recommendations in recent years.  In 2017, the government established a Competitiveness Council, chaired by the Minister of Economy, which includes representatives from multinationals, chambers of commerce, and other stakeholders, to increase Hungary’s competitiveness.  Many U.S. and foreign investors have signed MOUs with the GOH to facilitate one-on-one discussions and resolutions to any pending issues. For more information, see: http://www.kormany.hu/en/ministry-for-national-economy   and https://www.amcham.hu/  

The US-Hungary Business Council (USHBC) – a private, non-profit organization established in 2016 – aims to facilitate and maintain dialogue between American corporate executives and the top government leaders on the U.S.-Hungary commercial relationship.  The majority of significant U.S. investors in Hungary have joined USHBC, which hosts roundtables, policy conferences, briefings, and other major events featuring senior U.S. and Hungarian officials, academics, and business leaders. For more information, see: http://ushungarybc.org/  

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign ownership is permitted with the exception of some “strategic” sectors including defense-related industries, which require special government permit, and farmland.  There are no general limits on foreign ownership or control.

Foreign law firms and auditing companies must sign a cooperation agreement with a Hungarian company to provide services on Hungarian legal or auditing issues.

According to the Land Law, only private Hungarian citizens or EU citizens resident in Hungary with a minimum of three years of experience working in agriculture or holding a degree in an agricultural discipline can purchase farmland.  Eligible individuals are limited to purchasing 300 hectares (741 acres). All others may only lease farmland. Non-EU citizens and legal entities are not allowed to purchase agricultural land. All farmland purchases must be approved by a local land committee and Hungarian authorities, and local farmers and young farmers must be offered a chance to purchase the land first before a new non-local farmer is allowed to purchase the land.  For those who do not fulfill the above requirements or for legal entities, the law allows the lease of farmland up to 1200 hectares for a maximum of 20 years. The GOH has invalidated any pre-existing leasing contract provisions that guaranteed the lessee the first option to purchase, provoking criticism from Austria and Austrian farmers. Austria has reported the change to the European Commission, which initiated an infringement procedure against Hungary in October 2014.  In March 2018, the European Court of Justice ruled that the termination of land use contracts violated EU rules, opening the way for EU citizens who lost their land use rights to sue the GOH for damages. In March 2015, the EC launched another – still ongoing – infringement procedure against Hungary concerning its restrictions on acquisitions of farmland.

The GOH passed a law on investment screening in 2018 that requires foreign investors seeking to acquire more than a 25 percent stake in a Hungarian company in certain “sensitive sectors” (defense, intelligence services, certain financial services, electric energy, gas, water utility, and electronic information systems for governments) to seek approval from the Interior Ministry.  The Ministry has up to 90 days to issue an opinion and can only deny the investment if it determines that the investment is designed to conceal an activity other than normal economic activity. As of publication, we are not aware of any instances in which the Ministry has reviewed an investment.

Other Investment Policy Reviews

Hungary has not had any third-party investment policy reviews in the last three years.

Business Facilitation

Hungary maintains an open economy and its high-quality infrastructure and central location make it an attractive destination for investment.  Attracting FDI is an important priority for the GOH, especially in manufacturing and export-oriented sectors.  In 2006, Hungary joined the EU initiative to create a European network of “point of single contact” where existing businesses and potential investors can access all information on the business and legal environment, as well as connect to Hungary’s investment promotion agency.  Over the past two years, the government has strengthened investor relations and, in addition to signing strategic agreements with key investors, established a National Competitiveness Council to discuss competitiveness challenges, formulate pro-competitiveness measures, and build constructive stakeholder relationships.

The registration of business associations is compulsory in Hungary.  Firms must contract an attorney and register online with the Court of Registration.  Registry courts must process applications to register limited liability and joint-enterprise companies within 15 workdays, but the process usually does not take more than three workdays.  If the Court fails to act within the given timeframe, the new company is automatically registered. If the company chooses to use a template corporate charter, registration can be completed in a one-day fast track procedure.  Registry courts provide company information to the Tax Office (NAV) eliminating the need for separate registration. The Court maintains a computerized registry and electronic filing system and provides public access to company information.  The minimum capital requirement for a limited-liability company is HUF 3,000,000 (USD 10,800); for private limited companies HUF 5,000,000 (USD 17,900), and for public limited companies HUF 20,000,000 (USD 71,400). Foreign individuals or companies can establish businesses in Hungary without restrictions.

Further information on business registration and the business registry can be obtained at the GOH’s information website for businesses: http://eugo.gov.hu/starting-business-hungary   or at the Ministry of Justice’s Company Information Service: http://ceginformaciosszolgalat.kormany.hu/index  

Hungarian business facilitation mechanisms provide equitable treatment for women, but offer no special preference or assistance for them in establishing a company.

Outward Investment

The stock of total Hungarian investment abroad amounted to USD 28.7 billion in 2017.  Outward investment is mainly in manufacturing, services, finance and insurance, and science and technology.  There is no restriction in place for domestic investors to invest abroad. The GOH announced in early 2019 that it would like to increase Hungarian investment abroad and it is considering incentives to promote Hungarian investment.

2. Bilateral Investment Agreements and Taxation Treaties

Hungary and the United States do not have a bilateral investment treaty (BIT).

Hungary has bilateral investment treaties that the following countries: Albania, Argentina, Australia, Austria, Azerbaijan, Belgium, Bosnia and Herzegovina, Bulgaria, Canada, Chile, China, Croatia, Cuba, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, India, Indonesia, Jordan, Kazakhstan, Kuwait, Latvia, Lebanon, Lithuania, Luxemburg, The former Yugoslav Republic of Macedonia, Malaysia, Moldova, Mongolia, Morocco, The Netherlands, Norway, Paraguay, Poland, Portugal, Romania, Russian Federation, Serbia, Singapore, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Thailand, Tunisia, Turkey, Ukraine, United Kingdom, Uruguay, Uzbekistan, Vietnam and Yemen.

Hungary has tax treaties that eliminate many aspects of double taxation with the United States and the following other countries: Albania, Australia, Austria, Azerbaijan, Belarus, Belgium, Brazil, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Great Britain, Greece, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, Kuwait, Latvia, Lithuania, Luxembourg, The former Yugoslav Republic of Macedonia, Malaysia, Malta, Mexico, Moldova, Mongolia, Morocco, The Netherlands, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia, Serbia, Singapore, Slovakia, Slovenia, South Korea, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, Tunisia, Ukraine, Uruguay, Uzbekistan and Vietnam

Negotiations were concluded in 2010 to revise Hungary’s current tax treaty with the United States; this is currently awaiting U.S. Senate ratification.

In January 2014, Hungary signed a Foreign Account Tax Compliance Act (FATCA) Intergovernmental Agreement with the United States to improve international tax compliance through mutual assistance in tax matters and the automatic exchange of tax information.  The United States and Hungary have also signed a totalization agreement that will eliminate double social security taxation and fill gaps in benefits for workers that have divided their careers between the two countries.

3. Legal Regime

Transparency of the Regulatory System

Generally, legal, regulatory, and accounting systems are consistent with international and EU standards.  However, some executives in Hungarian subsidiaries of U.S. companies complain about a lack of transparency in the GOH’s policy-making process and an uneven playing field in public tendering.  In recent years, there has been an uptick in the number of companies, including major U.S. multinational franchises, reporting pressure to sell their businesses to government-affiliated investors.  Those that refuse to sell report an increase in tax audits, fines, and spurious regulatory challenges and court cases. SMEs increasingly report a desire to either remain small (and therefore “under the radar” of these government-friendly investors) or relocate their businesses outside of Hungary.

For foreign investors, the most relevant regulations stem from EU directives and the laws passed by Parliament to implement these.  Laws in Parliament can be found on Parliament’s website (http://www.parlament.hu/parl_en.htm  ).  Legislation, once passed, is published in a legal gazette and available online at www.magyarkozlony.hu  .  The GOH can issue decrees, which also have national scope, but they cannot be contrary to laws enacted by Parliament.  Local municipalities can create local decrees, limited to the local jurisdiction.

Hungarian financial reporting standards are in line with the International Accounting Standards and the EU Fourth and Seventh Directives.  The Accounting law requires all businesses to prepare consolidated financial statements on an annual basis in accordance with international financial standards.

The GOH rarely invites interested parties to comment on draft legislation.  Civil organizations have complained about a loophole in the current law that allows individual MPs to submit legislation and amendments without public consultation.  The average deadline for submitting public comment is often very short, usually less than one week. The Act on Legislation and the Law Soliciting Public Opinion, both passed by Parliament in 2010, govern the public consultation process.  The laws require the GOH to publish draft laws on its webpage and to give adequate time for all interested parties to give an opinion on the draft. However, implementation is not uniform and the GOH often fails to solicit public comments on proposed legislation.

The legislation process – including key regulatory actions – are published on Parliament’s webpage (www.parlament.hu  ).  Explanations attached to draft bills include a short summary on the aim of the legislation, but public comments received by regulators are only occasionally made public.

Regulatory enforcement mechanisms include the county and district level government offices whose decisions can be challenged at county level labor and administrative courts.  The court system generally provides efficient oversight over the GOH’s administrative processes.

In December 2018 the Parliament passed a new law on establishing a new parallel administrative court system with jurisdiction over cases relating to “public administration,” including tax, construction licensing, public procurement, competition cases, and politically sensitive matters like electoral law, freedom of information requests, and the right to protest.  The new court system will be under the control of the Minister of Justice and will start operating in January 2020.  Critics – including NGOs and opposition parties – claim the new system will further undermine the rule of law in Hungary and eliminate constitutional boundaries between the executive and judicial branches of government, paving the way for political interference.  In its opinion issued in March 2019, the Council of Europe’s Venice Commission (VC) found that the planned court system lacks effective checks and balances and said the new regime grants the Minister of Justice excessively wide powers to appoint and promote judges. The VC also determined that the head of the new administrative courts also has unjustifiably wide powers. The GOH passed amendments it claimed addressed, the VC’s concerns.  Watchdog NGOs, however, did not believe the amendments addressed the VC’s most significant criticisms.

The new administrative courts’ jurisdiction will extend to several types of cases significant for investors.  Although the creation of the administrative court is not expected to have direct economic impact, the independence of the judiciary is crucial to maintaining a positive business climate.

The GOH does not review regulations on the basis of scientific or data driven assessments, but some NGOs and academics do.  A 2017 study by Corruption Research Center Budapest (CRCB) found that in the 2010-2013 period the annual average number of new laws passed by Parliament increased, while the average time spent debating new laws in Parliament decreased significantly.  The analysis points out that the accelerating lawmaking process in Hungary in the 2010-2013 period had negative effects on the stability of the legal environment and the overall quality of legislation. The Parliament passed less new legislation in the past few years.

Hungary’s budget was widely accessible to the general public, including online through the Parliament and Finance Ministry websites and the Legal Gazette.  The government made budget documents, including the executive budget proposal, the enacted budget, and the end-of-year report publicly available within a reasonable period of time.  Information on debt obligations was publicly available, including online through the Hungarian Central Bank and Hungarian State Debt Manager’s websites.

International Regulatory Considerations

As an EU Member State, all EU regulations are directly applicable in Hungary, even without further domestic measures.  If a Hungarian law is contrary to EU legislation, the EU rule takes precedence. As a whole, labor, environment, health, and safety laws are consistent with EU regulations.  Hungary follows EU foreign trade and investment policy and all trade regulations follow EU legislation. Hungary participates in the WTO as an EU Member State.

Legal System and Judicial Independence

The Hungarian legal system is based on continental European (German-French and Roman law) traditions.  Contracts are enforced by ordinary courts or – if stipulated by contract – arbitration centers. Investors in Hungary can agree with their partners to turn to Hungarian or foreign arbitration courts.

Apart from these arbitration centers, there are no specialized courts for commercial cases; ordinary courts are entitled to judge any kind of civil case.  The Civil Code of 2013 applies to civil contracts.

The Hungarian judicial system includes four tiers: district courts (formerly referred to as local courts) and courts of public administration and labor; courts of justice (formerly referred to as county courts); courts of appeal; and the Curia (the Hungarian Supreme Court).  Hungary also has a Constitutional Court that reviews cases involving the constitutionality of laws and court rulings. From 2020, per legislation passed in December 2018, a new administrative court system will rule on administrative cases (see above). As a result, it is expected that labor courts and judges will be merged into district courts.

Although the GOH has criticized court decisions on several occasions, ordinary courts are considered to generally operate independently under largely fair and reliable judicial procedures.  Recently, an increasing number of current and former judges have raised concerns about growing GOH influence over the court system and intimidation of judges by court administration. Most business complaints about the court system pertain to the lengthy proceedings rather than the fairness of the verdicts.  The GOH hopes to improve the speed and efficiency of court proceedings with the new Civil Procedure Code, which entered into force in January 2018.

Regulations and law enforcement actions pertaining to investors are appealable at ordinary courts or at the Constitutional Court.

Laws and Regulations on Foreign Direct Investment

Hungarian law provides strong protections for property and investment.  The Hungarian state may only expropriate property in exceptional cases where there is a public interest; any such expropriations must be carried out in a lawful way, and the GOH is obliged to make immediate and full restitution for any expropriated property, without additional stipulations or conditions

 The GOH passed a law on investment screening in 2018 that requires foreign investors seeking to acquire more than a 25 percent stake in a Hungarian company in certain “sensitive sectors” (defense, intelligence services, certain financial services, electric energy, gas, water utility, and electronic information systems for governments) to seek approval from the Interior Ministry.  The Ministry has up to 90 days to issue an opinion and can only deny the investment if it determines that the investment is designed to conceal an activity other than normal economic activity. As of publication, we are not aware of any instances in which the Ministry has reviewed an investment.

There is no primary website or “one-stop shop” which compiles all relevant laws, rules, procedures, and reporting requirements for investors.  HIPA, the Hungarian Investment Promotion Agency, however, facilitates establishment of businesses and provides guidance on relevant legislation.

Competition and Anti-Trust Laws

The Hungarian Competition Authority, tasked with safeguarding the public interest, enforces the provisions of the Hungarian Competition Act.  Since EU accession in 2004, EU competition law also binds Hungary. The Competition Authority is empowered to investigate suspected violations of competition law, order changes to practices, and levy fines and penalties.  According to the Authority, since 2010 the number of competition cases has decreased, but they have become more complex. Out of more than 100 cases over the past year, only a few minor cases pertained to U.S.-owned companies.  Hungarian law does not consider conflict of interest to be a criminal offense. Citing evidence of conflict of interest and irregularities the European Anti-Fraud Office OLAF recommended opening a criminal investigation in a high profile USD 50 million EU-funded public procurement project, but Hungarian authorities declined to prosecute  the case.

Expropriation and Compensation

Hungary’s Constitution provides protection against expropriation, nationalization, and any arbitrary action by the GOH except in cases of extreme national security concern.  In such cases, immediate and full compensation is to be provided to the owner. There are no known expropriation cases where the GOH has discriminated against U.S. investments, companies, or representatives.  There have been some complaints from other foreign companies within the past several years that expropriations have been improperly executed, without proper remuneration. Parties involved in these cases turned to the legal system for dispute settlement.

There is no recent history of official GOH expropriations, but many critics raised concerns that the 2014 tobacco and advertising taxes were a de facto expropriation attempt because they intentionally and disproportionately targeted foreign firms with the intent to force them to seek a buy-out from a domestic firm.  The GOH backtracked on the taxes after a 2015 EU injunction. The increasing reports of the use of government regulatory and tax agencies to pressure businesses to sell to government-friendly investors may also be construed as a form of de-facto expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Hungary is a signatory to the International Centre for the Settlement of Investment Disputes (ICSID Convention), proclaimed in Hungary by Law 27 of 1978.  Hungary also is a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention), proclaimed in Hungary by Law 25 of 1962.

There is not specific legislation providing for enforcement other than the two domestic laws proclaiming the 1958 New York Convention and the ICSID Convention.  According to Law 71 of 1994, an arbitration court decision is equally binding to that of a court ruling.

Investor-State Dispute Settlement

Hungary is signatory to the 1965 Washington Convention establishing the International Centre for Settlement of Investment Disputes (ICSID) and to UN’s 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.  Under the New York Convention, Hungary recognizes and enforces rulings of the International Chamber of Commerce’s International Court of Arbitration.

Hungary has no Bilateral Investment Treaty or Free Trade Agreement with the United States.  In recent years, the number of investor-State arbitration claims against Hungary has increased, although very few involve U.S. investors.

Over the past 10 years U.S. investors have been involved only in a few investment disputes, including a recent major dispute with Hungary’s state owned energy company MVM, where the U.S. claimant stepped back after it was unable to reclaim a USD 17 million compensation.  Since 2010, ten cases have been launched against Hungary at the ICSID, but none of them involved U.S. investors.

Local courts recognize and enforce foreign arbitral awards against the GOH.

In 2016 Hungarian Tax Office NAV froze the bank account and working capital of a U.S. owned company, before any wrongdoing had been confirmed.  After several months, NAV released the account, but by that time the company has suffered significant losses.

International Commercial Arbitration and Foreign Courts

Hungary has accepted international arbitration in cases where the resolution of disputes between foreign investors and the state is unsuccessful.  In the last few years, parties have increasingly turned to mediation as a means by which to settle disputes without engaging in lengthy court procedures.  Law 71 of 1994 on domestic arbitration procedures is based on the UNCITRAL model law.

Investment dispute settlement clauses are usually regulated by stipulations of the investment contract.  Hungarian law allows the parties to set the jurisdiction of any courts or arbitration centers. The parties can also agree to set up an ad hoc arbitration court.  The law also allows investors to agree on settling investment disputes by turning to foreign arbitration centers, such as the International Centre for Settlement of Investment Disputes (ICSID), UNCITRAL’s Permanent Court of Arbitration (PCA), or the Vienna International Arbitral Centre.  In Hungary, foreign parties can turn to the Hungarian Chamber of Commerce and Industry arbitration court, which has its own rules of proceedings (https://mkik.hu/en/court-of-arbitration  ) and in financial issues to the Financial and Capital Market’s arbitration court.

Local courts recognize and enforce foreign or domestic arbitral awards.  Arbitral ruling may only be annulled in limited cases, and under special conditions.

Domestic courts do not favor SOEs disproportionately.  Investors can expect a fair trial even if SOEs are involved.  Investors do not complain about non-transparent or discriminatory court procedures.

Bankruptcy Regulations

The Act on Bankruptcy Procedures, Liquidation Procedures, and Final Settlement of 1991, covers all commercial entities with the exception of banks (which have their own regulatory statutes), trusts, and state-owned enterprises, and brought Hungarian legislation in line with EU regulations.  Debtors can only initiate bankruptcy proceedings provided that they have not sought bankruptcy protection within the previous three years. Within 90 days of seeking bankruptcy protection, the debtor must call a settlement conference to which all creditors are invited. Majority consent of the creditors present is required for all settlements.  If agreement is not reached, the court can order liquidation. The Bankruptcy Act establishes the following priorities of claims to be paid: 1) liquidation costs; 2) secured debts; 3) claims of the individuals; 4) social security and tax obligations; 5) all other debts. Creditors may request the court to appoint a trustee to perform an independent financial examination.  The trustee has the right to challenge, based on conflict of interest, any contract concluded within 12 months preceding the bankruptcy.

The debtor, the creditors, the administrator, or the Criminal Court may file liquidation procedures with the court.  Once a petition is filed, regardless of who filed it, the Court notifies the debtor by sending a copy of the petition.  The debtor has eight days to acknowledge insolvency. If the insolvency is acknowledged, the company declares if any respite for the settlement of debts is requested.  Failure to respond results in the presumption of insolvency. Upon request, the Court may allow a maximum period of 30 days for the debtor to settle its debt.

If the Court finds the debtor insolvent, it appoints a liquidator.  Transparency International (TI) has raised concerns about the transparency of the liquidation process because a company may not know that a creditor is filing a liquidation petition until after the fact.  TI also criticized the lack of accountability of liquidator companies and the impractical deadlines in the process. The EU has also criticized the Hungarian system as being rescue-unfriendly, since bankruptcy proceedings typically only recover 44 cents to the dollar, compared to the OECD average of 71 cents on the dollar.

Bankruptcy in itself is not criminalized, unless it is made in a fraudulent way, deliberately, and in bad faith to prevent the payment of debts.

Law 122 of 2011 obliges banks and credit institutions to establish and maintain the Central Credit Information System to assess creditworthiness of businesses and individuals to facilitate prudent lending (http://www.bisz.hu  ).

7. State-Owned Enterprises

In the 1990s, there was considerable privatization of former State-owned enterprises (SOEs), primarily in strategic sectors such as energy and transportation.  Since 2010, the GOH has reversed this trend by making new investments in machinery production and the energy and telecommunications sectors, with the number of SOEs increasing.

As of 2019, there are more than 400 SOEs.  The state holds majority ownership in more than half of them.  In addition, there are a large number of municipality-owned companies.  SOEs are particularly active in the energy and utility sectors, in banking, transportation, forestry, and postal services.

SOEs have independent boards, but in practice, all strategic decisions require government approval.

Major SOEs include the National Asset Management Company (MNV), Magyar Posta, state energy company MVM, Hungarian State Railways (MAV), state gambling monopoly Szerencsejatek, National Infrastructure Development Company (NIF), car manufacturer RABA, and state owned banks Exim bank, Hungarian Development Bank (MFB), Takarekbank, and Budapest Bank.  The GOH has a 25 percent stake in hydrocarbon company MOL.

A 2011 law on national assets lists the SOEs of strategic importance, which are to be kept in state ownership (https://net.jogtar.hu/jr/gen/hjegy_doc.cgi?docid=a1100196.tv  ); as of April 2019 there were 64 such companies.  There is no officially published, complete list of SOEs, but the State Asset Manager MNV has a list of companies under its control on its webpage.  The list does not cover all publicly owned companies: http://mnv.hu/felso_menu/tarsasagi_portfolio/mnvportfolio  

In principle, the same rules apply to SOEs as to privately owned companies in most cases, but in practice, some companies report that SOEs often enjoy preferential treatment from certain authorities.  According to many businesses, since mid-2012, the GOH has made it more difficult for foreign-owned energy companies to operate in the Hungarian market. The GOH has publicly stated its interest in nationalizing some private energy firms.  In 2013, the GOH purchased E.ON’s wholesale and gas storage divisions and RWE’s retail gas company, Fogaz. In 2014 and 2015, the GOH acquired other energy companies. By the end of 2016, state-owned Fogaz became the only remaining retail gas utility provider in Hungary.  Press has reported that the GOH intends to take over the electricity and the heating retail markets as well.

Hungary adheres to OECD Guidelines on Corporate Governance as well as to EU rules on SOEs.  The Hungarian National Asset Management Company is the state asset manager.

According to a 2015 study conducted by Transparency International (TI) Hungary, SOEs scored 61 points on a scale of 100 with regard to meeting transparency obligations in terms of data published on their websites, integrity, codes of ethics, and internal control systems.  TI noted that although there was a considerable improvement compared to the previous survey in 2013, none of the SOEs reviewed during their study was in full compliance with transparency and disclosure requirements as mandated by Hungarian law.

In a July 2018 State Audit Office (SAO) report on the monitoring of 62 SOEs, the SAO said that the investigated enterprises’ integrity and compliance regulations have improved over the past years and their current transparency and integrity level is satisfactory.  The report added that the auditing and asset management of SOEs could still be improved, and owners should investigate SOEs more often than the current practice, the report added.

Privatization Program

In the 1990s, the privatization of state owned enterprises (SOEs), including the energy sector, manufacturing, food processing, and chemistry, ushered in a significant period of change.  This policy has stopped in recent years as most SOEs have already been privatized, and in fact, the trend has reversed since 2010 as the state has taken more ownership or de facto control in certain sectors, including energy and public utilities.

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) 2017 $139844 2017 $139,135 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $2,965 2017 $7,131 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2017 $521 2017 $12,938 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 60% 2017 $74% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  


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 $246,610 100% Total Outward $195,205 100%
Netherlands $60,135 24.4% United States $84,108 43.1%%
Luxembourg  $38,347 15.5% Switzerland $49,437 25.3%%
Ireland $31,226 12.7% Ireland $5,563 2.8%%
Germany $21,241 8.6% South Korea $4,629 2.4%
Cayman Island $17,591 7.1% Croatia $4,286 2.2%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $13,602 100% All Countries $8,213 100% All Countries $5,390 100%
Luxembourg $4,323 31.8% Luxembourg $3,320 40.4% Luxembourg $1,004 18.6%
United States $1,545 11.4% United States $1,379 16.8% Austria $379 7.0%
Austria $949 7.0% Austria $570 6.9% Slovak Republic $379 7.0%
Germany $588 4.3% Belgium $568 6.9% Czech Republic $309 5.7%
Belgium $571 4.2% Germany $522 6.4% Poland $254 4.7%

Ireland

Executive Summary

The Irish government actively promotes foreign direct investment (FDI) and has had considerable success in attracting U.S. investment, in particular.  Currently, there are approximately 700 U.S. subsidiaries in Ireland operating primarily in the following sectors: chemicals, bio-pharmaceuticals and medical devices, computer hardware and software, electronics, and financial services.

One of Ireland’s most attractive features as an FDI destination is its low corporate tax rate, which has remained at 12.5 percent since 2003.  Other factors cited by foreign firms include the quality and flexibility of the English-speaking workforce; availability of a multilingual labor force; cooperative labor relations; political stability; and pro-business government policies and regulators.  Additional positive features include a transparent judicial system; transportation links; proximity to the United States and Europe; and Ireland’s geographic location, which leaves it well placed in time zones to support investment in Asia and the Americas.  Ireland also benefits from its membership in the European Union (EU) and resulting access to a Single Market of 500 million consumers, plus the drawing power of existing companies operating successfully in Ireland (a so-called “clustering” effect). The planned withdrawal by the United Kingdom (UK) from the EU, or Brexit, will leave Ireland as the only remaining English-speaking country in the EU and may make Ireland even more attractive as a destination for FDI.

The Irish government treats all firms incorporated in Ireland on an equal basis.  Ireland’s judicial system is transparent and upholds the sanctity of contracts, as well as laws affecting foreign investment.  Conversely, the following factors hurt Ireland’s ability to attract investment: high labor and operating costs (such as for energy); skilled-labor shortages; Eurozone-risk; sometimes-deficient infrastructure (such as in transportation, housing, energy and broadband Internet); uncertainty in EU policies on some regulatory matters; and absolute price levels among the highest in Europe.

There is no formal screening process for foreign investment in Ireland.  Investors looking to receive government grants or assistance through one of the four state agencies responsible for promoting foreign investment in Ireland are often required, however, to meet certain employment and investment criteria.

Ireland uses the euro as its national currency and enjoys full current and capital account liberalization.

The government recognizes and enforces secured interests in property, both chattel and real estate.  Ireland is a member of the World Intellectual Property Organization (WIPO) and a party to the International Convention for the Protection of Intellectual Property.

Several state-owned enterprises (SOEs) operate in Ireland in the energy, broadcasting, and transportation sectors.  All of Ireland’s SOEs are open to competition for market share.

The United States and Ireland do not have a Bilateral Investment Treaty, but since 1950 have shared a Friendship, Commerce, and Navigation Treaty, which provides for national treatment of U.S. investors.  The two countries also have shared a Tax Treaty since 1998, supplemented in December 2012 with an agreement to improve international tax compliance and to implement the U.S. Foreign Account Tax Compliance Act (FATCA).

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 18 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 23 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 10 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $446,383 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $55,290 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Irish government actively promotes FDI, a strategy that has fueled economic growth since the mid-1990s.  The principal goal of Ireland’s investment promotion has been employment creation, especially in technology-intensive and high-skill industries.  More recently, the government has focused on Ireland’s international competitiveness by encouraging foreign-owned companies to enhance research and development (R&D) activities and to deliver higher-value goods and services.

The Irish government’s actions have achieved considerable success in attracting U.S. investment in particular.  The stock of American FDI in Ireland stood at USD 446 billion in 2017, more than the U.S. total for China, India, Russia, Brazil, and South Africa (the so-called BRICS countries) combined.  There are approximately 700 U.S. subsidiaries currently in Ireland employing roughly 155,000 people and supporting work for another 100,000. This figure represents a significant proportion of the 2.28 million people employed in Ireland.  U.S. firms operate primarily in the following sectors: chemicals, bio-pharmaceuticals and medical devices, computer hardware and software, electronics, and financial services.

U.S. investment has been particularly important to the growth and modernization of Irish industry over the past 25 years, providing new technology, export capabilities, management and manufacturing best practices, and employment opportunities.  The activities of U.S. firms in Ireland span from the manufacturing of high-tech electronics, computer products, medical devices, and pharmaceuticals to retailing, banking, finance, and other services. More recently, Ireland has also become an important R&D center for U.S. firms in Europe, and a magnet for U.S. internet/digital media investment.  Industry leaders like Google, Amazon, eBay, PayPal, Facebook, Twitter, LinkedIn, and Electronic Arts use Ireland as the hub or important part of their respective European, and sometimes Middle Eastern, African, and/or Indian operations.

U.S. companies are attracted to Ireland as an exporting sales and support platform to the EU market of 500 million consumers and other global markets, mainly the Middle East and Africa.  Ireland is a successful FDI destination for many reasons, including a corporate tax rate of 12.5 percent for all domestic and foreign firms; a well-educated, English-speaking workforce; the availability of a multilingual labor force; cooperative labor relations; political stability; and pro-business government policies and regulators.  Ireland also benefits from a transparent judicial system; good transportation links; proximity to the United States and Europe, and the drawing power of existing companies operating successfully in Ireland (a so-called “clustering” effect).

Conversely, factors that negatively affect Ireland’s ability to attract investment include high labor and operating costs (such as for energy) costs; sporadic skilled-labor shortages; residual fallout from Ireland’s economic and financial restructuring; and sometimes-deficient infrastructure (such as in transportation, energy and broadband quality).  Ireland also suffers from housing and high-quality office space shortages; uncertainty in EU policies on some regulatory matters; and absolute price levels that are among the highest in Europe. Some Irish government agencies have in the past expressed concern that energy costs and the reliability of energy supply also could undermine Ireland’s attractiveness as a FDI destination.  The American Chamber of Commerce in Ireland has noted the need for greater attention to a “skills gap” in the supply of Irish graduates to the high technology sector. It also has asserted that high personal income tax rates can make attracting talent from abroad difficult.

In 2013, Ireland became the first country in the Eurozone to exit the EU, European Central Bank, and International Monetary Fund (EU/ECB/IMF, or so-called Troika) bailout program.  Compliance with the terms of the Troika program came at a substantial economic cost with gross domestic product (GDP) stagnation, austerity measures, and high unemployment (15 percent).  The economy has since recovered and has been the fastest growing Eurozone economy for the past five years, with a growth rate of 6 percent in 2018. Meanwhile, government initiatives to attract investment have continued to stimulate job creation and employment.  As a result, unemployment levels have fallen dramatically and the Central Bank of Ireland forecasts that Ireland’s unemployment rate will fall to 4.9 percent in 2019. Against this good economic background, there is a resurgent interest in Ireland as an investment destination.  Since exiting the bailout program, the Irish government has successfully returned to international sovereign debt markets, and successful bonds sales exemplify renewed international confidence in Ireland’s recovery.

Brexit and its Implications for Ireland

The UK’s exit from the EU will leave Ireland as the only remaining English-speaking country in the bloc.  Ireland is the only EU country to share a land border with the UK. It is still unclear what the full economic consequences of Brexit will be for Ireland as it loses a close EU ally on policy matters.  Econometric models from the Irish Department of Finance and from the Central Bank of Ireland suggest Brexit will cut economic growth modestly in the near term. Ireland is heavily dependent on the UK as an export market, especially for food products, and sectors such as food and agri-business may be hardest hit.  Ireland also sources many imports from the UK, which could raise costs if supply chains are disrupted. A number of UK-based firms (including US firms) have moved headquarters or opened subsidiary offices in Ireland to facilitate ease of business with other EU countries.

Industrial Promotion

Six government departments and organizations have responsibility to promote investment into Ireland by foreign companies:

  • The Industrial Development Authority of Ireland (IDA Ireland) has overall responsibility for promoting and facilitating FDI in all areas of the country, except in the Shannon Free Zone (see below).  IDA Ireland is also responsible for attracting foreign financial and insurance firms to Dublin’s International Financial Services Center (IFSC). IDA Ireland maintains seven U.S. offices (in New York, NY; Boston, MA; Chicago, IL; Mountain View, CA; Irvine, CA; Atlanta, GA; and Austin, TX), as well as offices throughout Europe and Asia.
  • Enterprise Ireland (EI) promotes joint ventures and strategic alliances between indigenous and foreign companies.  The agency also assists foreign firms that wish to establish food and drink manufacturing operations in Ireland. EI has five offices in the United States (New York, NY; Austin, TX; Boston, MA; Chicago, IL; and Mountain View, CA), as well as offices in Europe, South America, the Middle East, and Asia.
  • Shannon Group (formerly the Shannon Free Airport Development Company) promotes FDI in the Shannon Free Zone (see description below) and owns properties in the Shannon region as potential green-field investment sites.  Since 2006 and the Industrial Development Amendments Act, EI assumed responsibility for investment by Irish firms in the Shannon region. IDA Ireland remains responsible for FDI in the Shannon region outside the Shannon Free Zone.
  • Udaras na Gaeltachta (Udaras) has responsibility for economic development in those areas of Ireland where the predominant language is Irish, and works with IDA Ireland to promote overseas investment in these regions.
  • Department of Foreign Affairs and Trade (DFAT) has responsibility for economic messaging and supporting the country’s trade promotion agenda as well as diaspora engagement to attract investment.
  • Department of Business, Enterprise and Innovation (DBEI) supports the creation of good jobs by promoting the development of a competitive business environment in which enterprises will operate with high standards and grow in sustainable markets.

Limits on Foreign Control and Right to Private Ownership and Establishment

Irish law allows foreign corporations (registered under the Companies Act 2014 or previous legislation and known locally as a public limited company, or plc for short) to conduct business in Ireland.  Any company incorporated abroad that establishes a branch in Ireland must file certain papers with the Registrar of Companies. A foreign corporation with a branch in Ireland will have the same standing in Irish law for purposes of contracts, etc., as a domestic company incorporated in Ireland.  Private businesses are not competitively disadvantaged to public enterprises with respect to access to markets, credit, and other business operations.

No barriers exist to participation by foreign entities in the purchase of state-owned Irish companies.  Residents of Ireland may, however, be given priority in share allocations over all other investors. In 1998, the Irish government sold the state-owned telecommunications company Eircom, and Irish residents received priority in share allocations.  In 2005, the Government privatized the national airline Aer Lingus through a stock market flotation, but it chose to retain about a one-quarter stake. U.S. investors purchased shares during its privatization. In 2015, the International Airlines Group (IAG) purchased the Government’s remaining stake in the airline.

Citizens of countries other than Ireland and EU member states can acquire land for private residential or industrial purposes.  Under Section 45 of the Land Act, 1965, all non-EU nationals must obtain the written consent of the Land Commission before acquiring an interest in land zoned for agricultural use.  There are many equine stud farms and racing facilities owned by foreign nationals. No restrictions exist on the acquisition of urban land.

Ireland does not have formal investment screening legislation, but as an EU member it may need to implement any future common EU investment screening regulations/directives.

Other Investment Policy Reviews

The Economist Intelligence Unit and World Bank’s Doing Business 2019 provide current information on Ireland’s investment policies.

Business Facilitation

All firms must register with the Companies Registration Office (www.cro.ie).  As well as registering companies, the CRO also can register a business/trading name, a non-Ireland based foreign company (external company), or a limited partnership.  A firm or company registered under the Companies Act 2014 becomes a body corporate as and from the date mentioned in its certificate of incorporation. The website permits online data submission.  Firms must submit a signed paper copy of this online application to the CRO, unless the applicant company has already registered with www.revenue.ie (the website of Ireland’s tax collecting authority, the Office of the Revenue Commissioners).

Outward Investment

Enterprise Ireland assists Irish firms in developing partnerships with foreign firms mainly to develop and grow indigenous firms.

2. Bilateral Investment Agreements and Taxation Treaties

Ireland has signed no formal bilateral investment treaties (BITs) with other EU members or the United States.

The United States and Ireland have shared a Friendship, Commerce, and Navigation Treaty since 1950, which includes provisions common to BITs regarding national treatment, most-favored nation benefits, expropriation, and protection and security.  The full text is here: http://tcc.export.gov/Trade_Agreements/All_Trade_Agreements/exp_005438.asp  .

Since 1998, Ireland and the United States have shared a Tax Treaty, supplemented in December 2012 with an agreement to improve international tax compliance and to implement the U.S. Foreign Account Tax Compliance Act (FATCA).  See http://www.irs.gov/pub/irs-trty/ireland.pdf  for a copy of the existing treaty.

Ireland has signed comprehensive double taxation agreements with 74 countries, 73 of which (except Ghana) are fully ratified and in effect.  Agreements with other countries are also in negotiation. These taxation agreements serve to promote trade and investment between Ireland and the partner countries that would otherwise be discouraged by the possibility of double taxation.  The agreements generally cover corporate tax, income tax, and capital gains tax (direct taxes). The current list of agreements in effect, as of January 2018, includes the following countries: Albania, Armenia, Australia, Austria, Bahrain, Belarus, Belgium, Bosnia & Herzegovina, Botswana, Bulgaria, Canada, Chile, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Ethiopia, Finland, France, Georgia, Germany, Greece, Hong Kong, Hungary, Iceland, India, Israel, Italy, Japan, Kazakhstan, Korea (Republic of), Kuwait, Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Moldova, Montenegro, Morocco, Netherlands, New Zealand, Norway, Pakistan, Panama, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, United Arab Emirates, Ukraine, United Kingdom, United States, Uzbekistan, Vietnam, and Zambia.

In the absence of a bilateral tax treaty, provisions within the Irish Taxes Act allow unilateral credit relief against Irish taxation for taxes paid in the other country with respect to certain types of income, e.g., dividends and interest.

3. Legal Regime

Transparency of the Regulatory System

Ireland’s judicial system is transparent and upholds the sanctity of contracts, as well as laws affecting foreign investment.  These laws include:

  • The Companies Act 2014, which contains the basic requirements for incorporation in Ireland;
  • The 2004 Finance Act, which introduced tax incentives to encourage firms to set up headquarters in Ireland and to conduct R&D;
  • The Mergers, Takeovers and Monopolies Control Act of 1978, which sets out rules governing mergers and takeovers by foreign and domestic companies;
  • The Competition (Amendment) Act of 1996, which amends and extends the Competition Act of 1991 and the Mergers and Takeovers (Control) Acts of 1978 and 1987, and sets out the rules governing competitive behavior; and,
  • The Industrial Development Act (1993), which outlines the functions of IDA Ireland.

The Companies Act (2014), with more than 1,400 sections and 17 Schedules, is the largest-ever Irish statute.  It consolidated and reformed all Irish company law for the first time in over 50 years.

In addition, numerous laws and regulations pertain to employment, social security, environmental protection and taxation, with many of these keyed to EU Directives.

International Regulatory Considerations

Ireland has been a member of the European Union since 1973.  It incorporates all EU legislation into national legislation and applies all EU regulatory standards and rules.  Ireland is a member of the World Trade Organization (WTO) and follows all WTO procedures.

Legal System and Judicial Independence

Laws and Regulations on Foreign Direct Investment

One of Ireland’s most attractive features as an FDI destination is its low corporate tax rate.  Since 2003, the headline corporate tax rate for all firms, foreign and domestic, is 12.5 percent.  Ireland’s headline corporate tax rate is among the lowest in the EU. The Irish government continues to oppose strongly EU proposals to harmonize corporate taxes at a common EU rate.  In 2014, the Government announced that firms would no longer be able to incorporate in Ireland without also being tax resident. Prior to this change, firms could incorporate in Ireland and be tax resident elsewhere, making use of an arrangement colloquially known as the “Double Irish” to reduce tax liabilities.  The Irish government has indicated it will adhere to future decisions reached through the OECD’s Base Erosion and Profit Sharing (BEPS) discussions and has already incorporated a number of BEPS recommendations including Ireland’s ratification of the BEPS Multilateral Instrument in January 2019.  The government implemented a Knowledge Development Box (KDB), effective 2016, which is reportedly consistent with OECD guidelines.  The KDB allows for the application of a tax rate of 6.25 percent on profits arising to certain intellectual property assets that are the result of qualifying research and development activities carried out in Ireland.

Ireland treats all firms incorporated in Ireland on an equal basis.  With only a few exceptions, no constraints prevent foreign individuals or entities from ownership or participation in private firms/corporations.  The most significant of these exceptions is that, in common with other EU countries, Irish airlines must be at least 50 percent owned by EU residents to have full access to the single European aviation market.  Citizens of countries other than Ireland and EU member states can acquire land for private residential or industrial purposes. Under Section 45 of the Land Act, 1965, all non-EU nationals must obtain the written consent of the Land Commission before acquiring an interest in land zoned for agricultural use.  There are many stud farms and racing facilities in Ireland owned by foreign nationals in such areas. No restrictions exist on the acquisition of urban land.

Competition and Anti-Trust Laws

The Competition and Consumer Protection Commission (CCPC) is an independent statutory body with a dual mandate to enforce competition and consumer protection law in Ireland.  Ireland established the CCPC on October 31, 2014, after the amalgamation of the National Consumer Agency and the Competition Authority.

The Competition Act of 2002, subsequently amended and extended by the Competition Act 2006, mandates the enforcement power of the CCPC.  The Act introduced criminal liability for anti-competitive practices, increased corporate liability for violations, and outlined available defenses.  Most tax, labor, environment, health and safety, and other laws are compatible with EU regulations, and they do not adversely affect investment. The government publishes proposed drafts of laws and regulations to solicit public comment, including those by foreign firms and their representative associations.  Bureaucratic procedures are transparent and reasonably efficient, in line with a general pro-business climate espoused by the government.

The Irish Takeover Panel Act of 1997 governs company takeovers.  Under the Act, the Takeover Panel issues guidelines, or Takeover Rules, which regulate commercial behavior in mergers and acquisitions.  According to minority squeeze-out provisions in the legislation, a bidder who holds 80 percent of the shares of the target firm (or 90 percent for firms with securities on a regulated market) can compel the remaining minority shareholders to sell their shares.  There are no reports that the Irish Takeover Panel Act has prevented foreign takeovers, and, in fact, there have been several high-profile foreign takeovers of Irish companies in the banking and telecommunications sectors in the recent past.  In 2006, Babcock & Brown (an Australian investment firm) acquired the former national telephone company, Eircom. Babcock & Brown subsequently sold Eircom to Singapore Technologies Telemedia in 2009.  The EU Directive on Takeovers provides a framework of common principles for cross-border takeover bids, creates a level playing field for shareholders, and establishes disclosure obligations throughout the EU.  Irish legislation fully implemented the Directive in 2006, though the Irish Takeover Panel Act 1997 had already incorporated many of its principles.

Companies must notified the CCPC of mergers over a certain financial threshold for review as required by the Competition Act 2002, as amended (Competition Act).

Expropriation and Compensation

The government normally expropriates private property only for public purposes in a non-discriminatory manner and in accordance with established principles of international law.  The government condemns private property in accordance with recognized principles of due process.

Where there are disputes brought by owners of private property subject to a government action, the Irish courts provide a system of judicial review and appeal.

Dispute Settlement

There is no specific domestic body for handling investment disputes.  The Irish Constitution, legislation, and common law form the basis for the Irish legal system.  The DBEI has primary responsibility for drafting and enforcing company law. The judiciary is independent, and litigants are entitled to trial by jury in commercial disputes.

ICSID Convention and New York Convention

Ireland is a member of the International Center for the Settlement of Investment Disputes (ICSID) and a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning local courts must enforce international arbitration awards under appropriate circumstances.

In recent years, some U.S. business representatives have occasionally called into question the transparency of government tenders.  According to some U.S. firms, lengthy procedural decisions often delay the procurement tender process. Unsuccessful bidders have claimed they have had difficulty receiving information on the rationale behind the tender outcome.  Additionally, some successful bidders have experienced delays in finalizing contracts, commencing work on major projects, obtaining accurate project data, and receiving compensation for work completed, including through conciliation and arbitration processes.  Successful bidders have also subsequently found that the original tenders may not accurately describe conditions on the ground.

Bankruptcy Regulations

The Companies Act 2014 is the most important body of law dealing with commercial and bankruptcy law, which Irish courts consistently apply.  Irish company bankruptcy laws give creditors a strong degree of protection.

7. State-Owned Enterprises

There are a number of state-owned enterprises (SOEs) in Ireland in the energy, broadcasting, and transportation sectors.  Eirgrid is the SOE with responsibility of managing and operating the electricity grid on the island of Ireland. There are two energy SOEs – Electric Ireland for electricity and Ervia (formerly Bord Gáis Eireann) for natural gas.  Raidió Teilifís Éireann (RTE) operates the national broadcasting (radio and television) service while Córas Iompair Éireann (CIE) provides bus and train transportation throughout the country. The government privatized both Eircom (the national telecommunication service) and Aer Lingus (the national airline).  CIE remains wholly owned by the government. Irish Water (which operates as a subsidiary of Ervia) began operations in 2013 to serve as the state-owned entity to deliver water services (previously delivered by local authorities) to homes and businesses. Irish Water introduced new residential charges (previously funded from general government revenue) in 2015.  It subsequently suspended these charges in 2016 and has yet to decide on their future collection.

All of Ireland’s SOEs are open to competition for market share and can, as in the case of Electric Ireland and Ervia, compete with one another.  The SOEs do not discriminate against, or place unfair burdens on, foreign investors or foreign-owned investments. There has been a statutory transfer of responsibility for the regulatory functions for the energy sector from the Government to the Commission for Energy Regulation.  This statutory body is required to not discriminate unfairly between participants in the sector, while protecting the end-user. In general, SOEs aspire to pay their own way, financing their operations and funding further expansion through profits generated from their own operations.  Some pay an annual dividend to the government. A board of directors usually governs SOEs. The government appoints some of the SOE directors.

Privatization Program

Ireland does not have a formal privatization program but the government agreed in 2010, as part of the EU/ECB/IMF bailout program, to privatize some of its state-owned and semi-state owned enterprises.  The government nominated but has yet to sell some non-strategic elements of Ervia (formerly Bord Gais Eireann, the gas supply company) while it has also indicated that it may sell the electricity generating arm of Electric Ireland, the electricity supply company.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

U.S. and foreign companies with major foreign direct investments in Ireland include:

Abbott, AdRoll, Adobe, Alcatel-Lucent/Bell Labs, Aldi, Alexion, Allianz, Analog Devices, AOL, Apple, Aramark, AWS, Axa, BAM, Bank of America Merrill Lynch, Biotrin, BNY Mellon, Boots, Boston Scientific, BT, Citi, DellEMC, Dropbox, eBay, Eli Lilly,  Ericsson, Etsy, Facebook, Fidelity, Generali, Gilead, Google, Heineken, HPE, IBM, Intel, Johnson & Johnson, Kellogg’s, Lidl, Liebherr, LinkedIn, Mastercard, Microsoft, MSD (Merck Sharp & Dohme), Oracle, PayPal, Pfizer, Qualtrics, Quantcast, Regeneron, Salesforce.com, Sanofi, SAP, ServiceSource, Servier, Siemens, State Street, Stream Global Services, Tesco, Teva, Twitter, UnitedHealth Group, United Technologies Research Centre, Vodafone, Waters, Yahoo!, Zeus, and Zurich.

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) 2017 $369,181 www,cso.ie   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A  N/A 2017 $446,383 BEA data
Host country’s FDI in the United States ($M USD, stock positions) N/A   N/A 2017 $147,834 BEA data
Total inbound stock of FDI as % host GDP N/A N/A 2017 299.2% UNCTAD  

* Source: Central Statistics Office (www.cso.ie)


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data – 2017
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $892,742 100% Total Outward $860,058 100%
United States $214,665 24% Luxembourg $340,002 40%
Netherlands $119,946 13% United States $111,402 13%
Luxembourg $110,818 12% United Kingdom $105,528 12%
Switzerland $89,319 10% Netherlands $95,406 11%
United Kingdom $69,761 8% Bermuda $50,748 6%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $3,236,420 100% All Countries $1,331,249 100% Al lCountries $1,905,172 100%
U.S $917,119 28% U.S $436,844 33% UK $507,561 27%
UK $674,714 21% UK $167,154 13% U.S. $480,275 25%
France $210,312 6% Luxembourg $102,132 8% France $165,279 9%
Germany $134,448 4% Japan $80,228 6% Germany $83,381 4%
Luxembourg $134,535 4% Germany $53,067 4% Netherlands $77,887 4%

Italy

Executive Summary

Italy’s economy, the eighth largest in the world, is fully diversified, and dominated by small and medium-sized firms (SMEs), which comprise 99.9 percent of Italian businesses.  Italy is an original member of the 19-nation Eurozone. Germany, France, the United States, the United Kingdom, Spain, and Switzerland are Italy’s most important trading partners, with China continuing to gain ground.  Tourism is an important source of external revenue, as are exports of pharmaceutical products, furniture, industrial machinery and machine tools, electrical appliances, automobiles and auto parts, food, and wine, as well as textiles/fashion.  Italy continues to attract less foreign direct investment than many industrialized nations. Italy does not share a bilateral investment treaty with the United States.

Italy’s relatively affluent domestic market, access to the European Common Market, proximity to emerging economies in North Africa and the Middle East, and assorted centers of excellence in scientific and information technology research, remain attractive to many investors.  The government remains open to foreign investment in shares of Italian companies and continues to make information available online to prospective investors. The Italian government’s efforts to implement new investment promotion policies to position Italy as a desirable investment destination have been undermined in part by Italy’s slow economic growth and lack of consistent progress on structural reforms that could reduce lengthy and often inconsistent legal and regulatory procedures, unpredictable tax structure, and layered bureaucracy.  

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 53 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2018 51 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2018 31 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country (M USD, stock positions) 2017 $30,708 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $31,020 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Italy welcomes foreign direct investment (FDI).  As a European Union (EU) member state, Italy is bound by the Union’s treaties and laws.  Under the EU treaties with the United States, Italy is generally obliged to provide national treatment to U.S. investors established in Italy or in another EU member state.  

EU and Italian antitrust laws provide Italian authorities with the right to review mergers and acquisitions for market dominance.  In addition, the Italian government may block mergers and acquisitions involving foreign firms under the “Golden Power” law if the transactions appear to raise national security concerns.  This law was enacted in 2012 and further implemented with decrees in 2015, 2017, and 2019.  The Golden Power law allows the Government of Italy (GOI) to block foreign acquisition of companies operating in strategic sectors (identified as defense/national security, energy, transportation, telecommunications, critical infrastructure, sensitive technology, and nuclear and space technology).  On March 26, 2019 the GOI issued a decree expanding the Golden Power authority to cover the purchase of goods and services related to the planning, realization, maintenance, and management of broadband communications networks using 5G technology.  Per Italian law, Parliament must confirm the decree within 60 days. The GOI’s Golden Power authority always applies in cases involving the sectors above in which the potential purchaser is a non-EU company; it is extended to EU companies if the target of the acquisition is involved in defense/national security activities.  In this respect, the GOI has a say regarding the ownership of private companies as well as ones in which the government has a stake. This law replaced the “Golden Share” which the GOI previously held in former state-owned firms that were partially privatized in the 1990s and 2000s. The law also allows the State to maintain oversight over entire strategic sectors as opposed to individual companies, and by replacing the Golden Share legislation, has enabled Italy to address accusations the Golden Shares violated European treaties.   An interagency group led by the Prime Minister’s office reviews acquisition applications and prepares the dossiers/ recommendations for the Council of Ministers’ decision.   

According to the latest figures available from the Italian Trade Agency (ITA), foreign investors own significant shares of 12,768 Italian companies.  These companies employed 1,211,872 workers with overall sales of EUR 573.6 billion. ITA operates under the umbrella of the Italian Ministry of Economic Development.

The Italian Trade Agency (ITA) operates Invest in Italy: http://www.investinitaly.com/en/.   The Foreign Investments Attraction Department is a dedicated unit of ITA for facilitating the establishment and the development of foreign companies in Italy.  As of April 2019, ITA maintained a presence in 65 countries to assist foreign investors.  

Invitalia is the national agency for inward investment and economic development, owned by the Italian Ministry of Economy and Finance.  The agency focuses on strategic sectors for development and employment.  It places an emphasis on southern Italy, where investment and development lag in comparison to the rest of the country.  Invitalia finances projects both large and small, targeting entrepreneurs with concrete development plans, especially in innovative and high-added-value sectors.  For more information, see https://www.invitalia.it/eng  .  The Ministry of Economic Development also has a program to attract innovative investments: https://www.mise.gov.it  

Italy’s main business association (Confindustria) also provides assistance to companies in Italy: https://www.confindustria.it/en  

Limits on Foreign Control and Right to Private Ownership and Establishment

Under EU treaties and OECD obligations, Italy is generally obliged to provide national treatment to U.S. investors established in Italy or in another EU member state.  

EU and Italian antitrust laws provide Italian national local authorities with the right to review mergers and acquisitions over a certain financial threshold.  The Italian government may block mergers and acquisitions involving foreign firms if national security concerns are raised or on the principle of reciprocity if the government of the foreign firm applies discriminatory measures against Italian firms.  Foreign investors in the defense or aircraft manufacturing sectors are more likely to encounter resistance from the many ministries involved in reviewing foreign acquisitions.  

Italy maintains a formal national security screening process for inbound foreign investment in the sectors of defense/national security, transportation, energy, telecommunications, critical infrastructure, sensitive technology, and nuclear and space technology under its “Golden Power” legislation, and where there may be market concentration (antitrust) issues.  Italy’s Golden Power legislation was expanded on March 26, 2019 to include the purchase of goods and services related to the planning, realization, maintenance, and management of broadband communications networks using 5G technology. (Per Italian law Parliament must confirm the law within 60 days for it to remain in force.) To our knowledge, U.S. investors have not been disadvantaged relative to other foreign investors under the mechanisms described above.

Other Investment Policy Reviews

An OECD Economic Survey was published for Italy in April 2019.  https://www.oecd.org/economy/surveys/Italy-2019-OECD-economic-survey-overview.pdf 

Business Facilitation

Italy has a business registration website, available in Italian and English, administered through the Union of Italian Chambers of Commerce: http://www.registroimprese.it.    The online business registration process is clear and complete.  Foreign companies may use the online process. Before registering a company online, applicants must obtain a certified e-mail address and digital signature, a process that may take up to five days.  A notary is required to certify the documentation. The precise steps required for the registration process depend on the type of business being registered. The minimum capital requirement also varies by type of business.  Generally, companies must obtain a value-added tax account number (partita IVA) from the Italian Revenue Agency, register with the social security agency Istituto Nazionale della Previdenza Sociale (INPS), verify adequate capital and insurance coverage with the Italian workers’ compensation agency Istituto Nazionale per L’Assicurazione contro gli Infortuni sul Lavoro (INAIL), and notify the regional office of the Ministry of Labor.  According to the World Bank Doing Business Index 2018, Italy is ranked 67 out of 190 countries in terms of the ease of starting a business: it takes six procedures and six days to start a business in Italy.  Additional licenses may be required, depending on the type of business to be conducted.

Invitalia and the Italian Trade Agency’s Foreign Direct Investment Unit assist those wanting to set up a new business in Italy.  Many Italian localities also have one-stop shops to serve as a single point of contact for potential investors and provide advice in obtaining necessary licenses and authorizations.  These services are available to all investors.

Outward Investment

Italy neither promotes, restricts, or incentivizes outward investment nor restricts domestic investors from investing abroad.

2. Bilateral Investment Agreements and Taxation Treaties

BITs or FTAs

The United States and Italy do not share a bilateral investment treaty (BIT).

Italy has bilateral investment agreements with the following countries (for more information and text of the agreements, see http://investmentpolicyhub.unctad.org/IIA/CountryBits/103  ):

Albania, Algeria, Angola, Argentina, Armenia, Bahrain, Bangladesh, Barbados, Belarus, Belize (signed, not in force), Bolivia, Bosnia and Herzegovina, Brazil (signed, not in force), Cameroon, Cape Verde (signed, not in force), Chad, Chile, China, Congo, Cote d’Ivoire (signed, not in force),  Cuba, Democratic Republic of Congo (signed, not in force), Djibouti, Dominican Republic, Ecuador, Egypt, Eritrea, Ethiopia, Gabon, Georgia, Ghana (signed, not in force), Guatemala, Guinea, Hong Kong, Iran, Jamaica, Jordan, Kazakhstan, Kenya, DPR of Korea (signed, not in force), Republic of Kuwait, Lebanon, Libya, Macedonia FYR,  Malawi, Malaysia, Malta (signed, not in force), Mauritania, Mexico, Moldova, Republic of Mongolia, Morocco, Mozambique, Namibia, Nicaragua, Nigeria, Oman, Pakistan, Panama, Paraguay, Peru, Philippines, Qatar, Russian Federation, Saudi Arabia, Senegal, Serbia (signed, not in force), South Africa, Sri Lanka, Sudan (signed, not in force), Syrian Arab Republic, Tanzania, United Republic of Tunisia, Turkey, Turkmenistan (signed, not in force), United Arab Emirates, Uruguay, Uzbekistan, Venezuela (signed, not in force), Vietnam, Yemen, Zambia, Zimbabwe (signed, not in force).

Italy has not ratified a BIT since 2009 and has not negotiated a BIT since 2014.  Since 2009, investment treaty negotiations fall within the competence of the EU: http://ec.europa.eu/trade/policy/accessing-markets/investment/  .

As an EU member, Italy’s FTA negotiations are likewise handled at the EU level:  http://ec.europa.eu/trade/policy/  .

Bilateral Taxation Treaties:

Italy shares a bilateral taxation treaty with the United States.  The text of the treaty is available at https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z  .

Italy ranked 51 out of 190 countries in the World Bank’s 2018 Ease of Doing Business Report.  Several U.S. multinationals have sought U.S. Embassy assistance in dealing with Italy’s tax enforcement, with some expressing concerns that the Italian Revenue Agency unfairly targets large companies.  According to the companies, Italian tax investigations may question corporate accounting practices deemed legitimate in other EU Member States, creating inconsistencies and uncertainty.

3. Legal Regime

Transparency of the Regulatory System

Regulatory authority exists at the national, regional, and municipal level.  All applicable regulations could potentially be relevant for foreign investors.  Regulations are developed at the national level by the GOI and individual ministries, as well as independent regulatory authorities.  Regional and municipal authorities issue regulations at the sub-national level.  Draft regulations may be posted for public comment, but there is generally no requirement to do so. Final national-level regulations are in general published in the Gazzetta Ufficiale (and only become effective upon publication).  Regulatory agencies may publish summaries of received comments.  No major regulatory reform was undertaken in 2018.  Aggrieved parties may challenge regulations in court.  Public finances and debt obligations are transparent and are publicly available through banking channels such as the Bank of Italy.

International Regulatory Considerations

Italy is a member of the European Union (EU).  EU directives are brought into force in Italy through implementing national legislation.  In some areas, EU procedures require member states to notify the European Commission (EC) before implementing national-level regulations.  Italy has on occasion failed to notify the EC and/or WTO of draft regulations in a timely way. For example, in 2017 Italy adopted Country of Origin Labelling requirements for a range of products including rice, wheat used to make pasta, and certain tomato-based products.  Italy’s Economic Development Minister and Agriculture Minister publicly stated these measures would support the “Made in Italy” brand and make Italian products more competitive. Though the requirements were widely regarded as a Technical Barrier to Trade (TBT), Italy failed to notify the WTO in advance of implementing these regulations.  Italy is a signatory to the WTO’s Trade Facilitation Agreement (TFA) and has implemented all developed-country obligations.

Legal System and Judicial Independence

Italian law is based on Roman law and on French Napoleonic Code law.  The Italian judicial system consists of a series of courts and a body of judges employed as civil servants.  The system is unified; every court is part of the national network. Though notoriously slow, the Italian civil legal system meets the generally recognized principles of international law, with provisions for enforcing property and contractual rights.  Italy has a written and consistently applied commercial and bankruptcy law. Foreign investors in Italy can choose among different means of alternate dispute resolution (ADR), including legally binding arbitration, though use of ADR remains rare. The GOI has over recent years introduced justice reforms to reduce the backlog of civil cases and speed newly filed cases to conclusion.  These reforms also included a new emphasis on ADR and methods to make collecting judgments easier.

Regulations can be appealed in the court system.  

Laws and Regulations on Foreign Direct Investment

Italy is bound by EU laws on FDI.

Competition and Anti-Trust Laws

The Italian Competition Authority (AGCM) is responsible for reviewing transactions for competition-related concerns.  AGCM may examine transactions that restrict competition in Italy as well as in the broader EU market. As a member of the EU, Italy is also subject to interventions by the European Commission Competition Directorate (DG COMP).

Expropriation and Compensation

The Italian Constitution permits expropriation of private property for “public purposes,” defined as essential services or measures indispensable for the national economy, with fair and timely compensation.  Expropriations have been minimal.

Dispute Settlement

ICSID Convention and New York Convention

Italy is a member state of the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID convention).  Italy has signed and ratified the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).  Italian civil law (Section 839) provides for and governs the enforcement of foreign arbitration awards in Italy;

Italian law recognizes and enforces foreign court judgments.   

Investor-State Dispute Settlement

Italy is a contracting state to the 1965 Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States (entered into force on 28 April 1971).

Italy has had very few investment disputes involving a U.S. person in the last 10 years.  The U.S. Embassy identified less than five such active disputes at the time of the drafting of this report.  No cases have been terminated or resolved; all remain pending. Italy does not have a history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Italy is a party to the following international treaties relating to arbitration:

  • The 1927 Geneva Convention on The Execution of Foreign Arbitral Awards (entered into force on 12 February 1931);
  • The 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (entered into force on 1 May 1969); and
  • The 1961 European Convention on International Commercial Arbitration (entered into force on 1 November 1970).

Italy’s Code of Civil Procedure (Book IV, Title VIII, Sections 806-840) governs arbitration, including the recognition of foreign arbitration awards.  Italian law is not based on the UNCITRAL Model Law; however, many of the principles of the Model Law are present in Italian law. Parties are free to choose from a variety of Alternative Dispute Resolution methods, including mediation, arbitration, and lawyer-assisted negotiation.

Bankruptcy Regulations

Italy’s bankruptcy regulations are somewhat analogous to U.S. Chapter 11 restructuring, and allow firms and their creditors to reach a solution without declaring bankruptcy.  In recent years, the judiciary’s role in bankruptcy proceedings has been reduced in an attempt to simplify and expedite proceedings. In 2015, the Italian parliament passed a package of changes to the bankruptcy law, including measures to ease access to interim credit for bankrupt companies and to restructure debts.  Additional changes were approved in 2017 (juridical liquidation, early warning, simplified process, arrangement with creditors, insolvency of affiliated companies as a group, and reorganization of indebtedness rules). The measures aim to reduce the number of bankruptcies, limit the impact on the local economy, and facilitate the settlement of corporate disputes outside of the court system.  The reform follows on the 2015 reform of insolvency procedures. The legislative “implementation decree” for the 2017 bankruptcy reform was issued in early 2019. In the World Bank’s Doing Business Report 2018, Italy ranks 22 out of 190 economies in the category of Ease of Resolving Insolvency.

7. State-Owned Enterprises

The Italian government has in the past owned and operated a number of monopoly or dominant companies in certain strategic sectors.  However, beginning in the 1990s and through the early 2000s, the government began to privatize most of these state-owned enterprises (SOEs).  Notwithstanding this privatization effort, the GOI retains 100 percent ownership of the national railroad company (Ferrovie dello Stato) and road network company (ANAS), both of which merged in January 2018.  The GOI holds a 99.56 percent share of RAI, the national radio and television broadcasting network; and retains a controlling interest, either directly and/or through the state-controlled sovereign wealth fund Cassa Depositi e Prestiti (CDP), in companies such as shipbuilder Fincantieri (71.6 percent), postal and financial services provider Poste Italiane (65 percent), electricity provider ENEL (23.6 percent), oil and gas major Eni (30 percent), defense conglomerate Leonardo-Finmeccanica (30.2 percent), natural gas transmission company Snam (30.1 percent), as well as electricity transmission provider Terna (29.85 percent).

However, these companies are operating in a competitive environment (domestically and internationally) and are increasingly responsive to market-driven decision-making rather than GOI demands.  In addition, many of the state-controlled entities are publicly traded, which provides additional transparency and corporate governance obligations, including equitable treatment for non-governmental minority shareholders.  Italy’s parastatals (CDP, Ferrovie dello Stato, Eni, ENEL, ENAV, Poste Italiane and Leonardo) generated EUR 2.4 billion return on investment in 2018 for the GOI. The largest contributor was CDP (EUR 1.256 billion) and the second largest was Eni (EUR 671 million).

SOEs are subject to the same tax treatment and budget constraints as fully private firms.  Additionally, industries with SOEs remain open to private competition.

As an EU member, Italy is covered by EU government procurement rules.  

Privatization Program

The Italian government committed to privatize EUR 16 billion in state-owned assets in 2016 and 2017, planning for EUR 8 billion in each year, although privatizations have not reached these targets.  The privatizations fall into two categories: minority stakes in SOEs and underutilized real estate holdings. In 2016, the GOI sold a minority stake in the air traffic controller (ENAV). Revenues in 2016 were well below expectations due to the unfavorable markets that discouraged other privatizations and resulted in the postponement of the planned privatization of a minority share of the national rail network (Ferrovie dello Stato) as well as the national postal provider (Poste Italiane).  At the end of 2018, the government set a revenue target for 2019 equal to 1 percent of GDP (approximately EUR 18 billion).

The GOI solicits and actively encourages foreign investors to participate in its privatizations, which are non-discriminatory and transparent.  The GOI sells SOE shares through the Milan Stock Exchange (Borsa Italiana), while real estate sales are conducted through public bidding processes (typically online).  The Italian Public Property Agency (Agenzia del Demanio) administers real estate sales: https://venditaimmobili.agenziademanio.it/AsteDemanio/sito.php  .  The Agency has created a centralized registry with information on individual parcels for sale or long-term lease: http://www.investinitalyrealestate.com/en/  .

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) 2018 €1,757,000 2017 $1,935,000 www.worldbank.org/en/country  
Foreign Direct Investment Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $12,203 2017 $30,708 BEA data available at http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Host country’s FDI in the United States ($M USD, stock positions) 2017 $33,430 2017 $35,672 BEA data available at http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Total inbound stock of FDI as % host GDP 2017 24.8% 2017 21.7% N/A

* Italian GDP data are taken from ISTAT, the official statistics agency.  ISTAT publishes preliminary year end GDP data in early February and issues revised data in early March.  Italian FDI data are from the Bank of Italy and are the latest available; new data are released in May.


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 $420,437 100% Total Outward $557,022 100%
Luxembourg $88,638 21% Netherlands $63,550 11%
Netherlands $80,143 19% Luxembourg $47,074 9%
France $70,327 17% Germany $43,195 8%
United Kingdom $53,678 13% United States $40,279 7%
Germany $37,285 9% Spain $36,247 7%
“0” reflects amounts rounded to +/- USD 500,000.

The 2017 IMF statistics above show Italy’s largest investment partners to be within the European Union and the United States.  This is consistent with Italy being fully integrated with its EU partners and the United States. Note: Foreign direct investment data can vary widely by source, reflecting different definitions used.  End note.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Coun-tries $1,658,786 100% All Countries $1,018,524 100% All Countries $640,262 100%
Luxem-bourg $690,512 42% Luxem-bourg $665,672 65% France $104,049 16%
France $183,100 11% Ireland $131,735 13% Spain $99,870 16%
Ireland $148,185 8% France $79,051 8% United States $93,628 15%
United States $130,736 6% United States $37,108 4% Germany $61,778 10%
Spain $104,489 5% United Kingdom $32,263 3% Nether-lands $48,967 8%

The statistics above show Italy’s largest investment partners to be within the European Union and the United States.  This is consistent with Italy being fully integrated with its EU partners and the United States.

Latvia

Executive Summary

Located in the Baltic region of northeastern Europe, Latvia is a member of the EU, Eurozone, NATO, Organization for Economic Cooperation and Development (OECD), and the World Trade Organization (WTO).  The Latvian government recognizes that, as a small country, it must attract foreign investment in order to foster economic growth, and thus has pursued liberal economic policies and developed infrastructure to position itself as a transportation hub.  According to the latest World Bank’s Doing Business Report, Latvia remains ranked 19th out of 190 countries in terms of ease of doing business. As a member of the European Union, Latvia applies EU laws and regulations, and, according to current legislation, foreign investors generally possess the same rights and obligations as local investors.  Any foreign investor is entitled to establish and own a company in Latvia and may acquire a temporary residence permit.

Latvia implemented a major overhaul of its tax code in 2018.  To encourage investment, the tax reforms eliminated corporate taxes on all reinvested profits.  Profits distributed or disbursed as dividends, or used for purposes not directly related to business development are taxed at a rate of 20 percent, up from 15 percent.

There is a perceived lack of fairness and transparency in the public procurement process in Latvia.  A number of companies, including foreign companies, have complained that bidding requirements are sometimes written with the assistance of potential contractors or couched in terms that exclude all but “preferred” contractors.  Foreign investors have praised the reforms in the area of taxation and education, but remain concerned about corruption and a non-transparent or non-responsive bureaucracy and judiciary. Nonetheless, Latvia provides several advantages to potential investors, including: 

Regional Hub: Despite ongoing tensions between Russia and the European Union, Latvia remains a bridge between West and East, providing strategic access to both the EU market and to Russia and Central Asia.  Latvia’s three ice-free ports are connected to the country’s rail and road networks and to the largest international airport in the Baltic region [Riga International Airport (RIX)]. Latvia is connected to both European and Central Asian road networks.  The railroads connect Latvia with the other Baltic states, Russia, and Belarus, with further connections extending into Central Asia and China.  

Workforce: Latvia’s workforce is highly educated and multilingual, and its culture promotes hard work and dependability.  Labor costs in Latvia are the 4th lowest in the EU.

Competitive Tax system: Latvia ranked 2nd in the OECD 2018 International Tax Competitiveness Index.  To further boost its competitiveness, the Latvian government has abolished taxes on reinvested profits and has established special incentives for both foreign and domestic investment.  There are five special economic zones (SEZs) in Latvia: Riga Free Port, Ventspils Free Port, Liepaja Special Economic Zone, Rezekne Special Economic Zone, and Latgale Special Economic Zone, which provide various tax benefits for investors.  Latgale Special Economic Zone covers a large part of Latgale, which is the most economically challenged region in Latvia, bordering Russia and Belarus.  

Latvia’s GDP grew by 4.8 percent in 2018 – its fastest growth rate since 2011 and among the highest in the European Union.  Commentators attributed the increased growth rate to rising global economic growth, which contributed to increased demand for Latvian exports, and increased investment from both the private sector and EU structural funds.  The most competitive sectors in Latvia include woodworking, metalworking, transportation, IT, green tech, health care, life sciences, food processing, and finance. Recent reports suggest that some of the most significant challenges investors encounter in Latvia are demography, access to labor, and healthcare.  

The non-resident banking sector has come under increased regulatory scrutiny in recent years because of inadequate compliance with anti-money laundering (AML) provisions.  In the last three years, Latvia’s Financial and Capital Markets Commission has cancelled one bank’s operating licenses and has levied large fines against other banks for failure to comply with AML requirements.  On February 13, 2018, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) identified Latvia’s third-largest bank as a “foreign bank of primary money laundering concern” and issued a proposed rule cutting the bank off from the U.S. financial system.  On August 23, 2018, MONEYVAL, a Council of Europe agency that assesses member states’ compliance with AML standards, issued a report that found Latvia deficient in several assessment categories. The Government of Latvia has been working to restore confidence in its financial institutions and has proposed several pieces of reform legislation.  MONEYVAL plans to assess this progress by the end of 2019.  

The chart below shows Latvia’s ranking on several prominent international measures of interest to potential investors.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 41 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2018 19 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 34 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 USD 71 million  U.S. Bureau of Economic Analysis
World Bank GNI per capita 2017 USD 14,740 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=LV

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Latvian government actively encourages foreign direct investment (FDI) and works with investors to improve the country’s business climate.  To strengthen these efforts, the Latvian government introduced the POLARIS process (http://www.liaa.gov.lv/en/invest-latvia/investment-services-and-contacts/polaris-process  ), a mechanism designed to create an alliance between the public sector (including national and local governments), the private sector (including national and international companies), and major Latvian academic and research institutions to encourage FDI and spur economic growth.  The Latvian government also meets annually with the Foreign Investors Council in Latvia (FICIL), which represents large foreign companies and chambers of commerce, with the express purpose of improving the business environment and encouraging foreign investment. The Coordination Council for Large and Strategically Important Investment Projects is chaired by the Prime Minister.  In January 2019, FICIL published its Sentiment Index 2018 – a survey of current foreign investors on the investment climate in Latvia. It is available at: https://www.ficil.lv/wp-content/uploads/2019/01/FICIL-Sentiment-Index-2018-report_eng.pdf .

Limits on Foreign Control and Right to Private Ownership and Establishment

In March 2017, Latvia passed legislation that, on the basis of national security concerns, requires governmental approval prior to transfers of significant ownership interests in the energy, telecommunications, and media sectors.  Latvia reserves the right to enact policies and legislation that discriminates against foreign investors in the following areas: control of defense industries; manufacturing and sale of narcotics, weapons and explosives; control of newspaper, television and radio broadcasting stations, or news agencies; recovery of all renewable and non-renewable natural resources including resources found on the continental shelf; fishing; hunting; air transportation services and port management; ownership and control of land; brokerage or real property; gambling and lotteries; private security and surveillance services; auditing services; the cross-border provision of banking and financial services; and the cross-border provision of insurance and private pension services.  

With these limited exceptions, physical and legal persons who are citizens of Latvia or of other EU countries may freely purchase real property.  In general, physical and legal persons who are citizens of non-EU countries (third-country nationals) may also freely purchase developed real property.  However, third-country nationals may not directly purchase certain types of agricultural, forest, and undeveloped land. Such persons may acquire ownership interest in such land through a company registered in the Register of Enterprises of the Republic of Latvia, provided that more than 50 percent of the company is owned by: (a) Latvian citizens and/or Latvian governmental entities; and/or (b) physical or legal persons from countries with which Latvia signed and ratified an international agreement on the promotion and protection of investments on or before December 31, 1996; or for agreements concluded after this date, so long as such agreements provide for reciprocal rights to land acquisition.  The United States and Latvia have such an agreement (a bilateral investment treaty in force since 1996). In addition, foreign investors can lease land without restriction for up to 99 years. In 2014 changes in the Law on Land Privatization in Rural Areas allowed EU citizens to purchase Latvia’s agricultural land and forests. Other restrictions apply (to both Latvian citizens and foreigners) regarding the acquisition of land in Latvia’s border areas, Baltic Sea and Gulf of Riga dune areas, and other protected areas.  

In May 2017, the President of Latvia promulgated the amendments to the Law on Land Privatization in Rural Areas to simplify and clarify the process for local farmers to purchase land.  The law, however, prohibits foreigners who are not permanently residing in Latvia from purchasing agricultural land. It additionally requires that any person who wishes to purchase agricultural land must possess knowledge of the Latvian language at a level sufficient to present their plan for the future agricultural use of the land in Latvian.  

The Latvian constitution guarantees the right to private ownership.  Both domestic and foreign private entities have the right to establish and own business enterprises and engage in all forms of commercial activity, except those expressly prohibited by law.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) published an Economic Survey of Latvia in September 2017 (http://www.oecd.org/economy/surveys/economic-survey-latvia.htm  ).  Although there have been no trade policy reviews specifically involving Latvia, the WTO completed its latest review of the European Union in July 2017.  (https://www.wto.org/english/tratop_e/tpr_e/tp457_e.htm  ).  Additionally, in October 2017, the World Bank published a review of Latvia’s tax system (http://documents.worldbank.org/curated/en/587291508511990249/Latvia-tax-review  )).  Previously, the World Bank carried out a similar review of Latvia’s port infrastructure in 2013 (http://www.worldbank.org/en/news/press-release/2013/11/27/world-bank-reviews-competitiveness-of-latvian-ports  ).

Business Facilitation

Latvia has implemented special legislation to encourage startup ventures through favorable tax treatment.  For more information please see here: http://www.liaa.gov.lv/en/invest-latvia/start-up-ecosystem   and here: https://labsoflatvia.com/en/resources  .  

The official website of the Latvian Commercial Register has been fully revised and now provides detailed information in English on business registration process in Latvia – https://www.ur.gov.lv/en/  .  The World Bank’s Doing Business project has performed a detailed review of the business registration process in Latvia, which is available here: http://www.doingbusiness.org/data/exploreeconomies/latvia/#starting-a-business  .

In addition, the Latvian Investment and Development Agency has prepared a guide with step-by-step information on starting a business in Latvia: http://www.liaa.gov.lv/en/trade/market-entry/business-forms-and-registration  .  The agency prides itself on the fact that a business can be registered in Latvia in a single day.

Using the European Commission definitions of micro-, small-, and medium- enterprises (MSMEs), Latvia has established a special tax regime for micro-enterprises.  Under the micro-enterprise tax, qualifying businesses (those employing up to five employees and with less than 40,000 euros in revenue) pay a single tax that covers social security contributions, personal income tax, and business risk tax for employees, and includes corporate income tax if the micro- business taxpayer is a limited liability company.  This special tax regime is available to foreign nationals. For additional details on the micro-enterprise tax, see: https://www.vid.gov.lv/en/node/57223  

Outward Investment

The Latvian government does not incentivize outward investment or restrict Latvians from investing overseas.

2. Bilateral Investment Agreements and Taxation Treaties

Latvia and the United States share a bilateral investment treaty that came into force in December 1996.  Latvia has also concluded bilateral investment agreements with Armenia, Austria, Azerbaijan, Belarus, BLEU (Belgium-Luxembourg Economic Union), Bulgaria, Canada, China, Croatia, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, India, Israel, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Lithuania, Moldova,  Netherlands, Norway, Poland, Portugal, Romania, Singapore, Slovakia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom, Uzbekistan, and Vietnam.  

Latvia has concluded the Treaty on Avoidance of Double Taxation with the United States, which entered into force on December 30, 1999.

3. Legal Regime

Transparency of the Regulatory System

The Latvian government has amended its laws and regulatory procedures in an effort to bring Latvia’s legislation in compliance with the EU and WTO GPA requirements.  A number of legislative changes aimed at increasing the transparency of the Latvian business environment and regulatory system. However, the massive legislative changes carried out in a short period of time have led to some laws and regulations that could be subject to conflicting interpretations.  The Latvian government has developed a good working relationship with the foreign business community (through FICIL) to streamline various bureaucratic procedures and to address legal and regulatory issues as they arise. Additional information on the regulatory system in Latvia is available here: http://rulemaking.worldbank.org/en/data/explorecountries/latvia  .

International Regulatory Considerations

As a member state of the EU, Latvia has incorporated European norms and standards into its regulatory system.  As a WTO member, Latvia has the duty to notify all draft technical regulations to the WTO Committee on Technical Barriers to Trade.  As an EU member, Latvia is a signatory to the WTO Trade Facilitation Agreement.

Legal System and Judicial Independence

Under the 1993 Law on Judicial Power, Latvia has a three-tier court system comprising district (city) courts, regional courts, and the Supreme Court.  In addition, the Constitutional Court reviews the compatibility of decrees and acts of the President of the Republic, the government, and local authorities with the constitution and the law.  Unless otherwise stipulated by law, district courts are the courts of first instance in all civil, criminal, and administrative cases. Regional courts have appellate jurisdiction over district court cases and original jurisdiction for certain cases specified in the Civil Code, such as cases on the protection of patent rights, trademarks, and geographical indications, as well as cases on the insolvency and liquidation of credit institutions.  The Supreme Court is the highest-level court in Latvia and – depending on the origin of the case – either has de novo review of both factual and legal findings or, in instances where it is the second appellate court reviewing a case, cassation review of only legal findings.

City and regional courts are administered by the Ministry of Justice (www.tm.gov.lv  ), while the Supreme Court and Constitutional Court are independent.  

Many observers have voiced concerns about the length of civil cases in Latvia, and the nature and opacity of judicial rulings have led some investors to question the fairness and impartiality of some judges.  These concerns are not specific to foreign or local investors, however, and the court system is generally viewed as applying the law equally to the interests of foreign and local investors. Although the Ministry of Justice has enacted reforms designed to reduce the backlog of cases in the lower courts, the judicial system could benefit from additional measures to accelerate the adjudication of cases, to strengthen the enforcement of court decisions, and to upgrade professional standards.

Laws and Regulations on Foreign Direct Investment

Foreign investment in Latvia is regulated by the Commercial Law.  The website of the Latvian Investment and Development Agency is a helpful resource for navigating the rules and procedures governing foreign investment (http://www.liaa.gov.lv/en/invest-latvia/investor-business-guide/operating-environment   ).

Competition and Anti-Trust Laws

Competition-related concerns are supervised by the Competition Council (CC).  More information can be accessed at: http://www.kp.gov.lv/en  

Expropriation and Compensation

Cases of expropriation of private property by the Government of Latvia are extremely rare.  Expropriation of foreign investment is possible in a very limited number of cases specified in the Law on Expropriation of Real Property for Public Interest.  If the owner of the property claimed by the government deems the compensation inadequate, he or she may challenge the government’s decision in a Latvian court.

Dispute Settlement

ICSID Convention and New York Convention

Latvia has been a member of the International Center for the Settlement of Investment Disputes (ICSID) since 1997 and a member of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards since 1992.  Judgments of foreign arbitral tribunals that are made in accordance with either can therefore be enforced in Latvia. The Civil Procedure Law stipulates that the judgments of foreign non-arbitral courts can be enforced in Latvia.

Investor-State Dispute Settlement

There have been no claims to date against Latvia by U.S. investors under the Bilateral Investment Treaty.

On December 22, 2017, the World Bank’s International Center for Settlement of Investment Disputes (ICSID) ruled that Latvia had violated its bilateral investment treaty with Lithuania and ordered Latvia to pay 3.7 million euros to a Lithuanian energy company in a dispute over the nationalization of a heating and hot water supply system.  According to a local law firm, this is the first decision on the merits in an ICSID case against the Republic of Latvia. More information is available here: http://investmentpolicyhub.unctad.org/ISDS/Details/478  

International Commercial Arbitration and Foreign Courts

On January 1, 2015, the Law on Arbitration Courts came into force to regulate the establishment and operation of local arbitration courts in Latvia.  According to the information available in the register, there are 72 arbitration institutions registered in Latvia (https://www.ur.gov.lv/lv/registre/organizaciju/skirejtiesas/skirejtiesu-saraksts/  ).  In most commercial agreements, parties opt to refer their disputes to arbitration rather than to the Latvian courts.  

The Civil Procedure Law, which came into force on March 1, 1999, contains a section on arbitration courts.  This section was drafted on the basis of the United Nationals Commission on International Trade Law (UNCITRAL) model, thus providing full compliance with international standards.  The law also governs the enforcement of rulings of foreign non-arbitral courts and foreign arbitrations. The full text of the law in English can be found here: https://likumi.lv/ta/en/id/50500-civil-procedure-law  

Bankruptcy Regulations

There are two laws governing bankruptcy procedure:  the Law on Insolvency and the Law on Credit Institutions (regulating bankruptcy procedures for banks and other financial sector companies).

According to the latest World Bank’s Doing Business Report Latvia ranked 54th out of 190 countries in terms of ease of resolving insolvency.  More information is available here: http://www.doingbusiness.org/data/exploreeconomies/latvia#resolving-insolvency  

The business community has expressed concerns over inefficiency and allegations of corruption in Latvia’s insolvency administration system.  The Foreign Investors Council in Latvia has prepared a position paper on the system, which is accessible here: https://www.ficil.lv/wp-content/uploads/2017/04/16-04-06-FICIL-Insolvency-Abuse.pdf 

7. State-Owned Enterprises

Private enterprises may compete with public enterprises on the same terms and conditions with respect to access to markets, credit, and other business operations such as licenses and supplies.  The Latvian government has implemented the requirements of the EU’s Third Energy Package with respect to the electricity sector, including opening the electricity market to private power producers and allowing them to compete on an equal footing with Latvenergo, the state-owned power company.  The country’s natural gas market has also been liberalized, creating competition among privately owned gas suppliers.

SOEs are active in the energy and mining, aerospace and defense, services, information and communication, automotive and ground transportation, and forestry sectors.  

Latvia as a member of the EU is a party to the Government Procurement Agreement within the framework of the World Trade Organization, and SOEs are covered under the agreement.  

Detailed information on Latvian SOEs is available in the OECD Review of the Corporate Governance of State-Owned Enterprises in Latvia, which is available here:  http://www.oecd.org/daf/ca/oecd-review-corporate-governance-soe-latvia.htm  .

Senior managers of major SOEs in Latvia report to independent boards of directors, which in turn report to the line ministries.  Since January 2015, SOEs are operating under the law, On Public Persons Enterprises and Capital Shares Governance. The law also establishes an entity that coordinates state enterprise ownership and requires annual aggregate reporting.  Detailed information on Latvian SOEs is available here: http://www.valstskapitals.gov.lv/en/  

For additional information please see here: http://www.oecd.org/latvia/corporate-governance-in-latvia-9789264268180-en.htm  . 

Privatization Program

The Law on Privatization of State and Municipal Property governs the privatization process in Latvia.  The Latvian Privatization Agency (LPA), established in 1994, uses a case-by-case approach to determine the method of privatization for each state enterprise.  The three allowable methods are: public offering, auction for selected bidders, and international tender. For some of the largest privatized companies, a percentage of shares may be sold publicly on the NASDAQ OMX Riga Stock Exchange.  The government may maintain shares in companies deemed important to the state’s strategic interests. Privatization of small and medium-sized state enterprises is considered to be largely complete. 

Latvian law designates six State Joint Stock Companies that cannot be privatized:  Latvenergo (Energy and Mining), Latvijas Pasts (Services), Riga International Airport, Latvijas Dzelzcels (Automotive and Ground Transportation), Latvijas Gaisa Satiksme (Aerospace and Defense), and Latvijas Valsts Mezi (Forestry).  Other large companies in which the Latvian government holds a controlling interest include airBaltic (Travel), Lattelecom (Information and Communication), Latvian Mobile Telephone (Information and Communication), Conexus Baltic Grid (Energy).  While Latvia sold a 20 percent stake in national carrier airBaltic to a private investor in early 2016, the government to date has not been successful in finding a strategic investor for the airline.

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)  2018 EUR 29,500 2017 $ 30,200  https://data.worldbank.org/country/latvia    
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) 2018 EUR 161    2017 $ 174  http://data.imf.org/regular.aspx?key=61227424  
Host country’s FDI in the United States (stock positions) 2018 EUR 104     2017 USD 0 http://data.imf.org/regular.aspx?key=61227424  
Total inbound stock of FDI as % host GDP 2018 51.2% 2017 62% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx    http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Annex-Tables.aspx     

* Source for Host Country Data: http://www.fm.gov.lv/en/s/macroeconomics/main_macroeconomic_indicators/    https://statdb.bank.lv    


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 17,467 100% Total Outward 1,902 100%
Sweden 3,019 17.28% Lithuania 461 24.23%
Russian Federation 1,845 10.56% Estonia 227 11.93%
Estonia  1,539 8.81% Russian Federation 124 6.51%
Cyprus* 1,472 8.42% Luxembourg 118 6.20%
Netherlands 1,454 8.32% Netherlands 118 6.20%
“0” reflects amounts rounded to +/- USD 500,000.

*Cyprus is considered a tax haven and it is believed that the ultimate source of this inward FDI is primarily Russia. 


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 15,906 100% All Countries 3,075 100% All Countries 12,825 100%
International Organizations  5,526 34.74% Luxembourg 1,583 51.47% International Organizations 5,490 42.80%
Luxembourg* 3,471 21.82% Ireland 944 30.69% Luxembourg* 1,887 14.71%
Ireland 1,265 7.95% Germany 114 3.70% Lithuania 635 4.95%
Lithuania 675 4.24% Estonia 100 3.25% France 619 4.82%
France 645 4.05% United States 75 2.43% Spain 557 4.34%

*Luxembourg is considered a tax haven and it is believed that the ultimate source of this portfolio investment is primarily Russia.

Lithuania

Executive Summary

Lithuania is strategically situated at the crossroads of Europe and Eurasia.  It offers investors a diversified economy, EU rules and norms, a well-educated multilingual workforce, advanced IT infrastructure, low inflation, and a stable democratic government.  The Lithuanian economy has been growing steadily since the 2009 economic crisis. The country joined the Eurozone in January 2015, and completed the accession process for the Organization for Economic Cooperation and Development (OECD) in May 2018.  Lithuania’s income levels are lower than in most of the EU, with per capita GDP (at purchasing power parity) of approximately 45.8 percent of the EU average. According to preliminary data from the Lithuanian Statistics Department, at the end of 2018, the United States was Lithuania’s 15th largest investor, with cumulative investments totaling USD 337.9 million (1.8 percent of total FDI).

Following its election at the end of 2016, the current Lithuanian government focused on lowering barriers to investment, partnering with the private sector, and offering financial incentives for investors.  In 2013, the government passed legislation which streamlined land-use planning, saving investors both time and money, and in July 2017, the government introduced the new Labor Code which is believed to better balance the interests of both employees and employers.

The government provides equal treatment to foreign and domestic investors, and sets few limitations on their activities.  Foreign investors have the right to repatriate or reinvest profits without restriction, and can bring disputes to the International Center for the Settlement of Investment Disputes.  Lithuania offers special incentives, such as tax concessions, to both small companies and strategic investors. Incentives are also available in seven Special Economic Zones located throughout the country.

U.S. executives report burdensome procedures to obtain business and residence permits, as well as some instances of low-level corruption in government.  Transportation barriers, especially insufficient air links with European cities, remain a hindrance to investment, as does the lack of access to open, transparent information on tax collection and government procurement.  Energy costs in Lithuania are declining as a result of energy source diversification upgrades and lower global oil prices.

Lithuania offers many investment opportunities in most of its economy sectors.  The sectors which attracted most investment include Information and Communication Technology, Biotech, Metal Processing, Machinery and Electrical Equipment, Plastics, Furniture, Wood Processing and Paper Industry, Textiles and Clothing.  Lithuania also offers opportunities for investment in the growing sectors of Real Estate and Construction, Business Process Outsourcing (BPO), Shared Services, Financial Technologies, Biotech, and Lasers.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 38 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 14 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 40 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2018 $154 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2018 $15,200 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Lithuania’s laws assure equal protection for both foreign and domestic investors.  No special permit is required from government authorities to invest foreign capital in Lithuania.  State institutions have no right to interfere with the legal possession of foreign investors’ property.  In the event of justified expropriation, investors are entitled to compensation equivalent to the market value of the property expropriated.  The law obligates state institutions and officials to keep commercial secrets confidential and requires compensation for any loss or damage caused by illegal disclosure.  As a member of European Union, Lithuania is subject to WTO investment requirements. Invest Lithuania is the government’s principal institution dedicated to attracting foreign investment.  It serves as a one-stop-shop to: provide information on business costs, labor, tax and legal considerations, and other business concerns; facilitate the set up and launch of a company; provide help in accessing government financial support; and, advocate on behalf of investors for more business friendly laws.  In addition to its offices in Vilnius and major Lithuanian cities, Invest Lithuania has representative offices in Belgium, Kazakhstan, and the United States (Chicago). Every year the government holds a conference with foreign investors to discuss their concerns and ways to improve investment climate in Lithuania.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investors have the right to repatriate profits, income, or dividends, in cash or otherwise, or to reinvest the same without any limitation, after paying taxes.  The law establishes no limits on foreign ownership or control. Foreign investors have free access to all sectors of the economy with some limited exceptions:

  1. The Law on Investment prohibits investment of foreign capital in sectors related to the security and defense of the State.
  2. The Law on Investment also requires government permission and licensing for commercial activities that may pose risks to human life, health, or the environment, including the manufacturing of, or trade in, weapons.
  3. As of May 2014, foreign citizens are allowed to buy agricultural or forest land.

The Law on Investment specifically permits the following forms of investment in Lithuania:

  • establishment of an enterprise or acquisition of a part, or the whole, of the authorized capital of an operating enterprise registered in Lithuania;
  • acquisition of securities of any type;
  • creation, acquisition, and increase in the value of long-term assets;
  • lending of funds or other assets to business entities in which the investor owns a stake, allowing control or considerable influence over the company; and
  • performance of concession or leasing agreements.
  • Foreign entities are allowed to establish branches or representative offices.  There are no limits on foreign ownership or control. Foreign investors can contribute capital in the form of money, assets, or intellectual or industrial propertyThe State Property Bank screens the performance record and size of companies bidding on state or municipal property and has halted privatizations when it determined that the bidders were not suitable, i.e., for criminal or other reasons.

In 2018, the Lithuanian parliament passed a new edition of the law on the Protection of Objects Important to National Security.  The law is aimed at enforcing additional safeguards to avoid threats related to investments into companies of strategic national importance, thus requiring a special government commission to screen investments in identified strategic sectors.

Other Investment Policy Reviews

http://www.oecd.org/countries/lithuania/economic-survey-lithuania.htm  

Business Facilitation

The process of company registration in Lithuania involves the following steps that can be accomplished online at http://www.registrucentras.lt/en/  :

  1. Check and reserve the name of the company (limited liability company).  It takes about one day and costs approximately EUR 16.
  2. Register at the Company Register, including registration with State Tax Inspectorate (the Lithuanian Revenue Authority) for corporate tax, VAT, and State Social Insurance Fund Board (SODRA).  It takes one day and costs approximately EUR 57.
  3. Complete VAT registration.  It takes three days to complete at no charge.

Outward Investment

The Lithuanian government neither incentivizes nor restricts outward investment.

2. Bilateral Investment Agreements and Taxation Treaties

Lithuania has concluded 50 bilateral treaties concerning the promotion and mutual protection of investments.  Usually such treaties establish a more favorable investment treatment on a mutual basis. Most of the treaties on investment promotion and protection do not provide for Lithuania to expand treatment, incentives, or privileges relating to regulated investments provided for in a common market, customs union, economic union, free trade zone or a regional economic development agreement that the country belongs to or may belong in the future, or to expand the provisions of a current or future agreement regarding double taxation with a third country.  The U.S. has had a bilateral investment treaty (BIT) with Lithuania since 2001.

Lithuania has also concluded around 50 bilateral tax treaties, including with the U.S., to avoid double taxation of income and capital and to prevent tax evasion.  These treaties provide certain tax benefits for foreign investment in Lithuania. More information on treaties is available at: http://investmentpolicyhub.unctad.org/IIA/CountryBits/121  ; http://taxguide.lt/double-tax-avoidance-treaties-network/  

3. Legal Regime

Transparency of the Regulatory System

The regulatory system remains a challenge for some investors.  Local business leaders report that bureaucratic procedures often are not user-friendly and that the interpretation of regulations is inconsistent and unclear.  Businesses and private individuals complain of low-level corruption, including in the process of awarding government contracts and the granting of licenses and permits.  Businesses also note that they would like to have more opportunity to consult with lawmakers regarding new legislation and that new legislation sometimes appears with little advance notice.

However, the government is making efforts to improve transparency using technology.  For example, the parliament’s website contains all draft legislation, and public tenders must be published electronically in a central database.  Ministries also post many, but not all, draft laws under consideration. All government procurement tenders are required to be posted on-line in a centralized database.  In March 2014, Transparency International released a report recommending new laws aimed at protecting whistle-blowers, encouraging lobbying transparency, preventing and controlling conflicts of interest, and increasing transparency in political party funding.  Some of the recommendations have already been addressed by introducing a whistleblower protection law and a new law on lobbying in 2017. The World Bank’s Doing Business Report ranked Lithuania 14th out of 190 in 2018. Lithuania scored especially high in the categories of Registering Property (3rd), Enforcing contracts (7th) Dealing with Construction Permits (7th) and Starting a Business (31st).  It did less well in the categories of Resolving Insolvency (85th) and Getting Credit (44th).

International Regulatory Considerations

Since May 1, 2004, in accordance with its European Union membership, Lithuania has applied European Union trade policies, such as antidumping or anti-subsidy measures.  The European Union import regime applies to Lithuania. The country is a member of the WTO and it notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

The Lithuanian legal system stems from the legal traditions of continental Europe and complies with the EU’s acquis communautaire.  New laws enter into force upon promulgation by the President (or in some cases the Speaker of the parliament) and publication in the official gazette, Valstybes Zinios (State News).  Several possibilities exist for commercial dispute resolution.  Parties can settle disputes in local courts or in the increasingly popular independent, i.e., non-governmental, Commercial Court of Arbitration.  Lithuania also recognizes arbitration judgments by foreign courts. Domestic courts generally operate independently of government influence. Lithuania’s EU membership has given foreign firms the additional right to appeal adverse court rulings to the European Court of Justice.

The Lithuanian court system consists of courts of general jurisdiction that deal with civil and criminal matters, and includes the Supreme Court, the Court of Appeals, District Courts, and local courts.  In 1999, Lithuania established a system of administrative courts to adjudicate administrative cases, which generally involve disputes between government regulatory agencies and individuals or organizations.  The administrative court system consists of the High Administrative Court and District Administrative Courts.

The Constitutional Court of Lithuania is a separate, independent judicial body that determines whether laws and legal acts adopted by the parliament, president, and the government violate the Constitution.

Laws and Regulations on Foreign Direct Investment

Lithuanian law provides that foreign entities may establish branches or representatives offices, and there are no limits on foreign ownership or control.  A foreigner may hold a majority interest in a local company in Lithuania. However, there are some areas of the economy where investment is limited, such as in sectors related to national security and defense of the State, and licensing is necessary for activities related to human life and health, or which are deemed potentially risky.  The national investment promotion agency Invest Lithuania provides a detailed overview of the relevant laws and regulations on foreign investment. http://www.investlithuania.com  

Competition and Anti-Trust Laws

There is a domestic Competition Council, which is responsible for the prevention of competition law violations.  For more information: http://kt.gov.lt/en/index.php  

Expropriation and Compensation

Lithuanian law permits expropriation on the basis of public need, but requires compensation at fair market value in a convertible currency.  The law requires payment of compensation within three months of the date of expropriation in the currency the foreign investor requests. The compensation must include interest calculated from the date of publication of the notice of expropriation until the payment of compensation.  The recipient may transfer this compensation abroad without any restrictions. There have been no cases of expropriation of private property by the Lithuanian government since 1991. There is an ongoing process to restitute property expropriated during World War II and the Soviet occupation.  While the Lithuanian government returned most of this property, including Jewish communal property, in 2011, private property restitution remains incomplete.

Dispute Settlement

ICSID Convention and New York Convention

Lithuania is a member state to the International Centre for the Settlement of Investment Disputes (ICSID) Convention.  It is also a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).  Lithuania law recognizes and enforces arbitral body decisions

Investor-State Dispute Settlement

According to Lithuanian law, State owned enterprises (SOE) have no privileges in conducting business, competing for supply, and/or in implementing projects, enforcing contracts, and accessing finance.  While Baltic Institute for Corporate Governance (BICG) reports suggest that there have been cases of SOE executives extracting benefits for their own personal gain by way of guided tenders, exercising favoritism when selecting providers of goods or services, or giving business to friends and family members, the Embassy has no records of complaints from either foreign or domestic companies regarding the outcome of dispute settlement cases with state companies.

International Commercial Arbitration and Foreign Courts

According to the Lithuanian Arbitration Court, the arbitration process should be completed within six months, but depending on the complexity of a dispute and with the agreement of both parties, this period can be extended.  Also, before a process starts, the Arbitration Court has 30 days to decide if it will accept the dispute and three months to prepare all the needed materials for the arbitration process. Decisions of the Lithuanian Arbitration Court may be appealed to international institutions, such as the International Court of Arbitration.

Bankruptcy Regulations

Lithuania passed the current Enterprise Bankruptcy Law in 2001 This law applies to all enterprises, public establishments, commercial banks, and other credit institutions registered in Lithuania.  The law provides a mechanism to override the provisions of other laws regulating enterprise activities, assuring protection of creditors’ rights, recovery of debts, and payment of taxes and other mandatory contributions to the State.  This law establishes the following order of creditors’ claims: claims by creditors that are secured by a mortgage/pledge of debtor; claims related to employment; tax, social insurance, and state medical insurance claims; claims arising from loans guaranteed or issued on behalf of the Republic of Lithuania or its government; and other claims.  Bankruptcy can be criminalized in cases of intentional bankruptcy. The Law on the Bankruptcy of Natural Persons was introduced in Lithuania in 2013. The World Bank’s Ease of Doing Business survey ranks Lithuania 85th in the category of “resolving insolvency.”

7. State-Owned Enterprises

At the beginning of 2017, the Lithuanian government was majority or full owner of 131 enterprises, although throughout 2017, the government has consolidated many duplicative state-owned enterprises (SOEs) in response to OECD recommendations.  The SOE sector is valued at approximately USD 5.6 billion and employs just over 42,000 people. The greatest number of SOEs by value are found in the electricity and gas sector (38 percent), followed by transportation (36 percent) and extractive industries including fishing, farming, and mining (21 percent).  The transportation sector (which in Lithuania’s definition includes the postal service) accounts for over half of all SOE employment, followed by the electricity and gas sectors, which accounts for about one fifth. The largest SOE employers are Lithuanian Railways, Lithuanian Energy, and Lithuanian Post, which collectively employ over 23,000 people.

In response to OECD recommendations issued during Lithuania’s accession process, the government passed several laws to reform SOE governance, addressing such issues as the hiring, firing, and oversight of top management, the introduction of independent board members to professionalize and depoliticize SOE boards and strengthen independent and pragmatic decision making, and a requirement for SOE CEOs to certify financial statements. A list of SOEs is available at the Governance Coordination Center site: https://vkc.sipa.lt/apie-imones/vvi-sarasas/ 

Privatization Program

The government has privatized most state enterprises and property, with foreign investors purchasing the majority of state assets privatized since 1990.  These include companies in the banking and transportation sectors. Some foreign companies have complained about a lack of transparency or discrimination in certain privatization transactions.  Major assets still under government control include the railway company (Lietuvos Gelezinkeliai), Lithuania’s three international airports (Vilnius, Kaunas, and Klaipeda), Lithuanian post (Lietuvos Pastas), as well as energy companies controlled by Lietuvos Energija holding company.

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) ($Billion USD) 2018 $56 2017 $58 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $337.9 2017 $159 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2018 $14.4 2017 N/A 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 32% 2017 41% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx    

* Source for Host Country Data: Lithuanian 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 $17,769 100% Total Outward $3,531 100%
Sweden #1 $4,123 23.2% Netherlands #1 $852 24.1%
Netherlands #2 $2,364 13.3% Cyprus #2 $699 19.7%
Cyprus #3 $1,317 7.4% Latvia #3 $526 14.89%
Germany #4 $1,297 7.2% Poland #4 $372 10.5%
Poland #5 $1,069 6% Estonia #5 $365 10.3%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $9,976 100% All Countries $2,826 100% All Countries $7,150 100%
Luxembourg $1,190 11.9% Luxembourg $1,151 40.7% Latvia $299 4.1%
Ireland $1,111 11.1% Ireland $1,078 38.1% Netherlands $189 2.6%
Latvia $314 3.1% United States $99 3.5% Poland $146 2%
Sweden $164 1.6% Estonia $94 3.3% Sweden $122 1.7%
Poland $151 1.5% Germany  $57 2% Germany $112 1.6%

Luxembourg

Executive Summary

Luxembourg, the only Grand Duchy in the world, is a landlocked country in northwestern Europe surrounded by Belgium, France, and Germany.  Despite its small landmass and small population (614,000), Luxembourg is the second-wealthiest country in the world when measured on a Gross Domestic Product (GDP) per capita basis.

Since 2002, the Luxembourg Government has proactively implemented policies and programs to support economic diversification and to attract foreign direct investment.  The Government focused on key innovative industries that showed promise for supporting economic growth: logistics, information and communications technology (ICT), health technologies including biotechnology and biomedical research; clean energy technologies, and most recently, space technology and financial services technologies.

While the economy has evolved and flourished, its 2018 GDP did not grow as strongly as projected.  However, the economy did post a GDP growth rate of 2.6 percent, higher than the EU average of 2 percent.  The Luxembourg government projects a growth rate of 3 percent in 2019. Luxembourg offers a diverse and stable platform and outsized growth potential for a wide variety of U.S. investments and trade within the EU and beyond.

Luxembourg remains a financial powerhouse thanks to the exponential growth of the investment fund sector through the launch and development of cross-border funds (UCITS) in the 1990s.  Luxembourg is the world’s second-largest investment fund asset domicile, after only the United States, with USD 5 trillion of assets in custody in financial institutions.

Luxembourg is consistently ranked as one of the world’s most open and transparent economies and has no restrictions on foreign-ownership.  It is also consistently ranked as one of the world’s most competitive and least-corrupt economies.

Luxembourg ranks as the world’s safest city in the Mercer city index.

Over the past decade, Luxembourg has adopted major fiscal reforms to counter money-laundering, terrorist-financing, and tax evasion.

The Government of Luxembourg actively supports the development of new sectors in an effort to diversify the country’s economy, given the dominance of the financial sector.  Target sectors include space, logistics, and information technology, including financial technology and biomedicine.

Luxembourg launched its SpaceResources.lu initiative in 2016 and in 2017 announced a fund offering financial support for the space resources industry.  More than 50 companies dedicated to space initiatives are now active in Luxembourg.

Luxembourg has positioned itself as “the gateway to Europe” to establish European company headquarter operations by virtue of its central European location and advanced road, railway, and air connectivity.  Due to unc