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Congo, Democratic Republic of the

Executive Summary

The Democratic Republic of the Congo (DRC) is the second largest country in Africa and potentially one of the richest in the world in terms of natural resources.  With 80 million hectares (197 million acres) of arable land and 1,100 minerals and precious metals, the DRC has the resources to achieve prosperity for its people.  Despite its potential, the DRC often cannot provide adequate security, infrastructure and health care to its estimated 81 million inhabitants, of which 75 percent live on less than two dollars a day.

The country possesses untapped resources that attract investors and could make it a giant in the African and global economies, but it occupies the 184th place (of 190) in the World Bank’s Doing Business 2019 report.

Overall, businesses in the DRC face numerous challenges, including fragility of functional infrastructure and alleged corruption at all levels of government.  Though, the election of President Felix Tshilombo Tshisekedi has raised the hopes of the business community in the DRC, and there is optimism that this change in leadership heralds the beginning of a new era of transparency in the country.

Armed groups remain active in the eastern part of the country making for a fragile security situation that negatively affects the business environment.  A long cycle of delayed elections finally ended in December 2018, with the arrival in power of the new President Felix Tshilombo Tshisekedi, reducing long-standing political tensions.

Poor governance, corruption and a deficit of transport, energy, and telecommunications infrastructure continue to make the business climate difficult.  The infrastructure deficit is the main challenge as it hinders intra- and international trade.  The poor quality of DRC’s infrastructure leads to import and export costs that are reported to be among the highest in Africa.

Despite some reforms implemented by the government, investors continue to complain about corruption and the lack of reform in the mining and subcontracting sectors.

ANAPI (Agence de promotion des investissements au Congo) strives to coordinate the actions of the Government of the Democratic Republic of the Congo (GDRC) in an attempt to simplify administrative formalities and procedures, but its influence in the administrative sphere is still limited.  In 2018 business remained sluggish, with only the extractives sector exhibiting significant growth.

GDP growth in 2018 was 4.1 percent (compared to 3.7 percent in 2017), while the average rate of inflation was 27 percent (compared to 54 percent in 2017).  Despite this, the year-on-year increase in consumer prices dipped to approximately 7 percent by the 4th quarter of 2018.  The CDF stabilized against the USD, losing only 2.7 percent of its value in 2018 (compared to a depreciation rate of 23 percent in 2017).  In 2018, the financing of the elections was supported by USD 500 million in public funds, roughly 9 percent of the 2018 state budget.

According to the Governor of the Central Bank, the main challenge remains the insufficient mobilization of public revenues, which is estimated by various sources to be between 7 and 10 % of GDP, as compared to an average of 20% in sub-Saharan Africa.

The primary minerals sector is the country’s main source of revenue. Copper, cobalt, gold, coltan, diamond, tin and tungsten, along with oil from offshore fields, provide over 95 percent of the DRC’s export revenue.

The agricultural sector and the forestry sector present opportunities for economic diversification in the DRC.  Agriculture is the mainstay of the economy, as it employs approximately 60% of Congolese.  The National Strategic Development Plan (NSDP), currently being finalized, plans to use agricultural transformation to advance the DRC into a middle-income country by 2022, including through the establishment of agro-industrial parks in the country’s various regions, which will take into account the interests of small producers.  The industrialization of the forest-based sector would strengthen diversification efforts.

According to foreign investors, inadequate infrastructure and allegedly predatory taxation have greatly diminished the secondary sector.  Several breweries and bottlers, a number of large construction firms, and limited textiles production are still active.

The tertiary sector includes retail and wholesale sales, banking, transport and communication components.  Micro commerce dominates the retail sector; the banking sector is small in terms of capitalization, but diverse in terms of ownership; the highly competitive telecommunications industry is expanding into electronic banking.

The banking sector configuration in 2018 remains unchanged from the previous year.  There are currently 17 operational banks in the Congolese banking industry. This includes BIAC, which is in serious difficulty and will likely be dissolved and another, Byblos Bank RDC, which became Solidaire Banque following the withdrawal of its majority shareholder and has remained practically inactive.  The bank penetration rate is well below the sub-Saharan African average of 25%.  The nation’s economy is highly dollarized, which weakens monetary policy execution, financial development and systemic stability.

The DRC is finally opening up its insurance sector after years of hesitancy and delay. The new regulator ARCA (Autorité de Régulation et de Contrôle des Assurances), approved four new insurance companies and two insurance brokers on March 28th, 2019.  The insurance sector will hopefully stimulate the economy, by mitigating risk and financing economic development projects.

Reform of a non-transparent and often corrupt legal system is also a prerequisite for investors to benefit more fully from the DRC’s membership in the Organization for the Harmonization of Business Laws in Africa (OHADA).

The Embassy invites all prospective investors to visit www.travel.state.gov to read the latest country-specific information and travel warnings before traveling to the DRC.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 161 of 180 http://www.transparency.org/research/cpi/overview
World Bank Doing Business Report “Ease of Doing Business” 2019 184 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2017 N/A of 126 http://www.globalinnovationindex.org/content/page/data-analysis
U.S. FDI in partner country ($M USD, stock positions) 2017 $76 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $460 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

The DRC remains a challenging environment in which to conduct business.  At the same time, the GDRC sporadically takes steps to improve economic governance and its business climate, while the DRC’s rich endowment of natural resources, large population and generally open trading system provide significant potential opportunities for U.S. investors.  The GDRC’s investment agency, the National Agency for Investment Promotion (ANAPI), provides investment facilitation services for initial investments over USD 200,000 and is mandated to simplify the investment process, make procedures more transparent, assist new foreign investors and improve the image of the DRC as an investment destination.  Current investment regulations prohibit foreign investors from engaging in informal small retail commerce, referred to locally as petit commerce, and ban foreign majority-ownership of agricultural concerns. Visas for foreign workers are limited to six consecutive months and cost between USD 300 (single entry) and USD 400 (multiple-entry).

Following approval of an initial “temporary” work visa, which, normally, is not difficult to procure, a foreign worker may qualify for a more expensive “establishment visa” with at least a one year validity.  Salaries paid to expatriates are taxed at a higher rate than those of locals to encourage local employment.

Limits on Foreign Control and Right to Private Ownership and Establishment

The DRC Constitution stipulates entitlement to own and establish a business enterprise, and to engage in all forms of remunerative activity, noting minimal restrictions related to small commerce and a prohibition of foreign shareholder ownership of more than 49 percent of an agribusiness.  The government has drafted foreign ownership legislation, but parliamentary debate is still pending. Although it may not be based in law, many investors note that in practice the GDRC requires foreign investors to both hire local agents and participate in a joint venture with the government or local partners.

A new law on subcontracting in the private sector, which was enacted in January 2017, restricts foreign investors’ participation in subcontracting in almost all sectors and is considered discriminatory to the interests of some U.S. companies operating in DRC.  The law restricts subcontracting activity to majority Congolese-owned and capitalized-companies whose head offices are located in the national territory.  The only exception is in the case of unavailability of expertise in a specific subcontracting area. In that case, proof of lack of expertise must be provided to the competent authority to enable a non-Congolese company to be used as a subcontractor, but the activity may not exceed six months.

The law also forbids the subcontracting of more than 40 percent of the overall value of a contract; voids clauses, stipulations and contractual arrangements that violate the provisions of this law; and carries penalties of up to USD 150,000 and the risk of closure of operations for six months if certain provisions are violated.  As of April 2017, the Federations of Enterprises of the Congo (FEC), the American Chamber of Commerce DRC, and other business organizations were lobbying to review and revise the law.  Foreign businesses had a 12-month grace period, which ended in January 2018, to comply with the new law, but as noted below, the law is not yet being enforced.

On April 16th, 2018, the Congolese government adopted the draft decree on the “creation, organization and functioning of the Authority to Regulate Subcontracting in the Private Sector” (ARSP).  On December 27th, 2018 former President Kabila and Prime Minister Tshibala signed an order to appoint the Authority’s general management and the board of directors, which would implement the law.  The Director General of the ARSP announced in May 2019 that the Authority would begin operations shortly.

On March 9, 2018, the government promulgated a new mining code which increased royalty rates by two to ten percent, raised tax rates on “strategic” metals, and imposed a surcharge on “super profits” of mining companies.  Of particular concern to mining companies, the government unilaterally removed a stability clause contained in the mining code of 2002.  The stability clause protects investors from any new fees or taxes for ten years.  With no coherent and transparent legal and fiscal framework to alleviate investors’ concerns, the stability clause offered a significant inducement to major mining companies.  Removal of the stability clause may deter future investment in the mining sector.  Since August 27th, 2018, the day of the last meeting between the government and investors, the situation has not progressed.  Also in August, the DRC’s major industrial mining companies, responsible for 80 percent of copper and cobalt production and 90 percent of gold production, formed a new industry body, the Initiative for the Promotion of the Mining Industry (IPM), to engage the GDRC more effectively on the new mining code.  IPM is awaiting appointment of the new government to resume discussions.  The Tshisekedi government has indicated that it is willing to reopen discussions on the new mining code, but given its minority status in the National Assembly, it may not be able to implement changes that require legislative approval.

Other Investment Policy Reviews

The DRC has not undergone an Organization for Economic Cooperation and Development (OECD) or United Nations Conference on Trade and Development (UNCTAD) Investment Policy Review in the last 10 years, but the GDRC has made significant progress to improve its customs clearance procedures. Cities with high custom clearance traffic use Sydonia, which is an advanced software system for custom administrations in compliance with ASYCUDA.  (ASYCUDA is a large technical assistance software program recommended by UNCTAD for custom clearance management.)

Business Facilitation

Since 2013, the GDRC has operated a “one-stop shop” (https://www.guichetunique.cd/) that brings together all the government entities involved in the registration of a company in the DRC.  The registration process now officially takes three days, but in practice it can take much longer.  Yet, some businesses have reported that the Guichet Unique has considerably shortened and simplified the overall process of business registration.

Outward Investment

The GDRC does not prohibit outward investment, nor does it particularly promote it.  There are no current government restrictions preventing domestic investors from investing abroad, and there are no current blacklisted countries with which domestic investors are precluded from doing business.

2. Bilateral Investment Agreements and Taxation Treaties

The U.S.-DRC Bilateral Investment Treaty (BIT) was signed in 1984 and entered into force in 1989.  The BIT guarantees reciprocal rights and privileges to each country’s investors and provides that, should a claim arise under the treaty, it can be submitted to a dispute resolution mechanism through international arbitration.

Germany, France, Belgium, Italy, South Korea, and China have also signed bilateral investment treaties with the DRC, while South Africa and Kenya are currently negotiating BITs with the DRC.  Lebanon, Cote d’Ivoire, and Burkina Faso have negotiated, but not signed, bilateral investment treaties with the DRC.  In October 2016, the DRC and Rwanda signed an agreement on a simplified trade regime covering only small-scale commerce between the countries.

There is no bilateral taxation treaty between the United States and the DRC.  In August 2015, Zambia and the DRC signed a bilateral taxation treaty that abolished customs taxes across their common border.

4. Industrial Policies

Investment Incentives

Investment incentives for companies entering the DRC are generally negotiated during a streamlined period of approximately 30 days.  Negotiated incentives can range from tax breaks to duty exemptions, and are dependent upon the location and type of enterprise, the number of jobs created, the degree of training and promotion of local staff, and the export-producing potential of the operation.  Investors who wish to take advantage of customs and tax incentives in the extant 2002 Investment Code must apply to the National Agency for Investment Promotion (ANAPI), which, in turn, submits applications to the Ministries of Finance and Planning for final approval.

Foreign Trade Zones/Free Ports/Trade Facilitation

The DRC does not have designated free trade areas or free port zones; however legislation is pending to create such zones.  DRC is still progressively implementing legislation to integrate into the COMESA and SADC Free Trade Areas.  In 2015, the GDRC confirmed its commitment to work to enter the tripartite COMESA-SADC-EAC (Eastern African Community) Free Trade Area and the Continental Free Trade Area.  The implementation process has been on hold since that time, however, newly elected President Tshisekedi has signaled that he will revive stalled efforts to join the EAC.  Notwithstanding, the GDRC signed the agreement for the Continental Free Trade Area (Zone de libre-échange continentale or ZLEC) on March 21, 2018 in Kigali, under the aegis of the African Union.  The GDRC has yet to take any steps to implement the agreement.

Performance and Data Localization Requirements

Although there are no specific performance requirements for foreign investors, they invariably must negotiate many of the conditions of their investments with ANAPI.  Performance requirements agreed upon with ANAPI typically include a timeframe for the investment, use of OHADA accounting procedures and periodic authorized GDRC audits, protection of the environment, periodic progress reports to ANAPI, and the maintenance of international and local norms for the provision of goods and services.  The investor must also agree that all imported equipment and capital will remain in country for at least five years.

The Ministry of Labor controls expatriate residence and work permits.  For U.S. companies, the BIT assures the right to hire staff of their choice to fill some management positions, but companies agree to pay a special tax on expatriate salaries.  Visa, residence or work permit requirements are not discriminatory or excessively onerous, and are not designed to prevent or discourage foreigners from investing in the DRC, though corruption and bureaucratic hurdles can create serious delays in obtaining the necessary permits and visas.

The GDRC enacted a new law on subcontracting in January 2017, which requires foreign companies to use local subcontractors for subsidiary services.  The DRC does not have specific legislation on data storage, however, it recognizes the need for appropriate regulation.  As there is no obligatory legislation, in practice, few companies report having issues regarding data storage.

5. Protection of Property Rights

Real Property

The DRC’s Constitution (Chapter 2, Articles 34-40) protects private property ownership without discriminating between foreign and domestic investors.  Despite this provision, the GDRC has acknowledged the lack of enforcement in the protection of property rights.  Relevant draft bills have been pending before Parliament since 2015. Congolese law related to real property rights enumerates provisions for mortgages and liens, and real property (buildings and land) is protected and registered through the Ministry of Land’s Office of the Mortgage Registrar.  Nevertheless, land registration may not fully protect property owners, as records can be incomplete and legal disputes over land deals are common.  In addition, there is no specific regulation of real property lease or acquisition.

Ownership interest in personal property (e.g. equipment, vehicles, etc.) is protected and registered through the Ministry of the Interior’s Office of the Notary.

Intellectual Property Rights

In principle, intellectual property rights (IPR) are legally protected in the DRC, but enforcement of IPR regulations is limited.  Prior to independence in 1960, IPR was regulated by multiple Belgian instruments.  In 1963, the DRC became a party to the Berne Convention of 1886 for the Protection of Literary and Artistic Works, and in 1975 it joined the 1883 Paris Convention for the Protection of Industrial Property.  The DRC introduced Law No. 82-001 on Industrial Property in 1982, and Law No. 86-022 on the Protection of Copyright and Neighboring Rights in 1986.  Both instruments remain in force, but legislative action in the area of IPR and enforcement of the existing laws has been virtually non-existent since their passage.

The country is also a signatory to a number of relevant agreements with international organizations such as the World Intellectual Property Organization (WIPO) and the World Trade Organization (WTO), and is thus ostensibly subject to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), an international legal agreement between all the member nations of the WTO which sets down minimum standards for the regulation by national governments of many forms of IPR.  Specifically, TRIPS requires WTO members to provide copyright rights covering content producers, including performers; producers of sound recordings and broadcasting organizations; geographical indications, including appellations of origin; industrial designs; integrated circuit layout-designs; patents; new plant varieties; trademarks; trade dress; and undisclosed or confidential information.  TRIPS also specifies enforcement procedures, remedies, and dispute resolution procedures.  As a least-developed country member, DRC was given a longer transition period, through 2006, to comply with TRIPS, but it continues to be out of compliance with its international IPR obligations.

The pertinent conventions provide maximum protection of 20 years for patents, and 20 years, renewable, for trademarks, starting from the date of registration.  If not used within three years, a trademark can be cancelled. By contrast, the current Congolese laws provide only 15 years of protection on a number of patents, and do not include all the means mentioned in TRIPS for enforcement of IPR rights.  In July 2011, the Ministry of Culture and Art established the Société des Droits d’Auteur et des Droits Voisins (SOCODA) to address IPR issues faced by authors, and presented a bill to the government that seeks to rectify shortcomings of the existing 1982 IPR law.  Still, the reform bill is pending Parliamentary approval and it is unclear when that will be forthcoming.

6. Financial Sector

Capital Market and Portfolio Investment

The Congolese financial system continues to improve with new regulations and guidelines seeking to maintain stability and consolidate the system.  Although reforms have been initiated, the Congolese financial system remains small, heavily dollarized, characterized by fragile balance sheets, and cumbersome to use.  The GDRC backed away from its short-lived (2013-2016) de-dollarization program, and further reforms are needed to strengthen the financial system, support the expansion of the financial sector, and spur economic growth.  Shock resilience is undermined by inadequate risk-based controls, weak enforcement of regulations, low profitability, and excessive reliance on demand deposits.  The system is also characterized by a significant concentration of credit and exposure to systemic failure in the event of the insolvency of a large borrower.

Financial inclusion is increasing, but substantial progress is needed to develop payment systems, facilitate the use of financial services, and strengthen regulation of the non-banking sector. Consolidation and strengthening of microfinance along with reform of the pension sub-sector and continued privatization of the insurance sector could facilitate the expansion of financial services and attract long-term investors.

The DRC’s capital market remains underdeveloped and consists mainly of the issuance of treasury bonds.  There are no stock exchanges operating in the country, although a small number of private equity firms are actively investing in the mining industry.

The institutional investor base is not well developed, with only an insurance company and a state pension fund as participants.  The Central Bank of Congo (BCC), developed a market for short-term bonds, but most of these bonds are bought and held by local Congolese banks.  In the absence of private debt securities, the fixed-rate market is limited to government-issued treasury bonds with maturities of up to 28 days traded through commercial banks.

Access to the primary market is limited to commercial banks holding securities accounts at the BCC, and all investors, including institutional and individual investors, must submit bids through banks.  Commercial banks, which dominate the investor base, may trade in treasury bills in the secondary market, but in order to do so, bids and prices for which they agree to trade must be transparent and publicized.  There is no market for derivatives in the country.

The DRC suffers from a weak and fragile financial infrastructure.  National payment systems are not governed by central legislation, although the DRC’s National Payments and Settlement Committee is in the process of proposing legal reform through a draft bill that was proposed in 2016, has been adopted by the DRC Senate, and, as of the date of this report, is before the National Assembly for a second reading.

The Central Bank worked for a decade to implement reform on the national payment system via a gradual and interactive approach that identified and corrected deficiencies at each stage. This culminated with the Central Bank inaugurating in September 2017 an automated system that supports customer transfers, regulation of monetary policy operations, and the processing of transactions for the regional payment system-REPSS, set up by COMESA member countries. The system also includes an interbank automated clearing module for check payments, collections, and bills of exchange.

Borrowing options for small and medium enterprises (SME) are limited.  Maturities for loans are usually limited to 3-6 months, and interest rates typically hover around 16-21 percent.  Several companies complain that the inconsistency of the legal system, the often-cumbersome business climate, and the difficulty in obtaining inter-bank financing discourages banks from providing long-term loans.  There are limited possibilities to finance major projects in the domestic currency, the Congolese franc (CDF).  The Central Bank sets minimum capital requirements for local banks in CDF or its equivalent in USD.  Prior to 2016, the average was roughly USD 12 million per bank, but the economic downturn prompted the Central Bank to mandate an increase to USD 30 million by January 2019.  Foreign currency deposits account for almost 90 percent of bank holdings.

As for the insurance sector, the DRC Insurance Authority, ARCA, began implementing privatization of the sector in 2018, granting licenses to four private insurance companies.  These approvals came four years after passage of the 2015 Insurance Reform Law, and three years after the decree establishing ARCA as the regulator of the insurance sector.  Once the state owned insurance company SONAS is fully privatized, the DRC insurance sector should operate under competitive market conditions.  While analysts estimate that the DRC insurance market could be worth roughly USD 5 billion in ten years’ time, the current Congolese insurance market comprises roughly USD 80 million worth of insurance premiums for a penetration rate of only 0.5 percent.

Portfolio investment is absent in the DRC.  Cross-shareholding and stable shareholding arrangements are also not common.  There are occasional complaints about unfair privileges extended to certain investors in profitable sectors such as mining and telecommunications.

Money and Banking system

The Congolese financial system is growing but it remains fragile and operates primarily through the Central Bank.  The financial sector is comprised of 17 licensed banks, a national insurance company (SONAS), the National Social Security Institute (INSS), one development bank, SOFIDE (Société Financière de Development), a savings fund (CADECO), 102 microfinance institutions and cooperatives, 95 money transfer institutions which are concentrated in Kinshasa, Kongo Central, North and South Kivu and the former Katanga provinces, three electronic money institutions, and 23 foreign exchange offices. There is no secondary equity or debt market.

The Congolese Central Bank developed a charter of compliance with international financial rules that has been accepted by virtually all banks operating in DRC.  The stricter regulatory regime put in place after the global financial crisis increased bank compliance costs, however, and the resultant “de-risking” saw the bank lose two of its three remaining correspondent banks.  It currently works with one correspondent bank, Citigroup. All foreign banks accredited by the Congolese Central Bank are considered Congolese banks with foreign capital and fall under provisions and regulations covering the credit institutions’ activities in the DRC.

The financial system is mostly banking-based with aggregate holdings estimated at USD 5.1 billion, about 95 percent of the overall holdings of the financial system. Bank deposits account for about 90 percent of total deposits, with the balance held by microfinance institutions.  Among the five largest banks, four are local and one is controlled by foreign holdings.  The five largest banks hold almost 65 percent of bank deposits and more than 60 percent of total bank assets.

Bank financing is dominated by the collection of deposits, nearly 90 percent of which are denominated in U.S. dollars and held in demand accounts.  Bank operations are highly dollarized and financed largely by demand deposits.  Nearly 95 percent of loans are in dollars, and clients are mainly companies seeking working capital primarily for daily operations and import/export activities.  National and local government entities have significant balances in some banks (deposits in dollars used for investments) and also borrow funds from a few banks to finance administrative expenses.  Statistics on non-performing loans do not seem reliable.  According to the Central Bank’s regulatory framework, many banks only record the balance due rather than the total amount of the non-performing loan.

Transactions involving correspondence with associated foreign banks represent a significant part of the activities of DRC banks.  Correspondent accounts represent more than 30 percent of bank assets and more than 95 percent of interbank market activity.  They allow banks to settle transactions denominated in dollars, reflecting efforts to limit risks.  The profitability of the banks is fragile and has deteriorated over the last year, reflecting high operating costs and exchange rates.  Fees charged by banks are a major source of their revenues.

The banking system faces challenges in terms of net income and profitability.  In 2018, the banking system recorded a steady increase in net banking income and confirmed a strengthening and enrichment of banks.  Yet, the banking sector struggled to offset the increase in its cost/income ratio and the deterioration in the quality of its loan portfolio.

The DRC has roughly USD 4.6 billion of deposits in the banking system, up from USD 3.7 billion in 2017.  The 2018 Mining Code increased the percentage of export revenue that mining companies are required to repatriate from 40 percent to 60 percent.  This likely accounts for a good proportion of the increase in deposits, and will contribute to a further increase in 2019.  An estimated USD 10 billion of savings exist outside of banks informally.  Most deposits in the formal system are U.S. dollar-denominated.  A slight increase in bank penetration occurred after 2011 as the GDRC switched public employee payments from cash to bank transfers.

Bank penetration is roughly 6 percent or about 3.9 million accounts, which places the country among the most under-banked nations in the world.  Based on its strategic plan, the Central Bank seeks to increase the number of bank accounts to more than 20 million by 2030.  Banks are increasingly offering savings accounts that pay approximately 3 percent interest, but few Congolese hold savings in banks.

The overall balance sheet of the banks amounted to roughly USD 6.9 billion in 2018.  Credit volume is estimated at roughly USD 2.8 billion in comparison to USD 1.9 billion in 2017.  Credit remains scarce, short-term, and highly concentrated.  Domestic credit granted by banks increased from USD 1.9 billion in 2017 to USD 2.8 billion in 2018.  In 2018, the largest depositors in the banking system are private enterprises and households with 48 and 40 percent of deposits, respectively.  Public enterprises and central administration deposits comprise six percent and four percent, respectively.

Foreign Exchange and Remittance

Foreign Exchange

As part of broad economic reforms begun in 2001, the DRC adopted a free-floating exchange rate policy and lifted various restrictions on business transactions, including in the mining sector.  The international transfer of funds takes place freely when channeled through local commercial banks.  On average, bank declaration requirements and payments for international transfers take less than one week to complete.

The Central Bank is responsible for regulating foreign exchange and trade.  The only currency restriction imposed on travelers is a USD 10,000 limit on the amount an individual can carry when entering or leaving the DRC.  The GDRC requires that the Central Bank license exporters and importers.  The DRC’s informal foreign exchange market is large and unregulated and has tended to offer exchange rates not widely dissimilar from the official rate.  In practice, the nation’s economy remains highly dollarized.

On September 25, 2014, the Central Bank put into place new foreign exchange regulations. These regulations declared the Congolese franc (CDF) as the main currency in all transactions within the DRC.  Payment of fees related to education, medical care, water and electricity consumption, residential rents, and national taxes were mandated to be paid in CDF.  In the last several years, this requirement has been relaxed and where the parties involved and the appropriate monetary officials agree, exceptions may, and routinely are, made.

Any payments exceeding USD 10,000 must be executed within the banking system, unless there is no presence of banking entities.  The largest, albeit rarely used, banknote in circulation is the CDF 20,000 note (approximately USD 12.36).  Far more common are the CDF 500 and CDF 1,000 notes worth approximately USD 0.30 and USD 0.61 respectively.  U.S. banknotes printed after 2008 are readily accepted in virtually all transactions, with the exception of one-dollar bills.  Banks provide accounts denominated in either currency.  In September 2013, the GDRC embarked on a process of “de-dollarizing” the economy by requiring that tax records be kept in CDF and tax payments from mining companies be paid in CDF.  In March 2016, however, as a result of a dollar shortage, the GDRC began requiring mining and oil companies to pay their customs fees and taxes in U.S. dollars.

The economic forecast calls for continuing inflation and currency depreciation over the long term, but the currency has remained stable since August 2017.  The annualized inflation rate, which was stable at an average 1.4 percent from 2013 through 2015, increased to 54 percent in 2017 and decreased to 7.2 percent in 2018.  As of April 2018, foreign exchange reserves totaled USD 1 billion or 4.2 weeks of import cover in comparison to the 2017 level of USD 859 million 2.9 weeks of cover.  If government revenues from the extractive sectors continue to increase, the Central Bank will again have the option to support the CDF and maintain currency stability.

Remittance Policies

Although there is no legal restriction on converting or transferring funds related to investment, new exchange regulations will increase the time for in-country foreigners to repatriate export and re-export income from 30 to 60 days.  Foreign investors may remit through parallel markets when they are legally established and recognized by the Central Bank.

Sovereign Wealth Funds

The DRC has no reported Sovereign Wealth Funds, though the 2018 Mining Code discusses a Future Fund that is to be capitalized by a percentage of mining revenues.

7. State-Owned Enterprises

Some report the DRC state-owned enterprises (SOEs) can generally act as a burden on the nation’s economy. Investors have noted that SOEs stifle competition and are unable to provide reliable electricity, transportation, and other important services over which they have monopolies.  Some SOEs and other Congolese parastatal organizations are in a poor financial and operational state due primarily to indebtedness, mismanagement of resources and employees, and poor service delivery.

Reporting on the assets of SOEs and other parastatal enterprises is limited, making valuation difficult.  According to State law N° 08/007 of July 7, 2008 (related to business transformation), any firm of which the state owns 50 percent plus one share is considered to be an SOE.  DRC law does not grant SOEs advantage over private companies in bidding for government contracts, however, in practice, SOEs are accused of being favored over private companies, sometimes using questionable practices and arguably unsupportable legal actions.  The list of SOEs can be found at: http://www.leganet.cd/Legislation/Droit percent20Public/EPub/d.09.12.24.04.09.htm .

SOE accounts are not audited.  While the Supreme Audit Institution (Cour des Comptes) is authorized to audit SOEs and to publish findings, a lack of resources devoted to the organization has resulted in no or partial SOE audits.  In addition, the Conseil Superieur du Portefeuille – an oversight body under the Ministry of Portfolio – is mandated with assessing SOE financial performance in terms of growth, profitability, and solvency.  Their reports are for internal use and are not publicly available.

There is no official provision requiring preferential access to land and raw materials for SOEs; in a situation where both an SOE and private enterprise show interest in the same land or material, preferential access shall be granted to the first applicant.

The DRC is not a party to the WTO’s procurement agreement (GPA) but nominally adheres to the OECD guidelines on Corporate Governance for SOEs.  The DRC is a Participating Country in the Southern Africa SOE network, with the Ministry of Portfolio and the Steering Committee for SOE reforms designated as Regularly Participating Institutions.

According to some, in addition to being inadequately managed, some SOEs also serve as conduits for the illicit diversion of funds. U.S. NGO the Carter Center issued the November 2017 study, “A State Affair:  Privatizing Congo’s Copper Sector,” stating that roughly USD 750 million earned by the DRC’s state-owned mining company Gecamines between 2011 and 2014 cannot be reliably accounted for.  More recently, Gecamines has aggressively audited some of its joint venture partners, threatening to dissolve partnerships, and ultimately expropriate private mine holdings, unless partners transferred more revenue to GDRC and Gecamines accounts.

Privatization Program

The DRC has no official privatization program, though, with support of the World Bank, the GDRC established a Steering Committee in 2010 for the Reform of Public Enterprises (COPIREP), which attempts to address the performance of SOEs.  To date, only a handful of SOEs have undergone reform, with mixed results.

8. Responsible Business Conduct

In the past, the GDRC has taken actions of limited impact to support responsible business conduct (RBC) by encouraging the development and adherence to a code of ethics, and respect for the environment in which companies in the DRC operate.  Specific steps taken to encourage RBC include a 2012 roundtable between the GDRC, economic operators and the Fond Social de la République Democratique du Congo (FSRDC) in order to evaluate the implementation of socially responsible and environmentally sustainable investments in the DRC.

The DRC Labor Code includes provisions intended to protect employees, and there are legal provisions that require businesses to protect the environment or face prosecution.  Yet, these are spottily enforced and not effectively communicated to the private sector.  The DRC does not possess a legal framework to protect the rights of consumers and there are no existing domestic laws intended to protect individuals from adverse business impacts in general.  Most legal issues of this nature are resolved, if at all, on a case-by-case basis.

In September 2017, the United Nations Global Compact, with the support of the Embassy of the Netherlands in the DRC, officially launched the Global Compact Network DRC in Kinshasa.  The DRC Network consists of some 40 local firms, subsidiaries of multinational corporations, and international and national NGOs that seeks to encourage locally operating businesses to adopt sustainable and socially responsible policies.  The DRC Network is developing a partnership project to raise their visibility and highlight the Global Compact’s goals.

In 2016, the GDRC, in conjunction with the Federations of Enterprises of the Congo (FEC), and civil society organizations interested in the mining sector, launched the Guide on Corporate Social Responsibility (CSR Guide) for the mining sector in Katanga.  The project was financed by GIZ, the German development agency, and offers directives and guidance that propose a voluntary approach to achieve two objectives: (i) better enforcement of mining sector laws, and; (ii) identification of international standard practices for companies operating in DRC.

Although it is not a member of the Organization for Economic Cooperation and Development, the DRC has adopted the OECD due diligence guidelines on responsible mineral supply chains, as defined by the United Nations Group of Experts, as well as various resolutions of the UN Security Council related to business and human rights in the Congolese mining sector.  In addition, the DRC authorities renewed the mandate of the UN Group of Experts on transparency in the mining industry in June 2016.

The DRC participates in the Extractive Industries Transparency Initiative (EITI) and publishes reports on its revenue from natural resources, although in recent years the reports have been late and/or incomplete.  Systematizing the procedures necessary for a competitive process in awarding contracts and concessions in mining, oil, and forestry requires additional effort.

There are also existing internal measures in place in the DRC requiring supply chain due diligence for companies that source minerals in DRC.  Both the 2002 and 2018 mining codes provide domestic transparency measures requiring the disclosure of payments made to government entities, though they appear to have been infrequently enforced.  In addition, Promines, a technical parastatal body financed by the GDRC and the World Bank, works to improve the transparency of the artisanal mining sector.  Amnesty International, Pact Inc., Global Witness and the Carter Center have also published reports related to a responsible business climate in the DRC mining sector.  The Dodd-Frank Act mandated companies publicly listed in the United States to declare their supply chains for DRC-sourced “3Ts” (tin, tungsten and tantalum) and gold.  Although the Securities and Exchange Commission is no longer actively enforcing the act, many U.S. multinationals appear to be complying voluntarily so as to avoid possible reputational damage.

9. Corruption

The GDRC’s constitution includes laws intended to fight corruption and bribery by all citizens, including public officials.  Notwithstanding, the application of the laws are inconsistent and according to some sources they are sometimes politically motivated.  Historically, private firms have been more likely to develop and implement anti-corruption controls than their SOE and parastatal counterparts.

In 2015, former President Kabila authorized the creation of an anti-corruption office to fight corruption in the management of public affairs and appointed a “corruption czar” to decrease governmental malfeasance.  The office is reportedly under-financed and, although it has allegedly prepared reports on several politicians who have been accused of corruption and embezzlement of public funds, the reports have not been publicized, leading many to believe that the office is highly politicized.  The DRC’s 2018 Corruption Perception Index score—161 out of 180— highlights the lack of progress in fighting corruption, and underlines the endemic and deep roots of corruption in the DRC government.

While several NGOs contribute to the fight against corruption, the government can be prone to ignore their reports, particularly when government officials are implicated.  American firms see corruption as one of the main hurdles to investment in the DRC.

The DRC is a signatory to the UN Anticorruption Convention, but not to the OECD Convention on Combating Bribery.  In September 2007, the DRC ratified a protocol agreement with SADC on Fighting Corruption.  In 2015, the government drafted a bill to fight corruption that was scheduled to be discussed in Parliament in 2016, however that did not happen and it is not mentioned in the 2018 parliamentary agenda.

In December 2018, newly elected President Tshisekedi promised to combat corruption within the administration and establish a charter of good conduct.  The charter will be implemented in the administration and by SOEs in order to promote good governance, integrity and to encourage responsible business conduct within the communities in which they operate.  Since his arrival in power, President Tshisekedi has suspended two SOE administrators accused of embezzlement and mismanagement and has disciplined several other civil servants for specific acts of corruption.

The Agency in charge of fighting corruption in the DRC is:

Cellule Technique de Lutte contre l’Impunité
Falanga Mawete Coordinateur
Tel: 00243815189341
Email: nmbayo2002@yahoo.fr

Palais de Justice, Place de l’Indépendance
Kinshasa/Gombe, DRC
Special Advisor for Good Governance
Position is vacant
Email: jedenonce2015@gmail.com

10. Political and Security Environment

After decades of political instability and conflict, in December 2018 President Felix Tshisekedi was elected in DRC’s first peaceful transition of power.  The successful elections were the result of international, including U.S, pressure, as well as a long period of mediation involving the Catholic Church, the government, and the opposition. Maintaining public support for the Tshisekedi government will ultimately require the administration to deliver on the campaign slogan of “the People First.”  Nevertheless, large parliamentary majorities held by former President Kabila’s coalition have prevented the quick creation of a government, though a Prime Minister was named in May 2019.

Thousands of members of armed groups have been disarming and turning themselves in to the United Nations’ DRC peacekeeping operation (MONUSCO) and the GDRC since President Tshisekedi’s election, according to international observers.  Most of the defections have taken place in eastern and central (the Kasai provinces) DRC.  Nevertheless, international statistics indicate that over 140 armed groups continue to operate in 17 of the DRC’s 26 provinces, primarily in the east of the country.  The Allied Democratic Forces (ADF) rebel group in eastern DRC is one of the country’s most notorious and intractable armed groups, and its members do not appear to have demobilized to any significant degree.  Unlike his predecessor, President Tshisekedi appears cognizant of the important role security plays in attracting foreign investment, and is ready to work with MONUSCO to eliminate armed groups.

US citizens and interests are not being specifically targeted by armed groups, but can easily fall victim to violence or kidnapping by being in the wrong place at the wrong time.  The Armed Conflict Location and Event Dataset tracks political violence in developing countries, including the DRC, http://www.acleddata.com/ .  Kivu Security Tracker (www.kivusecurity.org ) is another database for information on attacks in eastern DRC.   In addition, the Department of State continues to advise travelers to review the Embassy’s travel advisory: https://travel.state.gov/content/travel/en/search.html?search_input=travel+advisory+drc&data-sia=true&data-con=true&starton=0

11. Labor Policies and Practices

The DRC is a difficult labor market, with chronically high unemployment, particularly among youth, as well as a lack of marketable skills in the labor force.  Expatriates frequently fill jobs requiring technical or vocational training.

There is no official or formal policy to mandate the make-up of senior management or boards of directors. Nonetheless, the labor law stipulates that for businesses with over 100 employees, 10 percent of all employees should be local.  Further, if the managing director is a foreigner, his deputy or secretary general is generally expected to be a Congolese citizen.  These provisions can be waived depending on the sector of activity and available expertise.  There are no onerous conditionality, visa, residence or work permit requirements inhibiting mobility of foreign investors and their employees, although visa fees are substantial.

While the agricultural sector is expanding, it continues to face challenges related to poor infrastructure; its contribution to employment though large, is primarily informal.

The DRC faces a deficit in skilled labor across all sectors.  There are few formal vocational training programs, though Article 8 of the labor law stipulates that all employers should provide training to their employees.  To address the high unemployment rate, the GDRC enacted a preferential policy, giving Congolese preference in hiring over expatriates.  Laws prevent firms from firing workers under most conditions without compensation.  These restrictions, however, have deterred hiring and encouraged the use of temporary contracts in lieu of permanent hiring.  In 2016, a new labor law was enacted that authorizes foreigners, under certain conditions, to be appointed to the management of a trade union, and allows women to work the night shift.  Despite these changes, the DRC labor code still requires substantial revision, including facilitating foreign employment and providing more protection for employees, foreign and domestic.

Congolese law imposes certain restrictions on the practice of free and voluntary collective bargaining in the public sector.  The law bans collective bargaining in certain sectors, including by civil servants and public employees, and the law does not provide adequate protection against anti-union discrimination.  While the right to strike is recognized, there are provisions which undermine this right, including requiring unions to obtain permission and adhere to lengthy compulsory arbitration and appeal procedures prior to initiating a strike.

Despite GDRC ratification of the International Labor Organization’s (ILO) eight core conventions, some Congolese laws continue to be inconsistent with the ILO Convention on Forced Labor.  There are significant gaps both in law and practice regarding compliance with ILO conventions.

The law prohibits discrimination in employment and occupation based on race, gender, language, or social status.  The law does not specifically protect against discrimination based on religion, age, political opinion, national origin, disability, pregnancy, sexual orientation, gender identity, or HIV-positive status.  Additionally, no law specifically prohibits discrimination in employment of career public service members.  According to some businesses, the government does not always effectively enforce relevant employment laws.

As of January 1, 2018, the DRC labor code increased the minimum wage (SMIG) from USD 1.04 to USD 5 per day for public and private enterprises.  The change did not affect civil servants’ salaries.

Although the new SMIG was supposed to take effect January 1, 2018, implementation has lagged.  Labor law defines different standard workweeks, ranging from 45 to 72 hours, for various jobs and prescribes rest periods and premium pay for overtime.  The law establishes no monitoring or enforcement mechanism, and employers in both the formal and informal sectors often do not respect these provisions.  The law does not prohibit compulsory overtime.

The labor code specifies health and safety standards.  The Ministry of Labor employs 200 labor inspectors, which is not sufficient to enforce consistent compliance with labor regulations.  The government does not effectively enforce such standards in the informal sector, and enforcement is uneven to non-existent in the formal sector.

The DRC Penal Code does not establish appropriate criminal penalties regarding the imposition of forced labor.  In practice, forced labor persists and remains a serious concern.  According to a 2015 UNICEF study, nearly a third of Congolese employed in the informal mining sector, or 40,000 individuals, were children.  According to the DRC’s Ministry of Labor, children continue to be engaged in the mining of gold, cassiterite (tin ore), and wolframite (tungsten ore).  The presence of children working in eastern DRC’s mines, especially in cobalt mines, was subject to growing international press coverage in 2017 and 2018.  In May 2018 the U.S. Department of Labor announced a USD 2.5 million, three-year project to combat child labor in the DRC’s cobalt mines.

Penalties for violations for the worst forms of child labor, which are one to three years of imprisonment and fines as high as 200,000 Congolese francs (USD 170), have proven to be insufficient to deter violations.  While DRC’s criminal courts could in principle adjudicate cases of child labor, neither the courts, nor other government agencies, effectively enforce these laws.

Reportedly, political parties also increasingly recruit children for violent election campaign activities targeting political opponents.  In order to combat this and other child labor issues, President Kabila signed and promulgated a law on July 15, 2016 fixing the legal working age at 18.

According to a report of the US Department of Labor, in 2017, the DRC made minimal advancement in efforts to eliminate the worst forms of child labor.  The GDRC adopted a revised Mining Code in 2018 which includes penalties for selling ore mined with child labor.  Children in the DRC continue to engage in the worst forms of child labor, including in the forced mining of gold, tin ore (cassiterite), tantalum ore (coltan), and tungsten ore (wolframite), and are used in armed conflict, sometimes because of forcible recruitment or abduction by non-state armed groups.

Other gaps remain in efforts to limit the worst forms of child labor, including a lack of trained enforcement personnel, a lack of financial resources for enforcement, and poor coordination of government efforts to combat child labor.

12. OPIC and Other Investment Insurance Programs

The U.S. Overseas Private Investment Corporation (OPIC), which provides political risk insurance and project financing to U.S. investors and non-governmental organizations, has granted political risk insurance for projects in the DRC in the past and is open to working on future projects in the DRC.  President Trump signed the Better Utilization of Investments Leading to Development (BUILD) Act on 5 October 2018, which established the Development Finance Corporation to succeed OPIC.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data

Host Country
Statistical Source
USG  International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) N/A

N/A

N/A

N/A

N/A

N/A

2015

2016

2017

$37,9

$37,1

$37,6

http://data.worldbank.org/country/con 

http://data.worldbank.org/country/con 

https://www.imf.org/en/Countries/COD 

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

Table 4: Sources of Portfolio Investment
Data not available.

Congo, Republic of the

Executive Summary

The Republic of Congo (ROC) possesses enormous potential wealth relative to its population of five million.  The IMF projects GDP growth of 3.7 percent in 2019. A sustained economic crisis since a 2014 drop in oil prices, poor governance, and a lack of economic diversification, however, have pushed the government of ROC to near insolvency, reduced its creditworthiness, and caused the central bank to use enormous amounts of its foreign currency reserves.

Oil represents the largest sector of the economy and contributes upwards of 60 percent of the government’s annual declared revenue.  The non-oil sector consists primarily of the logging industry, but significant economic activity also occurs in the telecommunications, banking, construction, and agricultural sectors.  ROC seems poised for economic diversification, with a territory of 30 percent arable land, some of the largest iron ore and potash deposits in the world, a heavily forested land mass, and a deep-water International Ship and Port Facility Security (ISPS) Code-certified port.  ROC has been AGOA eligible since October 2000, providing an additional enticement for export-related investment. ROC participates in the Central African Economic and Monetary Community (CEMAC).

Poverty rates in ROC remain much higher than in other oil-exporting countries, with 46 percent of the population living under the poverty line.  A sizeable middle class with robust education, skills, and material living standards does not exist on a large scale. ROC suffers from poor access to education, low educational standards, and little social mobility.  The majority of the population operates in the informal sector of the economy and does not declare revenues and profits, pay taxes, or pay employee benefits to the state. Women do not participate proportionally, in the formal or informal economies, and women entrepreneurs face additional structural challenges establishing and operating a business and accessing credit.

In addition to economic risks, ROC also faces periodic internal political and security risks  Potential investors should always check www.travel.state.gov for the latest safety and security information before traveling to ROC.

ROC has made significant investments in recent years to develop its infrastructure, including the completion of paved roads linking Brazzaville to the commercial capital of Pointe-Noire and other departments (regions).  Significant challenges remain, in particular ROC’s nascent internet and inconsistent supplies of electricity and water, which present both hurdles to and opportunities for foreign direct investment. Significant sections of the country’s road system remains in need of maintenance or paving. The limited railroad network competes with truck and bus traffic for commercial cargo.  However, major infrastructure projects still reach major cities, and the government reports spending significant amounts on infrastructure improvements.

The petroleum, timber, and mining sectors remain the most significant sectors of the economy in the near term.  Agro business presents a growth opportunity given that the country cultivates less than ten percent of its arable land.  Most agriculture remains at the subsistence level, and the country imports more than 80 percent of its food. The government has also voiced great interest in developing the country’s nascent tourism sector, a sector with potential for investment thanks to ROC’s pristine rainforest reserves.  Limited transportation infrastructure will challenge potential expansions of this sector, however.

The telecommunications and mobile banking sectors stand poised for growth as well.  Mobile phones saturate ROC’s market, though the country lacks supporting infrastructure for telecommunications.  Internet penetration remains at less than 10 percent and connections are extremely expensive, providing significant room for competition and growth in the sector.  While low per capita income prevents most people from owning personal computers and accessing the internet, cyber cafes and satellite broadband projects continue to grow in prevalence, indicating both a desire for internet services as well as a potential market for investors.  The government closely regulates internet and telecommunication networks and reliability of service remains limited.

Investors report that the commercial environment in ROC has not improved substantially in recent years.  The World Bank’s 2019 Ease of Doing Business report ranked ROC at 180 out of 190 countries, and ROC ranked 165 out of 180 countries in Transparency International’s Corruption Perceptions Index 2018.  American businesses operating in ROC and those considering establishing a presence regularly report obstacles linked to corruption, lack of transparency, and host government inefficiency in matters such as registering businesses, obtaining land titles, paying taxes, and negotiating natural resource contracts. 

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 165 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 180 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 N/A https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $230 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $1,430 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies towards Foreign Direct Investment

The government sees investment beyond the petroleum sector, which accounts for over 90 percent of FDI inflows, as key to stimulating growth and development.  The country has pledged to undertake a variety of legislative, regulatory and institutional reforms to improve the investment climate and attract more FDI with the goal of becoming an emerging market economy by 2025. 

No known laws or practices discriminate against foreign investors, including U.S. investors, by prohibiting, limiting or conditioning foreign investment in a sector of the economy. The U.S. and ROC signed an investment agreement in 1994.

ROC’s Agency for the Promotion of Investments (API), established in 2013, promotes economic diversification by seeking to expand the pool of external investors. It provides limited services, however.  The Ministry of Economy leads government-wide economic diversification efforts.

The government has made no significant efforts to retain foreign investments.  The High Committee for Public-Private Dialogue (“Le Haut Comité du Dialogue Public-Privé”), established in 2012, has not convened since 2014, despite significant lobbying efforts in 2018-19 from ROC’s union of private enterprises to restart a serious public-private dialogue.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity. 

ROC has no known general limits on foreign ownership or control.

Foreign business entities investing in the petroleum sector must pursue a joint venture with the Congolese National Petroleum Company (SNPC).  Informally, ROC enforces a policy that foreign companies must employ a significant number of Congolese workers, including managers, with a focus on employing an increased number of Congolese workers and managers in subsequent years.  There are no other known sector-specific restrictions, limitations, or requirements applied to foreign ownership and control.

ROC does not have an investment screening mechanism for inbound foreign investment.

Other Investment Policy Reviews

The government undergone no third-party investment policy reviews (IPRs) in recent years.

Business Facilitation

The ROC government has a “one-stop shop” for establishing a business called “Agence Congolaise Pour la Création des Entreprises” (ACPCE).  ACPCE has offices in Brazzaville, Pointe-Noire, N’kayi, Ouesso, and Dolisie. In order to establish a business in the ROC, investors must provide ACPCE with two copies of the company by-laws, two copies of capitalization documents (e.g. a bank letter or an affidavit), a copy of the company’s investment strategy, company-approved financial statements (if available), and ownership documents or lease agreements for the company’s offices in the ROC.

The ACPCE has a website: http://www.acpce.cg/  . However, this website serves as an information only website; business registration cannot be undertaken through the website.

Outward Investment

The ROC government does not promote or incentivize outward investment.

The ROC government does not restrict domestic investors from investing abroad.

2. Bilateral Investment Agreements and Taxation Treaties

On February 12, 1990, ROC signed a Bilateral Investment Treaty (BIT) with the United States.  The treaty entered into force on August 13, 1994. ROC maintains BITs in force with France, China, Germany, Italy, Republic of Korea, Mauritius, Switzerland, and the United Kingdom.  The ROC has fiscal agreements with the other member states of the Central African Economic and Monetary Community (CEMAC). Several African nations have signed commercial and bilateral agreements with ROC to safeguard investments, including South Africa in 2005 and Namibia in 2007. As a lower middle-income country, ROC may not join a number of trade agreements open to the Least Developed Countries.

ROC does not have stand-alone bilateral taxation treaties with any country. Some of ROC’s bilateral investment agreements, such as with the United States and France, do include taxation provisions to avoid double taxation, but tax authorities generally do not enforced these provisions. Some companies have reported issues recovering value added taxes (VAT) from the ROC government.

4. Industrial Policies

Investment Incentives

The ROC’s Ministry of Economy, Industrial Development, and Promotion of the Private Sector has overall responsibility for investment promotion. When a potential investor believes its investment will bring substantial investment and job creation to the Congolese economy, it may apply for preferential tax and customs treatment by applying to the Ministry of Finance’s National Committee on Investments. The Minister of Finance chairs this committee, which includes the Minister of Economy and Industrial Development as well as the Minister of Budget Planning.  The committee reviews applications once annually.

Presidential decree No. 2004-30 of February 18, 2004, defines the requirements for foreign and national companies to benefit from incentives offered by the Congolese Investment Charter. The decree promulgates four types of incentives:

(a) Incentives to export;
(b) Incentives to reinvest the company’s profit in ROC;
(c) Incentives for businesses in remote areas or areas that are difficult to access; and
(d) Incentives for social and cultural investment.

Examples of incentives include reduced or exempted taxes below the corporate tax rate of 30 percent, reduced customs duties over a period of five to 10 years, a 50 percent reduction in business registration fees and an accelerated depreciation mechanism. For companies owned at least 25 percent by domestic entities, other incentives include a reduced dividend tax rate of 10 percent, capital gains tax reductions, deductions for business expenditures, reduced rents, and deductible remunerations. Businesses may negotiate other incentives during the incorporation process.

Foreign Trade Zones/Free Ports/Trade Facilitation

The government has named four special economic zones (SEZs): in the main economic hub of Pointe-Noire, the capital Brazzaville, and the cities of Ouesso and Oyo. ROC signed memoranda of understanding with the Governments of Mauritius, Singapore, and China to advise on the development of the SEZs and has also expressed a desire to attract U.S. investment.  Little to no activity occurs in the SEZs, however, and no known timeline exists to render the SEZs operational.

Performance and Data Localization Requirements

Foreign companies must offer local employment to receive tax and investment benefits through the National Committee on Investment. Major foreign direct investment must demonstrate a significant economic windfall for the local community, including increased local employment, to receive an investment agreement from the National Committee on Investment.

ROC’s labor code requires the top manager of all companies to be a Congolese national.  The government frequently waives this requirement for multinational companies.

Applications for residence or work permits involve multiple, paperwork-intensive steps typically riddled with low-level requests for bribes in the immigration and customs sectors.  Visitors require a letter of invitation, approved by the immigration authority, prior to applying for any type of visa. A visitor or an investor must obtain a visa before travel; authorities do not provide visas on arrival.

The ROC government encourages local purchasing and production but in most cases does not impose requirements.  The new Hydrocarbons Law includes local content requirements for companies operating in the energy sector.

The Ministry of Commerce applies price controls on roughly four dozen staple products, including food and fuel. The Ministry of Commerce also subsidizes certain products – such as sugar, for example – to make the domestic market more profitable for companies that might otherwise seek to export additional supply.

ROC imposes water pollution safeguards and forest regeneration requirements in the oil and forestry sectors.  All forestry companies, both foreign- and locally-owned, are required by law to process 85 percent of their timber domestically and export it as furniture or otherwise transformed wood, and allows timber companies to export up to 15 percent of their wood product as natural timber. In practice, the economy exports much timber as natural timber.

The timber industry in ROC increasingly requires international certification, most often Forest Stewardship Council (FSC) certification. A number of foreign-owned timber companies in the ROC’s west and south, however, still operate without certification.  FSC-certified companies may benefit from future government incentives as the ROC continues to participate in a Voluntary Partnership Agreement with the European Union’s Forest Law Enforcement and Governance Transparency program and with the United Nations’ Reducing Emissions from Degradation and Deforestation program.

ROC applies tariffs and import price controls to a number of staple food goods to encourage local purchasing.

The government does not force local hiring, but has in recent years informally encouraged companies, particularly those in the oil sector, to hire more Congolese and “Congolize” their operations.

No known performance requirements exist for foreign or local companies. No known restrictions apply to U.S. or other foreign firms’ participation in ROC government-financed or subsidized research and development programs.

No known procedures for performance requirements exist in the Republic of the Congo.

No requirements for foreign information technology providers exist to provide source code and/or access to encryption.

No requirements prevent companies from transmitting customer or other business data outside the country.

No known requirements enforce local data storage.

5. Protection of Property Rights

Real Property

A process exists for the acquisition and retention of real property. The government enforces property rights, though companies and individuals cite inconsistent enforcement. Mortgages and liens exist. A generally reliable system of property exists.

No known regulations exist to prohibit land lease or acquisition by foreign investors.

The government has no definitive registry of untitled land.

Property ownership can transfer to other owners if the property remains unoccupied for 10 consecutive years while having been simultaneously used by another user (squatter).

Intellectual Property Rights

As a member of the Economic and Monetary Community of Central Africa (CEMAC), ROC participates in the African Intellectual Property Organization (AIPO). AIPO manages a single copyright system for all member states. Additionally, as a member of the World Trade Organization (WTO), ROC must ensure that legislation conforms to WTO intellectual property norms and standards.  The Ministry of Commerce leads issues related to counterfeit products. Local authorities have historically seized and destroyed contraband items, such as medical supplies and food products. The ROC government reportedly uses unlicensed software on its computers; however, overall infringement of intellectual property rights (IPR) remains uncommon.

The government has enacted no new IP-related laws or regulations in the past year.

ROC maintains no formal system of tracking and reporting seizures of counterfeit goods.

The ROC is not listed in the United States Trade Representative (USTR) Special 301 Report.

The ROC is not included in USTR’s Notorious Markets List.

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

ROC maintains a neutral attitude toward foreign portfolio investment and does not widely practice foreign portfolio investment.

ROC does not have a stock exchange. ROC-based companies may seek regional listing on the Douala Stock Exchange (DAC), which merged with the CEMAC Zone Stock Exchange (BVMAC). The regional central bank, BEAC, determines monetary and credit policies within the CEMAC framework to ensure the stability of the common regional currency.

Existing policies facilitate the free flow of financial resources, though complex products are not widely used.

The government and central bank respect IMF Article VIII and do not impose restrictions on international payments and transfers.

The central bank (BEAC) monitors credits and market terms. Foreign investors can easily obtain credit on the local market.  As an immature financial market, the ROC offers a limited range of credit instruments.

Money and Banking System

ROC’s banking sector lags behind regional peers. The regulatory body of the Central Bank of Central African States (BEAC), the Banking Commission of Central Africa (COBAC), supervises the Congolese banking sector.  Banking penetration likely remains in the five-to-seven percent range, although a government survey conducted in 2015 estimated a rate of 25-30 percent. High intermediation costs and high collateral requirements limit the pool of customers.  The 13 banks that operate in ROC suffer from strained liquidity and generally have deposits that outpace credit. Microfinance banks and electronic banking remain the fastest growth areas in the banking sector.

The current economic crisis and the government’s consecutive years of fiscal deficits have additionally strained the banking sector over the past five years.

Non-performing loans remained steady at approximately five percent in 2018.

Fiscal transparency issues limit any estimate of the total assets controlled by ROC’s largest banks.  The assets of the largest banks have likely decreased significantly in recent years as a result of the economic crisis.

ROC participates in the Central African Economic and Monetary Community (CEMAC) zone and the Central Bank of the Central African States (BEAC) system.

Foreign banks and branches may operate in ROC and constitute the majority of banking operations in ROC. BEAC banking regulations govern foreign and domestic banks in ROC. No banks have left ROC in the past three years.

No known restrictions exist on a foreigner’s ability to establish a bank account.

Foreign Exchange and Remittances

Foreign Exchange

No known legal restrictions or limitations exist against converting, transferring or repatriating funds associated with an investment, including remittances. CEMAC regulations require banks to record and report the identity of customers engaging in transactions valued at over USD 10,000. Financial institutions must maintain records of large transactions for a minimum of five years. The General Director of Monies and Credit (DGMC) within the Ministry of Finance oversees exchange control. Investors may remit on a legal parallel market with approval from the DGMC. The Central Bank (BEAC) recently began monitoring fund transfers larger than USD 100,000.

Foreign investors may hold local bank accounts and report no difficulty obtaining foreign assets (currencies) from any of the major commercial banks, which include French, Chinese, Moroccan, or African banks. No U.S.-based banks operate in ROC, but transfers directly to and from the United States are possible.

ROC and other CEMAC member states use the Central African CFA Franc (FCFA, sometimes abbreviated XAF) as a common currency. The CFA is pegged to the Euro as an intervention monetary unit at a fixed exchange rate of EUR 1: CFA 655.957. This agreement guarantees the availability of foreign exchange and the unlimited convertibility of the CFA Franc. It also provides considerable monetary stability to the ROC and other CEMAC countries. The exchange rate between the CFA Franc and the U.S. dollar fluctuates according to the exchange rate between the Euro and the U.S. dollar.

Remittance Policies

There have been no recent changes or plans to change investment remittance policies that either tighten or relax access to foreign exchange for investment remittances.

No known time limitations on remittances exist.

Sovereign Wealth Funds

ROC maintains no formal Sovereign Wealth Fund (SWF), although the Parliament adopted a law enabling the creation of a SWF. The law envisages establishment of the SWF at the BEAC and acquiring mostly risk-free foreign assets.

No official sovereign wealth fund exists.

7. State-Owned Enterprises

As a former people’s republic, state-owned enterprises (SOEs) dominated the Congolese economy of the 1970s and 1980s. The remaining number of SOEs remains comparatively small following a wave of privatization in the 1990s. The national oil company (SNPC), electricity company (SNE), and water supply company (SNDE) constitute the largest remaining SOEs. The government reorganized the country’s electricity and water companies in October 2018 to increase efficiency and place a greater emphasis on public-private partnership.

SOEs report to their respective ministries.  SOE corporate governance regulations require non-state corporate directorship. SOEs do not meet this requirement in practice, most notably by the SNPC.

Private companies may compete with public companies and, in some cases, have won contracts sought by SOEs.

Government budget constraints limit SOEs’ operations. Constraints on SOEs operating in the non-oil sector appear sufficiently monitored and subject to civil society and media scrutiny. The operations of SNPC, however, continue to present transparency concerns.

SOEs must publish annual reports subject to examination by the government’s supreme audit institution. In practice, these examinations do not always occur.

The government publishes no official list of SOEs.

No known SOEs in receive non-market based advantages from the government.  SOEs do not directly compete with U.S. or other private companies.

Privatization Program

The ROC has no known program for privatization.

8. Responsible Business Conduct

Corporate social responsibility (CSR) remains a well-known concept in ROC that local communities view favorably. Foreign oil companies constitute the primary CSR actors; however, telecommunications and transportation companies and banks have increasingly supported CSR initiatives and improved their public images. CSR actors appear to follow accepted CSR principles. The government promotes CSR to finance hospitals, education, nutrition programs, and road construction.

The government has not established a national contact point or ombudsman for responsible business conduct (RBC), nor has it established a national action plan to define and drive its approach to RBC.  The government encourages RBC by partnering with or endorsing companies’ CSR initiatives. RBC policies do not factor significantly into government procurement decisions.

No known high profile, controversial instances exist of private sector entities negatively impacting human rights.

ROC inconsistently enforces laws related to human rights, labor, and commerce.

No known corporate governance, accounting, or executive compensation standards exist to protect shareholders.

No independent NGOs, investment funds, worker organizations/unions, or business associations promote or monitor RBC practices.  Civil society groups promote individual matters of interest on a case-by-case basis.

ROC does not adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. No domestic measures require supply chain due diligence for companies that source minerals that may originate from conflict-affected areas.

ROC has participated in the Extractive Industries Transparency Initiative (EITI) since 2012 and published reports up to 2016. No domestic transparency measures require the disclosure of payments made to the government and/or of RBC policies or practices.

9. Corruption

ROC has a law against corruption by public officials. The government inconsistently enforces the law.  ROC ranks 165 out of 180 countries in Transparency International’s 2018 Corruption Perceptions Index.

The corruption law applies to elected and appointed officials.  It does not extend to family members of officials or to political parties.

No specific laws or regulations address conflict-of-interest in awarding contracts or government procurement.

ROC does not encourage or require private companies to establish internal codes of conduct that prohibit bribery of public officials.

Some private companies, multinationals in particular, use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials.

ROC serves as a party to the UN Anticorruption Convention.

ROC does not provide protection to non-governmental organizations (NGOs), to include NGOs investigating corruption.

Corruption remains rampant in ROC. U.S. companies have cited corruption as an impediment to investment, particularly in the petroleum sector, where corruption practices remain prolific.

Resources to Report Corruption

Contact at government agency or agencies responsible for combating corruption:

Emmanuel Ollita Ondongo
President
Observatoire Anti-Corruption
Centre Ville, Brazzaville
06 944 6165, 05 551 2229
emmallita2007@yahoo.fr

Contact at “watchdog” organization:

Christian Mounzeo
President
Rencontre pour la Paix et les Droits de l’Homme (RPDH)
B.P. 939 Pointe-Noire, République du Congo
+242 05 595 52 46
contact@rpdh-cg.org
www.rpdh-cg.org  

10. Political and Security Environment

U.S.-Republic of the Congo relations are positive and cooperative. The two countries work together on issues of common interest such as strengthening regional security, improving living standards of Congolese citizens, and safeguarding the environment. The United States has encouraged Congolese efforts to diversify the economy and improve the business environment. The United States collaborates with the next generation of Congolese leaders to improve access to knowledge and skills to build a more stable, secure, democratic, and prosperous Congo.

There are no known examples of damage to projects and/or installations.  Civil disturbances have occasionally resulted in damage to high-profile public places such as police stations.

The political environment has become noticeably calmer since the end of the 2017 legislative elections.

11. Labor Policies and Practices

Unemployment in the ROC remains high, with youth and women disproportionately affected. Reliable unemployment figures do not exist. The International Labor Organization (ILO) of the United Nations reports an overall unemployment rate of 18 percent, with unemployment among the 15-24 age group at 12.1 percent. The actual rate is most likely closer to the numbers reported by Trading Economics and African Economic Outlook, which report 46.1 percent unemployment. A large pool of applicants exists for potential employers.

Except for members of the police, gendarmerie, and armed forces, ROC’s constitution provides workers with the right to form unions and to strike, subject to conditions established by law. The Labor Code allows for collective bargaining. Public and private institutions usually resolve occasional strikes over non-payment of salaries quickly and without incident.

The Labor Code establishes a standard work period of seven hours per day and 35 hours per week.

Skilled labor shortages exist in a number of technical areas, including medicine, engineering, math, science, and banking.  The government has no specific training programs to address these shortages.

Excepting in the hydrocarbons sector, no government policy requires the hiring of Congolese nationals. However, the Government continues to pursue a local content law that may mandate increased hiring of Congolese nationals.

Government regulations govern employment adjustments attempting to respond to changing market conditions, including a severance requirement. Employers must demonstrate that market conditions have changed and obtain government approval before adjusting employment. Congolese severance laws differentiate between layoffs and firing.  An employer must generally document illegal behavior in order to terminate an employee for cause.

The government may waive some labor laws to attract or retain investment on a case-by-case basis.  ROC has, for example, waived the requirement for certain multinationals to hire a Congolese general manager. No known labor law exceptions exist for Special Economic Zones.

Collective bargaining remains uncommon.

No known labor dispute resolution mechanisms exist. Courts mediate and arbitrate labor disputes.

A number of strikes occurred in 2018, primarily by public sector university students and professors, health sector workers, and public transportation workers. A notable strike in the oil sector–where employees represent 60 percent of ROC’s total production volume–ceased production for one week. In this case, government security services intervened and oversaw negotiations to end the strike.

No known compliance gaps exist between ROC law and international labor standards that pose reputational risks to investors.

The government enacted no new labor laws or regulations during the last year.

12. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) has exposure in ROC.  One U.S. company has a political risk insurance program with OPIC. ROC participates in the Multilateral Investment Guarantee Agency (MIGA).

OPIC maintains an agreement with ROC; please refer to https://www.opic.gov/blog/impact-investing/a-world-of-opportunity-opics-interactive-map-feature  .

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 $9,200 2017 $8,701 www.worldbank.org/en/country   
U.S. FDI in partner country ($M USD, stock positions) 2017 N/A 2017 $230 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2017 N/A 2017 -$4 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 N/A 2017 314.50% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx    


Table 3: Sources and Destination of FDI

Data not available.


Table 4: Sources of Portfolio Investment

Data not available.

Costa Rica

Executive Summary

Costa Rica is the oldest continuous democracy in Latin America with moderate but falling economic growth rates (4.2 percent in 2016, 3.4 percent in 2017, 2.7 percent in 2018) and moderate inflation (2 percent in 2018) providing a stable investment climate.  The country’s relatively well-educated labor force, relatively low levels of corruption, physical location, living conditions, dynamic investment promotion board, and attractive free trade zone incentives also offer strong appeal to investors. Costa Rica’s continued popularity as an investment destination is well illustrated by strong yearly inflows of foreign direct investment (FDI) as recorded by the Costa Rican Central Bank, reaching an estimated USD 2.7 billion in 2017 (4.7 percent of GDP) and USD 2.1 billion in 2018 (3.6 percent of GDP).

Costa Rica’s technology and tourism sectors serve as “clusters” of economic growth in which each new exporter, service provider, sector employee, or university course of study adds depth to the sector as a whole and makes it more attractive for new entrants.  Costa Rica has had remarkable success in the last two decades in establishing and promoting an ecosystem of export-oriented technology companies, suppliers of input goods and services, associated public institutions and universities, and a trained and experienced workforce.  A similar transformation took place in the tourism sector, now characterized by a plethora of smaller enterprises handling a steadily increasing flow of tourists eager to visit despite Costa Rica’s relatively high prices. Costa Rica is doubly fortunate in that these two sectors positively reinforce each other as they both require and encourage English language fluency, openness to the global community, and Costa Rican government efficiency and effectiveness.   Costa Rica’s ongoing accession to the OECD has also pushed the country to address its economic weaknesses through executive decrees and legislative reforms in a process that began in 2015.

The Costa Rican investment climate is nevertheless threatened by a high and persistent government fiscal deficit capable of squeezing domestic credit and forcing government budget cuts, a complex and often-inefficient bureaucracy, high energy costs, and basic infrastructure – ports, roads, water systems – in need of major upgrading.  The Costa Rican business sector is feeling particularly buffeted in 2018 and 2019 by an unusual number of new requirements or challenges, stemming from the government’s anti-money laundering (AML) initiatives and continued efforts to address the fiscal imbalance through increased taxes. On the AML side, companies must register their beneficial ownership in a dedicated data base, banks will soon be using a single centralized Know-Your-Customer database to vet companies and individuals, and companies in industries identified as susceptible to money laundering activity will have their own registry and heightened reporting requirements.  All retail businesses must now accept credit cards or other alternative digital payment and all income tax reporting entities must now issue electronic invoices through a system controlled by the tax authority. On the fiscal front, tax calculations change in a number of ways in 2019, including a sales tax previously applied just to goods replaced by a Value Added Tax of up to 13 percent that applies to services as well; modified tax brackets; an increase in the tax of dividends from cooperatives; and an expansion and increase of the capital gains tax.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 48 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2018 67 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 54 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country (USD M USD, stock positions) 2017 19,924 http:/data.imf.org/CDIS
World Bank GNI per capita (USD) 2017 11,120 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Costa Rica actively courts foreign direct investment (FDI), placing a high priority on attracting and retaining high-quality foreign investment.  There are some limitations to both private and foreign participation in specific sectors, as detailed in the following section.

The Foreign Trade Promotion Corporation (PROCOMER) as well as the Costa Rican Investment and Development Board (CINDE) lead Costa Rica’s investment promotion efforts.  CINDE has had great success over the last several decades in attracting and retaining investment in specific areas, currently services, advanced manufacturing, life sciences, light manufacturing, and the food industry.  In addition, the Tourism Institute (ICT) attends to potential investors in the tourism sector. CINDE and ICT are strong and effective guides and advocates for their client companies, prioritizing investment retention and maintaining an ongoing dialogue with investors.

Limits on Foreign Control and Right to Private Ownership and Establishment

Costa Rica recognizes and encourages the right of foreign and domestic private entities to establish and own business enterprises and engage in most forms of remunerative activity.  The exceptions are in sectors that are reserved for the state (legal monopolies – see #7 below “State Owned Enterprises, first paragraph) or that require participation of at least a certain percentage of Costa Rican citizens or residents (electrical power generation, transport services, professional services, and aspects of broadcasting).  Properties in the Maritime Zone (from 50 to 200 meters above the mean high-tide mark) may only be leased from the state and with residency requirements. In the areas of medical services, telecommunications, finance and insurance, state-owned entities dominate, but that does not preclude private sector competition. Costa Rica does not have an investment screening mechanism for inbound foreign investment, beyond those applied under anti-money laundering procedures.  U.S. investors are not disadvantaged or singled out by any control mechanism or sector restrictions; to the contrary, U.S. investors figure prominently among the various major categories of FDI.

Other Investment Policy Reviews

The OECD accession process for Costa Rica beginning in 2015 has produced a series of changes by Costa Rica and recommendations by the OECD; within that context the OECD in April 2018 published the “OECD Economic Surveys Costa Rica 2018.” http://www.oecd.org/countries/costarica/oecd-economic-surveys-costa-rica-2018-eco-surveys-cri-2018-en.htm   .

In the same context, the OECD offers a number of recent publications relevant to investment policy: http://www.oecd.org/countries/costarica/  . As of April 2019, Costa Rica has passed 12 of the 22 technical bodies required for OECD accession, with the Investment Committee being one of the ten that remain.

Business Facilitation

Costa Rica’s single-window business registration website, crearempresa.go.cr  , brings together the various entities – municipalities and central government agencies – which must be consulted in the process of registering a business in Costa Rica.  A new company in Costa Rica must typically register with the National Registry (company and capital registry), Internal Revenue Directorate of the Finance Ministry (taxpayer registration), National Insurance Institute (INS) (basic workers’ comp), Ministry of Health (sanitary permit), Social Security Administration (CCSS) (registry as employer), and the local Municipality (business permit).  Crearempresa is rated 17th of 32 national business registration sites evaluated by “Global Enterprise Registration” (www.GER.co  ), which awards Costa Rica a relatively lackluster rating because Crearempresa has little payment facility and provides only some of the possible online certificates.

Traditionally, the Costa Rican government’s small business promotion efforts have tended to focus on participation by women and underserved communities.  The women’s institute INAMU, vocational training institute INA, MEIC, and the export promotion agency PROCOMER through its supply chain initiative have all collaborated extensively to promote small and medium enterprise with an emphasis on women’s entrepreneurship. In 2019, INA will launch a network of centers to support small and medium enterprises based upon the U.S. Small Business Development Center (SBDC) model.

The World Bank’s “Doing Business” evaluation for 2018, http://www.doingbusiness.org  , states that business registration takes nine steps in 22.5 days.  Notaries are a necessary part of the process and are required to use the Crearempresa portal when they create a company.  Women do not face explicitly discriminatory treatment when establishing a business.

Outward Investment

The Costa Rican government does not promote or incentivize outward investment.  Neither does the government discourage or restrict domestic investors from investing abroad.

2. Bilateral Investment Agreements and Taxation Treaties

Costa Rica has bilateral investment treaties (BITs) in force with Argentina, Canada, Chile, China, the Czech Republic, France, Germany, South Korea, the Netherlands, Paraguay, Qatar, Spain, Switzerland, Taiwan and Venezuela.  Treaty texts are on the COMEX website (http://www.comex.go.cr/Tratados  ).  The investment chapter of CAFTA-DR includes all aspects of a BIT thereby making a separate BIT with the United States unnecessary.   United Nations Conference on Trade and Development (UNCTAD) (http://investmentpolicyhub.unctad.org/IIA/IiasByCountry#iiaInnerMenu  ) features a parallel list of both signed investment treaties and those entered into force.

Costa Rica has in-force free trade agreements (FTA) with five groupings of countries.  The Central American Free Trade Agreement CAFTA-DR is with the United States, Nicaragua, Honduras, El Salvador, Guatemala, and Dominican Republic.  The European Union Association Agreement with Central America is with all EU members, Guatemala, Honduras, El Salvador, Nicaragua, and Panama. The European Free Trade Association (EFTA) free trade agreement is with Iceland, Liechtenstein, Norway, Switzerland, Panama and Guatemala.  The free trade agreement with the Caribbean nations of CARICOM is with Trinidad and Tobago, Guyana, Barbados, Belize, and Jamaica.    With Costa Rica’s March 2019 ratification of the South Korea Central American Free Trade Agreement between South Korea, Costa Rica, El Salvador, Honduras, Nicaragua and Panama, that FTA is now in force between Costa Rica and South Korea.  Costa Rica also has individual FTAs with Canada, Mexico, Panama, Colombia, Peru, Chile, China, and Singapore. Costa Rica in recent years has slowed the pace at which it has negotiated and signed new free trade agreements.

Costa Rican and U.S. tax authorities currently coordinate under the terms of two agreements, a Taxation Information Exchange Agreement (TIEA) signed in 1989, and a U.S-Costa Rica intergovernmental agreement titled “Agreement between the Government of the United States of America and the Government of the Republic of Costa Rica to Improve International Tax Compliance and to Implement FATCA” signed in December 2013 and expected to enter-into-force (EIF) during 2019.  Costa Rica has active bilateral or regional tax information exchange agreements with 16 other jurisdictions, in addition to a number of signed agreements that are not yet in force; see the Global Forum on Transparency and Exchange of Information for Tax Purposes for the full list: http://www.eoi-tax.org/jurisdictions/CR#agreements  .  Of those 16 agreements, two (Germany, Spain) are “Double Tax Conventions” that address overlapping tax obligations in addition to simple information exchange.  Costa Rica is also a party to the OECD “Convention on Mutual Administrative Assistance in Tax Matters,” which entered into force in August 2013: http://www.oecd.org/tax/exchange-of-tax-information/Status_of_convention.pdf .

In accordance with its international commitments to address the use of corporate tax havens, the Costa Rican government in 2013 adopted a new set of transfer pricing rules, followed by their implementation regulations [DGT-R-44-2016 published by the internal revenue department (DGT) of the Finance Ministry] in September 2016.  Large transnational companies must declare and justify the transfer-pricing methods they are using in a manner consistent with international norms.

4. Industrial Policies

Investment Incentives

Four investment incentive programs operate in Costa Rica: the free trade zone system, an inward-processing regime, a duty drawback procedure, and the tourism development incentives regime.  These incentives are available equally to foreign and domestic investors, and include tax holidays, training of specialized labor force, and facilitation of bureaucratic procedures. Costa Rica’s Foreign Trade Promotion Authority (PROCOMER) is in charge of the first three programs and companies may choose only one of the three.  As of early 2019, 453 companies are in the free trade zone regime, 90 in the inward processing regime, and 10 in duty drawback.

The Costa Rican Tourism Board (ICT) administers the tourism incentives; over 1,000 tourism firms are declared as such with access to incentives of various types depending on the firm’s operations (hotels, rent-a-car, travel agencies, airlines and aquatic transport).  The free trade zone regime is based on the 1990 law #7210, updated in 2010 by law #8794 and attendant regulations, while inward processing and duty drawback derive from the General Customs Law #7557. Tourism incentives are based on the 1985 law #6990, most recently amended in 2001.

The inward-processing regime suspends duties on imported raw materials of qualifying companies and then exempts the inputs from those taxes when the finished goods are exported. The goods must be re-exported within a non-renewable period of one year.  Companies within this regime may sell to the domestic market if they have registered to do so and pay applicable local taxes. The drawback procedure provides for rebates of duties or other taxes that were paid by an importer for goods subsequently incorporated into an exported good.  Finally, the tourism development incentives regime provides a set of advantages, including duty exemption – local and customs taxes – for construction and equipment to tourism companies, especially hotels and marinas, which sign a tourism agreement with ICT.

Foreign Trade Zones/Free Ports/Trade Facilitation

Individual companies are able to create industrial parks that qualify for free trade zone (FTZ) status by meeting specific criteria and applying for such status with PROCOMER.  Companies in FTZs receive exemption from virtually all taxes for eight years and at a reduced rate for some years to follow. Established companies may be able to renew this exemption through additional investment.  In addition to the tax benefits, companies operating in FTZs enjoy simplified investment, trade, and customs procedures, which provide a convenient way to avoid Costa Rica’s burdensome business licensing process. Call centers, logistics providers, and software developers are among the companies that may benefit from FTZ status but do not physically export goods. Such service providers have become increasingly important participants in the free trade zone regime.

PROCOMER and CINDE are traditionally proactive in working with FTZ companies to streamline and improve law, regulation and procedures touching upon the FTZ regime.  Current initiatives include a proposal suggested by the OECD to eliminate the current requirement that service firms in FTZ regime may sell no more than 50 percent into the local market, and a proposal to work with the Customs agency to simplify the procedures that FTZ companies must follow to recycle or donate materials.

Performance and Data Localization Requirements

Costa Rica does not impose requirements that foreign investors transfer technology or proprietary business information or purchase a certain percentage of inputs from local sources. However, the Costa Rican agencies involved in investment and export promotion do explicitly focus on categories of foreign investor who are likely to encourage technology transfer, local supply chain development, employment of local residents, and cooperation with local universities.  The export promotion agency PROCOMER operates an export linkages department focused on increasing the percentage of local content inputs used by large multinational enterprises; one recent program is dedicated to helping small and medium enterprises (SME) obtain international certifications such as ISO9000.

Costa Rica does not have excessively onerous visa, residence, work permit, or similar requirements designed to inhibit the mobility of foreign investors and their employees, although the procedures necessary to obtain residency in Costa Rica are often perceived to be long and bureaucratic.  Existing immigration measures do not appear to have inhibited foreign investors’ and their employees’ mobility to the extent that they affect foreign direct investment in the country. The government is responsible for monitoring so that foreign nationals do not displace local employees in employment, and the Immigration Law and Labor Ministry regulations establish a mechanism to determine in which cases the national labor force would need protection.  However, investors in the country do not generally perceive Costa Rica as unfairly mandating local employment. The Labor Ministry prepares a list of recommended and not recommended jobs to be filled by foreign nationals. Costa Rica does not have government/authority-imposed conditions on any permission to invest.

Costa Rica does not require Costa Rican data to be stored on Costa Rican soil.  With entry into force of law #8968 ‒ Personal Data Protection Law and its corresponding regulation ‒ in 2014, companies must notify the Data Protection Agency (PRODHAB) of all existing databases  from which personal information is sold or traded. The notification requirement applies in some cases to employee databases maintained, used, or accessed by third parties. Databases pay an annual registration fee.

Costa Rica does not require any IT providers to turn over source code or provide access to encryption.  The regulation associated with law #8968 did originally mandate that PRODHAB be given “super-user” privileges in databases registered with the agency, but that requirement was never acted upon and was reversed by a new regulation effective December 2016.

Costa Rica does not impose measurements that prevent or unduly impede companies from freely transmitting customer or other business-related data outside the economy/country’s territory.   The measures that do apply under the data privacy law and regulation are equally applicable to data managed within the country.

5. Protection of Property Rights

Real Property

The laws governing investments in land, buildings, and mortgages are generally transparent.  Secured interests in both chattel and real property are recognized and enforced. Mortgage and title recording are mandatory and the vast majority of land in Costa Rica has clear title.  However, there are continuing problems of overlapping title to real property and fraudulent filings with the National Registry, the government entity that records property titles. In addition, squatters do have rights under Costa Rican law such that legally purchased and registered property if left unoccupied long enough and under certain circumstances may revert to the person occupying the land rather than the registered owner.  Potential investors in Costa Rican real estate should also be aware that the right to use traditional paths is enshrined in law and can be used to obtain court-ordered easements on land bearing private title; disputes over easements are particularly common when access to a beach is an issue. Costa Rica is ranked 47th of 190 for ease of “registering property” within the World Bank 2018 Doing Business Report.

Foreigners are subject to the same land lease and acquisition laws and regulations as Costa Ricans with the exception of concessions within the Maritime Zone (Zona Maritima Terrestre – ZMT).  Almost all beachfront is public property for a distance of 200 meters from the mean high tide line, with an exception for long-established port cities and a few beaches such as Jaco. The first 50 meters from the mean high tide line cannot be used for any reason by private parties.  The next 150 meters, also owned by the state, is the Maritime Zone and can only be leased from the local municipalities or the Costa Rican Tourism Institute (ICT) for specified periods and particular uses, such as tourism installation or vacation homes. Concessions in this zone cannot be given to foreigners or foreign-owned companies.

Intellectual Property Rights

Costa Rica’s legal structure for protecting intellectual property rights (IPR) is quite strong, but enforcement is sporadic and does not always get the attention and resources required to be effective.  As a result, infringement of IPRs is relatively common in both physical and online markets. Costa Rica is a signatory of many major international agreements and conventions regarding intellectual property.  Building on the existent regulatory and legal framework, CAFTA-DR required Costa Rica to further strengthen and clarify its IPR regime, with several new IPR laws added to the books in 2008.  Prior to that, the GATT agreement on Trade Related Aspects of Intellectual Property (TRIPS) took effect in Costa Rica on January 1, 2000.  Costa Rica in 2002 ratified the World Intellectual Property Organization (WIPO) internet treaties pertaining to Performances and Phonograms (WPPT) and Copyright (WCT).

The Ministry of Foreign Trade (COMEX) and Costa Rica’s National Registry agreed in 2017 to amend the country’s treatment of geographic indicators (GI) to require that any GI identify a generic term in a compound name.  On February 27, 2019, through Executive Decree 41572-JP-COMEX, Costa Rica’s updated GI decree entered into force.

Online piracy is another major concern for the country with poor enforcement of online IPR infractions and lengthy notice and takedown procedures.  On February 8, 2019, Costa Rica passed and published in La Gaceta, Executive Decree #41557-COMEX-JP with modifications to the existing regulation on Internet Service Providers -ISP’s- (Executive Decree #36880-COMEX-JP) that significantly shorten the 45 days previously allowed for notice and takedown of pirated online content.  Amendments of Articles 12 and 13 of the regulation effectively create an expeditious safe harbor system for ISP’s in Costa Rica without requiring new legislation or changes to the General Law of Public Administration.

During 2018, the Registry of Industrial Property implemented a series of tools to support the services provided by the Patent Office.  As of December 3, 2018, the Patent Office began accepting electronic filing of international applications through ePCT-filing. Since 2016, Costa Rica has been a member of the Cooperation Systems on Aspects of Operational Information and Industrial Property (PROSUR), and as part of its activities has implemented a pilot program of Accelerated Patent Procedure, PPH by its acronym in Spanish.

While Costa Rica is not listed in the Notorious Market Report, it is and has been listed in the USTR’s Special 301 Watch List since 1995.  However, the 2018 Special 301 Report noted that Costa Rica has taken steps to increase intragovernment coordination on IP matters resulting in a significant increase in the number of criminal investigations and prosecutions. The Costa Rican government does not release official statistics on the seizure of counterfeit goods, but the Chamber of Commerce compiles the following from Costa Rican government sources: http://observatorio.co.cr/.  Costa Rica’s Economic Crimes Prosecutor investigated 75 cases as of September 2018, on pace for a similar number to the 99 cases investigated in 2017. As in years past, prosecutors ultimately dismissed a number of cases due to lack of interest, collaboration, and follow-up by the representatives of trademark rights holders.  The Costa Rican government continues to publish statistics on IPR criminal enforcement at http://www.comex.go.cr/estad percentC3 percentADsticas-y-estudios/otras-estad percentC3 percentADsticas/  .

Costa Rica has made less progress on implementing a systematic solution to ensure that government entities use licensed software.  Only one person currently compiles and tracks the data, stalling the effort to fully monitor compliance.

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

Resources for Rights Holders

Contact at Mission:

Attention:  Investment Climate Statement
Economics Section
Embassy San Jose, Costa Rica
2519-2000
Email: SanJoseEcon@state.gov

Country/Economy resources:

  • Costa Rican American Chamber of Commerce (AmCham):  http://www.amcham.co.cr/  
  • The U.S. Embassy in Costa Rica (Consular Section) maintains an extensive list of legal service providers, including some firms engaged in intellectual property law.  This list does not represent an endorsement on the part of the U.S. government: https://cr.usembassy.gov/u-s-citizen-services/attorneys/).
  • The Department of Commerce also maintains a list of Business Service Providers that includes law firms specializing in IPR, under the Business Service Provider tab at: http://www.export.gov/costarica  .

Observatory of Illicit Trade:  http://observatorio.co.cr/  

6. Financial Sector

Capital Markets and Portfolio Investment

The Costa Rican government’s general attitude towards foreign portfolio investment is cautiously welcoming, seeking to facilitate the free flow of financial resources into the economy while minimizing the instability that might be caused by the sudden entry or exit of funds.  The securities exchange (Bolsa Nacional de Valores) is small and is dominated by trading in bonds. Stock trading is of limited significance and involves less than 20 of the country’s larger companies, resulting in an illiquid secondary market. There is a small secondary market in commercial paper and repurchase agreements.  The Costa Rican government has recently explicitly welcomed foreign institutional investors purchasing significant volumes of Costa Rican dollar-denominated government debt in the local market. The securities exchange regulator SUGEVAL is generally perceived to be effective.

Costa Rica accepted the obligations of IMF Article VIII, agreeing not to impose restrictions on payments and transfers for current international transactions or engage in discriminatory currency arrangements, except with IMF approval.  There are no controls on capital flows in or out of Costa Rica or on portfolio investment in publicly-traded companies. However, law #9227 adopted in 2014 allows the Central Bank, in coordination with the executive branch, to discourage short-term investments through the imposition of taxes on interest earned by foreign non-residents on Costa Rican bonds and also provides for a special reserve requirement of up to 25 percent of the value of those bonds.  The Central Bank has never used the powers given it by law #9227, and within the context of OECD-recommended reforms the Costa Rican government has committed to abrogating it. Some capital flows are subject to a withholding tax (see section on Foreign Exchange and Remittances).

Within Costa Rica, credit is largely allocated on market terms, although long-term capital is scarce.  Favorable lending terms for USD-denominated loans compared to colon-denominated loans have made USD-denominated mortgage financing popular and common. Foreign investors are able to borrow in the local market; they are also free to borrow from abroad, although withholding tax may apply.

Money and Banking System

Costa Rica’s financial system boasts a relatively high financial inclusion rate, estimated by the Central Bank at 75 percent (the percentage of adults over the age of 15 holding a bank account).  As part of an ongoing financial inclusion campaign, the Costa Rican government in early 2016 began allowing non-resident foreigners to open what are termed “simplified accounts” in Costa Rican financial institutions.  Resident foreigners have full access to all banking services.

The banking sector is healthy.  Non-performing loans have risen over the past year but remained low at 2.14 percent of total loans as of December 2018; the state-owned banks had a higher 3.12 percent average.  The country hosts a large number of smaller private banks, credit unions, and factoring houses, although the four state-owned banks are still dominant, accounting for just under 50 percent of the country’s financial system assets.  Consolidated total assets of the country’s public commercial banks were approximately USD 27 billion in December 2018, while consolidated total assets of the eleven private commercial and cooperative banks were over USD 20 billion Combined assets of all bank groups (public banks, private banks and others) were approximately USD 58.1 billion as of December 2018.

Costa Rica’s Central Bank performs the functions of a central bank while also providing support to the four autonomous financial superintendencies (Banking, Securities, Pensions and Insurance) under the supervision of the national council for the supervision of the financial system (CONASSIF).   The Central Bank developed and operates the financial system’s transaction settlement mechanism “SINPE.” In addition to managing all transaction settlement between banks, SINPE allows all financial institutions to offer clients the opportunity to transfer money to and from accounts with any other account in the financial system.  Such direct bank transfer has become a common means of payment in the country.

Foreign banks may establish operations in the country under the supervision of the banking regulator SUGEF and as such are subject to the same regulatory burden as locally owned banks.   The Central Bank has a good reputation and has had no problem in maintaining sufficient correspondent relationships. Costa Rica is steadily improving its ability to ensure the efficacy of anti-money-laundering and anti-terrorism-finance and was removed from intensive monitoring by the Financial Action Task Force in 2017.  The Costa Rican financial sector in broad terms appears to be satisfied to date with the available correspondent banking services.

Cyber currencies are currently legal in Costa Rica, but Costa Rica’s Central Bank has taken a cautious approach to them in general, warning Costa Ricans that such currencies do not enjoy any formal backing.  The financial authorities have also noted that cyber currencies are a potential avenue for money laundering.

Foreign Exchange and Remittances

Foreign Exchange

No restrictions are imposed on expatriation of royalties or capital except when these rights are otherwise stipulated in contractual agreements with the government of Costa Rica.  However, Costa Rican sourced rents and benefits remitted overseas, including royalties, are subject to a withholding tax (see below). When such remittances are paid to a parent company or related legal entity, transfer pricing rules and certain limitations apply.

There are no restrictions on receiving, holding, or transferring foreign exchange.  There are no delays for foreign exchange, which is readily available at market clearing rates and readily transferable through the banking system.  Dollar bonds and other dollar instruments may be traded legally. Euros are increasingly available in the market. Costa Rica has a floating exchange rate regime in which the Central Bank is ready to intervene, if necessary, to smooth any exchange rate volatility.

Remittance Policies

Costa Rica does not have restrictions on remittances of funds to any foreign country; however, all funds remitted are subject to applicable withholding taxes that are paid to the country’s tax administration.  The default level of withholding tax is 30 percent with royalties capped at 25 percent, dividends at 15 percent, professional services at 25 percent from July 1 2019, transportation and communication services at 8.5 percent, and reinsurance at 5.5 percent (different withholding taxes also apply for other types of services).  By Costa Rican law, in order to pay dividends, procedures need to be followed that include being in business in the corresponding fiscal year and paying all applicable local taxes.  Those procedures for declaring dividends in effect put a timing restriction on them.  Withholding tax does not apply to payment of interest to multilateral and bilateral banks that promote economic and social growth, and companies located in free trade zones pay no dividend withholding tax.  Both Spain and Germany have double-taxation tax treaties with Costa Rica, lowering the withholding tax on dividends paid by companies from those countries.

Sovereign Wealth Funds

Costa Rica does not have a Sovereign Wealth Fund.

7. State-Owned Enterprises

Costa Rica’s state-owned enterprises (SOEs) are commonly known by their abbreviated names.  They include monopolies in petroleum-derived fuels (RECOPE), lottery (JPS), railroads (INCOFER), local production of ethanol (CNP/FANAL), water distribution (AyA), and electrical distribution (ICE, CNFL, JASEC, ESPH).  SOES have market dominance in insurance (INS), telecommunications (ICE, RACSA, JASEC, ESPH), and finance (BNCR, BCR, BanCredito, Banco Popular, BANHVI, INVU, INFOCOOP). They have significant market participation in parcel and mail delivery (Correos), and ports operation (INCOP and JAPDEVA).  Six of those SOEs hold significant economic power with revenues exceeding 1 percent of GDP: ICE, RECOPE, INS, BNCR, BCR and Banco Popular. Audited returns for each SOE may be found on each company’s website, while basic revenue and costs for each SOE are available on the General Controller’s Office “Sistema de Planes y Presupuestos” https://www.cgr.go.cr/02-consultas/consulta-pp.html  . The Costa Rican government does not currently hold minority stakes in commercial enterprises.

No Costa Rican state-owned enterprise currently requires continuous and substantial state subsidy to survive.  Many SOEs turn a profit, which is allocated as dictated by law and boards of directors. Financial allocations to and earnings from state-owned enterprises may be found in the “Sistema de Informacion de Planes y Presupuestos (SIPP)” within the General Controller’s Office (CGR) site: https://cgrweb.cgr.go.cr/pr02/f?p=150220:2:::NO:::  

U.S. investors and their advocates cite some of the following ways in which Costa Rican SOEs competing in the domestic market receive non-market-based advantages because of their status as state-owned entities.

Electricity generated privately must be distributed through the public entities (including rural electricity cooperatives not strictly classified as SOEs) and is limited to 30 percent of total electrical generation in the country: 15 percent to small privately-owned renewable energy plants and 15 percent to larger “build-operate-transfer” (BOT) operations.

Telecoms and technology sector companies have called attention to the fact that government agencies overwhelmingly choose SOEs as their telecom services providers despite a full assortment of private-sector telecom companies.  The information and telecommunications business chamber (CAMTIC) has been advocating for years against what its members feel to be unfair use by government entities of a provision (Article 2) in the public contracting law that allows non-competitive award of contracts to public entities when functionaries of the awarding entity certify the award to be an efficient use of public funds.  CAMTIC asserts that since 2016, the government has used Article 2 in 135 separate instances for a total contracted amount of over USD 400 million in information and communications technology (ICT) goods and services.

– The state-owned insurance provider National Insurance Institute (INS) has been adjusting to private sector competition since 2009 but in 2018 still registered 72 percent percent of total insurance premiums paid; 13 insurers are now registered with insurance regulator SUGESE: (https://www.sugese.fi.cr/SitePages/index.aspx  ).  New market entrants point to unfair advantages enjoyed by the state-owned insurer INS, including a strong tendency among SOE’s to contract their insurance with INS.

Costa Rica is not a party to the WTO Government Procurement Agreement (GPA) although it is registered as an observer.  Costa Rica strives to adhere to the OECD Guidelines on Corporate Governance for SOEs (www.oecd.org/daf/ca/oecdguidelinesoncorporategovernanceofstate-ownedenterprises.htm  ).

Privatization Program

Costa Rica does not have a privatization program and the markets that have been opened to competition in recent decades – banking, telecommunications, insurance and Atlantic Coast container port operations – were opened without privatizing the corresponding state-owned enterprise(s).

8. Responsible Business Conduct

Corporations in Costa Rica, particularly those in the export and tourism sectors, generally enjoy a positive reputation within the country as engines of growth and practitioners of Responsible Business Conduct (RBC).  The Costa Rica government actively highlights its role in attracting high-tech companies to Costa Rica; the strong RBC culture that many of those companies cultivate has become part of that winning package. Large multinational companies commonly pursue RBC goals in line with their corporate goals and have found it beneficial to publicize RBC orientation and activities in Costa Rica.  Many smaller companies, particularly in the tourism sector, have integrated community outreach activities into their way of doing business. There is a general awareness of RBC among both producers and consumers in Costa Rica.

The Costa Rican government maintains and enforces laws with respect to labor and employment rights, consumer protection and environmental protection.  Costa Rica has no mineral extraction industry with its accompanying issues. Costa Rica encourages foreign and local enterprises to follow generally accepted RBC principles such as the OECD Guidelines for Multinational Enterprises (MNE) and maintains a national contact point for OECD MNE guidelines within the Ministry of Foreign Trade (see http://www.oecd.org/investment/mne/ncps.htm  ).

Some Costa Rican government agencies took the principles of public-private partnership to heart by working with private companies in addressing specific social issues.  For example, since 2003 the Foundation Paniamor (www.paniamordigital.org  ) is the designated lead agency in Costa Rica guiding the network of 428 (through December 2018) tourism-related businesses which are signatories to the “Code of Conduct” an initiative of the Costa Rican Tourism Board (ICT).  The purpose of this code is to organize and direct the private sector’s work against the sexual commercial exploitation of children and adolescents.

9. Corruption

Costa Rica has laws, regulations, and penalties to combat corruption.  Though the resources available to enforce those laws are limited, Costa Rica’s institutional framework is strong, such that those cases that are prosecuted are generally perceived as legitimate.  Anti-corruption laws extend to family members of officials, contemplate conflict-of-interest in both procurement and contract award, and penalizes bribery by local businessmen of both local and foreign government officials.  Public officials convicted of receiving bribes are subject to prison sentences up to ten years, according to the Costa Rican Criminal Code (Articles 340-347). Entrepreneurs may not deduct the costs of bribes or any other criminal activity as business expenses.  In recent years, Costa Rica saw several publicized cases of firms prosecuted under the terms of the U.S. Foreign Corrupt Practices Act.

Costa Rica ratified the Inter-American Convention Against Corruption in 1997.  This initiative of the OECD and the Organization of American States (OAS) obligates subscribing nations to implement criminal sanctions for corruption and implies a series of follow up actions: http://www.oas.org/juridico/english/cri.htm  .  Costa Rica also ratified the UN Anti-Corruption Convention in March 2007, has been a member of the Open Government Partnership (OGP) since 2012, and as of July 2017 is a party to the OECD Convention on Combatting Bribery of Foreign Public Officials.

The Costa Rican government has encouraged civil society interest in good governance, open government and fiscal transparency, with a number of NGO’s operating unimpeded in this space.  While U.S. firms do not identify corruption as a major obstacle to doing business in Costa Rica, some have made allegations of corruption in the administration of public tenders and in approvals or timely processing of permits.  Developers of tourism facilities periodically cite municipal-level corruption as a problem when attempting to gain a concession to build and operate in the restricted maritime zone.

Resources to Report Corruption

Contact within government Anti-Corruption Agency:

Armando López Baltodano
Procurador Director de la Area de la Etica Publica, PGR
Procuraduria General de la Republica (PGR)
Avenida 2 y 6, Calle 13.  San Jose, Costa Rica
Telephone:  2243-8330, 2243-8394
Email: RocioCHT@PGR.go.cr

Contact at “watchdog” organization:

Evelyn Villarreal F.
Asociación Costa Rica Íntegra
Telephone: (506) 8355 3762
Email 1: evelyn.villarreal@cr.transparency.org
Email 2: crintegra.vice@gmail.com

10. Political and Security Environment

Since 1948, Costa Rica has not experienced significant domestic political violence. There are no indigenous or external movements likely to produce political or social instability.  However, Costa Ricans occasionally follow a long tradition of blocking public roads for a few hours as a way of pressuring the government to address grievances; the traditional government response has been to react slowly, thus giving the grievances time to air.  This practice on the part of peaceful protesters can cause logistical problems.

Crime increased in Costa Rica in recent decades and U.S. citizen visitors and residents are frequent victims.  While petty theft is the main problem, criminals show an increased tendency to use violence.   Please see the State Department’s Travel Advisory page for Costa Rica for the latest information —  https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/costa-rica-travel-advisory.html

11. Labor Policies and Practices

The Costa Rican labor force is relatively well-educated.  The country boasts an extensive network of publicly-funded schools and universities while Costa Rica’s national vocational training institute (INA) and private sector groups provide technical and vocational training.  According to the National Statistics Institute (INEC), as of December 2018, informal employment rose significantly from 41 percent in 2017 to 44.9 percent of total employment in 2018; 37.7 percent of the economically active population in the nonagricultural sector is in the informal economy.  The overall unemployment rate was 12 percent in 2018 while youth unemployment (between 15 and 24) reached 31.7 percent that year.

Several factors influenced Costa Rica’s labor market during 2018, including deceleration of the economy stemming from nation-wide public sector strikes, a drop in consumer confidence which reduced consumption, and the conflict in Nicaragua, which affected regional trade.  The Labor Ministry described the labor market in 2018 as a paradox: while the unemployment rate rose, the number of individuals employed also rose. Costa Rica has invested heavily in education and training, but the government recognizes it needs to focus on getting better results from its investment.  The government announced in November 2018 the creation of the National Qualifications Framework for Vocational Education and Training, a strategy to organize vocational education and to standardize and raise the quality of education.

The rapid growth of Costa Rica’s service, tourism, and technology sectors has stimulated demand for English-language speakers and prompted the Costa Rican government to declare English language and computer literacy to be a national priority at all levels of education.  In August 2018, the government announced an “Alliance for Bilingualism,” a public-private initiative to increase English teaching in the country. Several public and private institutions are also active in Costa Rica’s drive to English proficiency, including the 60-year-old U.S.-Costa Rican binational center (the Centro Cultural Costarricense Norteamericano), which offers general and business English courses to as many as 5,000 students annually, and receives U.S. government funding.  In 2010, the Peace Corps initiated a program in Teaching English as a Foreign Language and maintains an active program. While the presence of numerous multinational companies operating shared-services and call centers draw down the supply of speakers of fluent business and technical English, the pool of job candidates with English and technical skills in the Central Valley is sufficient to meet current demand.

The government does not keep track of shortages or surpluses of specialized labor skills.  Foreign nationals have the same rights, duties, and benefits as local employees. The government is responsible for monitoring that foreign nationals do not displace local employees in employment.  Labor law provisions apply equally across the nation, both within and outside free trade zones. The Immigration Law and the Labor Ministry regulations establish a mechanism to determine in which cases the national labor force would need protection.  The Labor Ministry prepares a list of recommended and not recommended jobs to be filled by foreign nationals.

There are no restrictions on employers adjusting employment to respond to fluctuating market conditions.  The law does not differentiate between layoffs and dismissal without cause. There are concepts established in the law related to unemployment and dismissals such as the mandatory savings plan (Fondo de Capitalizacion Laboral), as well as the notice of termination of employment (preaviso) and severance pay (cesantia).  Costa Rican labor law requires that employees released without cause receive full severance pay, which can amount to close to a full year’s pay in some cases.  Although there is no insurance for workers laid off for economic reasons, employers may establish voluntarily an unemployment fund.

Costa Rican labor law and practice allows some flexibility in alternate schedules but is nevertheless based on a 48-hour week made up of 8-hour days.  Workers are entitled to one day of rest after six consecutive days of work. The labor code stipulates that the workday may not exceed 12 hours. Use of temporary or contract workers for jobs that are not temporary in nature in order to lower labor costs and avoid payroll taxes does occur, particularly in construction and in agricultural activities dedicated to domestic (rather than export) markets.  No labor laws are waived to attract or retain investment‒all labor laws apply in all Costa Rican territory, including free trade zones. 

Costa Rican law guarantees the right of workers to join labor unions of their choosing without prior authorization.  Unions operate independently of government control and may form federations and confederations and affiliate internationally.  The vast majority of unions developed in the public sector, including state-run enterprises. “Permanent committees of employees” informally represent employees in some enterprises of the private sector and directly negotiate with employers; these negotiations are expressed in “direct agreements,” which have a legal status.  Based on 2018 statistics, 90.4 percent of government employees are union members as compared to 3.2 percent in the private sector. In 2018, the Labor Ministry reported 112 collective bargaining agreements, 80 with public sector entities and 32 within the private sector, covering 10.1 percent of the working population. The Ministry reported a total of 155 “direct agreements” in different sectors (agriculture, industry and transportation) during 2018.   The government continued in 2018 with the renegotiation of collective labor agreements in the public sector that began in 2016.

In the private sector, many Costa Rican workers join “solidarity associations,” under which employers provide easy access to saving plans, low-interest loans, health clinics, recreation centers, and other benefits.  A 2011 law solidified that status by giving solidarity associations constitutional recognition comparable to that afforded labor unions. Solidarity associations and labor unions coexist at some workplaces, primarily in the public sector.  Business groups claim that worker participation in permanent committees and/or solidarity associations provides for better labor relations compared to firms with workers represented only by unions. However, some labor unions allege that private businesses use permanent committees and solidarity associations to hinder union organization while permanent workers’ committees displace labor unions on collective bargaining issues in contravention of internationally recognized labor rights.

The Ministry of Labor has a formal dispute-resolution body and will engage in dispute-resolution when necessary; labor disputes may also be resolved through the judicial process.  The Ministry of Labor regulations establish that conciliation is the mechanism to solve individual labor disputes, as defined in the Alternative Dispute Resolution Law (No. 7727 dated 9 December 1997).  The Labor Code and ADR Law establish the following mechanisms: dialogue, negotiation, mediation, conciliation, and arbitration. The Labor Law promotes alternate dispute resolution in judicial, administrative and private proceedings.  The law establishes three specific mechanisms: arbitration to resolve individual or collective labor disputes (including a Labor Ministry’s arbitrator roster list); conciliation in socio-economic collective disputes (introducing private conciliation processes); and arbitration in socio-economic collective disputes (with a neutral arbitrator or a panel of arbitrators issuing a decision). The Labor Ministry also participates as mediator in collective conflicts, facilitating and promoting dialogue among interested parties.  The law provides for protection from dismissal for union organizers and members and requires employers found guilty of anti-union discrimination to reinstate workers fired for union activities.

The law provides for the right of workers to conduct legal strikes, but it prohibits strikes in public services considered essential (police, hospitals and ports).  Strikes affecting the private sector are rare and do not pose a risk for investment. Public sector labor unions paralyzed government services with strikes in September 2018 to protest against a fiscal reform bill that became law in December 2018.  The government enforced the law by lifting blockades and clearing port entrances to guarantee the free transit of citizens and goods. Labor courts declared most of the strikes in the public sector illegal and most workers returned to work after four weeks (except for teachers’ union, which continued to strike for three months).

Child and adolescent labor is uncommon in Costa Rica.  The government has implemented a strategy to eliminate any remaining child labor by 2020 through programs to encourage school attendance, awareness campaigns on social media, increased inspections by the Labor Ministry, and improvements to child care in targeted areas.  Between 2011 and 2016, employment by minors under 15 fell by 76 percent from 34,494 to 8,071, or 1.1 percent of the population, according to Department of Labor reporting.

Chapter 16 of the U.S.-Central American Free Trade Agreement (CAFTA-DR) obliges Costa Rica to enforce its laws that defend core international labor standards. The government, organized labor, employers organizations, and the International Labor Organization signed a memorandum of understanding to launch a Decent Work Program for the period 2019-2023, which aims to improve labor conditions and facilitate employability for vulnerable groups through government-labor-business tripartite dialogue.

In December 2018, the government enacted a law to cut the fiscal deficit which amends and regulates legal provisions on public sector employment.  There are several bills pending before the National Assembly, including a reform to provisions regulating strikes, a bill expanding the list of essential services in which employees are prohibited from striking, and a bill facilitating internships, apprenticeships, and vocational education.

12. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) offers both financing and insurance coverage against expropriation, war, revolution, insurrection and inconvertibility for eligible U.S. investors in Costa Rica. OPIC can provide insurance for U.S. investors, contractors, exporters, and financial institutions.  Financing is available for overseas investments that are wholly owned by U.S. companies or that are joint ventures in which the U.S. company is a participant.

In Costa Rica, OPIC’s 2018 portfolio exposure totaled USD 151 million across 15 projects in financial services, real estate/construction, and utility sectors.  OPIC continues to be active in Costa Rica. For more information, see OPIC’s master list of projects by year: https://www.opic.gov/opic-action/all-project-descriptions  .   Costa Rica is a member of the Multilateral Investment Guarantee Agency, a member of the World Bank group.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $60,126 2017 $57,286 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $19,924 2017 $19,924 IMF CDIS data available at http:/data.imf.org/CDIS 
Host country’s FDI in the United States ($M USD, stock positions) 2017 $117 2017 $117 IMF CDIS data available at http:/data.imf.org/CDIS  
Total inbound stock of FDI as % host GDP 2017 63.2% 2017 62.5% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

* For 2017 GDP in dollars with National Accounts exchange rate, the Costa Rican Central Bank (BCCR) is “Host Country Statistical Source”.  http://indicadoreseconomicos.bccr.fi.cr/indicadoreseconomicos/Cuadros/frmVerCatCuadro.aspx?idioma=1&CodCuadro= percent202999  

* For 2017 US FDI stock in Costa Rica, and Costa Rican FDI stock in the US, the Costa Rican Central Bank (BCCR) is “Host Country Statistical Source

* For “Total Inbound Stock of FDI as  percent host GDP”, local statistical source is BCCR.  GDP for 2017 was USD 58,174.6 million; total Inbound FDI stock in 2017 was USD 36,742.7.


Table 3: Sources and Destination of FDI

Costa Rica’s open and globally integrated economy receives FDI principally from the United States followed by Europe and Latin America.   Costa Rica’s outward FDI is more regionally focused on its neighbors Nicaragua, Guatemala and Panama, with the U.S. and Colombia following.

Direct Investment From/in Counterpart Economy Data – 2017
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 36,743 100% Total Outward 3,023 100%
USA 19,924 54% Nicaragua 955 32%
Spain 2,490 7% Guatemala 907 30%
Mexico 1,872 5% Panama 650 22%
Netherlands 1,443 4% USA 117 4%
Switzerland 1,395 4% Colombia 70 2%
“0” reflects amounts rounded to +/- USD 500,000.

Stock Positions.  IMF’s Coordinated Direct Investment Survey (CDIS) site: (http:/data.imf.org/CDIS)


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 1,816 100% All Countries 1,017 100% All Countries 799 100%
USA 924 50.9%% USA 492 48.4% USA 432 54.1%
Ireland 356 19.6% Ireland 354 34.8% UK 85 10.6%
Luxembourg 151 8.3%% Luxembourg 143 14.1% Sweden 74 9.3%
UK 89 4.9%% China PR 3 .3%% Mexico 25 3.1%
Sweden 74 4.1% Canada 3 .3% Australia 20 2.5%

Croatia

Executive Summary

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

The government is willing to meet at senior levels with interested investors and to assist in resolving problems.  Prime Minister Andrej Plenkovic is a former member of the European Parliament and has signaled his commitment to wide-ranging structural reforms in line with recommendations from the EU and global financial institutions.  Relative strengths in the Croatian economy include low inflation, a stable exchange rate, and developed infrastructure. Historically, the most promising sectors for investment in Croatia have been tourism, telecommunications, pharmaceuticals, and banking.

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

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

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

Table 1: Key Metrics and Rankings

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

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

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

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

The Agency for Investment and Competitiveness (AIK) — previously a stand-alone Croatian government agency providing investors with various services intended to help with implementation of investment projects — became part of the Ministry of Economy, Entrepreneurship and Crafts at the start of 2019.  The Ministry’s Directorate for Investment, Industry and Innovation has assumed the assistance role previously offered by AIK. For more information, see: investcroatia.gov.hr. The Strategic Investment Act helps investors streamline large projects by gathering all necessary information the investor needs to implement the project and then fast-tracking the necessary procedures for implementation of the project, including acquiring permits and help with location. Various business groups, including the American Chamber of Commerce, Foreign Investors’ Council, and the Croatian Employers’ Association, are in dialogue with the government about ways to make doing business easier and to keep investment retention as a priority.

Limits on Foreign Control and Right to Private Ownership and Establishment

Croatian law allows for all entities, both foreign and domestic, to establish and own businesses and to engage in all forms of remunerative activities.  Article 49 of the Constitution states all entrepreneurs have equal legal status. However, the Croatian government restricts foreign ownership or control of services for a handful of national security-sensitive sectors:  inland waterways transport, maritime transport, rail transport, air ground-handling, freight-forwarding, publishing, education, and ski instruction. Apart from these, the only blocks to market access involve routine professional requirements (architect, auditor, engineer, lawyer, and veterinarian).  Over 90 percent of the banking sector is foreign-owned. 

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) published an investment climate review for Croatia in June 2019:

https://www.oecd.org/publications/oecd-investment-policy-reviews-croatia-2019-2bf079ba-en.htm

The World Bank Group published a “Doing Business” Economic Profile of Croatia in 2018: http://www.doingbusiness.org/en/data/exploreeconomies/croatia

Business Facilitation

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

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

Outward Investment

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

2. Bilateral Investment Agreements and Taxation Treaties

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

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

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

Bilateral Taxation Treaties

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

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

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

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

4. Industrial Policies

Investment Incentives

The Investment Promotion Act (IPA), amended in 2018, offers incentives to investment projects in manufacturing and processing activities, development and innovation activities, business support activities and high added value services. The incentives are either tax refunds or cash grants. After they are approved for implementation, they are not distributed immediately. Those who receive cash grants are required to provide documentation proving they have fulfilled the criteria per which the request was granted for every year they have received approval for the incentive. Tax refunds are provided to companies on an annual basis, based on information provided in tax returns. Incentive measures can be combined or used individually.

The IPA provides the following incentive measures: tax refunds for microenterprises; tax advantages for small, medium and large enterprises; cash grants for eligible costs of new jobs linked to the investment project; cash grants for eligible training costs linked to the investment project; additional aid for development and innovation activities, business development support and high value-added services; cash grants for capital costs of investment projects; cash grants for labor intensive investment projects; and investment incentives for economic revitalization projects, involving previously state-owned property.

All incentive measures can be used by entrepreneurs.  Entrepreneurs are defined as individuals subject to Croatian income tax or companies registered in Croatia investing the minimum amount of USD 56,000 in fixed assets, and creating at least 3 new jobs for microenterprises or ten new jobs for companies investing in information computer technology (ICT) systems and software development centers, or USD 168,000 in fixed assets and creating at least 5 new jobs for small or medium enterprises, and large companies.

Substantial tax cuts on profits are available depending on the size of the investment and the number of new jobs created. A 50 percent reduction applies for up to ten years for companies that invest up to USD 1.12 million (USD 56,000 for microenterprises) and create at least five new jobs (3 jobs for microenterprises or 10 jobs for companies investing in ICT system and software development centers). This reduction increases to 75 percent for companies investing USD 1.12 -USD 3.4 million and creating at least 10 new jobs, and up to 100 percent for companies that invest over USD 3.4 million and create at least 15 new jobs.

Cash grants for new jobs created can be up to USD 10,100 per new position, depending on the location of the investment and category of the person employed. Financial support of 10 percent of expenses, which is not subject to reimbursement, or up to USD 3,400 per new position can be used to create jobs in counties with unemployment levels up to 10 percent. This support increases to 20 percent or up to USD 6,700 per position in counties with unemployment levels from 10 to 20 percent, and up to 30 percent or USD 10,100 per new position in counties with unemployment levels above 30 percent.

There are also programs to reimburse costs for employee education and training connected to an investment project which can cover up to 50 percent of the of education and training costs for large companies, up to 60 percent for medium sized companies or if training is given to workers with disabilities, or up to 70 percent for small businesses and microenterprises. Incentives for education cannot exceed 70 percent of eligible costs of education and training.

Additional incentives for job creation are available for development and innovation activities that affect the development of new products or significantly improve existing products, production series, manufacturing processes, and/or production technologies; for business support activities such as customer support, outsourced business activities centers, or logistics and distribution centers, as well as ICT systems and software development centers; for activities such as hospitality and tourism accommodation facilities categorized as four or five stars, heritage hotels and other types of accommodation created through renovation of cultural and historical structures, and supporting services; for health tourism, conference and event tourism, nautical tourism, golf tourism, cultural tourism, entertainment and/or recreation centers and parks, ecological tourism projects and other innovative projects in tourism; as well as for creative services and industrial engineering services.

Additional incentives for job creation are offered for labor-intensive investment projects within the first three years of the project start date. Cash grants for job creation are increased by 25 percent for projects creating 100 or more positions, by an additional 50 percent for projects creating 300 or more jobs, and by up to 100 percent or the total cost (or up to the maximum allowed limit) for creating 500 or more jobs.

Cash grants for the capital costs of investment projects are approved for investments over USD 6.1 million which generate 50 new positions within 3 years of the start of the investment. They cover 10 percent of the cost of new factory construction, production facility construction, or the purchase of new equipment (up to USD 600,000) in counties where the unemployment rate is from 10-20 percent. This incentive increases to 20 percent of the investment cost (up to USD 1.2 million) in counties where the unemployment rate is above 20 percent, with the condition that at least 40 percent of the investment is machines or equipment and that at least 50 percent of those machines or equipment are of high-value technology.

There are also grants for buying equipment or machinery for research and development activities up to 20 percent of the cost of the equipment, or up to USD 560,340.

There are also incentives for investment projects which revitalize inactive state-owned property and provide free land leases for investors investing USD 3.4 million and creating at least 15 new jobs.

Additional information regarding the types of incentives offered by the Ministry of Economy, Entrepreneurship and Crafts can be found at investcroatia.gov.hr.

The Act on Strategic Investment Projects went into effect in November 2013 and was amended in 2018. This Act facilitates and accelerates administrative procedures for projects deemed to be of strategic interest for Croatia based on a number of conditions listed in the Act. Strategic projects can include private, public-private or public investments in economy, mining, energy, tourism, transport, infrastructure, electronic communication, postal services, environmental protection, public utilities, agriculture, forestry, water management, fishery, health care, culture, audio-visual activities, science, defense, judiciary, technology and education. A project may be considered strategic if it contributes to the employment of a large number of people, improves manufacturing or service standards, implements or develops new technologies, offers sustainable growth, or helps advance the competitiveness of the economy.

The minimum amount for an investment to be considered strategic is approximately USD 11.4 million, which is significantly less than previous minimum of USD 22.8 million. All investments over this amount may be considered strategic, and will be entitled to accelerated permitting and registration procedures. Investments may also be treated as strategic if they are valued at USD 1.5 million or more, and are implemented in assisted areas, or if they are implemented on the islands or are in the agriculture, fisheries, and forestry sector. A guide and application materials for private investors interested in applying for status under the Act on Strategic Investment Projects can be found at:www.investcroatia.gov.hr.

The Construction Act allows investors to secure permits through an e-licensing system which is a novelty in an otherwise cumbersome permit acquisition procedure. The investor may obtain a license valid for three years, which allows for a three percent change in the dimensions of the project from start to finish. The e-licensing system can be accessed at https://dozvola.mgipu.hr/  

Foreign Trade Zones/Free Ports/Trade Facilitation

There are currently 13 Free Trade Zones operating in Croatia. Contact information for each of the Free Trade Zones can be found at the following website http://www.croatianfreezones.org/  . Both domestic and foreign investors are afforded equal treatment in the trade zones. After Croatia entered the European Union in 2013, many of the Free Trade Zones that operated throughout Croatia were slowly transitioned to Industrial/Business zones. Investment incentives are available in these zones. For more information regarding these zones go to http://www.aik-invest.hr/en/zone/  .

Performance and Data Localization Requirements

Croatian law does not impose performance requirements on or mandate employment requirements for foreign or domestic investors, nor are senior management or board of directors positions mandated in private companies. In regard to U.S. investors, Article VII of the U.S.-Croatia BIT prohibits mandating or enforcing specified performance requirements as a condition for a covered investment. The list of prohibited requirements is exhaustive and covers domestic content requirements and domestic purchase preferences, the “balancing” of imports or sales in relation to exports or foreign exchange earnings, requirements to export products or services, technology transfer requirements and requirements relating to the conduct of research and development in the host country. Article VII of the BIT makes clear, however, that a party may impose conditions for the receipt or continued receipt of benefits and incentives.

Although procedures for obtaining business visas are generally clear, they can be cumbersome and time-consuming. Foreign investors should familiarize themselves with the provisions of the Act on Foreigners. Questions relating to visas and work permits should be directed to the Croatian Embassy or a Croatian Consulate in the United States. The U.S. Embassy in Zagreb maintains a website with information on this subject at https://hr.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/entry-residence-requirements/.

There are no government imposed conditions for investment, nor are there “forced localization” policies for investors in terms of goods and technology. There are no performance requirements, or associated enforcement procedures. Foreign IT providers are not required to turn over source code or give access to surveillance. There are no measures that prevent companies from freely transmitting customer or other business related data outside the country’s territory. There are no requirements for investors to maintain or store data within the territory of Croatia.

5. Protection of Property Rights

Real Property

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

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

While the cadaster offices reliably maintain records, there is a significant volume of property in Croatia which has changed hands without appropriate documentation of the transfer because the owners have sought to avoid paying the title transfer fees. The embassy routinely learns of companies or individuals who have bought property in Croatia, only to learn there are conflicting claims to the property.  These individuals and companies may spend years in court attempting to resolve these claims.  For this reason potential buyers should seek to verify that the seller possesses clear title to both the land and buildings (which can be titled and owned separately). 

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

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

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

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

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

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

When purchasing land for construction purposes, potential buyers should determine whether the property is classified as agricultural or construction land. The Agricultural Land Act provides for additional fees for re-zoning of up to 50 percent of the value of the land that is diverted from agriculture to construction purposes. The Agricultural Land Agency works with local governments to review potential agricultural land purchases. However, the Agricultural Land Act no longer covers the sale of privately owned farmland, which is now treated solely as the subject of a sales agreement between the parties. Buyers of this type of land should still proceed with caution and be aware of potentially unresolved legacy issues with land ownership. Land in Croatia is either publicly or privately owned and cannot be transferred to squatters solely based on physical presence.

The Ministry of Justice and the State Geodetic Office co-manage the National Program for Resolving Land Registration and Cadaster Issues. This program includes a One Stop Shop system, which is a single point for accessing land registry and cadaster data.  For more information see uredjenazemlja.hr. 

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

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

The World Bank Ease of Doing Business 2018 report ranks Croatia as 51st out of 190 countries on ease of registering property, up eight spots from the 2017 ranking of 58th. 

There is no property tax in Croatia; a proposal to introduce a property tax failed in 2018.

Intellectual Property Rights

Croatian intellectual property rights (IPR) legislation includes the Patent Act, Trademark Act, Industrial Design Act, Act on the Geographical Indications of Products and Services, Act on the Protection of Layout Design of Integrated Circuits, and the Act on Copyrights and Related Rights. These acts define the process for protecting and enforcing intellectual property rights. Texts of these laws are available on the website of the State Intellectual Property Office (https://www.dziv.hr/en/ip-legislation/national-legislation/).

Legislation pertaining to Intellectual Property Rights can be found at http://www.dziv.hr/en/ip-legislation/national-legislation/  . The Law on Protecting Unpublished Information with Market Value went into force in 2018. 

Croatian law enforcement officials keep public records of seized counterfeit goods. According to the latest available report from the Customs Office, in 2018, customs officials stopped 540 international deliveries that resulted in a total of 593 procedures for temporary detainment of goods, which included 88,827 items.  Customs also detained 137 domestic deliveries, which contained 18,384 counterfeit goods. They initiated 3 criminal proceedings against those who were involved in the transportation of seized goods. Croatian customs officials and Ministry of Interior work together to locate and seize goods.

Although some areas of IPR protection remain problematic, Croatia is currently not on the U.S. Special 301 Watch List nor is it in the Notorious Markets List. Problem areas are piracy of digital media and counterfeiting. Due to its geographic position, Croatia is also one of the transit routes for various illegal products bound for other countries in the region. There have been no problems reported with regard to registration of intellectual property in Croatia by American companies. In May 2016, the American Chamber of Commerce in Croatia delivered to the Croatian government Recommendations for Improving the Enforcement of Intellectual Property Protection in Croatia based on discussions with their members in regard to treatment of intellectual property http://www.amcham.hr/position-papers-d207   (please scroll down to the 15th line). The American Chamber of Commerce continues dialogue with the Croatian government in regard to intellectual property rights issues.

As a WTO member, Croatia is a party to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Croatia is also a member of the World Intellectual Property Organization (WIPO). For a list of international conventions to which Croatia is a signatory, consult the State Intellectual Property Office’s website at www.dziv.hr  .

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

6. Financial Sector

Capital Markets and Portfolio Investment

Croatia’s securities and financial markets are open equally to domestic and foreign investment. Foreign residents may open non-resident accounts and may do business both domestically and abroad. Specifically, Article 24 of the Foreign Currency Act states that non-residents may subscribe, pay in, purchase, or sell securities in the Republic of Croatia in accordance with regulations governing securities transactions. Non-residents and residents are afforded the same treatment in spending and borrowing. These and other non-resident financial activities regarding securities are covered by the Foreign Currency Act, available on the central bank website (www.hnb.hr).

Securities are traded on the Zagreb Stock Exchange (ZSE), established in 1991. Regulations that govern activity and participation in the ZSE can be found (in English) at: http://zse.hr/default.aspx?id=97  . There are three tiers of securities traded on the ZSE. The Capital Markets Act regulates all aspects of securities and investment services, and defines the responsibilities of the Croatian Financial Services Supervisory Agency (HANFA). The Capital Market Act was amended in April 2018 to give HANFA more authority in terms of investigating and punishing false annual business reporting.  All legislation associated with the Capital Market act can be found (in English) at: http://www.hanfa.hr/regulations/capital-market/  

There is sufficient liquidity in the markets to enter and exit sizeable positions. There are no policies that hinder the free flow of financial resources. There are no restrictions on international payments or transfers. As such, Croatia is in accordance with IMF Article VIII. The private sector, both domestic and foreign owned, enjoys open access to credit and a variety of credit instruments on the local market on market terms.

Money and Banking System

The banking sector is now overwhelmingly privatized, consolidated, highly developed, competitive, and increasing the diversity of products available to businesses (foreign and domestic) and consumers. French, German, Italian or Austrian companies own over 90 percent of Croatia’s banks. In 2016, Addiko Bank became the first U.S. bank registered in Croatia by taking over all of Hypo Bank’s holdings in Croatia. The banking sector suffered no long-term consequences during the 2008 global banking crisis. More than 90 percent of total banking sector assets are foreign-owned. As of December 2018, there were 21 commercial banks and four savings banks, with assets totaling USD 66 billion. The largest bank in Croatia is Italian-owned Zagrebacka Banka, with assets of USD 18 billion, for a market share of 27.3 percent of total banking assets in Croatia. The second-largest is Italian-owned Privredna Banka Zagreb, with USD 13 billion, or 20.05 percent of total banking assets. The third largest is Austrian Erste Bank, with assets of USD 10 billion, with a 14.83 percent market share in Croatia. The country has a central bank system and all information regarding the Croatian National Bank can be found at http://www.hnb.hr/  .

Non-residents are able to open bank accounts without restrictions or delays. The Croatian government has not introduced or announced any current intention to introduce block chain technologies in banking transactions.

Foreign Exchange and Remittances

The Croatian Constitution guarantees the free transfer, conversion, and repatriation of profits and invested capital for foreign investments. Article VI of the U.S.-Croatia Bilateral Investment Treaty (BIT) additionally establishes protection for American investors from government exchange controls. The BIT obliges both countries to permit all transfers relating to a covered investment to be made freely and without delay into and out of each other’s territory. Transfers of currency are additionally protected by Article VII of the International Monetary Fund (IMF) Articles of Agreement (http://www.imf.org/External/Pubs/FT/AA/index.htm#art7).

The Croatian Foreign Exchange Act permits foreigners to maintain foreign currency accounts and to make external payments. The Foreign Exchange Act also defines foreign direct investment (FDI) in a manner that includes use of retained earnings for new investments/acquisitions, but excludes financial investments made by institutional investors such as insurance, pension and investment funds. The law also allows Croatian entities and individuals to invest abroad. Funds associated with any form of investment can be freely converted into any world currency.

The exchange rate is determined by the Croatian National Bank. The National Bank intervenes in the foreign exchange market to ensure the Euro-Croatian kuna rate remains stable as an explicit and longstanding policy. The exchange rate of the Croatian kuna, while floating freely, is more tightly linked to the euro than the U.S. dollar. Any risk of currency devaluation or significant depreciation is generally low.

Remittance Policies

No limitations exist, either temporal or by volume, on remittances. The U.S. Embassy in Zagreb has not received any complaints from American companies regarding transfers and remittances.

Sovereign Wealth Funds

The Republic of Croatia does not own any sovereign wealth funds.

7. State-Owned Enterprises

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

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

CERP also oversees 374 companies; of these, the state owns from ten to 49 percent of 88 companies, and under ten percent of the remaining 260 companies. By statute, CERP must divest the state from these companies. Lists of SOEs are published on the websites of the Ministry of State Owned Assets at https://imovina.gov.hr/   and on CERP’s website at http://www.cerp.hr/  

County and city level governments have majority ownership in approximately 500 companies, mostly utilities; however, exact data is not available. The European Bank for Reconstruction and Development (EBRD) concluded in a report on Croatian SOEs published in 2018 that a way to improve corporate governance and reduce political influence is to appoint professional boards with independent members. The International Monetary Fund Staff Concluding Statement of the 2018 IMF Article IV Mission from December 2018 noted that SOEs’ revenue-generating capacity is low, and that loss-making SOEs are a drain on the state budget.  SOEs competing on the domestic market do not receive market based advantages from the host government.  

The Zagreb Stock exchange is currently working with the EBRD on reviewing and revising the Croatian Corporate Governance Code, which is expected to be finished in August 2019. Croatia is not a member of the OECD, but adheres to OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict Affected and High-Risk Areas.  

Privatization Program

Croatia continues to slowly pursue privatization of SOEs through the Ministry of State Owned Assets and the Center for Reconstruction and Sales. There are no restrictions against foreigners participating in privatization tenders. The banking sector, telecommunications, and Croatia’s largest pharmaceutical company were purchased by foreign investors when Croatia initiated its privatization process in the late 1990’s. The bidding process is public and terms are clearly defined in tender documentation, however, problems with bureaucracy and timely judicial remedies can significantly slow progress for projects. There is no privatization timeline; however, the government views privatization as a means to reduce the budget deficit and increase output. The Ministry of State Owned Assets identified completing the privatization of state-owned assets and improving the management of SOE’s as its priorities in its 2018-2020 strategy.  This strategy is available (only in Croatian) at: https://imovina.gov.hr/UserDocsImages/dokumenti/Izvjesca/Strateski percent20plan percent20MIDIM percent202018.-2020.pdf 

All tenders are published internationally and there are no restrictions on foreign investor participation in privatization. The bidding process is public. Tenders are in Croatian and can be found at https://imovina.gov.hr/vijesti/8  .

8. Responsible Business Conduct

There is a general awareness of societal expectations regarding responsible business conduct which is regulated by law. The Croatian Financial Services Supervisory Agency has established a Corporate Governance Code of Ethics for all Zagreb Stock Exchange (ZSE) participants, and the Company Act, Audit Law, Accounting Law and Credit Institutions law are the sources for corporate governance provisions. Publicly listed companies are required to upload their annual corporate governance reports on the ZSE website. The existing code was drafted in 2007 by ZSE in cooperation with the Croatian Financial Services Supervisory Agency (HANFA) for companies listed on the ZSE.  The EBRD is currently partnering with the Croatian Financial Services Supervisory Agency and the ZSE to update and strengthen corporate governance legislation, which is expected to be finished in August 2019. It introduces significant progress on transparency of business operations, avoidance of conflicts of interest, efficient internal control, and effective division of responsibilities. 

No high profile or controversial instances of private sector labor rights violations have occurred in Croatia. The government effectively implements and enforces domestic laws in order to maintain consumer and environmental protection and avoid infringement of human and labor rights. Sometimes these regulations even exceed European Union standards.  Croatia implements all EU legislation which requires a due diligence approach to responsible business conduct. Labor unions are considered watchdogs for responsible business conduct and draw attention to issues that they find to be impeding on labor, environmental, or consumer rights in the business sector. The EBRD is currently partnering with the Croatian Financial Services Supervisory Agency and the ZSE to update and strengthen corporate governance legislation.

Although Croatia is not a member, Croatia encourages the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High Risk Areas and considers minerals from conflict affected areas to be illegal.  Various laws related to forest and water management, concessions, and environmental protection are implemented in extractive and mining businesses to maintain high environmental and human rights standards. All procedures for mining or extraction tenders are publicly available and transparent.

9. Corruption

Croatia has a suitable legal framework, including regulations and penalties, to combat corruption.  The Criminal Code and the Criminal Procedure Act define the tools available to the investigative authorities to fight corruption.  The criminal code also provides for asset seizure and forfeiture. In terms of a corruption case, it is assumed that all of a defendant’s property was acquired through criminal offences unless the defendant can prove the legal origin of the assets in question.  Pecuniary gain in such cases is also confiscated if it is in possession of a third party (e.g. spouse, relatives, or family members) and was not acquired in good faith. Croatian laws and provisions regarding corruption apply equally to domestic and foreign investors, to public officials, their family members and political parties. The Croatian Criminal Code covers such acts as trading in influence, abuse of official functions, bribery in the private sector, embezzlement of private property, money laundering, concealment and obstruction of justice.  The Act on the Office for the Suppression of Corruption and Organized crime provides broad authority to prosecute tax fraud linked to organized crime and corruption cases.  

The Law on Public Procurement is entirely harmonized with EU legislation and prescribes transparency and fairness for all public procurement activities.  Government officials use public speeches to encourage ethical business. The Croatian Chamber of Economy created a Code of Business Ethics which it encourages all companies in Croatia to abide by, but it is not mandatory. The Code can be found at  https://www.hgk.hr/documents/kodeksposlovneetikehrweb581354cae65c8.pdf 

Additional laws for the suppression of corruption include: the State Attorney’s Office Act; the Public Procurement Act; the Act on Procedure for Forfeiture of Assets Attained Through Criminal Acts and Misdemeanors; the Budget Act; the Conflict of Interest Prevention Act; the Corporate Criminal Liability Act; the Money Laundering Prevention Act; the Witness Protection Act; the Personal Data Protection Act; the Right to Access Information Act; the Act on Public Services; the Code of Conduct for Public Officials; and the Code of Conduct for Judges.  The Labor Act contains whistleblower protections, which as yet remain unproven.

Croatia has signed but not ratified the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, but it is a member and currently chairs the Group of States Against Corruption (GRECO), a peer monitoring organization that allows members to assess anticorruption efforts on a continuing basis. Croatia has been a member of INTERPOL since 1992. Croatia cooperates regionally through the Southeast European Co-operative Initiative (SECI), the Southeast Europe Police Chiefs Association (SEPCA), and the Regional Anti-Corruption Initiative (RAI). Croatia is a member of Eurojust, the EU’s Judicial Cooperation Unit, and is a signatory to the UN Convention Against Corruption.

Croatian legislation provides protection for NGOs involved in investigating or drawing attention to corruption.  GONG, a non-partisan citizens’ organization founded in 1997, which also acts as a government watchdog, monitors election processes, educates citizens about their rights and duties, encourages communication between citizens and their elected representatives, promotes transparency within public services, manages public advocacy campaigns, and assists citizens in self-organizing initiatives.  The Partnership for Social Development is another nongovernmental organization active in Croatia dealing with the suppression of corruption.

Historically, the business community has identified corruption in healthcare, public procurement, and construction, and continues to raise it as an obstacle to FDI.  During the years ahead of EU accession, Croatia invested considerable efforts in establishing a wide-ranging legal and institutional anti-corruption framework. The Strategy for Combatting Corruption from 2015-2020 is currently being implemented, and the Ministry of Justice published an action plan in June 2017 to complement the Strategy for 2017-2018.  Croatian prosecutors have secured corruption convictions against a number of high-level former government officials, former ministers, other high-ranking officials, and senior managers from state-owned enterprises, although many such convictions have later been overturned.

Resources to Report Corruption

The State Prosecutor’s Office for the Suppression of Corruption and Organized Crime (USKOK) is tasked with directing police investigations and prosecuting cases. USKOK is headquartered in Zagreb, with offices in Split, Rijeka and Osijek.  In addition, the National Police Office for the Suppression of Corruption and Organized Crime (PN-USKOK) conducts corruption-related investigations and is based in the same cities. Specialized criminal judges are situated in the four largest county courts in Croatia, again in Zagreb, Rijeka, Split, and Osijek, and are responsible for adjudicating corruption and organized crime cases.  The cases receive high priority in the justice system, but still encounter excessive delays. The Ministry of Interior, the Office for Suppression of Money Laundering, the Tax Administration, and the Anti-Corruption Sector of the Ministry of Justice, all have a proactive role in combating and preventing corruption. GONG is a civil society organization founded in 1997 to encourage citizens to actively participate in the political process.

Contact information below:

Office of the State Attorney of the Republic of Croatia
Gajeva 30, 10000 Zagreb, Republic of Croatia
+385 1 4591 855
tajnistvo.dorh@dorh.hr

Office for the Suppression of Corruption and Organized Crime
Gajeva 30a, 10000 Zagreb, Republic of Croatia
+385 1 4591 874
tajnistvo@uskok.dorh.hr

GONG
Trg Bana Josipa Jelacica 15/IV, 10000 Zagreb, Republic of Croatia
+385 1 4825 444
gong@gong.hr

10. Political and Security Environment

The risk of political violence in Croatia is low. Following the breakup of Yugoslavia and the subsequent wars in the region, Croatia has emerged as a stable, democratic country and is a member of NATO and the EU. Relations with neighboring countries are generally fair and improving, although some disagreements regarding border demarcation and residual war-related issues persist.

11. Labor Policies and Practices

Croatia has an educated, highly skilled, and relatively high-value labor force as compared to regional averages, but remains relatively low for the entire EU.  Employment is regulated by the constitution, international conventions, treaties, labor law, collective agreements and employment agreements.  

The World Bank estimates the grey economy accounts for 35 percent of GDP.  Unemployment rates are falling, yet Croatia maintains the 5th highest unemployment rate in the EU.  

The Labor Law is the main piece of legislation that governs employment and prescribes general labor regulations. Among other items, the Labor Law prohibits discrimination, defines various types of leave including maternity, and provides terms for striking, salaries and other labor related issues. The government is committed to increasing jobs, especially for youth, through various programs funded by the EU. Companies report that Croatia’s labor law makes it relatively expensive to hire and dismiss employees in comparison to the United States and other countries in Europe at the same level of development.

There are currently labor shortages reported in the construction, food production, and tourism sectors.  Foreign or migrant workers do not currently play a significant role in any field; the government has increased quotas for foreign workers to address these shortages.  Croatia continues to experience a brain drain, with an estimated 60,000 Croatians (mostly young and educated) leaving the country annually. In 2018, the Government announced measures intended to incentivize people to remain rather than working abroad.  These measures includes USD 307 million worth of financial support for employers and the self-employed, and for training and seasonal work programs. A large portion of the funding is intended to be directed at policies for active employment, while a portion will fund specialized programs for groups that have a harder time entering the labor market. 

Croatian law does not require the hiring of Croatian nationals. Employers are bound by law to offer severance pay to individuals laid off due to restructuring or down-sizing.  The labor law defines the conditions and amounts of severance pay, to include three items necessary to qualify for severance: 1) the employer must terminate the employee, 2) the termination must not be the result of behavioral issues, and 3) the employee must have been employed for two consecutive years.  The Croatian Employment Agency provides unemployment payments for those laid off due to economic reasons.

Labor laws are strictly implemented and not waived to retain or attract investment.  Collective bargaining is a common tool, mostly implemented by unions, which overwhelmingly represent workers associated with government spending and state owned enterprises.

12. OPIC and Other Investment Insurance Programs

Croatia is eligible for OPIC political risk insurance.  OPIC’s active portfolio in Croatia is USD 500,000. Additionally, Croatia is a member of the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA). For more information see www.miga.org  .

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $60,892 2018 $60,805 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $138 N/A N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2018 $56.7 N/A N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2018 65.15% N/A N/A UNCTAD data available at

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

[Select country, scroll down to “FDI Stock”- “Inward”, scan rightward for most recent  year’s “as percentage of gross domestic product”]

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


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $39,675 100% Total Outward $7,722 100%
The Netherlands $6,856 20.4% The Netherlands $3,212 41.6%
Austria $4,326 12.9% Bosnia Herzegovina $1,448 18.8%
Italy $3,612 10.8% Slovenia $1,151 14.9%
Germany $3,215 9.6% Serbia $946 12.2%
Luxembourg $2,756 8.2% Montenegro $302 3.9%
“0” reflects amounts rounded to +/- USD 500,000.

*FDI at www.hnb.hr    for Q1-Q3 2018


Table 4: Sources of Portfolio Investment

Data not available.

Cyprus

Executive Summary

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

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

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

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

Table 1: Key Metrics and Rankings

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

Area Administered by Turkish Cypriots

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

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

1. Openness To, and Restrictions Upon, Foreign Investment

Republic of Cyprus

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

For more information:

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

One-Stop-Shop & Point of Single Contact

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

Area Administered by Turkish Cypriots

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

Republic of Cyprus

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

The following restrictions apply to investing in the ROC:

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

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

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

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

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

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

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

Area Administered by Turkish Cypriots

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

Other Investment Policy Reviews

Republic of Cyprus

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

Area Administered by Turkish Cypriots

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

Business Facilitation

Republic of Cyprus

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

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

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

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

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

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

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

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

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

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

Area Administered by Turkish Cypriots

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

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

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

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

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

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

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

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

Outward Investment

Republic of Cyprus

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

Area Administered by Turkish Cypriots

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

2. Bilateral Investment Agreements and Taxation Treaties

Republic of Cyprus

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

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

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

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

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

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

Area Administered by Turkish Cypriots

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

4. Industrial Policies

Investment Incentives

Republic of Cyprus

The ROC offers investors one of the lowest corporate tax rates in the EU at 12.5 percent.  Other tax advantages include:One of the EU’s lowest top statutory personal income tax rates at 35 percent;

  • An extensive double tax treaties network with 63 countries, enabling lower withholding tax rates on dividend or other income received from the subsidiaries abroad;
  • No withholding tax on dividend income received from subsidiary companies abroad under certain conditions;
  • No withholding tax on dividends received from EU subsidiaries; and
  • Low Tonnage Tax for shipping.

Additionally, Cyprus offers the option of obtaining Cypriot residency or citizenship through foreign investment.  For more information on the residency and citizenship by investment schemes, see: http://www.moi.gov.cy/moi/moi.nsf/All/0A09FCB93BA3348BC22582C4001F50CF  

Recently, Cyprus harmonized and enhanced all its regulations regarding investment funds, becoming a more attractive jurisdiction for managing and home-basing investment funds.

The Council of Ministers approved a program in 2017 to attract foreign investment to Cyprus through third-country – i.e., non-European Union – innovative start-ups.  The plan invites third-country nationals with start-up capital of at least € 50,000 (USD 55,000), undergraduate-level education, and fluent either in Greek or English, to set up their headquarters and tax residence in Cyprus, provided their proposed business is certifiably innovative.  The plan made 150 visas available to eligible investors, valid for two years, provided the relevant business takes is successful. The program was renewed in February 2019 for two more years. Additional info at: https://launchincyprus.com/  .

Area Administered by Turkish Cypriots

There are incentives for tourism and industrial-related investments, including:

  • 100 to 200 percent investment allowance on the initial fixed capital investment expenditure for certain regions and sectors;
  • Exemption from “corporate tax” and “income tax” until the above-mentioned allowance percentages are met;
  • Exemption from “custom duties” when importing machinery and equipment the projects;
  • exemption from construction license fees;
  • Exemption from VAT for both imported and locally purchased machinery and equipment; and
  • Reduction of stamp duty and mortgage procedure fees.

Foreign Trade Zones/Free Ports/Trade Facilitation

Republic of Cyprus

The lead government agency handling areas subject to a special customs regime is the Department of Customs and Excise.  Specific rules for the two main types of such areas, namely Customs Warehouses and Free Zones, are listed below and are fully harmonized with equivalent EU norms:  http://www.mof.gov.cy/mof/customs/customs.nsf/All/6D61C14C3E95345CC22572A6003BCBD5?OpenDocument  .

There are two types of Free Zones:

  • Control Type I Free Zone, in which controls are principally based on the existence of a fence; and
  • Control Type II Free Zone, in which controls are principally based on the formalities carried out in accordance with the requirements of the customs warehousing procedure.

Cyprus has two Control Type II Free Zones (FZs) located in the main seaports of Limassol and Larnaca, which are used for transit trade.  These areas are treated as being outside normal EU customs territory. Consequently, non-EU goods placed in FZs are not subject to import duties, VAT, or excise tax.  FZs are governed under the provisions of relevant EU and ROC legislation. The Department of Customs has jurisdiction over both normal zones and FZs and can impose restrictions or prohibitions on certain activities, depending on the nature of the goods.  Additionally, the MECI has management oversight over the Larnaca FZ.

A Customs Warehouse can be set up anywhere in the ROC, provided the right criteria are met and with the approval of the Department of Customs.  For more information, interested parties may contact:

Department of Customs and Excise
Michali Karaoli Str.
1096 Nicosia
Telephone: +357-22-601754 or 55
Fax: +357-22-302018
Email: headquarters@customs.mof.gov.cy
Website: www.mof.gov.cy/ce  

When larger projects are involved, potential investors interested in, establishing their own customs warehouse or seeking to engage existing customs warehouses may also contact the One Stop Shop (www.businessincyprus.gov.cy  ) for guidance on identifying suitable locations.

Additional information on the Limassol and Larnaca FZs can be obtained from:

Cyprus Ports Authority
P.O. Box 22007
1516 Nicosia
23 Kritis Street
1061 Nicosia
Tel. +357-22-817200, X-0
Fax: +357-22-762050
Email: cpa@cpa.gov.cy
Website: https://www.cpa.gov.cy/  

Area Administered by Turkish Cypriots

Famagusta has a “free port and zone,” which is regulated by the Free Ports and Free Zones “Law.”

Operations and activities permitted there include:

  • Engaging in all kinds of industry, manufacturing, and production;
  • Storage and export of goods imported to the “Free Port and Zone”;
  • Assembly and repair of goods imported to the “Free Port and Zone”;
  • Building, repair and assembly of ships; and
  • Banking and insurance services.

Information about incentives provided to businesses established there can be accessed at: http://www.portisbi.com/  

Performance and Data Localization Requirements

Republic of Cyprus

There are no requirements for local sourcing, ownership, or employment.  Hiring Cypriot and EU staff is quite easy, but declining unemployment is placing a strain on labor availability in certain fields.  Securing work permits for non-EU staff can be difficult, particularly in sectors where there is abundant local labor readily available.  In order to overcome this problem, a foreign investor must explain to the satisfaction of ROC authorities why the non-EU staff in question is essential to the business.  As with other such matters, CIPA can offer invaluable assistance to investors overcoming hiring problems (see Section 2 on Business Facilitation, and Section 12 on Labor Policies and Practices.)

Area Administered by Turkish Cypriots

In order to recruit foreign labor, companies or investors apply to the local labor authorities to for “work permits.”  Once they apply, the vacancy is announced locally. Priority is given to local “TRNC citizens” with the required expertise or skillset.  If the skillset is not available locally, employers can recruit foreign labor.

In evaluating a foreign investment incentives application, the “State Planning Office” carries out a feasibility study regarding the type of investment.  For more information on employment, visit the labor authorities’ website: http://csgb.gov.ct.tr/en-us/  

5. Protection of Property Rights

Real Property

Republic of Cyprus

EU nationals and companies domiciled in any EU country are not subject to any restrictions when buying property in the ROC.  By contrast, Cypriot law imposes significant restrictions on the foreign ownership of real estate by non-EU residents. Non-EU persons and entities may purchase a maximum of two real estate properties for private use (defined as a holiday home built on land of up to 4,014 square meters; plus a second home or office of up to 250 square meters, or shop of up to 100 square meters).  Exceptions can be made for projects requiring larger plots of land but are difficult to obtain and rarely granted. This restriction applies to non-EU citizens or non-EU companies. A legal entity is deemed to be controlled by non-EU citizens if it meets any of the conditions listed below:

  • 50 percent or more of its board members are non-EU citizens;
  • 50 percent or more of its share capital belongs to non-EU citizens;
  • Control (50 percent or more) belongs to non-EU citizens; and
  • Either the company’s Memorandum or Articles of Association provides authority to a non-EU citizen securing the company’s activities are conducted based on his/her will during the real estate acquisition period.  In the case that the authority is provided to two or more persons, a legal entity is considered to be controlled by non-EU citizens if 50 percent or more of the people granted such authority are non-EU citizens.

For additional information and application forms for the acquisition of property by non-EU residents, please refer to the Ministry of Interior website: http://www.moi.gov.cy/moi/moi.nsf/index_en/index_en?OpenDocument  .

Legal requirements and procedures for acquiring and disposing of property in Cyprus are complex, but professional help from real estate agents and developers can ease the burden of complying with government requirements.  The ROC Department of Lands and Surveys keeps excellent records and follows internationally-accepted procedures. Non-residents are allowed to sell their property and transfer abroad the amount originally paid, plus interest or profits, without restriction.

The UK government website also offers useful information on buying property in Cyprus: https://www.gov.uk/guidance/how-to-property-in-cyprus  .

Additionally, there are restrictions on investing in Turkish Cypriot property located in the ROC.  The Turkish Cypriot Property Management Service (TCPMS), established in 1991, administers properties of Turkish Cypriot  who are not ordinarily residents of the government-controlled area. This service acts as the temporary custodian for such properties until a comprehensive political settlement is reached.  The TCPMS is mandated to administer properties under its custodianship “in the manner most beneficial for the owner.” Ownership of Turkish Cypriot properties cannot change (except for inheritance purposes) except in exceptional cases when this is deemed beneficial for the owner or necessary for the public interest

The World Bank’s 2018 Doing Business report ranked Cyprus 94th among 190 countries in terms of efficiency and quality for registering property.  For more information, please see: http://www.doingbusiness.org/en/data/exploreeconomies/cyprus#DB_rp  .

Area Administered by Turkish Cypriots

Special Note: Investors are advised to consider the risks associated with investing in immovable property in the area administered by Turkish Cypriots.  Potential investors are strongly advised to obtain independent legal advice prior to purchasing or leasing property there. Purchase or use of property in the area administered by Turkish Cypriots is a contentious issue in Cyprus, as per the following note posted on the Republic of Cyprus Ministry of Foreign Affairs website: http://www.mfa.gov.cy/mfa/properties/occupiedarea_properties.nsf/index_en/index_en?OpenDocument  .

For property in the Turkish Cypriot-administered areas, only pre-1974 title deeds are uncontested.  In response to the European Court of Human Rights’ (ECHR) 2005 ruling that Turkey’s “subordinate local authorities” in Cyprus had not provided an adequate local remedy for property disputes, Turkish Cypriot authorities established an Immovable Property Commission (IPC) to handle property claimed by Greek Cypriots.  In a March 2010 ruling, the ECHR recognized the IPC as a domestic remedy. As of March 19, 2019, the IPC had received 6,518 applications, of which 943 have been concluded through friendly settlements, and 32 through formal hearings. The ROC does not consider the IPC to be a legitimate body. For more information on IPC please visit http://www.tamk.gov.ct.tr/  .

On January 19, 2010, the UK Court of Appeal enforced an earlier court decision taken in the ROC in support of a Greek Cypriot person’s trespassing claim (the Orams case – http://curia.europa.eu/juris/liste.jsf?language=en&num=C-420/07   and http://www.bailii.org/ew/cases/EWCA/Civ/2010/9.html  ), effectively voiding the transfers of Greek Cypriot property in the Turkish Cypriot-administered areas.  This landmark decision also establishes precedent in cases where foreign investors purchasing disputed properties outside of the ROC-controlled area can be found liable for damages.

There are significant restrictions on the foreign ownership of real estate by non-“TRNC” residents who may purchase only one real estate properties for private use subject to the approval of the “Council of Ministers.”

Intellectual Property Rights

Republic of Cyprus

On the whole, intellectual property rights (IPR) protection in the ROC has improved over time, and Cyprus has not appeared in the United States Trade Representative (USTR) Special 301 Report since 2006, and it is not included in the Notorious Markets List.

Cypriot Law (Law 207(I) (2012)) places the burden of proof on the defendant in cases of IPR infringement.  The Law also allows the police to assess samples of pirated articles in lieu of the whole shipment and allows for out-of-court settlement in some cases.  Other important IPR laws include Law 103 (2007) on unfair commercial practices and Law 133(I) (2006), which strengthens earlier legislation targeting copyright infringement.  The Department of Customs and the Police confiscate thousands of counterfeit items every year, including pirated articles of clothing, luggage, accessories, and optical media.

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

Resources for Rights Holders

Embassy point of contact:

George F. Demetriou
Economic Specialist
U.S. Embassy, Nicosia
Telephone: +357-22-393361
Email: demetriougf@state.gov

Local attorneys listed with Embassy: https://cy.usembassy.gov/u-s-citizen-services/attorneys/

AmCham Cyprus: http://www.amchamcyprus.com.cy.

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/  .

Area Administered by Turkish Cypriots

Intellectual property rights are not adequately protected in the area administered by Turkish Cypriots.  Related “laws” in this area are inadequate, antiquated, and there is a lack of enforcement. Infringing goods imported from Turkey and other countries are a concern, such as counterfeit merchandise.

6. Financial Sector

Capital Markets and Portfolio Investment

Republic of Cyprus

The ROC Stock Exchange (CSE), launched in 1996, is one of the EU’s smallest stock exchanges, with a capitalization of € 2.0 billion (USD 2.3 billion) as of March 2019.  The CSE and the Athens Stock Exchange (ASE) have operated from a joint trading platform since 2006, allowing capital to move more freely from one exchange to the other, even though both exchanges retain their autonomy and independence.  The joint platform has increased capital available to Cypriot firms and improved the CSE’s liquidity, although its small size remains a constraint. The private sector has access to a variety of credit instruments, which has been enhanced through the operation of private venture capital firms.  Credit is allocated on market terms to foreign and local investors alike. Foreign investors may acquire up to 100 percent of the share capital of Cypriot companies listed on the CSE with the notable exception of companies in the banking sector.

Area Administered by Turkish Cypriots

There is no stock exchange in the area administrated by Turkish Cypriots and no foreign portfolio investment.  Foreign investors are able to get credit from the local market, provided they have established domestic legal presence, majority-owned (at least 51 percent) by domestic companies or persons.

Money and Banking System

Republic of Cyprus

The ROC banking sector is still consolidating and restructuring, following the March 2013 “haircut” of uninsured deposits.  The banking sector returned to profitability in the first half of 2018 but the high stock of NPLs continues to affect bank performance.  NPLs decreased considerably in 2018 mainly due to the collapse of the Cyprus Cooperative Bank (CCB), which transferred bad assets from the banking system to a separate public entity.  NPLs declined from 42 percent of gross loans at the end of 2017 to 32 percent at the end of November 2018. New laws on insolvency, foreclosures, and securitization support the effort to reduce NPLs further.  Meanwhile, an improving economy and stabilizing property market are helping households and companies service their high debt. Public debt rose to 105 percent of GDP in 2018, due to the government’s support in the sale of the CCB, but is expected to decline to 98.4 percent in 2019, with a steadily declining outlook.  Cyprus’ sovereign debt regained investment grade rating in 2018, mitigating refinancing risks.

Following increased provisioning for NPLs, the banks’ capital position declined moderately although it is still adequate — from 14.9 percent on December 31, 2017 to 14.1 percent on September 30, 2018.  Total deposits in the Cypriot banking system stood at € 47.7 billion (USD 54.4 billion) in February 2019 – only slightly above the level at the end of 2013, reflecting growing, but still fragile, depositor confidence.  The total assets of Cyprus’ three largest banks in 2018 were as follows: Bank of Cyprus € 22.1 billion (USD 26.1 billion), Hellenic Bank € 16.0 billion (USD 18.9 billion), and RCB € 9.1 billion (USD 10.6 billion). Cyprus has a central bank — the Central Bank of Cyprus — which forms part of the European Central Bank.  Foreign banks or branches are allowed to establish operations in Cyprus after obtaining relevant permits, and they are subject to Central Bank of Cyprus supervision, just like domestic banks. Following Deutsche Bank’s decision to stop providing correspondent banking relationships to Cypriot banks in September 2017, only Citibank and Bank of New York currently provide such service to ROC banks.

Opening a personal bank account in Cyprus is straightforward, and the documents needed to do so are:  (a) a copy of a valid passport or identity card (some banks will require notarized copies of identification documents); a utility bill stating the residence address of the applicant (the bill cannot be older than 6 months); and an application form issued by the bank.  Opening a corporate bank account, which is mandatory when registering a company in Cyprus, requires the following documents, such as: (a) Articles of Association, the Certificate of Incorporation and the Share Certificate of the company; (b) a certificate of good standing for foreign companies if they have been opened for over 2 years; (c) Certificates of Directors and Secretary, the Certificate of the Registered Office; (d) proof of the registered office issued by the Group Principal Trading Offices; and (e) an application form released by the bank (each bank has its own model of application).  A current list of authorized credit institutions in Cyprus is available on the Central bank of Cyprus website: https://www.centralbank.cy/en/licensing-supervision/banks/register-of-credit-institutions-operating-in-cyprus  .

Cyprus has taken steps in 2018 to address recognized regulatory shortcomings in combatting illicit finance in its international banking and financial services sector, tightening controls over non-resident shell companies and bank accounts.

Area Administered by Turkish Cypriots

The “Central Bank” oversees and regulates local, foreign, and private banks.  In addition to the “Central Bank” and the “Development Bank”, there are 19 banks in the area administrated by Turkish Cypriots, of which 14 are Turkish Cypriot-owned banks, and five are branch banks from Turkey.  Banks are required to follow “know-your-customer” (KYC) and AML “laws,” which are regulated by the “Ministry of Economy and Energy,” and supervised by the “Central Bank.” Due to non-recognition issues, Turkish Cypriot banks encounter practical difficulties as a result of not qualifying for an international SWIFT number (SWIFT code is a standard format of Bank Identifier Codes (BIC)).  Therefore, Turkish Cypriots and foreigners making international transfers depend on Turkish banks for assistance. The total number of deposits, was approximately USD 4.8 billion as of January 2019. The “Central Bank” claimed 96.7 percent liquidity, assessing this as sufficient to withstand a crisis. NPLs reached USD 187 million (1.045 billion Turkish lira) as of December 2018.

More information is available at the “Central Bank” website: http://www.kktcmerkezbankasi.org/  .

Foreign Exchange and Remittances

Foreign Exchange

Republic of Cyprus

As a member of the Eurozone, the ROC uses the euro as its currency.  The Eurozone has no restrictions on the transfer or conversion of its currency, and the exchange rate is freely determined in the foreign exchange market.  There is no difficulty in obtaining foreign exchange. Since the 2008 financial crisis, the European Commission, has pursued several initiatives aimed at creating a safer and sounder financial sector, known as the Banking Union.  These initiatives, which include stronger prudential requirements for banks, improved depositor protection and rules for managing failing banks, form a single rulebook for all financial actors in the 28 member states of the EU. The single rulebook is the foundation of the Banking Union.  For more info, please refer to: http://ec.europa.eu/finance/general-policy/banking-union/index_en.htm  .

Area Administered by Turkish Cypriots

The “TRNC” has a separate financial system from the ROC.  The financial system in the area administered by Turkish Cypriots is linked closely with that of Turkey.  The Turkish lira (TL) is the main currency in use, although the Euro, U.S. dollar, and British pound are commonly accepted.  The vast majority of business borrowing is derived from domestic and Turkish sources.

A devaluation of the TL against foreign exchange rates (or the opposite) has a strong effect on the economy of the area administered by Turkish Cypriots.  Wages across sectors are generally paid in TL, but almost all real estate, rents, electronic goods, vehicles, and other expensive products are valued in foreign currency.  Banks in the Turkish Cypriot administered areas provide lower interest rates for Euro or British pound loans than for TL loans. Foreign investors are authorized to repatriate all proceeds from their investments and business.

Banks are free to keep foreign currency, act as intermediary in import and export transactions, accept foreign currency savings, engage in purchase and sale of foreign currency, and give foreign currency loans.

Remittance Policies

Republic of Cyprus

There are no restrictions or delays on investment remittances or the inflow or outflow of profits.  Remittance firms, also known as Money Transfer Businesses or MTBs, are regulated by the Central Bank of Cyprus.

Cyprus’ first national risk assessment (NRA) of money laundering and terrorist financing, released publicly November 30, 2018, is available at: http://mof.gov.cy/en/press-office/announcements/national-risk-assessment-of-money-laundering-and-terrorist-financing-risks-cyprus  .  The NRA assessed the money laundering threat for MTBs as medium, noting the following:  “The misuse of MTB services for terrorism financing is globally considered as the biggest threat although there are no available local typologies.  No official statistics on investigations, prosecutions or convictions were available for MTBs. Statistics revealed that the value of outward transfers is significantly higher than the inward transfers in MTB sector.  This falls in line with predictions as Cyprus relies on legal immigration to fill labor positions, mainly unskilled, and is home for workers from third countries who despite having access to banking services (obligation for the issuance of working visa) still prefer to use MTBs for the remittance of financial aid to their families due to the significantly lower costs of transmission and the convenience emanating from the infrastructures available in their country of origin.”

The NRA also noted that the Central Bank of Cyprus maintains a public register, including:  (a) licensed payment institutions, (b) the names and addresses of their agents and their branches’ addresses, and (c) payment institutions authorized in other EU Member States with the right of freedom to provide services in the ROC.  As of June 30, 2016, six payment institutions with 330 agents were operating within the sector as money remitters and three agents were passported with physical presence with 62 subagents. As of the same date, there were also around 250 passported institutions, with no physical presence.  The bulk of money transfer business is carried out by two international household names. No indigenous scheme is operating in Cyprus.

Cyprus is a member of the Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL), a FATF-style regional body.  Its most recent mutual evaluation report of the Cypriot banking sector, conducted in March 2013, can be found at: https://www.coe.int/en/web/moneyval/jurisdictions/cyprus  .  MONEYVAL’s next assessment of Cyprus will commence in May 2019.

Sovereign Wealth Funds

Republic of Cyprus

The Parliament passed legislation March 1, 2019 providing for the establishment of a National Investment Fund (NIF) to manage future offshore hydrocarbons and other natural resources revenue.  The fund is not established as regulations for the NIF are being drafted and will require legislative approval before the fund can operate. See: http://mof.gov.cy/en/useful-links/1-useful-links  .

Area Administered by Turkish Cypriots

There is no established sovereign wealth fund.

7. State-Owned Enterprises

Republic of Cyprus

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

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

Area Administered by Turkish Cypriots

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

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

Some of these organizations include:

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

Privatization Program

Republic of Cyprus

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

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

Area Administered by Turkish Cypriots

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

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

8. Responsible Business Conduct

REPUBLIC OF CYPRUS

In recent years, responsible business conduct (RBC) awareness among both producers and consumers is growing in Cyprus.  Leading foreign and domestic enterprises tend to follow generally-accepted RBC principles, and firms pursuing these practices tend to be viewed more favorably by the public.  The Cyprus Stock Exchange is among the entities imposing a responsible code of conduct among listed companies: http://www.cse.com.cy/en-GB/profile/code-of-conduct/  .  Most professional associations also promote ethical business conduct among their members, including the Cyprus Bar Association, and the Institute of Certified Public Accountants of Cyprus.

The ROC does not specifically adhere to OECD Guidelines for Multinational Enterprises, however, multinationals are expected to follow generally-accepted RBC principles.  ROC authorities have made some initial soundings considering the possibility of eventually joining the Extractive Industries Transparency Initiative (EITI – www.eiti.org  ).

Area Administered by Turkish Cypriots

RBC awareness has grown among both producers, consumers and business in the area administrated by Turkish Cypriots.  Firms pursing these practices tend to be viewed favorably by the public.

9. Corruption

Republic of Cyprus

Transparency International, the global anti-corruption watchdog, ranked Cyprus 38 out of 180 countries in its 2018 Corruption Perception Index.  For reference, please see: https://www.transparency.org/country/CYP  .  Disagreements between the Berlin-based headquarters of Transparency International and its Cypriot division in 2017 led to the disaccreditation of the latter in 2017 and the launch of a successor organization on the island called the Cyprus Integrity Forum (contact details follow).

Corruption, both in the public and private sectors, constitutes a criminal offense.  Under the Constitution, the Auditor General controls all government disbursements and receipts and has the right to inspect all accounts on behalf of the Republic.  Private sector concerns focus on the inertia in the system, as reflected in the Auditor General’s annual reports, listing hundreds of alleged incidents of corruption and mismanagement in public administration that usually remain unpunished or unrectified.  A 2016 survey found 65 percent of local CEOs listed bribery and corruption as the top threat to their companies’ ability to conduct business. GAN Integrity, a business anti-corruption portal with offices in the United States and Denmark, released a report on corruption in Cyprus April 2018 noting the following:  “Although Cyprus is generally free from corruption, high-profile corruption cases in recent years have highlighted the presence of corruption risks in the Cypriot banking sector, public procurement and land administration sector. Businesses may encounter demands for irregular payments, but the government has established a strong legal framework to combat corruption and generally implements it effectively.  Bribery, facilitation payments and giving or receiving gifts are criminal offenses under Cypriot law. The government has a strong anti-corruption framework and has developed effective e-governance systems (the Point of Single Contact and the e-Government Gateway project) to assist businesses.” The report can be accessed at: https://www.business-anti-corruption.com/country-profiles/cyprus/  

Cyprus cooperates closely with EU and other international authorities to fight corruption and provide mutual assistance in criminal investigations.  Cyprus ratified the European Convention on Mutual Assistance in Criminal Matters. Cyprus also uses the foreign Tribunal Evidence Law, Chapter 12, to execute requests from other countries for obtaining evidence in Cyprus in criminal matters.  Additionally, Cyprus is an active participant in the Council of Europe’s Multidisciplinary Group on Corruption. Cyprus signed and ratified the Criminal Law Convention on Corruption and has joined the Group of States against Corruption in the Council of Europe (GRECO).  GRECO’s most recent report on Cyprus is available at: https://www.coe.int/en/web/greco/-/cyprus-makes-promising-moves-to-fight-corruption-but-many-results-yet-to-materialise-says-anti-corruption-group  .

Cyprus is a member of the UN Anticorruption Convention (http://www.unodc.org/unodc/en/treaties/CAC/signatories.html  ) but it is not a member of the OECD Convention on Combatting Bribery (http://www.oecd.org/daf/anti-bribery/countryreportsontheimplementationoftheoecdanti-briberyconvention.htm  ).

Resources to Report Corruption

Government agencies responsible for combating corruption:

Financial Crime Unit
Cyprus Police Headquarters
Athalassa
1478 Nicosia
Telephone: +357-22-808080
E-mail: fcu@police.gov.cy
Website: www.police.gov.cy  

Unit for Combating Money Laundering (MOKAS)
7 Pericleous Str.
2020 Strovolos
Telephone: +357-22-446004
E-mail: mokas@mokas.law.gov.cy
Website: http://www.law.gov.cy/law/mokas/mokas.nsf/index_en/index_en?OpenDocument  

Auditor General of the Republic
6 Deligiorgi Str.
1406 Nicosia
Telephone: +357-22-401300
E-mail: omichaelides@audit.gov.cy
Website: www.audit.gov.cy  

Anti-corruption NGO:

Cyprus Integrity Forum (CIF)
27 Michalacopoulou Street
City Business Centre
Office FF08
1075 Nicosia
Telephone: +357 22 025772, +357 22 025773
E-mail: info@cyprusintegrityforum.org
Website: http://cyprusintegrityforum.org/  

Area Administered by Turkish Cypriots

Corruption, both in the public and private sectors, constitutes a criminal offense.  The “Audit Office” controls all disbursements and receipts and has the right to inspect all accounts.  In its annual report, this office identifies specific instances of mismanagement or deviation from proper procedures and anecdotal evidence suggests corruption and patronage continue to be a factor in the economy.  For more information, visit http://sayistay.gov.ct.tr  .

10. Political and Security Environment

Republic of Cyprus

There have been no incidents of politically-motivated damage to foreign projects and or installations since 1974. U.S. companies have not been the target of violence.  There were numerous relatively peaceful protests against the ROC government following the financial crisis of March 2013 and in response to the forced conversion of deposits into equity.  Since then, protests against additional austerity measures have been fairly calm. Several of these demonstrations resulted in minor scuffles with police but most passed without incident.

Area Administered by Turkish Cypriots

There have been no incidents of politically-motivated damage to foreign projects and or installations since 1974.  U.S. companies have not been the target of violence. Protests and demonstrations, usually targeting the “government,” are commonplace.  They are generally peaceful and well-regulated; however, some demonstrations result in scuffles with police or damage to public of private buildings.

11. Labor Policies and Practices

Republic of Cyprus

The rate of unemployment in the ROC has been declining steadily, dropping from 16.1 percent in 2014 to 8.4 percent in 2018 and is expected to drop below the EU28 average in 2019.  According to Eurostat, Cyprus has a tertiary education attainment level of 36.3 percent of the total population – well above the EU28 average of 26.7 percent, and one of the highest in the EU.  Many of these graduates are from UK and U.S. colleges and universities, resulting in an abundant supply of English-speaking staff. Cyprus’ total labor force was estimated at 400,878 persons in 2018, broken down as follows:  services, 81.2 percent; industry and construction, 16.5 percent; and agriculture, 2.3 percent. More women are joining the labor force and their percentage participation has risen from 33.4 percent in 1980 to 47.6 percent today.  For information about hiring local employees, contact the Ministry of Labor and Social Insurance: www.mlsi.gov.cy/dlr  .  Applications for work permits for non-EU workers must be submitted to the Civil Registry and Migration Department by the intended employer, and should be accompanied by a work contract stamped by the Ministry of Labor and Social Insurance.  This ministry must certify that there are no available or adequately qualified Cypriots to carry out the work in question. For more info, please see: https://www.cyprusvisa.eu/cyprus-work-permit.html  .

Cypriot labor law differentiates between layoffs and firing on redundancy grounds.  In order to be eligible for redundancy pay, an employee must have worked in the same position for more than two years, and must be laid off either due to: (a) budget constraints leading the employer to abolish the position, or (b) inability on the part of the employee to keep up with technological advances.  Employees laid off by their employer are entitled to a redundancy payment depending on their length of service. Redundancy payments are equivalent to between two and four weeks of pay per year of service depending on length of service for up to 25 years, with a maximum of 75 weeks of pay or € 55,000 (USD 60,500) per employee, whichever is greater.  Redundancy payments are made out of a government fund, supported with employer and employee contributions. In addition to redundancy pay, a handful of employers, including banks and SOEs, offer severance pay to their employees, although this is not common in the private sector.

Eroding labor conditions over the past six years have enabled many employers to hire temporary workers or employ staff on personal contract to avoid hiring unionized labor, often offering less than the going rate under collective agreements.  Some employers hire employees for a year in order to benefit from a wage subsidy of up to € 1,100 (USD 1,210) per month by the Human Resources Development Authority and then dismiss them as soon as the subsidy expires.

International companies are not required by law to hire union labor.  Investors should be aware Cyprus tends to have strong unions in several sectors.  As of March 2018, the percentage of the labor force belonging to unions was unofficially estimated at approximately 50 percent, compared to the EU average of approximately 33 percent.  The unions remain vocal opponents to privatizations and general austerity measures.

As an EU country, Cyprus also has robust labor standards, safeguarding the freedom of association and the right to organize and bargain collectively.  The Department of Labor Inspection and other bodies effectively guard against forced labor, child labor, employment discrimination, and secure acceptable working conditions with respect to minimum wage, occupational safety and health, and hours of work.  There are several social safety net programs, including unemployment insurance.

For additional information on Cypriot labor legislation, please refer to the International Labor Organization (ILO) website: http://www.ilo.org/dyn/normlex/en/f?p=1000:11003:0::NO  .

Cyprus imposes a minimum wage for certain professions as follows (unchanged since March 2016):

  • Clerks/secretaries, sales assistants, paramedical, live-in maids/domestic helpers, school assistants/child-caregivers: € 870 (USD 957) per month, rising to € 924 (USD 1,016) after six months’ employment.
  • Security guards: € 4.90 (USD 5.39) per hour, rising to € 5.20 (USD 5.72) after six months’ employment.
  • Cleaning personnel: € 4.55 (USD 5.00) per hour, rising to € 4.84 (USD 5.32) after six months’ employment.  Non-EU, live-in domestic servants have a separate minimum wage, set at € 460 (USD 506) per month, plus their room and board.

For all other professions, there is no minimum wage and wages are set by the employer and employee.  Collective bargaining agreements between trade unions and employers cover most sectors of the economy.  Wages set in these agreements are typically significantly higher than the legislated minimum wage.

Under the EU single market, EU citizens benefit from the right to free movement of workers.  Employers are required to seek work visas for third-country nationals from the Civil Registry and Migration Department.  The ROC caps the number of third-country nationals a company may employ. Some companies have noted seeking visas for their third-country national staff can be lengthy and cumbersome.  Third-country nationals may visit the following sites for visa information on Cyprus: http://www.mfa.gov.cy/mfa/mfa2016.nsf/All/0E03E0EE9B9833EAC2258022003F023B?OpenDocument   and http://cyprusvisa.eu/  .

U.S. passport-holders do not need a visa for Cyprus for visits of up to 90 days: https://travel.state.gov/content/passports/en/country/cyprus.html. U.S. travelers to Cyprus should consult the website of the ROC Embassy in Washington DC: http://www.cyprusembassy.net/home/index.php?module=page&pid=42  .

Area Administered by Turkish Cypriots

According to the 2017-2018 Turkish Cypriot Competitiveness Report published by the Turkish Cypriot Chamber of Commerce the greatest obstacles to doing business was inefficient public bureaucracy, insufficiently trained workforce, and policy instability.

Reliable labor statistics are often difficult to obtain.  The “State Planning Office” (“SPO”) estimated the total employed in 2017 was 128,000.  The labor force in the area administered by Turkish Cypriots has a high per capita level of university graduates, including many from U.S. and European universities, and offers an abundant supply of white-collar workers.  The unemployment rate was 5.6 percent as of December 2017. Women accounted for approximately 30 percent of the labor force. Around 10 percent of private sector workers and more than 65 percent of “semi-public” and “public sector” workers belong to labor unions.  Workers are allowed to form and become members of unions. As of February 2019, the minimum wage was USD 500 (3,150 Turkish lira) per month.

Foreign persons are required to obtain work permits through their employer.  Foreign entities may import their key personnel from abroad and are also permitted to hire trainees and part-time workers.  A full-time work week is 40 hours for “public sector” employees.

Public sector working hours are 08:00 – 12:30, 12:30 – 13:00 lunch break, 13:00 – 16:15 (Thursdays until 17:30).

Private sector working hours are 08:00 – 17:00 (with an hour lunch break).  Private sector employees can work up to 8 hours a day. After 8 hours, employees can continue to work up to 4 hours of overtime a day.  Overtime during weekdays is paid at 110 percent of the base rate. On weekends and holidays, overtime is paid at 150 percent of the base rate.  Employees cannot work on Sundays unless there is an emergency, or an approval by labor authorities.

Workers are able to exercise their right to bargain collectively, mainly in the public sector.  “Public sector” and “semi-public sector” employees benefit from collective bargaining agreements.  The “law” provides for collective bargaining.

According to authorities, the majority of foreign workers are from Turkey and worked in the service (hotel, restaurant, catering) and construction sectors.

12. OPIC and Other Investment Insurance Programs

Republic of Cyprus

The Overseas Private Investment Corporation (OPIC) is not active in Cyprus, but OPIC finance and insurance programs are open and may be useful when bidding on build, operate, and transfer (BOT) contracts in the government-controlled areas: https://www.opic.gov/doing-business-us/OPIC-policies/where-we-operate  .

Likewise, U.S. exporters should avail themselves of Export-Import Bank financing whenever possible.  Please see: http://www.exim.gov/  .

The ROC is a member of the Multilateral Investment Guarantee Agency (MIGA) and of the multilateral Convention on the Settlement of Investment Disputes between States.  A full list of ROC multilateral agreements currently in effect is available from the ROC Office of the Law Commissioner website: http://www.olc.gov.cy/olc/olc.nsf/dmlpartii_en/dmlpartii_en?OpenDocument  .

Area Administered by Turkish Cypriots: See http://www.investinnorthcyprus.org/  .

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

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

* Source for Host Country Data: Central Bank of Cyprus


Table 3: Sources and Destination of FDI

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


Table 4: Sources of Portfolio Investment

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

Czech Republic

Executive Summary

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

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

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

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

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


Table 1:  Key Metrics and Rankings

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

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

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

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

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

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

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

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

Other Investment Policy Reviews

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

Business Facilitation

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

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

Outward Investment

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

2. Bilateral Investment Agreements and Taxation Treaties

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

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

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

4. Industrial Policies

The Czech Republic offers incentives to foreign and domestic firms that invest in the manufacturing sector, technology and research and development centers (R&D), and business support centers.  Incentives are funded from the Czech Republic’s national budget as well as from European Union Structural Funds.  The government provides investment incentives in the form of corporate income tax relief for 10 years, cash grants for job creation up to USD 13,000 per job, cash grants for training up to 50 percent of training costs, and cash grants for the purchase of fixed assets up to 10 percent of eligible costs. In 2019, an amendment to the legislation on investment incentives (Act No. 72/2000 Coll.) will likely go into effect.  The amendment will shift incentives from support for all types of investment towards support for investments that require higher-level, technical and R&D support.

The government does not have a common practice of issuing guarantees or jointly financing foreign direct investment projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Both Czech and EU laws permit foreign investors involved in joint ventures to take advantage of commercial or industrial customs-free zones into which goods may be imported and later exported without depositing customs duty.  Free trade zone treatment means duties need to be paid only in the event that the goods brought into the free trade zone are introduced into the local economy. Since the Czech Republic became part of the single customs territory of the European Community and now offers various exemptions on customs tariffs, the original tariff-driven use of these free trade zones has declined.  While there were some instances of abuse of customs-free zones for tax evasion purposes, new Customs Act No. 242/2016 Coll. now precludes this practice by repealing a clause on exemption from value added taxation in customs-free zones.

Performance and Data Localization Requirements

The Czech Republic abides by EU law governing data localization and performance.  That being said, within the EU, the Czech Republic is highly critical of data localization policies.  On December 2, 2016, it published a joint statement alongside 13 other countries stressing the importance of the free flow of data within Europe.

The host government does not mandate local employment.  There are no government-imposed conditions on permission to invest.  The host government does not follow “forced localization.”

The visa process for non-EU foreign investors and their employees is time consuming and slow, but the requirements are the same for domestic, EU, and non-EU companies.  Worker mobility is currently a difficult issue for all companies operating in the Czech Republic due to the extremely low unemployment rate.

5. Protection of Property Rights

Real estate (land and buildings) located in the Czech Republic must be registered in the Cadastral Register under the Cadastral Office.  The Cadastral Register contains information on plots of land and buildings, housing units and non-residential premises, liens, and other information and is publicly available online in Czech only at:  https://nahlizenidokn.cuzk.cz/  .  Transfer of ownership title to real estate (e.g., sale and purchase agreement) is effective from the date of execution of a written agreement and registration of the transfer of the ownership title in the Cadastral Register.  The Czech Republic ranked 33rd for ease of registering property in the 2019 World Bank’s Doing Business Index.

There is a negligible proportion of land that does not have clear title.  If property legally purchased is unoccupied, property ownership does not revert to squatters.

Intellectual Property Rights

The Czech Republic is a signatory to the Bern, Paris, and Universal Copyright Conventions.  In 2001, the government ratified the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Treaty on Performances and Phonograms.  Domestic legislation protects all intellectual property rights, including patents, copyrights, trademarks, industrial designs, and utility models. Amendments to the trademark law and the copyright law have brought Czech law into compliance with relevant EU directives and WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS) requirements.  The Customs Administration of the Czech Republic and the Czech Commercial Inspection have legal authority to seize counterfeit goods. The Criminal Code, which came into effect January 1, 2010, increased maximum penalties for trademark, industrial rights, and copyright violations from two to eight years. Information on seizures of counterfeit goods and cases of IPR infringement are tracked by the Customs Administration.  Information is available in Czech at https://www.celnisprava.cz/cz/statistiky/Stranky/dusevni-vlastnictvi.aspx  .

IPR violations at markets on the borders of Germany and Austria were once an issue of great concern, but since 2008 Czech authorities have made substantial efforts against physical markets and have adopted an acceptable legal framework for IPR protection.  In recognition of this fact, USTR removed the Czech Republic from the Special 301 Watch List in 2011. While online piracy is a growing concern, the legal framework for IPR protection has been tested and proven successful in punishing infringers. The Czech Republic is not listed in the Notorious Markets Report.

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

6. Financial Sector

Capital Markets and Portfolio Investment

The Czech Republic is open to portfolio investment.  The Prague Stock Exchange (PSE) is small, with only 16 listed companies.  The overall trade volume of stocks decreased from CZK 168.03 billion (USD 6.8 billion) in 2016 to CZK 138.78 billion (USD 5.8 billion) in 2017, with an average daily trading volume of CZK 555.13 million (USD 23.0 million).

In March 2007, the PSE created the Prague Energy Exchange (PXE) to trade electricity in the Czech Republic and Slovakia and, later, Hungary.  PXE’s goal is to increase liquidity in the electricity market and create a standardized platform for trading energy. Following a June 2017 merger of PXE’s trading platform with German power exchange EEX, the PXE benefited from both an increased number of traders and increased trade volume.

The Czech National Bank, as the financial market supervisory authority, sets rules to safeguard the stability of the banking sector, the capital markets, the insurance industry, and the pension scheme industry, and systematically regulates, supervises and, where appropriate, issues penalties for non-compliance with these rules.

The Central Credit Register (CCR) is an information system that pools information on the credit commitments of individual entrepreneurs and legal entities, facilitating the efficient exchange of information between CCR participants.  CCR participants consist of all banks and branches of foreign banks operating in the Czech Republic, as well as other individuals included in a special law.

As an EU member country, the local market provides credits and credit instruments on market terms.  Foreign investors are able to get credit on the local market and a variety of credit instruments are available.

The Czech Republic respects IMF Article VIII.

Money and Banking System

Large domestic banks belong to European banking groups.  Most operate conservatively and concentrate almost exclusively on the domestic Czech market.  As a result, Czech banks remained relatively healthy throughout the last global financial crisis.  Results of regular banking sector stress tests, as conducted by the Czech National Bank, repeatedly confirm the outstanding state of the Czech banking sector which is deemed resistant to potential shocks.  The stress test conditions developed by the Czech National Bank present substantially stricter criteria than those established by the European Central Bank (ECB). Results of the most recent stress test conducted by the Czech National Bank are available at https://www.cnb.cz/en/financial_stability/stress_testing/  .  As of February 28, 2019, the total assets of commercial banks stood at CZK7.8 billion (approximately USD 342 billion), according to the Czech National Bank.  Foreign investors have access to bank credit on the local market, and credit is generally allocated on market terms. Domestic household borrowing in foreign currencies is negligible.

The Czech National Bank has 10 correspondent banking relationships.  The Czech Republic has not lost any correspondent banking relationships in the past three years and there are no relationships in jeopardy.

The Czech National Bank does not determine crypto currencies to be standard currency units and, therefore, does not regulate them.  An amendment to the Anti-Money Laundering Act No. 253/2008 Col., effective from January 2017, expands the list of entities that are likely to be confronted with money laundering cases as a result of access to virtual currencies, such as currency platforms and wallet providers, and subjects them to additional reporting requirements.

Foreign Exchange and Remittances

Foreign Exchange Policies

The CZK is fully convertible.  As of April 2017, the Czech National Bank no longer pegs the CZK to the EUR and the CZK floats freely.  The Czech National Bank supervises the foreign exchange market and its compliance with foreign exchange regulations.  The law permits conversion into any currency.

Imports or exports equal to or exceeding EUR10,000 (~USD 11,200) in cash, travelers’ checks, money orders, securities, other investment tools or commodities of high value (such as precious metals or stones) must be declared at the border.

Remittance Policies

All international transfers of investment-related profits and royalties can be carried out freely.  The U.S.-Czech Bilateral Investment Treaty guarantees repatriation of earnings from U.S. investments in the Czech Republic.  However, a 15 percent withholding tax is charged on repatriation of profits from the Czech Republic. This tax is reduced under the terms of applicable double taxation treaties.  There are no administrative obstacles for removing capital. The average delay for remitting investment returns meets the international standard of three working days.

Sovereign Wealth Funds

The Czech government does not operate a sovereign wealth fund.

7. State-Owned Enterprises

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

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

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

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

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

Privatization Program

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

8. Responsible Business Conduct

The concept of responsible business conduct (RBC) is now widely understood and every year is implemented by more companies in the Czech Republic.  The government understands and supports the concept of corporate social responsibility (CSR).

In April 2014, the Czech government adopted a National Action Plan (NAP) for CSR.  The major goal of the NAP is to establish fundamental principles and to support and encourage CSR, highlighting that CSR should remain a voluntary policy.  In 2015, the Sustainable Development Section of the Quality Council of the Czech Republic created a National Informational CSR Portal that provides businesses, NGOs, representatives of state administration, and the public with updates related to CSR in the Czech Republic.  In 2016, the government updated the NAP to address public tenders and encourage businesses and state administration to consider the potential long-term social and environmental impacts of their procurement decisions instead of deciding strictly based on financial costs. The new NAP (2019-2023) was approved by the government in January 2019.  The new NAP aims to motivate businesses and public administration to voluntarily implement specific CSR projects and create favorable conditions for CSR projects.

Post is not aware of any controversial instances of corporate impact on human rights.  The government strictly and effectively enforces legislation in the area of human rights, labor rights, consumer protection, and environmental protection to protect individuals from adverse business impacts.  Domestic standards are generally very high and in many instances exceed EU-wide requirements. Negligence or failure to comply with this legislation results in serious consequences.

Shareholders are protected by developed legislation that clearly describes legal processes, organizational structures, administration, and management of all business components, including stakeholders.    

Companies are not required to disclose publicly information about their RBC or CSR activities.  Various local NGOs monitor and advise CSR programs, such as the Association for Corporate Social Responsibility, the Business Leaders Forum, Business for Society, and the CSR Committee of the American Chamber of Commerce.  The Association for CSR is the host entity in the Czech Republic for the UN Global Compact, a UN strategic policy initiative for businesses that are committed to aligning their operations and strategies with 10 universally accepted principles in the areas of human rights, labor, environment, and anti-corruption.

The host government encourages local as well as foreign enterprises to follow generally accepted RBC principles on grounds of adherence to the OECD Guidelines for Multinational Enterprises (MNE) and to the United Nations Guiding Principles of Business and Human Rights.  The OECD Guidelines for MNE are actively promoted by the National Contact Point (NCP) and the United Nations Principles are being reviewed at the Office of the Government, with the goal to issue a separate national action plan to secure its implementation. The NCP working group consists of representatives of the government, employer organizations (Confederation of Industry and Trade), employee organizations (Czech-Moravian Confederation of Trade Unions), and NGOs (Frank Bold).  The NCP closely and actively cooperates with other regional NCPs to share best practices, procedures, and experience.

The host government adheres to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.  The Ministry of Industry and Trade is responsible for implementation and compliance.

The Czech Republic does not have any significant oil and natural gas resources and it is dependent on purchasing these commodities from abroad.  There are no special domestic transparency measures requiring the disclosure of payments made to governments for projects related to the commercial development of oil, natural gas, or minerals.  Payments for extraction of minerals in the Czech Republic abide by the Mining Law, which requires that payments are processed for extracted minerals as well as for mined areas. International trade with oil, natural gas, and minerals is not subject to any special legislation; it follows the general rules of international trade.  The Czech Republic is not an Extractive Industries Transparency Initiative (EITI)-compliant country or an EITI candidate.

9. Corruption

Despite concerns about corruption, U.S. companies have not been significantly deterred from investing in the Czech Republic.  Current law criminalizes both payment and receipt of bribes, regardless of the perpetrator’s nationality. Prison sentences for bribery or abuse of power can be as high as 12 years for officials.  Corruption of public officials is prosecuted on the regional level to ensure that prosecutors have specialized knowledge and avoid bias; the government believes that regional prosecutors know the local environment and actors better than their colleagues on the national level.  There have been several successful cases prosecuting corruption, but cases are often lengthy and face many delays. The 2016 police reform merged the special Organized Crime Police Unit (UOOZ) and the Unit for Combating Corruption and Serious Financial Criminality (UOKFK) into a new body called the National Center for Organized Crime (NCOZ).  NCOZ is now primarily responsible for investigating high-level corruption cases. Anti-corruption laws apply equally to Czech and foreign investors. Criminal procedure law allows for the seizure of criminal proceeds paid or transferred to family members of corrupt officials, although their prosecutions depend on evidence.

Czech law obliges legislators, members of the cabinet, and other selected public officials to declare their assets annually.  The public can view the declarations with limited content on a website, but access to more details remains complicated because it requires a password issued by the Justice Ministry that is only valid for 30 days.

In addition to the financial disclosure law, the Bohuslav Sobotka government (2014-2017) was successful in passing an amendment to the law on public procurement, a law on the register of public tenders, and a law on transparent financing of political parties.  The government failed to enact a debated bill on the public prosecution service that contained measures to ensure stronger prosecutor independence. The amended law on public procurement seeks to counter conflict-of-interest in awarding contracts or government procurement.

The government ratified the OECD Anti-Bribery Convention in January 2000 and the UN Convention against Corruption in January 2014.  According to the 2017 OECD Phase 4 Evaluation Report, the Czech Republic demonstrates its commitment to improvement in the implementation of the Convention; however, it must take significant steps to enforce its foreign bribery laws and its efforts to detect, investigate, and prosecute foreign bribes.  The report calls for better protection of whistleblowers and for better implementation of the criminal liability of legal entities law that has been amended six times since it came into force in 2012. Based on the report, no legal person has been prosecuted for the bribery of foreign public officials.

In October 2016, the government passed a new public procurement law that introduces new tools for evaluation of tenders that takes into account not only the price, but also the quality of the offer.  The law also requires every contracting authority to post the winning contract on its public profile within 15 working days after the contract has been signed. Furthermore, it increases the threshold for the simplified procedure of construction tenders from CZK10 to CZK50 million (USD 2.5 million), which many NGOs criticized for decreasing transparency because many construction tenders fall under CZK50 million.  The law requires more than one bidder for all procurements and requires bidders to disclose more of their ownership structure in the bidding process, but it also contains some exceptions to those obligations. American businesses have expressed some concerns about such frequent changes in competition policies as obstacles to investment.

The government encourages companies to establish internal codes of conduct that, among other things, prohibit bribery of public officials.  Many companies have adopted such codes but it is not an obligatory government requirement.

An amendment to the Law on the Central Registry of Contracts was enacted in December 2015 and took effect July 1, 2016.  The amendment requires all national, regional, and local authorities and companies to make public all newly concluded contracts valued at CZK50,000 (USD 2,400) or more.  As of July 1, 2017 contracts not posted publicly in the Registry within 30 days will not be acknowledged as effective. The Registry of Contracts has its own government web page in Czech only at:  http://smlouvy.gov.cz  .

Several NGOs such as Oziveni, Transparency International, and Anticorruption Endowment receive corruption reports online.  In 2015, Oziveni introduced a new software GlobalLeaks that enables absolute anonymity to those who decide to report corruption.  While there is not a specific law to protect NGOs involved in investigating corruption, NGO activities are protected under the Charter of Fundamental Rights and Freedom that protects civil society and free speech.

Resources to Report Corruption

Contact at government agency responsible for combating corruption:

Conflict of Interest and Anti-Corruption Department
Anti-Corruption Unit
Ministry of Justice of the Czech Republic
Vyšehradská 16
12800 Prague 2
http://www.justice.cz 
+420 221 997 595
Email: korupce@msp.justice.cz

Contact at “watchdog” organizations:

David Ondracka, Director
Transparency International Czech Republic
Sokolovska 260/143
+420-224 240 895-7
Email: ondracka@transparency.cz
http://www.transparency.cz 

Oziveni
Muchova 13, 160 00 Praha 6
tel: +420 257 531 983
Email: oziveni@oziveni.cz
http://www.oziveni.cz 

Anticorruption Endowment
Nadacni Fond Proti Korupci
Revoluční 8, building A, 5th floor, 110 00 Praha 1
+420 226 209 047
Email: info@nfpk.cz
http://www.nfpk.cz 

10. Political and Security Environment

The risk of political violence in the Czech Republic is extremely low.  Two historic political changes – the Velvet Revolution, which ended the communist era in 1989, and the dissolution of Czechoslovakia into the Czech Republic and Slovakia in 1993 – occurred with minimal loss of life and without significant violence.  The political institutions underpinning parliamentary democracy generally function smoothly. Elections have resulted in orderly and peaceful changes of government.

11. Labor Policies and Practices

A historically strong and well-developed machinery industry, one of the key drivers of Czech exports, requires a wide range of technically qualified staff, including the entire spectrum of professions from manual workers to engineers and designers.  The rapidly growing electronics and information technology sectors are also creating demand for highly skilled workers. Key economic growth and export-driven industries are facing the challenge of demand for highly skilled technical workers that exceeds supply.  Robotic automation and digitalization are also impacting many industries.

The wide availability in the Czech Republic of an educated, relatively low-cost labor force on the doorstep of Western Europe was a major attraction for foreign investors in the 1990s.  While the wage gap continues to narrow and the income convergence process reflects the Czech Republic’s economic growth in recent years, Czech wages still trail significantly those of neighbors like Germany and Austria.  In 2018, wage levels increased by an average of 8.1 percent, according to the Czech Statistical Office. According to Eurostat, the Czech Republic’s unemployment rate was 1.9 percent in February 2019, which is the lowest in the EU, however, unemployment rates vary significantly between regions.

Unemployment insurance and other social safety net programs exist for workers laid off for economic reasons.  Labor laws differentiate between layoffs and firing. Labor laws are generally very strict and favor the employee rather than the employer.

Given record low unemployment, employers are facing labor shortages and some companies have started to rethink investment or expansion plans out of concern they will not be able to find workers to fill new jobs.

Czech law guarantees Czech workers’ right to form and join independent unions of their choice without authorization or excessive requirements.  It permits them to conduct their activities without interference. The right to freely associate covers both citizens and foreign workers. The law also provides for collective bargaining.  It prohibits anti-union discrimination and does not recognize union activity as a valid reason for dismissal. Workers in most occupations have the legal right to strike if mediation efforts fail, and they generally exercise this right.

Strikes can be restricted or prohibited in essential service sectors such as hospitals, electricity/water supply services, air traffic control, the nuclear energy sector, and oil /natural gas sectors.  Members of the armed forces, prosecutors, and judges may not form trade unions or strike. The scope for collective bargaining is limited for civil servants, whose wages are regulated by law. Only trade unions may legally represent workers, including non-members.  Labor dispute resolutions are carried out in civil court proceedings. There were no strikes in the last year that posed an investment risk.

12. OPIC and Other Investment Insurance Programs

A bilateral agreement was signed in 1990 between the Overseas Private Investment Corporation (OPIC) and Czech Republic.  Finance programs of OPIC, including investment insurance, have been available in the Czech Republic since 1991. Investors are urged to contact OPIC’s offices in Washington directly for up-to-date information regarding availability of services and eligibility.  The Czech Republic is a member of the World Bank Group’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 $215,861  2017 $215,726 http://data.worldbank.org/country/czech-republic  
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in Partner Country (M USD, stock positions) 2017 $1,284 2017 $5,406 http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Host Country’s FDI in the United States (M USD, stock positions) 2017 $85 2017 N/A https://apps.bea.gov/international/factsheet/factsheet.cfm?Area=364  
Total Inbound Stock of FDI as % host GDP 2017 65.8% 2017 78.3% https://data.oecd.org/fdi/fdi-stocks.htm  

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

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


Table 3:  Sources and Destination of FDI

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

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

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


Table 4:  Sources of Portfolio Investment

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

States

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

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

Denmark

Executive Summary

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

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

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

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

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

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

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

Table 1: Key Metrics and Rankings

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

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

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

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

Ownership restrictions are applied in the following sectors:

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

Other Investment Policy Reviews

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

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

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

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

Business Facilitation

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

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

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

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

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

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

Outward Investment

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

2. Bilateral Investment Agreements and Taxation Treaties

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

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

4. Industrial Policies

Investment Incentives

Performance incentives are available both to foreign and domestic investors. For instance, foreign and domestic investors in designated regional development areas may take advantage of certain grants and access to preferential financing. Investments in Greenland may be eligible for incentives as well. Foreign subsidiaries located in Denmark can participate in government-financed or subsidized research programs on a national-treatment basis.

Foreign Trade Zones/Free Ports/Trade Facilitation

The only free port in Denmark is the Copenhagen Free Port, operated by the Port of Copenhagen. The Port of Copenhagen and the Port of Malmo (Sweden) merged their commercial operations in 2001, including the free port activities, in a joint company named CMP. CMP is one of the largest port and terminal operators in the Nordic Region and one of the largest Northern European cruise-ship ports; it occupies a key position in the Baltic Sea Region for the distribution of cars and transit of oil. The facilities in the free port are mostly used for tax-free warehousing of imported goods, for exports, and for in-transit trade. Tax and duties are not payable until cargo leaves the Free Port. The processing of cargo and the preparation and finishing of imported automobiles for sale can freely be set up in the Free Port. Manufacturing operations can be established with permission of the customs authorities, which is granted if special reasons exist for having the facility in the Free Port area. The Copenhagen Free Port welcomes foreign companies establishing warehouse and storage facilities.

Performance and Data Localization Requirements

Performance requirements are applied only in connection with investment in hydrocarbon exploration, where concession terms normally require a fixed work program, including seismic surveys and in some cases exploratory drilling, consistent with applicable EU directives. Performance requirements are mostly designed to protect the environment, mainly through encouraging reduced use of energy and water. Several environmental and energy requirements are systematically imposed on households as well as businesses in Denmark, both foreign and domestic. For instance, Denmark was the first of the EU countries, in January 1993, to introduce a carbon dioxide (CO2) tax on business and industry. This includes certain reimbursement schemes and subsidy measures to reduce the costs for businesses, thereby safeguarding competitiveness.

Performance requirements are governed by Danish legislation and EU regulations. Potential violations of the rules governing this area are punishable by fines or imprisonment.

Performance requirements are applied uniformly to domestic and foreign investors.

The Danish government does not follow “forced localization” policies, nor does it require foreign IT providers to turn over source code and/or provide access to surveillance. The Danish Data Protection Agency, a government agency, the Ministry of Justice and the Ministry for Culture are the entities involved with data storage.

5. Protection of Property Rights

Real Property

Property rights in Denmark are well protected by law and in practice. Real estate is chiefly financed through the well-established Danish mortgage bond credit system, the security of which compares to that of government bonds. To comply with the covered bond definition in the EU Capital Requirements Directive (CRD), the Danish mortgage banking regulation was amended effective July 1, 2007. With the amended Danish mortgage banking regulation, commercial banks now have the same opportunities as mortgage banks and ship-financing institutions to issue covered bonds. Only issuers that have been granted a license from the Danish Financial Supervisory Authority (FSA) are able to issue Danish covered bonds.

Secured interests in property are recognized and enforced in Denmark. All mortgage credits in real estate are recorded in local public registers of mortgages. Except for interests in cars and commercial ships, which are also publicly recorded, other property interests are generally unrecorded. The local public registers are a reliable system of recording security interests. Denmark is ranked 11th in the World Bank’s Doing Business Report for its ease of “registering property.”

Intellectual Property Rights

Intellectual property in Denmark is well protected. Denmark adheres to key international conventions and treaties concerning protection of property rights. Denmark has ratified the World Trade Organization (WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). The World Intellectual Property Organization (WIPO) internet treaties, the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT), have also been signed, ratified, and are in force.

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

A list of attorneys in Denmark known to accept foreign clients can be found at https://go.usa.gov/xmkME  . This list of attorneys and law firms is provided by the American Embassy as a convenience to U.S. citizens. It is not intended to be a comprehensive list of attorneys in Denmark, and the absence of an attorney from the list is in no way a reflection on competence. A complete list of attorneys in Denmark, Greenland and the Faeroe Islands may be found at the Danish Bar Association web site: www.advokatnoeglen.dk.

6. Financial Sector

Capital Markets and Portfolio Investment

Denmark has fully liberalized foreign exchange flows, including those for direct and portfolio investment purposes. Credit is allocated on market terms and freely available. Denmark adheres to its IMF Article VIII obligations. The Danish banking system is under the regulatory oversight of the Financial Supervisory Authority. Differentiated voting rights – A and B stocks – are used to some extent, and several Danish companies are controlled by foundations, which can restrict potential hostile takeovers, including foreign takeovers.

The Danish stock market functions efficiently. In 2005, the Copenhagen Stock Exchange became part of the integrated Nordic and Baltic market place, OMX Exchanges, which is headquartered in Stockholm. Besides Stockholm and Copenhagen, OMX also includes the stock exchanges in Helsinki, Tallinn, Riga and Vilnius. In order to increase the access to capital for primarily small companies, the OMX in December 2005 opened a Nordic alternative marketplace – “First North” – in Denmark. In February 2008, the exchanges were acquired by the NASDAQ-OMX Group. In the World Economic Forum 2018 report, Denmark ranks 12th out of 140 on the metric “Financial System”

The Danish stock market is divided into four different branches/indexes. The C25 index contains the 25 most valuable companies in Denmark. Other large companies with a market value exceeding USD 1.1 billion (EUR 1 billion) are in the group of “Large Cap,” companies with a market value between USD 170 million (EU 150 million) and USD 1.1 billion belong to the “Mid Cap” segment, while companies with a market value smaller than USD 170 million belong to “Small Cap” group.

Money and Banking System

The major Danish banks are rated by international agencies, and their creditworthiness is rated as high by international standards. The European Central Bank and the Danish National Bank reported that Denmark’s major banks have passed stress tests by considerable margins.

Denmark’s banking sector is relatively large; based on the ratio of consolidated banking assets to GDP, the sector is three times bigger than the national economy. Domestic banks in Denmark own approximately 87 percent of the industry’s total assets, while foreign banks hold only 13 percent. The assets of the three largest Danish banks – Danske Bank, Nordea Bank Danmark, and Jyske Bank – constitute approximately 75 percent of the total assets in the Danish banking sector.

Denmark’s biggest systemically important bank, Dansk Bank, with assets that are roughly 1 1/2 times Denmark’s total GDP, is under criminal investigation in several jurisdictions amid accusations an Estonian branch became a European hub for money launderers from Russia. The bank has admitted that a significant part of about EUR 200 billion (USD 230 billion) that flowed through the non-resident portfolio of its tiny Estonian branch between 2007 and 2015 could have illicit origins.  The scandal has led to significant tightening of financial regulation, including increasing penalties by up to 700 percent and increased funding for the Financial Supervisory Authority.

The primary goal of the Central Bank (Nationalbanken) is to keep the peg of the Danish currency towards the Euro – with allowed fluctuations of 2.25 percent. It also functions as the general lender to Danish commercial banks and controls the money supply in the economy.

As occurred in many countries, Danish banks experienced significant turbulence in 2008 – 2009. The Danish Parliament subsequently passed a series of measures to establish a “safety net” program, provide government lending to financial institutions in need of capital to uphold their solvency requirements, and ensure the orderly winding down of failed banks.  The Parliament passed an additional measure, the fourth Bank Package, in August 2011, which sought to identify systemically important financial institutions, ensure the liquidity of banks which assume control of a troubled bank, support banks acquiring troubled banks by allowing them to write off obligations of the troubled bank to the government, and change the funding mechanism for the sector-funded guarantee fund to a premiums-based, pay-as-you-go system. According to the Danish Government, Bank Package 4 provides mechanisms for a sector solution to troubled banks without senior debt holder losses, but does not supersede earlier legislation. As such, senior debt holder losses are still a possibility in the event of a bank failure.

On October 10, 2013, the Danish Minister for Business and Growth concluded a political agreement with broad political support which, based on the most recent financial statements, identified seven financial institutions as “systemically important”: Danske Bank, Nykredit, Nordea Bank Danmark, Jyske Bank, Sydbank and DLR Kredit. These were identified based on three quantitative measures: 1) a balance sheet to GDP ratio above 6.5 percent; 2) market share of lending in Denmark above 5 percent; or 3) market share of deposits in Denmark above 5 percent, which will be lowered to 3 percent during 2018. If an institution is above the requirement of any one of the three measures, it will be considered systemically important and must adhere to the stricter requirements on capitalization, liquidity and resolution. The Faroese SIFI are P/F BankNordik, Betri Banki P/F and Norðoya Sparikassi, while Grønlandsbanken is the only SIFI in Greenland.

Experts expect a revision of the Danish system of troubled financial institution resolution mechanisms in connection with a decision to join the EU Banking Union. The national payment system, “Nets” was sold to a consortium consisting of Advent International Corp., Bain Capital LLC, and Danish pension fund ATP in March 2014 for DKK 17 billion (USD 2.58 billion). Nets went public with an IPO late 2016.

Foreign Exchange and Remittances

Foreign Exchange

Exchange rate conversions throughout this document are based on the 2018 average exchange rate where Danish Kroner (DKK) 6.3174 = 1 USD (USD )

There are no restrictions on converting or transferring funds associated with an investment into or out of Denmark. Policies in place are intended to facilitate the free flow of capital and to support the flow of resources in the product and services markets. Foreign investors can obtain credit in the local market at normal market terms, and a wide range of credit instruments is available.

Denmark has not adopted the Euro currency. The country meets the EU’s economic convergence criteria for membership and can join if it wishes to do so. Denmark conducts a fixed exchange rate policy with the Danish Krone linked closely to the Euro within the framework of ERM II. The Danish Krone (DKK; plural: Kroner, in English, “the Crown”) has a fluctuation band of +/- 2.25 percent of the central rate of DKK 746.038 per 100 Euro. The Danish Government supports inclusion in a European Banking Union, as long as it can be harmonized with the Danish Euro opt-out and there is a guarantee that the Danish mortgage finance system will be allowed to continue in its present form.

The Danish political reservation concerning Euro participation can only be abolished by national referendum, and Danish voters have twice (in 1992 and 2000) voted it down. The government has stated that in principle it supports adopting the Euro, but no referendum is expected for the foreseeable future. Regular polling on this issue shows a majority of public opinion remains in favor of keeping the Krone. According to the Stability and Growth Pact, a Euro country’s debt to GDP ratio cannot exceed 60 percent and budget deficit to GDP ratio cannot exceed 3 percent. Denmark’s debt to GDP ratio was 34.1 percent by the end of 2018, down from 36.1 percent in 2017. Denmark ran a budget surplus of 0.5 percent in 2018 and of 1.4 percent in 2017, well within Stability & Growth Pact parameters.

Remittance Policies

Sovereign Wealth Funds

Denmark maintains no sovereign wealth funds.

7. State-Owned Enterprises

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

Privatization Program

Denmark has no current plans to privatize its SOEs.

8. Responsible Business Conduct

As an OECD member, Denmark promotes, through the Danish Business Authority, the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. Denmark’s National Contact Point can be reached at: http://mneguidelines.oecd.org/ncps/denmark.htm  .

The Danish Business Authority has published a National Action Plan to advance Corporate Social Responsibility (CSR) and Responsible Business Conduct (RBC) in Denmark; the most recent plan covers the 2012 – 2015 period and contains 42 initiatives focusing on business-driven CSR. A global survey by the London Business School and Harvard Business School concluded that corporate management is considered the most trustworthy in Denmark, Finland and Singapore. All major companies in Denmark have a public CSR strategy.  The government hosts www.csrgov.dk  , a website “to promoting corporate social responsibility (CSR) through development and dissemination of new knowledge, guidelines and tools for companies.”

9. Corruption

Denmark is the least corrupt country in the world according to the 2018 Corruption Perceptions Index by Transparency International, which has local representation in Denmark. The Ministry of Justice is responsible for combating corruption, which is covered under the Danish Penal Code. Penalties for violations range from fines to imprisonment of up to four years for a private individual’s involvement and up to six years for a public employee’s involvement. Since 1998, Danish businesses cannot claim a tax deduction for the cost of bribes paid to officials abroad.

Denmark is a signatory to the OECD Convention on Combating Bribery, the UN Anticorruption Convention, and a participating member of the OECD Working Group on Bribery. In the Working Group’s 2014 Phase 3 report on Denmark, the government was urged to be more proactive in its investigations and to prosecute foreign bribery allegations.

Resources to Report Corruption

Resources to which Corruption may be reported:

The Danish State Prosecutor for Serious Economic and International Crime,
Kampmannsgade 1
1604 København V.
Phone: +45 72 68 90 00
Fax: +45 45 15 01 19
Email: saoek@ankl.dk

Ministry of Foreign Affairs of Denmark’s development assistance agency DANIDA to report any knowledge of corruption within DANIDA projects or among staff or DANIDA partners.

http://um.dk/en/danida-en/about-danida/Danida-transparency/anti-corruption/report-corruption/  

“Watchdog” organization:

Transparency International Danmark
c/o CBS
Dalgas Have 15, 2. sal, lokale 2c008
2000 Frederiksberg

The Secretariat is manned by Jasmin Frentzel Sørensen and Emma Siemens Lorenzen who can be reached at sekretariatet@transparency.dk

Contact at Embassy Copenhagen responsible for combating corruption:

Sung Choi
Political Officer
U.S. Department of State
Dag Hammarskjolds Alle 24, 2100 Copenhagen, Denmark
+45 3341 7100
CopenhagenICS@state.gov

10. Political and Security Environment

Denmark is a politically stable country. Incidents involving politically-motivated damage to projects or installations are very rare. This is reflected in the EIU’s “AAA” rating of Denmark in terms of political risk.

11. Labor Policies and Practices

The Danish labor force is generally well-educated and efficient. English language skills are good, and English is considered a natural second language among a very high proportion of Danes. The labor market is stable and flexible. U.S. companies operating in Denmark have indicated that Danish rules on the hiring and firing of employees generally enable employers to adjust the workforce quickly to changing market conditions.

The Danish labor force amounted to approximately 3.036 million persons in January 2019. Of these, 716,278 (Q2, 2018) are employed in the public sector. Denmark’s OECD-harmonized unemployment rate was 5.0 percent in February 2019, relative to the EU-28 6.5 percent and OECD 5.32 percent averages (. The unemployment rate is expected to remain stable  in the coming years due to policies intended to increase the labor supply and continued demand for labor.

The public sector in Denmark is large and accounts for about 25 percent of the employment at full-time equivalence. The labor force participation rate for women is among the highest in the world. By Q4, 2018, 76.3 percent of working-age women participated in the labor force and the employment rate was 66.6 percent 72.6 percent. The male labor force participation rate and employment rate were 82.6 percent and 78.4 percent, respectively

The Danish labor force is highly organized, with approximately 75 percent belonging to a union. Labor disputes and strikes occur only sporadically. As a general rule, private sector labor/ management relations are excellent, based on dialogue and consensus rather than confrontation. Working conditions are laid down in a complex system of legislation and organizational agreements, where most aspects of wage and working conditions are determined through collective bargaining rather than legislation.

The contractual workweek for most wage earners is 37 and 1/2 hours. By law, employees are entitled to five weeks of paid annual leave. However, the majority of the labor force has the right to six weeks of paid annual leave, gained through other labor market agreements.

Denmark has well-functioning unemployment insurance and sick-pay schemes, self-financed or financed by the state. Maternity leave in Denmark is 52 weeks, 18 of which are reserved for the mother and two for the father, while the remainder may be divided between the parents as they see fit. Employers are obliged to pay salary for at least 14 weeks, while the government supports the remainder of the leave.  Forthcoming EU legislation will reserve 8 of the weeks’ leave to fathers. The legislation is expected to be enacted in member states before 2022.

Danish wages are high by international standards and have prompted the use of capital-intensive technologies in many sectors. Some investors report that the high average wage level is detrimental to Danish competitiveness. Although high wages and generous benefits including time off reduce competitiveness, high productivity and low direct costs to employers can result in per employee costs that are lower than in other industrialized countries. Nominal wages increased by 2.6 percent from Q4 2017 to Q4 2017, while inflation was 0.7 percent in 2018, down from 1.1 percent in 2017 enhancing real wage increases. Nominal wages are forecast to increase by approximately 3.5 percent annually towards 2022, which will allow for substantial real wage increases with continued subdued inflation.

Generally, personal income tax rates in Denmark are among the highest in the world. However, foreign employees making more than an amount specified annually by the Danish Immigration Service and certain researchers may choose to be subject to a 27 percent income tax rate, plus a labor market contribution amounting to 32.84 percent income tax in the first seven years of working in Denmark. Certain conditions must be fulfilled for key employees to be eligible for the 27 percent tax scheme: for example, since January 1, 2019, wages had to total at least DKK 66,600 (USD 10,550) per month before the deduction of labor market contributions and after Danish labor market supplementary pension contributions. There are also limits based on an individual’s previous work history in the Danish labor market. Compared with the general Danish progressive income tax system, this is an attractive incentive. Further information can be obtained from Danish embassies or from the Danish Immigration Service (www.nyidanmark.dk  ).

Danish work permits are not required for citizens of EU countries. U.S. companies have reported that in general, work permits for foreign managerial staff may be readily obtained. However, permits for non-managerial workers from countries outside the EU and the Nordic countries are granted only if substantial professional or labor-related conditions warrant. Special rules, detailed by the Danish Immigration Service in its “Positive List Scheme” apply to certain professional fields experiencing a shortage of qualified manpower. The list is updated twice annually. Foreigners who have been hired in the designated fields will be immediately eligible for residence and work permits. The minimum educational level required for a position on the Positive List is a Professional Bachelor’s degree, e.g. pedagogue. In some cases, a Danish authorization must be obtained. This is explicitly stated on the Positive List. (E.g.; non-Danish trained doctors must be authorized by the Danish Patient Safety Authority.) Professions covered by the Positive List Scheme included engineers, scientists, doctors, nurses, IT specialists, marine biologists, lawyers, accountants and a wide range of other Masters or Bachelors degree positions. As of 2019, the Pay Limit Scheme extends to positions with an annual pay of no less than DKK 426,985 (approximately USD 67,589), regardless of the field or specific nature of the job. Persons who have been offered a highly paid job have particularly easy access to the Danish labor market through the Pay Limit Scheme. The length of work and residence permits granted under the Pay Limit Scheme depends on the length of the employment contract in Denmark. For permanent employment contracts, work permits are granted for an initial period of 4 years. After this period the permit can be extended if the same job is held. There are several other schemes meant to make it easier for certified companies to bring employees with special skills or qualifications to Denmark. These schemes vary in duration and requirements.

Danish immigration law also allows issuance of residency permits of up to 18 months duration based on an individual evaluation, using a point system based on education, language skills and adaptability.

Denmark has ratified all eight ILO Core Conventions and been an ILO member since 1919.

12. OPIC and Other Investment Insurance Programs

OPIC programs are not applicable to U.S. investments in Denmark, but may be used by at least 95 percent U.S.-owned subsidiaries in Denmark to support their investments in qualifying countries.

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

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

[Select country, scroll down to “FDI Stock”- “Inward”, scan rightward for most recent  year’s “as percentage of gross domestic product”]

* Source for Host Country Data:
http://www.dst.dk/en/Statistik/emner/nationalregnskab-og-offentlige-finanser/aarligt-nationalregnskab   (or www.statbank.dk  ).


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $151,800 100% Total Outward $235,040 100%
Sweden $25,233 17% UK $29,929 13%
Netherlands $22,270 15% Sweden $29,900 13%
France $17,636 12% Germany $26,227 11%
Luxembourg $15,390 10% Switzerland $21,232 9%
United Kingdom $13,446 9% United States $16,183 7%
“0” reflects amounts rounded to +/- USD 500,000.

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


Table 4: Sources of Portfolio Investment

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

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

Dominica

Executive Summary

The Commonwealth of Dominica (Dominica) is a member of the Organization of Eastern Caribbean States (OECS) and the Eastern Caribbean Currency Union (ECCU).  Dominica had an estimated gross domestic product (GDP) of USD 411.7 million in 2018, with forecast growth of 2.02 percent for 2019, according to Eastern Caribbean Central Bank (ECCB).  Dominica continues to recover from the devastation caused by the passage of Hurricane Maria in 2017. It is estimated that the losses from Hurricane Maria amounted to USD 1.37 billion or 226 per cent of GDP.  The government continues to be focused on reconstruction efforts, with support from the international community. The government is seeking to stimulate sustainable and climate-resilient economic growth through a revised macroeconomic framework that includes strengthening the nation’s fiscal framework.  The government remains committed to creating a vibrant business climate to attract more foreign investment.

In the World Bank’s 2019 Doing Business Report, Dominica ranks 103rd out of 190 countries.  The report noted minimal changes from the 2018 report, but some improvement in the ease of starting a business and resolving insolvency.

Dominica remains an emerging market in the Eastern Caribbean, with investment opportunities mainly within the services sector, particularly eco-tourism, information and communication technologies, and education.  Other opportunities exist in alternative energy, including geothermal energy, and capital works due to reconstruction and new tourism projects.

Recently, the government instituted a number of investment incentives for businesses that would consider being based in Dominica, encouraging both domestic and foreign private investment. Foreign investors in Dominica can repatriate all profits and dividends and can import capital.

Dominica bases its legal system on British common law.  Dominica does not have a bilateral investment treaty with the United States but has bilateral investment treaties with the UK and Germany.

In June 2018, the government of Dominica signed an Intergovernmental Agreement to implement the United States’ Foreign Account Tax Compliance Act (FATCA), making it mandatory for banks in Dominica to report the banking information of U.S. citizens.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 45 of 175 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 103 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 N/A https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2018 N/A http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2018 USD 6,590 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The government of Dominica strongly encourages foreign direct investment (FDI), particularly in industries that create jobs, earn foreign currency, and have a positive impact on local citizens.

Through the Invest Dominica Authority (IDA), the government instituted a number of investment incentives for businesses considering the possibility of locating in Dominica.  Government policies provide liberal tax holidays, duty-free import of equipment and materials, exemption from value added tax on some capital investments, and withholding tax exemptions on dividends, interest payments, and some external payments and income.

The government has prioritized investment in certain sectors, such as hotel accommodation, including eco-lodges and boutique hotels, nature and adventure tourism services, marina and yachting sector development, fine dining restaurants, information and technology services, particularly business processing operations.  Other sectors include film, music, and video production, agro-processing, manufacturing, bulk water export and bottled water operations, medical and nursing schools, health and wellness tourism, geothermal and biomass industries, biodiversity, aquaculture, and English language training services. The government has signaled that it is also willing to consider additional sectors.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are no limits on foreign control in Dominica.  Foreign investment in Dominica is not subject to any restrictions, and foreign investors are entitled to receive the same treatment as nationals of Dominica.  Foreign investors are entitled to hold up to 100 percent of their investment. The only restriction is the requirement to obtain an Alien Landholders License for foreign investors seeking to purchase property for residential or commercial purposes.  Local enterprises generally welcome joint ventures with foreign investors in order to access technology, expertise, markets, and capital.

Other Investment Policy Reviews

The OECS, of which Dominica is a member, has not conducted a trade policy review in the last three years.

Business Facilitation

The IDA is Dominica’s main business facilitation unit.  It facilitates FDI into priority sectors and advises the government on the formation and implementation of policies and programs to attract investment in Dominica.  The IDA provides business support services and market intelligence to all investors. It offers an online tool useful for navigating laws, rules, procedures, and registration requirements for foreign investors.  It is available at http://www.investdominica.com/  .

All potential investors applying for government incentives must submit their proposals for review by the IDA to ensure the project is consistent with the national interest and provides economic benefits to the country.

The Companies and Intellectual Property Office (CIPO) maintains an e-filing portal for most of its services, including company registration on its website.  However, this only allows for the preliminary processing of applications prior to the investor physically making a payment at the Supreme Court office. Investors are advised to seek the advice of a local attorney prior to starting the process.  Further information is available at: http://www.cipo.gov.dm/   .

According to the World Bank’s Doing Business Report for 2019, Dominica ranks 69th out of 190 countries in the ease of starting a business.  It takes five procedures and about 12 days to complete the process. The general practice is to retain an attorney who prepares all the relevant incorporation documents.  A business must register with the CIPO, the Tax Authority, and the Social Services Institute.

The government of Dominica continues to support the growth of women–led businesses.  The government supports equitable treatment and support of women in the private sector through non-discriminatory processes for business registration, fiscal incentives, investment opportunities, and quality assessments.

Outward Investment

There is no restriction on domestic investors seeking to do business abroad.  Local companies in Dominica are actively encouraged to take advantage of export opportunities specifically related to the country’s membership in the OECS Economic Union and the Caribbean Community Single Market and Economy (CSME), which enhance the competitiveness of the local and regional private sectors across traditional and emerging high-potential markets.

2. Bilateral Investment Agreements and Taxation Treaties

Dominica has not signed a bilateral investment treaty with the United States.  Dominica has bilateral investment treaties with the UK and Germany. Dominica has bilateral tax treaties with the United States and the UK.  Dominica is also party to the following agreements:

Caribbean Community (CARICOM)

The Treaty of Chaguaramas established CARICOM in 1973 to promote economic integration among its fifteen member states.  Investors operating in Dominica have preferential access to the entire CARICOM market. The Revised Treaty of Chaguaramas established the CSME, which permits the free movement of goods, capital, and labor within CARICOM member states.

Organization of Eastern Caribbean States

The Revised Treaty of Basseterre established the OECS.  The OECS consists of seven full members: Antigua and Barbuda, Dominica, Grenada, Montserrat, Saint Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines, and four associate members: Anguilla, Martinique, Guadeloupe and the British Virgin Islands.  The OECS aims to promote harmonization among member states concerning foreign policy, defense and security, and economic affairs. The seven independent countries of the OECS ratified the Revised Treaty of Basseterre, establishing the OECS Economic Union in 2011.  The Economic Union established a single financial and economic space within which all factors of production, including goods, services, and people, move without hindrance.

Economic Partnership Agreement

The European Community and the CARIFORUM states signed an Economic Partnership Agreement (EPA) in 2008.  The overarching objectives of the EPA are to alleviate poverty in CARIFORUM states, to promote regional integration and economic cooperation, and to foster the gradual integration of the CARIFORUM states into the world economy by improving their trade capacity and creating an investment-conducive environment.  The EPA promotes trade-related developments in areas such as competition, intellectual property, public procurement, the environment, and protection of personal data.

Caribbean Basin Initiative

The objective of the Caribbean Basin Initiative (CBI) is to promote economic development through private sector initiatives in Central America and the Caribbean islands by expanding foreign and domestic investment in non-traditional sectors, diversifying CBI country economies, and expanding exports.  It permits duty-free entry of products manufactured or assembled in Dominica into the United States.

Caribbean/Canada Trade Agreement

The Caribbean/Canada Trade Agreement (CARIBCAN) is an economic and trade development assistance program for Commonwealth Caribbean countries in which Canada provides duty-free access to its national market for the majority of products originating in Commonwealth Caribbean countries.

4. Industrial Policies

Investment Incentives

The government of Dominica implemented a series of investment incentives codified in the Fiscal Incentives Act.  These include tax holidays for up to 20 years for approved hotel and resort development projects, duty-free concessions on the purchase of machinery and equipment, and various tax exemptions.  While there is no requirement for enterprises to purchase a fixed percentage of goods from local sources, the government encourages local sourcing. There are no requirements for participation by nationals or the government in foreign investment projects.

Under the Fiscal Incentives Act, four types of enterprise qualify for tax holidays.  The length of the tax holiday for the first three depends on the amount of value added in Dominica.  The fourth type, known as an enclave industry, must produce goods exclusively for export outside the CARICOM region.

Enterprise Value Added Maximum Tax Holiday
Group I 50 percent or more 15 years
Group II 25 percent to 50 percent 12 years
Group III 10 percent to 25 percent 10 years
Enclave Enclave 15 years

 

Companies that qualify for tax holidays are allowed to import into Dominica duty-free all equipment, machinery, spare parts, and raw materials used in production.

The Hotels Aid Act provides relief from customs duties on items brought into the country for use in construction, extension, and equipping of a hotel of not less than five bedrooms.  In addition, the Income Tax Act provides special tax relief benefits for approved hotels and villa development. A tax holiday for up to 20 years is available for approved hotel and resort developments and up to 10 years for income accrued from the rental of villas in approved villa developments.  The Cabinet must approve these developments.

The standard corporate income tax rate is 25 percent.  There is no capital gains tax. International businesses are exempt from tax.  Corporate tax does not apply to exempt companies or to enterprises that have been granted tax concession.

Dominica provides companies with a further tax concession effective at the end of the tax holiday period.  In effect, it is a rebate of a portion of the income tax paid based on export profits as a percentage of total profits.  Full exemption from import duties on parts, raw materials, and production machinery is also available.

Foreign Trade Zones/Free Ports/Trade Facilitation

There are no foreign trade zones or free ports in Dominica.

Performance and Data Localization Requirements

Dominica does not mandate local employment.  The provisions of the Labor Code outline the requirements for acquiring a work permit and prohibit anyone who is not a citizen of Dominica or the OECS to engage in employment unless they have obtained a work permit.  When the government grants work permits to senior managers because no qualified nationals are available for the post, the government may recommend a counterparty trainee who is a Dominican citizen. There are no excessively onerous visa, residency, or work permit requirements.

As a member of the WTO, Dominica is party to the Agreement to the Trade Related Investment Measures.  While there are no formal performance requirements, the government encourages investments that will create jobs, increase exports and foreign exchange earnings.  There are no requirements for participation by nationals or by the government in foreign investment projects. There is no requirement that enterprises must purchase a fixed percentage of goods or technology from local sources, but the government encourages local sourcing.  Foreign investors receive national treatment. There are no requirements for foreign information technology providers to turn over source code and/or provide access to surveillance (backdoors into hardware and software, turn over keys for encryption, etc.).

5. Protection of Property Rights

Real Property

Civil law protects physical property and mortgage claims.  There are some special license requirements for the acquisition of land, development of buildings, and expansion of existing construction, and special standards for various aspects of the tourism industry.  Individuals or corporate bodies who are not citizens and who are seeking to acquire land require an Alien Landholders License prior to the execution of transactions, depending upon the amount of land in question.  A foreign national may hold less than one acre of land for residential purposes or less than three acres for commercial purposes without obtaining an alien landholding license. If more land is required then a license must be obtained, and the applicant must pay a fee of XCD USD 6,000 (USD2,239) the Office of the Accountant-General.  Applicants must meet all the submission requirements before Cabinet can consider granting the license. Failure to apply for the license will result in a penalty of XCD USD 20,000 (USD 7,408). Upon acquiring land under Section 5 for an approved development, foreign investors must apply for development permission under the Physical Planning Act (2002) within six months of acquiring the land and must start construction of the approved development within one year of receipt of development permission.  Dominica is ranked 168th of 190 countries for ease of registering property in the World Bank Doing Business Report 2019.  It takes about 42 days to complete the five necessary procedures and the cost is about 13.3 percent of the property value.  The report describes the procedure for purchasing and registering property in Dominica.

Intellectual Property Rights

Dominica has a legislative framework supporting its commitment to the protection of intellectual property rights (IPR).  While the legal structures governing IPR are generally adequate, enforcement could be strengthened. The Attorney General is responsible for the administration of IPR laws.  The Companies & Intellectual Properties Office (CIPO) registers patents, trademarks, and service marks.

Dominica is signatory to the Paris Convention for the Protection of Industrial Property, the Patent Cooperation Treaty, and the Berne Convention for the Protection of Literary and Artistic Works.  It is also a member of the UN World Intellectual Property Organization (WIPO).

Article 66 of the Revised Treaty of Chaguaramas (2001) establishing the Caribbean Single Market and Economy (CSME) commits all 15 members to implement IPR protection and enforcement.  The CARIFORUM-EU Economic Partnership Agreement (EPA) contains the most detailed obligations regarding IPR in any trade agreement to which Dominica is a party. The EPA recognizes the protection and enforcement of IPR.  Article 139 of the EPA requires parties to “ensure an adequate and effective implementation of the international treaties dealing with intellectual property to which they are parties, and of the [World Trade Organization (WTO)] Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).”

The Comptroller of Customs of Dominica spearheads the enforcement of IPR, which includes the detention, seizure, and forfeiture of goods.  The Customs and Excise Department investigates customs offences and administers fines and penalties.

Dominica is not included in the United States Trade Representative (USTR) Special 301 Report or Notorious Markets List.

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

6. Financial Sector

Capital Markets and Portfolio Investment

Dominica is a member of the ECCU.  As such, it is a member of the Eastern Caribbean Securities Exchange (ECSE) and the Regional Government Securities Market.  The ECSE is a regional securities market established by the ECCB and licensed under the Securities Act of 2001, a uniform regional body of legislation governing the buying and selling of financial products for the eight member territories.  In 2018, the ECSE listed 135 securities, comprising 112 sovereign debt instruments, 14 equities, and nine corporate bonds. Market capitalization stood at USD 3.07 billion. Dominica is open to portfolio investment.

Dominica has accepted the obligations of Article VIII of the International Monetary Fund (IMF) Agreement, Sections 2, 3, and 4 and maintains an exchange system free of restrictions on making payments and transfers for current international transactions.  Dominica does not normally grant foreign tax credits except in the case of taxes paid in a British Commonwealth country that grants similar relief for Dominica taxes or where an applicable tax treaty provides a credit. The private sector has access to credit on the local market through loans, purchases of non-equity securities, and trade credits and other accounts receivable that establish a claim for repayment.

Money and Banking System

The eight participating governments of the ECCU have passed the Eastern Caribbean Central Bank Agreement Act.  The Act provides for the establishment of the ECCB, its management and administration, its currency, relations with financial institutions, relations with the participating governments, foreign exchange operations, external reserves, and other related matters.  Dominica is a signatory to this agreement and the ECCB controls Dominica’s currency and regulates its domestic banks.

The Banking Act is a harmonized piece of legislation across the ECCU.  The Minister of Finance usually acts in consultation with, and on the recommendation of, the ECCB with respect to those areas of responsibility within the Minister of Finance’s portfolio.

Domestic and foreign banks can establish operations in Dominica.  The Banking Act requires all commercial banks and other institutions to be licensed in order to conduct any banking business.  The ECCB regulates financial institutions. As part of ongoing supervision, licensed financial institutions are required to submit monthly, quarterly, and annual performance reports to the ECCB.  In its latest annual report, the ECCB listed the commercial banking sector in Dominica as stable. Assets of commercial banks totaled USD 876.4 million in 2018 and remained relatively consistent during the previous year.  The reserve requirement for commercial banks was six percent of deposit liabilities.

Dominica is well served by bank and non-bank financial institutions.  There are minimal alternative financial services. Some citizens still participate in informal community group lending.

The Caribbean region has witnessed a withdrawal of correspondent banking services by U.S. and European banks.  CARICOM remains committed to engaging with key stakeholders on the issue and appointed a Committee of Ministers of Finance on Correspondent Banking to monitor the issue.

In March 2019, the ECCB launched an 18-month financial technology pilot to launch a Digital Eastern Caribbean dollar (DXCD) with its partner, Barbados-based Bitt Inc.  The ECCB will work closely with Bitt to develop, deploy, and test technology focusing on data management, compliance, and transaction monitoring systems for know your customer, anti-money laundering, and combating the financing of terrorism.  The goal of the pilot is to improve the risk profile of the ECCU and mitigate against the trend of de-risking by the region’s correspondent banking partners. The pilot will also focus on developing a secure, resilient digital payment and settlement platform with embedded regional and global compliance.  The digital Eastern Caribbean currency will operate alongside physical Eastern Caribbean currency. The ECCB will issue the DXCD to licensed bank and non-bank financial institutions on a private blockchain platform.

Foreign Exchange and Remittances

Foreign Exchange

Dominica is a member of the ECCU and the ECCB. The currency of exchange is the Eastern Caribbean dollar (denoted as XCD).  As a member of the OECS, Dominica has a fully liberalized foreign exchange system. The XCD has been pegged to the United States dollar at a rate of XCD 2.70 to USD 1.00 since 1976.  As a result, the XCD does not fluctuate, creating a stable currency environment for trade and investment in Dominica.

Remittance Policies

Companies registered in Dominica have the right to repatriate all capital, royalties, dividends, and profits free of all taxes or any other charges on foreign exchange transactions.  There are no restrictions on the repatriation of dividends for totally foreign-owned firms. However, a mixed foreign-domestic company may repatriate profits to the extent of its foreign participation.

As a member of the OECS, there are no exchange controls in Dominica and the invoicing of foreign trade transactions are allowed in any currency.  Importers are not required to make prior deposits in local funds and export proceeds do not have to be surrendered to government authorities or to authorized banks.  There are no controls on transfers of funds. Dominica is a member of the Caribbean Financial Action Task Force (CFATF).

In June 2018, the government of Dominica formally signed an Intergovernmental Agreement in observance of FATCA, making it mandatory for banks in Dominica to report the banking information of U.S. citizens.

Sovereign Wealth Funds

Neither the government of Dominica, nor the ECCB, of which Dominica is a member, maintains a sovereign wealth fund.

7. State-Owned Enterprises

State-owned enterprises (SOEs) in Dominica work in partnership with ministries, or under their remit to carry out certain specific ministerial responsibilities.  There are currently 20 SOEs in Dominica operating in areas such as tourism, investment services, broadcasting and media, solid waste management, and agriculture. They are all wholly-owned government entities.  Each is headed by a board of directors which senior management reports.

Privatization Program

Dominica does not currently have a targeted privatization program.

8. Responsible Business Conduct

The private sector is involved in projects that benefit society, including in support of environmental, social, and cultural causes.  Individuals benefit from business-sponsored initiatives when local and foreign owned enterprises pursue volunteer opportunities and make monetary or in-kind donations to local causes.

The non-governmental organization (NGO) community, while comparatively small, is involved in fundraising and volunteerism in gender, health, environmental, and community projects.  The government at times partners with NGOs in activities. The government encourages philanthropy, but does not have regulations in place to mandate such activities by private companies.

9. Corruption

The law provides criminal penalties for official corruption, and the government generally implemented these laws effectively.  According to civil society sources and members of the political opposition, officials sometimes engaged in corrupt practices with impunity.  Dominica acceded to the United Nations Convention against Corruption in 2010. The country is party to the Inter-American Convention against Corruption.

The Integrity in Public Office Act, 2003 and the Integrity in Public Office (Amendment) Act 2015 require government officials to account annually for their income, assets, and gifts.  All offenses under the act, including the late filing of declarations, are criminalized. The Integrity Commission was established and functions under this Act. The Integrity Commission’s mandate and decisions can be found at: http://www.integritycommission.gov.dm/  .

The Director of Public Prosecutions is responsible for prosecuting corruption offenses, but it lacks adequate personnel and resources to handle complicated money laundering and public corruption cases.

Resources to Report Corruption

Dermot Southwell
Chairman, Integrity Commission
Cross Street, Roseau, Dominica
Tel: 1-767-266-3436
Email: integritycommission@dominica.gov.dm

10. Political and Security Environment

Dominica held parliamentary elections in December 2014.  The next general elections is constitutionally due by December 2019.  There were no reports of political violence.

11. Labor Policies and Practices

The government last raised Dominica’s minimum wage in June 2008.  It varies according to the category of worker, with the lowest minimum wage set at about USD USD 1.50 an hour and the maximum set at around USD USD 2.06 an hour.  The standard workweek is 40 hours for five or six days of work. The law provides overtime pay for work in excess of the standard workweek. Dominica has a labor force of about 32,630, with a literacy rate of 95 percent.

The local state college largely meets the country’s technical and training needs.  There is also a small pool of professionals to draw from in fields such as law, medicine, engineering, business, information technology, and accounting.  Many of the professionals in Dominica trained in the United States, Canada, the UK, or the wider Caribbean, where many of them gained work experience before returning to the country.

The labor legislation in Dominica is applicable to all employees and employers.  There are no waivers or exceptions regarding the application of labor laws and standards in Dominica.

Employers usually advertise job vacancies in local newspapers. The government recommends that the advertisement should be placed on three separate occasions to ensure transparency and equal opportunity for Dominican residents to apply.  The government does not interfere with the employer’s right to make hiring determinations.

The Labor Contracts Act stipulates that employees shall receive a contract within 14 days of engagement from his/her employer, which outlines the terms and conditions of employment.

 The labor laws clearly regulate and define layoffs and the conditions under which layoffs can occur.  Severance by redundancy is also regulated by law. People employed for three years or more qualify for severance pay.  Social Security benefits are payable only when the employee reaches retirement age.

The Industrial Relations Act provides for and regulates trade unions in both public and private sectors.  Dominican law provides for the right of workers to form and join independent unions, the right to strike, and the right of workers to bargain collectively with employers.  The government generally enforced laws governing worker rights effectively. The law prohibits anti-union discrimination by providing that employers must reinstate workers who file a successful complaint of illegal dismissal, which can cover being fired for engaging in union activities or other grounds of wrongful dismissal.

Collective bargaining is permitted in all firms (both public and private) where the employees are unionized.  A copy of the collective bargaining agreement must be filed at the Ministry of Labor. There are no sectoral collective agreements.  All unionized firms are obliged by law to negotiate terms and conditions of employment of all workers, whether or not they are members of a trade union.  Dominica ratified all of the International Labor Organization (ILO)’s eight core conventions on human rights and labor administration.

The government deemed emergency, port, electricity, telecommunications, and prison services employees, as well as the banana, coconut, and citrus fruit cultivation workers “essential,” deterring workers in these sectors from going on strike.  Nonetheless, in practice essential workers conducted strikes and did not suffer reprisals. The procedure for essential workers to strike is cumbersome, involving appropriate notice and submitting the grievance to the labor commissioner for possible mediation.  These actions are usually resolved through mediation by the Office of the Labor Commissioner, with the rest referred to the Industrial Relations Tribunal for binding arbitration.

The Industrial Relations Act also mandates the establishment of the Industrial Relations Board and the Industrial Relations Tribunals as dispute resolution mechanisms.  The Division of Labor acts as the first arbitrator with matters of investigation, mediation and conciliation. Matters are referred only to the tribunals by the Minister when conciliation fails or by request of any of the disputing parties.

Enforcement is the responsibility of the Labor Commissioner within the Ministry of Justice, Immigration and National Security.  Labor laws provide that the labor commissioner may authorize the employment of a person with disabilities at a wage lower than the minimum rate to enable that person to work.  The Employment Safety Act provides occupational health and safety regulations that are consistent with international standards. Workers have the right to remove themselves from unsafe work environments without jeopardizing their employment, and the authorities effectively enforced this right in practice.

12. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) provides financing and political risk insurance to viable private sector projects, helps U.S. businesses invest overseas, and fosters economic development in new and emerging markets.  Dominica is a qualifying country for OPIC projects. There are currently no active OPIC projects in Dominica.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $411.7 2017 $496.7 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2017 N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2017 N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP N/A N/A 2017 68.9% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

* Source for Host Country Data: Eastern Caribbean Central Bank https://www.eccb-centralbank.org/statistics/dashboard-datas/   . All ECCB GDP figures for 2018 are currently estimates.


Table 3: Sources and Destination of FDI

Data not available; Dominica does not appear in the IMF’s Coordinated Direct Investment Survey (CDIS).


Table 4: Sources of Portfolio Investment

Data not available; Dominica does not appear the IMF Coordinated Portfolio Investment Survey (CPIS).

Dominican Republic

Executive Summary

The Dominican Republic is an upper middle-income country and the second largest economy in the Caribbean.  In 2018, the Dominican GDP grew an estimated 7 percent, the highest growth rate in the Western Hemisphere. Foreign direct investment (FDI) plays a prominent role in the Dominican economy.  U.S. FDI (stock) was USD 2.1 billion in 2017, an increase from USD 1.2 billion in 2016. Total FDI flows (inward) declined nearly 30 percent in 2018, according to the Central Bank. The tourism, real estate, telecommunications, free trade zones, mining, and financing sectors are the largest FDI recipients.  Historically, the United States has been the largest investor, followed by Canada, Brazil, and Spain.

The Central America Free Trade Agreement-Dominican Republic (CAFTA-DR) increased bilateral trade between the United States and the Dominican Republic from USD 9.9 billion in 2006 to USD 14.3 billion in 2018.  Observers credit the agreement with increasing competition, improving the rule of law, and expanding access to quality products in the Dominican Republic. CAFTA-DR includes protections for foreign investors, including mechanisms for dispute resolution.

Despite a relatively stable macroeconomic situation, U.S. investors have reported to continuously face numerous systemic problems in the Dominican Republic.  Foreign investors cite a lack of clear, standardized rules by which to compete and a lack of enforcement of existing rules. Complaints include allegations of widespread corruption; requests for bribes; delays in government payments; weak intellectual property rights enforcement; bureaucratic hurdles; slow and sometimes locally biased judicial and administrative processes; and non-standard procedures in customs valuation and classification of imports.  Businesses have noted that weak land tenure laws and government expropriations without due compensation continue to be a problem. The public perceives administrative and judicial decision-making at times as inconsistent, nontransparent, and overly time-consuming. Dominican authorities have carried out some efforts aimed at improving fiscal transparency. Nevertheless, corruption and poor implementation of existing laws are widely discussed as key investor grievances.

The Dominican government in 2017 was the subject of a large corruption scandal, sparking public protests and calls for institutional change.  U.S. companies say the government’s slow response to this scandal has contributed to a culture of perceived impunity for corrupt public officials.  U.S. businesses operating in the Dominican Republic often need to take extensive measures to ensure compliance with the Foreign Corrupt Practices Act.  Many U.S. firms and investors have expressed concerns that corruption in the government, including in the judiciary, continues to constrain successful investment in the Dominican Republic.

The investment climate in the coming years will largely depend on whether the government demonstrates the political will to implement reforms necessary to promote competitiveness and transparency, rein in expanding public debt, and bring corrupt public officials to justice.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 129 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 102 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 87 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $2.1 billion http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2018 $6,630 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Dominican government promotes inward FDI and has established formal programs to attract it, including the 2017 launch of the “ProDominicana” program.  The legal framework supports foreign investment. Article 221 of the Constitution declares that foreign investment shall receive the same treatment as domestic investment. Foreign Investment Law (No. 16-95) states that unlimited foreign investment is permitted in all sectors, with a few exceptions for hazardous materials or materials linked to national security. The Dominican Republic provides tax incentives to investment in tourism, renewable energy, film production, Haiti-Dominican Republic border development, and the industrial sector.  The Dominican Republic is also a signatory of CAFTA-DR, which mandates non-discriminatory treatment, free transferability of funds, protection against expropriation, and procedures for the resolution of investment disputes.

The Export and Investment Center of the Dominican Republic (CEI-RD) offers assistance for prospective foreign investors, including assistance with business registration and identification of investment opportunities.  The National Council of Free Trade Zones for Export (CNZFE) offers assistance to foreign companies looking to invest in the free trade zones.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are no general (statutory, de facto, or otherwise) limits on foreign ownership or control.  According to Law No. 98-03 and Regulation 214-04, an interested foreign investor must file an application form at the offices of CEI-RD within 180 calendar days from the date on which the foreign investment took place. CEI-RD will then evaluate the application and issue the corresponding Certificate of Registration within 15 working days.

In order to set up a business in a free trade zone, a formal request must be made to the CNZFE, the entity responsible for issuing the operating licenses needed to a free zone company or operator.  CNZFE assesses the application and determines its feasibility. For more information on the procedure to apply for an operating license, visit the website of the CNZFE at http://www.cnzfe.gov.do  .

The Dominican Republic does not maintain a formalized investment screening and approval mechanism for inbound foreign investment.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) has not conducted an investment policy review of the Dominican Republic.  The United Nations Conference on Trade and Development (UNCTAD) published an investment policy review in 2009. The World Trade Organization (WTO) published a trade policy review in 2015.

Business Facilitation

According to the World Bank’s 2018 Doing Business report, starting a limited liability company (Sociedad de responsibilidad limitada or SRL) in the Dominican Republic is a seven-step process, which requires 16.5 days.  SRL registration steps include (1) verifying the availability of the company name with the National Office of Industrial Property (ONAPI); (2) purchasing the company name with ONAPI; (3) paying the incorporation tax with the National Internal Revenue Agency (DGII); (4) registering the company with the Chamber of Commerce and obtaining a tax identification number (RNC); (5) filing for the national taxpayer registry and applying for fiscal receipts at DGII; (6) registering local employees with the Ministry of Labor; and (7) registering employees at the Social Security Office.

The Dominican Republic has a single-window registration website for SRL registration (https://www.formalizate.gob.do/ ) that offers a one-stop shop for registration needs.  Foreign companies may use the registration website. However, this electronic method of registration is not widely used in practice and consultation with a local lawyer is advisable for company registrations.

The Ministry of Industry and Commerce (MIC) leads the Dominican Republic’s assistance and registration program for micro, small, and medium-sized enterprises (PYMES).  The PYMES program, a partnership between the MIC and the National Competitiveness Council, offers technical assistance to majority Dominican-owned micro, small, and medium companies.   According to the Law no. 187-17, micro enterprises are those with 10 employees or less, the small enterprises are defined as those with 11 to 50 employees, and medium enterprises employ 51 to 150 employees.

Outward Investment

There are no legal or government restrictions on domestic investment abroad, although outbound foreign investment is significantly lower than inbound investment.  The largest recipient of Dominican outward investment is the United States.

2. Bilateral Investment Agreements and Taxation Treaties

The Dominican Republic has Bilateral Investment Treaties (BIT) in-force with: Chile, Finland, France, Italy, Republic of Korea, Morocco, Netherlands, Panama, Spain, and Switzerland. (Note: The Dominican Republic also had a BIT with Taiwan.  Post is working to confirm whether that agreement remains in force after the Dominican Republic’s recognition of the People’s Republic of China in May 2018. End Note.). The Dominican Republic has signed BITs with Argentina, Cuba, and Haiti, however, these agreements are not in force. According to the Dominican Ministry of Industry and Commerce, free trade agreements currently in force include: CAFTA-DR; the Economic Partnership Agreement (EPA) between the European Union and CARIFORUM (an organization of Caribbean nations, including the Dominican Republic); a trade agreement between the Dominican Republic and the Central American countries of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua; a free trade agreement with CARICOM (the Caribbean Community); and a trade agreement with Panama.

An agreement for the exchange of tax information between the United States and Dominican Republic has been in effect since 1989.  In 2016, the United States and the Dominican Republic signed an agreement to improve international tax compliance and to implement the Foreign Account Tax Compliance Act (FATCA).  However, the agreement has yet to be implemented. The Dominican Republic has tax agreements in force with Canada and Spain to avoid double taxation and prevent tax evasion.

4. Industrial Policies

Investment Incentives

Foreign investors receive no special investment incentives and no other types of favored treatment, except for investments in renewable energy; in manufacturing investments located in Special Zones; and investments in tourism projects in certain locations. There are no requirements for investors to export a defined percentage of their production.

Foreign companies are not restricted in their access to foreign exchange.  There are no requirements that foreign equity be reduced over time or that technology be transferred according to defined terms.  The government imposes no conditions on foreign investors concerning location, local ownership, local content, or export requirements.

The Renewable Energy Incentives Law No. 57-07 provides some incentives to businesses developing renewable energy technologies.  Foreign investors praise the provisions of the law, but express frustration with approval and execution of potential renewable energy projects.

Special Zones for Border Development, created by Law No. 28-01, encourage development near the economically deprived Dominican Republic – Haiti border.  A range of incentives, largely in the form of tax exemptions for a maximum period of 20 years, are available to direct investments in manufacturing projects in the Zones.  These incentives include the exemption of income tax on the net taxable income of the projects, the exemption of sales tax, the exemption of import duties and tariffs and other related charges on imported equipment and machinery used exclusively in the industrial processes, as well as on imports of lubricants and fuels (except gasoline) used in the processes.

Law 158-01 on Tourism Incentives, as amended by Law 195-13, and its regulations, grants wide-ranging tax exemptions, for fifteen years, to qualifying new projects by local or international investors. The projects and businesses that qualify for these incentives are: (a) hotels and resorts; (b) facilities for conventions, fairs, festivals, shows and concerts; (c) amusement parks, ecological parks, and theme parks; (d) aquariums, restaurants, golf courses, and sports facilities; (e) port infrastructure for tourism, such as recreational ports and seaports; (f) utility infrastructure for the tourist industry such as aqueducts, treatment plants, environmental cleaning, and garbage and solid waste removal; (g) businesses engaged in the promotion of cruises with local ports of call; and (h) small and medium-sized tourism-related businesses such as shops or facilities for handicrafts, ornamental plants, tropical fish, and endemic reptiles.

For existing projects, hotels and resort-related investments that are five years or older are granted 100 percent exemptions from taxes and duties related to the acquisition of the equipment, materials and furnishings needed to renovate their premises. In addition, hotels and resort-related investments that are fifteen years or older will receive the same benefits granted to new projects if the renovation or reconstruction involves 50 percent or more of the premises.

Finally, individuals and companies get an income tax deduction for investing up to 20 percent of their annual profits in an approved tourist project. The Tourism Promotion Council (CONFOTOUR) is the government agency in charge of reviewing and approving applications by investors for these exemptions, as well as supervising and enforcing all applicable regulations. Once CONFOTOUR approves an application, the investor must start and continue work in the authorized project within a three-year period to avoid losing incentives.

The government does not currently have a practice of jointly financing foreign direct investment projects.  It has contemplated changes to the investment legal framework, such as a law on public-private partnerships, but this change has not yet been introduced.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Dominican Republic’s free trade zones (FTZs) are regulated by the Promotion of Free Zones Law (No. 8-90), which provides for 100 percent exemption from all taxes, duties, charges and fees affecting production and export activities in the zones. These incentives are for 20 years for zones located near the Dominican-Haitian border and 15 years for those located throughout the rest of the country.  This legislation is managed by the Free Trade Zone National Council (CNZFE), a joint private sector/government body with discretionary authority to extend the time limits on these incentives. Products produced in FTZs can be sold on the Dominican market, however, relevant taxes apply.

In general, firms operating in the FTZs experience report fewer bureaucratic and legal problems than do firms operating outside the zones.  Foreign currency flows from the FTZs are handled via the free foreign exchange market. Foreign and Dominican firms are afforded the same investment opportunities both by law and in practice.

In 2018, FTZs exports totaled USD USD 6.2 billion, comprising 3.3 percent of GDP.  According to CNZFE’s 2018 Statistical Report, there are 673 companies (up from 665 the previous year) operating in a total of 74 FTZs (up from 71 the previous year).  Of the companies operating in FTZs, 39.9 percent are from the United States. Other significant investments were made by companies registered in the Dominican Republic (22.4 percent), United Kingdom (8.2 percent), Canada (4.5 percent), and Germany (3.5 percent).  Companies registered in 38 other countries comprised the remaining 22.6 percent of investments. The main FTZ sectors receiving investment include: medical and pharmaceutical products (27.3 percent); tobacco and derivatives (20 percent); textiles (14.5 percent); services (7.7 percent); agroindustrial products (6 percent), footwear (4.2 percent); metals (3 percent); plastics (2.6 percent); and electronics (2.4 percent).

Exporters/investors seeking further information from the CNZFE may contact:

Consejo Nacional de Zonas Francas de Exportación
Leopoldo Navarro No. 61
Edif. San Rafael, piso no. 5
Santo Domingo, Dominican Republic
Phone: (809) 686-8077
Fax: (809) 686-8079
Website Address: http://www.cnzfe.gov.do  

Performance and Data Localization Requirements

The Dominican labor code establishes that 80 percent of the labor force of a foreign or national company, including free trade zone companies, be composed of Dominican nationals.  The management or administrative staff of a foreign company is exempt from this regulation. The Foreign Investment Law (No. 16-95) provides that contracts for licensing patents or trademarks, for the provision of technical expertise, and for leases of machinery and equipment must be registered with the Directorate of Foreign Investment of the Central Bank.

There are no requirements for foreign information technology providers to turn over source code and/or provide access (i.e. backdoors into hardware and software or turn-over keys for encryption) to surveillance.  There are no mechanisms used to enforce any rules on maintaining set amounts of data storage within the country/economy. The government has not enacted data localization policies.

5. Protection of Property Rights

Real Property

The Dominican Constitution guarantees the right to own private property and provides that the state shall promote the acquisition of property, especially titled real property.  The Constitution further provides that it is “in the public interest that land be devoted to useful purposes and that large estates be gradually eliminated.” Furthermore, the state social policy shall promote land reform and effectively integrate the rural population to the national development process by encouraging renewal of agricultural production.

Mortgages and liens exist in the Dominican Republic, and there is a National Registry of Deeds.  The government advises that investors are ultimately responsible for due diligence and recommends partnering with experienced attorneys to ensure that all documentation, ranging from title searches to surveys, have been properly verified and processed.

Under Dominican law, all land must be registered, and that which is not registered is considered state land.  Registration requires seven steps, an average of 60 days, and payment of 3.7 percent of the value of the land as a registration fee.  The landowner is required to have a survey of the land, a certificate demonstrating that property taxes are current, and a certificate from the Title Registry Office that evidences any encumbrances on the land (such as mortgages or easements) and serves as a check on the extent of land rights to be transferred.  Property ownership may revert to occupants (such as squatters) after twenty years, if they properly register the property.

Many businesses have complained that land tenure insecurity persists, fueled by government land expropriations, institutional weaknesses, lack of effective law enforcement, and local community support for land invasions and squatting.  Some companies have reported that concessions granted by the government are subsequently interfered with or not respected, and alleged political expediency or influence as a reason for such actions. Despite the requirement of land registration, some land in the Dominican Republic is not registered, and even if land rights are registered, tenure is not assured, according to some reports.  Investors have claimed that ln some parts of the country, unregistered land has been expropriated for development without notice or compensation. In some cases, however, holders of title certificates have reported to receive little or no additional security. Several companies note that long-standing titling practices, such as issuing provisional titles that are never completed or providing title to land to multiple owners without requiring individualization of parcels, have created substantial ambiguity in property rights and undermined the reliability of land records.  Some report that certain of these practices have been curtailed in the last few years, but nonetheless undermine the reliability of existing land documentation. In addition, companies have complained of the country’s struggles to control fraud in the creation and registration of land titles, including illegal operations within the government agencies responsible for issuing titles.

In the last decade, the Dominican government has implemented reform programs focused on developing institutional frameworks and strengthening government agencies and public administration.  As part of its overarching program to modernize the justice sector, the Dominican Republic Supreme Court modernized its property title registration process through a USD 10 million USD Inter-American Development Bank (IDB) loan in an effort to address deficiencies and gaps in the land administration system and strengthen land tenure security.  The project involved digitization of land records, decentralization of registries, establishment of a fund to compensate people for title errors, separation of the legal and administrative functions within the agency, and redefinition of the roles and responsibilities of judges and courts.

The Dominican government has instituted a number of reforms, including the development of a cadaster with digitized property titles and the establishment and expansion of 23 land registry offices across the country.  In 2012, the government created the State Lands Titling Commission, which, working with the Dominican Agrarian Institute, is intended to achieve the titling of around 150,000 urban and rural properties.

Intellectual Property Rights

Since 2003, the U.S. Trade Representative (USTR) has designated the Dominican Republic as a Special 301 Watch List country for serious intellectual property rights (IPR) deficiencies.  Despite strong IPR laws on the books, enforcement is reported to remain weak. In the 2019 Watch List designation, USTR cited the Dominican government’s lack of progress in addressing long-standing IPR issues such as signal piracy and the widespread availability of counterfeit products.  Weak IPR enforcement can be attributed to lack of resources and properly trained personnel; weak institutions and the absence of an inter-institutional enforcement mechanism to unite the various IPR authorities; and widespread cultural acceptance of piracy and counterfeiting.

Key IPR issues that third parties have flagged include rampant television signal broadcast piracy, insufficient enforcement actions against the manufacturers of counterfeit pharmaceuticals and other products, and weak customs enforcement against counterfeit trafficking. A 2018 Euromonitor International report noted that 30.8 percent of all alcohol consumed in the Dominican Republic was either counterfeit or smuggled, the highest rate in all of Latin America.

Customs officers have ex officio authority to seize any goods suspected as counterfeit.  Prior to destroying counterfeit goods, customs officers must notify the rights holder. During this time, customs stores the goods at the expense of the rights holder.  The rights holder then has 30 days to inspect the shipment and reach an agreement with the sender and manufacturer. At the end of the 30 days, if no agreement has been reached, then the rights holder can pay to send the items back or to have them destroyed.  If the rights holder does not act, customs will release the shipment to the importer.

U.S. industry representatives observe more willingness on the part of Dominican authorities to prosecute health and safety crimes as opposed to copyright and trademark violations.  In 2018, industry representatives said the Attorney General’s office for Technology Crimes, which oversees IPR prosecutions, deprioritized the prosecution of copyright and trademark violations and focused instead on cybercrimes.  By contrast, industry representatives complimented the work of the Attorney General’s Office for Health Matters, which is responsible for prosecuting manufacturers and distributors of counterfeit pharmaceuticals, cigarettes, and food products.

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

Resources for Rights Holders

Contact at Mission:

Economic Officer
U.S. Embassy Santo Domingo
(809) 567-7775
Email: InvestmentDR@State.gov

Country/Economy resources:

List of Attorneys in the Dominican Republic, compiled by the Consular Section of the U.S. Embassy in Santo Domingo: https://do.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/legal-assistance/

American Chamber of Commerce of the Dominican Republic
Avenida Sarasota No. 20
Torre Empresarial, 6to. Piso.
Santo Domingo
(809) 381-0777
Email: amcham@amcham.org.do

National Copyright Office (ONDA)
Ministry of Industry and Commerce
Edificio del Archivo General de la Nación
Calle Modesto Diaz No. 2
Zona Universitaria
Santo Domingo, D.N.
809-508-7373 / 809-508-7742
Email: admin.onda@onda.gob.do

National Office of Industrial Property (ONAPI)
Ministry of Industry and Commerce
Av. Los Próceres No.11, Santo Domingo, D.N.
(809) 567-7474
Email: serviciocliente@onapi.gob.do

6. Financial Sector

Capital Markets and Portfolio Investment

The Dominican stock market, the Bolsa de Valores de Santo Domingo, is regulated by the Monetary Council and supervised by the Superintendency of Securities, which approves all public securities offerings.  The private sector has access to a variety of credit instruments. Foreign investors are able to obtain credit on the local market, but tend to prefer less expensive offshore sources. The Central Bank regularly issues certificates of deposit, using an auction process to determine interest rates and maturities.

Money and Banking System

The Dominican banking sector is comprised by 124 entities, as follows: 60 financial intermediation entities (including multiple banks, savings and loans associations, savings and loans banks, financial intermediation public entities, credit corporations), 47 foreign exchange and remittance agents (specifically, 42 exchange brokers and 5 remittances and foreign exchange agents), and 17 trustees.

The mission of the Dominican Central Bank is to ensure the stability of prices, guarantee the efficient regulation of the financial system and the proper functioning of payment systems, as the issuing entity and executor of monetary, exchange, and financial policies to contribute with the growth of national economy

Foreign banks may establish operations in the Dominican Republic, although it may require a special decree for the foreign financial institution to establish domicile in the country.  Foreign banks not domiciled in the Dominican Republic may establish representative offices in accordance with current regulations. Major U.S. banks have a commercial presence in the country, but most focus on corporate banking services as opposed to retail banking.  Some other foreign banks offer retail banking. There are no restrictions on foreigners opening bank accounts, although identification requirements do apply.

The Dominican government enacted robust banking reforms in the wake of a 2003 financial crisis.  Today, the Dominican Republic’s financial sector is relatively stable and the IMF declared the financial system indicators largely satisfactory during 2019 Article IV consultations.  The IMF team’s preliminary report noted that the country’s “robust economic performance benefitted from the strengthened policy frameworks, competitiveness, and banking system over the past decade.

Foreign Exchange and Remittances

Foreign Exchange

The Dominican exchange system is a market with free convertibility of the peso.  Economic agents perform their transactions of foreign currencies under free market conditions.  There are generally no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment.

The Central Bank sets the exchange rates and practices a policy of managed float.  Some firms have had repeated difficulties obtaining dollars during periods of high demand.  Importers may obtain foreign currency directly from commercial banks and exchange agents. The Central Bank participates in this market in pursuit of monetary policy objectives, buying or selling currencies and performing any other operation in the market to minimize volatility.

Remittance Policies

The Regulation No. 214-04 on the Registration of Foreign Investment in the Dominican Republic establishes the requirements for the registration of foreign investments, the remittance of profits, the repatriation of capital, and the requirements for the sale of foreign currency, among other issues related with investments.

Sovereign Wealth Funds

The Dominican government does not maintain a sovereign wealth fund.

7. State-Owned Enterprises

State-Owned Enterprises (SOEs) in general do not have a significant presence in the economy, with most functions performed by privately-held firms.  Notable exceptions are in the electricity, banking, and refining sectors. The government lists 22 public enterprises in its budget documents, primarily as public utilities, state-run banks, or quasi-public entities that manage infrastructure.  The largest of these is the Dominican Corporation of State Electrical Companies (CDEEE). In the electricity sector, generally speaking, private companies only operate in the electricity generation phase of the process, with the government handling the transmission and distribution phases.  However, Punta Cana-Macao Energy Consortium (CEPM), a private company that generates and transmits electricity in the Punta Cana area, is a notable exception. 

Law 10-04 requires the Chamber of Accounts to audit SOEs.  Audits are published in http://www.camaradecuentas.gob.do/index.php/auditorias-realizadas  However, the available audits are dated several years ago. In addition, all audits are available upon request according to freedom of information provisions.

Privatization Program

The government does not have any privatization programs.  A partial privatization of state-owned enterprises (SOEs) in the late 1990s resulted in foreign investors obtaining management control of former SOEs engaged in activities such as electricity generation, airport management, and sugarcane processing.  In 2017, the government ordered the dissolution of the SOE corporation that previously managed several (now private) SOEs (CORDE).

8. Responsible Business Conduct

The government does not have an official position or policy on responsible business conduct, including corporate social responsibility (CSR).  Although there is not a local culture of CSR, large foreign companies normally have active CSR programs, as do some of the larger local business groups.  While most local firms do not follow OECD principles regarding CSR, the firms that do are viewed favorably, especially when their CSR programs are effectively publicized.

The Dominican Constitution states “Everyone has the right to have quality goods and services, to objective, truthful and timely information about the content and characteristics of the products and services that they use and consume”  To that end, the national consumer protection agency, Pro Consumidor, offers consumer advocacy services.

The country joined the Extractive Industries Transparency Initiative (EITI) as candidate in 2016.  The government incorporates EITI standards into its mining transparency framework. In 2019, EITI is conducting a validation study of the Dominican Republic’s implementation of EITI standards.

9. Corruption

The Dominican Republic has a legal framework that includes laws, regulations and criminal penalties to combat corruption.  Foreign investors, however, indicate that corruption and official impunity are endemic in the security forces, government, and private sector.  Many companies complain of the often ineffectiveness in enforcing existing laws. Some report that corruption and the need for reform are an openly and widely discussed public grievance.  The 2018 Transparency International Corruption Perception Index ranked the Dominican Republic 129th out of 180 countries assessed. The World Economic Forum’s 2018 Global Competitiveness report ranked the Dominican Republic as 113 of 140 countries for incidence of corruption.  U.S. businesses operating in the Dominican Republic often need to take extensive measures to ensure compliance with the Foreign Corrupt Practices Act.

In December 2016, high-level public officials in the Dominican Republic were among those implicated in the far-reaching corruption scandal involving Brazilian construction giant Odebrecht.  In a plea agreement with the United States Department of Justice, Odebrecht admitted to paying more than USD 92 million in kickbacks to Dominican officials to secure public works contracts. U.S. companies say the government’s slow response to this scandal contributes to a culture of perceived impunity for high-level government officials, which fuels widespread acceptance and tolerance of corruption at all levels.

Civil society is engaged in anti-corruption campaigns. Several non-governmental organizations are particularly active in transparency and anti-corruption, notably the Foundation for Institutionalization and Justice (FINJUS), Citizen Participation (Participación Ciudadana), and the Dominican Alliance Against Corruption (ADOCCO).

UN Anticorruption Convention, OECD Convention on Combatting Bribery

The Dominican Republic signed and ratified the UN Anticorruption Convention.  The Dominican Republic is not a party to the OECD Convention on Combating Bribery.

Resources to Report Corruption

Contact for government agency responsible for combating corruption:

Procuraduría Especializada contra la Corrupción Administrativa (PEPCA)
Calle Hipólito Herrera Billini esq. Calle Juan B. Pérez
Centro de los Heroes, Santo Domingo, República Dominicana
Telephone: (809) 533-3522
Fax: (809) 533-4098
Email: info@pepca.pgr.gob.do

Government service for filing complaints and denunciations:

Linea 311
Phone: 311 (from inside the country)
Website: http://www.311.gob.do/ 

Contact for “watchdog” organization that monitors corruption:

Participación Ciudadana
Phone: 809 685 6200
Fax: 809 685 6631
Email: info@pciudadana.org

10. Political and Security Environment

There is no recent history of widespread, politically motivated violence.  In 2017, there were multiple, mostly-peaceful protests throughout the country over corruption, access to identity documents for Dominicans of Haitian descent, and labor disputes.  There are no examples of significant politically motivated damage to projects or installations in the last 10 years.

In polling, Dominicans consistently cite crime and violence as among the largest challenges affecting daily life.  The World Economic Forum 2018 Global Competitiveness report ranked the Dominican Republic 123 out of 140 countries in overall security imposing costs on business and 100 of 140 in terms of organized crime imposing costs on businesses.

11. Labor Policies and Practices

An ample labor supply is available, although there is a scarcity of skilled workers and technical supervisors.  Some labor shortages exist in professions requiring lengthy education or technical certification. According to 2016 World Bank data, the Dominican labor force consists of approximately 5 million workers.  The labor force participation rate is 67 percent; 70 percent of the labor force works in services, 18 percent in industry, and 13 percent in agriculture. The labor force is divided roughly 50-50 between the formal and informal sectors of the economy.  In 2018, unemployment and underemployment was approximately 16 percent. A 2017 survey by the National Statistics Office and UN Population Fund found that of the 334,092 Haitians age 10 or older living in the country, 67 percent were working in the formal and informal sectors of the economy.

The Dominican Labor Code establishes policies and procedures for many aspects of employer-employee relationships, ranging from hours of work and overtime and vacation pay to severance pay, causes for termination, and union registration.  The code applies equally to migrant workers, however, many irregular Haitian laborers and Dominicans of Haitian descent working in the construction and agricultural industries do not exercise their rights due to fear of being fired or deported.  The law requires that at least 80 percent of non-management workers of a company be Dominican nationals. Exemptions and waivers are available and regularly granted. The law provides for severance payments, which are due upon layoffs or firing without just cause.  The amount due is prorated based on length of employment.

Although the Labor code provides for freedom to form unions and bargain collectively, it places several restrictions on these rights, which the International Labor Organization (ILO) considers excessive.  For example, it restricts trade union rights by requiring unions to represent 51 percent of the workers in an enterprise to bargain collectively. In addition, the law prohibits strikes until mandatory mediation requirements have been met.  Formal requirements for a strike to be legal also include the support of an absolute majority of all company workers for the strike, written notification to the Ministry of Labor, and a 10-day waiting period following notification before proceeding with the strike.  Government workers and essential public service personnel may not strike.

The law prohibits dismissal of employees for trade union membership or union activities.  In practice, however, some report that the law is inconsistently enforced. The majority of companies resist collective negotiating practices and union activities. Companies reportedly fire workers for union activity and blacklist trade unionists, among other anti-union practices. Workers frequently have to sign documents pledging to abstain from participating in union activities. Companies also create and support company-backed unions. Formal strikes occur but are not common.

The law establishes a system of labor courts for dealing with disputes. The process is often long, with cases pending for several years.  One exception is workplace injury cases, which typically conclude quickly – and often in the worker’s favor. Both workers and companies report that mediation facilitated by the Ministry of Labor was the most rapid and effective method for resolving worker-company disputes.

Many of the major manufacturers in free trade zones have voluntary codes of conduct that include worker rights protection clauses generally aligned with the ILO Declaration on Fundamental Principles and Rights at Work; however, workers are not always aware of such codes or the principles they contain.  The Ministry of Labor monitors labor abuses, health, and safety standards in all worksites where an employer-employee relationship exists. Labor inspectors can request remediation for violations, and if remediation is not undertaken, can refer offending employers to the public prosecutor for sanctions.

12. OPIC and Other Investment Insurance Programs

Embassy Santo Domingo is actively working to attract Overseas Private Investment Corporation (OPIC) investment in the Dominican Republic.  OPIC was previously active in the Dominican Republic; however, lending largely dried up over the past 20 years, with only two projects approved for OPIC’s investment or political risk insurance since 2000.   A breakdown in the process for obtaining Foreign Government Approval (FGA), required for most projects under the 1962 bilateral agreement on investment guaranties, hampered OPIC’s ability to back projects in the Dominican Republic.  In January 2019, the Dominican government clarified the FGA process in a bilateral letter, paving the way for future OPIC investment. The Dominican government is also a party to the Multilateral Investment Guarantee Agency (MIGA) Agreement.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $81,283 2017 $75,932 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2017 $2,140 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2017 $2 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP N/A N/A 2017 47.5 UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  


Table 3: Sources and Destination of FDI

Data not available (country not reported on IMF/CDIS website)


Table 4: Sources of Portfolio Investment

Data not available (country not reported on IMF/CDIS website)

Ecuador

Executive Summary

The government of Ecuador (GOE) under President Moreno has taken a distinct path from the policies of his predecessor, focusing on reducing the size of the public sector and  influencing the economy through private sector investment to drive economic growth.  Facing budget deficits, the Moreno Administration is consolidating the size of government, including the merger of several ministries and state owned enterprises.  Other cost cutting measures include reducing fuel subsidies and mandatory reductions in the number of public employees.  Ecuador is still saddled with a very large public sector, and Moreno has committed to continue government spending on social welfare programs.  To fund these programs and continue reforms, the GOE reached in February 2019 an agreement with the IMF and international financial institutions for financial assistance totaling USD 10.2 billion over three years.  The IMF program is in line with the GOEs efforts to correct fiscal imbalances and to improve on transparency and efficiency in public finance.

As part of the efforts to increase private sector engagement in the economy, the GOE has taken some steps attract foreign direct investment (FDI) such as passing a Productive Development Law, a Public-Private Partnership law and changing tax and regulatory policies for mining.  Despite these efforts, FDI inflow to Ecuador has remained very low when compared to other countries in the region.

Corruption is reported as a serious problem in Ecuador.  Ecuador ranked in the bottom third of countries surveyed for Transparency International’s Corruption Perceptions Index.  Two high-profile cases of alleged official corruption involving state-owned petroleum company PetroEcuador and Brazilian construction firm Odebrecht illustrate the challenges that confront Ecuador in regards to corruption.   Some report that numerous officials have been charged for corruption related offenses, and several have been convicted, including former Vice President Jorge Glas, who was sentenced to six years in prison in December 2017.

Economic, commercial, and investment policies are subject to frequent changes and can increase the risks and costs of doing business in Ecuador, according to many businesses.  The 2008 Constitution established that the state reserves the right to manage strategic sectors through state-owned or controlled companies.  The sectors identified are energy, telecommunications, non-renewable natural resources, transportation, hydrocarbon refining, water, biodiversity, and genetic patrimony.  Foreign investors may remit 100 percent of net profits and capital, subject to a capital exit tax of 5 percent.  Ecuadorian law requires private companies to distribute 15 percent of pre-tax profits to employees each year.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 114 of 175 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 123 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 97 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $779 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $5,920 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Ecuador is open to FDI in most sectors.  The 2008 Constitution established that the state reserves the right to manage strategic sectors through state-owned or controlled companies.  The sectors identified are energy, telecommunications, non-renewable natural resources, transportation, hydrocarbon refining, water, biodiversity, and genetic patrimony.  Although Ecuador recently took some steps intended to attract FDI, foreign investors claim that Ecuador’s overall investment climate remains challenging as economic, commercial, and investment policies are subject to frequent change.  In 2018, total FDI inflow doubled from 2017 numbers to USD 1.4 billion, or about 1 percent of GDP.  Despite the increase, FDI inflow remains very low when compared to other countries in the region.

In general, companies complain that the legal complexity resulting from the inconsistent application and interpretation of existing laws and regulations increases the risks and costs of doing business in Ecuador.  Disputes involving U.S. companies have been allegedly politicized, especially in sensitive areas such as the energy sector.  Ecuador has been involved in several high profile investment disputes with U.S. companies.  Chevron, Conoco Phillips, Occidental Petroleum Corporation, and Murphy Oil Corporation were awarded damages in international arbitration rulings against Ecuador in the last several years.  Other companies such as Merck have received interim awards in international arbitration.

Limits on Foreign Control and Right to Private Ownership and Establishment

One hundred percent foreign equity ownership is allowed without the need for authorization or prior screening in sectors open to domestic private investment.

For license and franchise transactions, no limits exist on royalties that may be remitted, although financial outflows are subject to a five percent capital exit tax.  All license and franchise agreements must be registered with the National Service for Intellectual Property Rights (SENADI).  In addition to registering with the Superintendence of Companies, Securities, and Insurance, foreign investors must register investments with Ecuador’s Central Bank for statistical purposes.

Sectors of interest to Foreign Investors:

Automotive: the Ministry of Foreign Trade eliminated quotas of automobile imports January 1, 2017, and cancelled tariff surcharges in June 2017.  This action removed an important restriction on U.S. automobile exports to Ecuador.  In December 2018, Ecuador instituted COMEX Resolution 25 that eliminated tariffs on automobiles assembled in Ecuador based on new investments, with certain limitations.

Petroleum: per the 2008 Constitution, all subsurface resources belong to the state.  The petroleum sector is controlled by two state owned enterprises (SOEs).  In 2018, the government removed subsidies on all higher-octane gasoline and some subsidies on regular and diesel fuel, changing some fuel pricing.

Mining: the Ecuadorian government has taken steps to reduce taxes in the mining sector in order to attract FDI.  Presidential Decree 475, published in October 2014, made minor reductions to the windfall tax and sovereign adjustment calculations.  The Organic Law for Production Incentives and Tax Fraud Prevention, passed in December 2014, included provisions to improve tax stability and lower the income tax rate in the mining sector.  Former President Correa’s administration also developed mining sector incentives such as fiscal stability agreements, limited VAT reimbursements, remittance tax exceptions, and mechanisms for companies to recover their investments before certain taxes are applied.

 Electricity: the Organic Law for the Public Service of Electric Energy, which took effect in January 2015, permits some private sector participation and foreign investment in Ecuador’s electricity sector.  Per the 2008 Constitution, the electricity sector is a public service and strategic sector.

Telecommunications: in February 2015, Ecuador’s National Assembly passed a telecommunications law that requires telecommunications companies to pay a percentage of revenue to the government.  This requirement applies to providers of cellular and fixed line telephone service, internet service, and subscription television with more than 30 percent of market share.  The payments range from 0.5 to 9 percent of revenue.

Media: the 2013 Communications Law introduced a requirement that advertising disseminated in Ecuador must have 80 percent domestic content.  It also requires that television and radio frequencies are distributed 33 percent to private media, 33 percent to public media, and 34 percent to community media.

The government controls a large share of radio, television, and other press holdings.  Article 312 of the Constitution prohibits shareholders and representatives of financial institutions from media ownership.  In addition, the 2011 Organic Law for Regulation and Control of Market Power prohibits anyone possessing more than a six percent interest in a media company from investing in any other business sector.

Other Investment Policy Reviews

Ecuador conducted a trade policy review with the World Trade Organization in March 2019; information can be found at https://www.wto.org/english/tratop_e/tpr_e/tp483_e.htm 

In the past three years, Ecuador has not conducted an investment policy review with the Organization for Economic Cooperation and Development (OECD) or the United Nations Conference on Trade and Development (UNCTAD).

Business Facilitation

In 2018 Ecuador folded its ProEcuador (https://www.proecuador.gob.ec/ ), the entity that is responsible for promoting economic development through exports, imports, and investment in Ecuador, into the Ministry of Production, Foreign Trade, Investments and Fisheries (MPCIEP).  ProEcuador is now a Vice Ministry within MPCIEP, and has 31 offices in 26 countries, including four in the United States.  Ecuador is ranked 123rd out of 190 countries on the World Bank’s Ease of Doing Business report for 2019, with particularly low rankings for Starting a Business (168), Resolving Insolvency (158) and Paying Taxes (143).

A newly created company will at a minimum be required to register with the Superintendence of Companies Securities, and Insurance (http://www.supercias.gob.ec/.), the municipal government, the Internal Revenue Service, and the Social Security Institute. The registry with the Superintendence of Companies is a completely online process as of April 2019.

Outward Investment

Ecuador does not restrict domestic investors from investing abroad.  ProEcuador  is responsible for promotion of outward investment from Ecuador.  Foreign investments are subject to a capital exit tax of five percent.

In February 2017, voters passed a government-backed referendum prohibiting elected officials and public servants from having financial interactions with official lists of tax havens and other suspect jurisdictions.  The lists include several U.S. states and territories.  The prohibition entered into effect in September 2017.

2. Bilateral Investment Agreements and Taxation Treaties

Ecuador’s National Assembly voted on May 3, 2017 to terminate 12 of its bilateral investment treaties, including its agreement with the United States.  The Government of Ecuador notified the U.S. government of its withdrawal from our Bilateral Investment Treaty (BIT) on May 18, 2017, effective May 18, 2018.  Investments made prior to withdrawal are covered for 10 years, but the BIT covers no new investments in Ecuador.

Ecuador signed on June 25, 2018 a Comprehensive Economic Partnership Agreement with the European Free Trade Association, which includes Switzerland, Norway, Liechtenstein, and Iceland.  That agreement has yet to be ratified.  The accession of Ecuador to the European Union’s Multiparty Trade Agreement with Colombia and Peru became effective January 1, 2017.  Ecuador concluded two limited trade agreements in 2017, with El Salvador on November 16, 2017 and Nicaragua on November 19, 2017.  Ecuador has been negotiating a Strategic Cooperation Agreement with South Korea.

Ecuador does not have a bilateral taxation treaty with the United States.

4. Industrial Policies

Investment Incentives

In August 2018, the National Assembly approved the Productive Development Law that provides income tax exemptions and VAT exemptions to attract investments, good for 12 years in all areas except the cities of Quito and Guayaquil, where it is 8 years, and 20 years in border regions.

In December 2015, Ecuador’s National Assembly approved a Public-Private Partnership law intended to attract investment.  The law offers incentives including the reduction of the income tax, value added tax, and capital exit tax, for investors in certain projects.  It designates Latin American arbitration bodies as the dispute resolution mechanism.  The law came into effect upon publication in the official registry on December 18, 2015.  The Organic Law of Production Incentives and Tax Fraud Prevention, which took effect on December 30, 2014, provides tax incentives related to depreciation calculations and income tax rates, which could benefit some foreign investors.

Foreign Trade Zones/Free Ports/Trade Facilitation

The 2010 Production Code authorized the creation of Special Economic Development Zones (ZEDEs) that are subject to reduced taxes and tariffs.  The government considers the extent to which projects promote technology transfer, innovation, and industrial diversification when granting ZEDE status; foreign owned firms have the same investment opportunities as national firms.

Performance and Data Localization Requirements

 Nationally the government does not mandate local employment, however, the Organic Law of the Amazon approved by the National Assembly on May 21, 2018, mandates that any company, national or foreign, operating within the area covered by the law (the Amazon Basin) must hire at least 70 percent of their staff locally, unless they cannot find qualified labor locally.

There are no requirements for foreign IT providers to turn over source code and/or provide access to encryption.  Companies can transmit data freely into and out of Ecuador, and there are no requirements to store data within the country.

On October 11, 2016, Ecuador’s National Assembly passed the Code of the Social Economy of Knowledge, Creativity, and Innovation, covering a wide range of intellectual property matters.   Article 148 of the Code establishes that agencies must give preference to open source software with content developed in Ecuador when procuring software for government use.

Visa and residency requirements are relatively relaxed and do not inhibit foreign investment.

5. Protection of Property Rights

Real Property

Ecuador ranks 75 out of 190 in the 2018 World Bank’s Doing Business Report’s category for Ease of Registering Property.  Foreign citizens are allowed to own land.

Intellectual Property Rights

According to some sources, enforcement against intellectual property infringement remains a problem in Ecuador.  In April 2016, the United States Trade Representative moved Ecuador from the Priority Watch List to the Watch List in its annual Special 301 Report on intellectual property where Ecuador has remained in 2017 and 2018.  This decision was in recognition of Ecuador’s passage of an amendment reinstating criminal procedures and penalties for intellectual property violations.  The government has drafted implementing regulations for the 2016 Code of the Social Economy of Knowledge, Creativity, and Innovation, which is the legislation that covers Intellectual Property Rights, and allowed for public input into the regulations; however, those regulations have not yet been approved.

Piracy of computer software and counterfeit activity in brand name apparel is widespread, and enforcement is weak.  Pirated CDs and DVDs are readily available on many streets and in shopping malls and copyright enforcement reportedly remains a significant problem.  The National Service for Intellectual Rights (SENADI – formerly Ecuadorian Intellectual Property Institute (IEPI)) was established in January 1999 to handle patent, trademark, and copyright registrations.  SENADI reports information on its activities on its website at http://www.propiedadintelectual.gob.ec/ .

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 2014 Law to Strengthen and Optimize Business Partnerships and Stock Markets created the Securities Market Regulation Board to oversee the stock markets.  Investment options on the Quito and Guayaquil stock exchanges are very limited.  Sufficient liquidity to enter and exit sizeable positions does not exist in the local markets.  The five percent capital exit tax also inhibits free flow of financial resources into the product and factor markets.

Money and Banking System

Ecuador’s banking sector is healthy, and according to the Banking Association (ASOBANCA) approximately 51 percent of the population having access to a bank account.  The country’s largest banks are Banco Pichincha with about USD 10.5 billion in assets, Banco Pacifico with about USD 5.8 billion, Banco Produbanco with about USD 4.7 billion, and Banco Guayaquil with about USD 4.2 billion.

Ecuador’s Superintendence of Banks regulates the financial sector.  Between 2012 and 2013, the financial sector was the target of numerous new restrictions.  By 2012, most banks had sold off their brokerage firms, mutual funds, and insurance companies to comply with constitutional changes following a May 2010 referendum.  The amendment to Article 312 of the Constitution required banks and their senior managers and shareholders with more than six percent equity in financial entities to divest entirely from any interest in all non-financial companies by July 2012.  These provisions were incorporated into the Anti-Monopoly Law passed in September 2011.

The Organic Monetary and Financial Code, published in the official registry September 12, 2014, created a five-person Monetary and Financial Policy and Regulation Board of presidential appointees to regulate the banking sector.  The law gives the Monetary and Financial Policy and Regulation Board the ability to prioritize certain sectors for lending from private banks. The Code also established that finance companies had to become banks, merge or close their operations by 2017. Of the 10 finance companies in Ecuador, two became banks; six closed their operations or are in the process of closing, and two were absorbed by other financial institutions.

Electronic currency appeared in 2014 with the approval of the Organic Monetary and Financial Code, which established the exclusive management of the system by Ecuador’s Central Bank. In 2017, with the approval of the Law for the Reactivation of the Economy, Strengthening of Dollarization and Modernization of Financial Management, the electronic currency management was transferred to private banks.  The Central Bank issued Regulation 29 in July 2012 requiring all financial transfers (inflows and outflows) to be channeled through the Central Bank’s accounts.  In principle, the regulation increases monetary authorities’ oversight and prevents banks from netting their inflows and outflows to avoid paying the five percent capital exit tax.

Foreign Exchange and Remittances

Foreign Exchange

Ecuador adopted the U.S. dollar as the official currency in 2000.  Foreign investors may remit 100 percent of net profits and capital, subject to a five percent capital exit tax.  There are no restrictions placed on foreign investors in transferring or repatriating funds associated with an investment.

Remittance Policies

 Resolution 107-2015-F from Ecuador’s Monetary and Finance Board issued in July 2015 exempted some payments to foreign lenders from the capital exit tax.  Among other requirements, the duration of the loan must be more than 360 days, the loan must be registered with the Central Bank, and the resources must be destined for specific purposes such as to fund small businesses or social housing.

The Financial Action Task Force (FATF) announced October 23, 2015 that it had removed Ecuador from the list of countries with strategic deficiencies in anti-money laundering and countering the financing of terrorism (AML/CFT) regimes.

Sovereign Wealth Funds

The Government of Ecuador does not maintain a Sovereign Wealth Fund (SWF).

7. State-Owned Enterprises

The 18 SOEs in Ecuador are concentrated primarily in the petroleum, electricity, and telecommunications sectors.  The government also owns an airline, a railroad company, a cement company, and a university.  Two SOEs, Petroamazonas and Petroecuador, control the petroleum sector.  The government has a rationalization and reorganization plan for some of these entities, reducing the total from an original of 22 to 15 by merging some and dissolving others.

The 2009 Organic Law of Public Enterprises regulates state-owned enterprises (SOEs).  SOEs are most active in areas designated by the 2008 Constitution as strategic sectors.  Ecuador’s Coordinator of Public Companies maintains a list of SOEs at http://www.emco.gob.ec/empresas-publicas/ .  SOEs follow a special procurement regime with greater flexibility and limited oversight.  The Law of Public Enterprises requires SOEs to follow generally accepted accounting principles; however, SOEs are not required to follow the same accounting practices as the central government, nor do they have to participate in the electronic financial management system used in most of the public sector for budget and accounting management.  SOEs are eligible for government guarantees, and face lower tax burdens than private companies.

Ecuador is not party to the Government Procurement Agreement (GPA) within the framework of the World Trade Organization.

Privatization Program

Ecuador is not implementing a privatization program, although the Ministry of Trade and Investment is touting a number of projects as potential public private partnerships.

8. Responsible Business Conduct

Article 66 of the 2008 Constitution guarantees the right to pursue economic activities in a manner that is socially and environmentally responsible.  NGOs such as the Institute of Corporate Social Responsibility and the Ecuadorian Consortium for Social Responsibility promote responsible business conduct.  Many Ecuadorian companies have programs to further responsible business conduct within their organizations.  The GOE committed in March 2018 to implement the Extractive Industries Transparency Initiative, but has not yet joined the initiative.

9. Corruption

Corruption is a serious problem in Ecuador, and one that the government has begun to confront.  Numerous cases of corruption have recently been tried, resulting in convictions of high-level officials, including former Vice President Jorge Glas.  U.S. companies have cited corruption as an obstacle to investment, with concerns related specifically to dispute resolution and payment of arbitration awards.

Ecuadorian law provides criminal penalties for corruption by public officials, but the government has not implemented the law effectively, and officials engaged in corrupt practices.  Ecuador ranked 114 out of 180 countries surveyed for Transparency International’s 2018 Corruption Perceptions Index and received a score of 34 out of 100.  High-profile cases of alleged official corruption involving state-owned petroleum company PetroEcuador and Brazilian construction firm Odebrecht illustrate the significant challenges that confront Ecuador concerning corruption.

Illicit payments for official favors and theft of public funds reportedly have taken place frequently.  Dispute settlement procedures are complicated by the lack of transparency and inefficiency in the judicial system.  Offering or accepting a bribe is illegal and punishable by imprisonment for up to five years.  The Controller General is responsible for the oversight of public funds and there are frequent investigations and occasional prosecutions for irregularities.

Ecuador ratified the UN Anticorruption Convention in September 2005.  Ecuador is not a signatory to the OECD Convention on Combating Bribery.  The 2008 Constitution created the Transparency and Social Control branch of government, tasked with preventing and combating corruption, among other things.  In December 2008, President Correa issued a decree that created the National Secretariat for Transparency to investigate and denounce acts of corruption in the public sector.  Both entities can conduct investigations into alleged acts of corruption.  Responsibility for prosecution remains with the Office of the Prosecutor General.

Resources to Report Corruption

Through the Function of Transparency and Social Control, alleged acts of corruption can be reported by dialing 159 within Ecuador.  The Council for Citizen Participation and Social Control also maintains a web portal for reporting alleged acts of corruption: http://www.cpccs.gob.ec .

10. Political and Security Environment

Ecuador does not have a tradition of frequent violence as a result of demonstrations or political instability, but security along the border with Colombia deteriorated significantly in late 2017 and early 2018.  Drug trafficking groups attacked police and military units, and engaged in kidnappings, resulting in several deaths, a first for Ecuador.  Student, labor union, and indigenous protests against government policies have been a regular feature of political life in Ecuador.  While disruptive, especially to transportation, violence is usually limited and localized.  Popular protests in 1997, 2000, and 2005 contributed to the removal of three elected presidents before the end of their terms.  Large-scale but peaceful demonstrations against the Correa government occurred in June 2015.  Some indigenous communities opposed to development have blocked access by petroleum and mining companies.

11. Labor Policies and Practices

Semi-skilled and unskilled workers are relatively abundant at low wages.  The supply of available workers is high due to layoffs in sectors affected by the downturn in Ecuador’s economy since 2014.  In addition, first Colombian and now Venezuelan migrants have added to the supply of labor.  The National Wages Council and Ministry of Labor Relations set minimum compensation levels for private sector employees annually.  The minimum basic salary for 2019 is USD 394 per month.

Ecuador’s Production Code requires that workers be paid a dignified wage, defined as an amount that would enable a family of four with 1.6 wage earners to be able to afford necessities.  The cost and the products that are considered necessities are determined by Ecuador’s Statistics Institute (INEC).  In March 2019, the cost of basic necessities was USD 713.05, while the official family wage level is at USD 735.47.  As of December 2017, INEC estimated 37.9 percent of workers had adequate employment.  INEC defines adequate employment as earning at least the minimum basic salary working 40 hours per week.

Ecuador’s National Assembly passed a labor reform law in March 2016 intended to promote youth employment, support unemployed workers, and introduce greater labor flexibility for companies suffering from reduced revenue.  The law established a new unemployment insurance program, a subsidized youth employment scheme, temporary reductions in workers’ hours for financially strapped companies, and nine months of unpaid maternity or paternity leave.

The Law for Labor Justice and Recognition of Work in the Home, which included several changes related to labor and social security, took effect in April 2015.  The law limits the yearly bonus paid to employees, which is equal to 15 percent of companies’ profits and is required by law, to 24 times the minimum wage.  Any surplus profits are to be collected by IESS.  The law also mandates that employees’ thirteenth and fourteenth month bonuses, which are required by law, be paid in installments throughout the year instead of in lump sums.  Employees have the option to opt out of this change and continue to receive the payments in lump sums.  The law eliminates fixed-term employee contracts in favor of indefinite contracts, which shorten the allowable trial period for employees to 90 days.  The law also allows participation in social security pensions for non-paid work at home.

The Labor Code provides for a 40-hour workweek, 15 calendar days of annual paid vacation, restrictions and sanctions for those who employ child labor, general protection of worker health and safety, minimum wages and bonuses, maternity leave, and employer-provided benefits.  The 2008 Constitution bans child labor, requires hiring workers with disabilities, and prohibits strikes in most of the public sector.  Unpaid internships are not permitted in Ecuador.

Most workers in the private sector and at SOEs have the constitutional right to form trade unions and local law allows for unionization of any company with more than 30 employees.  Private employers are required to engage in collective bargaining with recognized unions.  The Labor Code provides for resolution of conflicts through a tripartite arbitration and conciliation board process.  The Code also prohibits discrimination against union members and requires that employers provide space for union activities.

Workers fired for organizing a labor union are entitled to limited financial indemnification, but the law does not mandate reinstatement.  The Public Service Law enacted in October 2010 prohibits the vast majority of public sector workers from joining unions, exercising collective bargaining rights, or paralyzing public services in general.  The Constitution lists health; environmental sanitation; education; justice; fire brigade; social security; electrical energy; drinking water and sewerage; hydrocarbon production; processing, transport, and distribution of fuel; public transport; and post and telecommunications as strategic sectors.  Public workers who are not under the Public Service Law may join a union and bargain collectively since they are governed by the provisions under the Labor Code.

12. OPIC and Other Investment Insurance Programs

Ecuador has an Investment Guarantee Agreement with the Overseas Private Investment Corporation.  Ecuador is also a signatory to the Multilateral Investment Guarantee Agreement.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($B USD) 2018 $108.3 2017 $104.3 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2017 $779 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2017 $14 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data 
Total inbound stock of FDI as % host GDP N/A N/A 2017 17.7% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx   

 

* Source for Host Country Data: Central Bank of Ecuador.  The Central Bank publishes FDI calculated as net flows only.  Outward Direct Investment statistics are not published by the Central Bank.


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $1,401 100% Total Outward Amount 100%
Bermuda $199.7 14% N/A N/A
Canada $196.8 14% N/A N/A
Netherlands $186.2 13% N/A N/A
Spain $173.6 12% N/A N/A
Cayman Islands $111.3 8% N/A N/A
“0” reflects amounts rounded to +/- USD 500,000.

Source: Ecuador Central Bank, no Information available on the IMF’s CDIS website, and there no information available on Outward Direct Investment

Egypt

Executive Summary

Progress on Egyptian economic reforms over the past two years has been noteworthy.  Though many challenges remain, Egypt’s investment climate is improving. The country has undertaken a number of structural reforms since the flotation of the Egyptian Pound (EGP) in November 2016 and implemtation of a three-year, USD 12 billion International Monetary Fund (IMF)-backed economic reform program.  Increased investor confidence and the reactivation of Egypt’s interbank foreign exchange (FX) market have attracted foreign portfolio investment and grown foreign reserves. As yields on government debt fall, investors may shift towards direct investments, which would be a positive market signal that the Egyptian economy is beginning to trend  towards higher growth. The Government of Egypt (GoE) understands that attracting foreign direct investment (FDI) is key to addressing many of the economic challenges it faces, including low economic growth, high unemployment, current account imbalances, and hard currency shortages. Though FDI inflows grew 13 percent year-on-year in 2017, they declined slightly in 2018 from USD 7.9 to 7.7 billion, according to the Central Bank of Egypt.

Egypt implemented a number of regulatory reforms in 2017 and 2018.  Key among these are the new Investment Law and the Companies Law – which aim to improve Egypt’s ranking in international reports of doing business and to help the economy realize its full potential.  These reforms have increased investor confidence.

The Investment Law (Law 72 of 2017) aims to attract new investment and provides a framework for the government to offer investors more investment-related incentives and guarantees.  Additionally, the law aims to attract new investments, consolidate many investment-related rules, and streamlines procedures.

The government also hopes to attract  international investment in several “mega projects,” including a large-scale industrial and logistics zone around the Suez Canal, the construction of a new national administrative capital, a 1.5 million-hectare agricultural land reclamation and development project, and to promote mineral extraction opportunities in the Golden Trianlge economic zone between the Red Sea and the Nile River.

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

Several challenges persist for investors.  Dispute resolution is slow, with the time to adjudicate a case to completion averaging three to five years.  Other obstacles to investment include excessive bureaucracy, regulatory complexity, a mismatch between job skills and labor market demand, slow and cumbersome customs procedures, and various non-tariff trade barriers.  Inadequate protection of intellectual property rights (IPR) remains a significant hurdle in certain sectors and Egypt remains on the U.S. Trade Representative’s Special 301 Watch List. Nevertheless, Egypt’s reform story is noteworthy, and if the steady pace of implementation for structural reforms continues, and excessive bureaucracy reduces over time, then the investment climate should continue to look more favorable to U.S. investors.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 105 of 175 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 120 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 95 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country (M USD, stock positions) 2017 $9,352.0  http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2018 $3,010 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies toward Foreign Direct Investment

The flotation of the EGP in November 2016 and the restart of Egypt’s interbank foreign exchange FX market as part of the IMF program was a first step in restoring investor confidence that immediately attracted increased portfolio investment and should lead to increased FDI over the long term.  The stable macro-economic outlook has allowed Egypt to focus on structural reforms to support strong economic growth. The next phase of reform has included a new investment law, an industrial licensing law, a bankruptcy law and other reforms to reduce regulatory overhang and improve the ease of doing business.  Successful implementation of these reforms could give greater confidence to foreign investors. Egypt’s government has announced plans to further improve its business climate through investment promotion, facilitation, efficient business services, and advocacy of more investor friendly policies.

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

The new Tenders Law No. 182 of 2018 requires the government to consider both price and best value in awarding contracts and to issue an explanation following refusal of a bid.  Nevertheless, the law contains preferences for Egyptian domestic contractors, who are accorded priority if their bids do not exceed the lowest foreign bid by more than 15 percent. Additionally the new law includes a wide range of reforms, such as establishing new rules in the contracting process on good governance, sustainable development goals, transparency, competition, equal opportunity, and an improved business environment.  Egyptian small- and medium-sized enterprises (SMEs) have the right under the new law to obtain up to 20 percent annually of the Government’s contracts. This aims to achieve a positive return on investment of public expenditures, along with controls to combat corruption.

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

The General Authority for Investment and Free Zones (GAFI) is an affiliate of the Ministry of Investment and International Cooperation (MIIC) and the principal government body regulating and facilitating investment in Egypt. ”The Investor Service Center (ISC)” is an administrative unit established within GAFI that provides ”one-stop-shop” services, easing the way for global investors looking for opportunities presented by Egypt’s domestic economy and the nation’s competitive advantages as an export hub for Europe, the Arab world, and Africa.

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

  • Advice and support to help in the evaluation of Egypt as a potential investment location;
  • Identification of suitable locations and site selection options within Egypt;
  • Assistance in identifying suitable Egyptian partners;
  • Aftercare and dispute settlement services.​

ISC Branches are expected to be established in all Egyptian governorates.  Egypt maintains ongoing communication with investors through formal business roundtables, investment promotion events (conferences and seminars), and one-on-one investment meetings

Limits on Foreign Control and Right to Private Ownership and Establishment

The Egyptian Companies Law does not set any limitation on the number of foreigners, neither as shareholders nor as managers or board members, except for Limited Liability Companies where the only restriction is that one of the managers should be an Egyptian national.  In addition, companies are required to obtain a commercial and tax license, and pass a security clearance process. Companies are able to operate while undergoing the often lengthy security screening process. Nevertheless, if the firm is rejected, it must cease operations and undergo a lengthy appeals process.  Businesses have cited instances where Egyptian clients were hesitant to conclude long term business contracts with foreign firms that have yet to receive a security clearance. They have also expressed concern about seemingly arbitrary refusals, a lack of explanation when a security clearance is not issued, and the lengthy appeals process.  Although the GoE has made progress in streamlining the business registration process at GAFI, its apparent overall lack of familiarity or experience of Egyptians working closely with foreign nationals has sometimes led to inconsistent and questionable treatment by banks and government officials, thus, delaying registration.

Sector-specific limitations to investment include restrictions on foreign shareholding of companies owning lands in the Sinai Peninsula.  Likewise, the Import-Export Law requires companies wishing to register in the Import Registry to be 51 percent owned and managed by Egyptians.  In 2016, the Ministry of Trade prepared an amendment to the law allowing the registration of importing companies owned by foreign shareholders, but, as of April 2019, the law had not yet been submitted to Parliament.  Nevertheless, the new Investment Law does allow wholly foreign companies, which invest in Egypt to import goods and materials.

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

Under Law No. 230 non-Egyptians are allowed to own real estate (vacant or built) only under the following conditions:

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

Exemption from the first and second conditions is subject to the approval of the Prime Minister. Ownership in tourist areas and new communities is subject to conditions established by the Cabinet of Ministers.  Non-Egyptians owning vacant real estate in Egypt must build within a period of five years from the date their ownership is registered by a notary public. Non-Egyptians cannot sell their real estate for five years after registration of ownership, unless the consent of the Prime Minister for an exemption is obtained.  http://www.gafi.gov.eg/English/StartaBusiness/Laws-and-  Regulations/Pages/BusinessLaws.aspx  

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) signed a declaration with Egypt on International Investment and Multinational Enterprises on July 11, 2007, at which time Egypt became the first Arab and African country to sign the OECD Declaration, marking a new stage in Egypt’s drive to attract more FDI.

The United Nations Conference of Trade Development (UNCTAD) signed in an Investment Policy Review with Egypt in June 1999 that recognized the efforts that the GoE had made to establish an adequate investment regulatory framework and improve the business environment.

The UNCTAD Review pointed out that overcoming the limited involvement of multinational companies in manufacturing sectors with export potential such as food, garments, and electronics, would require policy emphasis on infrastructure investments, promotion of  clusters of related enterprises, and self-sustaining development. Since the publication of its policy review on Egypt, UNCTAD has assisted the government with training diplomats on investment trends, policies, and promotion, and staff on FDI statistics.

Business Facilitation

GAFI’s new ISC was launched in February 2018 at a ceremony attended by President Sisi. The ISC provides a full start-to-end service to the investor as described above.  The new Investment Law also introduces ”Ratification Offices” to facilitate the obtaining of necessary approvals, permits, and licenses within 10 days of issuing a Ratification Certificate.

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

Outward Investment

Egypt promotes and incentivizes outward investment.  According to the Egyptian government’s FDI Markets database for the period from January 2003 to February 2019, outward investment indicated that Egyptian companies implemented 241 Egyptian FDI projects.  The estimated total value of these projects, which employed about 48,204 workers, was USD 23.86 billion.

The following countries received the largest amount of Egyptian outward investment in terms of total project value:  United Arab Emirates (UAE), Saudi Arabia, Algeria, Jordan, Germany, Kenya, Libya, Morocco, Sudan, and Ethiopia. The UAE, Saudi Arabia and Algeria accounted for about 28.6 percent of the total amount.

Elsewedy Electric (Elsewedy Cables) was the largest Egyptian company investing abroad, implementing 19 projects with a total investment estimated to be USD 2.1 billion.

Egypt does not restrict domestic investors from investing abroad.

2. Bilateral Investment Agreements and Taxation Treaties

Egypt has signed 115 Bilateral Investment Treaties (BITs), out of which 74 BITs have entered into force.  The full list can be found at http://investmentpolicyhub.unctad.org/IIA.

The U.S.-Egypt Bilateral Investment Treaty provides for fair, equitable, and nondiscriminatory treatment for investors of both nations. The treaty includes provisions for international legal standards on expropriation and compensation; free financial transfers; and procedures for the settlement of investment disputes, including international arbitration.

In addition to BITs, Egypt is also a signatory to a wide variety of other agreements covering trade issues. Egypt joined the Common Market for Eastern and Southern Africa (COMESA) in June 1998.  In June 2001, Egypt signed an Association Agreement (AA) with the European Union (EU), which entered into force on June 1, 2004. The agreement provided immediate duty free access of Egyptian products into EU markets, while duty free access for EU products into the Egyptian market was phased in over a 12-year period ending in 2016.  In 2010, Egypt and the EU completed an agricultural annex to their agreement, liberalizing trade in over 90 percent of agricultural goods.

In July 1999, Egypt and the United States signed a Trade and Investment Framework Agreement (TIFA). The TIFA forum has been an effective forum to discuss tariff and non-tariff barriers and address issues affecting U.S. commercial interests.

Egypt is also a member of the Greater Arab Free Trade Agreement (GAFTA), and a member of the Agadir Agreement with Jordan, Morocco, and Tunisia, which relaxes rules of origin requirements on products jointly manufactured by the countries for export to Europe.  Egypt also has an FTA with Turkey, in force since March 2007, and an FTA with the Mercosur bloc of Latin American nations.

In 2004, Egypt and Israel signed an agreement to take advantage of the U.S. Government’s Qualifying Industrial Zone (QIZ) program.  The purpose of the QIZ program is to promote stronger ties between the region’s peace partners, as well as to generate employment and higher incomes, by granting duty-free access to goods produced in QIZs in Egypt using a specified percentage of Israeli and local input.  Under Egypt’s QIZ agreement, Egypt’s exports to the United States produced in certain industrial areas are eligible for duty-free treatment if they contain a minimum 10.5 percent Israeli content.

The industrial areas currently included in the QIZ program are Alexandria, areas in Greater Cairo such as Sixth of October, Tenth of Ramadan, Fifteenth of May, South of Giza, Shobra El-Khema, Nasr City, and Obour, areas in the Delta governorates such as Dakahleya, Damietta, Monofeya and Gharbeya, and areas in the Suez Canal such as Suez, Ismailia, Port Said, and other specified areas in Upper Egypt.  Egyptian exports to the United States through the QIZ program have mostly been ready-made garments and processed foods. The value of the Egyptian QIZ exports to the United States was approximately USD 877 million in 2018, up 16 percent from 2017.

Egypt has a bilateral tax treaty with the United States. Egypt also has tax agreements with 59 other countries, including UAE, Kuwait, Saudi Arabia, Mauritius, Bahrain, and Morocco.

The Egyptian Parliament passed and the government implemented a value added tax (VAT) in late 2016, which took the place of the General Sales Tax, as part of the IMF loan and economic reform program. Yet, the government decided to postpone the “Stock Market Capital Gains Tax” for three years as of early 2017. In 2016, there were a number of tax disputes between foreign investors and the government, but most of them were resolved through the Tax Department and the Economic Court.

4. Industrial Policies

Investment Incentives

The Investment Law 72//2017 provides incentives to investors, including:

General Incentives:

  • All investment projects subject to the provisions of the new law enjoy the general incentives provided by it.
  • Investors are exempted from the stamp tax, fees of the notarization, registration of the memorandum of incorporation of the companies, credit facilities, and mortgage contracts associated with their business for five years from the date of registration in the Commercial Registry, in addition to the registration contracts of the lands required for a company’s establishment.
  • If the establishment is under the provisions of the new investment law, it will benefit from a 2 percent unified custom tax over all imported machinery, equipment, and devices required for the establishment of such a company.

Special Incentive Programs:

  • Investment projects established within three years of the date of the issuance of the Investment Law will enjoy a deduction from their net profit, subject to the income tax:
    • 50 percent of the investment costs for geographical region (A) (the regions the most in need of development as well as designated projects in Suez Canal Special Economic Zone and the “Golden Triangle” along the Red Sea between the cities of Safaga, Qena and El Quseer);
    • 30 percent of the investment costs to geographical region (B) (which represents the rest of the republic).
  • Provided that such deduction shall not exceed 80 percent of the paid-up capital of the company, the incentive could be utilized over a maximum of seven years.

Additional Incentive Program:

The Cabinet of Ministers may decide to grant additional incentives for investment projects in accordance with specific rules and regulations as follows:

  • The establishment of special customs ports for exports and imports of the investment projects.
  • The state may incur part of the costs of the technical training for workers.
  • Free allocation of land for a few strategic activities may apply.
  • The government may bear in full or in part the costs incurred by the investor to invest in utility connections for the investment project.
  • The government may refund half the price of the land allocated to industrial projects in the event of starting production within two years from receiving the land.

Other Incentives related to Free Zones according to Investment Law 72/2017:

  • Exemption from all taxes and customs duties.
  • Exemption from all import/export regulations.
  • The option to sell a certain percentage of production domestically if customs duties are paid.
  • Limited exemptions from labor provisions.
  • All equipment, machinery, and essential means of transport (excluding sedan cars) necessary for business operations are exempted from all customs, import duties, and sales taxes.
  • All licensing procedures are handled by GAFI. To remain eligible for benefits, investors operating inside the free zones must export more than 50 percent of their total production.
  • Manufacturing or assembly projects pay an annual charge of 1 percent of the total value of their products.
  • Excluding all raw materials, storage facilities are to pay 1 percent of the value of goods entering the free zones while service projects pay 1 percent of total annual revenue.
  • Goods in transit to specific destinations are exempt from any charges.

Other Incentives related to the Suez Canal Economic Zone (SCZone):

  • 100 percent foreign ownership of companies.
  • 100 percent foreign control of import/​export activities.
  • Imports are exempted from customs duties and sales tax.
  • Customs duties on exports to Egypt imposed on imported components only, not the final product.
  • Fast-track visa services.
  • A full service one-stop shop for registration and licensing.
  • Allowing enterprises access to the domestic market; duties on sales to domestic market will be assessed on the value of imported inputs only.

The Ministry of Industry & Foreign Trade and the Ministry of Finance’s Decree No. 719//2007 provides incentives for industrial projects in the governorates of Upper Egypt (Upper Egypt refers to governorates in southern Egypt).  The decree provides an incentive of EGP 15,000 (approximately USD 850) for each job opportunity created by the project, on the condition that the investment costs of the project exceed EGP 15 million (approximately USD 850,000).  The decree can be implemented on both new and ongoing projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Public and private free trade zones are authorized under GAFI’s Investment Incentive Law.  Free zones are located within the national territory, but are considered to be outside Egypt’s customs boundaries, granting firms doing business within them more freedom on transactions and exchanges.  Companies producing largely for export (normally 80 percent or more of total production) may be established in free trade zones and operate using foreign currency. Free trade zones are open to investment by foreign or domestic investors.  Companies operating in free trade zones are exempted from sales taxes or taxes, and fees on capital assets and intermediate goods. The Legislative Package for the Stimulation of Investment, issued in 2015, stipulated a 1 percent duty paid on the value of commodities upon entry for storage projects and a 1 percent duty upon exit for manufacturing and assembly projects.

There are currently 11 public free trade zones in operation in the following locations: Alexandria, Damietta, East Port Said Port Zone, Ismailia, Qeft, Media Production City, Nasr City, Port Said, Shebin el Kom, and Suez.  Private free trade zones may also be established with a decree by GAFI, but are usually limited to a single project. Export-oriented industrial projects are given priority. There is no restriction on foreign ownership of capital in private free zones.

The Special Economic Zones (SEZ) Law 83//2002 allows establishment of special zones for industrial, agricultural, or service activities designed specifically with the export market in mind.  The law allows firms operating in these zones to import capital equipment, raw materials, and intermediate goods duty free. Companies established in the SEZs are also exempt from sales and indirect taxes, and can operate under more flexible labor regulations.  The first SEZ was established in the northwest Gulf of Suez.

Law 19//2007 authorized creation of investment zones, which require Prime Ministerial approval for establishment.  The government regulates these zones through a board of directors, but the zones are established, built, and operated by the private sector.  The government does not provide any infrastructure or utilities in these zones. Investment zones enjoy the same benefits as free zones in terms of facilitation of license-issuance, ease of dealing with other agencies, etc., but are not granted the incentives and tax/custom exemptions enjoyed in free zones.  Projects in investment zones pay the same tax/customs duties applied throughout Egypt. The aim of the law is to assist the private sector in diversifying its economic activities.

The Suez Canal Economic Zone, a major industrial and logistics services hub announced in 2014, is expected to include upgrades and renovations to ports located along the Suez Canal corridor, including West and East Port Said, Ismailia, Suez, Adabiya, and Ain Sokhna.  The Egyptian government has invited foreign investors to take part in the projects, which are expected to be built in several stages, the first of which is scheduled to be completed by 2020. Reported areas for investment include maritime services like ship repair services, bunkering, vessel scrapping and recycling; industrial projects, including pharmaceuticals, food processing, automotive production, consumer electronics, textiles, and petrochemicals; IT services such as research and development and software development; renewable energy; and mixed use, residential, logistics, and commercial developments.  Website for the Suez Canal Development Project: http://www.sczone.com.eg/English/Pages/default.aspx  

Performance and Data Localization Requirements

Egypt has rules on national percentages of employment and difficult visa and work permit procdeures.  The application of these provisions that restrict access to foreign worker visas has been inconsistent.  The government plans to phase out visas for unskilled workers, but as yet has not done so. For most other jobs, employers may hire foreign workers on a temporary six-month basis, but must also hire two Egyptians to be trained to do the job during that period.  Only jobs where it is not possible for Egyptians to acquire the requisite skills will remain open to foreign workers. The application of these regulations is inconsistent. The Labor Law allows Ministers to set the maximum percentage of foreign workers that may work in companies in a given sector.  There are no such sector-wide maximums for the oil and gas industry, but individual concession agreements may contain language establishing limits or procedures regarding the proportion of foreign and local employees.

No performance requirements are specified in the Investment Incentives Law, and the ability to fulfill local content requirements is not a prerequisite for approval to set up assembly projects.  In many cases, however, assembly industries still must meet a minimum local content requirement in order to benefit from customs tariff reductions on imported industrial inputs.

Decree 184//2013 allows for the reduction of customs tariffs on intermediate goods if the final product has a certain percentage of input from local manufacturers, beginning at 30 percent local content.  As the percentage of local content rises, so does the tariff reduction, reaching up to 90 percent if the amount of local input is 60 percent or above. In certain cases, a minister can grant tariff reductions of up to 40 percent in advance to certain companies without waiting to reach a corresponding percentage of local content.  In 2010, Egypt revised its export rebate system to provide exporters with additional subsidies if they used a greater portion of local raw materials.

Manufacturers wishing to export under trade agreements between Egypt and other countries must complete certificates of origin and local content requirements contained therein.  Oil and gas exploration concessions, which do not fall under the Investment Incentives Law, do have performance standards, which are specified in each individual agreement and which generally include the drilling of a specific number of wells in each phase of the exploration period stipulated in the agreement.

Egypt does not impose localization barriers on IT firms.  Egypt does not make local production a requirement for market access, does not have local content requirements, and does not impose forced technology or intellectual property transfers as a condition of market access.  But there are exceptions where the government has attempted to impose controls by requesting access to a company’s servers located offshore, or request servers to be located in Egypt and thus under the government’s control.

5. Protection of Property Rights

Real Property

The Egyptian legal system provides protection for real and personal property.  Laws on real estate ownership are complex and titles to real property may be difficult to establish and trace.  According to the World Bank’s 2019 Doing Business Report, Egypt ranks 125 of 190 for ease of registering property.

The National Title Registration Program introduced by the Ministry of State for Administrative Development has been implemented in nine areas within Cairo.  This program is intended to simplify property registration and facilitate easier mortgage financing. Real estate registration fees, long considered a major impediment to development of the real estate sector, are capped at no more than EGP 2000 (USD 110), irrespective of the property value.  In November 2012, the government postponed implementation of an enacted overhaul to the real estate tax and as of April 2017 no action has been taken.

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

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

Presidential Decree 17//2015 permitted the government to provide land free of charge, in certain regions only, to investors meeting certain technical and financial requirements.  This provision expires on April 1, 2020 and the company must provide cash collateral for five years following commencement of either production (for industrial projects) or operation (for all other projects).

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

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

Intellectual Property Rights

Egypt remains on the Special 301 Watch List in 2019.  Egypt’s IPR legislation generally meets international standards, but is weakly enforced.  Shortcomings in the IPR environment include infringements to copyrights and patents, particularly in the pharmaceuticals sector.

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

Multinational pharmaceutical companies complain that local generic drug-producing companies infringe on their patents.  Delays and inefficiencies in processing patent applications by the Egyptian Patent Office compound the difficulties pharmaceutical companies face in introducing new drugs to the local market.  The government views patent linkage as “a legal violation” against the concept of separation of authorities between the Ministry of Health and the Egyptian Patent Office. As a result, the Ministry of Health has the authority to issue permits for the sale of drugs, but generally issues these permits without cross-checking patent filings.

Eight GoE ministries have the responsibility to oversee IPR concerns: Supply and Internal Trade for trademarks, Higher Education and Research for patents, Culture for copyrights, Agriculture for plants, Communications and Information Technology for copyright of computer programs, Interior for combatting IPR violations, Customs for border enforcement, and Trade and Industry for standards and technical regulations.  Article 69 of Egypt’s 2014 constitution mandates the establishment of a “specialized agency to uphold [IPR] rights and their legal protection.” A National Committee on IPR was temporary established to address IPR matters until a permanent body is established. All IPR stakeholders are represented in the committee, and members meet every two months to discuss issues. The National Committee on IPR is chaired by the Ministry of Foreign Affairs and reports directly to the Prime Minister. As of April 2019, Parliament was drafting a revision of the 2002 IPR law, and was receptive to U.S. government advice and input.

The Egyptian Customs Authority (ECA) handles IPR enforcement at the national border and the Ministry of Interior’s Department of Investigation handles domestic cases of illegal production. The ECA cannot act unless the trademark owner files a complaint.  Moreover, Egypt’s Economic Courts often take years to reach a decision on IPR infringement cases.

ECA’s customs enforcement also tends to focus on protecting Egyptian goods and trademarks. The ECA is taking steps to adopt the World Customs Organization’s (WCO) Interface Public-Members platform, which allows customs officers to detect counterfeit goods by scanning a product’s barcode and checking the WCO trademark database system.

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

6. Financial Sector

Capital Markets and Portfolio Investment

To date, high returns on GoE debt have crowded out Egyptian investment in productive capacity.  The large foreign inflows Egypt witnessed in 2018 have been mostly portfolio capital, which is highly volatile.  Returns on GoE debt have begun to decrease, which could presage investment by Egyptian capital in the real economy

The Egyptian Stock Exchange (EGX) is Egypt’s registered securities exchange.  There are more than 500,000 investors registered to trade on the exchange. Stock ownership is open to foreign and domestic individuals and entities.  The GoE issues dollar-denominated and Egyptian pound-denominated debt instruments. The GoE has developed a positive outlook toward foreign portfolio investment, recognizing the need to attract foreign capital to help develop the Egyptian economy.

The Capital Market Law 95//1992, along with the Banking Law 88//2003, constitutes the primary regulatory frameworks for the financial sector.  The law grants foreigners full access to capital markets, and authorizes establishment of Egyptian and foreign companies to provide underwriting of subscriptions, brokerage services, securities and mutual funds management, clearance and settlement of security transactions, and venture capital activities.  The law specifies mechanisms for arbitration and legal dispute resolution and prohibits unfair market practices. Law 10//2009 created the Egyptian Financial Supervisory Authority (EFSA) and brought the regulation of all non-banking financial services under its authority. In 2017, EFSA became the Financial Regulatory Authority (FRA).

Settlement of transactions takes one day for treasury bonds and two days for stocks.  Although Egyptian law and regulations allow companies to adopt bylaws limiting or prohibiting foreign ownership of shares, virtually no listed stocks have such restrictions.  While a significant number of the companies listed on the exchange have been family-owned or dominated conglomerates, the exchange has gone through a period of major delisting of many companies that do not have sufficient shares or do not meet the management, fiscal, and transparency standards. Free trading of the remaining shares in many of these ventures is increasing, with a 110 percent increase in trade value and a 53 percent increase in trading volume from 2016 to 2017.  Companies are delisted from the exchange if not traded for six months.

The Higher Investment Council extended the suspension of capital gains tax for three years, until 2020 as part of efforts to draw investors back.   In 2017, the government implemented a stamp duty on all stock transactions with a duty of 0.125 percent on all buyers and sellers. Egypt’s stamp duty on stock exchange transactions includes for the first time a 0.3 percent levy for investors acquiring more than a third of a company’s stocks.

Foreign investors can access Egypt’s banking system by opening accounts with local banks, and buying and selling all marketable securities with brokerages.  The government has repeatedly emphasized its commitment to maintaining the profit repatriation system to encourage foreign investment in Egypt, especially since the pound floatation and implementation of the IMF loan program in November 2016.  The current system for profit repatriation by foreign firms requires sub-custodian banks to open foreign and local currency accounts for foreign investors (global custodians), which are exclusively maintained for stock exchange transactions. The two accounts serve as a channel through which foreign investors process their sales, purchases, dividend collections, and profit repatriation transactions using the bank’s posted daily exchange rates.  The system is designed to allow for settlement of transactions in fewer than two days.

The Egyptian credit market, open to foreigners, is vibrant and active. Repatriation of investment profits has become much easier, as there is enough available hard currency to execute FX trades. Since the floatation of the EGP in November 2016, FX trading is considered straightforward, given the reestablishment of the interbank foreign currency trading system.

Money and Banking System

Benefitting from the nation’s increasing economic stability over the past two years, Egypt’s banks have enjoyed both ratings upgrades and continued profitability.  Thanks to economic reforms, a new floating exchange system, and an Investment Law passed in 2017, the project finance pipeline is increasing after a period of lower activity.  Banking competition is improving to serve a largely untapped retail segment and the nation’s challenging, but potentially rewarding, the SME segment. The Central Bank of Egypt (CBE) has mandated that 20 percent of bank loans go to SMEs within the next two years).  Also, with only about a quarter to a third of Egypt’s adult population owning or sharing an account at a formal financial institution (according to press and comments from contacts), the banking sector has potential for growth and higher inclusion, which the government and banks discuss frequently.  A low median income plays a part in modest banking penetration. But the CBE has taken steps to work with banks and technology companies to expand financial inclusion.

Egypt’s banking sector is generally regarded as healthy and well-capitalized due in part to its deposit-based funding structure and ample liquidity—especially since the floatation and restoration of the interbank market.  The CBE estimates that approximately 4.3 percent of the banking sector’s loans are non-performing in 2018. Still, since 2011, a high level of exposure to government debt, accounting for over 40 percent of banking system assets, at the expense of private sector lending, has reduced the diversity of bank balance sheets and crowded out domestic investment.  Given the floatation of the Egyptian Pound and restart of the interbank trading system, Moody’s and S&P have upgraded the outlook of Egypt’s banking system to positive from stable to reflect improving macroeconomic conditions and ongoing commitment to reform.

38 banks operate in Egypt, including several foreign banks. The CBE has not issued a new commercial banking license since 1979.  The only way for a new commercial bank, whether foreign or domestic, to enter the market (except as a representative office) is to purchase an existing bank.  To this end, in 2013, QNB Group acquired National Société Générale Bank Egypt (NSGB). That same year, Emirates NBD, Dubai’s largest bank, bought the Egypt unit of BNP Paribas.  In 2015, Citibank sold its retail banking division to CIB Bank. In 2016 and 2017, Egypt indicated a desire to partially (less than 35 percent) privatize at least one (potentially two) state-owned banks and a total of 23 firms through either expanded or new listings on the Egypt Stock Exchange, though no action has been taken as of early 2018. In March 2019, Egypt began its program to privatize 23 State-Owned Enterprises with a successful minority stake in the Eastern Tobacco Company.

According to the CBE, banks operating in Egypt held EGP 4.216 trillion in total assets at the end of first quarter of 2018, of which approximately 45 percent were held by the largest five banks (the National Bank of Egypt, Banque Misr, the Commercial International Bank, Qatar National Bank Al-Ahli, and the Banque Du Caire). Egypt’s three state-owned banks (Banque Misr, Banque du Caire, and National Bank of Egypt) control nearly 40 percent of banking sector assets.

The chairman of the EGX recently stated that Egypt is allowing, even encouraging, exploration of the use of blockchain technologies across the banking community.  The FRA will review the development and most likely regulate how the banking system adopts the fast-developing blockchain systems into banks’ back-end and customer-facing processing and transactions. Seminars and discussions are beginning around Cairo, including visitors from Silicon Valley, in which leaders and experts are still forming a path forward.  While not outright banning cryptocurrencies, which is distinguished from blockchain technologies, authorities caution against speculation in unknown asset classes.

Alternative financial services in Egypt are extensive, given the large informal economy, estimated to be from 30 to 50 percent of the GDP. Informal lending is prevalent, but the total capitalization, number of loans, and types of terms in private finance is less well known.

Foreign Exchange and Remittances

Foreign Exchange

There has been significant progress in accessing hard currency since the floatation of the EGP and reestablishment of the interbank currency trading system in November 2016.  While the immediate aftermath saw some lingering difficulty of accessing currency, by 2017 most firms operating in Egypt reported having little difficulty obtaining hard currency for business purposes, such as importing inputs and repatriating profits.  In 2016 the Central Bank lifted dollar deposit limits on households and firms importing priority goods which had been in place since early 2015. With net foreign reserves at an all-time high of over USD 44 billion (March 2019), accessing foreign currency is no longer an issue.

Funds associated with investment can be freely converted into any world currency, depending on the availability of that currency in the local market.  Some firms and individuals report that the process takes time. But the interbank trading system works in general and currency is available as the foreign exchange markets continue to react positively to the government’s commitment to macro and structural reform.

The floating exchange rate operates on the principle of market supply and demand: the exchange rate is dictated by availability of currency and demand by firms and individuals.  While there is some reported informal Central Bank window guidance, the rate generally fluctuates depending on market conditions, without direct market intervention by authorities.  In general, the EGP has stabilized within an acceptable exchange rate range, which has increased the foreign exchange market’s liquidity. Since the early days following the floatation, there has been very low exchange rate volatility.

Remittance Policies

The 1992 U.S.-Egypt Bilateral Investment Treaty provides for free transfer of dividends, royalties, compensation for expropriation, payments arising out of an investment dispute, contract payments, and proceeds from sales.

The Investment Incentives Law stipulates that non-Egyptian employees hired by projects established under the law are entitled to transfer their earnings abroad.  Conversion and transfer of royalty payments are permitted when a patent, trademark, or other licensing agreement has been approved under the Investment Incentives Law.

Banking Law 88//2003 regulates the repatriation of profits and capital.  The current system for profit repatriation by foreign firms requires sub-custodian banks to open foreign and local currency accounts for foreign investors (global custodians), which are exclusively maintained for stock exchange transactions.  The two accounts serve as a channel through which foreign investors process their sales, purchases, dividend collections, and profit repatriation transactions using the bank’s posted daily exchange rates. The system is designed to allow for settlement of transactions in fewer than two days, though in practice some firms have reported short delays in repatriating profits, no longer due to availability but more due to processing steps.

Sovereign Wealth Funds

The Cabinet has approved  the establishment of a sovereign wealth fund, which will be charged with investing state funds locally and abroad across asset classes and will be tapped to manage underutilized assets.  The framework of the EGP200 billion sovereign wealth fund was issued in March of 2018. The government is collaborating with regional and European institutions to take part in forming the fund’s sector-specific units.

7. State-Owned Enterprises

State and military-owned companies compete directly with private companies in many sectors of the Egyptian economy.  According to Public Sector Law 203//1991, SOEs should not receive preferential treatment from the government, nor should they be accorded any exemption from legal requirements applicable to private companies.  In addition to the SOEs groups, 40 percent of the banking sector’s assets are controlled by three state-owned banks (Banque Misr, Banque du Caire, and National Bank of Egypt). In March 2014, the government announced that nine public holding companies will be placed under an independent sovereign fund.

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

The state-owned telephone company, Telecom Egypt, lost its legal monopoly on the local, long-distance, and international telecommunication sectors in 2005.  Nevertheless, Telecom Egypt held a de facto monopoly until late 2016 because the National Telecommunications Regulatory Authority (NTRA) had not issued additional licenses to compete in these sectors.  In October 2016, NTRA, however, implemented a unified license regime that allows companies to offer both fixed line and mobile networks. The agreement allows Telecom Egypt to enter the mobile market and the three existing mobile companies to enter the fixed line market.  The introduction of Telecom Egypt as a new mobile operator in the Egyptian market will increase competition among operators, which will benefit users by raising the bar on the quality of services as well as improving prices. Egypt is not a party to the WTO’s Government Procurement Agreement.

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

Privatization Program

Egypt has made some progress on its program to privatize 23 State-Owned Enterprises (SOEs). The process formally began in March 2019 with a successful public offering of a minority stake in the Eastern Tobacco Company. The long-awaited program had been delayed repotedly due to market conditions.  The government plans to sell 20-30 percent of Banque du Caire’s shares in an initial public offering on the EGX by the end of 2019, according to the Central Bank. Efforts to privatize before had stalled in an environment where the public often associates privatization with poor quality and higher prices.

Egypt’s privatization program is based on Public Enterprise Law 203//1991, which permits the sale of SOEs to foreign entities.  In 1991, Egypt began a privatization program for the sale of several hundred wholly or partially SOEs and all public shares of at least 660 joint venture companies (joint venture is defined as mixed state and private ownership, whether foreign or domestic).  Bidding criteria for privatizations were generally clear and transparent.

8. Responsible Business Conduct

Responsible Business Conduct (RBC) programs have grown in popularity in Egypt over the last 10 years.  Most programs are limited to multinational and larger domestic companies as well as the banking sector and take the form of funding and sponsorship for initiatives supporting entrepreneurship and education and other social activities.  Environmental and technology programs are also garnering greater participation. The Ministry of Trade has engaged constructively with corporations promoting RBC programs, supporting corporate social responsibility (CSR) conferences and providing Cabinet-level representation as a sign of support to businesses promoting RBC programming.

A number of organizations and corporations work to foster the development of RBC in Egypt.  The American Chamber of Commerce has an active CSR committee. Several U.S. pharmaceutical companies are actively engaged in RBC programs related to Egypt’s hepatitis-C epidemic.  The Egyptian Corporate Responsibility Center, which is the UN Global Compact local network focal point in Egypt, aims to empower businesses to develop sustainable business models as well as improve the national capacity to design, apply, and monitor sustainable responsible business conduct policies.  In March 2010, Egypt launched an environmental, social, and governance (ESG) index, the second of its kind in the world after India’s, with training and technical assistance from Standard and Poor’s. Egypt does not participate in the Extractive Industries Transparency Initiative. Public information about Egypt’s extractive industry remains limited to the government’s annual budget.

9. Corruption

Egypt has a set of laws to combat corruption by public officials, including an Anti-Bribery Law (which is contained within the Penal Code), an Illicit Gains Law, and a Governmental Accounting Law, among others.  Countering corruption remains a long-term focus. There have been cases involving public figures and entities, including the arrests of Alexandria’s deputy governor and the secretary general of Suez on several corruption charges and the investigation into five members of parliament alleged to have sold Hajj visas.  Nevertheless, according to some businesses, corruption laws have not been consistently enforced. Transparency International’s Corruption Perceptions Index ranked Egypt 105 out of 180 in its 2018 survey, an improvement of 12 places from its rank of 117 in 2017. Transparency International also found that approximately 50 percent of Egyptians reported paying a bribe in order to obtain a public service.

Some private companies use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials. There is no government requirement for private companies to establish internal codes of conduct to prohibit bribery.

Egypt ratified the UN Convention against Corruption in February 2005. It has not acceded to the OECD Convention on Combating Bribery or any other regional anti-corruption conventions.

While NGOs are active in encouraging anti-corruption activities, dialogue between the government and civil society on this issue is almost non-existent, the OECD found in 2009 and a trend that continues today.  While government officials publicly asserted they shared civil society organizations’ goals, they rarely cooperated with NGOs, and applied relevant laws in a highly restrictive manner against NGOs critical of government practices.  Media was also limited in its ability to report on corruption, with Article 188 of the Penal Code mandating heavy fines and penalties for unsubstantiated corruption allegations.

U.S. firms have sometimes identified corruption as an obstacle to FDI in Egypt.  Companies might encounter corruption in the public sector in the form of requests for bribes, using bribes to facilitate required government approvals or licenses, embezzlement, and tampering with official documents.  Corruption and bribery are reported in dealing with public services, customs (import license and import duties), public utilities (water and electrical connection), construction permits, and procurement, as well as in the private sector.  Businesses have described a dual system of payment for services, with one formal payment and a secondary, unofficial payment required for services to be rendered.

Resources to Report Corruption

Several agencies within the GoE share responsibility for addressing corruption.  Egypt’s primary anticorruption body is the Administrative Control Authority (ACA), which has jurisdiction over state administrative bodies, SOEs, public associations and institutions, private companies undertaking public work, and organizations to which the state contributes in any form.  In October 2017, Parliament approved and passed amendments to the ACA law, which grants the organization full technical, financial, and administrative authority to investigate corruption within the public sector (with the exception of military personnel/entities).  The law is viewed as strengthening an institution, which was established in 1964.  The ACA appears well funded and well trained when compared with other Egyptian law enforcement organizations.  Strong funding and the current ACA leadership’s close relationship with President Sisi reflect the importance of this organization and its mission. It is too small for its mission (roughly 300 agents) and is routinely over-tasked with work that would not normally be conducted by a law enforcement agency.

The ACA periodically engages with civil society.  For example, it has met with the American Chamber of Commerce and other organizations to encourage them to seek it out when corruption issues arise.

In addition to the ACA, the Central Auditing Authority (CAA) acts as an anti-corruption body, stationing monitors at state-owned companies to report corrupt practices.  The Ministry of Justice’s Illicit Gains Authority is charged with referring cases in which public officials have used their office for private gain.  The Public Prosecution Office’s Public Funds Prosecution Department and the Ministry of Interior’s Public Funds Investigations Office likewise share responsibility for addressing corruption in public expenditures.

Contact information for the government agency responsible for combating corruption:

Minister of Interior
General Directorate of Investigation of Public Funds
Telephone: 02-2792-1395 / 02-2792 1396
Fax: 02-2792-2389

10. Political and Security Environment

Stability and economic development remain Egypt’s priorities. The GoE has taken measures to eliminate politically-motivated violence, while also limiting peaceful protests and political expression.  Egypt’s presidential elections proceeded without incident in March 2018. Late 2018 and early 2019 saw a relatively low number of small-scale terrorist attacks primarily against security targets in Cairo and elsewhere in the Nile Valley, with some against civilians. Militant groups committed several large-scale attacks in the Western Desert and Sinai in late 2017, and a car bombing in Alexandria in early 2018.  In the Sinai Peninsula, militants affiliated with ISIS have conducted terrorist attacks against military installations and personnel, as well as a prominent religious site targeting civilians. In response, the government launched a comprehensive counterterrorism offensive beginning in early 2018, which is still ongoing. The United States designated three groups – Harakat Sawaad Misr (HASM), Liwaa el Thawra, and ISIS Egypt – as Specially Designated Global Terrorists in 2018, and designated ISIS-Sinai Province as an alias of Ansar Bayt al-Maqdis, which had been designated a Foreign Terrorist Organization in September 2015.

11. Labor Policies and Practices

Official statistics put Egypt’s labor force at approximately 29 million, with an official unemployment rate of 10.7 percent as of December 2018, a 0.6 percent decrease since the previous quarter and a continuation of a gradual downward trend since its peak of over 13 percent in 2014.  Women account for some 75 percent of those unemployed, according to a May 2017 statement by Abu Bakr el-Gendy, head of Egypt’s Central Agency for Public Mobilization and Statistics (CAPMAS). Accurate figures are difficult to determine and verify given Egypt’s large informal economy in which some 62 percent of the non-agricultural workforce is engaged, according to ILO estimates.

The government bureaucracy and public sector enterprises are substantially over-staffed compared to the private sector and other international norms.  According to the World Bank, Egypt has the highest number of government workers per capita in the world.  Businesses highlight a mismatch between labor skills and market demand, despite high numbers of university graduates in a variety of fields.  Foreign companies frequently pay internationally competitive salaries to attract workers with valuable skills.

The Unified Labor Law 12//2003 provides comprehensive guidelines on labor relations, including hiring, working hours, termination of employees, training, health, and safety.  The law grants a qualified right for employees to strike, as well as rules and guidelines governing mediation, arbitration, and collective bargaining between employees and employers.   Non-discrimination clauses are included, and the law complies with labor-related International Labor Organization (ILO) conventions regulating the employment and training of women and eligible children. Egypt ratified ILO Convention 182 on combating the Worst Forms of Child Labor in April 2002. On July 2018, Egypt launched the first National Action Plan on combating the Worst Forms of Child Labor. The law also created a national committee to formulate general labor policies and the National Council of Wages, whose mandate is to discuss wage-related issues and national minimum-wage policy, but it has rarely convened and a minimum wage has rarely been enforced in the private sector. .

Parliament adopted a new Trade Unions Law in late 2017, replacing a 1976 law, which experts said was out of compliance with Egypt’s commitments to ILO conventions.  After a March 2016 Ministry of Manpower and Migration (MOMM) directive not to recognize documentation from any trade union without a stamp from the government-affiliated Egyptian Trade Union Federation (ETUF), the new law established procedures for registering independent trade unions, but some of the unions noted that the directorates of the Ministry of Manpower didn’t implement the law and placed restrictions on freedoms of association and organizing for trade union elections.  Executive regulations for trade union elections stipulate a very tight deadline of three months for trade union organizations to legalize their status, and one month to hold elections, which, critics said, restricted the ability of unions to legalize their status or to campaign. On April 3, 2018, the government registered its first independent trade union in more than two years. Under the new law, a trade union or workers’ committee may be formed if 150 employees in an entity express a desire to organize.  Minimum membership thresholds for forming a general trade union are 20,000 and for a trade union federation, 200,000. The new law explicitly bans compulsory membership or the collection of union dues without written consent of the worker and allows members to quit unions. Each union, general union, or federation is registered as an independent legal entity, thereby enabling any such entity to exit any higher-level entity.

The 2014 Constitution stipulated in Article 76 that “establishing unions and federations is a right that is guaranteed by the law.”  Only courts are allowed to dissolve unions. The 2014 Constitution maintained past practice in stipulating that “one syndicate is allowed per profession.”  The Egyptian constitutional legislation differentiates between white-collar syndicates (e.g. doctors, lawyers, journalists) and blue-collar workers (e.g. transportation, food, mining workers). Workers in Egypt have the right to strike peacefully, but strikers are legally obliged to notify the employer and concerned administrative officials of the reasons and time frame of the strike 10 days in advance.  In addition, strike actions are not permitted to take place outside the property of businesses.  The law prohibits strikes in strategic or vital establishments in which the interruption of work could result in disturbing national security or basic services provided to citizens.  In practice, however, workers strike in all sectors, without following these procedures, but at risk of prosecution by the government.

Collective negotiation is allowed between trade union organizations and private sector employers or their organizations.  Agreements reached through negotiations are recorded in collective agreements regulated by the Unified Labor law and usually registered at MOMM.  Collective bargaining is technically not permitted in the public sector, though it exists in practice.  The government often intervenes to limit or manage collective bargaining negotiations in all sectors.

MOMM sets worker health and safety standards, which also apply in public and private free zones and the Special Economic Zones (see below).  Enforcement and inspection, however, are uneven.  The Unified Labor Law prohibits employers from maintaining hazardous working conditions, and workers have the right to remove themselves from hazardous conditions without risking loss of employment.

Egyptian labor laws allow employers to close or downsize operations for economic reasons.  The government, however, has taken steps to halt downsizing in specific cases.  The Unemployment Insurance Law, also known as the Emergency Subsidy Fund Law 156//2002, sets a fund to compensate employees whose wages are suspended due to partial or complete closure of their firm or due to its downsizing.  The Fund allocates financial resources that will come from a 1 percent deduction from the base salaries of public and private sector employees.  According to foreign investors, certain aspects of Egypt’s labor laws and policies are significant business impediments, particularly the difficulty of dismissing employees.  To overcome these difficulties, companies often hire workers on temporary contracts; some employees remain on a series of one-year contracts for more than 10 years. Employers sometimes also require applicants to sign a “Form 6,” an undated voluntary resignation form which the employer can use at any time, as a condition of their employment. Negotiations on drafting a new Labor Law, which has been under consideration in the Parliament for two years, have included discussion of requiring employers to offer permanent employee status after a certain number of years with the company and declaring Form 6 or any letter of resignation null and void if signed prior to the date of termination.

Egypt has a dispute resolution mechanism for workers.  If a dispute concerning work conditions, terms, or employment provisions arises, both the employer and the worker have the right to ask the competent administrative authorities to initiate informal negotiations to settle the dispute. This right can be exercised only within seven days of the beginning of the dispute. If a solution is not found within 10 days from the time administrative authorities were requested, both the employer and the worker can resort to a judicial committee within 45 days of the dispute.  This committee is comprised of two judges, a representative of MOMM and representatives from the trade union, and one of the employers’ associations. The decision of this committee is provided within 60 days. If the decision of the judicial committee concerns discharging a permanent employee, the sentence is delivered within 15 days. When the committee decides against an employer’s decision to fire, the employer must reintegrate the latter in his/her job and pay all due salaries. If the employer does not respect the sentence, the employee is entitled to receive compensation for unlawful dismissal.

Labor Law 12//2003 sought to make it easier to terminate an employment contract in the event of “difficult economic conditions.”  The Law allows an employer to close his establishment totally or partially or to reduce its size of activity for economic reasons, following approval from a committee designated by the Prime Minister.  In addition, the employer must pay former employees a sum equal to one month of the employee’s total salary for each of his first five years of service and one and a half months of salary for each year of service over and above the first five years.  Workers who have been dismissed have the right to appeal. Workers in the public sector enjoy lifelong job security as contracts cannot be terminated in this fashion; however, government salaries have eroded as inflation has outpaced increases.

Egypt has regulations restricting access for foreigners to Egyptian worker visas, though application of these provisions has been inconsistent.  The government plans to phase out visas for unskilled workers, but as yet has not done so. For most other jobs, employers may hire foreign workers on a temporary six-month basis, but must also hire two Egyptians to be trained to do the job during that period.  Only jobs where it is not possible for Egyptians to acquire the requisite skills will remain open to foreign workers. Application of these regulations is inconsistent.

12. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) is operating in Egypt to provide the capital and risk mitigation tools that investors need to overcome the barriers faced in this region. In 2012, OPIC launched the USD 250 million Egypt Loan Guaranty Facility (ELGF), in partnership with USAID, to support bank lending and stimulate job creation. The ELGF’s main objective is to help SMEs access finance for growth and development, by providing creditors the needed guarantees to help them mitigate loan risks.  This objective goes hand-in-hand with the Central Bank of Egypt’s initiative to support SMEs. The ELGF expands lending to SMEs by supporting local partner banks as they lend to the target segment and increase access to credit for SMEs. The result is the promotion of jobs and private sector development in Egypt. The ELGF and partner banks sign a Guarantee Facility Agreement (GFA) to outline main terms and conditions of credit guarantee. The two bank partners are Commercial International Bank (CIB) and the National Bank of Kuwait (NBK).  USAID has collaborated with OPIC/ELGF and the CIB to provide training to SME owners and managers on the basics of accounting and finance, banking and loan processes, business registration, and other topics that will help SMEs access financing for business growth.

OPIC is affiliated with several renewable energy, oil and gas, and water supply projects in Egypt, as well. Apache Corporation, the largest U.S. investor in Egypt, has supported its natural gas investment with OPIC risk insurance since 2004. In December 2018, the OPIC Board approved a project to provide USD 430 million in political risk insurance to Noble Energy, Inc. to support the restoration, operation, and maintenance of a natural gas pipeline in Egypt and the supply of natural gas through a pipeline from Israel.

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 $235,370    2018 $242,800 www.worldbank.org/en/country  
Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country (M USD , stock positions) 2018 $2,244.4  2017 $9,352.0  BEA data available at https://tradingeconomics.com/egypt/foreign-direct-investment  
Host country’s FDI in the United States (M USD , stock positions) 2017  $2,960.0  2017  $2,950.5 BEA data available at http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Total inbound stock of FDI as % host GDP N/A N/A 2017 55.63% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

Measurements of FDI in Egypt vary according to the source and the definitions employed to calculate the figure.  The Central Bank of Egypt records figures on quarterly and annual investment flows based on financial records for Egypt’s balance of payments statistics.  They are reported in the table below. The Ministry of Petroleum maintains statistics on investment in the oil and gas sector (which accounts for the bulk of FDI in Egypt), while GAFI has statistics on all other investments – including re-invested earnings and investment-in-kind.  Statistics are not always current. GAFI’s figures are calculated in EGP at the historical value and rate of exchange, with no allowance for depreciation, and are cumulative starting from 1971.

U.S. firms are active in a wide range of manufacturing industries, producing goods for the domestic and export markets.  U.S. investors include American Express, AIG, Ideal Standard, Apache Corporation, Bechtel, Bristol-Myers Squibb, Cargill, Citibank, Coca-Cola, Devon Energy, Dow Chemical, ExxonMobil, Eveready, General Motors, Guardian Industries, H.J.  Heinz, Johnson & Johnson, Kellogg’s, Mars, Mondelez, Microsoft, Proctor and Gamble, Pfizer, PepsiCo, Pioneer, and Xerox. Leading investors from other countries include BG, ENI-AGIP, BP, Vodaphone, and Shell (in the oil/gas sector), Unilever, Al-Futtaim, (UAE), the M.A. Kharafi Group (Kuwait), and the Kingdom Development Company (Saudi Arabia).


Table 3: Sources and Destination of FDI

Data not available.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars, 2016)
Total Equity Securities Total Debt Securities
All Countries $1,886 100% All Countries $888 100% All Countries $998 100%
Cayman Islands $416 22% Saudi Arabia $347 39% Cayman Islands $406 41%
Saudi Arabia $392 13% International Organizations $250 28% United States $190 19%
International Organizations $250 12% United Kingdom $45 5% Qatar $103 10%
United States $219 5% Italy $36 4% Germany $48 5%
Qatar $103 5% Switzerland $32 4% Saudi Arabia $46 5%

El Salvador

Executive Summary

The outgoing government of El Salvador (GOES) is generally perceived as unsuccessful at improving the investment climate.  Political polarization, cumbersome bureaucracy, an ineffective judicial system, and widespread violence and extortion have all contributed to this perception.  The GOES has taken some measures to improve the business climate, with very limited results. The most commonly cited impediments to doing business in El Salvador include the discretionary application of laws/ regulations, lengthy and unpredictable permitting procedures, and customs delays.

President-elect Nayib Bukele assumes office on June 1, 2019.  He has pledged to support investors and make El Salvador a more attractive destination for investment.  The incoming administration’s plans to improve the investment climate will be evident soon after Bukele takes office.

In 2015, El Salvador’s second Millennium Challenge Corporation (MCC) Compact entered into force.  The five-year USD 277 million Compact (plus USD 88.2 million from GOES funding) seeks to improve El Salvador’s investment climate by improving its productivity and competitiveness in international markets.  MCC Compact information is available at https://www.mcc.gov/where-we-work/program/el-salvador-investment-compact.

El Salvador began implementing the Simplified Administrative Procedures Law in February 2019.  This law seeks to streamline and consolidate administrative processes among GOES entities to facilitate investment.  In 2016, El Salvador adopted the Electronic Signature Law to facilitate e-commerce and trade, which is still pending implementation.

In August 2018, El Salvador recognized the People’s Republic of China and ceased to recognize Taiwan.  El Salvador signed several memorandums of understanding (MOUs) with China, but has not entered into negotiations with China for an investment or trade agreement.  Although the GOES announced the cancellation of its trade agreement with Taiwan in February 2019, the Supreme Court halted the cancellation in March 2019 and the agreement remains in force.

In November 2018, El Salvador officially joined the Northern Triangle Customs Union with Guatemala and Honduras following the ratification of the Accession Protocol by Legislative Assembly.  The Customs Union inaugurated the first integrated border post in El Salvador in December 2018. Northern Triangle countries continue technical-level negotiations to operationalize the Customs Union, harmonize customs regulations and procedures, interconnect automated systems, and finalize which goods will freely move within the single customs territory.  Full implementation of the Customs Union is targeted for 2020.

In recent years, El Salvador has lagged behind the region in attracting foreign direct investment (FDI).  The sectors with the largest investment have historically been textiles and retail establishments, though investment in energy projects has been increasing steadily.

In November 2018, El Salvador and Bolivia signed a Partial Scope Agreement that is pending ratification in the Legislative Assembly.  In 2018, El Salvador also ratified a free trade agreement (FTA) with South Korea, signed trade agreements with Cuba and Bolivia, and reinitiated long-stalled FTA negotiations with Canada.

In December 2018, El Salvador adopted the Regulatory Improvement Law (LMR), which establishes the Regulatory Improvement Institution (OMR), an MCC compact investment, as the government’s sole institution for regulatory reform.  OMR will coordinate the regulatory improvement process and the simplification of business procedures and paperwork.  In addition, El Salvador enacted the Law on the Elimination of Bureaucratic Barriers in December 2018 that creates a specialized tribunal to verify that regulations and procedures are implemented in compliance with the law.  The new tribunal has the authority to sanction public officials who impose administrative requirements not contemplated in the law.

Table 1

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 “Ease of Doing Business” 2018 85 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2018 104 of 126 http://www.globalinnovationindex.org/content/page/data-analysis
U.S. FDI in partner country ($M USD, stock positions) 2017 $3,037 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $3,560 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment