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Brazil

Executive Summary

Brazil is the second largest economy in the Western Hemisphere behind the United States, and the eighth largest economy in the world, according to the World Bank.  The United Nations Conference on Trade and Development (UNCTAD) named Brazil the fourth largest destination for global Foreign Direct Investment (FDI) flows in 2017.  In recent years, Brazil received more than half of South America’s total incoming FDI, and the United States is a major foreign investor in Brazil. The Brazilian Central Bank (BCB) reported the United States had the largest single-country stock of FDI by final ownership, representing 22 percent of all FDI in Brazil (USD 118.7 billion) in 2017, the latest year with available data.  The Government of Brazil (GoB) prioritized attracting private investment in infrastructure during 2017 and 2018.

The current economic recovery, which started in the first quarter of 2017, ended the deepest and longest recession in Brazil’s modern history.  The country’s Gross Domestic Product (GDP) expanded by 1.1 percent in 2018, below most initial market analysts’ projections of 3 percent growth in 2018.  Analysts forecast a 2 percent growth rate for 2019. The unemployment rate reached 11.6 percent at the end of 2018. Brazil was the world’s fourth largest destination for FDI in 2017, with inflows of USD 62.7 billion, according to UNCTAD.  The nominal budget deficit stood at 7.1 percent of GDP (USD132.5 billion) in 2018 and is projected to end 2019 at around 6.5 percent of GDP (USD 148.5 billion). Brazil’s debt-to-GDP ratio reached 76.7 percent in 2018 with projections to reach 83 percent by the end of 2019.  The BCB has maintained its target for the benchmark Selic interest rate at 6.5 percent since March 2018 (from a high of 13.75 percent at the end of 2016).

President Bolsonaro took office on January 1, 2019, following the interim presidency by President Michel Temer, who had assumed office after the impeachment of former President Dilma Rousseff in August 2016.  Temer’s administration pursued corrective macroeconomic policies to stabilize the economy, such as a landmark federal spending cap in December 2016 and a package of labor market reforms in 2017. President Bolsonaro’s economic team pledged to continue pushing reforms needed to help control costs of Brazil’s pension system, and has made that issue its top economic priority.  Further reforms are also planned to simplify Brazil’s complex tax system. In addition to current economic difficulties, since 2014, Brazil’s anti-corruption oversight bodies have been investigating allegations of widespread corruption that have moved beyond state-owned energy firm Petrobras and a number of private construction companies to include companies in other economic sectors.  

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

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

 

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 105 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 109 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 64 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical-cost basis) 2017 $68,272 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $8,600 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Brazil was the world’s fourth largest destination for Foreign Direct Investment (FDI) in 2017, with inflows of USD 62.7 billion, according to UNCTAD.  The GoB actively encourages FDI – particularly in the automobile, renewable energy, life sciences, oil and gas, and transportation infrastructure sectors – to introduce greater innovation into Brazil’s economy and to generate economic growth.  GoB investment incentives include tax exemptions and low-cost financing with no distinction made between domestic and foreign investors. Foreign investment is restricted in the health, mass media, telecommunications, aerospace, rural property, maritime, insurance, and air transport sectors.  

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

Screening of FDI

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

To enter Brazil’s insurance and reinsurance market, U.S. companies must establish a subsidiary, enter into a joint venture, acquire a local firm, or enter into a partnership with a local company.  The BCB reviews banking license applications on a case-by-case basis. Foreign interests own or control 20 of the top 50 banks in Brazil. Santander is the only major wholly foreign-owned retail bank remaining in Brazil.  Brazil’s anti-trust authorities (CADE) approved Itau bank’s purchase of Citibank’s Brazilian retail banking operation in August 2017. In June 2016, CADE approved Bradesco bank’s purchase of HSBC’s Brazilian retail banking operation.  

Currently, foreign ownership of airlines is limited to 20 percent.  Congressman Carlos Cadoca (PCdoB-PE) presented a bill to Brazilian Congress in August of 2015 to allow for 100 percent foreign ownership of Brazilian airlines (PL 2724/2015).  The bill was approved by the lower house, and since March 2019, it is pending a Senate vote. In 2011, the United States and Brazil signed an Air Transport Agreement as a step towards an Open Skies relationship that would eliminate numerical limits on passenger and cargo flights between the two countries.  Brazil’s lower house approved the agreement in December 2017, and the Senate ratified it in March 2018. The Open Skies agreement has now entered into force.

In July 2015, under National Council on Private Insurance (CNSP) Resolution 325, the Brazilian government announced a significant relaxation of some restrictions on foreign insurers’ participation in the Brazilian market, and in December 2017, the government eliminated restrictions on risk transfer operations involving companies under the same financial group.  The new rules revoked the requirement to purchase a minimum percentage of reinsurance and eliminated a limitation or threshold for intra-group cession of reinsurance to companies headquartered abroad that are part of the same economic group. Rules on preferential offers to local reinsurers, which are set to decrease in increments from 40 percent in 2016 to 15 percent in 2020, remain unchanged.  Foreign reinsurance firms must have a representation office in Brazil to qualify as an admitted reinsurer. Insurance and reinsurance companies must maintain an active registration with Brazil’s insurance regulator, the Superintendence of Private Insurance (SUSEP) and maintaining a minimum solvency classification issued by a risk classification agency equal to Standard & Poor’s or Fitch ratings of at least BBB-.

In September 2011, Law 12485/2011 removed a 49 percent limit on foreign ownership of cable TV companies, and allowed telecom companies to offer television packages with their service.  Content quotas require every channel to air at least three and a half hours per week of Brazilian programming during primetime. Additionally, one-third of all channels included in any TV package have to be Brazilian.  

The National Land Reform and Settlement Institute administers the purchase and lease of Brazilian agricultural land by foreigners.  Under the applicable rules, the area of agricultural land bought or leased by foreigners cannot account for more than 25 percent of the overall land area in a given municipal district.  Additionally, no more than 10 percent of agricultural land in any given municipal district may be owned or leased by foreign nationals from the same country. The law also states that prior consent is needed for purchase of land in areas considered indispensable to national security and for land along the border.  The rules also make it necessary to obtain congressional approval before large plots of agricultural land can be purchased by foreign nationals, foreign companies, or Brazilian companies with majority foreign shareholding. Draft Law 4059/2012, which would lift the limits on foreign ownership of agricultural land,

has been awaiting a vote in the Brazilian Congress since 2015.

Brazil is not a signatory to the World Trade Organization (WTO) Agreement on Government Procurement (GPA), but became an observer in October 2017.  By statute, a Brazilian state enterprise may subcontract services to a foreign firm only if domestic expertise is unavailable. Additionally, U.S. and other foreign firms may only bid to provide technical services when there are no qualified Brazilian firms.  U.S. companies need to enter into partnerships with local firms or have operations in Brazil in order to be eligible for “margins of preference” offered to domestic firms to participate in Brazil’s public sector procurement to help these firms win government tenders.  Foreign companies are often successful in obtaining subcontracting opportunities with large Brazilian firms that win government contracts. Under trade bloc Mercosul’s Government Procurement Protocol, member nations Brazil, Argentina, Paraguay, and Uruguay are entitled to non-discriminatory treatment of government-procured goods, services, and public works originating from each other’s suppliers and providers.  However, only Argentina has ratified the protocol, and per the Brazilian Ministry of Economy website, this protocol has been in revision since 2010, so it has not yet entered into force.

Other Investment Policy Reviews

The Organization for Economic Co-operation and Development’s (OECD) 2018 Brazil Economic Survey of Brazil highlights Brazil as a leading global economy.  However, it notes that high commodity prices and labor force growth will no longer be able to sustain Brazil’s economic growth without deep structural reforms.  While praising the Temer government for its reform plans, the OECD urged Brazil to pass all needed reforms to realize their full benefit. The OECD cautions about low investment rates in Brazil, and cites a World Economic Forum survey that ranks Brazil 116 out of 138 countries on infrastructure as an area in which Brazil must improve to maintain competitiveness.  

The OECD’s March 15, 2019 Enlarged Investment Committee Report BRAZIL: Position Under the OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations noted several areas in which Brazil needs to improve.  These observations include, but are not limited to: restrictions to FDI requiring investors to incorporate or acquire residency in order to invest; lack of generalized screening or approval mechanisms for new investments in Brazil; sectoral restrictions on foreign ownership in media, private security and surveillance, air transport, mining, telecommunication services; and, restrictions for non-residents to own Brazilian flag vessels.  The report did highlight several areas of improvement and the GoB’s pledge to ameliorate several ongoing irritants as well.

The IMF’s 2018 Country Report No. 18/253 on Brazil highlights that a mild recovery supported by accommodative monetary and fiscal policies is currently underway.  But the economy is underperforming relative to its potential, public debt is high and increasing, and, more importantly, medium-term growth prospects remain uninspiring, absent further reforms.  The IMF advises that against the backdrop of tightening global financial conditions, placing Brazil on a path of strong, balanced, and durable growth requires a committed pursuit of fiscal consolidation, ambitious structural reforms, and a strengthening of the financial sector architecture.  The WTO’s 2017 Trade Policy Review of Brazil notes the country’s open stance towards foreign investment, but also points to the many sector-specific limitations (see above). All three reports highlight the uncertainty regarding reform plans as the most significant political risk to the economy.  These reports are located at the following links:

http://www.oecd.org/brazil/economic-survey-brazil.htm  ,

https://www.oecd.org/daf/inv/investment-policy/Code-capital-movements-EN.pdf ,

https://www.imf.org/~/media/Files/Publications/CR/2017/cr17216.ashx  , and https://www.wto.org/english/tratop_e/tpr_e/tp458_e.htm  .

Business Facilitation

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

Outward Investment

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

2. Bilateral Investment Agreements and Taxation Treaties

Brazil does not have a Bilateral Investment Treaty (BIT) with the United States.  In the 1990s, Brazil signed BITs with Belgium, Luxembourg, Chile, Cuba, Denmark, Finland, France, Germany, Italy, the Republic of Korea, the Netherlands, Portugal, Switzerland, the United Kingdom, and Venezuela.  The Brazilian Congress has not ratified any of these agreements. In 2002, the Executive branch withdrew the agreements from Congress after determining that treaty provisions on international Investor-State Dispute Settlement (ISDS) were unconstitutional.  

In 2015, Brazil developed a state-to-state Cooperation and Facilitation Investment Agreement (CFIA) which, unlike traditional BITs, does not provide for an ISDS mechanism.  CFIAs instead outline progressive steps for the settlement of “issue[s] of interest to an investor,” including: 1) an ombudsmen and a Joint Committee appointed by the two governments will act as mediators to amicably settle any dispute; 2) if amicable settlement fails, either of the two governments may bring the dispute to the attention of the Joint Committee; 3) if the dispute is not settled within the Joint Committee, the two governments may resort to interstate arbitration mechanisms.”  The GOB has signed several CFIAs since 2015 with: Mozambique (April 2015), Angola (May 2015), Mexico (May 2015), Malawi (October 2015), Colombia (October 2015), Peru (October 2015), Chile (November 2015), Iran (November 2016), Azerbaijan (December 2016), Armenia (November 2017), Ethiopia (April 2018), Suriname (May 2018), Guyana (December 2018), and the United Arab Emirates (March 2019). The following CFIAs are in force: Mexico, Angola, Armenia, Azerbaijan, and Peru. A few CFIAs have received Congressional ratification in Brazil and are pending ratification by the other country: Mozambique, Malawi, and Colombia (https://concordia.itamaraty.gov.br/ ).  Brazil also negotiated an intra-Mercosul protocol similar to the CFIA in April 2017, which was ratified on December 21, 2018.  (See sections on responsible business conduct and dispute settlement.)

Brazil does not have a double taxation treaty with the United States, but it does have such treaties with 34 other countries, including: Japan, France, Italy, the Netherlands, Canada, Spain, Portugal, and Argentina.  Brazil signed a Tax Information Exchange Agreement (TIEA) with the United States in March 2007, which entered into force on May 15, 2013. In September 2014, Brazil and the United States signed an intergovernmental agreement to improve international tax compliance and to implement the Foreign Account Tax Compliance Act (FATCA).  This agreement went into effect in August 2015.

3. Legal Regime

Transparency of the Regulatory System

In the 2019 World Bank Doing Business report, Brazil ranked 109th out of 190 countries in terms of overall ease of doing business in 2018, an improvement of 16 positions compared to the 2018 report.  According to the World Bank, it takes approximately 20.5 days to start a business in Brazil. Brazil is seeking to streamline the process and decrease the amount to time it takes to open a small or medium enterprise (SME) to five days through its RedeSimples Program.  Similarly, the government has reduced regulatory compliance burdens for SMEs through the continued use of the SIMPLES program, which simplifies the collection of up to eight federal, state, and municipal-level taxes into one single payment.  

The 2019 World Bank study noted that the annual administrative burden for a medium-size business to comply with Brazilian tax codes is an average of 1,958 hours versus 160.7 hours in OECD high-income economies.  The total tax rate for a medium-sized business in Rio de Janeiro is 69 percent of profits, compared to the average of 40.1 percent in the OECD high-income economies. Business managers often complain of not being able to understand complex, and sometimes contradictory, tax regulations, despite their housing large local tax and accounting departments in their companies.  

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

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

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

In addition to these federal regulatory agencies, Brazil has at least 27 state-level regulatory agencies and 17 municipal-level regulatory agencies.  

The Office of the Presidency’s Program for the Strengthening of Institutional Capacity for Management in Regulation (PRO-REG) has introduced a broad program for improving Brazil’s regulatory framework.  PRO-REG and the U.S. White House Office of Information and Regulatory Affairs (OIRA) are collaborating to exchange best practices in developing high quality regulations that mandate the least burdensome approach to address policy implementation.  

Regulatory agencies complete Regulatory Impact Analyses (RIAs) on a voluntary basis.  The Senate has approved a bill on Governance and Accountability for Federal Regulatory Agencies (PLS 52/2013 in the Senate, and PL 6621/2016 in the Chamber) that is pending Senate Transparency and Governance Committee approval after the Lower House proposed changes to the text in December 2018.  Among other provisions, the bill would make RIAs mandatory for regulations that affect “the general interest.” PRO-REG is drafting enabling legislation to implement this provision. While the legislation is pending, PRO-REG has been working with regulators to voluntarily make RIAs part of their internal procedures, with some success.  

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

In 2018, the Department of State found Brazil to have met its minimum fiscal transparency requirements in its annual Fiscal Transparency Report.  The Open Budget Index ranked Brazil on par with the United States in terms of budget transparency in its most recent (2017) index. The Brazilian government demonstrates adequate fiscal transparency in managing its federal accounts, although there is room for improvement in terms of completeness of federal budget documentation.  Brazil’s budget documents are publically available, widely accessible, and sufficiently detailed. They provide a relatively full picture of the GoB’s planned expenditures and revenue streams. The information in publicly available budget documents is considered credible and reasonably accurate.

International Regulatory Considerations

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

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

Legal System and Judicial Independence

Brazil has a civil legal system structured around courts at the state and federal level.  Investors can seek to enforce contracts through the court system or via mediation, although both processes can be lengthy.  The Brazilian Superior Court of Justice (STJ) must accept foreign contract enforcement judgments for the judgments to be considered valid in Brazil.  Among other considerations, the foreign judgement must not contradict any prior decisions by a Brazilian court in the same dispute. The Brazilian Civil Code, enacted in 2002, regulates commercial disputes, although commercial cases involving maritime law follow an older, largely superseded Commercial Code.  Federal judges hear most disputes in which one of the parties is the Brazilian State, and also rule on lawsuits between a foreign state or international organization and a municipality or a person residing in Brazil.

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

Laws and Regulations on Foreign Direct Investment

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

Brazil does not offer a “one-stop-shop” for international investors.  There have been plans to do so for several years, but nothing has been officially created to facilitate foreign investment in Brazil.  The BCB website offers some useful information, but is not a catchall for those seeking guidance on necessary procedures and requirements.  The BCB’s website in English is: https://www.bcb.gov.br/en#!/home .

Competition and Anti-Trust Laws

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

In 2018, CADE conducted 74 formal investigations of cases that allegedly challenged the promotion of the free market.  It also approved 390 merger and/or acquisition requests and rejected an additional 14 requests.

Expropriation and Compensation

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

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

Contract disputes in Brazil can be lengthy and complex.  Brazil has both a federal and a state court system, and jurisprudence is based on civil code and contract law.  Federal judges hear most disputes in which one of the parties is the State, and rule on lawsuits between a foreign State or international organization and a municipality or a person residing in Brazil.  Five regional federal courts hear appeals of federal judges’ decisions. The 2019 World Bank Doing Business report found that on average it takes 12.5 procedures and 731 days to litigate a breach of contract.

International Commercial Arbitration and Foreign Courts

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

Bankruptcy Regulations

Brazil’s commercial code governs most aspects of commercial association, while the civil code governs professional services corporations.  In 2005, bankruptcy legislation (Law 11101) went into effect creating a system modeled on Chapter 11 of the U.S. bankruptcy code. Critics of Law 11101 argue it grants equity holders too much power in the restructuring process to detriment of debtholders.  Brazil is drafting an update to the bankruptcy law aimed at increasing creditor rights, but it has not yet been presented in Congress. The World Bank’s 2019 Doing Business Report ranks Brazil 77th out of 190 countries for ease of “resolving insolvency.”

4. Industrial Policies

Investment Incentives

The GoB extends tax benefits for investments in less developed parts of the country, including the Northeast and the Amazon regions, with equal application to foreign and domestic investors.  These incentives were successful in attracting major foreign plants to areas like the Manaus Free Trade Zone in Amazonas State, but most foreign investment remains concentrated in the more industrialized southern states in Brazil.  

Individual states seek to attract private investment by offering tax benefits and infrastructure support to companies, negotiated on a case-by-case basis.  Competition among states to attract employment-generating investment leads some states to challenge such tax benefits as beggar-thy-neighbor fiscal competition.  

While local private sector banks are beginning to offer longer credit terms, the state-owned Brazilian National Development Bank (BNDES) is the traditional Brazilian source of long-term credit as well as export credits.  BNDES provides foreign- and domestically-owned companies operating in Brazil financing for the manufacturing and marketing of capital goods and primary infrastructure projects. BNDES provides much of its financing at subsidized interest rates.  As part of its package of fiscal tightening, in December 2014, the GoB announced its intention to scale back the expansionary activities of BNDES and ended direct Treasury support to the bank. Law 13483, from September 2017, created a new Long-Term Lending Rate (TLP) for BNDES, which will be phased-in to replace the prior subsidized loans starting on January 1, 2018.  After a five-year phase in period, the TLP will float with the market and reflect a premium over Brazil’s five-year bond yield (a rate that incorporates inflation). The GoB plans to reduce BNDES’s role further as it continues to promote the development of long-term private capital markets.

In January 2015, the GoB eliminated the industrial products tax (IPI) exemptions on vehicles, while keeping all other tax incentives provided by the October 2012 Inovar-Auto program.  Through Inovar-Auto, auto manufacturers were able to apply for tax credits based on their ability to meet certain criteria promoting research and development and local content. Following successful WTO challenges against the trade-restrictive impacts of some of its tax benefits, the government allowed Inovar-Auto program to expire on December 31, 2017.  Although the government has announced a new package of investment incentives for the auto sector, Rota 2030, it remains at the proposal stage, with no scheduled date for a vote or implementation.

On February 27, 2015, Decree 8415 reduced tax incentives for exports, known as the Special Regime for the Reinstatement of Taxes for Exporters, or Reintegra Program.  Decree 8415 reduced the previous three percent subsidy on the value of the exports to one percent for 2015, to 0.1 percent for 2016, and two percent for 2017 and 2018.

Brazil provides tax reductions and exemptions on many domestically-produced information and communication technology (ICT) and digital goods that qualify for status under the Basic Production Process (PPB).  The PPB is product-specific and stipulates which stages of the manufacturing process must be carried out in Brazil in order for an ICT product to be considered produced in Brazil. The major fiscal benefits of the National Broadband Plan (PNBL) and supporting implementation plan (REPNBL-Redes) have either expired or been revoked.  In 2017, Brazil held a public consultation on a National Connectivity Plan to replace the PNBL, but has not yet published a final version.

Under Law 12598/2013, Brazil offers tax incentives ranging from 13 percent to 18 percent to officially classified “Strategic Defense Firms” (must have Brazilian control of voting shares) as well as to “Defense Firms” (can be foreign-owned) that produce identified strategic defense goods.  The tax incentives for strategic firms can apply to their entire supply chain, including foreign suppliers. The law is currently undergoing a revision, expected to be complete in 2018.

Industrial Promotion

The InovAtiva Brasil and Startup Brasil programs support start-ups in the country.  The GoB also uses free trade zones to incentivize industrial production. A complete description of the scope and scale of Brazil’s investment promotion programs and regimes can be found at: http://www.apexbrasil.com.br/en/home  .  

Foreign Trade Zones/Free Ports/Trade Facilitation

The federal government grants tax benefits to certain free trade zones.  Most of these free trade zones aim to attract investment to the country’s relatively underdeveloped North and Northeast regions.  The most prominent of these is the Manaus Free Trade Zone, in Amazonas State, which has attracted significant foreign investment, including from U.S. companies.  Constitutional amendment 83/2014 came into force in August 2014 and extended the status of Manaus Free Trade Zone until the year 2073.

Performance and Data Localization Requirements

Government Procurement Preferences:  The GoB maintains a variety of localization barriers to trade in response to the weak competitiveness of its domestic tech industry.

  1. Tax incentives for locally sourced information and communication technology (ICT) goods and equipment (Basic Production Process (PPB), Law 8248/91, and Portaria 87/2013);
  2. Government procurement preferences for local ICT hardware and software (2014 Decrees 8184, 8185, 8186, 8194, and 2013 Decree 7903); and the CERTICS Decree (8186), which aims to certify that software programs are the result of development and technological innovation in Brazil.

Presidential Decree 8135/2013 (Decree 8135) regulated the use of IT services provided to the Federal government by privately and state-owned companies, including the provision that Federal IT communications be hosted by Federal IT agencies. In 2015, the Ministry of Planning developed regulations to implement Decree 8135, which included the requirement to disclose source code if requested.  On December 26, 2018, President Michel Temer approved and signed the Decree 9.637/2018, which revoked Decree 8.135/2013 and eliminated the source code disclosure requirements.

The Institutional Security Cabinet (GSI) mandated the localization of all government data stored on the cloud during a review of cloud computing services contracted by the Brazilian government in Ordinance No. 9 (previously NC 14), this was made official in March 2018.  While it does provide for the use of cloud computing for non-classified information, it imposes a data localization requirement on all use of cloud computing by the Brazil government.

Investors in certain sectors in Brazil must adhere to the country’s regulated prices, which fall into one of two groups: those regulated at the federal level by a federal company or agency, and those set by sub-national governments (states or municipalities).  Regulated prices managed at the federal level include telephone services, certain refined oil and gas products (such as bottled cooking gas), electricity, and healthcare plans. Regulated prices controlled by sub-national governments include water and sewage fees, vehicle registration fees, and most fees for public transportation, such as local bus and rail services.  As part of its fiscal adjustment strategy, Brazil sharply increased regulated prices in January 2015.

For firms employing three or more persons, Brazilian nationals must constitute at least two-thirds of all employees and receive at least two-thirds of total payroll, according to Brazilian Labor Law Articles 352 to 354.  This calculation excludes foreign specialists in fields where Brazilians are unavailable.

Decree 7174 from 2010, which regulates the procurement of information technology goods and services, requires federal agencies and parastatal entities to give preferential treatment to domestically produced computer products and goods or services with technology developed in Brazil based on a complicated price/technology matrix.  

Brazil’s Marco Civil, an Internet law that determines user rights and company responsibilities, states that data collected or processed in Brazil must respect Brazilian law, even if the data is subsequently stored outside the country.  Penalties for non-compliance could include fines of up to 10 percent of gross Brazilian revenues and/or suspension or prohibition of related operations. Under the law, Internet connection and application providers must retain access logs for specified periods or face sanctions.  While the Marco Civil does not require data to be stored in Brazil, any company investing in Brazil should closely track its provisions – as well provisions of other legislation and regulations, including a data privacy bill passed in August 2018 and cloud computing regulations.

5. Protection of Property Rights

Real Property

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

Intellectual Property Rights

The last year brought increased attention to IP in Brazil, but rights holders still face significant challenges.  Brazil’s National Institute of Industrial Property (INPI) streamlined procedures for review processes to increase examiner productivity for patent and trademark decisions.  Nevertheless, the wait period for a patent remains nine years and the market is flooded with counterfeits. Brazil’s IP enforcement regime is constrained by limited resources.  Brazil has remained on the “Watch List” of the U.S. Trade Representative’s Special 301 report since 2007. For more information, please see: https://ustr.gov/issue-areas/intellectual-property/Special-301 .

Brazil has no physical markets listed on USTR’s 2017 Review of Notorious Markets, though the report does acknowledge a file sharing site popular among Brazilians that is known for pirated digital media.  For more information, please see: https://ustr.gov/sites/default/files/files/Press/Reports/2017 percent20Notorious percent20Markets percent20List percent201.11.18.pdf .

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

6. Financial Sector

Capital Markets and Portfolio Investment

The Central Bank of Brazil (BCB) embarked in October 2016 on a sustained monetary easing cycle, lowering the Special Settlement and Custody System (Selic) baseline reference rate from a high of 14 percent in October 2016 to 6.5 percent in December 2018.  Inflation for 2018 was 3.67 percent, within the 1.5 percent plus/minus of the 4 percent target. In June 2018, the National Monetary Council (CMN) set the BCB’s inflation target to 4.25 percent in 2019, 4.5 percent in 2020, and 3.75 percent for 2021. Because of a heavy public debt burden and other structural factors, most analysts expect the “neutral policy rate will remain higher than target rates in Brazil’s emerging-market peers (around five percent) over the forecast period.  

After a boom in 2004-2012 that more than doubled the lending/GDP ratio (to 55 percent of GDP), the recession and higher interest rates significantly decreased lending.  In fact, the lending/GDP ratio remained below 55 percent at year-end 2017. Financial analysts contend that credit will pick up again in the medium term, owing to interest rate easing and economic recovery.  

The role of the state in credit markets grew steadily beginning in 2008, with public banks now accounting for over 55 percent of total loans to the private sector (up from 35 percent).  Directed lending (that is, to meet mandated sectoral targets) also rose and accounts for almost half of total lending. Brazil is paring back public bank lending and trying to expand a market for long-term private capital.  

While local private sector banks are beginning to offer longer credit terms, state-owned development bank BNDES is a traditional Brazilian source of long-term credit.  BNDES also offers export financing. Approvals of new financing by BNDES increased 27 percent year-over-year, with the infrastructure sector receiving the majority of new capital.

The Sao Paulo Stock Exchange (BOVESPA) is the sole stock market in Brazil, while trading of public securities takes place at the Rio de Janeiro market.  In 2008, the Brazilian Mercantile & Futures Exchange (BM&F) merged with the BOVESPA to form what is now the fourth largest exchange in the Western Hemisphere, after the NYSE, NASDAQ, and Canadian TSX Group exchanges.  As of April 2019, there were 430 companies traded on the BM&F/BOVESPA. The BOVESPA index increased 15.03 percent in valuation during 2018. Foreign investors, both institutions and individuals, can directly invest in equities, securities, and derivatives.  Foreign investors are limited to trading derivatives and stocks of publicly held companies on established markets.

Wholly owned subsidiaries of multinational accounting firms, including the major U.S. firms, are present in Brazil.  Auditors are personally liable for the accuracy of accounting statements prepared for banks.

Money and Banking System

The Brazilian financial sector is large and sophisticated.  Banks lend at market rates that remain relatively high compared to other emerging economies.  Reasons cited by industry observers include high taxation, repayment risk, and concern over inconsistent judicial enforcement of contracts, high mandatory reserve requirements, and administrative overhead, as well as persistently high real (net of inflation) interest rates.  According to BCB data collected from 2011 through the first quarter of 2019, the average rate offered by Brazilian banks was 9.22 percent, with an average monthly high of 11.34 percent in July 2016, and an average monthly rate of 7.7 percent for March 2019.

The financial sector is concentrated, with BCB data indicating that the four largest commercial banks (excluding brokerages) account for approximately 70 percent of the commercial banking sector assets, totaling USD 1.59 trillion as of Q1, 2019.  Three of the five largest banks (by assets) in the country – Banco do Brasil, Caixa Economica Federal, and BNDES – are partially or completely federally owned. Large private banking institutions focus their lending on Brazil’s largest firms, while small- and medium-sized banks primarily serve small- and medium-sized companies.  Citibank sold its consumer business to Itau Bank in 2016, but maintains its commercial banking interests in Brazil. It is currently the sole U.S. bank operating in the country.

In recent years, the BCB has strengthened bank audits, implemented more stringent internal control requirements, and tightened capital adequacy rules to reflect risk more accurately.  It also established loan classification and provisioning requirements. These measures apply to private and publicly owned banks alike. In April 2018, Moody’s upgraded a collection of 20 Brazilian banks and their affiliates to stable from negative.  The Brazilian Securities and Exchange Commission (CVM) independently regulates the stock exchanges, brokers, distributors, pension funds, mutual funds, and leasing companies with penalties against insider trading.

Foreigners may find it difficult to open an account with a Brazilian bank.  The individual must present a permanent or temporary resident visa, a national tax identification number issued by the Brazilian government (CPF), either a valid passport or identity card for foreigners (CIE), proof of domicile, and proof of income.  On average, this process from application to account opening lasts more than three months

Foreign Exchange and Remittances

Foreign Exchange

Brazil’s foreign exchange market remains small, despite recent growth.  The latest Triennial Survey by the Bank for International Settlements, conducted in December 2016, showed that the net daily turnover on Brazil’s market for OTC foreign exchange transactions (spot transactions, outright forwards, foreign-exchange swaps, currency swaps and currency options) was USD 19.7 billion, up from USD 17.2 billion in 2013.  This was equivalent to around 0.3 percent of the global market in both years.

Brazil’s banking system has adequate capitalization and has traditionally been highly profitable, reflecting high interest rates and fees.  Per an April 2018 Central Bank Financial Stability Report, all banks exceeded required solvency ratios, and stress testing demonstrated the banking system has adequate loss absorption capacity in all simulated scenarios.  Furthermore, the report noted 99.9 percent of banks already met Basel III requirements, and possess a projected Common Equity Tier 1 (CET1) capital ratio above the minimum 7 percent required at the beginning of 2019.

There are few restrictions on converting or transferring funds associated with a foreign investment in Brazil.  Foreign investors may freely convert Brazilian currency in the unified foreign exchange market where buy-sell rates are determined by market forces.  All foreign exchange transactions, including identifying data, must be reported to the BCB. Foreign exchange transactions on the current account are fully liberalized.

The BCB must approve all incoming foreign loans.  In most cases, loans are automatically approved unless loan costs are determined to be “incompatible with normal market conditions and practices.”  In such cases, the BCB may request additional information regarding the transaction. Loans obtained abroad do not require advance approval by the BCB, provided the Brazilian recipient is not a government entity.  Loans to government entities require prior approval from the Brazilian Senate as well as from the Economic Ministry’s Treasury Secretariat, and must be registered with the BCB.

Interest and amortization payments specified in a loan contract can be made without additional approval from the BCB.  Early payments can also be made without additional approvals, if the contract includes a provision for them. Otherwise, early payment requires notification to the BCB to ensure accurate records of Brazil’s stock of debt.

In March 2014, Brazil’s Federal Revenue Service consolidated the regulations on withholding taxes (IRRF) applicable to earnings and capital gains realized by individuals and legal entities resident or domiciled outside Brazil.  The regulation states that the cost of acquisition must be calculated in Brazilian currency (reais). Also, the definition of “technical services” was broadened to include administrative support and consulting services rendered by individuals (employees or not) or resulting from automated structures having clear technological content.

Upon registering investments with the BCB, foreign investors are able to remit dividends, capital (including capital gains), and, if applicable, royalties.  Investors must register remittances with the BCB. Dividends cannot exceed corporate profits. Investors may carry out remittance transactions at any bank by documenting the source of the transaction (evidence of profit or sale of assets) and showing payment of applicable taxes.

Remittance Policies

Under Law 13259/2016 passed in March 2016, capital gain remittances are subject to a 15 to 22.5 percent income withholding tax, with the exception of capital gains and interest payments on tax-exempt domestically issued Brazilian bonds.  The capital gains marginal tax rates are: 15 percent up to USD 1.5 million in gains; 17.5 percent for USD 1.5 million to USD 2.9 million in gains; 20 percent for USD 2.9 million to USD 8.9 million in gains; and 22.5 percent for more than USD 8.9 million in gains.

Repatriation of a foreign investor’s initial investment is also exempt from income tax under Law 4131/1962.  Lease payments are assessed a 15 percent withholding tax. Remittances related to technology transfers are not subject to the tax on credit, foreign exchange, and insurance, although they are subject to a 15 percent withholding tax and an extra 10 percent Contribution for Intervening in Economic Domain (CIDE) tax.

Sovereign Wealth Funds

Law 11887 established the Sovereign Fund of Brazil (FSB) in 2008.  It was a non-commodity fund with a mandate to support national companies in their export activities and to offset counter-cyclical development, promoting investment in projects of strategic interest to Brazil both domestically and abroad.  The GoB also had the authority to use money from this fund to help meet its fiscal targets when annual revenues were lower than expected, and to invest in state-owned companies. In May 2018, then-President Temer signed an executive order abolishing the fund.  The money in the fund was earmarked for repayment of foreign debt.

7. State-Owned Enterprises

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

In the 1990s and early 2000s, the GoB privatized many state-owned enterprises across a broad spectrum of industries, including mining, steel, aeronautics, banking, and electricity generation and distribution.  While the GoB divested itself from many of its SOEs, it maintained partial control (at both the federal and state level) of some previously wholly state-owned enterprises. This control can include a “golden share” whereby the government can exercise veto power over proposed mergers or acquisitions.  

Notable examples of majority government owned and controlled firms include national oil and gas giant Petrobras and power conglomerate Eletrobras.  Both Petrobras and Eletrobras include non-government shareholders, are listed on both the Brazilian and NYSE stock exchanges, and are subject to the same accounting and audit regulations as all publicly-traded Brazilian companies.  Brazil previously restricted foreign investment in offshore oil and gas development through 2010 legislation that obligated Petrobras to serve as the sole operator and minimum 30 percent investor in any oil and gas exploration and production in Brazil’s prolific offshore pre-salt fields.  As a result of the GoB’s desire to increase foreign investment in Brazil’s hydrocarbon sector, in October 2016 the Brazilian Congress granted foreign companies the right to serve as sole operators in pre-salt exploration and production activities and eliminated Petrobras’ obligation to serve as a minority equity holder in pre-salt oil and gas operations.  Nevertheless, the 2016 law still gives Petrobras right-of-first refusal in developing pre-salt offshore fields before those areas are available for public auction.  Industry estimates project bonuses of USD 26.3 billion by opening the Brazilian oil and gas market to foreign investment.

Privatization Program

Given limited public investment funding, the GoB has focused on privatizing state–owned energy, airport, road, railway, and port assets through long-term (up to 30 year) infrastructure concession agreements.  Eletrobras successfully sold its six principal, highly-indebted power distributors. The SOE is currently working to begin a capitalization process to reduce the GoB’s share holdings in the company to less than 50 percent.  The process cannot move forward, however, until Congress passes a bill authorizing the reduction. In 2018, Petrobras faced criticism over its daily fuel adjustment policy and a major 12-day truckers strike hit Brazil and forced the resignation of Petrobras’ CEO Pedro Parente.  To end the strike, the GoB eliminated the collection of the CIDE tax over diesel and gave a USD 3 billion subsidy to diesel producers (mainly Petrobras) to reduce the prices to consumers (primarily truckers).

In 2016, Brazil launched its newest version of these efforts to promote privatization of primary infrastructure.  The Temer administration created the Investment Partnership Program (PPI) to expand and accelerate the concession of public works projects to private enterprise and the privatization of some state entities.  PPI covers federal concessions in road, rail, ports, airports, municipal water treatment, electricity transmission and distribution, and oil and gas exploration and production contracts. Between 2016 and 2018, PPI auctioned off 124 projects and collected USD 62.5 billion in investments.  The full list of PPI projects is located at: https://www.ppi.gov.br/schedule-of-projects 

While some subsidized financing through BNDES will be available, PPI emphasizes the use of private financing and debentures for projects.  All federal and state-level infrastructure concessions are open to foreign companies with no requirement to work with Brazilian partners. In 2017, Brazil launched the Agora é Avançar initiative for promoting investments in primary infrastructure, and this has supported several projects.  Details can be found at: www.avancar.gov.br .The latest information available about Avançar Parcerias is from September 30, 2018.  From over 7,000 projects, the program has completed 36.5 percent and 92.2 percent are in progress.

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

8. Responsible Business Conduct

Most state-owned and private sector corporations of any significant size in Brazil pursue corporate social responsibility (CSR) activities.  Brazil’s new CFIAs (see sections on bilateral investment agreements and dispute settlement) contain CSR provisions. Some corporations use CSR programs to meet local content requirements, particularly in information technology manufacturing.  Many corporations support local education, health and other programs in the communities where they have a presence. Brazilian consumers, especially the local residents where a corporation has or is planning a local presence, expect CSR activity.  Corporate officials frequently meet with community members prior to building a new facility to review the types of local services the corporation will commit to providing. Foreign and local enterprises in Brazil often advance United Nations Development Program (UNDP) Millennium Development Goals (MDGs) as part of their CSR activity, and will cite their local contributions to MDGs, such as universal primary education and environmental sustainability.  Brazilian prosecutors and civil society can be very proactive in bringing cases against companies for failure to implement the requirements of the environmental licenses for their investments and operations. National and international nongovernmental organizations monitor corporate activities for perceived threats to Brazil’s biodiversity and tropical forests and can mount strong campaigns against alleged misdeeds.

The U.S. diplomatic mission in Brazil supports U.S. business CSR activities through the +Unidos Group (Mais Unidos), a group of more than 100 U.S. companies established in Brazil.  Additional information on how the partnership supports public and private alliances in Brazil can be found at: www.maisunidos.org 

9. Corruption

Brazil has laws, regulations, and penalties to combat corruption, but their effectiveness is inconsistent.  Several bills to revise the country’s regulation of the lobbying/government relations industry have been pending before Congress for years.  Bribery is illegal, and a bribe by a local company to a foreign official can result in criminal penalties for individuals and administrative penalties for companies, including fines and potential disqualification from government contracts.  A company cannot deduct a bribe to a foreign official from its taxes. While federal government authorities generally investigate allegations of corruption, there are inconsistencies in the level of enforcement among individual states. Corruption is problematic in business dealings with some authorities, particularly at the municipal level.  U.S. companies operating in Brazil are subject to the U.S. Foreign Corrupt Practices Act (FCPA).

Brazil signed the UN Convention against Corruption in 2003, and ratified it in 2005.  Brazil is a signatory to the OECD Anti-Bribery Convention and a participating member of the OECD Working Group on bribery.  It was one of the founders, along with the United States, of the intergovernmental Open Government Partnership, which seeks to help governments increase transparency.  

In 2018, Brazil ranked 105th out of 180 countries in Transparency International’s Corruption Perceptions Index.  The full report can be found at: https://www.transparency.org/cpi2018 

Since 2014, the federal criminal investigation known as Operação Lava Jato (Operation Car Wash) has uncovered a complex web of public sector corruption, contract fraud, money laundering, and tax evasion stemming from systematic overcharging for government contracts, particularly at parastatal oil company Petrobras.  The ongoing investigation led to the arrests of Petrobras executives, oil industry suppliers including executives from Brazil’s largest construction companies, money launderers, former politicians, and political party operatives. Many sitting Brazilian politicians are currently under investigation.  In July 2017, former Brazilian President Luiz Inacio Lula da Silva (Lula) was convicted of corruption and money laundering charges stemming from the Lava Jato investigation.  The Brazilian authorities jailed Lula in April 2018, and the courts sentenced him in February 2019 to begin serving an almost 13-year prison sentence.  In March 2019, authorities arrested former President Michel Temer on charges of corruption.

In December 2016, Brazilian construction conglomerate Odebrecht and its chemical manufacturing arm Braskem agreed to pay the largest FCPA penalty in U.S. history and plead guilty to charges filed in the United States, Brazil, and Switzerland that alleged the companies paid hundreds of millions of dollars in bribes to government officials around the world.  The U.S. Department of Justice case stemmed directly from theLava Jatoinvestigation and focused on violations of the anti-bribery provisions of the FCPA.  Details on the case can be found at: https://www.justice.gov/opa/pr/odebrecht-and-braskem-plead-guilty-and-agree-pay-least-35-billion-global-penalties-resolve 

In January 2018, Petrobras settled a class-action lawsuit with investors in U.S. federal court for USD 3 billion, which was one of the largest securities class action settlements in U.S. history.  The investors alleged that Petrobras officials accepted bribes and made decisions that had a negative impact on Petrobras’ share value. In September 2018, the U.S. Department of Justice announced that Petrobras would pay a fine of USD 853.2 million to settle charges that former executives and directors violated the FCPA through fraudulent accounting used to conceal bribe payments from investors and regulators.

In 2015, GoB prosecutors announced Operacão Zelotes (Operation Zealots), in which both domestic and foreign firms were alleged to have bribed tax officials to reduce their assessments.  The operation resulted in a complete closure and overhaul of Brazilian tax courts, including a reduction in the number of courts and judges as well as more subsequent rulings in favor of tax authorities.  

Resources to Report Corruption

Petalla Brandao Timo Rodrigues
International Relations Chief Advisor
Brazilian Federal Public Ministry
contatolavajato@mpf.mp.br

Transparencia Brasil
Bela Cintra, 409; Sao Paulo, Brasil
+55 (11) 3259-6986
http://www.transparencia.org.br/contato 

10. Political and Security Environment

Strikes and demonstrations occasionally occur in urban areas and may cause temporary disruption to public transportation.  Occasional port strikes continue to have an impact on commerce. Brazil has over 60,000 murders annually, with low rates of success in murder investigations and even lower conviction rates.  Brazil announced emergency measures in 2017 to counter a rise in violence in Rio de Janeiro state, and approximately 8,500 military personnel deployed to the state to assist state law enforcement.  In February, 2018, then-President Temer signed a federal intervention decree giving the federal government control of the state’s entire public security apparatus under the command of an Army general.  The federal intervention ended on December 31, 2018, with the withdrawal of the military. Shorter-term and less expansive deployments of the military in support of police forces also occurred in other states in 2017, including Rio Grande do Norte and Roraima.  The military also supported police forces in 11 states and nearly 500 cities for the 2018 general elections.

In 2016, millions peacefully demonstrated to call for and against then-President Dilma Rousseff’s impeachment and protest against corruption, which was one of the largest public protests in Brazil’s history.  Non-violent pro- and anti-government demonstrations have occurred regularly in recent years.

Although U.S. citizens are usually not targeted during such events, U.S. citizens traveling or residing in Brazil are advised to take common-sense precautions and avoid any large gatherings or any other event where crowds have congregated to demonstrate or protest.  For the latest U.S. State Department guidance on travel in Brazil, please consult www.travel.state.gov

11. Labor Policies and Practices

The Brazilian labor market is composed of approximately 124 million workers of whom 32.9 million (26.5 percent) work in the informal sector.  Brazil had an unemployment rate of 12 percent as of March 2019, although that percentage was nearly double (22.6 percent) for young workers ages 18-29.  Foreign workers made up less than one percent of the overall labor force, but the arrival of 160,000 economic migrants and refugees from Venezuela since 2016 has led to large local concentrations of foreign workers in the border state of Roraima and the city of Manaus.  Migrant workers from within Brazil play a significant role in the agricultural sector. There are no government policies requiring the hiring of Brazilian nationals.

Low-skilled employment dominates Brazil’s labor market.  During the country’s economic recession (2014-2016), eight low-skilled occupations – such as market attendants and janitors – accounted for half of the roughly 900,000 job openings added to the market.  The number of professionals working as biomedical and information analysts – however small – also increased, while that of bill collectors, cashier supervisors, and welders saw declines. Sectors such as information technology services stood out among those that generated job vacancies between 2011 and 2016.

Workers in the formal sector contribute to the Time of Service Guarantee Fund (FGTS) that equates to one month’s salary over the course of a year.  If a company terminates an employee, the employee can access the full amount of their FGTS contributions or 20 percent in the event they leave voluntarily.  Brazil’s labor code guarantees formal sector workers 30 days of annual leave and severance pay in the case of dismissal without cause. Unemployment insurance also exists for laid off workers equal to the country’s minimum salary (or more depending on previous income levels) for six months.  A labor law that went into effect in November 2017 modified 121 sections of the national labor code (CLT). The law introduced flexible working hours, eased restrictions on part-time work, relaxed how workers can divide their holidays and cut the statutory lunch hour to 30 minutes. The government does not waive labor laws to attract investment; they apply uniformly across the country.  

Collective bargaining is common, and there were 11,587 labor unions operating in Brazil in 2018.  Labor unions, especially in sectors such as metalworking and banking, are well organized in advocating for wages and working conditions, and account for approximately 19 percent of the official workforce according to the Brazilian Institute of Applied Economic Research (IPEA).  Unions in various sectors engage in collective bargaining negotiations, often across an entire industry when mandated by federal regulation. The November 2017 labor law ended mandatory union contributions, which has reduced union finances by as much as 90 percent according to the Inter-Union Department of Statistics and Socio-economic Studies (DIESSE).  DIESSE reported a significant decline in the number of collective bargaining agreements reached in 2018 (3,269) compared to 2017 (4,378).

Employer federations also play a significant role in both public policy and labor relations.  Each state has its own federation, which reports to the National Confederation of Industry (CNI), headquartered in Brasilia, and the National Confederation of Commerce (CNC), headquartered in Rio de Janeiro.  

Brazil has a dedicated system of labor courts that are charged with resolving routine cases involving unfair dismissal, working conditions, salary disputes, and other grievances.  Labor courts have the power to impose an agreement on employers and unions if negotiations break down and either side appeals to the court system. As a result, labor courts routinely are called upon to determine wages and working conditions in industries across the country.  The labor courts system has millions of pending legal cases on its docket, although the number of new filings has decreased since the November 2017 labor law went into effect. Nevertheless, pending legal challenges to the 2017 labor law have resulted in considerable legal uncertainty for both employers and employees.

Strikes occur periodically, particularly among public sector unions.  A strike organized by truckers unions protesting increased fuel prices paralyzed the Brazilian economy in May 2018, and led to billions of dollars in losses to the economy.

Brazil has ratified 97 International Labor Organization (ILO) conventions.  Furthermore, Brazil is party to the UN Convention on the Rights of the Child and major ILO conventions concerning the prohibition of child labor, forced labor, and discrimination.  For the past eight years (2010-2018), the Department of Labor, in its annual publication Findings on the Worst forms of Child Labor, has recognized Brazil for its significant advancement in efforts to eliminate the worst forms of child labor.  The Ministry of Labor (MTE), in 2018, inspected 231 properties, resulting in the rescue of 1,133 victims of forced labor. Additionally, MTE rescued 1,409 children working in violation of child labor laws.

On January 1, 2019, newly elected President Jair Bolsonaro extinguished MTE and divided its responsibilities between the Ministries of Economy, Justice and Social Development.  

12. OPIC and Other Investment Insurance Programs

Programs of the Overseas Private Investment Corporation (OPIC) are fully available.  Brazil has been a member of the Multilateral Investment Guarantee Agency (MIGA) since 1992.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($ USD) 2017 $2,053 trillion 2017 $2.056 trillion www.worldbank.org/en/country  
U.S. FDI in partner country ($M USD, stock positions)

BCB data, year-end.

2017 $95,100 2017 $68,300 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  

*U.S. is historical-cost basis

Host country’s FDI in the United States ($M USD, stock positions) 2017 $16,070 2017 ($2,030) BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  

*U.S. is historical-cost basis

Total inbound stock of FDI as % host GDP 2017 26.29% 2017 36.4% UNCTAD data available at

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

* IBGE and BCB data, year-end.


Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, billions)
Inward Direct Investment Outward Direct Investment
Total Inward 635.12 100% Total Outward 254.23 100%
Netherlands 158.42 24.9% Cayman Islands 72.58 28.5%
United States 109.61 17.3% British Virgin Islands 46.73 18.4%
Luxembourg 60.12 6.5% Bahamas 37.21 14.6%
Spain 57.98 9.1% Austria 32.14 12.6%
France 33.30 5.2% United States 14.92 5.9%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (billions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 40.13 100% All Countries 31.11 100% All Countries 9.02 100%
United States 13.84 34.5% United States 10.37 33.3% United States 3.47 38.5%
Bahamas 6.80 16.9% Bahamas 6.76 21.7% Spain 2.64 29.3%
Cayman Islands 4.25 10.6% Cayman Islands 3.93 12.6% Korea, South 0.50 5.5%
Spain 3.72 9.3% Switzerland 2.01 6.5% Switzerland 0.41 4.5%
Switzerland 2.42 6.0% Luxembourg 1.69 5.4% Denmark 0.38 4.2%

 

14. Contact for More Information

Economic Section
U.S.  Embassy Brasilia
BrasiliaECON2@State.gov
+55-61-3312-7000

Spain

Executive Summary

Spain is open to foreign investment and is actively seeking to attract additional investment to sustain its strong economic growth. Spain had a GDP growth rate in 2018 of 2.6 percent—one of the highest in the EU. Spain’s excellent infrastructure, large domestic market, well-educated workforce, and robust export possibilities are key selling points for foreign investors. Spanish law permits foreign ownership in investments up to 100 percent, and capital movements are completely liberalized. According to Spanish data, in 2018, foreign direct investment flow into Spain was EUR 52.8 billion, 31.6 percent more than in 2017. Of this total, EUR 948 million came from the United States, the eighth-largest investor in Spain in new foreign direct investment. Foreign investment is concentrated in the energy, real estate, finance and insurance, engineering, and construction sectors.

The Spanish economy sustained its strong and balanced growth in 2018, due in large part to strong domestic consumption, although Spain maintains a relatively high unemployment rate—14.4 percent at the close of 2018—and high levels of household and public indebtedness. Spain’s economy has benefitted from favorable external factors, namely low global energy prices and the European Central Bank’s expansionary monetary policy. As it recovered, Spain’s economy diversified, becoming more export competitive. As a result, Spain has had a current account surplus since 2013.

Following the global financial and euro crises, the Spanish government implemented a series of labor market reforms and restructured the banking system. In 2013, the Spanish government adopted the Market Unity Guarantee Act, which eliminated duplicative administrative controls by implementing a single license system to facilitate the free flow of all goods and services throughout Spain. Since the law’s adoption five years ago, Spain’s National Commission on Markets and Competition (CNMC)—the public-sector authority in charge of competition and regulatory matters—has taken 381 actions to enforce the law. However, certain provisions have been declared unconstitutional by Spanish courts, and some U.S. companies continue to complain about the difficulties in dealing with variances in regional regulations within Spain.

Since its financial crisis, Spain also has regained access to affordable financing from international financial markets, which has improved Spain’s credibility and solvency, in turn generating more investor confidence. Spain’s credit ratings were raised in 2018, and Spanish issuances of public debt have been oversubscribed, reflecting strong investor appetite for investment in Spain. However, small and medium-sized enterprises (SMEs) still have some difficulty accessing credit.

In implementing its fiscal consolidation program, the government took actions between 2012 and 2014 that negatively affect U.S. and other investors in the renewable energy sector on a retroactive basis. As a result, Spain is facing several international arbitration claims. Spanish law protects property rights and those of intellectual property. The government has amended the Intellectual Property Act, the Civil Procedure Law, and the Penal Code to strengthen online protection. In 2018, internet piracy decreased by 3 percent compared to 2017, although piracy continues at high levels.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 41 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2019 30 of 190 https://www.doingbusiness.org/rankings
Global Innovation Index 2018 28 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in Partner Country ($M USD, stock positions) 2017 $33,128 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $27,180 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Foreign direct investment (FDI) has played a significant role in modernizing the Spanish economy during the past 40 years. Attracted by Spain’s large domestic market, export possibilities, and growth potential, foreign companies set up operations in large numbers. Spain’s automotive industry is mostly foreign-owned. Multinationals control half of the food production companies, one-third of chemical firms, and two-thirds of the cement sector. Several foreign investment funds acquired networks from Spanish banks, and foreign firms control about one-third of the insurance market.

The Government of Spain recognizes the value of foreign investment. Spain offers investment opportunities in sectors and activities with significant added value. There have not been any major changes in Spain’s regulations for investment and foreign exchange under the current Spanish Socialist Workers Party (PSOE) administration, which took office in June 2018. Spanish law permits 100 percent foreign ownership in investments (limits apply regarding audio-visual broadcast licenses; see next section), and capital movements are completely liberalized. Due to its degree of openness and the favorable legal framework for foreign investment, Spain has received significant foreign investments in knowledge-intensive activities in the past few years. New FDI into Spain increased by 31.6 percent in 2018 according to Spain’s Industry, Trade, and Tourism Ministry data, continuing the growing path of gross FDI flow into Spain that began significantly in 2014. In 2018, 19.2 percent of total gross investments were investments in new facilities or the expansion of productive capacity, while 59 percent of gross investments were in acquisitions of existing companies. In 2018 the United States had a gross direct investment in Spain of EUR 984 million, accounting for 2.1 percent of total investment and representing a decrease of 52 percent compared to 2017. U.S. FDI stock in Spain stayed relatively steady between 2013 (USD 33.9 billion) to 2017 (USD 33.1 billion).

Limits on Foreign Control and Right to Private Ownership and Establishment

Spain has a favorable legal framework for foreign investors. Spain has adapted its foreign investment rules to a system of general liberalization, without distinguishing between EU residents and non-EU residents. Law 18/1992 of July 1, which established rules on foreign investments in Spain, provides a specific regime for non-EU persons investing in certain sectors: national defense-related activities, gambling, television, radio, and air transportation. For EU residents, the only sectors with a specific regime are the manufacture and trade of weapons or national defense-related activities. For non-EU companies, the Spanish government restricts individual ownership of audio-visual broadcasting licenses to 25 percent. Specifically, Spanish law permits non-EU companies to own a maximum of 25 percent of a company holding a digital terrestrial television broadcasting license; and for two or more non-EU companies to own a maximum of 50 percent in aggregate. In addition, under Spanish law a reciprocity principle applies (art. 25.4 General Audiovisual Law). The home country of the (non-EU) foreign company must have foreign ownership laws that permit a Spanish company to make the same transaction.

Spain is one of the 14 countries of the 28 EU member states that has established mechanisms to evaluate the possible risks of direct foreign investments. The cornerstone on which the control system is structured is the probable impact “on security and public order” of the arrival of foreign capital into Spain. Critical sectors include energy, transport, communications, technology, defense, and data processing and storage, among others.

The Spanish Constitution and Spanish law establish clear rights to private ownership, and foreign firms receive the same legal treatment as Spanish companies. There is no discrimination against public or private firms with respect to local access to markets, credit, licenses, and supplies.

Other Investment Policy Reviews

Spain is a signatory to the convention on the Organization for Economic Co-operation and Development (OECD). Spain is also a member of the World Trade Organization (WTO) and the United Nations Conference on Trade and Development (UNCTAD). Spain has not conducted Investment Policy Reviews with these three organizations within the past three years.

Business Facilitation

For setting up a company in Spain, the two basic requirements include incorporation before a Public Notary and filing with the Mercantile Register (Registro Mercantil). The public deed of incorporation of the company must be submitted. It can be submitted electronically by the Public Notary. The Central Mercantile Register is an official institution that provides access to companies’ information supplied by the Regional Mercantile Registers after January 1, 1990. Any national or foreign company can use it but must also be registered and pay taxes and fees. According to the World Bank’s Doing Business report, the process to start a business in Spain should take about two weeks.

“Invest in Spain” is the Spanish investment promotion agency to facilitate foreign investment. Services are available to all investors.

Useful web sites:

Outward Investment

Among the financial instruments approved by the Spanish Government to provide official support for the internationalization of Spanish enterprise are the Foreign Investment Fund (FIEX), the Fund for Foreign Investment by Small and Medium-sized Enterprises (FONPYME), the Enterprise Internationalization Fund (FIEM), and the Fund for Investment in the tourism sector (FINTUR). The Spanish Government also offers financing lines for investment in the electronics, information technology and communications, energy (renewables), and infrastructure concessions sectors.

2. Bilateral Investment Agreements and Taxation Treaties

Bilateral Taxation Treaties

Spain has concluded bilateral investment agreements with: Hungary (1989), the Czech Republic (1990), Russia (1990), Azerbaijan (1990), Belarus (1990), Georgia (1990), Tajikistan (1990), Turkmenistan (1990), Kirgizstan (1990), Armenia (1990), Slovakia (1990), Argentina (1991), Chile (1991), Tunisia (1991), Egypt (1992), Poland (1992), Uruguay (1992), Paraguay (1993), Philippines (1993), Algeria (1994), Honduras (1994), Pakistan (1994), Kazakhstan (1994), Peru (1994), Cuba (1994), Nicaragua (1994), Lithuania (1994), South Korea (1994), Bulgaria (1995), Dominican Republic (1995), El Salvador (1995), Gabon (1995), Latvia (1995), Malaysia (1995), Romania (1995), Venezuela (1995), Turkey (1995), Lebanon (1996), Ecuador (1996), Costa Rica (1997), Croatia (1997), Estonia (1997), Panama (1997), Slovenia (1998), Ukraine (1998), the Kingdom of Jordan (1999), Trinidad and Tobago (1999), Jamaica (2002), Iran (2002), Montenegro (2002), Bosnia and Herzegovina (2002), Serbia (2002), Nigeria (2002), Guatemala (2002), Namibia (2003), Albania (2003), Uzbekistan (2003), Syria (2003), Equatorial Guinea (2003), Colombia (2005), Macedonia (2005), Morocco (2005), Kuwait (2005), China (2005), the Republic of Moldova (2006), Mexico (2006), Vietnam (2006), Saudi Arabia (2006), Libya (2007), Senegal (2007), Bahrain (2008), the Islamic Republic of Mauritania (2008), Bolivia (2012), South Africa (2013), India (2016), and Indonesia (2016).

Spain and the United States have a Friendship, Navigation and Commerce (FCN) Treaty, and a Bilateral Taxation Treaty (1990), which was amended on January 14, 2013, approved by the United States Senate Foreign Relations Committee on July 16, 2014, and authorized by the Spanish Parliament on December 10, 2014. However, the amended bilateral taxation protocol is pending ratification by the United States Senate before it enters into force.

3. Legal Regime

Transparency of the Regulatory System

On December 2014, the Spanish government launched a transparency website that makes over 500,000 details of public interest freely accessible to all citizens. The website offers details about the central government, public institutions such as the Royal House, the Parliament, the Constitutional Court, the Judicial Power, Ombudsman, the Audit Court, the Central Bank, and the Economic and Social Council, and other organisms such as the European Commission. http://transparencia.gob.es/transparencia/en/transparencia_Home/index.html . Regional and local authorities have developed their own transparency portals and related legislation.

International Regulatory Considerations

Spain modernized its commercial laws and regulations following its 1986 entry into the EU. Its local regulatory framework compares favorably with other major European countries. Bureaucratic procedures have been streamlined and much red tape has been eliminated, although permitting and licensing processes still result in significant delays. The efficacy of regulation at the regional level is uneven. The Market Unity Guarantee Act 20/2013 was adopted in December 2013 with the goal of rationalizing the regulatory framework for economic activities in order to facilitate the free flow of goods and services throughout Spain. It also reinforced coordination among competent authorities and introduced a mechanism to rapidly resolve operators’ problems. With a license from only one of Spain’s 17 regional governments, companies are able to operate throughout the Spanish territory, rather than needing to requests licenses from each region. The measures are designed to reduce business operating costs, improve competitiveness, and attract foreign investment.

Legal System and Judicial Independence

The Spanish judiciary has a well-established tradition of supporting and facilitating the enforcement of both foreign judgments and awards. In fact, the recognition and enforcement of foreign judgments is so well entrenched in the judicial system, that it has not been subject to any relevant modifications (save those imposed by international conventions) since the late nineteenth century, underscoring the strength of the system. For a foreign judgment to be enforced in Spain, an order declaring it is enforceable or exequatur is necessary. Once the exequatur is granted, enforcement itself is quite fast, provided that the assets are identified. Attachment of the assets will be immediate and time for realization will depend on the type of assets. First instance courts are competent for the enforcement of foreign rulings.

Local legislation establishes mechanisms to resolve disputes if they arise. The judicial system is open and transparent, although sometimes slow-moving. Judges are in charge of prosecution and criminal investigation, which permits greater independence. The Spanish prosecution system allows for successive appeals to a higher Court of Justice. The European Court of Justice can hear the final appeal. In addition, the Government of Spain abides by rulings of the International Court of Justice at The Hague.

The number of civil claims has grown significantly over the past decade, due in part to litigation stemming from Spain’s financial crisis, resulting in an increased openness to alternative dispute resolution mechanisms. Although ordinary proceedings are relatively straightforward, due to the significant number of cases within each court, getting to trial can take years. Domestic court decisions are subject to appeal, and the average time taken for a final judgment to be issued by the Court of Appeal can be anywhere from months to years. After this, the decision may still be subject to appeal to the Supreme Court (although the grounds for this appeal are very limited) and this court generally takes between two to three years to issue a decision. Due to the uncertainty surrounding the duration of appeals, disputes involving large companies or significant amounts of money tend to be resolved through arbitration.

Laws and Regulations on Foreign Direct Investment

In 2015, changes to the Personal Income Tax Law affected the transfer of investments outside of Spain by creating a tax on unrealized gains from investment. Spanish tax residents who have resided in Spain for at least 10 out of the previous 15 years are subject to a tax of 19-23 percent if they relocate their holdings or investments outside of Spain—if the market value of the shares held exceeds EUR 4 million or if the individual holds shares of 25 percent or more in a venture whose market value exceeds EUR 1 million.

Some U.S. and other foreign companies operating in Spain say they are disadvantaged by the Tax Administration’s (AEAT) interpretation of Spanish legislation designed to attract foreign investment. In the past several years, AEAT has investigated and disallowed deductions based on operational restructuring at the European level involving a number of U.S.-owned Spanish holding companies for foreign assets (Empresas de Tenencia de Valores Extranjeros or ETVEs), claiming the companies are committing “an abuse of law.” This situation disadvantages FDI in Spain; as a result, many U.S. companies channel their Spanish investments and operations through third countries.

In April 1999, the adoption of royal decree 664/1999 eliminated requirements for government authorization in investments except for those activities directly related to national defense, such as arms production. The decree abolished previous authorization requirements on investments in other sectors deemed to be of strategic interest, such as telecommunications and transportation. It also removed all forms of portfolio investment authorization and established free movement of capital into Spain as well as out of the country. As a result, Spanish law conforms to multi-disciplinary EU Directive 88/361, which prohibits all restrictions of capital movements between Member States as well as between Member States and other countries. The Directive also classifies investors according to residence rather than nationality.

Registration requirements are straightforward and apply equally to foreign and domestic investments. They aim to verify the purpose of the investment and do not block any investment. On September 1, 2016, a new Resolution of the Directorate General for International Trade and Investments at the Ministry of Economy, Industry and Competitiveness came into force. This established new forms for declaration of foreign investments before the Investment Registry, which oblige the investor(s) to declare foreign participation in the company.

Useful websites:

Competition and Anti-Trust Laws

The parliament passed Act 3/2013 on June 4, 2013, by which the entities that regulated energy (CNE), telecoms (CMT), and competition (CNC) merged into a new entity—the National Securities Market and Competition Commission (CNMC). The law attributes practically all of the functions entrusted to the National Competition Commission under the Competition Act 15/2007, of July 3, 2007 (LDC), to the CNMC.

Expropriation and Compensation

Spanish legislation has set up a series of safeguards to prevent the nationalization or expropriation of foreign investments. Since its economic crisis, Spain has altered its renewables policy several times, creating a high degree of regulatory uncertainty and resulting in losses to U.S. companies’ earnings and investments. In December 2012, the government enacted a comprehensive energy sector reform plan in an effort to address a EUR 30 billion energy tariff deficit caused by user rates that were insufficient to cover system costs. In February 2014, Spain’s government announced its plan to cut subsidies for renewable-energy producers, a move that producers decried as a dramatic change to the business environment in which they made their initial investment decisions. Additional reforms in 2014 negatively affected U.S. investors in the solar power sector, with some companies arguing that the legal changes were tantamount to indirect expropriation. As a result of these energy reforms, Spain accumulated more than 30 lawsuits, totaling about EUR 7.6 billion in claims. Spain now faces an array of related international claims for solar photovoltaic and other renewable energy projects. Two international panels have ordered the Government of Spain to compensate companies for losses due to cuts in renewable energy support. In May 2017, the World Bank’s International Center for the Settlement of Investment Disputes (ICSID) arbitration panel ordered the Spanish government to pay 128 million euros to solar thermal investors, and in February 2018, a Swedish arbitration panel awarded a Luxembourg-based investment firm 53 million euros on a similar energy investment case.

Spain registered four new cases with ICSID in 2018, (three of them are related to renewable energy, and one to shares and bonds), and one on February 2019, bringing its total of pending cases to 32 (as of February 2019). By way of comparison, Venezuela has 19 pending cases in ICSID.

Dispute Settlement

ICSID Convention and New York Convention

Spain is a member state to the International Centre for the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and a signatory to the 1958 Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Therefore, the recognition and enforcement of awards is straightforward and implies the same guarantees and practicalities sought by the New York Convention and arbitration practitioners worldwide, with the additional advantage of the existence of a court specialized only in arbitration issues.

Investor-State Dispute Settlement

Contractual disputes between U.S persons and Spanish entities are handled accordingly. U.S. citizens seeking to execute American court judgments within Spain must follow the Exequatur procedure established by Spanish law.

International Commercial Arbitration and Foreign Courts

Law 11/2011 of May 2011 (amending Law 60/2003 of December 2003) on Arbitration applies to national and international arbitration conducted in Spanish territory and aims to promote alternative dispute resolution (ADR) methods, particularly arbitration. The Arbitration Act says that the Civil Court and Criminal Court of Justice are competent to recognize foreign arbitral awards. The Spanish Arbitration Act is based on the UNCITRAL Model law.

There are two main arbitration institutions in Spain, the Court of Arbitration of the Official Chamber of Commerce of Madrid (CAM), and the Civil and Commercial Arbitration Court of Madrid (CIMA). Both institutions have modern and flexible rules that facilitate successful arbitration outcomes. The number of cases–both domestic and international– handled by both institutions, has been rapidly increasing over the past years. In particular, proceedings in the CAM are resolved swiftly, allowing the parties to obtain an award in as few as six months. In December 2017, the Chamber of Commerce of Spain, the Chamber of Commerce of Madrid, and the Civil and Commercial Court of Arbitration Court of Madrid signed a memorandum of understanding (MOU) to unify their arbitration activities and to create a unified Arbitration Court to administer international arbitrations. The MOU will create a commission that will settle the bases of this unified international court. In addition, the new institution’s primary objectives will be the resolution of conflicts related to Latin America, under the principles of autonomy, independence, and transparency. Another arbitration organization in Spain is the Barcelona Court of Arbitration (TAB), which offers services in the field of dispute resolution through arbitration or other similar mechanisms such as conciliation.

Bankruptcy Regulations

Spain has a fair and transparent bankruptcy regime. Bankruptcy proceedings are governed by the Bankruptcy Law of 2003, which entered into force on September 1, 2004, and applies to both individuals and companies. The main objective of the law was to ensure the collection of debts by creditors, to promote consensus between the parties by requiring an agreement between debtor and creditor, and for companies, to enable their survival and continuity, if possible. However, given the law’s requirement for agreement between debtor and creditor—primarily banks, many of which refused to negotiate debt reductions—relatively few companies and individuals were able to declare bankruptcy, even at the height of Spain’s economic crisis. To address the issue, in 2014, the government approved a reform of the bankruptcy law to promote Spain’s economic recovery by establishing mediation mechanisms. These reforms—nicknamed the Second Chance Law—aimed to avoid the bankruptcy of viable companies and to preserve jobs by facilitating refinancing agreements through debt write-off, capitalization, and rescheduling. However, even with the new legislation, declaring bankruptcy remains much less prevalent in Spain than in other parts of the world.

4. Industrial Policies

Investment Incentives

A range of investment incentives exist in Spain, and they vary according to the authorities granting incentives and the type and purpose of the incentives. The national government provides financial aid and tax benefits for activities pursued in certain industries that are considered priority industries (e.g., mining, technological development, research and development, etc.), given these industries’ potential effect on the nation’s overall economy. Regional governments also provide similar incentives for most of these industries. Financial aid includes both nonrefundable subsidies and interest relief on loans obtained by beneficiaries—or combinations of the two.

The European Union:

Since Spain is a European Union (EU) Member State, potential investors are able to access European aid programs, which provide further incentives for investing in Spain.

The EU provides incentives primarily to projects that focus on economically depressed regions or that benefit the EU as a whole.

The European Investment Bank (EIB) provides guarantees, microfinance, equity investment, and global loans for small and medium enterprises (SMEs) as well as individual loans focused on innovation and skills, energy, and strategic infrastructure. Projects aiming to extend and modernize infrastructure in the health and education sectors may also qualify for EIB support.

The European Investment Fund (EIF) provides venture capital to small and medium-sized enterprises, particularly new firms and technology-oriented businesses, via financial intermediaries. It also provides guarantees to financial institutions (such as banks) to cover their loans to SMEs. The EIF does not grant loans or subsidies to businesses, nor does it invest directly in any firms. Instead, it works through banks and other financial intermediaries. It uses either its own funds or those entrusted to it by the EIB or the EU.

The European Structural and Investment Funds (ESI Funds) include the Funds under the Cohesion Policy (Structural Funds (ERDF and ESF) and the Cohesion Fund), which contribute to enhancing economic, social and territorial cohesion. Most autonomous regions of Spain qualify for structural funds under the EU’s 2014-2020 budget (EUR 454 billion). Investments under the European Regional Development Fund (ERDF) are concentrated in four key priority areas: innovation and research, the digital agenda, support for small and medium-sized enterprises (SMEs) and the low-carbon economy, depending on the category of region. The European Social Fund (ESF)’s Cohesion Fund provides funding for programs aiming to reduce economic and social disparities and to promote sustainable development.

EU financial incentives are routed through major Spanish financial institutions, such as the Instituto de Credito Oficial (ICO) and Banco Bilbao-Vizcaya Argentaria (BBVA); EU financial incentives must also be applied for through the financial intermediary.

The Central Government:

Spain’s central government provides numerous financial incentives for foreign investment, which are designed to complement European Union financing. The Ministry of Economy and Competitiveness (MINECO) assists businesses seeking investment opportunities through the Directorate General for International Trade and Investments and the Directorate General for Innovation and Competitiveness. These Directorates provide support to foreign investors in both the pre- and post-investment phases. Most grants seek to promote the development of select economic sectors; however, while these sectoral subsidies are often preferential, they are not exclusive.

A comprehensive list of incentive programs is available at the website: www.investinspain.org  

Using this tool, companies can access up-to-date information regarding grants available for investment projects. Users can also sign up for the automatic alert system, which provides customized updates as suitable grants or subsidies are published. Applications for these incentives should be made directly with the relevant government agency.

Spain provides some support to SMEs through a national program designed to strengthen innovative business groups and networks and boost their competitiveness. In 2013, Spain passed the “Law of Entrepreneurs,” which established an entrepreneur visa for investors and entrepreneurs. Entrepreneurs may apply for the visa with a business plan that has been approved by the Spanish Commercial Office. Entrepreneurs must also demonstrate the intent to develop the project in Spain for at least one year. Investors who purchase at least EUR 2 million in Spanish bonds or acquire at least EUR 1 million in shares of Spanish companies or Spanish banks deposits may also apply. Foreigners who acquire real estate with an investment value of at least EUR 500,000 are also eligible.

The central government provides financial aid and tax benefits for certain industries that it considers priority sectors given their potential growth resultant effect on the nation’s overall economy. Such activities include, for example: new industrial plants, increases in production capacity, relocations that industries undertake to boost competitiveness, new infrastructure projects, and the extension of projects, which are already mature. Preferred sectors are transportation, energy and environment, and social infrastructure and services. Furthermore, priority activities also include those involving Research &Development (R&D) and innovation—including the acquisition, upgrade and maintenance of scientific-technological equipment for R&D activities, private technology centers, and private centers of innovation support. Regional governments also offer similar incentives for most of these industries. Financial aid includes both nonrefundable subsidies and interest relief on loans obtained by the beneficiaries—or combinations of the two. Companies are classified according to size, which can be a limiting factor in accessing certain types of public aid. According to the current usage, the term “micro” company refers to those employing 0-9 employees, with a turnover of less than EUR 2 million, and with a EUR 2 million limit for total assets. A “small” company has 10-49 employees, a turnover below EUR 10 million, and total assets below EUR 10 million. “Medium” enterprises 50-249 employees, annual turnover not exceeding EUR 50 million, and total assets less than EUR 43 million.

The state-owned financial institution (Instituto de Credito Oficial, ICO), which is attached to the Ministry of Economy and Competitiveness, has the status of State Financial Agency. Its mission is to promote economic activities that contribute to economic growth and development as well as the improved distribution of wealth within Spain. As part of this mission, the ICO seeks to foster the growth of small- and medium-sized companies, to encourage technological innovation and renewable energy projects, and to provide financial relief to those affected by natural disasters. The ICO’s direct financing programs are aimed at financing large-scale investment projects in strategic sectors in Spain, backing large-scale investments by Spanish companies abroad, and supporting projects which are economically, financially, technologically and commercially sound and involve a Spanish interest. The maximum amount that can be applied for is EUR 12.5 million.

Other official bodies that grant aid and incentives:

  • Ministry of Finance
  • MINCORUR – Ministry of Industry, Trade, and Tourism
  • ENISA – National Innovation Company S.A. (under MINCOTUR)
  • AXIS ICO Group (under MINECO)
  • INVEST IN SPAIN (under MINCOTUR)
  • RED.ES (under MINECO)
  • IDAE – Institute for Energy Diversification and Saving (under MITECO)
  • CERSA – Spanish Guarantee Company S.A. (under MINCOTUR)
  • CDTI – Center for Industrial Technological Development (under Ministry of Science, Innovation and Universities)
  • Tripartite Foundation for training in employment (under Ministry of Employment and Social Security)
  • CESGAR – Spanish Confederation of Mutual Guarantee Companies

The Regional Governments:

Spain’s 17 regional governments, known as autonomous communities, provide additional incentives for investments in their region. Many are similar to the incentives offered by the central government and the EU, but they are not all compatible. Additionally, some autonomous community governments grant investment incentives in areas not covered by state legislation but which are included in EU regional financial aid maps. Royal Decree 899/2007, of July 6 2007, sets out the different types of areas that are entitled to receive aid, along with their ceilings. Each area’s specific aspects and requirements (economic sectors, investments which can be subsidized, and conditions) are set out in the Royal Decrees determining the different areas. Most are granted on an annual basis.

Generally, the regional governments are responsible for the management of each type of investment. This provides a benefit to investors as each autonomous community has a specific interest in attracting investment that enhances its economy. No investment project can receive other financial aid if the amount of the aid granted exceeds the maximum limits on aid stipulated for each approved investment in the legislation defining the eligible areas. Therefore, the subsidy received is compatible with other aid, provided that the sum of all the aid obtained does not exceed the limit established by the legislation of demarcation and EU rules do not preclude the provision of funding (i.e., due to incompatibilities between Structural Funds).

Incentives from national, regional, or municipal governments and the European Union are granted to Spanish and foreign companies alike without discrimination.

Municipalities:

Municipal corporations offer incentives for direct investment by facilitating infrastructure needs, granting licenses, and allowing for the operation and transaction of permits, although these have been reduced significantly due to budget constraints. Municipalities such as Madrid also offer varied support services for potential foreign investors. Local economic development agencies often provide free advice on the local business environment and relevant laws, administrative support, and connections to human capital in order to facilitate the establishment of new businesses. Spain recently made starting a business easier by eliminating the requirement to obtain a municipal license before starting operations and by improving the efficiency of the commercial registry.

Research and Development

Incentives from national, regional or municipal governments and the European Union are granted to Spanish and foreign companies alike without discrimination. The most notable incentives include those aimed at fostering innovation, technological improvement (TI), and research and development (R&D) projects, which have been priorities of the Spanish government in recent years. The Science, Technology and Innovation Law 14/2011, of June 1, 2011, establishes the legal framework for promoting scientific and technical research, experimental development, and innovation in Spain. On February 2013 the Council of Ministers approved, in a combined document, “the Spanish Strategy for Science and Technology and for Innovation” for the 2013-2020 period, the essential purpose of which is to promote the scientific, technological, and business leadership of the country as a whole and to increase the innovation capacities of the Spanish company and the Spanish economy. The beneficiaries may be: individuals, public research agencies, public and private universities, other public R&D centers, public and private health entities and institutions related to or assisted by the National Health System, certified health research institutes, public and private non-profit entities (foundations and associations) engaging in R&D activities, enterprises (including SMEs), state technological centers, state technological and innovation support centers, business groupings or associations (joint ventures, economic interest groupings, industry-wide business associations), innovative business groupings and technological platforms, and organizations supporting technological transfer and technological and scientific dissemination and disclosure.

The aid can take the form of subsidies, loans, venture capital instruments, and other instruments (tax guarantees and incentives).

In 2013, the European Commission implemented Horizon 2020, the largest-ever EU research and innovation program with nearly EUR 80 billion of funding available from 2014 – 2020. The goal of the program is to attract additional private investment to promote breakthroughs and discoveries and take new ideas from the laboratory to the market. Horizon 2020 is open to all EU Member States and seeks to promote public and private collaboration in delivering innovation. EU Members States are eligible for funding on international collaborations; however, Horizon 2020 expressly prohibits funding on international collaboration with advanced economies outside of the EU.

Foreign Trade Zones/Free Ports/Trade Facilitation

Both the mainland and islands (and most Spanish airports and seaports) have numerous free trade zones where manufacturing, processing, sorting, packaging, exhibiting, sampling, and other commercial operations may be undertaken free of any Spanish duties or taxes. Spain’s seven free zone ports are located in Vigo, Cadiz, Barcelona, Santander, Seville, Tenerife, and the Canary Islands—all of which fall under the EU Customs Union, permitting the free circulation of goods within the EU. The entire province of the Canary Islands is a Special Economic Zone (SEZ), offering fiscal benefits that include a reduced corporate tax rate, a reduced Value-Added Tax (VAT) rate, and exemptions for transfer taxes and stamp duties. The Spanish territories of Ceuta and Melilla also offer unique tax incentives; they do not impose a VAT but instead tax imports, production, and services at a reduced rate. Spanish customs legislation also allows companies to have their own free trade areas. Duties and taxes are payable only on those items imported for use in Spain. These companies must abide by Spanish labor laws.

Performance and Data Localization Requirements

Spain does not have performance and localization requirements for investors.

The Spanish Data Protection Agency and the Spanish Police request data from companies, although the companies may refuse unless required by court order.

5. Protection of Property Rights

Real Property

There are generally no restrictions on foreign ownership of real estate. The buyer must fill out a Declaration to the Foreign Investment Register form before buying the property if the funds for the purchase come from a country or territory considered to be a tax haven. The declaration lasts six months. Foreign individuals require an identification card for foreigners (NIE for individuals). Other foreign legal persons require an identification card known as a CIF. Apart from money laundering regulations, no special restrictions or limitations apply to foreign mortgage guarantees and loans.

The Land Register provides evidence of title. The registration system is rigid, formalistic, and functions efficiently. It provides legal certainty to all parties involved in a transaction. Public or private acts that affect the property are included in the land register. The Property Registry is responsible for managing the Land Register. A right or title recorded in the registry prevails over any other right or title. Certain administrative concessions (licenses for individuals to use or develop publicly-owned property for a particular purpose) may also be registered. Anyone who can prove a legitimate interest in the information contained in the register may access the register. It is not possible to make changes to the ownership of the real estate by electronic means. The transfer of real estate or the grant of rights over property should be executed by public deed in front of a notary before being registered with the Land Registry. A registered title includes the plot of land and the buildings attached to the land. Each plot constitutes a registered property. Each registered property is a legal object and has its own separate entry in the registry in which all related data is registered. There are rules that determine whether a parcel of land, a building, farm, spring or other type of property has a separate entry in the registry system.

Lenders generally use mortgages as security. Mortgages are made by public deed and registered at the land registry. Once registered, the mortgage takes priority over the interest of any third party. Anyone with a legitimate interest in a property can find out whether it is mortgaged by consulting the register. Sale and leaseback is another form of real estate financing that has been used by some Spanish financial institutions. These institutions raised finance through the sale of their offices to their clients and subsequently leased them back. The institution raised funds and their clients received a stream of rental income.

Intellectual Property Rights

Spanish law protects intellectual property rights; enforcement is carried out at the administrative and judicial levels. Intellectual property protection has improved in recent years and is generally effective. However, several municipalities struggle to curb the sale of counterfeit apparel. Spanish patent, copyright, and trademark laws all approximate or exceed European Union levels of intellectual property protection. Spain is a party to the Paris Convention, Bern Convention, the Madrid Accord on Trademarks and the Universal Copyright Conventions.

Copyrights

Spanish law extends copyright protection to all literary, artistic, or scientific creations, including computer software. Spain has ratified the World Intellectual Property Organization’s (WIPO) Copyright Treaty (WCT) and the WIPO Phonograms and Performances Treaty (WPPT)—the so-called Internet treaties. In 2006, Spain passed legislation implementing the EU Copyright Term Directive, thereby also making the Internet treaties part of Spanish law. However, the Internet remains a problematic area in terms of respect for intellectual property rights in Spain.

Since its removal from the United States Trade Representative (USTR) Special 301 Watch List in 2012, Spain has undertaken extensive, multi-year reform measures to strengthen its framework for intellectual property rights (IPR) protections. The latest legislative changes to the 1996 Law on Intellectual Property, in force as of March 3, 2019, streamline anti-piracy and anti-counterfeit measures. As a result, Spain now has a stronger legal framework and corresponding criminal procedures to address IPR violations.

Patents

Spanish authorities published a new Patents Law in 2015 (Law 24/2015). It entered into force on April 1, 2017. A non-renewable 20-year period for working patents is available if the patent is used within the first three years. Spain permits both product and process patents. The European Parliament approved regulations to establish a single patent for the European Union (EU) in December 2012. Spain and Italy decided to opt out, however, due to discrepancies with the patent’s linguistic regime (English, French, and German). A special court will be created to resolve disputes arising from the 25 country signatories. Companies or individuals who want to protect their innovations throughout the EU will have to request a patent in three places – in Munich, the headquarters of the European Patent Office, in Spain, and in Italy (compared to the need to do so in 28 different countries currently) – and will be exposed to litigation in many other jurisdictions. Patents will be issued in English, French, or German, although applications may be presented in any official EU language, along with a summary in one of the three aforementioned languages. Although the regulations entered into force on January 20, 2013, the Patent Package will not enter into force until Germany, France, and 10 other Member States have ratified the Agreement on a Unified Patent Court. As of April 2019, 12 countries have ratified the agreement, which will enter into force upon ratification by Germany and the United Kingdom.

Pharmaceutical companies have reported that Spain’s lack of patent harmonization with the majority of European Union Member States has left holders of pharmaceutical process patents with weaker patent protection than required by the World Trade Organization (WTO) Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. The Spanish government has amended the penal code to stipulate that patent infringers will receive one to three years imprisonment for infringing on protected plant varieties for commercial or agricultural purposes.

Trademarks

Despite high-profile, high-impact raids in 2016 to halt physical sales of counterfeit goods, storefronts selling counterfeit goods have reopened and sales have rebounded. Spanish National Police note that the removal of IP from the EUROPOL Strategic Plan will diminish attention to IP crime in Spain. Purchase and sale of counterfeit items—particularly apparel and accessories on offer by street vendors in tourist areas of major cities and beach towns—noticeably increased over the course of 2018. Spain is listed on USTR’s 2018 Notorious Markets List with specific mention to the Els Limits de La Jonquera market in Girona and tourism centers in Barcelona and Madrid which sell counterfeit goods. Audiences in Spain also stream illegally produced movie and television content. The government has committed to developing a national action plan to combat the problem, which requires coordination with national, regional, and local authorities.

Spanish authorities published a new Trademark law in 2001 (Law 17/2001), which came into effect in July 2002. The Spanish Office of Patents and Trademarks oversees protection for national trademarks. Trademarks registered in the Industrial Property Registry receive protection for a 10-year period from the date of application, which may be renewed. Protection is not granted for generic names, geographic names, those that violate Spanish customs or other inappropriate trademarks. In March 2015, the Spanish parliament passed a reform of the penal code that entered into force in July 2015 (Ley Organica 1/2015). The revised penal code removed the condition that certain intellectual property rights crimes related to the sale of counterfeit items meet a threshold of EUR 400 in order to merit prosecution and changed the procedure for destruction of counterfeit items seized by law enforcement. Counterfeit items may be destroyed once an official report has been made regarding the items, unless a judge formally requests that the items be retained.

The Spanish Tax Agency releases statistics on seizures of counterfeit goods sporadically via its website. In 2017—the most recent data available—Spain confiscated 3.1 million counterfeit products in nearly 3,000 operations.

Businesses may seek a trademark valid throughout the European Union. The Office for Harmonization in the Internal Market (OHIM) for the registration of community trademarks in the European Union started its operations in 1996. Its headquarters are located in Alicante:

Office for Harmonization in the Internal Market (Trade Marks and Designs)
Avenida de Europa, 4
E-03008 Alicante
Tel: (34) 96-513-9100
http://oami.europa.eu/ows/rw/pages/OHIM/contact.en.do  

The World International Property Organization (WIPO, headquartered in Geneva) oversees an international system of registration. Applicants must designate the countries where they wish to obtain protection. However, this system only applies to U.S. firms with an establishment in a country that is a party of the Agreement or the Protocol.

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/ .

6. Financial Sector

Capital Markets and Portfolio Investment

The convergence of monetary policy following the adoption of the euro led to a significant lowering of interest rates; however, the eurozone crisis and the downgrade of Spanish sovereign debt had a negative effect on public financing costs. Foreign investors do not face discrimination when seeking local financing for projects. A large range of credit instruments are available through Spanish and international financial institutions. Many large Spanish companies rely on cross-holding arrangements and ownership stakes by banks rather than pure loans. However, these arrangements do not act to restrict foreign ownership. Several of the largest Spanish companies that engage in this practice are also publicly traded in the U.S. There is a significant amount of portfolio investment in Spain, including by American entities. Spain has an actively traded and liquid stock market.

Money and Banking System

Spain’s domestic housing crisis, which began in 2007, was linked to poor lending practices by Spanish savings banks (cajas de ahorros), many of which were heavily exposed to troubled construction and real estate companies. The government subsequently created a Fund for Orderly Bank Restructuring (FROB) through Royal Decree-law 9/2009 of June 26, which restructured credit institutions with an eye toward bolstering capital and provisioning levels. The number of Spanish financial entities has shrunk significantly since 2009 with 50 entities consolidated into 11 as of March 2019 (Banco Santander, BBVA, Bankinter, Banco Sabadell, CaixaBank, Bankia, Ibercaja Banco, Kutxabank, Liberbank, Abanca, and Unicaja Banco).

Since the financial sector’s peak in 2008, the number of financial institution branches that accept deposits has been reduced by 43.1 percent, according to Bank of Spain and European Central Bank data. Catalonia is the Spanish region most affected by the closure of financial branches, as 55.8 percent of the branches have closed in the past decade. The economic crisis, the wave of mergers and acquisitions, the digitalization of the sector, and the need to reduce costs led to a radical adjustment of the branch network. There were 26,011 financial institution branches at the end of 2018, according to the Bank of Spain, the lowest number since the end of 1980. The sector has also shed nearly 95,000 workers, and downsizing continues as banks reassess profitability. With profit margins narrowing, banks are continuing to downsize, reducing both numbers of employees and branches. Banco Santander plans to close 1,000 branches and lay off more than 3,000 employees over the next two to three years. CaixaBank announced the closure of 800 branches and plans to lay off more than 2,000 employees. BBVA planned the closure of 195 offices, Bankia about 25 offices, and the merger of two medium-sized banks, Unicaja and Liberbank, was estimated to result in layoffs for 3,000 employees and the closure of 200 branches. Early retirement for those over 50 years old has been the mechanism of choice for banks seeking to downsize their workforce. In 2017, two significant banking consolidations occurred. Banco Santander (Spain’s largest bank by market capitalization) acquired Banco Popular in June 2017 after the EU’s Single Resolution Board (SRB)—the centralized banking authority for the EU, established in 2015—deemed Banco Popular as “failing or likely to fail.” Later in June, Bankia agreed to acquire Banco Mare Nostrum—a deal finalized in January 2018, making Bankia Spain’s fourth-largest bank in terms of market capitalization.

In January 2014, Spain cleanly exited its EU aid program, the European Stability Mechanism (ESM), which was used to recapitalize Spanish banks in 2012 and 2013. Spain has made nine voluntary early repayments of its ESM loans; through 2018, Spain had paid back 19.6 billion EUR of the original 41.3 billion EUR loan. These payments have boosted investor confidence in the Spanish economy and have earned praise from EU officials. In November 2015, the Government approved legislation implementing the Law on the Recovery and Resolution of Credit Institutions and Investment Service Companies. The regulation also develops the role of the Orderly Bank Restructuring Fund (Spanish acronym: FROB), as the National Resolution Authority, as well as the contributions of institutions to the National Resolution Fund and the Deposit Guarantee Fund. The flow of credit has been restored and alternative financing mechanisms have been created. The IMF conducted a Financial System Stability Assessment of Spain in August 2017—the first such review since 2012—and deemed that Spain’s financial system has made steady progress strengthening its solvency and reducing nonperforming loans (NPLs) since 2012.

Total assets for the five biggest banks in Spain at the close of 2018 were 2.95 trillion euros:

  1. Banco Santander: 1.459 trillion euros
  2. Banco Bilbao Vizcaya Argentaria (BBVA): 677 billion euros
  3. CaixaBank: 386.6 billion euros
  4. Banco Sabadell: 223.2 billion euros
  5. Bankia: 205.2 billion euros

Foreign Exchange and Remittances

Foreign Exchange Policies

There are no controls on capital flows. In February 1992, Royal Decree 1816/1991 provided complete freedom of action in financial transactions between residents and non-residents of Spain. Previous requirements for prior clearance of technology transfer and technical assistance agreements were eliminated. The liberal provisions of this law apply to payments, receipts and transfers generated by foreign investments in Spain.

Remittance Policies

Capital controls on the transfer of funds outside the country were abolished in 1991. Remittances of profits, debt service, capital gains, and royalties from intellectual property can all be affected at market rates using commercial banks.

Sovereign Wealth Funds

Spain does not have a sovereign wealth fund or similar entity.

7. State-Owned Enterprises

The size of the public enterprise sector in Spain is relatively small. Over the last three decades, the role and importance of state-owned enterprises (SOE) in Spain decreased notably due to the privatization process that started in the early 1980s. The reform of SOE oversight in the 1990s led the government to create the State Holding for Industrial Participations, (Sociedad Estatal de Participaciones Industriales, SEPI). SEPI was created as a public-law entity by decree in 1995; its status was then protected by law in 1996. SEPI has direct majority participation in 15 SOEs, which makes up the SEPI Group, with a workforce of more than 74,000 employees in 2017, and also is a direct minority shareholder in nine SOEs (five of them listed on stock exchanges), and participates indirectly in ownership of more than a hundred companies. Both legislative chambers and any parliamentary group may request the presence of SEPI and SOE representatives to discuss issues related to their performance. SEPI and the SOEs are required to submit economic and financial information to the legislature on a regular basis. The European Union, through specialized committees, also controls SOEs’ performance on issues concerning sector-specific policies and anti-competitive practices. SEPI’s mission is to make profitable its entrepreneurial participations and orient all its activities taking into account the public interest, which makes it responsible for combining the objectives of economic and social profitability. Beyond its initial nature of a mere Agent in charge of industrial policy, SEPI has been consolidated as an instrument for the economic and financial policy, maintaining a close relationship with the budgetary policy.

Corporate Governance of Spain’s SOEs uses criteria based on principles and guidelines from the Organization for Economic Co-operation and Development (OECD). These include the state ownership function and accountability, as well as issues related to performance monitoring, information disclosure, auditing mechanisms and the role of the board in the companies.

  • Companies with a Majority Interest:
    Agencia Efe – Cetarsa – Defex (company in liquidation) – Ensa – Grupo Cofivacasa – Grupo Correos – Grupo Enusa – Grupo Hunosa – Grupo Mercasa – Grupo Navantia – Grupo Sepides – Grupo Tragsa – Hipodromo de la Zarzuela – Mayasa – Saeca
  • Companies with a Minority Interest:
    Airbus Group, NV – Alestis Aerospace – Enagas – Enresa – Hispasat – Indra – International Airlines Group – Red Electrica Corporacion – Ebro Foods
  • Attached companies: RTVE- Corporacion de Radio y Television Espanola
  • Reference: http://www.sepi.es/es/sectores  

Privatization Program

As the size of its public enterprise sector is relatively small, Spain does not have a formal privatization program.

8. Responsible Business Conduct

Spanish companies consider corporate reputation, competitive advantage, and industry trends to be the major driving forces of responsible business conduct (RBC). Initiatives undertaken by the EU and international organizations have influenced companies’ decision to implement RBC, and companies continue to increasingly adhere to its principles. Associations and fora that bring together the heads of leading corporations, business schools and other academic institutions, NGOs and the media are actively contributing to implementation of RBC in Spain. Although the visibility of RBC efforts is still moderate by international standards, in the last two decades there has been a growing interest in it. Today, almost all of Spain’s largest energy, telecommunications, infrastructure, transport, financial services and insurance companies, among many others, have undertaken RBC projects, and such practices are spreading throughout the economy.

The Spanish government has taken some measures to promote RBC since 2002. The government endorsed the Organization for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises, and the national point of contact is the Ministry of Industry, Trade, and Tourism.

9. Corruption

Spain has a wide variety of laws, regulations, and penalties to address corruption. The legal regime has both civil and criminal sanctions for corruption, bribery, financial malfeasance, etc. Giving or accepting a bribe is a criminal act. Under Section 1255 of the Spanish civil code, corporations and individuals are prohibited from deducting bribes from domestic tax computations. There are laws against tax evasion and regulations for banks and financial institutions to fight money laundering terrorist financing. In addition, the Spanish Criminal Code provides for jail sentences and hefty fines for corporations’ (legal persons) administrators who receive illegal financing.

The Spanish government continues to build on its already strong measures to combat money laundering. After the European Commission threatened to sanction Spain for failing to bring its anti-money laundering regulations in full accordance with the EU’s Fourth Anti-Money Laundering Directive, in 2018, Spain approved measures to modify its money laundering legislation to comply with the EU Directive. These measures establish new obligations for companies to license or register service providers, including identifying ultimate beneficial owners; institute harsher penalties for money laundering offenses; and create public and private whistleblower channels for alleged offenses.

The General State Prosecutor is authorized to investigate and prosecute corruption cases involving funds in excess of roughly USD 500,000. The Office of the Anti-Corruption Prosecutor, a subordinate unit of the General State Prosecutor, investigates and prosecutes domestic and international bribery allegations. There is also the Audiencia Nacional, a corps of magistrates with broad discretion to investigate and prosecute alleged instances of Spanish businesspeople bribing foreign officials.

Spain enforces anti-corruption laws on a generally uniform basis. Public officials are subjected to more scrutiny than private individuals, but several wealthy and well-connected business executives have been successfully prosecuted for corruption. In 2018, Spanish courts conducted 48 corruption cases involving 205 defendants. The courts issued 63 sentences, with 40 including a full or partial guilty verdict.

There is no obvious bias for or against foreign investors. U.S. firms have rarely identified corruption as an obstacle to investment in Spain, although entrenched incumbents have frequently attempted and at times succeeded in blocking the growth of U.S. franchises and technology platforms in both Madrid and Barcelona. As a result, Spain is among the least welcoming countries in Europe for some of the U.S.’s leading technology companies, such as Airbnb, Uber, and Expedia. Although no formal corruption complaints have been lodged, U.S. companies have indicated that they have been disqualified at times from public tenders based on reasons that these companies’ legal counsels did not consider justifiable.

Spain’s rank in Transparency International’s annual Corruption Perceptions Index improved slightly in 2018, with the country climbing to position 41 (from 42 in 2017); its overall score (58) is one of the lowest among Western European countries. Among the Spanish public, corruption continues to be one of the main concerns, second after unemployment.

Spain is a signatory of the Organization for Economic Co-operation and Development (OECD) Convention on Combating Bribery and the UN Convention Against Corruption. It has also been a member of the Group of States Against Corruption (GRECO) since 1999. OECD has noted concerns about the low level of foreign bribery enforcement in Spain and the lack of implementation of the enforcement-related recommendations. GRECO highlighted the “limited progress made by Spain in adopting 11 of the group’s recommendations from 2013 to combat corruption. GRECO criticized Spain for failing to adopt of a code of conduct in its Congress and Senate, conduct a thorough review of the financial disclosure regime, or establish an enforcement mechanism for when misconduct occurs.

Resources to Report Corruption

Contact at government agency or agencies are responsible for combating corruption:

Resources to Report Corruption

Ministry of Finance
Alcala, 9
28071 Madrid, Spain
34 91 595 8000
https://ssweb.seap.minhap.es/ayuda/consulta/PTransparencia 
informacion.administrativa@minhap.es

Transparency International
National Chapter – Spain
Fundacion Jose Ortega y Gasset
Calle Fortuny, 53, 28010 Madrid
Spain
Telephone: +34 91 700 4105
Email: transparency.spain@transparencia.org.es
Website:http://www.transparencia.org.es/ 

10. Political and Security Environment

There have been periodic peaceful demonstrations against austerity measures and other social or economic policies. Public sector employees and union members have organized frequent small demonstrations in response to service cuts, privatization, and other government measures.

11. Labor Policies and Practices

Spain’s unemployment rate fell to 14.4 percent at the end of 2018, down from 16.5 percent at the beginning of 2018 and marking the lowest level in a decade—down from its peak of 26.9 percent in 2013. The youth unemployment rate fell to 33.5 percent at the end of 2018, an improvement of almost four percentage points from 2017, but still representing 502,900 unemployed people under the age of 25. Despite these gains, in 2018 Spain maintained the EU’s second highest unemployment and youth unemployment rates after Greece. Steady job creation is due, in part, to Spain’s flourishing tourism industry. In 2018, Spain set a new record with more than 82.6 million visitors (a 0.9 percent increase compared to 2017), who spent more than 89.7 billion euros—a 3.1 percent year-over-year increase.

While youth unemployment has fallen substantially, the “lost decade” of extraordinarily high unemployment continues to affect Spain’s socioeconomic development and harms the country’s long-term competitiveness. Spanish economists and politicians across the political spectrum consistently raise concerns about the quality of youth jobs, which are often low-paid, temporary, low-skilled positions that are the first to be terminated in any economic difficulty.

Spain added 566,200 jobs in 2018, lowering its unemployment rate to 14.4 percent, the lowest rate since the fourth quarter of 2008, according to Spain’s National Institute of Statistics (INE). Spain’s economically active population increased by 103,800 people in 2018, totaling 22.8 million people, of whom 19.5 million were employed and 3.3 million unemployed. Several indicators suggest a modest but gradual improvement in Spain’s longer-term employment trends. The 2018 job growth rate rose to nearly three percent from 2.6 percent in 2017; the number of “long-term” unemployed (over a year without work) dropped 17.4 percent from 2017; and over four-fifths of the jobs created in 2018 were full-time positions (476,800 positions)—2.9 percent higher than 2017.

The labor market is divided into permanent workers with full benefits and temporary workers with many fewer benefits. Labor market reform legislation enacted by the parliament in September 2010 aimed to encourage the use of indefinite labor contracts by reducing the number of days of severance pay under these contracts. In January 2011, government, business, and labor union representatives agreed to a pension reform that increases the legal retirement age from 65 to 67 over a 15-year period beginning in January 1, 2013, and gradually increases the number of years of contributions on which pensions are calculated. In 2012 the Spanish government enacted a series of measures to make hiring and firing easier.

Collective bargaining is widespread in both the private and public sectors. A high percentage of the working population is covered by collective bargaining agreements, although only a minority (generally estimated to be about 10 percent) of those covered are actually union members. Under the Spanish system, workers elect delegates to represent them before management every four years. If a certain proportion of those delegates are union-affiliated, those unions form part of the workers’ committees. Large employers generally have individual collective agreements. In industries characterized by smaller companies, collective agreements are often industry-wide or regional. The reforms enacted in 2012 gave business-level agreements primacy over sectoral and regional agreements and made it easier for businesses to opt out of higher-level agreements. They also required collective labor agreements to be renegotiated within one year of expiration.

The Constitution guarantees the right to strike, and this right has been interpreted to include the right to call general strikes to protest government policy.

12. OPIC and Other Investment Insurance Programs

As Spain is a member of the European Union, Overseas Private Investment Corporation (OPIC) insurance is not offered. Various EU directives, as adopted into Spanish law, adequately protect the rights of foreign investors. Spain is a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2017 $1,317,600 2017 $1,314,314 www.worldbank.org/en/country  
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in Partner Country ($M USD, stock positions) 2016 $66,309 2017 $33,128 BEA data available at http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Host Country’s FDI in the United States ($M USD, stock positions) 2016 $78,014 2017 $74,716 BEA data available at http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Total Inbound Stock of FDI as % host GDP 2016 44.8% 2017 52.3% UNCTAD data available at

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

*Ministry of Industry, Trade, and Tourism, http://www.comercio.gob.es/es-ES/inversiones-exteriores/informes/Paginas/presentacion.aspx  


Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions), 2017
Inward Direct Investment Outward Direct Investment
Total Inward 633,756 100% Total Outward 570,294 100%
Netherlands 129,598 20.4% United Kingdom 120,091 21%
Luxembourg 90,864 14.3% United States 86,520 15.2%
United Kingdom 85,969 13.5% Brazil 63,204 11%
France 58,832 9.3% Mexico 41,032 7.2%
Germany 51,887 8.2% Portugal 26,961 4.7%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets, June 2018
Top Five Partners (US Dollars, Millions)
Total Equity Securities Total Debt Securities
All Countries 748,201 100% All Countries 359,711 100% All Countries 388,490 100%
Luxembourg 179,119 23.9% Luxembourg 172,724 48.0% Italy 124,293 31.9%
Italy 128,287 17.1% France 44,017 12.2% United States 37,570 9.6%
France 69,176 9.2% Ireland 47,324 13.1% Netherlands 32,110 8.3%
Ireland 59,061 7.9% United States 18,373 5.1% France 21,833 5.6%
United States 55,943 7.5% United Kingdom 18,068 5.0% United Kingdom 21,506 5.5%

14. Contact for More Information

Elliot Carmean, Economic Officer, tel.: (34) 91 5872399; carmeaner@state.gov
Ana Maria Waflar, Economic Specialist, tel.: (34) 91 5872290; waflarax@state.gov

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