West Bank and Gaza
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The PA continues to rank poorly in the World Bank’s Ease of Doing Business report, receiving a ranking of 140 out of 190 in 2017 (compared to 138 in 2016) due to a challenging business environment affecting domestic and foreign investors alike. The 2016 Doing Business Report scored the Palestinian economy particularly low in the categories of Resolving Insolvency (169 of 190), Starting a Business (169 of 190), and Dealing with Construction Permits (157of 190), though all of these scores were improvements from last year. The cost of starting a business has been reduced by eliminating the minimum paid-in capital requirement at registration. In addition, paying taxes became easier for companies with the new option of paying corporate income tax in advance through one or four installments. Securing construction permits became smoother after the PA streamlined the process for obtaining the civil defense permit and for submitting the stamped concrete casting permit to the municipality. The PA performed worse this year with regard to Getting Credit (118 of 190), Paying Taxes (101 of 190), and Protecting Minority Investors (158 of 190). Overall, the World Bank’s Doing Business 2017 indicates improvement in the regulatory environment when comparing with best practice indicators, but a decline when measuring progress against other economies.
In 2007, the PA began implementing reforms aimed at stimulating growth through private sector investment as well as consolidating public finances. This year, the PA put out its National Policy Agenda for 2017 -2022, which replaced the 2014-2016 National Development Plan (NDP). The NPA is both a national development policy and a political document outlining the PA’s aspirations. The NPA contains three pillars: the path to independence, government reform, and sustainable development. The latter section highlights the need for economic independence, which includes domestic reform to promote economic growth with fewer regulatory restrictions, supporting business start-ups and micro, small and medium enterprises, as well as looking ahead to economic opportunities following the resolution of the political conflict with Israel.
Since June of 2010, the PA has not hosted any major investment conference, though they have announced plans to hold one in 2017.
PA – GOI trade relations are governed by the 1994 Paris Protocol, which was meant to last for five years until a final peace agreement. Many of the stipulations are therefore outdated or are not fully implemented. Since 1995, the PA has taken steps to facilitate and increase foreign trade by signing free trade agreements with the European Union, the European Free Trade Association (EFTA), Canada, and Turkey. The PA also is eligible for the benefits of the Free Trade Agreement signed between the United States and Israel. The PA has finalized other trade agreements with Russia, Jordan, Egypt, the Gulf States, Morocco, Tunisia, Mercosur, Vietnam, and Germany and is a member of the Greater Arab Free Trade Area. The PA is preparing to seek permanent observer status in the World Trade Organization (WTO); it participated in the 2005, 2009, 2011, 2013, and 2015 WTO Ministerial meetings as an ad hoc observer.
Limits on Foreign Control and Right to Private Ownership and Establishment
The PA’s 2014 amendments to Promotion of Investment in Palestine Law No. 1 of 1998 shifted promotional incentives from a focus on those that benefit from industrial projects providing large capital investments to a focus on employment growth, development of human capital, increased exports, and local sourcing of machinery and raw materials. (See “Investment Incentives” below.)
Under the Jordanian Company Law of 1966, the foreign investor should own no more than 49 percent of a company, with a local partner holding at least 51 percent. However, foreign investors can readily obtain exceptions to this policy by working with PIPA and the MONE, which issues exceptions promptly. Foreign and domestic private entities may` establish and own business enterprises in areas under PA civil control.
The PA is currently working on finalizing a draft of a new Companies Law, which would replace the 1966 law. This new law – which is expected to be issued by Presidential decree in summer 2017 — introduces best practices for debt resolution, protecting minority investors, and starting a business.
Certain investment categories require pre-approval by the Council of Ministers (PA Cabinet). These include investments involving (1) weapons and ammunition, (2) aviation products and airport construction, (3) electrical power generation/distribution, (4) reprocessing of petroleum and its derivatives, (5) waste and solid waste reprocessing, (6) wired and wireless telecommunication, and (7) radio and television. Purchase of land by foreigners also requires approval by the Council of Ministers.
Other Investment Policy Reviews
The Office of the Quartet (OQ), an international organization working to support the Palestinian people on economic development, rule of law and improved movement and access for goods and people, has continued to work on advancing economic development and application of the rule of law. OQ gives priority to areas where accomplishments are most viable under current conditions. Its current priorities focus on five strategic pillars that represent the fundamental impact areas that contribute to economic growth and capacity building: (i) movement and trade; (ii) investment promotion; (iii) reliable infrastructure; (iv) unlocking value of land and human capital; and (v) strengthening government. A summary overview of the Initiative for the Palestinian Economy is available online .
The Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), and the United Nations Conference on Trade and Development (UNCTAD) do not provide investment policy reviews for the West Bank and Gaza.
Foreign companies may register businesses in the West Bank and Gaza according to the Jordanian Companies Law Number 12 of 1964. The Ministry of National Economy (MONE) and the PIPA provide information online about the business registration process, but the PA does not offer a business registration website. The PA is working to simplify the process of starting a business, which currently requires ten steps and 43 days to complete, according to the World Bank’s 2017 Doing Business Report. This includes two days to register the company, one day to pay registration fees, two days to register for taxes, one day to register with the Chamber of Commerce, and 36 days to obtain the business license from the Municipality. Foreign investors must obtain approval from the MONE and submit the application for registration through a local attorney. The process requires 11 steps for firms and takes 44 days to complete. The procedures required to register this form of company are as follows (and available online here ):
- Search for company name and reserve proposed name via MONE’s website
- Submit company incorporation papers to MONE and sign document pledging to deposit initial capital within four years, if applicable (Jordanian Dinars (JD) 250,000 for a public shareholding company, JD 10,000 for a private shareholding company, or JD 10,000 for a nonprofit; other companies are exempt from this requirement). Obtain certificate of registration from the MONE.
- Register with the Companies Registry and pay registration fee.
- Register for income tax and value added tax.
- Register with the Chamber of Commerce.
- Obtain business license from the municipality.
- Obtain approval from fire department and Ministry of Health.
In addition to applicable fees, public and private companies must submit the following documents to the Companies Registry:
- Articles of Association (3 copies)
- Company Bylaws (3 copies)
- Shareholders Identification (copies)
- Verified company name
- Registration application (3 copies)
- Powers of attorney
Foreign companies may work with PIPA to obtain the investment registration certificate and investment confirmation certificate. In addition, foreign companies seeking to open branches in the West Bank or Gaza must submit registration documents certified by the Palestinian Liberation Organization (PLO) representative in their home country. According to PIPA, the majority of Palestinian companies are small- and medium-sized enterprises (SMEs), and the PA has sought to support SME development and financing. SMEs are categorized according to staff size: small enterprises employ up to nine people, while medium enterprises employ 10-19 people.
The PA encourages foreign investors, and is planning a large investment conference this summer to market potential opportunities for regional and international investors. The PA is also working to strengthen incentives for high potential sectors via PIPA.
2. Bilateral Investment Agreements and Taxation Treaties
The PA recognizes the international trade agreements listed below, which refer implicitly or explicitly to WTO rules. These include:
- Paris Protocol Agreement with Israel (1994) – free trade in products between Israel and Palestinian markets
- Technical and Economic Cooperation Accord with Egypt (1994)
- Trade Agreement between the PA and Jordan (1995)
- Duty Free Arrangements with the United States (1996)
- The EuroMed Interim Association Agreement on Trade and Co-operation (1997)
- Interim Agreement between European Free Trade Area (EFTA) states and the PLO (1997)
- Joint Canadian-Palestinian Framework for Economic Cooperation and Trade (1999)
- Agreement on Commercial Cooperation with Russia – extends MFN status
- Greater Arab Free Trade Area, to which PA is a party (2001)
- Free Trade Agreement with Turkey (2004)
- Trade Agreement with the EU – duty free access for Palestinian agricultural and fishery goods (2011)
- Free Trade Agreement with Mercosur (2011)
- Unilateral acts by other Arab trade partners extending preferential treatment to trade with the Palestinians.
Since 1996, duty-free treatment has been available for all goods exported from the West Bank and Gaza to the United States, provided they meet qualifying criteria as spelled out in the U.S. – Israel Free Trade Area (FTA) Implementation Act of 1985, as amended. The duty-free benefits accorded under the FTA exceed those benefits which would be provided under the Generalized System of Preferences (GSP). It is worth noting that the benefits for imports provided in all of the trade agreements listed above are subject to application by the GOI, since all goods destined for the West Bank or Gaza must enter through Israeli-controlled crossings or ports. The GOI generally applies duties and tariffs consistent with its trade agreements, not with the PA’s trade agreements.
The West Bank and Gaza do not have a bilateral taxation treaty with the United States.
3. Legal Regime
Transparency of the Regulatory System
The PA has worked to erect a sound legislative framework for business and other economic activity in the areas under its jurisdiction since its creation in 1994; however, implementation and monitoring of implementation needs to be strengthened, according to many observers. The PA MONE, with the assistance of international donors, is in the process of drafting a number of proposed laws related to business and commercial regulation, including licensing, intellectual property rights, business registration regulation of competition, secured lending, bankruptcy, and trademark and copyright. In May 2016, the PA passed the Secure Transactions Law, Moveable Assets Law and Leasing Law.
The MONE regularly holds stakeholder meetings for draft commercial legislation to gather input from the private sector, and publishes drafts of the proposed law. Because the Palestinian Legislative Council has not met in the West Bank since 2007, each law must be adopted as a presidential decree, an effort that often delays reform efforts. The proposed laws will likely need to be approved by the PLC, should it reconvene in the future. The PA Ministry of Justice, in cooperation with Birzeit University, publishes online the Official Gazette of all PA legislation since 1994 at http://muqtafi.birzeit.edu/en/index.aspx .
The PA budget is publicly available, including on the Ministry of Finance website. A regulatory body governs the insurance sector, and the PA has adopted a telecom law that calls for establishment of an independent regulator. However, establishment of the telecom regulator has stalled due to disagreement over its proposed members and authorities.
The Palestinian Standards Institution also has a website with information on standards for the business community (http://www.psi.pna.ps/ar_new/index.php?p=home ).
International Regulatory Considerations
The PA is not a member of the World Trade Organization (WTO), but is actively preparing for Permanent Observer status, and participated in the 2005, 2009, 2011, 2013, and 2015 WTO Ministerial meetings as an ad hoc observer.
Legal System and Judicial Independence
Commercial disputes can be resolved by way of conciliation, mediation, or domestic arbitration. Arbitration in the Palestinian territories is governed by Law No. 3 of 2000. International arbitration is accepted. The law sets out the basis for court recognition and enforcement of arbitral awards. Generally, every dispute may be referred to arbitration by agreement of the parties, unless prohibited by the law. Article 4 of the law states that certain disputes cannot be referred to arbitration, including those involving marital status, public order issues, and cases where no conciliation is permitted. In the event that parties do not agree on the formation of the arbitration tribunal, each party may choose one arbitrator and arbitrators shall then choose a presiding arbitrator, unless the parties agree to do otherwise.
Judgments made in other countries that need to be enforced in the West Bank/Gaza are honored, according to the prevailing law in the West Bank, mainly Jordanian Law No. 8 of 1952 as amended by the PA in 2005. Gazan courts refer back to Israeli and Egyptian laws, which were in force prior to 1993, for matters not covered by PA law; however, the de facto Hamas-led government in Gaza does not consistently apply PA, Egyptian, or Israeli laws. The law covers many issues in relation to the enforcement of foreign judgments.
Laws and Regulations on Foreign Direct Investment
The PA is working on a draft Foreign Trade Law, but it is still in the review process. A project to develop, draft and implement a new Competition Law will begin in 2017. As mentioned above, there are laws that govern foreign direct investment, overseen by the Ministry of National Economy.
Competition and Anti-Trust Laws
There is no Competition Law for the Palestinian territories at this time. The PA drafted a law in 2003 that was not enacted, and in 2012 the PA prepared a new draft law that has not yet been issued. Because of the geographic division between businesses in East Jerusalem, the West Bank and Gaza, many firms in disparate geographic locations within the Palestinian territories have little to no competition, causing variations in both pricing and firm productivity between regions and sometimes cities within a region.
Expropriation and Compensation
The Investment Law, as amended in 2014, prohibits expropriation and nationalization of approved foreign investments, except in exceptional cases for a public purpose with due process of law, which shall be in return for fair compensation based on market prices and for losses suffered because of such expropriation. The PA must secure a court decision before proceeding with expropriation.
PA sources and independent lawyers say that any Palestinian citizen can file a petition or a lawsuit against the PA. In 2011, the PA established independent, specialized courts for labor, chambers, customs, and anti-corruption. These courts are composed of judges and representatives from the Ministries of National Economy and Finance. There is general confidence in the judicial system is and businesses rely on the courts and police to enforce contracts and seek redress, though alternative means of arbitration are still used to resolve some disputes.
ICSID Convention and New York Convention
The PA signed the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) in January 2015, and the Convention entered into force in April 2015. The PA is not a member of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention).
In 2014 the IMF reported an average of 540 days to resolve a standardized commercial dispute through the courts, with 44 separate procedures required for a dispute resolution. Litigants suggested that the decisions at different levels of the courts were inconsistent, prompting more appeals and a larger overall caseload.
Investor-State Dispute Settlement
The Investment Law, as amended in 2014, provides for dispute resolution between the investor and official agencies by binding independent arbitration or in Palestinian courts. It has been reported that some contracts contain clauses referring dispute resolutions to the London Court of Arbitration. The Jerusalem Arbitration Center (JAC) provides a forum to resolve business disputes between Palestinian and Israeli companies. Commercial disputes may be resolved by way of conciliation, mediation, or arbitration.
International Commercial Arbitration and Foreign Courts
International arbitration is permitted and governed by governed by Law No. 3 of 2000. The law sets out the basis for court recognition and enforcement of awards. Generally, every dispute may be referred to arbitration by the agreement of the parties, unless prohibited by the law. Article 4 of the law states that certain disputes cannot be referred to arbitration, including those involving marital status, public order issues, and cases where no conciliation is permitted. In the event that parties do not agree on the formation of the arbitration panel, each party may choose an arbitrator and arbitrators shall choose a casting arbitrator unless the parties agree to proceed otherwise. Arbitral awards made in other countries that need to be enforced in the West Bank/Gaza are honored, according to the prevailing law in the West Bank, mainly Jordanian Law Number 8 of 1952 as amended by the PA in 2005. The law covers many issues in relation to the enforcement of foreign judgments.
The World Bank’s 2017 Doing Business Report did not cite any cases involving a foreclosure, liquidation or reorganization proceedings filed in the country in the last 12 months. According to that report, no priority is assigned to post-commencement creditors, and debtors may file for liquidation only. The PA MONE, with the assistance of international donors, is in the process of drafting a number of proposed laws related to bankruptcy, but no bankruptcy reform has been enacted. In the updated Companies law, there will also be a chapter on insolvency.