FDI has historically played an essential role in China’s economic development. Chinese government officials have prioritized promoting relatively friendly FDI policies promising market access expansion and non-discriminatory, “national treatment” for foreign enterprises through general improvements to the business environment.  They also have made efforts to strengthen China’s regulatory framework to enhance broader market-based competition.

In 2020, China issued an updated nationwide “negative list” that made some modest openings to foreign investment, most notably in the financial sector, and promised future improvements to the investment climate through the implementation of China’s new FIL.  MOFCOM reported FDI flows grew by 4.5 percent year-on-year, reaching USD144 billion.  In 2020, U.S. businesses expressed concern over China’s COVID-19 restrictive travel restrictions, excessive cyber security and personal data-related requirements, increased emphasis on the role of CCP cells in foreign enterprises, and an unreliable legal system.  See the following: HYPERLINK “https://www.amchamchina.org/white_paper/2020-american-business-in-china-white-paper/” t “_blank” American Chamber of Commerce China 2020 American Business in China White Paper

• American Chamber of Commerce China 2020 American Business in China White Paper
• American Chamber of Commerce China 2020 Business Climate Survey

Limits on Foreign Control and Right to Private Ownership and Establishment

Entry into the Chinese market is regulated by the country’s “negative lists,” which identify the sectors in which foreign investment is restricted or prohibited, and a catalogue for encouraged foreign investment, which identifies the sectors in which the government encourages investment.

• (the “FTZ Negative List”) used in China’s 20 FTZs and one free trade port.
• (̈the “Nationwide Negative List”) came into effect on June 23, 2020.
•  released on December 27, 2020.  The PRC uses this list to encourage FDI inflows to key sectors, in particular semiconductors and other high-tech industries, to help China achieve MIC 2025 objectives.
• The “Encouraged list” is subdivided into a cross-sector nationwide catalogue and a separate catalogue for western and central regions, China’s least developed regions.

MOFCOM and NDRC also released on September 16 the annual  Market Access Negative List  to guide FDI. This negative list – unlike the previous lists that apply only to foreign investors – defines prohibitions and restrictions for all investors, foreign and domestic.  Launched in 2016, this list highlights what economic sectors are only open to state-owned investors.  In restricted industries, foreign investors face equity caps or joint venture requirements to ensure control is maintained by a Chinese national and enterprise.  Due to these requirements, foreign investors often feel compelled to enter into partnerships that require transfer of technology in order to participate in China’s market.  Foreign investors report fearing government retaliation if they publicly raise instances of technology coercion.

Below are a few examples of industries where these sorts of investment restrictions apply:

• Preschool to higher education institutes require a Chinese partner with a dominant role.
• Establishment of medical institutions require a Chinese JV partner.

Examples of foreign investment sectors requiring Chinese control include:

• Selective breeding and seed production for new varieties of wheat and corn.
• Basic telecommunication services and radio/television market research.

The 2020 negative lists made minor modifications to some industries, reducing the number of restrictions and prohibitions from 40 to 33 in the nationwide negative list, and from 37 to 30 in China’s pilot FTZs. Notable changes included openings in the services sector, yet most of these openings had previously been announced in 2019. In the service sector, the lists codified the removal of equity caps in financial services, eliminated requirements for investing in water and sewage systems for any city of half a million residents or fewer, and scrapped the ban on foreign investment in air traffic control.  While U.S. businesses welcomed market openings, foreign investors remained underwhelmed and disappointed by Chinese government’s lack of ambition and refusal to provide more significant liberalization.  Foreign investors noted these announced measures occurred mainly in industries that domestic Chinese companies already dominate.

Other Investment Policy Reviews

China is not a member of the Organization for Economic Co-Operation and Development (OECD), but the OECD Council established a country program of dialogue and co-operation with China in October 1995.  The OECD completed its most recent investment policy review for China in 2008 and published an update in 2013.

China’s 2001 accession to the World Trade Organization (WTO) boosted China’s economic growth and advanced its legal and governmental reforms.  The WTO completed its most recent investment trade review for China in 2018, highlighting that China remains a major destination for FDI inflows and a key market for multinational companies.

In 2020, China improved its rating in the World Bank’s Ease of Doing Business Survey to 31st place out of 190 economies.  This was partly due to regulatory reforms that helped streamline some business processes. This ranking does not account, however, for major challenges U.S. businesses face in China like IPR violations and market access.  Moreover, China’s ranking is based on data limited only to the business environments in Beijing and Shanghai.    HYPERLINK “https://www.doingbusiness.org/en/rankings?region=east-asia-and-pacific” t “_blank” World Bank Ease of Doing Business

• World Bank Ease of Doing Business

Created in 2018, the State Administration for Market Regulation (SAMR) is now responsible for business registration processes.  Under SAMR’s registration system, investors in sectors outside of the Foreign Negative List are required to report when they (1) establish a Foreign Invested Enterprise (FIE); (2) establish a representative office in China; (3) acquire stocks, shares, assets or other similar equity of a domestic Chinese company; (4) re-invest and establish subsidiaries in China; and (5) invest in new projects.  While an improvement relative to previous requirements for similar activities to require regulatory approval, foreign companies still complain about continued challenges when setting up a business relative to their Chinese competitors. Many companies offer consulting, legal, and accounting services for establishing operations in China. Investors should review their options carefully with an experienced advisor before investing.

 Outward Investment

Since 2001, China has pursued a “going-out” investment policy.  At first, the PRC mainly encouraged SOEs to invest overseas but in recent years, China’s overseas investments have diversified with both state and private enterprises investing in nearly all industries and economic sectors.  While China remains a major global investor, total outbound direct investment (ODI) flows fell 4.3 percent year-on-year in 2019 to USD136.9 billion, according to 2019 Statistical Bulletin of China’s Outward Foreign Director Investment .

The Chinese government also created “encouraged,” “restricted,” and “prohibited” outbound investment categories to suppress significant capital outflow pressure in 2016 and to guide Chinese investors into “more” strategic sectors. While the Sensitive Industrial-Specified Catalogue of 2018  restricted Chinese outbound investment in sectors like property, cinemas, sports teams and non-entity investment platforms, they encouraged outbound investment in sectors that supported China’s industrial policy by acquiring advanced manufacturing and high-tech assets.  Chinese firms involved in MIC 2025 sectors often receive preferential government financing and subsidies for outbound investment.  The guidance also encourages investments that promoted China’s Belt and Road Initiative (BRI), which seeks to create cooperation agreements with other countries via infrastructure investment, construction projects, etc.

Transparency of the Regulatory System

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

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

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

International Regulatory Considerations

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

Legal System and Judicial Independence

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

Laws and Regulations on Foreign Direct Investment

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

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

FDI Requirements for Investment Approvals

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

The Anti-Monopoly Bureau of the SAMR enforces China’s Anti-Monopoly Law (AML) and oversees competition issues at the central and provincial levels.  The agency reviews mergers and acquisitions, and investigates cartel and other anticompetitive agreements, abuse of a dominant market position, and abuse of administrative powers by government agencies.  SAMR also oversees the Fair Competition Review System (FCRS), which requires government agencies to conduct a review prior to issuing new and revising existing laws, regulations, and guidelines to ensure such measures do not inhibit competition. SAMR issues implementation guidelines and antitrust provisions to fill in gaps in the AML, address new trends in China’s market, and help foster transparency in enforcement. Generally, SAMR has sought public comment on proposed measures, although comment periods are sometimes less than 30 days.

In January 2020, SAMR published draft amendments to the AML for comment, which included, among other changes, stepped-up fines for AML violations and specified the factors to consider in determining whether an undertaking in the Internet sector has a dominant market position, when investigating the undertaking for abuse of market dominance. SAMR also issued four sets of AML guidelines. These guidelines addressed leniency in horizontal monopoly agreements, undertakings’ commitments to resolve Anti-Monopoly cases, the application of AML to the automobile industry, and the application of the AML to intellectual property rights. In February 2021, SAMR published (after public comment) the “Antitrust Guidelines for the Platform Economy.” The Guidelines address monopolistic behaviors of online platforms operating in China, most notably exclusionary agreements and abuses of a dominant market position. Contacts predicted the Guidelines would lead to an uptick in SAMR investigations of online platform behavior, particularly around M&A and variable interest entities.

Foreign companies have expressed concern that the government uses AML enforcement in support of China’s industrial policies, such as promoting national champions, particularly for companies operating in strategic sectors.  The AML explicitly protects the lawful operations of government monopolies in industries that affect the national economy or national security.  U.S. companies have expressed concerns that in SAMR’s consultations with other Chinese agencies when reviewing M&A transactions, those agencies raise concerns not related to antitrust enforcement in order to block, delay, or force transacting parties to comply with preconditions, including technology transfer, in order to receive approval.

Expropriation and Compensation

Chinese law prohibits nationalization of FIEs, except under vaguely specified “special circumstances” where there is a national security or public interest need. Chinese law requires fair compensation for an expropriated foreign investment but does not detail the method used to assess the value of the investment.  The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, although the Department has notified Congress through the annual 527 Investment Dispute Report of several cases of concern.

Dispute Settlement

ICSID Convention and New York Convention

China is a contracting state to the Convention on the Settlement of Investment Disputes (ICSID Convention) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).  Chinese legislation that provides for enforcement of foreign arbitral awards related to these two Conventions includes the Arbitration Law, the Civil Procedure Law, and other laws with similar provisions that have embraced many of the fundamental principles of the United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration.

Investor-State Dispute Settlement (ISDS)

Initially, China was disinclined to accept ISDS as a method to resolve investment disputes based on its suspicions of international law and arbitration, as well as its emphasis on state sovereignty. China’s early BITs, such as the 1982 China–Sweden BIT, only included state–state dispute settlement. As China has become a capital exporter under its initiative of “Going Global” and infrastructure investments under BRI, its views on ISDS have shifted to allow foreign investors with unobstructed access to international arbitration to resolve any investment dispute that cannot be amicably settled within six months. Chinese investors did not use ISDS mechanisms until 2007, and the first known ISDS case against China was initiated in 2011 by Malaysian investors. China submitted a proposal on ISDS reform to the United Nations Commission on International Trade Law (UNCITRAL) Working Group III in 2019. Under the proposal, China reaffirmed its commitment to ISDS as an important mechanism for resolving investor-state disputes under public international law. However, it suggested various pathways for ISDS reform, including supporting the study of a permanent appellate body.

International Commercial Arbitration and Foreign Courts

Chinese officials typically urge private parties to resolve commercial disputes through informal mediation.  If formal mediation is necessary, Chinese parties and the authorities typically prefer arbitration to litigation.  Many contract disputes require arbitration by the Beijing-based China International Economic and Trade Arbitration Commission (CIETAC).  Established by the State Council in 1956 under the auspices of the China Council for the Promotion of International Trade (CCPIT), CIETAC is China’s most widely utilized arbitral body for foreign-related disputes.  Some foreign parties have obtained favorable rulings from CIETAC, while others have questioned CIETAC’s fairness and effectiveness.  Besides CIETAC, there are also provincial and municipal arbitration commissions.  A foreign party may also seek arbitration in some instances from an offshore commission.  Foreign companies often encounter challenges in enforcing arbitration decisions issued by Chinese and foreign arbitration bodies.  In these instances, foreign investors may appeal to higher courts.  The Chinese government and judicial bodies do not maintain a public record of investment disputes.  The SPC maintains an annual count of the number of cases involving foreigners but does not provide details about the cases.

In 2018, the SPC established the China International Commercial Court (CICC) to adjudicate international commercial cases, especially cases related to BRI. The CICC has established three locations in Shenzhen, Xi’an, and Suzhou. As of June 2020, the courts have accepted a total of 213 international commercial cases, with most cases filed in Suzhou. Despite its international orientation, CIIC’s 16 judges are all PRC citizens and Mandarin Chinese is the court’s working language. Parties to a dispute before the CICC can only be represented by Chinese law-qualified lawyers, as foreign lawyers do not have a right of audience in Chinese courts; and unlike other international courts, foreign judges are not permitted to be part of the proceedings. Judgments of the CICC, given it is a part of the SPC, cannot be appealed from, but are subject to possible “retrial” under the Civil Procedure Law.

China has bilateral agreements with 27 countries on the recognition and enforcement of foreign court judgments, but not with the United States. Under Chinese law, local courts must prioritize the Party’s needs, China’s laws and other regulatory measures above foreign court judgments.

Bankruptcy Regulations

China introduced formal bankruptcy laws in 2007, under the Enterprise Bankruptcy Law (EBL), which applies to all companies incorporated under Chinese laws and subject to Chinese regulations.  After a decade of heavy borrowing, China’s growth has slowed and forced the government to make needed bankruptcy reforms. China now has more than 90 U.S.-style specialized bankruptcy courts. In 2020 the government added new courts in Nanjing, Suzhou, Jinan, Qingdao and Xiamen.  Court-appointed administrators – law firms and accounting firms that help verify claims, organize creditors’ meetings, list, and sell assets online – look to handle more cases and process them faster.  China’s SPC recorded over 19,000 liquidation and bankruptcy cases in 2019, double the number of cases in 2017.  National data is unavailable for 2020, but local courts have released some information that suggest an over 40 percent increase in liquidation and bankruptcy cases in cities such as Shanghai and Shandong. While Chinese authorities are taking steps to address mounting corporate debt and are gradually allowing some companies to fail, companies generally avoid pursing bankruptcy because of the potential for local government interference and fear of losing control over the bankruptcy outcome. According to experts, Chinese courts not only lack the resources and capacity to handle bankruptcy cases, but bankruptcy administrators, clerks, and judges lack relevant experience.

In May 2020, China released the Civil Code, one of the most important set of contract and property rights rules that will have a direct impact to upcoming amendments to China’s bankruptcy laws, especially the EBL. The National People’s Congress (NPC) has listed amendments to the EBL as the top work priority for 2021. In August 2020, Shenzhen released the Personal Bankruptcy Regulations of Shenzhen Special Economic Zone, to take effect on March 1, 2021. This is China’s first regulation on personal bankruptcy.

Investment Incentives

To attract foreign investment, different provinces and municipalities offer preferential packages like a temporary reduction in taxes, import/export duties, land use, research and development subsidies, and funding for initial startups.  Often, these packages stipulate that foreign investors must meet certain benchmarks for exports, local content, technology transfer, and other requirements.  However, many economic sectors that China deems sensitive due to broadly defined national or economic security concerns remain closed to foreign investment.

Foreign Trade Zones/Free Ports/Trade Facilitation

In 2013, the State Council announced the Shanghai pilot FTZ to provide open and high-standard trade and investment services to foreign companies. China gradually scaled up its FTZ pilot program to a total of 20 FTZs and one Free Trade Port.  China’s FTZs are in: Shanghai, Tianjin, Guangdong, Fujian, Chongqing, Hainan, Henan, Hubei, Liaoning, Shaanxi, Sichuan, Zhejiang, Jiangsu, Shandong, Hebei, Heilongjiang, Guangxi, Yunnan provinces, Beijing, Shanghai FTZ Lingang Special Area and Hainan Free Trade Port.  The goal of China’s FTZs/FTP is to provide a trial ground for trade and investment liberalization measures and to introduce service sector reforms, especially in financial services, that China expects to eventually introduce in other parts of the domestic economy. The FTZs promise foreign investors “national treatment” investment in industries and sectors not listed on China’s negative lists.  However, the 2020 FTZ negative list lacked substantive changes, and many foreign firms report that in practice, the degree of liberalization in FTZs is comparable to opportunities in other parts of China.

As part of China’s WTO accession agreement, the PRC government promised to revise its foreign investment laws to eliminate sections that imposed on foreign investors requirements for export performance, local content, balanced foreign exchange through trade, technology transfer, and research and development as a prerequisite to enter China’s market.  In practice, China has not completely lived up to these promises.  Some U.S. businesses report that local officials and regulators sometimes only accept investments with “voluntary” performance requirements or technology transfer that help develop certain domestic industries and support the local job market.

Moreover, China’s evolving cybersecurity and personal data protection regime includes onerous restrictions on firms that generate or process data in China, such as requirements for certain firms to store data in China.  Restrictions exist on the transfer of certain personal information of Chinese citizens outside of China. These restrictions have prompted many firms to review how their networks manage, store, and process data, in some cases necessitating changes to business models and reduplicative infrastructure.

Real Property

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

Intellectual Property Rights

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

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

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

Capital Markets and Portfolio Investment

China’s leadership has stated that it seeks to build a modern, highly developed, and multi-tiered capital market.  Since their founding over three decades ago, the Shanghai and Shenzhen Exchanges, combined, are ranked the third largest stock market in the world with over USD11 trillion in assets, according to statistics from World Federation of Exchanges.  China’s bond market has similarly expanded significantly to become the second largest worldwide, totaling approximately USD17 trillion.  In 2020, China fulfilled its promises to open certain financial sectors such as securities, asset management, and life insurance. Direct investment by private equity and venture capital firms has increased but has also faced setbacks due to China’s capital controls, which obfuscate the repatriation of returns. As of 2020, 54 sovereign entities and private sector firms, including BMW and Xiaomi Corporation, have since issued roughly USD41 billion in “Panda Bonds,” Chinese renminbi (RMB)-denominated debt issued by foreign entities in China.  China’s private sector can also access credit via bank loans, bond issuance, trust products, and wealth management. However, the vast majority of bank credit is disbursed to state-owned firms, largely due to distortions in China’s banking sector that have incentivized lending to state-affiliated entities over their private sector counterparts.  China has been an IMF Article VIII member since 1996 and generally refrains from restrictions on payments and transfers for current international transactions.  However, the government has used administrative and preferential policies to encourage credit allocation towards national priorities, such as infrastructure investments.

Money and Banking System

China’s monetary policy is run by the People’s Bank of China (PBOC), China’s central bank.  The PBOC has traditionally deployed various policy tools, such as open market operations, reserve requirement ratios, benchmark rates and medium-term lending facilities, to control credit growth.  The PBOC had previously also set quotas on how much banks could lend but ended the practice in 1998.  As part of its efforts to shift towards a more market-based system, the PBOC announced in 2019 that it will reform its one-year loan prime rate (LPR), which would serve as an anchor reference for other loans.  The one-year LPR is based on the interest rate that 18 banks offer to their best customers and serves as the benchmark for rates provided for other loans.  In 2020, the PBOC requested financial institutions to shift towards use of the one-year LPR for their outstanding floating-rate loan contracts from March to August. Despite these measures to move towards more market-based lending, China’s financial regulators still influence the volume and destination of Chinese bank loans through “window guidance” – unofficial directives delivered verbally – as well as through mandated lending targets for key economic groups, such as small and medium sized enterprises. In 2020, the China Banking and Insurance Regulatory Commission (CBIRC) also began issuing laws to regulate online lending by banks including internet companies such as Ant Financial and Tencent, which had previously not been subject to banking regulations.

The CBIRC oversees China’s 4,607 lending institutions, about USD49 trillion in total assets.  China’s “Big Five” – Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank, and Industrial and Commercial Bank of China – dominate the sector and are largely stable, but over the past year, China has experienced regional pockets of banking stress, especially among smaller lenders.  Reflecting the level of weakness among these banks, in November 2020, the PBOC announced in “China Financial Stability Report 2020” that 12.4 percent of the 4400 banking financial institutions received a “fail” rating (high risk) following an industry-wide review in 2019.  The assessment deemed 378 firms, all small and medium sized rural financial institutions, “extremely risky.”  The official rate of non-performing loans among China’s banks is relatively low: 1.92 percent as of the end of 2020.  However, analysts believed the actual figure may be significantly higher.  Bank loans continue to provide the majority of credit options (reportedly around 60.2 percent in 2020) for Chinese companies, although other sources of capital, such as corporate bonds, equity financing, and private equity are quickly expanding in scope, reach, and sophistication in China.

As part of a broad campaign to reduce debt and financial risk, Chinese regulators have implemented measures to rein in the rapid growth of China’s “shadow banking” sector, which includes wealth management and trust products.  These measures have achieved positive results. In December 2020, CBIRC published the first “Shadow Banking Report,” and claimed that the size of China’s shadow banking had shrunk sharply since 2017 when China started tightening the sector. By the end of 2019, the size of China’s shadow banking by broad measurement dropped to 84.8 trillion yuan from the peak of 100.4 trillion yuan in early 2017. Shadow banking to GDP ratio had also dropped to 86 percent at the end of 2019, yet the report did not provide statistics beyond 2019. Foreign owned banks can now establish wholly-owned banks and branches in China, however, onerous licensing requirements and an industry dominated by local players, have limited foreign banks market penetration. Foreigners are eligible to open a bank account in China but are required to present a passport and/or Chinese government issued identification.

Foreign Exchange and Remittances

Foreign Exchange

While the central bank’s official position is that companies with proper documentation should be able to freely conduct business, in practice, companies have reported challenges and delays in obtaining approvals for foreign currency transactions by sub-national regulatory branches. Chinese authorities instituted strict capital control measures in 2016, when China recorded a surge in capital flight.  China has since announced that it would gradually reduce those controls, but market analysts expect they would be re-imposed if capital outflows accelerate again. Chinese foreign exchange rules cap the maximum amount of RMB individuals are allowed to convert into other currencies at approximately USD50,000 each year and restrict them from directly transferring RMB abroad without prior approval from the State Administration of Foreign Exchange (SAFE).  SAFE has not reduced the USD50,000 quota, but during periods of higher-than-normal capital outflows, banks are reportedly instructed by SAFE to increase scrutiny over individuals’ requests for foreign currency and to require additional paperwork clarifying the intended use of the funds, with the intent of slowing capital outflows. China’s exchange rate regime is managed within a band that allows the currency to rise or fall by 2 percent per day from the “reference rate” set each morning.

Remittance Policies

According to China’s FIL, as of January 1, 2020, funds associated with any forms of investment, including profits, capital gains, returns from asset disposal, IPR loyalties, compensation, and liquidation proceeds, may be freely converted into any world currency for remittance. Based on the “2020 Guidance for Foreign Exchange Business under the Current Account” released by SAFE in August, firms do not need any supportive documents or proof that it is under USD50,000. For remittances over USD50,000, firms need to submit supportive documents and taxation records.  Under Chinese law, FIEs do not need pre-approval to open foreign exchange accounts and are allowed to retain income as foreign exchange or convert it into RMB without quota requirements. The remittance of profits and dividends by FIEs is not subject to time limitations, but FIEs need to submit a series of documents to designated banks for review and approval.  The review period is not fixed and is frequently completed within one or two working days of the submission of complete documents.  For remittance of interest and principal on private foreign debt, firms must submit an application, a foreign debt agreement, and the notice on repayment of the principal and interest.  Banks will then check if the repayment volume is within the repayable principal.  There are no specific rules on the remittance of royalties and management fees. Based on guidance for remittance of royalties and management fees, firms shall submit relevant contracts and invoice.  In October 2020, SAFE cut the reserve requirement for foreign currency transactions from 20 percent to zero, reducing the cost of foreign currency transactions as well as easing Renminbi appreciation pressure.

Sovereign Wealth Funds

China officially has only one sovereign wealth fund (SWF), the China Investment Corporation (CIC), which was launched in 2007 to help diversify China’s foreign exchange reserves. CIC is ranked the second largest SWF by total assets by Sovereign Wealth Fund Institute (SWFI). With USD200 billion in initial registered capital, CIC manages over USD1.04 trillion in assets as of 2020 and invests on a 10-year time horizon.  CIC has since evolved into three subsidiaries:

• CIC International was established in September 2011 with a mandate to invest in and manage overseas assets.  It conducts public market equity and bond investments, hedge fund, real estate, private equity, and minority investments as a financial investor.
• CIC Capital was incorporated in January 2015 with a mandate to specialize in making direct investments to enhance CIC’s investments in long-term assets.
• Central Huijin makes equity investments in Chinese state-owned financial institutions.

China also operates other funds that function in part like sovereign wealth funds, including: China’s National Social Security Fund, with an estimated USD372 billion in assets; the China-Africa Development Fund (solely funded by the China Development Bank), with an estimated USD10 billion in assets; the SAFE Investment Company, with an estimated USD417.8 billion in assets; and China’s state-owned Silk Road Fund, established in December 2014 with USD40 billion in assets to foster investment in BRI partner countries.  Chinese state-run funds do not report the percentage of their assets that are invested domestically.  However, Chinese state-run funds follow the voluntary code of good practices known as the Santiago Principles and participate in the IMF-hosted International Working Group on SWFs. While CIC affirms that they do not have any formal government guidance to invest funds consistent with industrial policies or designated projects, CIC is still expected to pursue government objectives.

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

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

Privatization Program

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

Additional Resources

Department of State

Department of Labor

Since 2016, China established an RBC platform but general awareness of RBC standards (including environmental, social, and governance issues) is a relatively new concept, especially for companies that exclusively operate in China’s domestic market.  Chinese laws that regulate business conduct use voluntary compliance, are often limited in scope, and are frequently cast aside when other economic priorities supersede RBC priorities.  In addition, China lacks mature and independent non-governmental organizations (NGOs), investment funds, independent worker unions, and other business associations that promote RBC, further contributing to the general lack of awareness.  The Foreign NGO Law remains a concern for U.S. organizations, including those looking to promote RBC and corporate social responsibility (CSR) best practices, due to restrictions the Law places on their operations in China.  For U.S. investors looking to partner with a Chinese firm or expand operations, finding partners that meet internationally recognized standards in areas like labor rights, environmental protection, and manufacturing best practices can be a significant challenge.  However, the Chinese government has placed greater emphasis on protecting the environment and elevating sustainability as a key priority, resulting in more Chinese companies adding environmental concerns to their CSR initiatives.  As part of these efforts, Chinese ministries have signed several memoranda of understanding with international organizations such as the OECD to cooperate on RBC initiatives.

Since 2012, China has undergone a large-scale anti-corruption campaign, with investigations reaching into all sectors of the government, military, and economy.  CCP General Secretary Xi labeled endemic corruption an “existential threat” to the very survival of the Party.  In 2018, the CCP restructured its Central Commission for Discipline Inspection (CCDI) to become a state organ, calling the new body the National Supervisory Commission-Central Commission for Discipline Inspection (NSC-CCDI). The NSC-CCDI wields the power to investigate any public official.  From 2012 to 2020, the NSC-CCDI claimed it investigated 3.4 million cases. In 2020, the NSC-CCDI investigated 618,000 cases and disciplined 522,000 individuals, of whom 41 were at or above the provincial or ministerial level. Since 2014, the PRC’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of more than 8,350 fugitives suspected of corruption who were living in other countries, including over 2,200 CCP members and government employees. In most cases, the PRC did not notify host countries of these operations.  In 2020, the government reported apprehending 1,421 alleged fugitives and recovering approximately USD457 million through this program.

In June 2020 the CCP passed a law on Administrative Discipline for Public Officials, continuing their effort to strengthen supervision over individuals working in the public sector. The law further enumerates targeted illicit activities such as bribery and misuse of public funds or assets for personal gain. The CCP also issued Amendment 11 to the Criminal Law, which increased the maximum punishment for acts of corruption committed by private entities to life imprisonment, from the previous maximum of 15-year imprisonment. Anecdotal information suggests the PRC’s anti-corruption crackdown is inconsistently and discretionarily applied, raising concerns among foreign companies in China.  For example, to fight rampant commercial corruption in the medical/pharmaceutical sector, the PRC’s health authority issued “blacklists” of firms and agents involved in commercial bribery, including several foreign companies. While central government leadership has welcomed increased public participation in reporting suspected corruption at lower levels, direct criticism of central government leadership or policies remains off-limits and is seen as an existential threat to China’s political and social stability.  China ratified the United Nations Convention against Corruption in 2005 and participates in the Asia-Pacific Economic Cooperation (APEC) and OECD anti-corruption initiatives. China has not signed the OECD Convention on Combating Bribery, although Chinese officials have expressed interest in participating in the OECD Working Group on Bribery meetings as an observer.

Resources to Report Corruption

The following government organization receives public reports of corruption:   Anti-Corruption Reporting Center of the CCP Central Commission for Discipline Inspection and the Ministry of Supervision, Telephone Number:  +86 10 12388.   10. Political and Security Environment

Foreign companies operating in China face a low risk of political violence.  However, the ongoing PRC crackdown on virtually all opposition voices in Hong Kong and continued attempts by PRC organs to intimidate Hong Kong’s judges threatens the judicial independence of Hong Kong’s courts – a fundamental pillar for Hong Kong’s status as an international hub for investment into and out of China.  The CCP also punished companies that expressed support for Hong Kong protesters – most notably, a Chinese boycott of the U.S. National Basketball Association after one team’s general manager expressed his personal view supporting Hong Kong protesters. Apart from Hong Kong, the PRC government has also previously encouraged protests or boycotts of products from countries like the United States, South Korea, Japan, Norway, Canada, and the Philippines, in retaliation for unrelated policy decisions such as the boycott campaigns against Korean retailer Lotte in 2016 and 2017 in response to the South Korean government’s decision to deploy the Terminal High Altitude Area Defense (THAAD); and the PRC’s retaliation against Canadian companies and citizens for Canada’s arrest of Huawei’s Chief Financial Officer Meng Wanzhou. PRC authorities also have broad authority to prohibit travelers from leaving China and have imposed “exit bans” to compel U.S. citizens to resolve business disputes, force settlement of court orders, or facilitate PRC investigations. U.S. citizens, including children, not directly involved in legal proceedings or wrongdoing have also been subject to lengthy exit bans in order to compel family members or colleagues to cooperate with Chinese courts or investigations. Exit bans are often issued without notification to the foreign citizen or without clear legal recourse to appeal the exit ban decision.     11. Labor Policies and Practices

For U.S. companies operating in China, finding, developing, and retaining domestic talent at the management and skilled technical staff levels remain challenging for foreign firms, especially as labor costs, including salaries and inputs continue to rise. Foreign companies also complain of difficulty navigating China’s labor and social insurance laws, including local implementation guidelines. Compounding the complexity, due to ineffective enforcement of labor laws, Chinese domestic employers often hire local employees without contracts, putting foreign firms at a disadvantage.  Without written contracts, workers struggle to prove employment, thus losing basic protections such as severance if terminated.  The All-China Federation of Trade Unions (ACFTU) is the only union recognized under PRC law.  Establishing independent trade unions is illegal.  The law allows for “collective bargaining,” but in practice, focuses solely on collective wage negotiations.  The Trade Union Law gives the ACFTU, a CCP organ chaired by a member of the Politburo, control over all union organizations and activities, including enterprise-level unions.  ACFTU enterprise unions require employers to pay mandatory fees, often through the local tax bureau, equaling a negotiated minimum of 0.5 percent to a standard two percent of total payroll.  While labor laws do not protect the right to strike, “spontaneous” worker protests and work stoppages occur.  Official forums for mediation, arbitration, and other similar mechanisms of alternative dispute resolution often are ineffective in resolving labor disputes.  Even when an arbitration award or legal judgment is obtained, getting local authorities to enforce judgments is problematic.

The PRC has not ratified the International Labor Organization conventions on freedom of association, collective bargaining, or forced labor, but it has ratified conventions prohibiting child labor and employment discrimination. Uyghurs and members of other minority groups are subjected to forced labor in Xinjiang and throughout China via PRC government-facilitated labor transfer programs. In 2020, the U.S. government took additional actions to prevent the importation of products produced by forced labor into the United States, including by issuing a Xinjiang supply chain business advisory that outlined the legal, economic, and reputational risks of forced labor exposure in China-based supply chains. The U.S. Customs and Border Protection bureau issued multiple Withhold Release Orders  barring importation into the United States of products produced in Xinjiang, which were determined to be produced with prison or forced labor in violation of U.S. import laws.  The Commerce Department added Chinese commercial and government entities to its Entity List for their complicity in human rights abuses and the Department of Treasury sanctioned the Xinjiang Production and Construction Corps to hold human rights abusers accountable in Xinjiang. Some PRC firms continued to employ North Korean workers in violation of UN Security Council sanctions.

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

* Source for Host Country Data:

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

U.S.  Embassy Beijing Economic Section

55 Anjialou Road, Chaoyang District, Beijing, P.R.  China  +86 10 8531 3000

+86 10 8531 3000

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. According to surveys of U.S. investors, U.S. companies 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 but 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 maintains a national security review mechanism to screen high-risk investments. 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, review, 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 2014 Montebourg Decree.

On December 31, 2019 the government issued a decree to lower the threshold for vetting of foreign investment from outside Europe from 33 to 25 percent and then lowered it again to 10 percent on July 22, 2020, a temporary provision to prevent predatory investment during the COVID-19 crisis. This lower threshold is set to expire at the end of 2021. The decree also enhanced government-imposed conditions and penalties in cases of non-compliance and introduced a mechanism to coordinate the national security review of foreign direct investments with the European Union (EU Regulation 2019/452). The new rules entered into force on April 1, 2020. The list of strategic sectors was also expanded to include the following activities listed in the EU Regulation 2019/452: agricultural products, when such products contribute to national food supply security; the editing, printing, or distribution of press publications related to politics or general matters; and R&D activities relating to quantum technologies and energy storage technologies. Separately, France expanded the scope of sensitive sectors on April 30, 2020 to include biotechnology companies.

Procedurally, the Minister of Economy, Finance, and Recovery has 30 business days following the receipt of a request for authorization to either: 1) declare that the investor is not required to obtain such authorization; 2) grant its authorization without conditions; or 3) declare that an additional review is required to determine whether a conditional authorization is sufficient to protect national interests. If an additional review is required, the Minister has an additional 45 business days to either clear the transaction (possibly subject to conditions) or prohibit it. The Minister is further allowed to deny clearance based on the investor’s ties with a foreign government or public authority. The absence of a decision within the applicable timeframe is a de facto rejection of the authorization.

The government has also expanded the breadth of information required in the approval request. For example, a foreign investor must now disclose any financial relationship with or significant financial support from a State or public entity; a list of French and foreign competitors of the investor and of the target; or a signed statement that the investor has not, over the past five years, been subject to any sanctions for non-compliance with French FDI regulations.

In 2020, the government blocked at least one transaction—the attempted acquisition of a French firm by a U.S. company in the defense sector.

Other Investment Policy Reviews

France has not recently been the subject of international organizations’ investment policy reviews. The OECD Economic Survey for France (April 2019) 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 of promoting 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 financing and equity capital. Business France recently unveiled a website in English to help prospective businesses that are considering investments in 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 made innovation one of his priorities with a €10 billion ($11.8 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 the “French Tech” initiative to promote France as a location for start-ups and high-growth digital companies. In addition to 17 French cities, French Tech offices have been established in 100 cities around the world, including New York, San Francisco, Los Angeles, Shanghai, Hong Kong, Vietnam, Moscow, and Berlin. French Tech has special programs to provide support to startups at various stages of their development. The latest effort has been the creation of the French Tech 120 Program, which provides financial and administrative support to some 123 most promising tech companies. In 2019, €5 billion ($5.9 billion) in venture funding was raised by French startups, an increase of nearly threefold since 2015. In September 2019, President Emmanuel Macron convinced major asset managers such as AXA and Natixis to invest €5 billion ($5.9 billion) into French tech companies over the next three years. He also announced the creation of a listing of France’s top 40 startups “Next 40” with the highest potential to grow into unicorns.

On June 5, 2020, the French government introduced a new €1.2 billion ($1.4 billion) plan to support French startups, especially in the health, quantum, artificial intelligence, and cybersecurity sectors. The plan includes the creation of a €500 million ($590 million) investment fund to help startups overcome the COVID-19 crisis and continue to innovate. It also comprises a “French Tech Sovereignty Fund” with an initial commitment of €150 million ($177 million) launched on December 11, 2020 by Bpifrance, France’s public investment bank.

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

Outward Investment

French firms invest more in the United States than in any other country and support approximately 780,000 American jobs. Total French investment in the United States reached $310.7 billion in 2019. France was our tenth largest trading partner with approximately $99.7 billion in bilateral trade in 2020. The business promotion agency Business France also assists French firms with outward investment, which it does not restrict.

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 95 countries:  Albania, Algeria, Argentina, Armenia, Azerbaijan, Bahrain, Bangladesh, Bosnia and Herzegovina, Bulgaria, Cambodia, Chile, China, Colombia, the Democratic Republic of the Congo, Costa Rica, Croatia, Cuba, Czech Republic, Djibouti, Dominican Republic, Egypt, El Salvador, Equatorial Guinea, Estonia, Ethiopia, Georgia, Guatemala, Haiti, Honduras, Hong Kong, Hungary, Iran, Iraq, Jamaica, Jordan, Kazakhstan, Kenya, Korea (South), Kuwait, Kyrgyz Republic, Laos, Latvia, Lebanon, Liberia, Libya, Lithuania,  Madagascar, Malaysia, Malta, Mexico, Moldova, Mongolia, Montenegro, Morocco, Mozambique, Namibia, Nepal, Nicaragua, Nigeria, North Macedonia, Oman, Pakistan, Panama, Paraguay, Peru, Philippines, 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:  Angola, Belarus, Brazil, Ghana, 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: https://investmentpolicy.unctad.org/international-investment-agreements/countries/72/france .

The United States and France have enjoyed a Navigation and Commerce Treaty since 1822, which guarantees national treatment of U.S. citizens.

The 2021 finance law reduces corporate tax from its current level of 28 percent. Firms with revenues above €250 million ($295 million) will be taxed 26.5 percent on profits in 2021 and 25 percent in 2022.  Firms with revenues at or below €250 million ($295 million) will be taxed 27.5 percent on profits in 2021 and 25 percent in 2022.

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.  France has tax agreements with 128 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, Central African Republic, Chile, China, Cyprus, Colombia, the Democratic Republic of the Congo, Croatia, Czech Republic, Denmark, Ecuador, Egypt, Equatorial Guinea, Estonia, Ethiopia, Finland, Gabon, Georgia, Germany, 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, United States of America, Uruguay, Uzbekistan, Venezuela, Vietnam, Zambia, and Zimbabwe.   (Ref: https://www.impots.gouv.fr/portail/les-conventions-internationales .)

Transparency of the Regulatory System

The French government has made considerable progress in the last decade on the transparency and accessibility of its regulatory system. The 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 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 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, reforms have extended the investigative and decision-making powers of France’s Competition Authority. On April 11, 2019, France implemented the European Competition Network (ECN) Directive, which widens the powers of all European national competition authorities to impose larger fines and temporary measures. 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.  The Competition Authority continues to simplify takeover and merger notifications with online procedures via a dedicated platform in 2020. Also in 2020, the Competition Authority issued new merger control guidelines that replaced the prior ones issued in 2013. The new guidelines clarify the Competition Authority’s procedural rules and increase transparency into the substantive merger review process. In particular, the new rules emphasize the Competition Authority’s ability to request documents from merging parties.

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. Last September, the French government published its first “Green Budget,” as an annex to the 2021 Finance Bill. This event attests to France’s strong commitment, notably under the OECD-led “Paris Collaborative on Green Budgeting” (which France joined in December 2017), to integrate “green” tools into the budget process. 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).

The French Financial Prosecution Office (Parquet National Financier, or PNF), specialized in serious economic and financial crimes, was set up by a December 6, 2013 law and began its activities in 2014.

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 Antitrust Laws

Major reforms have extended the investigative and decision-making powers of France’s Competition Authority. France implemented the European Competition Network or ECN Directive on April 11, 2019, allowing the French Competition Authority to impose heftier fines (above €3 million / $3.5 million) and temporary measures to prevent an infringement that may cause harm. The Authority issues decisions and opinions mostly on antitrust issues, but its influence on competition issues is growing. For example, following a complaint in November 2019 by several French, European, and international associations of press publishers against Google over the use of their content online without compensation, the Authority ordered the U.S. company to start negotiating in good faith with news publishers over the use of their content online. In another matter, on December 20, 2019, Google was fined €150 million ($177 million) for abuse of dominant position. Following an in-depth review of the online ad sector, the Competition Authority found Google Ads to be “opaque and difficult to understand” and applied in “an unfair and random manner.”

The Competition Authority launches regular in-depth investigations into various sectors of the economy, which may lead to formal investigations and fines. 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.

Expropriation and Compensation

In accordance with international law, the national or local governments 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, 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.

Investor-State Dispute Settlement

The President of the High Civil Court of First Instance (Tribunal de Grande 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.

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 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.  The French Civil Code additionally provides for several mechanisms of alternative dispute resolution (ADR) including out-of-court arbitration and conciliation where a judicial conciliator facilitates resolution of a dispute.

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 2020 Doing Business Index, France ranked 32nd of 190 countries 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.

Investment Incentives

Following the election of 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 improved the operating environment in France, based on surveys of U.S. investors.

However, with the onset of the pandemic, Macron delayed further planned reforms, including on pensions and unemployment, and shifted focus to mitigating France’s most severe economic crisis in the post-war era. The economy shrank 8.3 percent in 2020 compared to the year prior. In response, the government passed four modified budgets in 2020 and implemented an unprecedented level of fiscal support. As of April 2021, support and investment for businesses and households reached nearly €600 billion ($708 billion), or approximately 25 percent of GDP. It is mainly comprised of loan guarantees, unemployment schemes that support workers’ wages, subsidies to vulnerable sectors, investment in green and developing technologies, production tax cuts and other tax benefits, and expanded funding for research and development. The government’s agenda aims to bolster competitiveness, increase productivity, and accelerate the ecological transition.

As part of the €600 billion ($708 billion) in support measures, the government’s centerpiece stimulus package came in September 2020 with the €100 billion ($118 billion) France Relance plan. Over half is dedicated to supporting businesses, most of which is accessible to U.S. firms operating in France. The plan focuses on three pillars: ecological transition; industrial competitiveness; and education and skills training, with a particular emphasis on youth employment. Whereas previous government measures in response to the pandemic mainly focused on supporting demand through initiatives like the temporary unemployment scheme, this package largely employs supply-side measures to support industry, including a €20 billion ($23.6 billion) cut to production taxes to encourage reshoring of manufacturing to France. The government earmarked €34 billion ($40.4 billion) to boost business competitiveness, support re-shoring of production, and invest in key innovative industries. Finally, the government dedicated another €36 billion ($42.7 billion) to skills retraining and education, with a specific focus on improving capacity for youth. The government highlighted this third pillar would partly aim to tackle inequality and promote “social cohesion” across France. Forty percent of the “France Relaunch” package will be funded by EU grants corresponding to France’s share of the €750 billion ($885 billion) Next Generation EU fund.

As of April 2021, the government continues to expand its support measures and adapt them to the evolution of the COVID pandemic.

Foreign Trade Zones/Free Ports/Trade Facilitation

France is subject to all EU free trade zone regulations. These allow member countries to designate portions of their customs’ territory as duty-free, where value-added activity is limited. France has several duty-free zones, which benefit from exemptions on customs for storage of goods coming from outside of the European Union. The French Customs Service administers them and provides details on its website ( http://www.douane.gouv.fr ). French legal texts are published online at http://legifrance.gouv.fr .

In September 2018, President Macron announced the extension of 44 Urban Free Zones (ZFU) in low-income neighborhoods and municipalities with at least 10,000 residents.  The program provides incentives for employers, who have created 600 new jobs since 2016. Incentives include exemption from payment of payroll taxes and certain social contributions for five years, financed by €15 million ($17.7 million) a year in State funds.

Performance and Data Localization Requirements

While there are no mandatory performance requirements established by law, the French government will generally require commitments regarding employment or R&D from both foreign and domestic investors seeking government financial incentives. Incentives like PAT regional planning grants (Prime d’Amenagement du Territoire pour l’Industrie et les Services) and related R&D subsidies are based on the number of jobs created, and authorities have occasionally sought commitments as part of the approval process for acquisitions by foreign investors.

The French government imposes the same conditions on domestic and foreign investors in cultural industries:  all purveyors of movies and television programs (i.e., television broadcasters, telecoms operators, internet service providers and video services) must contribute a percentage of their revenues toward French film and television productions. They must also abide by broadcasting cultural content quotas (minimum 40 percent French, 20 percent EU).

Real Property

Real property rights are regulated by the French civil code and are uniformly enforced. The World Bank’s Doing Business Index ranks France 32nd of 190 on registering property. French civil-law notaries (notaires) – highly specialized lawyers in private practice appointed as public officers by the Justice Ministry – handle residential and commercial conveyance and registration, contract drafting, company formation, successions, and estate planning. The official system of land registration (cadastre) is maintained by the French public land registry under the auspices of the French tax authority (Direction Generale des Finances Publiques or DGFiP), available online at  http://www.cadastre.gouv.fr . Mortgages are widely available, usually for a 15-year period.

Intellectual Property Rights

France is a strong defender of intellectual property rights (IPR). Under the French system, patents and trademarks protect industrial property, while copyrights protect literary/artistic property. By virtue of the Paris Convention, U.S. nationals have a priority period following filing of an application for a U.S. patent or trademark in which to file a corresponding application in France:  twelve months for patents and six months for trademarks.

Counterfeiting is a costly problem for French companies, and the government of France maintains strong legal protections and a robust enforcement mechanism to combat trafficking in counterfeit goods — from copies of luxury goods to fake medications — as well as the theft and illegal use of IPR. The French Intellectual Property Code has been updated repeatedly over the years to address this challenge, most recently in 2019 with the implementation of the so-called Action Plan for Business Growth and Transformation or PACTE Law (Plan d’Action pour la Croissance et la Transformation des Entreprises).  This law reinforced France’s anti-counterfeiting legislation and implemented EU Directive 2015/2436 of the Trademark Reform Package. It increased the Euro amount for damages to companies that are victims of counterfeiting and extends trademark protection to smartcard technology, certain geographical indications, plants, and agricultural seeds. The legislation also increased the statute of limitations for civil suits from three to ten years and strengthened the powers of customs officials to seize fake goods sent by mail or express freight.  France also adopted legislation in 2019 to implement EU Directive 2019/790 on Copyright and Related Rights in the Digital Single Market.

The government also reports on seizures of counterfeit goods. In February 2021, the government launched a new French customs plan to combat counterfeiting for the 2021-2022 calendar year. Customs seizures in France have increased from 200,000 in 1994 to 5.64 million in 2020 (+ 20 percent compared to 2019). This new action plan will focus on improved intelligence gathering, investigation, litigation, and cooperation between all the stakeholders involved, including the Customs Office, which investigates fraud cases; the National Institute of Industrial Property, which oversees patents, trademarks, and industrial design rights; and France’s top private sector anti-counterfeiting organization, UNIFAB.

France has robust laws against online piracy. A government agency called the High Authority for the Dissemination of Artistic Works and the Protection of Rights on Internet (Haute Autorite pour la Diffusion des Œuvres et la Protection des droits sur Internet or HADOPI) administers a “graduated response” system of warnings and fines. It has taken enforcement action against several online pirate sites. HADOPI cooperates closely with the U.S. Patent and Trademark Office (USPTO) including pursuing voluntary arrangements to single out awareness about intermediaries that facilitate or fund pirate sites. (Note that one of HADOPI’s tasks is to ensure that the technical measures used to protect works do not prevent the right of individuals to make personal copies of television programs for their private use.) In December 2019, HADOPI released its yearly barometer of online cultural consumption showing that 26 percent of French people acquired and consumed music, films, and television series through illegal sites (53 percent via streaming and 45 percent through direct or indirect download). This figure has remained steady over the past few years. Offenders risk fines of between €1,500 ($1,770) and €300,000 ($354,000) and/or up to three years imprisonment.

The French government is increasing its efforts to combat online piracy in 2021 with a bill on the creation of a new audiovisual regulatory authority, Arcom, to regulate websites and audiovisual communications. The Ministry of Culture (MoC) announced in September 2019 its intention to merge France’s digital piracy watchdog HADOPI with the Higher Audiovisual Council (Conseil Supérieur de l’Audiovisuel) to create a more powerful authority capable on blocking illegal sites and blacklisting pirate sites. However, the establishment of this new authority was delayed by the COVID-19 pandemic as well as the appointment of a new government in July 2020.

France does not appear on USTR’s 2021 Special 301 Report.  USTR’s 2020 Notorious Market List includes an infringing site reportedly hosted in France.  The 2020 report also listed amazon.fr, based in France, noting alleged high levels of counterfeit goods on its platform (Note: Other Amazon sites were also included in the report: amazon.ca in Canada, amazon.de in Germany, amazon.in in India, and amazon.co.uk in the United Kingdom.)

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

Capital Markets and Portfolio Investment

There are no administrative restrictions on portfolio investment in France, and there is an effective regulatory system in place to facilitate portfolio investment. France’s open financial market allows foreign firms easy access to a variety of financial products, both in France and internationally. France continues to modernize its marketplace; as markets expand, foreign and domestic portfolio investment has become increasingly important. As in most EU countries, France’s listed companies are required to meet international accounting standards. Some aspects of French legal, regulatory, and accounting regimes are less transparent than U.S. systems, but they are consistent with international norms. Foreign banks are allowed to establish branches and operations in France and are subject to international prudential measures. Under IMF Article VIII, France may not impose restrictions on the making of payments and transfers for current international transactions without the (prior) approval of the Fund.

Foreign investors have access to all classic financing instruments, including short-, medium-, and long-term loans, short- and medium-term credit facilities, and secured and non-secured overdrafts offered by commercial banks. These assist in public offerings of shares and corporate debt, as well as mergers, acquisitions and takeovers, and offer hedging services against interest rate and currency fluctuations. Foreign companies have access to all banking services. Most loans are provided at market rates, although subsidies are available for home mortgages and small business financing.

Euronext Paris (also known as Paris Bourse) is part of a regulated cross-border stock exchange located in six European countries. Euronext Growth is an alternative exchange for medium-sized companies to list on a less regulated market (based on the legal definition of the European investment services directive), with more consumer protection than the Marché Libre still used by a couple hundred small businesses for their first stock listing. A company seeking a listing on Euronext Growth must have a sponsor with status granted by Euronext and prepare a French language prospectus for a permit from the Financial Markets Authority (Autorité des Marchés Financiers or AMF), the French equivalent of the U.S. Securities and Exchange Commission. Small and medium-size enterprises (SMEs) may also list on Enternext, a subsidiary of the Euronext Group created in 2013. The bourse in Paris also offers Euronext Access, an unregulated exchange for Start-ups.

Money and Banking System

France’s banking system recovered gradually from the 2008-2009 global financial crises and passed the 2018 stress tests conducted by the European Banking Authority. In the context of the COVID-19 outbreak, the European Banking Authority (EBA) postponed the EU-wide stress test to 2021 as a measure to temporarily alleviate the acute operational burden for banks. The EBA launched the EU-wide stress test exercise in January 2021 and its results will be published at the end of July 2021.

Four French banks were ranked among the world’s 20 largest as of January 2021 (BNP Paribas SA; Crédit Agricole Group, Société Générale SA, Groupe BPCE). The assets of France’s top five banks totaled $9.5 trillion in 2020. Acting on a proposal from France’s central bank, Banque de France, in March 2020, the High Council for Financial Stability (HCSF) instructed the country’s largest banks to decrease the “countercyclical capital buffer” from 0.25 percent to zero percent of their bank’s risk-weighted assets, thereby increasing liquidity to help mitigate the impact of the pandemic-induced recession. As of March 2021, banks maintained the zero percent countercyclical capital buffer with no intention to increase it before the end of 2022, at the earliest. The HCSF considered the risks to financial stability remain high, due to the impact of the crisis on the accounts of financial and non-financial actors. Firms increased their debt significantly in 2020, even if this was accompanied by an almost equivalent increase in their cash position. HCSF data highlighted the heterogeneity of the impact, as some companies were significantly weakened by the crisis, while others remain unaffected.   Banque de France is a member of the Eurosystem, which groups together the European Central Bank (ECB) and the national central banks of all countries that have adopted the euro. Banque de France is a public entity governed by the French Monetary and Financial Code. The conditions whereby it conducts its missions on national territory are set out in its Public Service Contract. The three main missions are monetary strategy; financial stability, together with the High Council of financial stability (Haut Conseil de la Stabilité Financière) which implements macroprudential policy; and the provision of economic services to the community. In addition, it participates in the preparation and implementation of decisions taken centrally by the ECB Governing Council.

Banque de France is a member of the Eurosystem, which groups together the European Central Bank (ECB) and the national central banks of all countries that have adopted the euro. Banque de France is a public entity governed by the French Monetary and Financial Code. The conditions whereby it conducts its missions on national territory are set out in its Public Service Contract. The three main missions are monetary strategy; financial stability, together with the High Council of financial stability (Haut Conseil de la Stabilité Financière) which implements macroprudential policy; and the provision of economic services to the community. In addition, it participates in the preparation and implementation of decisions taken centrally by the ECB Governing Council.

Foreign banks can operate in France either as subsidiaries or branches but need to obtain a license. Credit institutions’ licenses are generally issued by France’s Prudential Authority (Autorité de Contrôle Prudentiel et de Résolution or ACPR) which reviews whether certain conditions are met (e.g., minimum capital requirement, sound and prudent management of the bank, compliance with balance sheet requirements, etc.). Both EU law and French legislation apply to foreign banks. Foreign banks or branches are additionally subject to prudential measures and must provide periodic reports to the ACPR regarding operations in France, including detailed reports on their financial situation. At the EU level, the ‘passporting right’ allows a foreign bank settled in any EU country to provide their services across the EU, including France. There are about 941 credit institutions authorized to carry on banking activities in France; the list of foreign banks is available on this website:  https://www.regafi.fr/spip.php?page=results&type=advanced&id_secteur=3&lang=en&denomination=&siren=&cib=&bic=&nom=&siren_agent=&num=&cat=01-TBR07&retrait=0 

Foreign Exchange and Remittances

Foreign Exchange

For purposes of controlling exchange, the French government considers foreigners as residents from the time they arrive in France. French and foreign residents are subject to the same rules; they are entitled to open an account in a foreign currency with a bank established in France, and to establish accounts abroad. They must report all foreign accounts on their annual income tax returns, and money earned in France may be freely converted into dollars or any other currency and transferred abroad.

France is one of nineteen countries (known collectively as the Eurozone) that use the euro currency. Exchange rate policy for the euro is handled by the European Central Bank, located in Frankfurt, Germany. The average euro to USD exchange rate from March 1, 2020 to March 1, 2021 was 1 USD to 0.86 euro.

France is a founding member of the OECD-based Financial Action Task Force (FATF, a 39-member intergovernmental body). As reported in the Department of State’s France Report on Terrorism, the French government has a comprehensive anti-money laundering/ counterterrorist financing (AML/CTF) regime and is an active partner in international efforts to control money laundering and terrorist financing.  Tracfin, the French government’s financial intelligence unit, is active within international organizations, and has signed new bilateral agreements with foreign countries.

Remittance Policies

France’s investment remittance policies are stable and transparent. All inward and outward payments must be made through approved banking intermediaries by bank transfers. There is no restriction on the repatriation of capital. Similarly, there are no restrictions on transfers of profits, interest, royalties, or service fees. Foreign-controlled French businesses are required to have a resident French bank account and are subject to the same regulations as other French legal entities. The use of foreign bank accounts by residents is permitted.

Sovereign Wealth Funds

France has no sovereign wealth fund per se (none that use that nomenclature) but does operate funds with similar intent. The Public Investment Bank (Bpifrance) supports small and medium enterprises (SMEs), larger enterprises (Entreprises de Taille Intermedaire), and innovating businesses with over €36 billion ($42.5 billion) assets under management. The government strategy is defined at the national level and aims to fit with local strategies.  Bpifrance may hold direct stakes in companies, hold indirect stakes via generalist or sectorial funds, venture capital, development or transfer capital.  In November 2020, Bpifrance became a member of the One Planet Sovereign Wealth Funds (OPSWF) international initiative, which federates international sovereign wealth funds mobilized to contribute to the transition towards a more sustainable economy. Bpifrance stepped up its support for the ecological and energy transition, aiming to reach nearly €6 billion ($7.1 billion) per year by 2023.

The 11 listed entities in which the French State maintains stakes at the federal level are Aeroports de Paris (50.63 percent); Airbus Group (10.95 percent); Air France-KLM (14.29 percent, although expected to increase temporarily to nearly 30 percent as part of a March 2021 bailout package); EDF (83.58 percent), ENGIE (23.64 percent), Eramet (25.57 percent), La Française des Jeux (FDJ) (21.91 percent), Orange (a direct 13.39 percent stake and a 9.60 percent stake through Bpifrance), Renault (15.01 percent), Safran (11.23 percent), and Thales 25.68 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 88 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. Conversely, SOEs may get subsidies and other financial resources from the government, just as private competitors.

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). The State as a shareholder must set an example in terms of upholding high standards with respect for the environment, gender equality and social responsibility. The report also highlighted that the State must protect its strategic assets and remain a shareholder in areas where the general interest is at stake.

Privatization Program

The government will temporarily increase its stake in Air France-KLM, which was severely impacted by the COVID-19 crisis. Although terms are still being negotiated as of March 2021, it is likely France’s stake in the entity will increase from 14.3 percent to nearly 30 percent.

The government was due to privatize many large companies in 2019, including ADP and ENGIE in order to create a €10 billion ($11.8 billion) fund for innovation and research. However, the program was delayed because of political opposition to the privatization of airport manager ADP, regarded as a strategic asset to be protected from foreign shareholders. The government succeeded in selling in November 2019 a 52 percent stake in gambling firm FDJ. The government continues to maintain a strong presence in some sectors, particularly power, public transport, and defense industries.

The business community has general awareness of standards for responsible business conduct (RBC) in France. The country has established a National Contact Point (NCP) for the OECD Guidelines for Multinational Enterprises, coordinated and chaired by the Directorate General of the Treasury in the Ministry for the Economy and Finance. Its members represent State Administrations (Ministries in charge of Economy and Finance, Labor and Employment, Foreign Affairs, Ecology, Sustainable Development and Energy), six French Trade Unions (CFDT, CGT, FO, CFE-CGC, CFTC, UNSA) and one employers’ organization, MEDEF.

The NCP promotes the OECD Guidelines in a manner that is relevant to specific sectors. When specific instances are raised, the NCP offers its good offices to the parties (discussion, exchange of information) and may act as a mediator in disputes if appropriate.  This can involve conducting fact-finding to assist parties in resolving disputes, and posting final statements on any recommendations for future action with regard to the Guidelines. The NCP may also monitor how its recommendations are implemented by the business in question. In April 2017, the French NCP signed a two-year partnership with Global Compact France to increase sharing of information and activity between the two organizations.

In France, corporate governance standards for publicly traded companies are the product of a combination of legislative provisions and the recommendations of the AFEP-MEDEF code (two employers’ organizations). The code, which defines principles of corporate governance by outlining rules for corporate officers, controls and transparency, meets the expectations of shareholders and various stakeholders, as well as of the European Commission. First introduced in September 2002, it is regularly updated, adding new principles for the determination of remuneration and independence of directors, and now includes corporate social and environmental responsibility standards. The latest amendments in February 2019 tackle the remuneration and post-employment benefits of Chief Executive Officers and Executive Officers: 60 percent variable remuneration based on quantitative objectives and 40 percent on quality objectives, including efforts in the corporate social responsibility.

Also relating to transparency, the EU passed a regulation in 2017 to stem the trade in conflict minerals and, in particular, to stop conflict minerals and metals from being exported to the EU; to prevent global and EU smelters and refiners from using conflict minerals; and to protect mine workers from being abused. The regulation wentinto effect January 1, 2021, and now applies directly to French law.

France has played an active role in negotiating the ISO 26000 standards, the International Finance Corporation Performance Standards, the OECD Guidelines for Multinational Enterprises, and the UN Guiding Principles on Business and Human Rights. France has signed on to the Extractive Industries Transparency Initiative (EITI), although, it has not yet been fully implemented.

The February 2017 “Corporate Duty of Vigilance Law” requires large companies based in France and having at least 5,000 employees to set up, implement, and publish a corporate plan to identify a due diligence approach and assess any potential risks to human rights, fundamental freedoms, workers’ health, safety, and risk to the environment from activities of their company and its affiliates through the supply chain.

Additional Resources 

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities and;
• North Korea Sanctions & Enforcement Actions Advisory

Department of Labor

• Findings on the Worst Forms of Child Labor Report;
• List of Goods Produced by Child Labor or Forced Labor.
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World and;
• Comply Chain.

In line with President Macron’s campaign promise to clean up French politics, the French parliament adopted in September 2017 the law on “Restoring Confidence in Public Life.” The new law bans elected officials from employing family members, or working as a lobbyist or consultant while in office. It also bans lobbyists from paying parliamentary, ministerial, or presidential staff and requires parliamentarians to submit receipts for expenses.

France’s “Transparency, Anti-corruption, and Economic Modernization Law,” also known as the “Loi Sapin II,” came into effect on June 1, 2017. It brought France’s legislation in line with European and international standards. Key aspects of the law include: creating a new anti-corruption agency; establishing “deferred prosecution” for defendants in corruption cases and prosecuting companies (French or foreign) suspected of bribing foreign public officials abroad; requiring lobbyists to register with national institutions; and expanding legal protections for whistleblowers. The Sapin II law also established a High Authority for Transparency in Public Life (HATVP). The HATVP promotes transparency in public life by publishing the declarations of assets and interests it is legally authorized to share publicly. After review, declarations of assets and statements of interests of members of the government are published on the High Authority’s website under open license. The declarations of interests of members of Parliament and mayors of big cities and towns, but also of regions are also available on the website. In addition, the declarations of assets of parliamentarians can be accessed in certain governmental buildings, though not published on the internet.

France is a signatory to the OECD Anti-Bribery Convention. The U.S. Embassy in Paris has received no specific complaints from U.S. firms of unfair competition in France in recent years. France ranked 23rd of 180 countries on Transparency International’s (TI) 2020 corruption perceptions index. See  https://www.transparency.org/country/FRA .

Resources to Report Corruption

The Central Office for the Prevention of Corruption (Service Central de Prevention de la Corruption or SCPC) was replaced in 2017 by the new national anti-corruption agency – the Agence Francaise Anticorruption (AFA). The AFA is charged with preventing corruption by establishing anti-corruption programs, making recommendations, and centralizing and disseminating information to prevent and detect corrupt officials and company executives. The French anti-corruption agency guidelines can be found here: https://www.agence-francaise-anticorruption.gouv.fr/files/2021-03/French%20AC%20Agency%20Guidelines%20.pdf . The AFA will also administrative authority to review the anticorruption compliance mechanisms in the private sector, in local authorities and in other government agencies.

Contact information for Agence Française Anti-corruption (AFA):

Director: Charles Duchaine
23 Avenue d’Italie
75013 Paris
Tel : (+33) 1 44 87 21 14
Email: charles.duchaine@afa.gouv.fr 

Contact information for Transparency International’s French affiliate:

Transparency International France
14, Passage Dubail
75010 Paris
Tel: (+33) 1 84 16 95 65;
Email:  contact@transparency-france.org 

France is a politically stable country. Large demonstrations and protests occur regularly (sometimes organized to occur simultaneously in multiple French cities); these normally do not result in violence. When faced with imminent business closures, on rare occasions French trade unions have resorted to confrontational techniques such as setting plants on fire, planting bombs, or kidnapping executives or managers.

From mid-November 2018 through 2019, Paris and other cities in France faced regular protests and disruptions, including “Gilets Jaunes” (Yellow Vest) demonstrations that turned violent, initiated by discontent over high cost of living, taxes, and social exclusion. In the second half of 2019, most demonstrations were in response to President Macron’s proposed unemployment and pension reform. Authorities permitted peaceful protests. During some demonstrations, damage to property, including looting and arson, in popular tourist areas occurred with reckless disregard for public safety.  Police response included water cannons, rubber bullets and tear gas.

Between 2012 and 2020, 270 people have been killed in terrorist attacks in France, including the January 2015 assault on the satirical magazine Charlie Hebdo, the November 2015 coordinated attacks at the Bataclan concert hall, national stadium, and streets of Paris, and the 2016 Bastille Day truck attack in Nice. While the terrorist threat remains high, the threat is lower than its peak in 2015. Terrorist attacks have since been smaller in scale. Security services remained concerned with lone-wolf attacks, carried out by individuals already in France, inspired by or affiliated with ISIS.  French security agencies continue to disrupt plots and cells effectively. Despite the spate of recent small-scale attacks, France remains a strong, stable, democratic country with a vibrant economy and culture. Americans and investors from all over the world continue to invest heavily in France.

France has one of the lowest unionized work forces in the developed world (between 8-11 percent of the total work force). However, unions have strong statutory protections under French law that give them the power to engage in sector- and industry-wide negotiations on behalf of all workers. As a result, an estimated 98 percent of French workers are covered by union-negotiated collective bargaining agreements. Any organizational change in the workplace must usually be presented to the unions for a formal consultation as part of the collective bargaining process.

The number of apprenticeships in France peaked in 2020, at over 500,000, including 495,000 in the private sector, according to February 5, 2021 Labor Ministry figures. Apprenticeships, like vocational training, have been placed under the direct management of the government via a newly created agency called France Compétences. Growth of apprenticeship and reform of vocational training help to explain the drop in the unemployment rate in 2019 and in the first quarter of 2020.

During the COVID-19 crisis, France’s partial unemployment scheme, which allows firms to retain their employees while the government continues to pay a portion of their wages, expanded dramatically in scope and size and kept unemployment at pre-crisis levels (between 8-9 percent). The government initially enacted a gradual reform of France’s Unemployment Insurance scheme in July 2019 but suspended it at the onset of the COVID-19 pandemic. Despite labor union opposition, a government decree published on April 1, 2021 changed how benefits are calculated from July 1, 2021 to ensure unemployment benefits never exceed the average monthly net salary. Other changes, such as stricter rules for accessing unemployment benefits and the reduction of benefits for high earners will go into effect “when the economic situation allows.” Pension reform and the introduction of financial sanctions to limit the use of short-term contracts have been delayed until after the May 2022 presidential elections.

* French Source:  INSEE database for GDP figures and French Central Bank (Banque de France) for FDI figures. Accessed on March 19, 2021.  

*Note: These figures represent the stock of foreign direct investment (FDI), not the annual flow of FDI.  The United States was the top investor by flow of FDI in 2020.

Dustin Salveson
Economic Officer
U.S. Embassy
2 Avenue Gabriel
75008 Paris, France
Tel: +33.1.43.12.2000
FranceICSeditor@state.gov
https://fr.usembassy.gov/business/

Policies Towards Foreign Direct Investment

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

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

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

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

Other Investment Policy Reviews

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

Business Facilitation

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

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

Outward Investment

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

Hong Kong has bilateral investment agreements with Australia, Austria, the Belgium-Luxembourg Economic Union, Canada, Chile, Denmark, Finland, France, Germany, Italy, Japan, South Korea, Kuwait, the Netherlands, New Zealand, Sweden, Switzerland, Thailand, the United Arab Emirates, the United Kingdom, and the Association of Southeast Asian Nations (ASEAN).  It has concluded but not yet signed agreements with Bahrain, Myanmar, and Maldives.  Hong Kong has also signed an investment agreement with Mexico, but it is not yet in force.  The HKG is currently negotiating agreements with Iran, Turkey, and Russia.  All such agreements are based on a model text approved by mainland China through the Sino-British Joint Liaison Group.  U.S. firms are generally not at a competitive or legal disadvantage.

Hong Kong has a free trade agreement (FTA) with mainland China, the Closer Economic Partnership Arrangement (CEPA), which provides tariff-free export to mainland China of Hong Kong-origin goods and preferential access for specific services.  CEPA has gradually expanded since its signing in 2003.  Under the CEPA framework, Hong Kong enjoys liberalized trade in services using a “negative list” covering 134 service sectors for Hong Kong and grants national treatment to Hong Kong’s 62 service industries.  Hong Kong also enjoys most-favored nation treatment, with liberalization measures included in FTAs signed by mainland China and other countries automatically extended to Hong Kong.  Hong Kong and mainland China have also signed an investment agreement and an economic and technical cooperation agreement.  The investment agreement includes provision of national treatment and non-services investment using a negative list approach.

Hong Kong also has FTAs with New Zealand, member states of the European Free Trade Association, Chile, Macau, ASEAN, Georgia, the Maldives, and Australia.  These agreements are consistent with the provisions of the WTO.  Hong Kong is exploring FTAs with the Pacific Alliance (Chile, Colombia, Mexico, and Peru) and the United Kingdom.  Hong Kong is keenly interested in joining the Regional Comprehensive Economic Partnership.

The United States does not have a bilateral treaty on the avoidance of double taxation with Hong Kong, but has a Tax Information Exchange Agreement and an Inter-Government Agreement on the Foreign Account Tax Compliance Act with Hong Kong.  As of April 2020, the HKG had Comprehensive Avoidance of Double Taxation Agreements (CDTAs) with 43 tax jurisdictions, and negotiations with 14 tax jurisdictions are underway.  The HKG targets to bring the total number of CDTAs to 50 by the end of 2022.  In September 2018, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters signed by mainland China entered into force for Hong Kong.  Effective January 2021, the number of reportable jurisdictions increased from 75 to 126.

Under the President’s Executive Order on Hong Kong Normalization, which directs the suspension or elimination of special and preferential treatment for Hong Kong, the United States notified the Hong Kong authorities in August 2020 of its suspension of the Reciprocal Tax Exemptions on Income Derived from the International Operation of Ships Agreement.

Transparency of the Regulatory System

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

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

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

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

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

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

International Regulatory Considerations

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

Legal System and Judicial Independence

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

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

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

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

Laws and Regulations on Foreign Direct Investment

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

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

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

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

Competition and Antitrust Laws

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

Expropriation and Compensation

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

International Commercial Arbitration and Foreign Courts

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

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

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

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

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

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

Bankruptcy Regulations

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

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

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

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

Investment Incentives

Hong Kong imposes no export performance or local content requirements as a condition for establishing, maintaining, or expanding a foreign investment.  There are no requirements that Hong Kong residents own shares, that foreign equity is reduced over time, or that technology is transferred on certain terms.  The HKG does not have a practice of issuing guarantees or jointly financing foreign direct investment projects.

The HKG allows a deduction on interest paid to overseas-associated corporations and provides an 8.25 percent concessionary tax rate derived by a qualifying corporate treasury center.

The HKG offers an effective tax rate of around three to four percent to attract aircraft leasing companies to develop business in Hong Kong.

The HKG has set up multiple programs to assist enterprises in securing trade finance and business capital, expanding markets, and enhancing overall competitiveness.  These support measures are available to any enterprise in Hong Kong, irrespective of origin.

Hong Kong-registered companies with a significant proportion of their research, design, development, production, management, or general business activities located in Hong Kong are eligible to apply to the Innovation and Technology Fund (ITF), which provides financial support for research and development (R&D) activities in Hong Kong.  Hong Kong Science & Technology Parks (Science Park) and Cyberport are HKG-owned enterprises providing subsidized rent and financial support through incubation programs to early-stage startups.

The HKG offers additional tax deductions for domestic expenditure on R&D incurred by firms.  Firms enjoy a 300 percent tax deduction for the first HKD 2 million (USD 255,000) qualifying R&D expenditure and a 200 percent deduction for the remainder.  Since 2017, the Financial Secretary has announced over HKD 120 billion (USD 15.3 billion) in funding to support innovation and technology development in Hong Kong.  These funds are largely directed at supporting and adding programs through the ITF, Science Park, and Cyberport.

In February 2009, HKD 20 billion (USD 2.6 billion) was  earmarked for the Research Endowment Fund, which provides research grants to academics and universities.  In February 2018, another HKD 10 billion (USD 1.3 billion) was set aside to provide financial incentives to foreign universities to partner with Hong Kong universities and establish joint research projects housed in two research clusters in Science Park, one specializing in artificial intelligence and robotics and the other specializing in biotechnology.  In February 2018, another HKD 20 billion (USD 2.6 billion) was appropriated to begin construction on a second, larger Science Park, located on the border with Shenzhen, which is intended to provide a much larger number of subsidized-rent facilities for R&D which are also expected to have special rules allowing mainland residents to work onsite without satisfying normal immigration procedures.

The Technology Talent Admission Scheme provides a fast-track arrangement for eligible technology companies/institutes to admit overseas and mainland technology talent to undertake R&D for them in the areas of biotechnology, artificial intelligence, cybersecurity, robotics, data analytics, financial technologies, and material science are eligible for application.  The Postdoctoral Hub Program provides funding support to recipients of the ITF, as well as incubatees and tenants of Science Park and Cyberport, to recruit up to two postdoctoral talents for R&D. Applicants must have a doctoral degree in a science, technology, engineering, and mathematics-related discipline from either a local university or a well-recognized non-local institution.

In July 2020, the HKG launched a USD 256.4 million Re-industrialization Funding Scheme to subsidize manufacturers, on a matching basis, setting up smart production lines in Hong Kong.

The Pilot Bond Grant Scheme launched by the Hong Kong Monetary Authority (HKMA) in May 2018 is aimed at improving Hong Kong’s competitiveness in the international bond market by enhanced tax concessions for qualifying debt instruments.  The HKG supports first-time issues with a grant of up to 50 percent of the eligible issuance expenses, with a cap of HKD 2.5 million (USD 320,500) for issues with a credit rating from a credit rating agency recognized by the Hong Kong Monetary Authority (HKMA), or a cap of HKD 1.25 million (USD 160,200) for issues that do not have a credit rating and where neither the issuer nor the issue’s guarantor have a credit rating.

In October 2020, the HKG launched a USD 38 million pilot subsidy scheme to encourage the logistics industry to enhance productivity through the application of technology.

Starting from December 2020, a USD 25.6 million Green Tech Fund (GTF) is open for applications.  The GTF provides funding supports to R&D projects which can help Hong Kong decarbonize and enhance environmental protection.  The amount of funding for each project ranges from USD 320,500 to USD 3.9 million, and each project may last up to five years.

In February 2021, the HKG announced a proposal to strengthen Hong Kong’s position as an asset management center.  The HKG planned to introduce in the second quarter of 2021 new legislation to facilitate the re-domicile of foreign investment funds to Hong Kong for registration as Open-ended Fund Companies (OFCs).  The HKG would provide subsidies to cover 70 percent of the expenses (capped at HKD 1 million or USD 125,000) paid to local professional service providers for OFCs set up in or re-domiciled to Hong Kong in the coming three years.

In February 2021, the HKG announced it would consolidate the Pilot Bond Grant Scheme and the Green Bond Grant Scheme into a Green and Sustainable Finance Grant Scheme to subsidize eligible bond issuers and loan borrowers to cover their expenses on bond issuance and external review services.

Foreign Trade Zones/Free Ports/Trade Facilitation

Hong Kong, a free port without foreign trade zones, has modern and efficient infrastructure making it a regional trade, finance, and services center.  Rapid growth has placed severe demands on that infrastructure, necessitating plans for major new investments in transportation and shipping facilities, including a planned expansion of container terminal facilities, additional roadway and railway networks, major residential/commercial developments, community facilities, and environmental protection projects.  Construction on a third runway at Hong Kong International Airport is scheduled for completion by 2023.

Hong Kong and mainland China have a Free Trade Agreement Transshipment Facilitation Scheme that enables mainland-bound consignments passing through Hong Kong to enjoy tariff reductions in the mainland.  The arrangement covers goods traded between mainland China and its trading partners, including ASEAN members, Australia, Bangladesh, Chile, Costa Rica, Iceland, India, New Zealand, Pakistan, Peru, South Korea, Sri Lanka, Switzerland, and Taiwan.

The HKG launched in December 2018 phase one of the Trade Single Window (TSW) to provide a one-stop electronic platform for submitting ten types of trade documents, promoting cross-border customs cooperation, and expediting trade declaration and customs clearance.  Phase two is expected to be implemented in 2023.

The latest version of CEPA has established principles of trade facilitation, including simplifying customs procedures, enhancing transparency, and strengthening cooperation.

Performance and Data Localization Requirements

The HKG does not mandate local employment or performance requirements.  It does not follow a forced localization policy making foreign investors use domestic content in goods or technology.

Foreign nationals normally need a visa to live or work in Hong Kong.  Short-term visitors are permitted to conduct business negotiations and sign contracts while on a visitor’s visa or entry permit.  Companies employing people from overseas must show that a prospective employee has special skills, knowledge, or experience not readily available in Hong Kong.

Hong Kong allows free and uncensored flow of information, though the imposition of the NSL created certain limits on freedom of expression and content, especially those that may be viewed as politically-sensitive such as advocating for Hong Kong’s independence from mainland China.  The freedom and privacy of communication is enshrined in Basic Law Article 30.  The HKG has no requirements for foreign IT providers to turn over source code and does not interfere with data center operations.  However, the NSL introduced a heightened risk of PRC and Hong Kong authorities using expanded legal authorities to collect data from businesses and individuals in Hong Kong for actions that may violate “national security.” For more information, please refer to the Hong Kong business advisory released jointly by the Department of State, along with the Department of the Treasury, the Department of Commerce, and the Department of Homeland Security on July 16, 2021.

The NSL grants Hong Kong police broad authorities to conduct wiretaps or electronic surveillance without warrants in national security-related cases.  The NSL also empowers police to conduct searches, including of electronic devices, for evidence in national security cases.  Police can also require Internet service providers to provide or delete information relevant to these cases.  In January 2021, the organizer of an online platform alleged that local Internet providers have made the site inaccessible for users in Hong Kong following requests from the Hong Kong government.  One ISP subsequently confirmed that they it blocked a website “in compliance with the requirement issued under the National Security Law.”

Hong Kong does not currently restrict transfer of personal data outside the SAR, but the dormant Section 33 the Personal Data (Privacy) Ordinance would prohibit such transfers unless the personal data owner consents or other specified conditions are met.  The Privacy Commissioner is authorized to bring Section 33 into effect at any time, but it has been dormant since 1995.

In January 2020, the HKG introduced a discussion paper to the LegCo and proposed certain changes to the Personal Data (Privacy) Ordinance with the aim of strengthening data protection in Hong Kong.  One of the amendments proposed was to require data users to formulate a clear data retention policy which specified a retention period for the personal data collected.  Feedback from the LegCo on this discussion paper formed the basis of further consultations with stakeholders and more concrete legislative amendment proposals.  There is no indication on the timeline of any legislative amendments to the Ordinance.

In December 2020, Hong Kong’s Securities and Futures Commission (SFC) required licensed corporations in Hong Kong to seek the SFC’s approval before using the following for storing regulatory records: 1) premises controlled exclusively by an external data storage provider(s) located inside or outside Hong Kong, such as cloud service providers like Google Cloud, Microsoft Azure or Amazon AWS; or 2) server(s) for data storage at data centers located inside or outside Hong Kong.

Real Property

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

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

Intellectual Property Rights

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

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

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

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

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

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

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

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

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

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

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

Capital Markets and Portfolio Investment

There are no impediments to the free flow of financial resources.  Non-interventionist economic policies, complete freedom of capital movement, and a well-understood regulatory and legal environment make Hong Kong a regional and international financial center.  It has one of the most active foreign exchange markets in Asia.

Assets and wealth managed in Hong Kong posted a record high of USD 3.7 trillion in 2019 (the latest figure available), with two-thirds of that coming from overseas investors.  To enhance the competitiveness of Hong Kong’s fund industry, OFCs as well as onshore and offshore funds are offered a profits tax exemption.

The HKMA’s Infrastructure Financing Facilitation Office (IFFO) provides a platform for pooling the efforts of investors, banks, and the financial sector to offer comprehensive financial services for infrastructure projects in emerging markets.  IFFO is an advisory partner of the World Bank Group’s Global Infrastructure Facility.

Under the Insurance Companies Ordinance, insurance companies are authorized by the Insurance Authority to transact business in Hong Kong.  As of February 2021, there were 165 authorized insurance companies in Hong Kong, 70 of them foreign or mainland Chinese companies.

The Hong Kong Stock Exchange’s total market capitalization surged by 24.0 percent to USD 6.1 trillion in 2020, with 2,538 listed firms at year-end.  Hong Kong Exchanges and Clearing Limited, a listed company, operates the stock and futures exchanges.  The Securities and Futures Commission (SFC), an independent statutory body outside the civil service, has licensing and supervisory powers to ensure the integrity of markets and protection of investors.

No discriminatory legal constraints exist for foreign securities firms establishing operations in Hong Kong via branching, acquisition, or subsidiaries.  Rules governing operations are the same for all firms.  No laws or regulations specifically authorize private firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation, or control.

In 2020, a total of 291 Chinese enterprises had “H” share listings on the stock exchange, with combined market capitalization of USD 906 billion.  The Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connects allow individual investors to cross trade Hong Kong and mainland stocks.  In December 2018, the ETF Connect, which was planned to allow international and mainland investors to trade in exchange-traded fund products listed in Hong Kong, Shanghai, and Shenzhen, was put on hold indefinitely due to “technical issues.” However, China approved two cross-listings of ETFs between Shanghai Stock exchange and the Tokyo Stock Exchange in June 2019, and between Shenzhen Stock Exchange and Hong Kong Stock Exchange in October 2020.

By the end of 2020, 50 mainland mutual funds and 29 Hong Kong mutual funds were allowed to be distributed in each other’s markets through the mainland-Hong Kong Mutual Recognition of Funds scheme. Hong Kong also has mutual recognition of funds programs with Switzerland, Thailand, Ireland, France, the United Kingdom, and Luxembourg.

Hong Kong has developed its debt market with the Exchange Fund bills and notes program.  Hong Kong Dollar debt stood at USD 292 billion by the end of 2020.  As of November 2020, RMB 1,203.5 billion (USD 180.5 billion) of offshore RMB bonds were issued in Hong Kong.  Multinational enterprises, including McDonald’s and Caterpillar, have also issued debt.  The Bond Connect, a mutual market access scheme, allows investors from mainland China and overseas to trade in each other’s respective bond markets through a financial infrastructure linkage in Hong Kong.  In the first eight months of 2020, the Northbound trading of Bond Connect accounted for 52 percent of foreign investors’ total turnover in the China Interbank Bond Market.  In December 2020, the HKMA and the People’s Bank of China (PBoC) set up a working group to drive the initiative of Southbound trading, with the target of launching it within 2021.

In June 2020, the PBoC, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, the State Administration of Foreign Exchange, the HKMA and the Monetary Authority of Macau announced that they decided to implement a cross-boundary Wealth Management Connect pilot scheme in the Greater Bay Area (GBA), an initiative to economically integrate Hong Kong and Macau with nine cities in Guangdong Province.  Under the scheme, residents in the GBA can carry out cross-boundary investment in wealth management products distributed by banks in the GBA.  These authorities are still working on the implementation details for the scheme.

In December 2020, the SFC concluded its consultation on proposed customer due diligence requirements for OFCs.  The new requirements will enhance the anti-money laundering and counter-financing of terrorism measures with respect to OFCs and better align the requirements for different investment vehicles for funds in Hong Kong.  Upon the completion of the legislative process, the new requirements will come into effect after a six-month transition period.

In February 2021, the HKG announced it would issue green bonds regularly and expand the scale of the Government Green Bond Program to USD 22.5 billion within the next five years.

The HKG requires workers and employers to contribute to retirement funds under the Mandatory Provident Fund (MPF) scheme.  Contributions are expected to channel roughly USD five billion annually into various investment vehicles.  By September of 2020, the net asset values of MPF funds amounted to USD 131 billion.

Money and Banking System

Hong Kong has a three-tier system of deposit-taking institutions: licensed banks (161), restricted license banks (17), and deposit-taking companies (12).  HSBC is Hong Kong’s largest banking group.  With its majority-owned subsidiary Hang Seng Bank, HSBC controls more than 50.9 percent of Hong Kong Dollar (HKD) deposits.  The Bank of China (Hong Kong) is the second-largest banking group, with 15.4 percent of HKD deposits throughout 200 branches.  In total, the five largest banks in Hong Kong had more than USD 2 trillion in total assets at the end of 2019.  Thirty-five U.S. “authorized financial institutions” operate in Hong Kong, and most banks in Hong Kong maintain U.S. correspondent relationships.  Full implementation of the Basel III capital, liquidity, and disclosure requirements completed in 2019.

Credit in Hong Kong is allocated on market terms and is available to foreign investors on a non-discriminatory basis.  The private sector has access to the full spectrum of credit instruments as provided by Hong Kong’s banking and financial system.  Legal, regulatory, and accounting systems are transparent and consistent with international norms.  The HKMA, the de facto central bank, is responsible for maintaining the stability of the banking system and managing the Exchange Fund that backs Hong Kong’s currency.  Real Time Gross Settlement helps minimize risks in the payment system and brings Hong Kong in line with international standards.

Banks in Hong Kong have in recent years strengthened anti-money laundering and counterterrorist financing controls, including the adoption of more stringent customer due diligence (CDD) process for existing and new customers.  The HKMA stressed that “CDD measures adopted by banks must be proportionate to the risk level and banks are not required to implement overly stringent CDD processes.”

In November 2020, the HKG launched a three-month public consultation on its proposed amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.  Among other proposed changes, the HKG suggested introducing a licensing regime for virtual asset services providers and a two-tier registration regime for precious assets dealers.  The HKG will analyze feedback from the public before introducing a draft bill to the LegCo.

The NSL granted police authority to freeze assets related to national security-related crimes.  In October 2020, the HKMA advised banks in Hong Kong to report any transactions suspected of violating the NSL, following the same procedures as for money laundering.  Hong Kong authorities reportedly asked financial institutions to freeze bank accounts of former lawmakers, civil society groups, and other political targets who appear to be under investigation for their pro-democracy activities.

The HKMA welcomes the establishment of virtual banks, which are subject to the same set of supervisory principles and requirements applicable to conventional banks.  The HKMA has granted eight virtual banking licenses by the end of January 2021.

The HKMA’s Fintech Facilitation Office (FFO) aims to promote Hong Kong as a fintech hub in Asia.  FFO has launched the faster payment system to enable bank customers to make cross-bank/e-wallet payments easily and created a blockchain-based trade finance platform to reduce errors and risks of fraud.  The HKMA has signed nine fintech co-operation agreements with the regulatory authorities of Brazil, Dubai, France, Poland, Singapore, Switzerland, Thailand, the United Arab Emirates, and the United Kingdom.

Foreign Exchange and Remittances

Foreign Exchange

Conversion and inward/outward transfers of funds are not restricted.  The HKD is a freely convertible currency linked via de facto currency board to the U.S. dollar.  The exchange rate is allowed to fluctuate in a narrow band between HKD 7.75 – HKD 7.85 = USD 1.

Remittance Policies

There are no recent changes to or plans to change investment remittance policies.  Hong Kong has no restrictions on the remittance of profits and dividends derived from investment, nor reporting requirements on cross-border remittances.  Foreign investors bring capital into Hong Kong and remit it through the open exchange market.

Hong Kong has anti-money laundering (AML) legislation allowing the tracing and confiscation of proceeds derived from drug-trafficking and organized crime.  Hong Kong has an anti-terrorism law that allows authorities to freeze funds and financial assets belonging to terrorists.  Travelers arriving in Hong Kong with currency or bearer negotiable instruments (CBNIs) exceeding HKD 120,000 (USD 15,385) must make a written declaration to the CED.  For a large quantity of CBNIs imported or exported in a cargo consignment, an advanced electronic declaration must be made to the CED.

Sovereign Wealth Funds

The Future Fund, Hong Kong’s wealth fund, was established in 2016 with an endowment of USD 28.2 billion.  The fund seeks higher returns through long-term investments and adopts a “passive” role as a portfolio investor.  About half of the Future Fund has been deployed in alternative assets, mainly global private equity and overseas real estate, over a three-year period.  The rest is placed with the Exchange Fund’s Investment Portfolio, which follows the Santiago Principles, for an initial ten-year period.  In February 2020, the HKG announced that it will deploy 10 percent of the Future Fund to establish a new portfolio, which is called the Hong Kong Growth Portfolio (HKGP), focusing on domestic investments to lift the city’s competitiveness in financial services, commerce, aviation, logistics and innovation.  Between December 2020 and January 2021, the HKMA conducted a market survey to better understand the profiles of private equity firms with interest to become a general partner for the HKGP.

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

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

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

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

Privatization Program

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

The Hong Kong Stock Exchange adopts a higher standard of disclosure – ‘comply or explain’ – about its environmental key performance indicators for listed companies.  Results of a consultation process to review its environmental, social, and governance (ESG) reporting guidelines indicate strong support for enhancing the ESG reporting framework.  It has implemented proposals from the consultation process since July 2020.  Because Hong Kong is not a member of the OECD, OECD Guidelines for Multinational Enterprises are not applicable to Hong Kong companies.  The HKG, however, commends enterprises for fulfilling their social responsibility.  Hong Kong is not a signatory of the Montreux Document on Private Military and Security Companies.  Under the Security Bureau, the Security and Guarding Services Industry Authority is responsible for formulating issuing criteria and conditions for security company licenses and security personnel permits and determining applications for security company licenses.

Additional Resources

Department of State

• Country Reports on Human Rights Practices (https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);
• Trafficking in Persons Report (https://www.state.gov/trafficking-in-persons-report/);
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities (https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;
• North Korea Sanctions & Enforcement Actions Advisory (https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf)

Department of Labor

• Findings on the Worst forms of Child Labor Report (https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings ) and;
• List of Goods Produced by Child Labor or Forced Labor (https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods).
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World (https://www.dol.gov/general/apps/ilab) and;
• Comply Chain (https://www.dol.gov/ilab/complychain/).

Mainland China ratified the United Nations Convention Against Corruption in January 2006, and it was extended to Hong Kong in February 2006.  The Independent Commission Against Corruption (ICAC) is responsible for combating corruption and has helped Hong Kong develop a track record for combating corruption.  U.S. firms have not identified corruption as an obstacle to FDI.  A bribe to a foreign official is a criminal act, as is the giving or accepting of bribes, for both private individuals and government employees.  Offenses are punishable by imprisonment and large fines.

The Hong Kong Ethics Development Center (HKEDC), established by the ICAC, promotes business and professional ethics to sustain a level-playing field in Hong Kong.  The International Good Practice Guidance – Defining and Developing an Effective Code of Conduct for Organizations of the Professional Accountants in Business Committee published by the International Federation of Accountants (IFAC) and is in use with the permission of IFAC.

Resources to Report Corruption

Simon Peh, Commissioner
Independent Commission Against Corruption
303 Java Road, North Point, Hong Kong
+852-2826-3111
Email: com-office@icac.org.hk

Beijing’s imposition of the National Security Law (NSL) on June 30, 2020 has introduced heightened uncertainties for companies operating in Hong Kong.  As a result, U.S. citizens traveling through or residing in Hong Kong may be subject to increased levels of surveillance, as well as arbitrary enforcement of laws and detention for purposes other than maintaining law and order.

As of March 2021, police have carried out at least 100 arrests of opposition politicians and activists under the NSL, including one U.S. citizen, in an effort to suppress all pro-democracy views and political activity in the city.  Police have also reportedly issued arrest warrants under the NSL for approximately thirty individuals residing abroad, including U.S. citizens.  Since June 2019, police have arrested over 10,000 people on various charges in connection with largely peaceful protests against government policies.

Please see the July 16, 2021 business advisory issued by the Department of State, along with the Department of the Treasury, the Department of Commerce, and the Department of Homeland Security.

The Department of State assesses that Hong Kong does not maintain a sufficient degree of autonomy under the “one country, two systems” framework to justify continued special treatment by the United States for bilateral agreements and programs per the Hong Kong Policy Act.  As a result of Hong Kong’s lack of autonomy from China, the Department of Commerce ended Hong Kong’s treatment as a separate trade entity from China, including the removal of many of Department of Commerce’s License Exceptions.  U.S. Customs and Borders Protection (CBP) requires goods produced in Hong Kong to be marked to show China, rather than Hong Kong, as their country of origin.  This requirement took effect November 9, 2020.  It does not affect country of origin determinations for purposes of assessing ordinary duties or temporary or additional duties.  Hong Kong has requested World Trade Organization dispute consultations to examine the issue.  As of March 2021, the Department of Treasury has sanctioned 35 former and current Hong Kong and mainland Chinese government officials and 44 Chinese-military companies identified by the Department of Defense.

The PRC government does not recognize dual nationality.  In January 2021, the Hong Kong government moved to enforce existing provisions of the Nationality Law of the People’s Republic of China in place since 1997, effectively ending its longstanding recognition of dual citizenship in Hong Kong.  The action ended consular access to two detained U.S. citizens as of March 2021 and potentially removed consular protection from about half of the estimated 85,000 U.S. citizens in Hong Kong.  U.S.-PRC, U.S.-Hong Kong and U.S. citizens of Chinese heritage may be subject to additional scrutiny and harassment, and the PRC government may prevent the U.S. Embassy or U.S. Consulate from providing consular services.

Hong Kong financial regulators have conducted outreach to stress the importance of robust anti-money laundering (AML) controls and highlight potential criminal sanctions implications for failure to fulfill legal obligations under local AML laws.  However, Hong Kong has a low number of prosecutions and convictions compared to the number of cases investigated.

Under the President’s Executive Order on Hong Kong Normalization, which directs the suspension or elimination of special and preferential treatment for Hong Kong, the United States notified the Hong Kong authorities in August 2020 of its suspension of the Surrender of Fugitive Offenders Agreement and the Transfer of Sentenced Persons Agreement.  The Reciprocal Tax Exemptions on Income Derived from the International Operation of Ships Agreement was also suspended.  In response, the Hong Kong government suspended the Agreement Between the Government of the United States of America and the Government of Hong Kong on Mutual Legal Assistance in Criminal Affairs, which entered into force in 2000.

Hong Kong’s unemployment rate stood at 6.6 percent in the fourth quarter of 2020, with the unemployment rate of youth aged 15-19 rising to 17.6 percent.  In 2020, skilled personnel working as administrators, managers, professionals, and associate professionals accounted for 40.6 percent of the total working population.  At the end of 2019, there were about 399,320 foreign domestic helpers working in Hong Kong.  In 2020, about 8,842 foreign professionals came to work in the city, more than 10,089 fewer than the previous year.  The Employees Retraining Board provides skills re-training for local employees.  To address a shortage of highly skilled technical and financial professionals, the HKG seeks to attract qualified foreign and mainland Chinese workers.

The Employment Ordinance (EO) and the Employees’ Compensation Ordinance prohibit the termination of employment in certain circumstances: 1) Any pregnant employee who has at least four weeks’ service and who has served notice of her pregnancy; 2) Any employee who is on paid statutory sick leave and; 3) Any employee who gives evidence or information in connection with the enforcement of the EO or relating to any accident at work, cooperates in any investigation of his employer, is involved in trade union activity, or serves jury duty may not be dismissed because of those circumstances. Breach of these prohibitions is a criminal offense.

According to the EO, someone employed under a continuous contract for not less than 24 months is eligible for severance payment if: 1) dismissed by reason of redundancy; 2) under a fixed term employment contract that expires without being renewed due to redundancy; or 3) laid off.

Unemployment benefits are income- and asset-tested on an individual basis if living alone; if living with other family members, the total income and assets of all family members are taken into consideration for eligibility.  Recipients must be between the ages of 15-59, capable of work, and actively seeking full-time employment.

Parties in a labor dispute can consult the free and voluntary conciliation service offered by the Labor Department (LD).  A conciliation officer appointed by the LD will help parties reach a contractually binding settlement.  If there is no settlement, parties can start proceedings with the Labor Tribunal (LT), which can then be raised to the Court of First Instance and finally the Court of Appeal for leave to appeal.  The Court of Appeal can grant leave only if the case concerns a question of law of general public importance.

Local law provides for the rights of association and of workers to establish and join organizations of their own choosing.  The government does not discourage or impede the formation of unions.  As of 2019, Hong Kong’s 866 registered unions had 923,239 members, a participation rate of about 25.7 percent.  In 2020, 491 new worker unions formed to improve chances of winning seats in the legislature.  Hong Kong’s labor legislation is in line with international laws.  Hong Kong has implemented 41 conventions of the International Labor Organization in full and 18 others with modifications.  Workers who allege discrimination against unions have the right to a hearing by the Labor Relations Tribunal.  Legislation protects the right to strike.  Collective bargaining is not protected by Hong Kong law; there is no obligation to engage in it; and it is not widely used.  For more information on labor regulations in Hong Kong, please visit the following website: http://www.labour.gov.hk/eng/legislat/contentA.htm (Chapter 57 “Employment Ordinance”).

The LT has the power to make an order for reinstatement or re-engagement without securing the employer’s approval if it deems an employee has been unreasonably and unlawfully dismissed.  If the employer does not reinstate or re-engage the employee as required by the order, the employer must pay to the employee a sum amounting to three times the employee’s average monthly wages up to USD 9,300.  The employer commits an offense if he/she willfully and without reasonable excuse fails to pay the additional sum.

Starting from January 2019, male employees are entitled to five days’ paternity leave (increased from three days).

Starting from December 2020,  the statutory maternity leave increases to 14 weeks from ten weeks.

Effective May 1, 2019, the statutory minimum hourly wage rate increases from USD 4.4 to USD 4.8.

In February 2020, about 2,500 medical workers of the Hospital Authority took part in an industrial action, demanding the HKG close its border to mainland China to prevent the spread of  COVID-19.  They ended the strike a few days later without getting their demands realized.

As a developed economy, there is little potential for the DFC to operate in Hong Kong.  However, there is scope for cooperation between companies based in Hong Kong with regional operations to work with the DFC.  Hong Kong is a member of the World Bank Group’s Multilateral Investment Guarantee Agency.

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

Eveline Tseng, Consul, Economic Affairs
U.S. Consulate General Hong Kong and Macau
26 Garden Road, Central

Policies Towards Foreign Direct Investment

The Ministry of Economic Development (MED) is responsible for overseeing investment policy in Russia. The Russian Direct Investment Fund (RDIF) was established in 2011 to facilitate direct investment in Russia and has already attracted over $40 billion of foreign capital into the Russian economy through long-term strategic partnerships. In 2013, Russia’s Agency for Strategic Initiatives (ASI) launched an “Invest in Russian Regions” project to promote FDI in Russian regions. Since 2014, ASI has released an annual ranking of Russia’s regions in terms of the relative competitiveness of their investment climates and provides potential investors with information about regions most open to foreign investment. In 2021, 40 Russian regions improved their Regional Investment Climate Index scores (https://asi.ru/investclimate/rating). The Foreign Investment Advisory Council (FIAC), established in 1994, is chaired by the Prime Minister and currently includes 53 international company members and four companies as observers. The FIAC allows select foreign investors to directly present their views on improving the investment climate in Russia and advises the government on regulatory rulemaking.

Russia’s basic legal framework governing investment includes 1) Law 160-FZ, July 9, 1999, “On Foreign Investment in the Russian Federation;” 2) Law No. 39-FZ, February 25, 1999, “On Investment Activity in the Russian Federation in the Form of Capital Investment;” 3) Law No. 57-FZ, April 29, 2008, “Foreign Investments in Companies Having Strategic Importance for State Security and Defense (Strategic Sectors Law, SSL);” and 4) the Law of the RSFSR No. 1488-1, June 26, 1991, “On Investment Activity in the Russian Soviet Federative Socialist Republic (RSFSR),” and (5) Law No. 69-FZ. April 1, 2020, “On Investment Protection and Promotion Agreements in the Russian Federation.” This framework of laws nominally attempts to guarantee equal rights for foreign and local investors in Russia. However, exemptions are permitted when it is deemed necessary to protect the Russian constitution, morality, health, human rights, or national security or defense, and to promote its socioeconomic development. Foreign investors may freely use the profits obtained from Russia-based investments for any purpose, provided they do not violate Russian law.

The new 2020 Federal Law on Protection and Promotion of Investments applies to investments made under agreements on protection and promotion of investments (“APPI”) providing for implementation of a new investment project. APPI may be concluded between a Russian legal entity (the organization implementing the project established by a Russian or a foreign company) and a regional and/or the federal government. APPI is a private law agreement coming under the Russian civil legislation (with exclusions provided for by the law). Support measures include reimbursement of (1) the costs of creating or reconstructing the infrastructure and (2) interest on loans needed for implementing the project. The maximum reimbursable costs may not exceed 50 percent of the costs actually incurred for supporting infrastructure facilities and 100 percent of the costs actually incurred for associated infrastructure facilities. The time limit for cost recovery is five years for the supporting infrastructure and ten years for the associated infrastructure.

Limits on Foreign Control and Right to Private Ownership and Establishment

Russian law places two primary restrictions on land ownership by foreigners. The first is on the foreign ownership of land located in border areas or other “sensitive territories.” The second restricts foreign ownership of agricultural land, including restricting foreign individuals and companies, persons without citizenship, and agricultural companies more than 50-percent foreign-owned from owning land. These entities may hold agricultural land through leasehold rights. As an alternative to agricultural land ownership, foreign companies typically lease land for up to 49 years, the maximum legally allowed.

In October 2014, President Vladimir Putin signed the law “On Mass Media,” which took effect on January 1, 2015. The law restricts foreign ownership of any Russian media company to 20 percent (the previous law applied a 50 percent limit to Russia’s broadcast sector). U.S. stakeholders have raised concerns about similar limits on foreign direct investments in the mining and mineral extraction sectors and describe the licensing regime as non-transparent and unpredictable. In December 2018, the State Duma approved in its first reading a draft bill introducing new restrictions on online news aggregation services. If adopted, foreign companies, including international organizations and individuals, would be limited to a maximum of 20 percent ownership interest in Russian news aggregator websites. The second, final hearing was planned for February 2019, but was postponed. To date, this proposed law has not been passed.

Russia’s Commission on Control of Foreign Investment (Commission) was established in 2008 to monitor foreign investment in strategic sectors in accordance with the SSL. Between 2008 and 2019, the Commission received 621 applications for foreign investment, 282 of which were reviewed, according to the Federal Antimonopoly Service (FAS). Of those 282, the Commission granted preliminary approval for 259 (92 percent approval rate), rejected 23, and found that 265 did not require approval (https://fas.gov.ru/news/29330). International organizations, foreign states, and the companies they control are treated as single entities under the Commission, and with their participation in a strategic business, are subject to restrictions applicable to a single foreign entity. There have been no updates regarding the number of applications received by the Commission since 2019. Due to COVID-19, the Commission met only twice since then, in December 2020 and February 2021.

Pursuant to legal amendments to the SSL that entered into force August 11, 2020, a foreign investor is deemed to exercise control over a Russia’s strategic entity even if voting rights in shares belonging to the investor have been temporarily transferred to other entities under the pledge or trust management agreement, or repo contract or a similar arrangement. According to the FAS, the amendments were aimed to exclude possible ways of circumventing the existing foreign investments control rules by way of temporary transfer of voting rights in the strategic entity’s shares.

In an effort to reduce bureaucratic procedures and address deficiencies in the SSL, on May 11, President Putin signed into law a draft bill introducing specific rules lifting restrictions and allowing expedited procedures for foreign investments into certain strategic companies for which strategic activity is not a core business.

Since January 1, 2019, foreign providers of electronic services to business customers in Russia (B2B e-services) have new Russian value-added tax (VAT) obligations. These obligations include VAT registration with the Russian tax authorities (even for VAT exempt e-services), invoice requirements, reporting to the Russian tax authorities, and adhering to VAT remittance rules.

Other Investment Policy Reviews

The WTO conducted the first Trade Policy Review (TPR) of the Russian Federation in September 2016. The next TPR of Russia will take place in October 2021, with reports published in September. (Related reports are available at https://www.wto.org/english/tratop_e/tpr_e/tp445_e.htm ).

The United Nations Conference on Trade and Development (UNCTAD) issues an annual World Investment Report covering different investment policy topics. In 2020, the focus of this report was on international production beyond the pandemic ( https://unctad.org/en/Pages/Publications/WorldInvestmentReports.aspx ). UNCTAD also issues an investment policy monitor ( https://investmentpolicyhub.unctad.org/IPM ).

Business Facilitation

The Federal Tax Service (FTS) operates Russia’s business registration website: www.nalog.ru . Per law (Article 13 of Law 129-FZ of 2001), a company must register with a local FTS office, and the registration process should not take more than three days. Foreign companies may be required to notarize the originals of incorporation documents included in the application package. To establish a business in Russia, a company must register with FTS and pay a registration fee of RUB 4,000. As of January 1, 2019, the registration fee has been waived for online submission of incorporation documents directly to the Federal Tax Service (FTS).

The publication of the Doing Business report was paused in 2020, as the World Bank is assessing its data collection process and data integrity preservation methodology.

The 2019 ranking acknowledged several reforms that helped Russia improve its position. Russia made getting electricity faster by setting new deadlines and establishing specialized departments for connection. Russia also strengthened minority investor protections by requiring greater corporate transparency and made paying taxes easier by reducing the tax authority review period of applications for VAT cash refunds. Russia also further enhanced the software used for tax and payroll preparation.

Outward Investment

The Russian government does not restrict Russian investors from investing abroad. Since 2015, Russia’s “De-offshorization Law” (376-FZ) requires that Russian tax residents notify the government about their overseas assets, potentially subjecting these assets to Russian taxes.

While there are no restrictions on the distribution of profits to a nonresident entity, some foreign currency control restrictions apply to Russian residents (both companies and individuals), and to foreign currency transactions. As of January 1, 2018, all Russian citizens and foreign holders of Russian residence permits are considered Russian “currency control residents.” These “residents” are required to notify the tax authorities when a foreign bank account is opened, changed, or closed and when funds are moved in a foreign bank account. Individuals who have spent less than 183 days in Russia during the reporting period are exempt from the reporting requirements and restrictions using foreign bank accounts. On January 1, 2020, Russia abolished all currency control restrictions on payments of funds by non-residents to bank accounts of Russian residents opened with banks in OECD or FATF member states. This is provided that such states participate in the automatic exchange of financial account information with Russia. As a result, from 2020 onward, Russian residents will be able to freely use declared personal foreign accounts for savings and investment in wide range of financial products.

Transparency of the Regulatory System

While the Russian government at all levels offers moderately transparent policies, actual implementation is inconsistent. Moreover, Russia’s import substitution program often leads to burdensome regulations that can give domestic producers a financial advantage over foreign competitors. Draft bills and regulations are made available for public comment in accordance with disclosure rules set forth in the Government Resolution 851 of 2012.

Key regulatory actions are published on a centralized web site which also maintains existing and proposed regulatory documents: www.pravo.gov.ru . (Draft regulatory laws are published on the web site: www.regulation.gov.ru . Draft laws can also be found on the State Duma’s legal database: http://asozd.duma.gov.ru/ ).

Accounting procedures are generally transparent and consistent. Documents compliant with Generally Accepted Accounting Principles (GAAP), however, are usually provided only by businesses that interface with foreign markets or borrow from foreign lenders. Reports prepared in accordance with the International Financial Reporting Standards (IFRS) are required for the consolidated financial statements of all entities who meet the following criteria: entities whose securities are listed on stock exchanges; banks and other credit institutions, insurance companies (except those with activities limited to obligatory medical insurance); non-governmental pension funds; management companies of investment and pension funds; and clearing houses. Additionally, certain state-owned companies are required to prepare consolidated IFRS financial statements by separate decrees of the Russian government. Russian Accounting Standards, which are largely based on international best practices, otherwise apply.

International Regulatory Considerations

As a member of the EAEU, Russia has delegated certain decision-making authority to the EAEU’s supranational executive body, the Eurasian Economic Commission (EEC). In particular, the EEC has the lead on concluding trade agreements with third countries, customs tariffs (on imports), and technical regulations. EAEU agreements and EEC decisions establish basic principles that are implemented by the member states at the national level through domestic laws, regulations, and other measures involving goods. The EAEU Treaty establishes the priority of WTO rules in the EAEU legal framework. Authority to set sanitary and phytosanitary standards remains at the individual country level.

U.S. companies cite SPS technical regulations and related product-testing and certification requirements as major obstacles to U.S. exports of industrial and agricultural goods to Russia. Russian authorities require product testing and certification as a key element of the approval process for a variety of products, and, in many cases, only an entity registered and residing in Russia can apply for the necessary documentation for product approvals. Consequently, opportunities for testing and certification performed by competent bodies outside Russia are limited. Manufacturers of telecommunications equipment, oil and gas equipment, construction materials and equipment, and pharmaceuticals and medical devices have reported serious difficulties in obtaining product approvals within Russia. Technical Barriers to Trade (TBT) issues have also arisen with alcoholic beverages, pharmaceuticals, and medical devices. Certain SPS restrictions on food and agricultural products appear to not be based on international standards.

In April 2021, Russia adopted amendments to Article 1360 of the Civil Code that significantly simplified the mechanism of issuing compulsory licenses in the pharmaceutical industry. Under the adopted amendments, compulsory licenses are allowed “in the interest of life and health protection.” The use of the compulsory license mechanism and the lack of certainty for right holders regarding the calculation of compensation could negatively affect the investment attractiveness of Russia for pharmaceutical companies producing original drugs.

Russia joined the WTO in 2012. Although Russia has notified the WTO of numerous SPS technical regulations, it appears to be taking a narrow view regarding the types of measures that require notification. In 2020, Russia submitted 16 notifications under the WTO TBT Agreement, up from six notifications submitted in 2029. However, they may not reflect the full set of technical regulations that require notification under the WTO TBT Agreement. Russia submitted 38 SPS notifications in 2020, up from 16 in 2019. (A full list of notifications is available at: http://www.epingalert.org/en).

Legal System and Judicial Independence

The U.S. Embassy advises any foreign company operating in Russia to have competent legal counsel and create a comprehensive plan on steps to take in case the police carry out an unexpected raid. Russian authorities have exhibited a pattern of transforming civil cases into criminal matters, resulting in significantly more severe penalties. In short, unfounded lawsuits or arbitrary enforcement actions remain an ever-present possibility for any company operating in Russia.

Critics contend that Russian courts, in general, lack independent authority and, in criminal cases, have a bias toward conviction. In practice, the presumption of innocence tends to be ignored by Russian courts, and less than one-half of one percent of criminal cases end in acquittal. In cases that are appealed when the lower court decision resulted in a conviction, less than one percent are overturned. In contrast, when the lower court decision is “not guilty,” 37 percent of the appeals result in a finding of guilt.

Russia has a code law system, and the Civil Code of Russia governs contracts. Specialized commercial courts (also called “Arbitrage Courts”) handle a wide variety of commercial disputes.

Russia was ranked by the World Bank’s 2020 Doing Business Report as 21st in contract enforcement, down three notches compared to the 2019 report. Source: https://www.doingbusiness.org/content/dam/doingBusiness/country/r/russia/RUS.pdf

Commercial courts are required by law to decide business disputes efficiently, and many cases are decided on the basis of written evidence, with little or no live testimony by witnesses. The courts’ workload is dominated by relatively simple cases involving the collection of debts and firms’ disputes with the taxation and customs authorities, pension funds, and other state organs. Tax-paying firms often prevail in their disputes with the government in court. As with some international arbitral procedures, the weakness in the Russian arbitration system lies in the enforcement of decisions and few firms pay judgments against them voluntarily.

A specialized court for intellectual property (IP) disputes was established in 2013. The IP Court hears matters pertaining to the review of decisions made by the Russian Federal Service for Intellectual Property (Rospatent) and determines issues of IP ownership, authorship, and the cancellation of trademark registrations. It also serves as the court of second appeal for IP infringement cases decided in commercial courts and courts of appeal.

Laws and Regulations on Foreign Direct Investment

The 1991 Investment Code and 1999 Law on Foreign Investment (160-FZ) guarantee that foreign investors enjoy rights equal to those of Russian investors, although some industries have limits on foreign ownership. Russia’s Special Investment Contract program, launched in 2015, aims to increase investment in Russia by offering tax incentives and simplified procedures for dealings with the government. In addition, a new law on public-private-partnerships (224-FZ) took effect January 1, 2016. The legislation allows an investor to acquire ownership rights over a property. The SSL regulates foreign investments in “strategic” companies. Amendments to Federal Law No. 160-FZ “On Foreign Investments in the Russian Federation” and Russia’s Strategic Sectors Law (SSL), signed into law in May 2018 by President Putin, liberalized access of foreign investments to strategic sectors of the Russian economy and made the strategic clearance process clearer and more comfortable. The new concept is more investor-friendly, since applying a stricter regime can now potentially be avoided by providing the required beneficiary and controlling person information. In addition, the amendments expressly envisage a right for the Federal Antimonopoly Service of Russia (FAS) to issue official clarifications on the nature and application of the SSL that may facilitate law enforcement.

Federal Law № 69-ФЗ on the Protection and Promotion of Investment, entered into force in April 2020, requires that a contract be concluded between public entities and private investors, either domestic or foreign and contain stabilization clauses relating to import customs duties, measures of state support, rules regulating land use, as well as ecological and utilization fees and taxes.

Competition and Anti-Trust Laws

The Federal Antimonopoly Service (FAS) implements antimonopoly laws and is responsible for overseeing matters related to the protection of competition. Russia’s fourth and most recent anti-monopoly legislative package, which took effect January 2016, introduced a number of changes to Russia’s antimonopoly laws. Changes included limiting the criteria under which an entity could be considered “dominant,” broadening the scope of transactions subject to FAS approval and reducing government control over transactions involving natural monopolies. Over the past several years, FAS has opened a number of cases involving American companies. In February 2019, the FAS submitted to the Cabinet the fifth anti-monopoly legislative package devoted to regulating the digital economy. It includes provisions on introducing new definitions of “trustee,” and a definition of “price algorithms,” empowering the FAS to impose provisions of non-discriminated access to data as a remedy. It also introduced data ownership as a set of criteria for market analysis, etc. The legislative package is still undergoing an interagency approval process and will be submitted to the State Duma once it is approved by the Cabinet. As of March 2021, it was supported by the FAS Public Council, but the review by the Ministry of Digital Development, Communications and Mass Media was largely negative.

FAS has also claimed the authority to regulate intellectual property, arguing that monopoly rights conferred by ownership of intellectual property should not extend to the “circulation of goods,” a point supported by the Russian Supreme Court.

Expropriation and Compensation

The 1991 Investment Code prohibits the nationalization of foreign investments, except following legislative action and when such action is deemed to be in the public interest. Acts of nationalization may be appealed to Russian courts, and the investor must be adequately and promptly compensated for the taking. At the sub-federal level, expropriation has occasionally been a problem, as well as local government interference and a lack of enforcement of court rulings protecting investors.

Despite legislation prohibiting the nationalization of foreign investments, investors in Russia – particularly minority-share investors in domestically-owned energy companies – are encouraged to exercise caution. Russia has a history of indirectly expropriating companies through “creeping” and informal means, often related to domestic political disputes, and other treatment of investors leading to investment disputes. Some examples of recent cases include: 1) The privately owned oil company Bashneft was nationalized and then “privatized” in 2016 through its sale to the government-owned oil giant Rosneft without a public tender; 2) In the Yukos case, the Russian government used allegedly questionable tax and legal proceedings to ultimately gain control of the assets of a large Russian energy company; 3) In February 2019, a prominent U.S. investor was jailed over a commercial dispute and currently remains under house arrest. Other examples of Russia expropriation include foreign companies allegedly being pressured into selling their Russia-based assets at below-market prices. Foreign investors, particularly minority investors, have little legal recourse in such instances.

Dispute Settlement

ICSID Convention and New York Convention

Russia is party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. While Russia does not have specific legislation providing for enforcement of the New York Convention, Article 15 of the Constitution specifies that “the universally recognized norms of international law and international treaties and agreements of the Russian Federation shall be a component part of [Russia’s] legal system. If an international treaty or agreement of the Russian Federation fixes other rules than those envisaged by law, the rules of the international agreement shall be applied.” Russia is a signatory but not a party, and never ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID).

Investor-State Dispute Settlement

According to available information, at least 14 investment disputes have involved an American and the Russian government since 2006. Some attorneys refer international clients who have investment or trade disputes in Russia to international arbitration centers in Paris, Stockholm, London, or The Hague. A 1997 Russian law allows foreign arbitration awards to be enforced in Russia, even if there is no reciprocal treaty between Russia and the country where the order was issued, in accordance with the New York Convention. Russian law was amended in 2015 to give the Russian Constitutional Court authority to disregard verdicts by international bodies if it determines the ruling contradicts the Russian constitution.

International Commercial Arbitration and Foreign Courts

In addition to the court system, Russian law recognizes alternative dispute resolution (ADR) mechanisms, i.e., domestic arbitration, international arbitration, and mediation. Civil and commercial disputes may be referred to either domestic or international commercial arbitration. Institutional arbitration is more common in Russia than ad hoc arbitration. Arbitral awards can be enforced in Russia pursuant to international treaties, such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the 1958 New York Convention, and the 1961 European Convention on International Commercial Arbitration, as well as domestic legislation. Mediation mechanisms were established by the Law on Alternative Dispute Resolution Procedure with participation of the Intermediary in January 2011. Mediation is an informal extrajudicial dispute resolution method whereby a mediator seeks mutually acceptable resolution. However, mediation is not yet widely used in Russia.

Beginning in 2016, arbitral institutions were required to obtain the status of a “permanent arbitral institution” (PAI) in order to arbitrate disputes involving shares in Russian companies. The requirement ostensibly combats the problem of dubious arbitral institutions set up by corporations to administer disputes in which they themselves are involved. The PAI requirement applies to foreign arbitral institutions as well. Until recently there were only four arbitral institutions – all of them Russian – which had been conferred the status of PAI. In April 2019, the Hong Kong International Arbitration Centre (HKIAC) became the first foreign arbitral tribunal to obtain PAI status in Russia. In June 2019, the Vienna International Arbitration Center became the second foreign institution licensed to administer arbitrations in Russia. On May 19, 2021, the International Court of Arbitration of the International Chamber of Commerce (ICC) and the Singapore International Arbitration Centre (SIAC) received from the Russian Ministry of Justice the right to act in Russia as PAIs. The London Court of International Arbitration, and the Arbitration Institute of the Stockholm Chamber of Commerce are occasionally chosen for administering international arbitrations seated in Russia, despite the fact that none of them has PAI status. Arbitral awards rendered by tribunals constituted under the rules of these institutions can be recognized and enforced in Russia.

Bankruptcy Regulations

Russia established a law providing for enterprises bankruptcy in the early 1990s. A law on personal bankruptcy came into force in 2015. Russia’s ranking in the World Bank’s Doing Business 2020 Report for “Resolving Insolvency” is 57 out of 190 economies, down two notches compared to 2019. Article 9 of the Law on Insolvency requires an insolvent firm to petition the court of arbitration to declare the company bankrupt within one month of failing to pay the bank’s claims. The court then convenes a meeting of creditors, who petition the court for liquidation or reorganization. In accordance with Article 51 of the Law on Insolvency, a bankruptcy case must be considered within seven months of the day the petition was received by the arbitral court.

Liquidation proceedings by law are limited to six months and can be extended by six more months (art. 124 of the Law on Insolvency). Therefore, the time dictated by law is 19 months. However, in practice, liquidation proceedings are extended several times and for longer periods. The total cost of insolvency proceedings is approximately nine percent of the value of the estate.

In July 2017, amendments to the Law on Insolvency expanded the list of persons who may be held vicariously liable for a bankrupted entity’s debts and clarified the grounds for such liability. According to the new rules, in addition to the CEO, the following can also be held vicariously liable for a bankrupt company’s debts: top managers, including the CFO and COO, accountants, liquidators, and other persons who controlled or had significant influence over the bankrupted entity’s actions by kin or position, or could force the bankrupted entity to enter into unprofitable transactions. In addition, persons who profited from the illegal actions by management may also be subject to liability through court action. The amendments clarified that shareholders owning less than 10 percent in the bankrupt company shall not be deemed controlling unless they are proven to have played a role in the company’s bankruptcy. The amendments also expanded the list of people who may be subject to secondary liability and the grounds for recognizing fault for a company’s bankruptcy.

Amendments to the Law on Insolvency approved in December 2019 gave greater protection, in the context of insolvency of a Russian counterparty, to collateral arrangements and close-out netting in respect of over-the-counter derivative, repurchase, and certain other “financial” transactions documented under eligible master agreements.

Investment Incentives

Since 2005, Russia’s industrial investment incentive regime has granted tax breaks and other government incentives to foreign companies in certain sectors in exchange for producing locally. As part of its WTO Protocol, Russia agreed to eliminate the elements of this regime that are inconsistent with the Trade-Related Investment Measures (TRIMS) Agreement by July 2018. The TRIMS Agreement requires elimination of measures such as those that require or provide benefits for the use of domestically produced goods (local content requirements), or measures that restrict a firm’s imports to an amount related to its exports or related to the amount of foreign exchange a firm earns (trade balancing requirements). Russia notified the WTO that it had terminated these automotive investment incentive programs as of July 1, 2018. In 2019, the Ministry of Industry and Trade introduced a new points-based system to estimate vehicle localization levels to determine Original Equipment Manufacturer (OEM)’s eligibility for Russian state support. The government provides state support only to OEMs whose finished vehicles are deemed to be of Russian origin, which will depend upon them scoring at least 2,000 points under the new system to get some assistance and 6,000 point to enjoy a full range of support measures. Points will be awarded for localizing the supply of certain components. Localized engines or transmissions used in vehicle assembly, for instance, are worth 40 points. OEMs running a research and development business in Russia score an additional 20 points; and a further 20 points are granted to those using localized aluminum or electronic systems in their vehicles. In May 2021, the government introduced a points-based system to assess localization levels in the shipbuilding industry to determine Original Equipment Manufacturer (OEM)’s eligibility for Russian state support in a move to facilitate the development of shipbuilding industry and import substitution.

The government also introduced Special Investment Contracts (SPICs) as an alternative incentive program in 2015. On December 18, 2017, the government changed the rules for concluding SPICs to increase investment in Russia by offering tax incentives and simplified procedures for government interactions. These contracts allow foreign companies in Russia access to import substitution programs, including certain subsidies, if they establish local production. In principle, these contracts may aid in expediting customs procedures, however, in practice, reports suggest companies that sign such contracts find their business hampered by policies biased in favor of local producers.

In August 2019, the Government created “SPIC-2,” which aimed to increase long-term private investment in high-technology projects and introduce advanced technology for local content in manufacturing products. The Ministry of Industry and Trade also extended the maximum SPIC term to 20 years, depending on the amount of investment. The key criteria for evaluating bids are speed of introducing technology, the volume of manufacturing, and the level of technology in local manufacturing processes.

The Russian Direct Investment Fund (RDIF) was established in 2011 as a sovereign wealth fund to operate with long-term and strategic investors and by offering co-financing for foreign investments directed at the modernization of the Russian economy. To date, foreign partners of the RDIF have invested RUB 1.9 trillion ($26 billion) in Russia, with the RDIF having co-invested RUB 200 billion ($2.7 billion). The RDIF has also attracted over $40 billion of foreign capital into the Russian economy through long-term strategic partnerships. The RDIF, in conjunction with the Gamaleya National Center for Microbiology and Epidemiology, financed the development and marketing of Russia’s Sputnik V and Sputnik Light vaccines.

Foreign Trade Zones/Free Ports/Trade Facilitation

Russia continues to promote the use of high-tech parks, special economic zones (SEZs), and industrial clusters, which offer additional tax and infrastructure incentives to attract investment. “Resident companies” can receive a broad range of benefits, including exemption from profit tax, value-added tax, property tax, import duties, and partial exemption from social fund payments. Russia currently has 27 SEZs ( http://www.russez.ru/oez/ ). A Russian Accounts Chamber (RAC) investigation of SEZs in February 2020 found they have had no measurable impact on the Russian economy, despite RUB 136 billion ($1.7 billion) investment from the federal government from 2006-2018. In 2015, the Russian government created a separate but similar program – “Territories of Advanced Development” – with preferential tax treatment and simplified government procedures in Siberia, Kaliningrad, and the Russian Far East.

Performance and Localization Requirements

Russian law generally does not impose performance requirements, and they are not widely included as part of private contracts in Russia. Some have appeared, however, in the agreements of large multinational companies investing in natural resources and in production-sharing legislation. There are no formal requirements for offsets in foreign investments. Since approval for investments in Russia can depend on relationships with government officials and on a firm’s demonstration of its commitment to the Russian market, these conditions may result in offsets.

In certain sectors, the Russian government has pressed for localization and increased local content. For example, in a bid to boost high-tech manufacturing in the renewable energy sector, Russia guarantees a 12 percent profit over 15 years for windfarms using turbines with at least 65 percent local content. Russia is currently considering local content requirements for industries that have high percentages of government procurement, such as medical devices and pharmaceuticals. Russia is not a signatory to the WTO’s Government Procurement Agreement. Consequently, restrictions on public procurement have been a major avenue for Russia to implement localization requirements without running afoul of international commitments.

Russia’s data storage law (the “Yarovaya law”) took effect on July 1, 2018, requiring providers to store data in “full volume” beginning October 1, 2018. The law requires domestic telecoms and ISPs to store all customers’ voice calls and texts for six months; ISPs must store data traffic for one month. The Yarovaya law initially required longer retention with a shorter implementation window, which companies criticized as costly and unworkable. Until recently there were no special liabilities for violations of the data localization requirement. In December, President Putin signed into law legislative amendments establishing significant fines ranging from RUB 1 million ($15,600) to RUB 18 million ($282,000) for legal entities and from RUB 100,000 ($1,560) to RUB 800,000 ($12,500) for company CEOs. Amendments to the “Plan for Achieving Russia’s National Development Goals until 2024 and for the Planning Period until 2030 call for a one-year postponement of some implementation timelines set in Russia’s data storage law (the “Yarovaya law”) that took effect on July 1, 2018. Specifically, the requirement to move Russian citizens’ data onto servers located in Russia was pushed back from October 31, 2021 to October 30, 2022.

On November 21, 2019, Russia adopted the law on mandatory preinstallation of Russian-produced software for smartphones, computers, and other electronic devices, in the sale of certain types of technically complex goods. Starting from July 31, 2021, the regulators will apply fines for the sale of any electronics without preinstalled Russian software.

On September 16, 2020, the Federal Service for Technical and Export Control (FSTEC) published the order on the amendments to the Requirements for ensuring the security of significant objects of the Russian critical information infrastructure (CII). The changes require using predominantly domestic software and equipment for Russian CII to ensure its technological independence and safety, and create the conditions for promotion of the Russian-made products abroad.

The Central Bank of Russia (CBR) has imposed caps on the percentage of foreign employees in foreign banks’ subsidiaries. The ratio of Russian employees in a subsidiary of a foreign bank is set at less than 75 percent. If the executive of the subsidiary is a non-resident of Russia, at least 50 percent of the bank’s managing body should be Russian citizens.

Real Property

Russia placed 12th overall in the 2020 World Bank Doing Business Report for “registering property,” which analyzes the “steps, time and cost involved in registering property, assuming a standardized case of an entrepreneur who wants to purchase land and a building that is already registered and free of title dispute,” as well as the “the quality of the land administration system.”

The Russian Constitution, along with a 1993 Presidential Decree, gives Russian citizens the right to own, inherit, lease, mortgage, and sell real property. The state owns the majority of Russian land, although the structures on the land are typically privately owned. Mortgage legislation enacted in 2004 facilitates the process for lenders to evict homeowners who do not stay current in their mortgage payments.

Intellectual Property Rights

Russia remained on the U.S. Trade Representative (USTR) Special 301 Priority Watch List in 2020 and had several illicit streaming websites and online markets reported in the 2019 Notorious Markets List. Particular areas of concern include copyright infringement, trademark counterfeiting/hard goods piracy, and non-transparent royalty collection procedures. Stakeholders continue to report significant piracy of video games, music, movies, books, journal articles, and television programming. Mirror sites related to infringing websites and smartphone applications that facilitate illicit trade are also a concern. Russia needs to direct more action to rogue online platforms targeting audiences outside the country. In December 2019, for the first time in Russia, the owner of several illegal streaming sites received a two-year suspended criminal sentence for violating Russia’s IP protection legislation. This case has set an important precedent for enforcing IPR laws in Russia.

Online piracy continues to pose a significant problem in Russia. Russia has not upheld its commitments to protect IPR, including commitments made to the United States as part of its WTO accession. Nevertheless, there are indications that the Russian internet piracy market is declining. According to Group-IB, a global cyber threat intelligence company, total revenue of the Russian video piracy market in 2020 reached $59 million. The market has been shrinking for several years in a row. In 2020, the market declined by 7 percent, compared to a 27 percent drop registered in 2019.

Despite Russia’s 2018 ban on virtual private networks (VPNs), the ban has not been fully enforced. Since 2017, search engines, including Google and Yandex, have been required to block IPR-infringing websites and “mirror” sites, as determined by federal communications watchdog Roskomnadzor. As a result of increased scrutiny, internet companies Yandex, Mail.Ru Group, Rambler, and Rutube signed an anti-piracy memorandum with several domestic right holders, which is valid through the end of 2021. From January to November 2020, Roskomnadzor blocked over 10,000 piracy websites and “mirror sites,” compared to over 6,000 in 2019.

Modest progress has been made in the area of customs IPR protection since the Federal Customs Service (FTS) can now confiscate imported goods that violate IPR. From January to November 2020, the FTS seized 12.8 million counterfeited goods, compared with 11 million in 2019. Over the same time period, the FTS prevented the infringement and damages to copyright holders amounting to RUB 4.6 billion ($64 million), and identified 11.8 million units of counterfeit industrial products in Russia, almost double compared to 2019. The turnover of counterfeit non-food consumer goods in Russia is estimated at around RUB 5.2 trillion ($70 billion), or 4.5 percent of Russia’s GDP.

In May 2020, the State Duma approved amendments to the Federal Law “On Information, Information Technologies and the Protection of Information” to allow blocking mobile applications with illegal content. The Law enables the Russian regulator (“Roskomnadzor”) to mandate app owners and app platforms such as AppStore, Google Play and Huawei AppGallery to delete the IP infringing content.

Capital Markets and Portfolio Investment

Russia is open to portfolio investment and has no restrictions on foreign investments. Russia’s two main stock exchanges – the Russian Trading System (RTS) and the Moscow Interbank Currency Exchange (MICEX) – merged in December 2011. The MICEX-RTS bourse conducted an initial public offering on February 15, 2013, auctioning an 11.82 percent share.

The Russian Law on the Securities Market includes definitions of corporate bonds, mutual funds, options, futures, and forwards. Companies offering public shares are required to disclose specific information during the placement process as well as on a quarterly basis. In addition, the law defines the responsibilities of financial consultants assisting companies with stock offerings and holds them liable for the accuracy of the data presented to shareholders. In general, the Russian government respects IMF Article VIII, which it accepted in 1996. Credit in Russia is allocated generally on market terms, and the private sector has access to a variety of credit instruments. Foreign investors can get credit on the Russian market, but interest rate differentials tend to prompt investors from developed economies to borrow on their own domestic markets when investing in Russia.

Money and Banking System

Banks make up a large share of Russia’s financial system. Although Russia had 396 licensed banks as of March 1, 2020, state-owned banks, particularly Sberbank and VTB Group, dominate the sector. The top three largest banks are state-controlled (with private Alfa Bank ranked fourth). The top three banks held 51.4 percent of all bank assets in Russia as of March 1, 2020. The role of the state in the banking sector continues to distort the competitive environment, impeding Russia’s financial sector development. At the beginning of 2019, the aggregate assets of the banking sector amounted to 91.4 percent of GDP, and aggregate capital was 9.9 percent of GDP. By January 2020 and 2021, the aggregate assets of Russian banks reached 92.2 and 97.2 percent, respectively. Russian banks reportedly operate on short time horizons, limiting capital available for long-term investments. Overall, the share of retail non-performing loans (NPLs) to total gross loans slightly increased from 4.4 percent of total gross retail loans in January 2020 to 4.5 percent in April 2021, while corporate NPLs declined from 7.5 percent to 6.5 percent in the same period, according to the Central Bank of Russia. ACRA-Rating analytical agency expects an increase in retail NPLs to 6.0 percent and corporate NPL – to 8.8 percent by the end of 2021.

Foreign banks are allowed to establish subsidiaries, but not branches within Russia and must register as a business entity in Russia.

Foreign Exchange and Remittances

Foreign Exchange

While the ruble is the only legal tender in Russia, companies and individuals generally face no significant difficulty in obtaining foreign currency from authorized banks. The CBR retains the right to impose restrictions on the purchase of foreign currency, including the requirement that the transaction be completed through a special account, according to Russia’s currency control laws. The CBR does not require security deposits on foreign exchange purchases. Otherwise, there are no barriers to remitting investment returns abroad, including dividends, interest, and returns of capital, apart from the fact that reporting requirements exist and failure to report in a timely fashion will result in fines.

Currency controls also exist on all transactions that require customs clearance, which, in Russia, applies to both import and export transactions, and certain loans. As of March 1, 2018, the CBR no longer requires a “transaction passport” (i.e., a document with the authorized bank through which a business receives and services a transaction) when concluding import and export contracts. The CBR also simplified the procedure to record import and export contracts, reducing the number of documents required for bank authorization. The government has also lifted the requirement to repatriate export revenues if settlements under a foreign trade contract are set in Russian rubles effective January 1, 2020.

Remittance Policies

The CBR retains the right to impose restrictions on the purchase of foreign currency, including the requirement that the transaction be completed through a special account, according to Russia’s currency control laws. The CBR does not require security deposits on foreign exchange purchases. To navigate these requirements, investors should seek legal expert advice at the time of making an investment. Banking contacts confirm that investors have not had issues with remittances and in particular with repatriation of dividends.

Sovereign Wealth Funds

In 2018, Russia combined its two sovereign wealth funds to form the National Welfare Fund (NWF). The fund’s holdings amounted to $165.4 billion, or 12.0 percent of GDP as of April 1, 2020 and grew to $185.9 billion, or 12.0 percent of GDP as of May 1, 2021. The Ministry of Finance oversees the fund’s assets, while the CBR acts as the operational manager. Russia’s Accounts Chamber regularly audits the NWF, and the results are reported to the State Duma. The NWF is maintained in foreign currencies, and is included in Russia’s foreign currency reserves, which amounted to $563.4 billion as of March 31, 2020. In June 2021, Russia’s Ministry of Finance announced plans to completely divest the $41 billion worth of NWF U.S. dollar holdings within a month, replacing them with RMB (Chinese Yuan), Euros and gold by July 2021.

Russia does not have a unified definition of a state-owned enterprise (SOE). However, analysts define SOEs as enterprises where the state has significant control, through full, majority, or at least significant minority ownership. The OECD defines material minority ownership as 10 percent of voting shares, while under Russian legislation, a minority shareholder would need 25 percent plus one share to exercise significant control, such as block shareholder resolutions to the charter, make decisions on reorganization or liquidation, increase in the number of authorized shares, or approve certain major transactions. SOEs are subdivided into four main categories: 1) unitary enterprises (federal or municipal, fully owned by the government), of which there are 692 unitary enterprises owned by the federal government as of January 1, 2020; 2) other state-owned enterprises where government holds a stake of which there are 1,079 joint-stock companies owned by the federal government, as of January 1, 2019 – such as Sberbank, the biggest Russian retail bank (over 50 percent is owned by the government); 3) natural monopolies, such as Russian Railways; and 4) state corporations (usually a giant conglomerate of companies) such as Rostec and Vnesheconombank (VEB).  There are six functioning state corporations directly chartered by the federal government, as of March 2021. By 2020, the number of federal government-owned “unitary enterprises” declined by 44 percent from 1,247 in 2017; according to the Federal Agency for State Property Management, the number of joint-stock companies with state participation declined only by 33.6 percent in the same period.

SOE procurement rules are non-transparent and use informal pressure by government officials to discriminate against foreign goods and services. Sole-source procurement by Russia’s SOEs increased to 45.5 percent in 2018, or to 37.7 percent in value terms, according to a study by the non-state “National Procurement Transparency Rating” analytical center. The current Russian government policy of import substitution mandates numerous requirements for localization of production of certain types of machinery, equipment, and goods.

Privatization Program

The Russian government and its SOEs dominate the economy. The government approved in January 2020 a new 2020-22 plan identifying 86 “federal state unitary enterprises” (100 percent state-owned “FGUPs”) (12.3 percent of all FGUPs), sell its stakes in 186 joint stock companies (“JSCs”) (16.5 percent of all JSCs with state participation) and in 13 limited liability companies (“LLCs”) for privatization. The plan would also reduce the state’s share in VTB, one of Russia’s largest banks, from over 60 percent to 50 percent plus one share and in Sovkomflot to 75 percent plus one share within three years. On October 7, 2020, Sovcomflot sold the government’s 17.2 percent stake through an IPO at the Moscow Exchange. The government’s stake in Sovcomflot will remain at 82.8 percent. The government raised about $550 million through the sale. Other large SOEs might be privatized on an ad hoc basis, depending on market conditions. The Russian government still maintains a list of 136 SOEs with “national significance” that are either wholly or partially owned by the Russian state and whose privatization is permitted only with a special governmental decree, including Aeroflot, Rosneftegaz, Transneft, Russian Railways, and VTB. While the total number of SOEs has declined significantly in recent years, mostly large SOEs remain in state hands and “large scale” privatization, intended to help shore up the federal budget and spur economic recovery, is not keeping up with implementation plans. The government expects that “small-scale privatization” (excluding privatization of large SOEs) will bring up to RUB 3.6 billion ($58 million) to the federal budget annually in 2020-2022.

The government’s previous 2017-2019 privatization program has substantially underperformed its benchmarks. Only 24.8 percent of the 581 state-owned enterprises (SOEs) slated to be privatized were actually privatized in 2017-2019, according to a May 27, 2021 report by the Russian Accounts Chamber (RAC). As a result, total privatization revenues received in 2018 reached only RUB 2.44 billion ($39 million), down 58 percent compared to 2017. In 2019, privatization revenues (excluding large SOEs) reached RUB 2.2 billion ($35 million), down 40.5 percent compared to the official target of RUB 5.6 billion ($86.5 million).

While not standard practice, Russian companies are beginning to show an increased level of interest in their reputation as good corporate citizens. When seeking to acquire companies in Western countries or raise capital on international financial markets, Russian companies face international competition and scrutiny, including with respect to corporate social responsibility (CSR) standards. As a result, most large Russian companies currently have a CSR policy in place, or are developing one, despite the lack of pressure from Russian consumers and shareholders to do so. CSR policies of Russian firms are usually published on corporate websites and detailed in annual reports, but do not involve a comprehensive “due diligence” approach of risk mitigation that the OECD Guidelines for Multinational Enterprises promotes. Most companies choose to create their own non-government organization (NGO) or advocacy outreach rather than contribute to an already existing organization. The Russian government is a powerful stakeholder in the development of certain companies’ CSR agendas. Some companies view CSR as merely financial support of social causes and choose to support local health, educational, and social welfare organizations favored by the government. One association, the Russian Union of Industrialists and Entrepreneurs (RSPP), developed a Social Charter of Russian Business in 2004 in which 269 Russian companies and organizations have since joined, as of April 1, 2020.

According to a joint study conducted by Skolkovo Business School and UBS Bank, in 2017 corporate contributions to charitable causes in Russia reached an estimated RUB 220 billion (USD 3.8 billion). RSPP reported that as many as 185 major Russian companies published 1,038 corporate non-financial reports between 2000 and 2019, including on social responsibility initiatives.

Additional Resources 

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities and;
• North Korea Sanctions & Enforcement Actions Advisory

Department of Labor

• Findings on the Worst Forms of Child Labor Report;
• List of Goods Produced by Child Labor or Forced Labor.
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the Worldand;
• Comply Chain.

Despite some government efforts to combat it, the level of corruption in Russia remains high. Transparency International’s 2020 Corruption Perception Index (CPI) puts Russia at 129th place among 180 countries – eight notches up from the rank assigned in 2019.

Roughly 24 percent of entrepreneurs surveyed by the Russian Chamber of Commerce in October and November 2019 said they constantly faced corruption. Businesses mainly experienced corruption during applications for permits (35.3 percent), during inspections (22.1 percent), and in the procurement processes (38.7 percent). The areas of government spending that ranked highest in corruption were public procurement, media, national defense, and public utilities.

In March 2020, Russia’s new Prosecutor General, Igor Krasnov, reported RUB 21 billion ($324 million) were recovered in the course of anticorruption investigations in 2019. In December 2019, Procurator General’s Office Spokesperson Svetlana Petrenko reported approximately over 7,000 corruption convictions in 2019, including of 752 law enforcement officers, 181 Federal Penitentiary Service (FPS) officers, 81 federal bailiffs and 476 municipal officials.

Until recently, one of the peculiarities of Russian enforcement practices was that companies were prosecuted almost exclusively for small and mid-scale bribery. Several 2019 cases indicate that Russian enforcement actions may expand to include more severe offenses as well. To date, ten convictions of companies for large-scale or extra large-scale bribery with penalty payments of RUB 20 million ($320,000) or more have been disclosed in 2019 – compared to only four cases in the whole of 2018. In July 2019, Russian Standard Bank, which is among Russia’s 200 largest companies according to Forbes Russia, had to pay a penalty of RUB 26.5 million ($420,000) for bribing bailiffs in Crimea in order to speed up enforcement proceedings against defaulted debtors.

Still, there is no efficient protection for whistleblowers in Russia. In June 2019, the legislative initiative aimed at the protection of whistleblowers in corruption cases ultimately failed. The draft law, which had been adopted at the first reading in December 2017, provided for comprehensive rights of whistleblowers, and responsibilities of employers and law enforcement authorities. Since August 2018, Russian authorities have been authorized to pay whistleblowers rewards which may exceed RUB 3 million ($50,000). However, rewards alone will hardly suffice to incentivize whistleblowing.

Russia adopted a law in 2012 requiring individuals holding public office, state officials, municipal officials, and employees of state organizations to submit information on the funds spent by them and members of their families (spouses and underage children) to acquire certain types of property, including real estate, securities, stock, and vehicles. The law also required public servants to disclose the source of the funds for these purchases and to confirm the legality of the acquisitions.

In July 2018, President Putin signed a two-year plan to combat corruption. The plan required public discussion for federal procurement worth more than RUB 50 million ($660,000) and municipal procurement worth more than RUB 5 million ($66,000). The government also expanded the list of property that can be confiscated if the owners fail to prove it was acquired using lawful income. The government maintains an online registry of officials charged with corruption-related offences, with individuals being listed for a period of five years. The Constitutional Court gave clear guidance to law enforcement on asset confiscation due to the illicit enrichment of officials. Russia has ratified the UN Convention against Corruption, but its ratification did not include article 20, which deals with illicit enrichment. The Council of Europe’s Group of States against Corruption reported in 2019 that Russia had implemented 18 out of 22 recommendations of the Council of Europe Group of States against Corruption (GRECO) (nine fully implemented, nine partially implemented, and four recommendations have not been implemented), according to a Compliance Report released by GRECO in August 2020. GRECO made 22 recommendations to Russia on further combatting corruption developments: eight concern members of the parliament, nine concern judges, and five concern prosecutors.

In 2020, overall damage from the corruption crimes entailing criminal cases in Russia exceeded RUB 63 billion ($ 836.7 million). The number of detected corruption-related crimes in January-February 2021 increased by 11.8 percent to 7,100 up from 6,300 in the same period of 2020, according to the Prosecutor General’s Office. The number of bribery cases increased by 21 percent year-on-year in the same period to reach 3,500. The damage caused by corruption increased from RUB 7.2 billion ($ 98.2 million) in January-February 2020 to RUB 13 billion ($ 177.4 million) in the same period of 2021.

U.S. companies, regardless of size, are encouraged to assess the business climate in the relevant market in which they will be operating or investing and to have effective compliance programs or measures to prevent and detect corruption, including foreign bribery. U.S. individuals and firms operating or investing in Russia should become familiar with the relevant anticorruption laws of both Russia and the United States to comply fully with them. They should also seek the advice of legal counsel when appropriate.

Resources to Report Corruption

Andrey Avetisyan
Ambassador at Large for International Anti-Corruption Cooperation
Ministry of Foreign Affairs
32/34 Smolenskaya-Sennaya pl, Moscow, Russia +7 499 244-16-06
+7 499 244-16-06

Anton Pominov
Director General
Transparency International – Russia
Rozhdestvenskiy Bulvar, 10, Moscow
Email: Info@transparency.org.ru

Individuals and companies that wish to report instances of bribery or corruption that impact, or potentially impact their operations, and to request the assistance of the United States Government with respect to issues relating to issues of corruption may call the Department of Commerce’s Russia Corruption Reporting hotline at (202) 482-7945, or submit the form provided at http://tcc.export.gov/Report_a_Barrier/reportatradebarrier_russia.asp .

Political freedom continues to be limited by restrictions on the fundamental freedoms of expression, assembly, and association and crackdowns on political opposition, independent media, and civil society. Since July 2012, Russia has passed a series of laws giving the government the authority to label NGOs as “foreign agents” if they receive foreign funding, greatly restricting the activities of these organizations. To date, more than 77 NGOs have been labelled foreign agents. A May 2015 law authorizes the government to designate a foreign organization as “undesirable” if it is deemed to pose a threat to national security or national interests. As of June, 2021, 34 foreign organizations were included on this list. (https://minjust.ru/ru/activity/nko/unwanted)

According to the Russian Supreme Court, 7,763 individuals were convicted of economic crimes in 2019; the Russian business community alleges many of these cases were the result of commercial disputes. Potential investors should be aware of the risk of commercial disputes being criminalized. Chechnya, Ingushetia, Dagestan and neighboring regions in the northern Caucasus have a high risk of violence and kidnapping.

Public protests continue to occur intermittently in Moscow and other cities. Russians protested in support of opposition leader Alexey Navalny after his return from Germany and detention in Moscow in January 2021. Rallies were held in almost 200 cities, the largest taking place in the capital. During these protests, authorities detained thousands and initiated several criminal cases against the participants; the number of detainees was record setting. Moscow saw the largest protests since 2011 in the summer of 2019 as many Muscovites were unhappy that opposition candidates had been banned from running in the September municipal elections.

The Russian labor market remains fragmented, characterized by limited labor mobility across regions and substantial differences in wages and employment conditions. Earning inequalities are significant, enforcement of labor standards remains relatively weak, and collective bargaining is underdeveloped. Employers regularly complain about shortages of qualified skilled labor. This phenomenon is due, in part, to weak linkages between the education system and the labor market and a shortage of highly skilled labor. In 2019, the minimum wage in Russia was linked to the official “subsistence” level, which as of June 2021, was RUB 12,792 ($178).

The 2002 Labor Code governs labor standards in Russia. Normal labor inspections identify labor abuses and health and safety standards in Russia. The government generally complies with ILO conventions protecting worker rights, though enforcement is often insufficient, as the Russian government employs a limited number of labor inspectors. Employers are required to make severance payments when laying off employees in light of worsening market conditions. 12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

Please note that the following tables include FDI statistics from three different sources, and therefore will not be identical. Table 2 uses BEA data when available, which measures the stock of FDI by the market value of the investment in the year the investment was made (often referred to as historical value). This approach tends to undervalue the present value of FDI stock because it does not account for inflation. BEA data is not available for all countries, particularly if only a few US firms have direct investments in a country. In such cases, Table 2 uses other sources that typically measure FDI stock in current value (or, historical values adjusted for inflation). Even when Table 2 uses BEA data, Table 3 uses the IMF’s Coordinated Direct Investment Survey (CDIS) to determine the top five sources of FDI in the country. The CDIS measures FDI stock in current value, which means that if the U.S. is one of the top five sources of inward investment, U.S. FDI into the country will be listed in this table. That value will come from the CDIS and therefore will not match the BEA data.

* Source for Host Country Data: FDI data – Central Bank of Russia (CBR); GDP data – Rosstat (GDP) (Russia’s GDP was RUB 110,046 billion in 2019, according to Rosstat. The yearly average RUB-USD- exchange rate in 2019, according to the CBR, was RUB 64.7362 to the USD).

Embassy of the United States of America
Economic Section
Bolshoy Deviatinsky Pereulok No. 8
Moscow 121099, Russian Federation
+7 (495) 728-5000 (Economic Section)
Email: MoscowECONESTHAmericans@state.gov 

Policies Towards Foreign Direct Investment

Market entry for U.S. firms is facilitated by a common language, legal heritage, and similar business institutions and practices.  The UK is well supported by sophisticated financial and professional services industries and has a transparent tax system in which local and foreign-owned companies are taxed alike.  The pound sterling is a free-floating currency with no restrictions on its transfer or conversion.  There are no exchange controls restricting the transfer of funds associated with an investment into or out of the UK.

UK legal, regulatory, and accounting systems are transparent and consistent with international standards.  The UK legal system provides a high level of investor protections.  Private ownership is protected by law and monitored for competition-restricting behavior.  U.S. exporters and investors generally will find little difference between the United States and the UK in the conduct of business, and common law prevails as the basis for commercial transactions in the UK.

The UK actively encourages inward FDI.  The Department for International Trade, including through its newly created Office for Investment, actively promotes inward investment and prepares market information for a variety of industries.  U.S. companies establishing British subsidiaries generally encounter no special nationality requirements on directors or shareholders.  Once established in the UK, foreign-owned companies are treated no differently from UK firms.  The UK government is a strong defender of the rights of any British-registered company, irrespective of its nationality of ownership.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign ownership is limited in only a few private sector companies for national security reasons, such as Rolls Royce (aerospace) and BAE Systems (aircraft and defense).  No individual foreign shareholder may own more than 15 percent of these companies.  Theoretically, the government can block the acquisition of manufacturing assets from abroad by invoking the Industry Act of 1975, but it has never done so.  Investments in energy and power generation require environmental approvals. Certain service activities (like radio and land-based television broadcasting) are subject to licensing.

The UK requires that at least one director of any company registered in the UK be ordinarily resident in the country.

The UK’s National Security and Investment Act, which came into effect in May 2021, significantly strengthened the UK’s existing investment screening powers.  Investments resulting in foreign control generally exceeding 15 percent of companies in 17 sectors pertaining to national security require mandatory notifications to the UK government’s Investment Security Unit (see https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/965784/nsi-scope-of-mandatory-regime-gov-response.pdf for details).  The regime operates separately from competition law.  The bill provides authority to a newly created Investment Security Unit to review investments retroactively for a period of five years.

Other Investment Policy Reviews

The Economist Intelligence Unit, World Bank Group’s “Doing Business 2020,” and the OECD’s Economic Forecast Summary (December 2020) have current investment policy reports for the United Kingdom:

http://country.eiu.com/united-kingdom

http://www.doingbusiness.org/data/exploreeconomies/united-kingdom/

https://www.oecd.org/economy/united-kingdom-economic-snapshot/  

Business Facilitation

The UK government has promoted administrative efficiency to facilitate business creation and operation.  The online business registration process is clearly defined, though some types of companies cannot register as an overseas firm in the UK, including partnerships and unincorporated bodies.  Registration as an overseas company is only required when the company has some degree of physical presence in the UK.  After registering their business with the UK governmental body Companies House, overseas firms must separately register to pay corporation tax within three months.  On average, the process of setting up a business in the UK requires 13 days, compared to the European average of 32 days, putting the UK in first place in Europe and sixth in the world.

As of April 2016, companies have to declare all “persons of significant control.”  This policy recognizes that individuals other than named directors can have significant influence on a company’s activity and that this information should be transparent.  More information is available at this link: https://www.gov.uk/government/publications/guidance-to-the-people-with-significant-control-requirements-for-companies-and-limited-liability-partnerships.  Companies House maintains a free, publicly searchable directory, available at https://www.gov.uk/get-information-about-a-company.

The UK offers a welcoming environment to foreign investors, with foreign equity ownership restrictions in only a limited number of sectors covered by the World Bank’s Investing Across Sectors indicators.

https://www.gov.uk/government/organisations/department-for-international-trade

https://www.gov.uk/set-up-business

https://www.gov.uk/topic/company-registration-filing/starting-company

http://www.doingbusiness.org/data/exploreeconomies/united-kingdom/starting-a-business

Special Section on the British Overseas Territories and Crown Dependencies

The British Overseas Territories (BOTs) comprise Anguilla, British Antarctic Territory, Bermuda, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands, Gibraltar, Montserrat, Pitcairn Islands, St. Helena, Ascension and Tristan da Cunha, Turks and Caicos Islands, South Georgia and South Sandwich Islands, and Sovereign Base Areas on Cyprus.  The BOTs retain a substantial measure of authority for their own affairs.  Local self-government is usually provided by an Executive Council and elected legislature.  Governors or Commissioners are appointed by the Crown on the advice of the British Foreign Secretary, and retain responsibility for external affairs, defense, and internal security.

Many of the territories are now broadly self-sufficient.  The UK’s Foreign, Commonwealth and Development Department (FCDO), however, maintains development assistance programs in St. Helena, Montserrat, and Pitcairn. This includes budgetary aid to meet the islands’ essential needs and development assistance to help encourage economic growth and social development in order to promote economic self-sustainability.  In addition, all other BOTs receive small levels of assistance through “cross-territory” programs for issues such as environmental protection, disaster prevention, HIV/AIDS, and child protection.

Seven of the BOTs have financial centers:  Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Montserrat, and the Turks and Caicos Islands.  These territories have committed to the OECD’s Common Reporting Standard (CRS) for the automatic exchange of taxpayer financial account information.  They have long exchanged information with the UK, and began exchanging information with other jurisdictions under the CRS from September 2017.

Of the BOTs, Anguilla is the only one to receive a “non-compliant” rating by the Global Forum for Exchange of Information on Request, putting it on the EU list of non-cooperative tax jurisdictions.  The Global Forum has rated the other six territories as “largely compliant.”  Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, and the Turks and Caicos Islands have committed in reciprocal bilateral arrangements with the UK to hold beneficial ownership information in central registers or similarly effective systems, and to provide UK law enforcement authorities with near real-time access to this information.

Anguilla:  Anguilla has no income, capital gains, estate, profit or other forms of direct taxation on either individuals or corporations, for residents or non-residents of the jurisdiction.  The territory has no exchange rate controls.  Non-Anguillan nationals may purchase property, but the transfer of land to an alien includes a 12.5 percent tax on the assessed value of the property or the sales proceeds, whichever is greater.

British Virgin Islands:  The government of the British Virgin Islands offers a series of tax incentive packages aimed at reducing the cost of doing business on the islands.  This includes relief from corporation tax payments over specific periods, but companies must pay an initial registration fee and an annual license fee to the BVI Financial Services Commission.  Crown land grants are not available to non-British Virgin Islanders, but private land can be leased or purchased following the approval of an Alien Land Holding License.  Stamp duty is imposed on transfers of real estate and the transfer of shares in a BVI company owning real estate in the BVI at a rate of four percent for belongers (i.e., residents who have proven they meet a legal standard of close ties to the territory) and 12 percent for non-belongers.  There is no corporate income tax, capital gains tax, branch tax, or withholding tax for companies incorporated under the BVI Business Companies Act.  Payroll tax is imposed on every employer and self-employed person who conducts business in BVI.  The tax is paid at a graduated rate depending upon the size of the employer.  The current rates are 10 percent for small employers (those which have a payroll of less than $150,000, a turnover of less than $300,000 and fewer than seven employees) and 14 percent for larger employers.  Eight percent of the total remuneration is deducted from the employee, the remainder of the liability is met by the employer.  The first $10,000 of remuneration is free from payroll tax.

Cayman Islands:  There are no direct taxes in the Cayman Islands.  In most districts, the government charges stamp duty of 7.5 percent on the value of real estate at sale, but certain districts, including Seven Mile Beach, are subject to a rate of nine percent.  There is a one percent fee payable on mortgages of less than KYD 300,000, and one and a half percent on mortgages of KYD 300,000 or higher.  There are no controls on the foreign ownership of property and land.  Investors can receive import duty waivers on equipment, building materials, machinery, manufacturing materials, and other tools.

Falkland Islands:  Companies located in the Falkland Islands are charged corporation tax at 21 percent on the first £1 million ($1.4 million) and 26 percent for all amounts in excess of £1 million ($1.4 million).  The individual income tax rate is 21 percent for earnings below £12,000 ($16,800) and 26 percent above this level.

Gibraltar:  With BREXIT, Gibraltar is not currently a part of the EU, but under the terms of an agreement in principle reached between the UK and Spain on December 31, 2020, it is set to become a part of the EU’s passport-free Schengen travel area.  The UK and EU are set to begin negotiations on a treaty on the movement of people and goods between Gibraltar and the bloc.  Gibraltar has a buoyant economy with a stable currency and few restrictions on moving capital or repatriating dividends.  The corporate income tax rate is 20 percent for utility, energy, and fuel supply companies, and 10 percent for all other companies.  There are no capital or sales taxes.

Montserrat:   Foreign investors are permitted to acquire real estate, subject to the acquisition of an Alien Land Holding license, which carries a fee of five percent of the purchase price.  The government also imposes stamp and transfer fees of 2.6 percent of the property value on all real estate transactions.  Foreign investment in Montserrat is subject to the same taxation rules as local investment and is eligible for tax holidays and other incentives.  Montserrat has preferential trade agreements with the United States, Canada, and Australia.  The government allows 100 percent foreign ownership of businesses, but the administration of public utilities remains wholly in the public sector.

St. Helena:  The  government offers tax-based incentives, which are considered on the merits of each project – particularly tourism projects.  All applications are processed by Enterprise St. Helena, the business development agency.

Pitcairn Islands:  The Pitcairn Islands have approximately 50 residents, with a workforce of approximately 29 employed in 10 full-time equivalent roles.  The territory does not have an airstrip or a commercially viable harbor.  Residents exist on fishing, subsistence farming, and handcrafts.

The Turks and Caicos Islands:  Through an “open arms” investment policy, the government commits to a streamlined business licensing system, a responsive immigration policy to give investment security, access to government-owned land under long-term leases, and a variety of duty concessions to qualified investors.  The islands have a “no tax” policy, but property purchasers must pay a stamp duty on purchases over $25,000.  Depending on the island, the stamp duty rate may be up to 6.5 percent for purchases up to $250,000, eight percent for purchases $250,001 to $500,000, and 10 percent for purchases over $500,000.

The Crown Dependencies:  The Crown Dependencies are the Bailiwick of Jersey, the Bailiwick of Guernsey, and the Isle of Man.  The Crown Dependencies are not part of the UK but are self-governing dependencies of the Crown.  This means they have their own directly elected legislative assemblies, administrative, fiscal and legal systems, and their own courts of law.  The Crown Dependencies are not represented in the UK Parliament.  The following tax data are current as of April 2021:

Jersey’s standard rate of corporate tax is zero percent.  The exceptions to this standard rate are financial service companies, which are taxed at 10 percent; utility companies, which are taxed at 20 percent; and income specifically derived from Jersey property rentals or Jersey property development, taxed at 20 percent.  A five percent VAT is applicable in Jersey.

Guernsey has a zero percent rate of corporate tax.  Exceptions include some specific banking activities, taxed at 10 percent; utility companies, which are taxed at 20 percent; Guernsey residents’ assessable income is taxed at 20 percent; and income derived from land and buildings is taxed at 20 percent.

The Isle of Man’s corporate standard tax is zero percent.  The exceptions to this standard rate are income received from banking business, which is taxed at 10 percent, and income received from land and property in the Isle of Man, which is taxed at 20 percent.  In addition, a 10 percent tax rate also applies to companies which carry on a retail business in the Isle of Man and have taxable income in excess of £500,000 ($695,000) from that business.  A 20 percent rate of VAT is applicable in the Isle of Man.

Outward Investment

The UK is one of the largest outward investors in the world, undergirded by numerousbilateral investment treaties (BITs) .  The UK’s international investment position abroad (outward investment) increased from £1,453 billion ($1,938) in 2018 to £1,498 ($1,912) by the end of 2019.  The main destination for UK outward FDI is the United States, which accounted for approximately 25 percent of UK outward FDI stocks at the end of 2019.  Other key destinations include the Netherlands, Luxembourg, France, and Spain which, together with the United States, account for a little under half of the UK’s outward FDI stock.  Europe and the Americas remain the dominant areas for UK international investment positions abroad, accounting for eight of the top 10 destinations for total UK outward FDI.

The UK has concluded 105 bilateral investment treaties, which are known in the UK as Investment Promotion and Protection Agreements (IPPAs).  These include:  Albania, Angola, Antigua and Barbuda, Argentina, Armenia, Azerbaijan, Bahrain, Bangladesh, Barbados, Belarus, Belize, Benin, Bolivia, Bosnia and Herzegovina, Brazil, Bulgaria, Burundi, Cameroon, Chile, China, Colombia, Congo, Costa Rica, Côte d’Ivoire, Croatia, Cuba, Czech Republic, Dominica, Ecuador, Egypt, El Salvador, Estonia, Ethiopia, Gambia, Georgia, Ghana, Grenada, Guyana, Haiti, Honduras, Hong Kong, China SAR, Hungary, Indonesia, Jamaica, Jordan, Kazakhstan, Kenya, Korea Republic of, Kuwait, Kyrgyzstan, Laos People’s Democratic Republic, Latvia, Lebanon, Lesotho, Libya, Lithuania, Malaysia, Malta, Mauritius, Mexico, Moldova, Mongolia, Morocco, Mozambique, Nepal, Nicaragua, Nigeria, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Qatar, Romania, Russian Federation, Saint Lucia, Senegal, Serbia, Sierra Leone, Singapore, Slovakia, Slovenia, Sri Lanka, Swaziland, Tanzania, United Republic of Tanzania, Thailand, Tonga, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Vanuatu, Bolivarian Republic of Venezuela, Vietnam, Yemen, Zambia, and Zimbabwe.

For a complete current list, including actual treaty texts, see:  http://investmentpolicyhub.unctad.org/IIA/CountryBits/221#iiaInnerMenu

International Regulatory Considerations

The UK’s withdrawal from the EU may result in a period in which the future regulatory direction of the UK is uncertain as the UK determines the extent to which it will either maintain and enforce the current EU regulatory regime or deviate towards new regulations in any particular sector.  The UK is an independent member of the WTO and actively seeks to comply with all WTO obligations.

Transparency of the Regulatory System

U.S. exporters and investors generally will find little difference between the United States and UK in the conduct of business.  The regulatory system provides clear and transparent guidelines for commercial engagement.  Common law prevails in the UK as the basis for commercial transactions, and the International Commercial Terms (INCOTERMS) of the International Chambers of Commerce are accepted definitions of trading terms.  As of 1 January 2021 firms in the UK must use the UK-adopted international accounting standards (IAS) instead of the EU-adopted IAS in terms of accounting standards and audit provisions. .  The UK’s Accounting Standards Board provides guidance to firms on accounting standards and works with the IASB on international standards.

Statutory authority over prices and competition in various industries is given to independent regulators, primarily the Competition and Markets Authority (CMA).  Other sector regulators with some jurisdiction over competition include, the Office of Communications (Ofcom), the Water Services Regulation Authority (Ofwat), the Office of Gas and Electricity Markets (Ofgem), the Rail Regulator, and the Prudential Regulatory Authority (PRA).  The PRA was created out of the dissolution of the Financial Services Authority (FSA) in 2013.  The PRA reports to the Financial Policy Committee (FPC) in the Bank of England.  The PRA is responsible for supervising the safety and soundness of individual financial firms, while the FPC takes a systemic view of the financial system and provides macro-prudential regulation and policy actions.  The Competition and Markets Authority (CMA) acts as a single integrated regulator focused on enforcement of the UK’s competition laws.  The Financial Conduct Authority (FCA) is a regulator that addresses financial and market misconduct through legally reviewable processes.  These regulators work to protect the interests of consumers while ensuring that the markets they regulate are functioning efficiently.  Most laws and regulations are published in draft for public comment prior to implementation.  The FCA maintains a free, publicly searchable register of their filings on regulated corporations and individuals here: https://register.fca.org.uk/. 

The UK government publishes regulatory actions, including draft text and executive summaries, on the Department for Business, Energy & Industrial Strategy webpage listed below.  The current policy requires the repeal of two regulations for any new one in order to make the business environment more competitive.

https://www.gov.uk/government/policies/business-regulation

https://www.gov.uk/government/organisations/regulatory-delivery

Legal System and Judicial Independence

The UK is a common-law country.  UK business contracts are legally enforceable in the UK, but not in the United States or other foreign jurisdictions.  International disputes are resolved through litigation in the UK Courts or by arbitration, mediation, or some other alternative dispute resolution (ADR) method.  The UK has a long history of applying the rule of law to business disputes.  The current judicial process remains procedurally competent, fair, and reliable, which helps position London as an international hub for dispute resolution with over 10,000 cases filed per annum.

Laws and Regulations on Foreign Direct Investment

Outside of national security reviews of investment in the 17 sectors deemed to be central to national security per the National Security and Investment Act, few statutes govern or restrict foreign investment in the UK.  The procedure for establishing a company in the UK is identical for British and foreign investors.  No approval mechanisms exist for foreign investment, apart from the process outlined in Section 1.  Foreigners may freely establish or purchase enterprises in the UK, with a few limited exceptions, and acquire land or buildings.  As noted above, the UK is currently reviewing its procedures and has proposed new rules for restricting foreign investment in those sectors of the economy with higher risk for adversely impairing national security.

Alleged tax avoidance by multinational companies, including by several major U.S. firms, has been a controversial political issue and subject of investigations by the UK Parliament and EU authorities.  Foreign and UK firms are subject to the same tax laws, however, and several UK firms have also been criticized for tax avoidance.  Foreign investors may have access to certain EU and UK regional grants and incentives designed to attract industry to areas of high unemployment, but these do not include tax concessions.  Access to EU grants ended on December 31, 2020.

The UK flattened its structure of corporate tax rates in 2015, toa flat rate of 19 percent for non-ring-fenced companies, with marginal tax relief granted for companies with profits falling between £300,000 ($420,000) and £1.5 million ($2.1 million).   There are different Corporation Tax rates for companies that make profits from oil extraction or oil rights in the UK or UK continental shelf.  These are known as “ring fence” companies.  Small ”ring fence” companies are taxed at a rate of 19 percent for profits up to £300,000 ($420,000), and 30 percent for profits over £300,000 ($420,000).  A special rate of 20 percent is given to unit trusts and open-ended investment companies.

On March 3, 2021, Chancellor of the Exchequer Rishi Sunak announced that, starting in 2023, UK corporate tax would increase to 25 percent for companies with profits over £250,000 ($346,000).  A small profits rate (SPR) will also be introduced for companies with profits of £50,000 ($69,000) or less so that they will continue to pay Corporation Tax at 19 percent.  Companies with profits between £50,000 ($69,000) and £250,000 ($346,000) will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective Corporation Tax rate.

Tax deductions are allowed for expenditure and depreciation of assets used for trade purposes.  These include machinery, plant, industrial buildings, and assets used for research and development.

The UK has a simple system of personal income tax.  The marginal tax rates for 2020-2021 are as follows: up to £12,500 ($17,370), 0 percent; £12,501 ($17,370) to £50,000 ($69,481), 20 percent; £50,001 ($69,481) to £150,000 ($208,444), 40 percent; and over £150,000 ($208,444), 45 percent.

UK citizens also make mandatory payments of about 12 percent of income into the National Insurance system, which funds social security and retirement benefits.  The UK requires non-domiciled residents of the UK to either pay tax on their worldwide income or the tax on the relevant part of their remitted foreign income being brought into the UK.  If they have been resident in the UK for seven tax years of the previous nine, and they choose to pay tax only on their remitted earnings, they may be subject to an additional charge of £30,000 ($42,000).  If they have been resident in the UK for 12 of the last 14 tax years, they may be subject to an additional charge of £60,000 ($84,000).

The Scottish Parliament has the legal power to increase or decrease the basic income tax rate in Scotland, currently 20 percent, by a maximum of three percentage points.

For further guidance on laws and procedures relevant to foreign investment in the UK, follow the link below:

https://www.gov.uk/government/collections/investment-in-the-uk-guidance-for-overseas-businesses

Competition and Anti-Trust Laws

UK competition law prohibits anti-competitive behavior within the UK through Chapters I and II of the Competition Act of 1998 and the Enterprise Act of 2002.  The UK’s Competition and Markets Authority (CMA) is responsible for implementing these laws by investigating potentially anti-competitive behaviors, including cases involving state aid, cartel activity, or mergers that threaten to reduce the competitive market environment.  While merger notification in the UK is voluntary, the CMA may impose substantial fines or suspense orders on potentially non-compliant transactions.  The CMA has no prosecutorial authority, but it may refer entities for prosecution in extreme cases, such as those involving cartel activity, which carries a penalty of up to five years imprisonment.  The CMA is also responsible for ensuring consumer protection, conducting market research, and coordinating with sectoral regulators, such as those involved in the regulation of the UK’s energy, water, and telecommunications markets.

On January 1, 2021, the UK began reviewing cross-border activities with a UK-EU nexus in parallel to the European Commission.  On April 8, 2021, the UK established the Digital Markets Unit, a new regulatory body that will be responsible for implementing upcoming changes to competition rules in digital markets.

UK competition law requires:

1) the prohibition of agreements or practices that restrict free trading and competition between business entities (this includes in particular the repression of cartels);

2) the banning of abusive behavior by a firm dominating a market, or anti-competitive practices that tend to lead to such a dominant position (practices controlled in this way may include predatory pricing, tying, price gouging, refusal to deal and many others); and,

3) the supervision of mergers and acquisitions of large corporations, including some joint ventures.

Any transactions which could threaten competition also fall into scope of the UK’s regulators.  UK law provides for remedies to problematic transactions, such as an obligation to divest part of the merged business or to offer licenses or access to facilities to enable other businesses to continue competing.  In addition to the CMA, the Takeover Panel, the Financial Conduct Authority, and the Pensions Regulator have principal regulatory authority:

• The Takeover Panel is an independent body, operating per the City Code on Takeover and Mergers(the “Code”), which regulates takeovers of public companies,  centrally managed or controlled in the UK, the Isle of Man, Jersey, and Guernsey.  The Code provides a binding set of rules for takeovers aimed at ensuring fair treatment for all shareholders in takeover bids, including requiring bidders to provide information about their intentions after a takeover.
• The Financial Conduct Authority administers Listing Rules, Prospectus Regulation Rules, and Disclosure Guidance and Transparency Rules, which can apply to takeovers of publicly-listed companies.
• The Pensions Regulator has powers to intervene in investments in pension schemes.

Expropriation and Compensation

The UK is a member of the OECD and adheres to the OECD principle that when a government expropriates property, compensation should be timely, adequate, and effective.  In the UK, the right to fair compensation and due process is uncontested and is reflected in all international investment agreements.  Expropriation of corporate assets or the nationalization of industry requires a special act of Parliament.  In response to the 2007-2009 financial crisis, the UK government nationalized Northern Rock Bank (sold to Virgin Money in 2012) and took major stakes in the Royal Bank of Scotland (RBS) and Lloyds Banking Group.

Dispute Settlement

As a member of the World Bank-based International Center for Settlement of Investment Disputes (ICSID), the UK accepts binding international arbitration between foreign investors and the State.  As a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the UK provides local enforcement on arbitration judgments decided in other signatory countries.

London is a thriving center for the resolution of international disputes through arbitration under a variety of procedural rules such as those of the London Court of International Arbitration, the International Chamber of Commerce, the Stockholm Chamber of Commerce, the American Arbitration Association International Centre for Dispute Resolution, and others.  Many of these arbitrations involve parties with no connection to the jurisdiction, but who are drawn to the jurisdiction because they perceive it to be a fair, neutral venue with an arbitration law and courts that support competent and efficient resolution of disputes.  They also choose London-based arbitration because of the general prevalence of the English language and law in international commerce.  A wide range of contractual and non-contractual claims can be referred to arbitration in this jurisdiction including disputes involving intellectual property rights, competition, and statutory claims.  There are no restrictions on foreign nationals acting as arbitration counsel or arbitrators in this jurisdiction.  There are few restrictions on foreign lawyers practicing in the jurisdiction as evidenced by the fact that over 200 foreign law firms have offices in London.

ICSID Convention and New York Convention

In addition to its membership in ICSID, the UK is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.  The latter convention has territorial application to Gibraltar (September 24, 1975), Hong Kong (January 21, 1977), Isle of Man (February 22, 1979), Bermuda (November 14, 1979), Belize and Cayman Islands (November 26, 1980), Guernsey (April 19, 1985), Bailiwick of Jersey (May 28, 2002), and British Virgin Islands (February 24, 2014).

The United Kingdom has consciously elected not to follow the UNCITRAL Model Law on International Commercial Arbitration.  Enforcement of an arbitral award in the UK is dependent upon where the award was granted.  The process for enforcement in any particular case is dependent upon the seat of arbitration and the arbitration rules that apply.  Arbitral awards in the UK can be enforced under a number of different regimes, namely:  The Arbitration Act 1996, The New York Convention, The Geneva Convention 1927, The Administration of Justice Act 1920 and the Foreign Judgments (Reciprocal Enforcement) Act 1933, and Common Law.

The Arbitration Act 1996 governs all arbitrations seated in England, Wales and Northern Ireland, both domestic and international.  The full text of the Arbitration Act can be found here: http://www.legislation.gov.uk/ukpga/1996/23/data.pdf.

The Arbitration Act is heavily influenced by the UNCITRAL Model Law, but it has some important differences.  For example, the Arbitration Act covers both domestic and international arbitration; the document containing the parties’ arbitration agreement need not be signed; an English court is only able to stay its own proceedings and cannot refer a matter to arbitration; the default provisions in the Arbitration Act require the appointment of a sole arbitrator as opposed to three arbitrators; a party retains the power to treat its party-nominated arbitrator as the sole arbitrator in the event that the other party fails to make an appointment (where the parties’ agreement provides that each party is required to appoint an arbitrator); there is no time limit on a party’s opposition to the appointment of an arbitrator; parties must expressly opt out of most of the provisions of the Arbitration Act which confer default procedural powers on the arbitrators; and there are no strict rules governing the exchange of pleadings.  Section 66 of the Arbitration Act applies to all domestic and foreign arbitral awards.  Sections 100 to 103 of the Arbitration Act provide for enforcement of arbitral awards under the New York Convention 1958.  Section 99 of the Arbitration Act provides for the enforcement of arbitral awards made in certain countries under the Geneva Convention 1927.

UK courts have a good record of enforcing arbitral awards.  The courts will enforce an arbitral award in the same way that they will enforce an order or judgment of a court.  At the time of writing, there are no examples of the English courts enforcing awards which were set aside by the courts at the place of arbitration.

Under Section 66 of the Arbitration Act, the court’s permission is required for an international arbitral award to be enforced in the UK.  Once the court has given permission, judgment may be entered in terms of the arbitral award and enforced in the same manner as a court judgment or order.  Permission will not be granted by the court if the party against whom enforcement is sought can show that (a) the tribunal lacked substantive jurisdiction and (b) the right to raise such an objection has not been lost.

The length of arbitral proceedings can vary greatly.  If the parties have a relatively straightforward dispute, cooperate, and adopt a fast-track procedure, arbitration can be concluded within months or even weeks.  In a substantial international arbitration involving complex facts, many witnesses and experts and post-hearing briefs, the arbitration could take many years.  A reasonably substantial international arbitration will likely take between one and two years.

There are two alternative procedures that can be followed in order to enforce an award.  The first is to seek leave of the court for permission to enforce.  The second is to begin an action on the award, seeking the same relief from the court as set out in the tribunal’s award.  Enforcement of an award made in the jurisdiction may be opposed by challenging the award.  The court may also, however, refuse to enforce an award that is unclear, does not specify an amount, or offends public policy.  Enforcement of a foreign award may be opposed on any of the limited grounds set out in the New York Convention.  A stay may be granted for a limited time pending a challenge to the order for enforcement.  The court will consider the likelihood of success and whether enforcement of the award will be made more or less difficult as a result of the stay.  Conditions that might be imposed on granting the stay include such matters as paying a sum into court.  Where multiple awards are to be rendered, the court may give permission for the tribunal to continue hearing other matters, especially where there may be a long delay between awards.

Most awards are complied with voluntarily.  If the party against whom the award was made fails to comply, the party seeking enforcement can apply to the court.  The length of time it takes to enforce an award which complies with the requirements of the New York Convention will depend on whether there are complex objections to enforcement which require the court to investigate the facts of the case.  If a case raises complex issues of public importance the case could be appealed to the Court of Appeal and then to the Supreme Court.  This process could take around two years.  If no complex objections are raised, the party seeking enforcement can apply to the court using a summary procedure that is fast and efficient.  There are time limits relating to the enforcement of the award.  Failure to comply with an award is treated as a breach of the arbitration agreement.  An action on the award must be brought within six years of the failure to comply with the award or 12 years if the arbitration agreement was made under seal.  If the award does not specify a time for compliance, a court will imply a term of reasonableness.

Bankruptcy Regulations

The UK has strong bankruptcy protections going back to the Bankruptcy Act of 1542.  Today, both individual bankruptcy and corporate insolvency are regulated in the UK primarily by the Insolvency Act 1986 and the Insolvency Rules 1986, regulated through determinations in UK courts.  The World Bank’s Doing Business Index ranks the UK 14 out of 190 for ease of resolving insolvency.

Regarding individual bankruptcy law, the court will oblige a bankrupt individual to sell assets to pay dividends to creditors.  A bankrupt person must inform future creditors about the bankrupt status and may not act as the director of a company during the period of bankruptcy.  Bankruptcy is not criminalized in the UK, and the Enterprise Act of 2002 dictates that for England and Wales bankruptcy will not normally last longer than 12 months.  At the end of the bankrupt period, the individual is normally no longer held liable for bankruptcy debts unless the individual is determined to be culpable for his or her own insolvency, in which case the bankruptcy period can last up to 15 years.

For corporations declaring insolvency, UK insolvency law seeks to distribute losses equitably between creditors, employees, the community, and other stakeholders in an effort to rescue the company.  Liability is limited to the amount of the investment.  If a company cannot be rescued, it is liquidated and assets are sold to pay debts to creditors, including foreign investors.  In March 2020, the UK government announced it would introduce legislation to change existing insolvency laws in response to COVID-19.  The new measures seek to enable companies undergoing a rescue or restructuring process to continue trading and help them avoid insolvency.

Investment Incentives

The UK offers a range of incentives for companies of any nationality locating in depressed regions of the country, as long as the investment generates employment.  DIT works with its partner organizations in the devolved administrations – Scottish Development International, the Welsh Government and Invest Northern Ireland – and with London and Partners and Local Enterprise Partnerships (LEPs) throughout England, to promote each region’s particular strengths and expertise to overseas investors.

Local authorities in England and Wales also have power under the Local Government and Housing Act of 1989 to promote the economic development of their areas through a variety of assistance schemes, including the provision of grants, loan capital, property, or other financial benefit.  Separate legislation, granting similar powers to local authorities, applies to Scotland and Northern Ireland.

Foreign Trade Zones/Free Ports/Trade Facilitation

In March 2021, The UK government identified eight sites as post-Brexit freeports to spur trade, investment, innovation and economic recovery.  The eight sites are: East Midlands Airport, Felixstowe and Harwich, Humber region, Liverpool City Region, Plymouth, Solent, Thames, and Teesside.  The designated areas will offer special customs and tax arrangements and additional infrastructure funding to improve transport links.

The cargo ports and freight transportation ports at Liverpool, Prestwick, Sheerness, Southampton, and Tilbury used for cargo storage and consolidation are designated as Free Trade Zones.  No activities that add value to commodities are permitted within the Free Trade Zones, which are reserved for bonded storage, cargo consolidation, and reconfiguration of goods.  The Free Trade Zones offer little benefit to exporters or investors.

Performance and Data Localization Requirements

The UK does not mandate “forced localization” of data and does not require foreign IT firms to turn over source code.  The Investigatory Powers Act became law in November 2016 addressing encryption and government surveillance.  It permitted the broadening of capabilities for data retention and the investigatory powers of the state related to data.

The EU’s General Data Protection Regulation (GDPR) no longer applies to the UK.  Entities based in the UK must comply with the Data Protection Act (DPA) 2018, which incorporated provisions of the EU GDPR directly into UK law.  The UK GDPR sits alongside the DPA 2018 with some technical amendments so that it works in a UK-only context.

On February 19, 2021, the European Commission launched the process towards the adoption of two data adequacy decisions for transfers of personal data to the UK, one under the GDPR and the other for the Law Enforcement Directive.  The decisions, once adopted, would ensure personal data transfers from the European Economic Area (EEA) to the UK continue without the restrictions that the European Commission would ordinarily require on transfers to non-EEA countries.  The EU-UK Trade and Cooperation Agreement (TCA) allows these transfers to continue on an interim basis until the data adequacy decisions are adopted.

HMG brought forward new immigration rules on January 1, 2021. The new rules have wide-ranging implications for foreign employees, students, and EU citizens.  The new rules are points-based, meaning immigrants need to attain a certain number of points in order to be awarded a visa.  The previous cap on visas has been abolished.  Applicants will need to be able to speak English and be paid the relevant salary threshold by their sponsor. This will either be the general salary threshold of £25,600 ($35,800) or the going rate for their job, whichever is higher.  If applicants earn less – but no less than £20,480 ($28,700) – they may still be able to apply by ”trading” points on specific characteristics against their salary.  For example, if they have a job offer in a shortage occupation or have a PhD relevant to the job.  More details are available here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/899755/UK_Points-Based_System_Further_Details_Web_Accessible.pdf

EU citizens who arrived before December 31, 2020, will not have to apply for a visa, but instead are eligible to apply for “settled” or “pre-settled” status, which allows them to live and work in the UK much the same as they were before the UK left the EU.  EU citizens arriving to the UK after January 1, 2021, must apply for the relevant visa.

Real Property

The UK has robust real property laws stemming from legislation including the Law of Property Act 1925, the Settled Land Act 1925, the Land Charges Act 1972, the Trusts of Land and Appointment of Trustees Act 1996, and the Land Registration Act 2002.

Interests in property are well enforced, and mortgages and liens have been recorded reliably since the Land Registry Act of 1862.  The Land Registry is the government database where all land ownership and transaction data are held for England and Wales, and it is reliably accessible online, here: https://www.gov.uk/search-property-information-land-registry.  Scotland has its own Registers of Scotland, while Northern Ireland operates land registration through the Land and Property Services.

Long-term physical presence on non-residential property without permission is not typically considered a crime in the UK.  Police take action if squatters commit other crimes when entering or staying in a property.

Intellectual Property Rights

The UK legal system provides a high level of intellectual property rights (IPR) protection, and enforcement mechanisms are comparable to those available in the United States.  The UK is a member of the World Intellectual Property Organization (WIPO).  The UK is also a member of the following major intellectual property protection agreements: the Berne Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, the Universal Copyright Convention, the Geneva Phonograms Convention, and the Patent Cooperation Treaty.  The UK has signed and, through implementing various EU Directives, enshrined into UK law the WIPO Copyright Treaty (WCT) and WIPO Performance and Phonograms Treaty (WPPT), known as the internet treaties.

The Intellectual Property Office (IPO) is the official UK government body responsible forIPR, including patents, designs, trademarks, and copyright.  The IPO web site contains comprehensive information on UK law and practice in these areas.  https://www.gov.uk/government/organisations/intellectual-property-office 

According to the Intellectual Property Crime Report for 2019/20, imports of counterfeit and pirated goods to the UK accounted for as much as £13.6 billion ($18.8 billion) in 2016 – the equivalent of three percent of UK imports in genuine goods.

The U.S. Trade Representative’s (USTR’s) 2020 Notorious Markets Report includes amazon.co.uk, based in the UK, due to high levels of counterfeit goods on the platform, but the report also notes the UK has blocking orders in place for a number of torrent and infringing websites.  The 2020 report further details the “innovative approaches to disrupting ad-backed funding of pirate sites” taken by the London Police Intellectual Property Crime Unit (PIPCU) and IPO.

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

Capital Markets and Portfolio Investment

The City of London houses one of the largest and most comprehensive financial centers globally.  London offers all forms of financial services:  commercial banking, investment banking, insurance, venture capital, private equity, stock and currency brokers, fund managers, commodity dealers, accounting and legal services, as well as electronic clearing and settlement systems and bank payments systems.  London is highly regarded by investors because of its solid regulatory, legal, and tax environments, a supportive market infrastructure, and a dynamic, highly skilled workforce.

The UK government is generally hospitable to foreign portfolio investment.  Government policies are intended to facilitate the free flow of capital and to support the flow of resources in product and services markets.  Foreign investors are able to obtain credit in local markets at normal market terms, and a wide range of credit instruments are available.  The principles underlying legal, regulatory, and accounting systems are transparent, and  are consistent with international standards.  In all cases, regulations have been published and are applied on a non-discriminatory basis by the Bank of England’s Prudential Regulation Authority (PRA).

The London Stock Exchange is one of the most active equity markets in the world.  London’s markets have the advantage of bridging the gap between the day’s trading in the Asian markets and the opening of the U.S. market.  This bridge effect is also evidenced by the fact that many Russian and Central European companies have used London stock exchanges to tap global capital markets.

The Alternative Investment Market (AIM), established in 1995 as a sub-market of the London Stock Exchange, is specifically designed for smaller, rapidly expanding companies.  The AIM has a more flexible regulatory system than the main market and has no minimum market capitalization requirements.  Since its launch, the AIM has raised more than £68 billion ($95 billion) for more than 3,000 companies.

Money and Banking System

The UK banking sector is the largest in Europe and represents the continent’s deepest capital pool.  More than 150 financial services firms from the EU are based in the UK.  The financial and related professional services industry contributed approximately 10 percent of UK economic output in 2020, employed approximately 2.3 million people, and contributed the most to UK tax receipts of any sector.  The long-term impact of Brexit on the financial services industry is uncertain at this time.  Some firms have already moved limited numbers of jobs outside the UK in order to service EU-based clients, but the UK is anticipated to remain a top financial hub.

The Bank of England serves as the central bank of the UK.  According to its guidelines, foreign banking institutions are legally permitted to establish operations in the UK as subsidiaries or branches.  Responsibilities for the prudential supervision of a foreign branch are split between the parent’s home state supervisors and the Prudential Regulation Authority (PRA).  The PRA, however, expects the whole firm to meet the PRA’s threshold conditions.  The PRA expects new foreign branches to focus on wholesale and corporate banking and to do so at a level that is not critical to the UK economy.  The Financial Conduct Authority (FCA) is the conduct regulator for all banks operating in the United Kingdom.  For foreign branches the FCA’s Threshold Conditions and conduct of business rules apply, including areas such as anti-money laundering.  Eligible deposits placed in foreign branches may be covered by the UK deposit guarantee program and therefore foreign branches may be subject to regulations concerning UK depositor protection.

There are no legal restrictions that prohibit foreign residents from opening a business bank account; setting up a business bank account as a non-resident is in principle straightforward.   In practice, however, most banks will not accept applications from overseas due to fraud concerns and the additional administration costs.  To open a personal bank account, an individual must at minimum present an internationally recognized proof of identification and prove residency in the UK.  This can present a problem for incoming FDI and American expatriates.  Unless the business or the individual can prove UK residency, they will have limited banking options.

Foreign Exchange and Remittances

Foreign Exchange

The pound sterling is a free-floating currency with no restrictions on its transfer or conversion.  Exchange controls restricting the transfer of funds associated with an investment into or out of the UK are not exercised.

Remittance Policies

Not applicable.

Sovereign Wealth Funds

The United Kingdom does not maintain a national wealth fund.  Although there have at time been calls to turn The Crown Estate – created in 1760 by Parliament as a means of funding the British monarchy – into a wealth fund, there are no current plans to do so.  Moreover, with assets of just under $20 billion, The Crown Estate would be small in relation to other national funds.

There are 20 partially or fully state-owned enterprises in the UK at the national level.  These enterprises range from large, well-known companies to small trading funds.  Since privatizing the oil and gas industry, the UK has not established any new energy-related state-owned enterprises or resource funds.

Privatization Program

The privatization of state-owned utilities in the UK is now essentially complete.  With regard to future investment opportunities, the few remaining government-owned enterprises or government shares in other utilities are likely to be sold off to the private sector when market conditions improve.

Businesses in the UK are accountable for a due-diligence approach to responsible business conduct (RBC), or corporate social responsibility (CSR), in areas such as human resources, environment, sustainable development, and health and safety practices – through a wide variety of existing guidelines at national, EU, and global levels.  There is a strong awareness of CSR principles among UK businesses, promoted by UK business associations such as the Confederation of British Industry and the UK government.

The British government fairly and uniformly enforces laws related to human rights, labor rights, consumer protection, environmental protection, and other statutes intended to protect individuals from adverse business impacts.

The UK government adheres to the OECD Guidelines for Multinational Enterprises.  It is committed to the promotion and implementation of these Guidelines and encourages UK multinational enterprises to adopt high corporate standards involving all aspects of the Guidelines.  The UK has established a National Contact Point (NCP) to promote the Guidelines and to facilitate the resolution of disputes that may arise within that context.  The NCP is part of the Department for International Trade.  A Steering Board monitors the work of the UK NCP and provides strategic guidance.  It is composed of representatives of relevant government departments and four external members nominated by the Trades Union Congress, the Confederation of British Industry, the All Party Parliamentary Group on the Great Lakes Region of Africa, and the NGO community.  The results of a UK government consultation on CSR can be found here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/300265/bis-14-651-good-for-business-and-society-government-response-to-call-for-views-on-corporate-responsibility.pdf.

Information on UK regulations and policies relating to the procurement of supplies, services and works for the public sector, and the relevance of promoting RBC, are found here: https://www.gov.uk/guidance/public-sector-procurement-policy.

Although isolated instances of bribery and corruption have occurred in the UK, U.S. investors have not identified corruption of public officials as a challenge in doing business in the UK.

The Bribery Act 2010 amended and reformed UK criminal law and provided a modern legal framework to combat bribery in the UK and internationally.  The scope of the law is extra-territorial.  Under the Act, a relevant person or company can be prosecuted for bribery if the crime is committed abroad.  The Act applies to UK citizens, residents and companies established under UK law.  In addition, non-UK companies can be held liable for a failure to prevent bribery if they do business in the UK.

Section 9 of the Act requires the UK government to publish guidance on procedures that commercial organizations can put in place to prevent bribery on their behalf.  It creates the following offenses: active bribery, described as promising or giving a financial or other advantage, passive bribery, described as agreeing to receive or accepting a financial or other advantage; bribery of foreign public officials; and the failure of commercial organizations to prevent bribery by an associated person (corporate offense).  This corporate criminal offense places a burden of proof on companies to show they have adequate procedures  in place to prevent bribery (http://www.transparency.org.uk/our-work/business-integrity/bribery-act/adequate-procedures-guidance/).  To avoid corporate liability for bribery, companies must make sure that they have strong, up-to-date and effective anti-bribery policies and systems.  It is a corporate criminal offense to fail to prevent bribery by an associated person.  The briber must be “associated” with the commercial organization, a term which will apply to, amongst others, the organization’s agents, employees, and subsidiaries.  A foreign corporation which “carries on a business, or part of a business” in the UK may therefore be guilty of the UK offense even if, for example, the relevant acts were performed by the corporation’s agent outside the UK.  The Act does not extend to political parties and it is unclear whether it extends to family members of public officials.

The UK formally ratified the OECD Convention on Combating Bribery in 1998 and ratified the UN Convention Against Corruption in 2006.

Resources to Report Corruption

UK law provides criminal penalties for corruption by officials, and the government routinely implements these laws effectively.  The Serious Fraud Office (SFO) is an independent government department, operating under the superintendence of the Attorney General with jurisdiction in England, Wales, and Northern Ireland.  It investigates and prosecutes those who commit serious or complex fraud, bribery, and corruption, and pursues them and others for the proceeds of their crime.

All allegations of bribery of foreign public officials by British nationals or companies incorporated in the United Kingdom—even in relation to conduct that occurred overseas—should be reported to the SFO for possible investigation.  When the SFO receives a report of possible corruption, its intelligence team makes an assessment and decides if the matter is best dealt with by the SFO itself or passed to a law enforcement partner organization, such as the Overseas Anti-Corruption Unit of the City of London Police (OACU) or the International Corruption Unit of the National Crime Agency.  Allegations can be reported in confidence using the SFO’s secure online reporting form: https://www.sfo.gov.uk/contact-us/reporting-serious-fraud-bribery-corruption/.

Details can also be sent to the SFO in writing:

SFO Confidential
Serious Fraud Office
2-4 Cockspur Street
London, SW1Y 5BS
United Kingdom

The UK is politically stable but continues to be a target for both domestic and global terrorist groups.  Terrorist incidents in the UK have significantly decreased in frequency and severity since 2017, which saw five terrorist attacks that caused 36 deaths.  In 2019, the UK suffered one terrorist attack resulting in three deaths (including the attacker), and another two attacks in early 2020 caused serious injuries and resulted in the death of one attacker.  In November 2019, the UK lowered the terrorism threat level to substantial, meaning the risk of an attack was reduced from “highly likely” to “likely.”  UK officials categorize Islamist terrorism as the greatest threat to national security, though officials identify a rising threat from racially or ethnically motivated extremists, which they refer to as “extreme right-wing” terrorism.  Since March 2017, police and security services have disrupted 19 Islamist and seven extreme right-wing plots.

Environmental advocacy groups in the UK have been involved with numerous protests against a variety of business activities, including: airport expansion, bypass roads, offshore structures, wind farms, civilian nuclear power plants, and petrochemical facilities.  These protests tend not to be violent but can be disruptive, with the aim of obtaining maximum media exposure.

Brexit has waned as a source of political instability.  Nonetheless, the June 2016 EU referendum campaign was characterized by significant polarization and widely varying perspectives across the country.  Differing views about the future UK-EU relationship continue to polarize political opinion across the UK.  Scottish political leaders have indicated that the UK leaving the EU may provide justification to pursue another Referendum on Scotland leaving the UK.  Implementation of the Withdrawal Agreement has contributed to heightened political and sectarian tensions in Northern Ireland.

The UK formally departed the bloc on January 31, 2020, following the ratification of the Withdrawal Agreement, and completed its transition out of the EU on December 31, 2020.

The Conservative Party, traditionally the UK’s pro-business party, was, until the COVID-19 pandemic, focused on implementing Brexit, a process many international businesses opposed because they anticipated it would make trade in goods, services, workers, and capital with the UK’s largest trading partners more challenging and costly, at least in the short term.  The Conservative Party-led government implemented a Digital Services Tax (DST), a two percent tax on the revenues of predominantly American search engines, social media services and online marketplaces which derive value from UK users, and has additionally legislated for an increase in the Corporation Tax rate from 19 percent to 25 percent.

The Labour Party’s leader, Sir Keir Starmer, is widely acknowledged to be more economically centrist than his predecessor.  In his first major economic speech following his election as Labour Party leader, Starmer declared his intention to repair and improve the party’s relationship with the business community, but has proposed few policies beyond the focus of the COVID-19 crisis.

The UK’s labor force comprises more than 41 million workers.  The employment rate between November 2020 and January 2021 was 75 percent, with 28.3 million workers employed.  There were 1.7 million workers unemployed in January 2021, or five percent, one percent higher than at the start of the COVID-19 pandemic.

The most serious issue facing British employers is a skills gap derived from a high-skill, high-tech economy outpacing the educational system’s ability to deliver work-ready graduates.  The government has placed a strong emphasis on improving the British educational system in terms of greater emphasis on science, research and development, and entrepreneurial skills, but any positive reforms will necessarily deliver benefits with a lag.

As of 2018, approximately 23.5 percent of UK workers belonged to a union.  Public-sector workers represented a much higher share of union members at 52.5 percent, while the private sector was 13.2 percent.  Manufacturing, transport, and distribution trades are highly unionized. Unionization of the workforce in the UK is prohibited only in the armed forces, public-sector security services, and police forces.  Union membership has risen slightly in recent years, despite a previous downward trend.

In the 2019, 234,000 working days were lost from 35 official labor disputes.  The Trades Union Congress (TUC), the British nation-wide labor federation, encourages union-management cooperation.

On April 1, 2021, the UK raised the minimum wage to £8.91 ($12.33) an hour for workers ages 25 and over.  The increased wage impacts about 2 million workers across Britain.

The 2006 Employment Equality (Age) Regulations make it unlawful to discriminate against workers, employees, job seekers, and trainees because of age, whether young or old.  The regulations cover recruitment, terms and conditions, promotions, transfers, dismissals, and training.  They do not cover the provision of goods and services.  The regulations also removed the upper age limits on unfair dismissal and redundancy.  It sets a national default retirement age of 65, making compulsory retirement below that age unlawful unless objectively justified.  Employees have the right to request to work beyond retirement age and the employer has a duty to consider such requests.

U.S. Embassy London
Economic Section
33 Nine Elms Ln
London SW11 7US
United Kingdom
+44 (0)20-7499-9000
LondonEconomic@state.gov