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Austria

Executive Summary

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

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

The COVID-19 crisis deeply affected Austria’s economy, contributing to a forecasted GDP decrease of -7.4% in 2020 and an increase in the unemployment rate from 4.5% to 5.4% at the end of 2020. A prolonged lockdown at the start of 2021 will delay Austria’s economic recovery, with GDP growth forecast at +2.0% in 2021 and +5.1% in 2022.

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

Some 220 U.S. companies have investments in Austria, represented by around 300 subsidiaries, and many have expanded their original investment over time. U.S. Foreign Direct Investment into Austria totaled approximately EUR 12.2 billion (USD 13.7 billion) at the end of 2019, according to the Austrian National Bank, and U.S. companies support over 16,500 jobs in Austria. Austria offers a stable and attractive climate for foreign investors.

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

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

Negative aspects of Austria’s investment climate include:

  • A large public sector and a complex regulatory system with extensive bureaucracy;
  • Relatively low levels of private venture capital;
  • Low-to-moderate innovation dynamics;
  • A relatively high overall tax burden;

Key sectors that have historically attracted significant investment in Austria:

  • Automotive;
  • Pharmaceuticals;
  • ICT and Electronics;
  • Financial.

Key issues to watch:

After a summer virtually free of COVID-19 restrictions, infection rates spiked in fall 2020 with Austria reporting the highest global rate of infections per 100,000 people in November 2020. The government mandated a full lockdown from early November 2020 to early February 2021. Hotels and restaurants remained largely closed in early 2021, with few exceptions, and the tourism sector, which accounts for 15 percent of the country’s GDP, was at a standstill. A combination of high reliance on tourism and exports, low consumption levels, and a high number of lockdown days (79 in 2020, compared to 45 in Germany), significantly hindered the economic recovery. Austria’s recovery is likely to be slower than many other EU countries.

The high degree of government assistance kept many firms afloat that may otherwise have filed for bankruptcy. The number of insolvency procedures decreased by 27% in 2020, compared to 2019. Austria may witness a significant spike in bankruptcies once the government scales back assistance measures.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 15 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 27 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 19 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 7.64 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 51,460 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

There are limited restrictions on foreign investment. American investors have not complained of discriminatory laws against foreign investors. Austria strengthened its national security investment screening law, lowering the threshold at which government approval of the transaction is required to 10 percent foreign ownership for sensitive sectors. Please see the “Laws and Regulations on Foreign Investment” section below for further details. The corporate tax rate, a 25 percent flat tax, is above the OECD average of 21.5 percent. The government announced plans to reduce it to 21 percent in 2024 but the global pandemic may delay these plans. U.S. citizens and investors have occasionally reported that it is difficult to establish and maintain banking services since the U.S.-Austria Foreign Account Tax Compliance Act (FATCA) Agreement went into force in 2014, as some Austrian banks have been reluctant to take on this reporting burden.

Potential investors should also be aware of Austria’s lengthy environmental impact assessments in their investment decision-making. Some sectors also suffer from heavy regulation that may affect certain investments. For example, the requirement that over 50 percent of an energy provider must be publicly owned places a potential cap on investments in the energy sector. Strict liability and co-existence regulations in the agriculture sector restrict research and virtually outlaw the cultivation, marketing, or distribution of biotechnology crops. The mining and transportation sectors are also heavily regulated.

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

The Austrian Economic Chamber (WKO) and the American Chamber of Commerce in Austria (Amcham) are also good resources for foreign investors. Both conduct annual polls of their members to measure their satisfaction with the business climate, thus providing early warning to the government of problems identified by investors.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are limited restrictions on foreign ownership of private businesses in Austria. A local managing director must be appointed to any newly established enterprise. For non-EU citizens to establish and own a business, the Austrian Foreigner’s Law mandates a residence permit that includes the right to run a business. Many Austrian trades are regulated, and the right to run a business in regulated trade sectors is only granted when certain preconditions are met, such as certificates of competence, and recognition of foreign education.

Austria’s updated national security investment screening law, strengthened in July 2020, retains an investment screening process to review potential high-risk foreign acquisitions of 25% or more of a company essential to the country’s infrastructure, lowering the threshold to 10% ownership for sensitive sectors (see the “Laws and Regulations on Foreign Investment” section below for further details). In April 2019, the EU Regulation on establishing a framework for the screening of foreign direct investments entered into force. It creates a cooperation mechanism through which EU countries and the European Commission will exchange information and raise concerns related to specific investments which could potentially threaten the security of other EU countries.

Other Investment Policy Reviews

Not applicable.

Business Facilitation

While the World Bank ranked Austria as the 27th best country in 2020 with regard to “ease of doing business” (www.doingbusiness.org ), starting a business takes time and requires many procedural steps (Austria ranked 127th in this category in 2020). The average time to set up a company is 21 days, while the average time in OECD high income countries is 9.2 days.

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

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

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

Outward Investment

The Austrian government encourages outward investment. Advantage Austria, the “Austrian Foreign Trade Service” is a special section of the WKO that promotes Austrian exports and also supports Austrian companies establishing an overseas presence. Advantage Austria operates six offices in the United States (Washington D.C., New York, Chicago, Atlanta, Los Angeles, and San Francisco). Overall, it has about 100 trade offices in 70 countries across the world, reflecting Austria’s strong export focus and the important role the WKO plays. (https://www.wko.at/service/aussenwirtschaft/aussenwirtschaftscenter.html#heading_aussenwirtschaftscenter ) The Ministry for Digital and Economic Affairs and the WKO run a joint program called “Go International,” providing services to Austrian companies that are considering investing for the first time in foreign countries. The program provides grants for market access costs and provides “soft subsidies,” such as counseling, legal advice, and marketing support.

2. Bilateral Investment Agreements and Taxation Treaties

There is currently no investment agreement between the United States and Austria. Austria has Bilateral Investment Treaties (BITs) in force with: Albania, Algeria, Argentina, Armenia, Azerbaijan, Bangladesh, Belarus, Belize, Bosnia and Herzegovina, Bulgaria, Chile, China, Croatia, Cuba, Czech Republic, Egypt, Estonia, Ethiopia, Georgia, Guatemala, Hong Kong, Hungary, Iran, Jordan, Kazakhstan, Republic of Korea, Kuwait, Kyrgyzstan, Latvia, Lebanon, Libya, Lithuania, North Macedonia, Malaysia, Malta, Mexico, Moldova, Mongolia, Montenegro, Morocco, Namibia, Oman, Paraguay, Philippines, Poland, Romania, Russia, Saudi Arabia, Serbia, Slovakia, Slovenia, Tajikistan, Tunisia, Turkey, Ukraine, United Arab Emirates, Uzbekistan, Vietnam, and Yemen.

Austria was not among the 23 EU countries that signed the agreement for the termination of intra-EU bilateral investment treaties on May 5, 2020. Austria agreed with the European Commission to terminate its 12 bilateral intra-EU BITS (as did the other Member States), but negotiations on the date of termination are ongoing with these Member States.

Austria and the United States are parties to a bilateral double taxation convention covering income and corporate taxes, which went into effect in January 1998. Another bilateral double taxation convention (covering estates, inheritances, gifts and generation-skipping transfers) has been in effect since 1982 (amended in 1999). Austria and the United States signed the Foreign Account Tax Compliance Act (FATCA) Agreement on April 29, 2014, covering U.S. citizen account holders in Austria. The FATCA Agreement went into force December 9, 2014. Austria has 90 additional double taxation treaties in force with other countries. Two other Austrian agreements, with Switzerland and Liechtenstein, on cooperation in the areas of taxation and financial markets (which entered into force in January and April 2013 respectively) cover the treatment of anonymous accounts from Austrian citizens in those countries.

3. Legal Regime

Transparency of the Regulatory System

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

Federal ministries generally publish draft laws and regulations, including investment laws, for public comment prior to their adoption by Austria’s cabinet and/or Parliament. Relevant stakeholders such as the “Social Partners” (Economic Chamber, Agricultural Chamber, Labor Chamber, and Trade Union Association), the Federation of Industries, and research institutions are invited to provide comments and suggestions for improvement, which may be taken into account before adoption of laws. These comments are publicly available. Austria’s nine provinces can also adopt laws relevant to investments; their review processes are generally less extensive, but local laws are less important for investments than federal laws. The judicial system is independent from the executive branch, helping ensure the government follows administrative processes. The government is required to follow administrative processes and its compliance is monitored by the courts, primarily the Court of Auditors. Individuals can file proceedings against the government in Austria’s courts, if the government did not act in accordance with the law. Similarly, the public prosecution service can file cases against the government.

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

The effectiveness of regulations is not reviewed as a regular process, only on an as-needed basis. Austrian regulations governing accounting provide U.S. investors with internationally standardized financial information. In line with EU regulations, listed companies must prepare their consolidated financial statements according to the International Financial Reporting Standards (IAS/IFRS) system.

Public finances are transparent and easily accessible, through the Finance Ministry’s website, Austria’s Central Bank, and various economic research institutes. Overall, Austria has no legal restrictions, formally or informally, that discriminate against foreign investors.

International Regulatory Considerations

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

Legal System and Judicial Independence

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

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

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

Laws and Regulations on Foreign Direct Investment

Austria has national security restrictions on investments in industries designated as critical infrastructure, technology, resources, and industries with access to sensitive information and involved in freedom and plurality of the media. The government must approve any foreign acquisition of a 25% or higher stake in any companies that generally fall within these areas. The threshold is 10% for sensitive sectors, defined as military goods and technology, operators of critical energy or digital infrastructure and water, system operators charged with guarding Austria’s data sovereignty and R&D in medicine and pharmaceutical products. Additional screenings are required when an investor in the above categories plans to increase the stake above the thresholds of 25% or 50%. The investment screening review period generally takes 1-2 months. The Austrian government has reported an increase in filed applications since the law was implemented but has not reported any rejected applications under the new law.

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

The “Law to Support Investments in Municipalities” (published in the Federal Law Gazette, 74/2017, available online in German only on the federal legal information system www.ris.bka.gv.at ), allows federal funding of up to 25 percent of the total investment amount of a project to “modernize” a municipality. The Austrian government also introduced several investment incentives, due to COVID-19 (see the “Investment Incentives” section for details). The Austrian Business Agency serves as a central contact point for companies looking to invest in Austria. It does not serve as a one-stop-shop but can help answer any questions potential investors may have (https://investinaustria.at/en/ )

Competition and Antitrust Laws

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

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

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

Expropriation and Compensation

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

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

International Commercial Arbitration and Foreign Courts

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

Bankruptcy Regulations

The Austrian Insolvency Act contains provisions for business reorganization and bankruptcy proceedings. Reorganization requires a restructuring plan and the debtor to be able to cover costs or advance some of the costs up to a maximum of EUR 4,000 (USD 4,480). The plan must offer creditors at least 20 percent of what is owed, payable within two years of the date the debtor’s obligation is determined. The plan must be approved by a majority of all creditors and a majority of creditors holding at least 50 percent of all claims.

If the restructuring plan is not accepted, a bankruptcy proceeding is begun. Bankruptcy proceedings take place in court upon application of the debtor or a creditor; the court appoints a receiver for winding down the business and distributing proceeds to the creditors. Bankruptcy is not criminalized, provided the affected person performed all his documentation and reporting obligations on time and in accordance with the law.

Due to COVID-19, Austria provided an extension for initiating bankruptcy proceedings for companies becoming technically bankrupt between March 1, 2020 and March 31, 2021. The court may, upon application of any of the parties involved, extend procedural deadlines by 90 days. For applications filed by December 31, 2020, the deadline for paying the 20 percent owed to creditors has been extended to three years, instead of two.

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

4. Industrial Policies

Investment Incentives

Financial incentives and business subsidies provided by Austrian federal, state, and local governments to promote investments are equally available to domestic and foreign investors and include tax incentives, preferential loans, loan guarantees, and grants. Most incentives are targeted to investments that meet specified criteria, including job-creation, use of cutting-edge technology, improving regional infrastructure, strengthening SMEs, promoting research and development, supporting environmental protection, and promoting startups. Tax allowances for advanced employee training and R&D expenditures are also available, as are financing options for start-ups and cash grants. The Austrian Labor Market Service (AMS) offers grants for job creation and personnel development training.

Various government agencies in Austria offer incentives for research and development (R&D) activities (up to 50 percent of the investment amount). The incentives are also available for foreign-owned enterprises. The agencies providing incentives include: The Austrian Research Promotion Agency (FFG) (https://www.ffg.at/en ); the Austrian Science Fund (FWF), which is the country’s central body for the promotion of basic research (https://www.fwf.ac.at/en/ ); and AWS (above). The latter also provides guarantees of up to EUR 25 million over 5 to 10 years for investments in Austria, with a focus on small and medium-sized companies.

Foreign investors in Austria can also benefit from government support measures designed for companies affected by COVID-19, including: a hardship fund for sole proprietorships; a COVID-19 assistance fund which provides EUR 15 billion (USD $16.8 billion) in loan guarantees; banking measures to increase liquidity; and a short-time work (Kurzarbeit) program which allows staff working hours to be reduced by up to 90%, with the government paying up to 90% of the salary cost. The government also established a EUR 100 million (USD 112 million) COVID-19 assistance package for startups, where it matches one-to-one private (including foreign) investments in Austrian startups, and a EUR 50 million (USD 56 million) venture capital fund (also open for foreign investors), where it guarantees 50% of the fund’s investment. More information can be found here: https://investinaustria.at/en/downloads/covid-19.php 

From September 2020 to February 2021 the government offered an “investment premium” for all new investments up to EUR 50 million (USD 60 million) in Austria with the exception of certain sectors (e.g. investments detrimental for climate protection, buildings, financial assets, etc.). The program provided a subsidy of up to 14% of investments in greening, digitalization, and health, and 7% of all other investments. The initiative was expanded and extended due to high demand and another extension or a new program is possible.

Austria’s Wirtschaftsservice (AWS) is the governmental institution that provides most federal government financial incentives for businesses. Information on targeted investment incentives is available at https://www.aws.at/en/. More detailed information on investment incentives and promotion in English language is also available on the ABA website (see chapter 1) at http://investinaustria.at/en/ .

Foreign Trade Zones/Free Ports/Trade Facilitation

Not applicable

Performance and Data Localization Requirements

While there is no requirement for foreign IT providers to turn over source code and/or provide access to encryption, EU and Austrian data protection stipulations apply. The EU General Data Protection Regulation (GDPR) as adopted by Austria in 2018, places restrictions on companies’ ability to store and use customer data. It also requires specific user consent, in order for companies to send out promotional materials (previously, implied consent was sufficient). Transmission of customer or business-related data is therefore subject to EU GDPR regulations. Austria’s Data Protection Authority is in charge of enforcing all GDPR-related matters, which include GDPR rules on data storage. In October 2019, the DPA imposed a fine of EUR 18 million (USD 20.2 million) on Austria’s Postal Service Company (PSC) for illegal use of customer data, which included collecting and selling data on party affiliations. The postal service was ordered to delete the data concerned, but in December 2020 the Federal Administrative Court annulled the fine, saying the DPA should have fined individual managers rather than the PSC.

The Austrian government may impose performance requirements when foreign investors seek financial or other assistance from the government, although there are no performance requirements to apply for tax incentives. There is no requirement that Austrian nationals hold shares in foreign investments or for technology transfer, and no requirement for foreign investors to use domestic content in the production of goods or technology.

If investors want to employ foreign workers from outside the EU in Austria, they need to apply for a work permit with the immigration authority in one of the Austrian provinces. The Austrian Labor Service (AMS) then certifies whether there is no comparable person in the pool of registered unemployed persons in Austria, which is a prerequisite for employing non-EU workers. This does not apply to senior management positions, researchers, highly qualified personnel, and a limited set of other categories.

Austria offers several non-immigrant business visa classifications, including intra-company transfers/rotational workers, and employees on temporary duty. Recruitment of long-term, overseas specialists or those with managerial duties is governed by a points-based immigration scheme to attract skilled workers and specialists in individual sectors (points are available for qualification, education, age, and language skills). This Red-White-Red card (RWR) model allows firms to react flexibly to rising demand for talent in different occupations. It is available to highly qualified individuals, qualified specialists/craftsmen in certain understaffed professions (qualified labor and registered nurse jobs), and key personnel/professionals. Applicants must have an offer of employment to apply for the RWR. Highly qualified individuals holding U.S. citizenship may apply locally in Austria or opt to find a potential employer from abroad and have the company apply in Austria on their behalf.

Austrian immigration law requires those applying for residency permits in some categories to take German language courses and exams. There is a specific visa category under the RWR model for founders of start-up enterprises to support Austria’s push to expand its innovation economy.

A less bureaucratic alternative is the EU Blue Card, which entitles applicants to a fixed-term settlement of 24 months and employment is tied to a specific employer. However, there is a threshold of a gross annual income of at least one and a half times the average gross annual income for full-time employees (in 2021: at least EUR 65,579 (USD 78,039); annual salary plus special payments).

5. Protection of Property Rights

Real Property

The Austrian legal system protects secured interests in property. For any real estate agreement to be effective, owners must register with the land registry. Mortgages and liens must also be registered. As a rule, property for sale must be unencumbered. In case of rededication of land, approval of the land transfer commission or the office of the state governor is required. The land registry is a reliable system for recording interests in property, and access to the registry is public.

Non-EU/EEA citizens need authorization from administrative authorities of the respective Austrian province to acquire land. Provincial regulations vary, but in general there must be a public (economic, social, cultural) interest for the acquisition to be authorized. Often, the applicant must guarantee that he does not want to build a vacation home on the land in order to receive the required authorization.

Further details on registering property in Austria, where the country generally scores well, can be found in the World Bank’s Doing Business Report, where Austria ranks above OECD high-incomes countries on quality, time and procedures of land administration, and slightly behind them on costs. https://www.doingbusiness.org/en/data/exploreeconomies/austria#DB_rp 

Intellectual Property Rights

Austria has a strong legal structure to protect intellectual property rights (IPR), including patent and trademark laws, a law protecting industrial designs and models, and a copyright law. Austria is a member of the World Intellectual Property Organization (WIPO) and party to several international IPR conventions. Austria also participates in the Patent Prosecution Highway (PPH) program with the USPTO (started in 2014), which allows filing of streamlined applications for inventions determined to be patentable in other participating countries.

Austria’s Copyright Act conforms to EU directives on IPR. It grants authors exclusive rights to publish, distribute, copy, adapt, translate, and broadcast their work. The law also regulates copyrights of digital media (restrictions on private copies), works on the Internet, protection of computer programs, and related damage compensation. Infringement proceedings, however, can be time-consuming and costly. Austria is still in the process of implementing the EU Directive on Copyright in the Digital Single Market (2019/790); the government is currently incorporating input from rights holders and aims to adopt the Austrian legislation by June 2021. Austrian Internet providers must prevent access to illegal music and streaming platforms once they are made aware of a copyright violation. They must also block workaround websites from these platforms.

Austria has a law against trade in counterfeit articles. In 2020, Austrian customs authorities confiscated pirated goods worth EUR 24.0 million (USD 26.9 million), which is a six-fold increase from the previous year.

Austria is not listed in USTR’s Special 301 Report or Notorious Markets List, but its trade secrets regime has historically been a concern for some U.S. businesses. Austrian and U.S. companies have voiced specific concerns about both the scope of protection and the difficulty of adjudicating breaches. Following years of steady U.S. government advocacy, and because Austria was required to implement the 2016 EU Directive on Trade Secrets, the country improved its trade secrets regime in the Law Against Unfair Competition (entered into force in February 2019) to address these concerns. The most relevant change in the law is a requirement for safeguarding the confidentiality of trade secrets (and other business confidential information) in court procedures. The new law also defines injunctive relief and claims for damages in case of breach of trade secrets. The 2020 government program includes a plan to further toughen prosecution of trade secrets violations that have an impact on Austria as a business location and to tackle industrial espionage, but no specific actions to implement the plan have been taken to date.

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

6. Financial Sector

Capital Markets and Portfolio Investment

Austria has sophisticated financial markets that allow foreign investors access without restrictions. The government welcomes foreign portfolio investment. The Austrian National Bank (OeNB) regulates portfolio investments effectively.

Austria has a national stock exchange that currently includes 61 companies on its regulated market and several others on its multilateral trading facility (MTF). The Austrian Traded Index (ATX) is a price index consisting of the 20 largest stocks on the market and forms the most important index of Austria’s stock market. The size of the companies listed on the ATX is roughly equivalent to those listed on the MDAX in Germany. The market capitalization of Austrian listed companies is small compared to the country’s western European counterparts, accounting for 30% of Austria’s GDP, compared to 54% in Germany or 148% in the United States.

Unlike the other market segments in the stock exchange, the Direct Market and Direct Market Plus segments, targeted at SMEs and young, developing companies, are subject only to the Vienna Stock Exchange’s general terms of business, not more stringent EU regulations. These segments have lower reporting requirements but also greater risk for investors, as prices are more likely to fluctuate, due to the respective companies’ low level of market capitalization and lower trading volumes.

Austria has robust financing for product markets, but the free flow of resources into factor markets (capital, raw materials) could be improved. Overall, financing is primarily available through banks and government-sponsored funding organizations with relatively little private venture capital available. The Austrian government is aware of this but has taken few tangible steps to improve the availability of private venture capital.

Austria is fully compliant with IMF Article VIII, all financial instruments are available, and there are no restrictions on payments. Credit is available to foreign investors at market-determined rates. Austria’s financial system ranked 30th in the 2019 World Economic Forum’s Global Competitiveness Report, out of 141 countries examined, compared to 28th place in 2018 and 30th in 2017.

Money and Banking System

Austria has one of the most fragmented banking networks in Europe, with more than 3,500 branch offices registered in 2020, yet is considered to be one of the most stable in the world. The banking system is highly developed, with worldwide correspondent banks and representative offices and branches in the United States and other major financial centers. Large Austrian banks also have extensive networks in Central and Southeast European (CESEE) countries and the countries of the former Soviet Union. Total assets of the banking sector amounted to EUR 1.02 trillion (USD 1.1 trillion) in 2019 (approximately 2.5 times the country’s GDP). Approximately EUR 400 million of banking sector assets are held by Austria’s two largest banks, Erste Group and Raiffeisen Bank International (RBI). Austria’s banking sector is managed and overseen by the Austrian National Bank (OeNB) and the Financial Market Authority (FMA). Four Austrian banks with assets in excess of EUR 30 billion (USD 34 billion) are subject to the Eurozone’s Single Supervisory Mechanism (SSM), as is Sberbank Europe AG, a Russian bank subsidiary headquartered in Austria, and Addiko Bank AG due to their significant cross-border assets, as well as Volksbank Wien AG, due to its importance for the economy. All other Austrian banks continue to be subject to the country’s dual-oversight banking supervisory system with roles for the OeNB and the FMA, both of which are also responsible for policing irregularities on the stock exchange and for supervising insurance companies, securities markets, and pension funds. Foreign banks are allowed to establish operations in the country with no legal restrictions that place them at a disadvantage compared to local banks.

Due to U.S. financial reporting requirements, Austrian banks are very cautious in committing the time and expense required to accept U.S. clients and U.S. investors without clearly established U.S. corporate headquarters.

Foreign Exchange and Remittances

Foreign Exchange

Austria has no restrictions on cross-border capital transactions, including the repatriation of profits and proceeds from the sale of an investment, for non-residents and residents. The Euro, a freely convertible currency and the only legal tender in Austria and 18 other Euro-zone member states, shields investors from exchange rate risks within the Euro-zone.

Remittance Policies

Not applicable

Sovereign Wealth Funds

Austria has no sovereign wealth funds.

7. State-Owned Enterprises

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

The government has direct representation in the supervisory boards of its companies (commensurate with its ownership stake), and OeBAG has the authority to buy and sell company shares, as well as purchase minority stakes in strategically relevant companies. Such purchases are subject to approval from an audit committee consisting of government-nominated independent economic experts.

OeBAG holds a 53 percent stake in the Post Office, 51 percent in energy company Verbund, 33 percent in the gambling group Casinos Austria, 31.5 percent in the energy company OMV, 28 percent in the Telekom Austria Group, and a few other minor ventures. Local governments own the majority of utilities, Vienna International Airport, and more than half of Austria’s 264 hospitals and clinics.

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

The five major OeBAG-controlled companies (Postal Service, Verbund AG, Casinos Austria, OMV, Telekom Austria), are listed on the Vienna stock exchange. Senior managers in these companies do not directly report to a minister, but to an oversight board. That being said, the government often appoints management and board members who have strong political affiliations.

Privatization Program

The government has not privatized any public enterprises since 2007. Austrian public opinion is skeptical regarding further privatization and there are no indications of any government privatizations on the horizon. In prior privatizations, foreign and domestic investors received equal treatment. Despite a historical government preference for maintaining blocking minority rights for domestic shareholders, foreign investors have successfully gained full control of enterprises in several strategic sectors of the Austrian economy, including in telecommunications, banking, steel, and infrastructure. In March 2020, the government chose not to intervene when the Czech Sazka group increased its stake in the partially state-owned gambling group Casinos Austria to a majority share.

8. Responsible Business Conduct

Austrian Responsible Business Conduct (RBC)/Corporate Social Responsibility (CSR) standards are laid out in the Austrian Corporate Governance Codex, which is based on the EU Commission’s 2011 “Strategy for Corporate Social Responsibility.” The Austrian Standards Institute’s ONR 192500 acts as the main guidance for CSR and is based on the EU Commission’s published Strategy, which is also compliant with UN guidelines. Major Austrian companies follow generally accepted CSR principles and publish a CSR chapter in their annual reports; many also provide information on their health, safety, security, and environmental activities.

Austria adheres to the OECD’s Guidelines for Multinational Enterprises. The Federal Ministry for Digital and Economic Affairs serves as the National Contact Point: https://www.bmdw.gv.at/en/Topics/International/OECD-Guidelines-for-Multinational-Enterprises-and-the-Austrian-NCP.html 

The Ministry for Labor, Social Affairs, Health, and Consumer Protection is also represented in national and international CSR-relevant associations, and supports CSR initiatives while working closely together with the Austrian Standards Institute.

The Austrian export credit agency promotes information on CSR issues, principles and standards, including the OECD Guidelines, on its website. https://www.oekb.at/en/oekb-group/our-claim/corporate-governance.html 

Austria is a signatory to the Montreaux Document on Private Military and Security Companies, which it ratified in 2008.

Additional Resources

Department of State

Department of Labor

9. Corruption

Austria is a member of the Council of Europe’s Group of States against Corruption (GRECO) and also ratified the UN Convention against Corruption (UNCAC) and the OECD Anti-Bribery Convention. As part of the UNCAC ratification process, Austria has implemented a national anti-corruption strategy. Central elements of the strategy are promoting transparency in public sector decisions and raising awareness of corruption. Corruption generally is not a major issue in Austria, which ranked 15th (out of 180 countries) in Transparency International’s latest Corruption Perceptions Index. Despite this ranking, the Group of States Against Corruption (GRECO) February 2021 report criticized Austria for only fully implementing two of 19 recommendations since the last report was issued in 2017. The criticism largely focused on a lack of transparency on lobbying, receipt of donations, and the income of Members of Parliament. Austria is required to produce a progress report in September 2021.

Bribery of public officials, their family members and political parties, is covered under the Austrian Criminal Code, and corruption does not significantly affect business in Austria. However, the 2017 Ibiza scandal in which then-Vice Chancellor Heinz Christian Strache and right populist Freedom Party FPOe party chairman Johann Gudenus were filmed discussing providing government contracts in exchange for favors and party donations shook the public’s belief in the integrity of the political system. This was compounded by further revelations in 2019 that the FPOe had allegedly promised gambling licenses to Casinos Austria in exchange for placing a party loyalist on the company’s executive board. As of April 2021, prosecutors are also investigating allegations Finance Minister Bluemel (from the governing, center-right People’s Party, OeVP) may have facilitated an exchange of party donations by Casinos Austria subsidiary Novomatic, in exchange for government assistance with the company’s tax problems.

Anti-corruption cases are often characterized by slow-moving trials that drag on for years. The trial of former Finance Minister Grasser, which started in 2017, concluded in late 2020, with Grasser receiving a sentence of eight years in prison from the trial court judge. Grasser is appealing the sentence, with a ruling at the next instance (appellate level) in his case expected during the second half of 2021.

Bribing members of Parliament is considered a criminal offense, and accepting a bribe is a punishable offense with the sentence varying depending on the amount of the bribe. The 2018 Austrian Federal Contracts Act implements EU guidelines prohibiting participating in public procurement contracts if there is a potential conflict of interest and requires measures to be put in place to detect and prevent such conflicts of interest. This required public authorities to set up compliance management systems or amend their existing structures accordingly. Virtually all Austrian companies have internal codes of conduct governing bribery and potential conflicts of interest.

Corruption provisions in Austria’s Criminal Code cover managers of Austrian public enterprises, civil servants, and other officials (with functions in legislation, administration, or justice on behalf of Austria, in a foreign country, or an international organization), representatives of public companies, members of parliament, government members, and mayors. The term “corruption” includes the following in the Austrian interpretation: active and passive bribery; illicit intervention; and abuse of office. Corruption can sometimes include a private manager’s fraud, embezzlement, or breach of trust.

Criminal penalties for corruption include imprisonment ranging from six months to ten years, depending on the severity of the offence. Jurisdiction for corruption investigations rests with the Austrian Federal Bureau of Anti-Corruption and covers corruption taking place both within and outside the country. The Lobbying Act of 2013 introduced binding rules of conduct for lobbying. It requires domestic and foreign organizations to register with the Austrian Ministry of Justice. Financing of political parties requires disclosure of donations exceeding EUR 2,500 (USD 2,800). No donor is allowed to give more than EUR 7,500 (USD 8,400) and total donations to one political party may not exceed EUR 750,000 (USD 840,000) in a single year. Foreigners are prohibited from making donations to political parties. Private companies are subject to the Austrian Act on Corporate Criminal Liability, which makes companies liable for active and passive criminal offences. Penalties include fines up to EUR 1.8 million (USD 2.0 million).

To date, U.S. companies have not reported any instances of corruption inhibiting FDI.

Resources to Report Corruption

Contacts at government agencies responsible for combating corruption:

Wirtschafts- und Korruptionsstaatsanwaltschaft (Central Public Prosecution for Business Offenses and Corruption)
Dampfschiffstraße 4
1030 Vienna, Austria
Phone: +43-(0)1-52 1 52 0
E-Mail: wksta.leitung@justiz.gv.at

BAK – Bundesamt zur Korruptionsprävention und Korruptionsbekämpfung (Federal Agency for Preventing and Fighting Corruption)
Ministry of the Interior
Herrengasse 7
1010 Vienna, Austria
Phone: +43-(0)1-531 26 – 6800
E-Mail: BMI-III-BAK-SPOC@bak.gv.at

Contact at “watchdog” organization:

Transparency International – Austrian Chapter
Berggasse 7
1090 Vienna, Austria
Phone: +43-(0)1-960 760
E-Mail: office@ti-austria.at

10. Political and Security Environment

Generally, civil disturbances are rare and the overall security environment in the country is considered to be safe. There have been no incidents of politically motivated damage to foreign businesses. Austria suffered a terrorist attack on November 2, 2020, when a lone gunman shot and killed four civilians and injured 23 in the center of Vienna.

11. Labor Policies and Practices

Austria has a well-educated and productive labor force of 4.1 million, of whom 3.6 million are employees and 500,000 are self-employed or farmers. In line with EU regulations, the free movement of labor from all member states is allowed.

The COVID-19 crisis has led to a spike in unemployment, which rose to 5.8% in February 2021, compared to 4.5% in 2019. At the same time, the number of people unemployed for longer than 12 months has increased by 83% over the past year, raising some concern that additional labor market initiatives will be required to reintegrate them in the job market. To combat the effects of lockdown-related business closures, the government implemented a reduced hours work program, enabling employers to reduce employees’ hours by up to 90%, with assistance to cover up to 80-90% of regular pay. The unemployment rate is expected to gradually decrease as the economy re-opens but it may take until the end of 2022 to reach pre-crisis levels.

Foreigners account for almost one-fifth of Austria’s labor force; around 800,000 foreign workers are employed in Austria. Migrant workers come largely from the CEE region, but there are also many workers who arrived during the Syrian refugee crisis who have entered the labor market. Migrants workers often occupy lower-paying jobs and make up a large percentage of workers in the tourism and healthcare sectors.

Youth unemployment is relatively low, compared to European reference countries. Austria’s successful dual-education apprenticeship system, combining on-the-job training with classroom instruction in vocational schools, has helped bring youth into the labor market. The program includes guaranteed placement by the Public Employment Service for those 15–24-year-olds who cannot find an apprenticeship. Austria has a well-balanced labor market but, like many of its neighbors, suffers from a shortage of skilled IT personnel, particularly in the banking and financial sector. Social insurance is compulsory in Austria and is comprised of health insurance, old-age pension insurance, unemployment insurance, and accident insurance. Employers and employees contribute a percentage of total monthly earnings to a compulsory social insurance fund. Austrian laws closely regulate terms of employment, including working hours, minimum vacation time, holidays, maternity leave, statutory separation notice, severance pay, dismissal, and an option for part-time work for parents with children under the age of seven.

Problematic areas include increased deficits in the pension and health insurance systems, the shortage of healthcare personnel to care for the increasing number of elderly, and escalating costs for retirement and long-term care. Due to its generous social welfare system, Austria has a high rate of employer non-wage labor costs, amounting to approximately 30% of gross wages. Labor laws are commonly adhered to and strictly enforced.

Labor-management relations are relatively harmonious in Austria, which traditionally enjoys a low incidence of industrial unrest. Strikes are uncommon with only two notable incidents over the past decade (2011, 2018). Additionally, all employees are automatically members of the Austrian Labor Chamber.

Collective bargaining revolves mainly around wages and fringe benefits. Approximately 90 percent of the labor force works under a collective bargaining agreement. In 2017, Austria implemented a national minimum wage of EUR 1,500 (approx. USD 1,700) per month, with monthly wages paid 14 times per year. This equates to an hourly wage of EUR 10.09 (approx. USD 11.50), placing Austria in the upper tier among European countries with a minimum wage, ahead of France, Germany and the UK.

Austrian law stipulates a 40-hour maximum workweek limit, but collective bargaining agreements also allow for a workweek of 38 or 38.5 hours per week. Firms may increase the maximum regular hours from 40 to 60 per week in special cases, with no more than 12 hours in a single day. Responsibility for agreements on flextime or reduced workweeks is at the company level. Overtime is paid at an additional 50 percent of the employee’s salary and, in some cases, such as work on public holidays, 100 percent. Austrian employees are generally entitled to five weeks of paid vacation (and an additional week after 25 years in the workforce); the rate of absence due to illness/injury averages 13 workdays annually.

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) 2020 $428 billion 2020 $445 billion www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($B USD, stock positions) 2019 $13.70 2019 $7.64 BEA data available at https://apps.bea.gov/international/factsheet/
Host country’s FDI in the United States ($B USD, stock positions) 2019 $13.76 2019 $6.25 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2019 45.8 2019 1.0% (flow) UNCTAD data available at https://stats.unctad.org/handbook/
EconomicTrends/Fdi.html  

* Source for Host Country Data: Austrian Statistics Office (GDP); Austrian National Bank (FDI, published March 2020)

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 201,287 100% Total Outward 248,978 100%
Germany 54,040 27% The Netherlands 41,145 16%
The Netherlands 30,585 15% Germany 34,448 14%
Russia 26,061 13% Czech Republic 15,073 6%
Luxembourg 21,876 11% United States 13,773 5%
Switzerland 12,002 6i% Romania 10,090 4%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 368,776 100% All Countries 157,873 100% All Countries 210,904 100%
Luxembourg 64,898 18% Luxembourg 56,101 36% Germany 25,193 12%
Germany 54,439 15% Germany 29,235 19% France 23,440 11%
United States 35,558 10% United States 18,338 6% United States 17,249 8%
France 30.312 8% Ireland 18,335 6% Spain 16,099 8%
Ireland 23,850 6% France 6,872 4% The Netherlands 15,248 7%

14. Contact for More Information

NAME: Andreas Lerch
TITLE: Economic Specialist
ADDRESS OF MISSION/AIT: U.S. Embassy Vienna, Vienna 1090, Boltzmanngasse 16
TELEPHONE NUMBER: +43 1 31339-2387
EMAIL ADDRESS: lercha@state.gov

Brazil

Executive Summary

Brazil is the second largest economy in the Western Hemisphere behind the United States, and the ninth largest economy in the world (in nominal terms), according to the World Bank.  The United Nations Conference on Trade and Development (UNCTAD) named Brazil the sixth largest destination for global Foreign Direct Investment (FDI) flows in 2019 with inflows of $72 billion, which increased 26 percent since Brazil announced its privatization plan that same year.  In recent years, Brazil received more than half of South America’s total incoming FDI and the United States is a major foreign investor in Brazil.  According to the International Monetary Fund (IMF), the United States had the second largest single-country stock of FDI by final ownership (UBO) representing 18 percent of all FDI in Brazil ($117 billion) behind only the Netherlands’ 23 percent ($147.7 billion) in 2019, the latest year with available data, while according to the Brazil Central Bank (BCB) measurements, U.S. stock was 23 percent ($145.1 billion) of all FDI in Brazil, the largest single-country stock by UBO for the same year. The Government of Brazil (GoB) prioritized attracting private investment in its infrastructure and energy sectors during 2018 and 2019.  The COVID-19 pandemic in 2020 delayed planned privatization efforts.

The Brazilian economy returned to an expansionary trend in 2017, ending the deepest and longest recession in Brazil’s modern history.  However, the global coronavirus pandemic in early 2020 returned Brazil to recession after three years of modest recovery. The country’s Gross Domestic Product (GDP) dropped 4.1 percent in 2020.  As of March 2021, analysts forecast growth of 3.29 percent for 2021.  The unemployment rate was 13.4 percent at the end of 2020.  The nominal budget deficit stood at 13.7 percent of GDP ($196.7 billion) in 2020 and is projected to end 2021 at around 4 percent depending on passage of the 2021 budget.  Brazil’s debt to GDP ratio reached a new record of 89.3 percent in 2020 with National Treasury projections of 94.5 percent by the end of 2021, while the Independent Financial Institution (IFI) of Brazil’s Senate projects 92.67 percent and the IMF estimates the ratio will finish 2021 at 92.1 percent.  The BCB lowered its target for the benchmark Selic interest rate from 4.5 percent at the end of 2019 to 2 percent at the end of 2020, and as of March 2021, the BCB anticipates the Selic rate to rise to 5 percent by the end of 2021.

President Bolsonaro took office on January 1, 2019. In late 2019, Congress passed and President Bolsonaro signed into law a much-needed pension system reform and made additional economic reforms a top priority.  Bolsonaro and his economic team have outlined an agenda of further reforms to simplify Brazil’s complex tax system and the onerous labor laws in the country, but the legislative agenda in 2020 was largely absorbed by response to the COVID-19 pandemic.  However, Brazil advanced a variety of legal and regulatory changes that contributed to its overall goal to modernize its economy

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

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

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 94 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 124 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 62 of 129 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 81,731 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 9,130 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Brazil was the world’s sixth-largest destination for Foreign Direct Investment (FDI) in 2019, with inflows of $72 billion, according to UNCTAD.  The GoB actively encourages FDI – particularly in the automobile, renewable energy, life sciences, oil and gas, and transportation infrastructure sectors – to introduce greater innovation into Brazil’s economy and to generate economic growth. GoB investment incentives include tax exemptions and low-cost financing with no distinction made between domestic and foreign investors.  Foreign investment is restricted in the health, mass media, telecommunications, aerospace, rural property, maritime, and insurance sectors.

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

In 2019, the Ministry of Economy created the Ombudsman’s office to provide foreign investors with a single point of contact for concerns related to FDI.  The plan seeks to eventually streamline foreign investments in Brazil by providing investors, foreign and domestic, with a simpler process for the creation of new businesses and additional investments in current companies.  Currently, the Ombudsman’s office is not operating as a single window for services, but rather as an advisory resource for FDI.

Limits on Foreign Control and Right to Private Ownership and Establishment

A 1995 constitutional amendment (EC 6/1995) eliminated distinctions between foreign and local capital, ending favorable treatment (e.g. tax incentives, preference for winning bids) for companies using only local capital.  However, constitutional law restricts foreign investment in healthcare (Law 8080/1990, altered by 13097/2015), mass media (Law 10610/2002), telecommunications (Law 12485/2011), aerospace (Law 7565/1986 a, Decree 6834/2009, updated by Law 12970/2014, Law 13133/2015, and Law 13319/2016), rural property (Law 5709/1971), maritime (Law 9432/1997, Decree 2256/1997), and insurance (Law 11371/2006).

Screening of FDI

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

To enter Brazil’s insurance and reinsurance market, U.S. companies must establish a subsidiary, enter into a joint venture, acquire a local firm, or enter into a partnership with a local company.  The BCB reviews banking license applications on a case-by-case basis. Foreign interests own or control 20 of the top 50 banks in Brazil, but Santander is the only major wholly foreign-owned retail bank.

Since June 2019, foreign investors may own 100 percent of capital in Brazilian airline companies.

While 2015 and 2017 legislative and regulatory changes relaxed some restrictions on insurance and reinsurance, rules on preferential offers to local reinsurers remain unchanged.  Foreign reinsurance firms must have a representation office in Brazil to qualify as an admitted reinsurer.  Insurance and reinsurance companies must maintain an active registration with Brazil’s insurance regulator, the Superintendence of Private Insurance (SUSEP) and maintain a minimum solvency classification issued by a risk classification agency equal to Standard & Poor’s or Fitch ratings of at least BBB-.

Foreign ownership of cable TV companies is allowed, and telecom companies may offer television packages with their service.  Content quotas require every channel to air at least three and a half hours per week of Brazilian programming during primetime.  Additionally, one-third of all channels included in any TV package must be Brazilian.

The National Land Reform and Settlement Institute administers the purchase and lease of Brazilian agricultural land by foreigners.  Under the applicable rules, the area of agricultural land bought or leased by foreigners cannot account for more than 25 percent of the overall land area in a given municipal district.  Additionally, no more than 10 percent of agricultural land in any given municipal district may be owned or leased by foreign nationals from the same country.  The law also states that prior consent is needed for purchase of land in areas considered indispensable to national security and for land along the border.  The rules also make it necessary to obtain congressional approval before large plots of agricultural land can be purchased by foreign nationals, foreign companies, or Brazilian companies with majority foreign shareholding.  In December 2020, the Senate approved a bill (PL 2963/2019; source:  https://www25.senado.leg.br/web/atividade/materias/-/materia/136853) to ease restrictions on foreign land ownership; however, the Chamber of Deputies has yet to consider the bill. Brazil is not yet a signatory to the World Trade Organization (WTO) Agreement on Government Procurement (GPA), but submitted its application for accession in May 2020.  In February 2021, Brazil formalized its initial offer to start negotiations.  The submission establishes a series of thresholds above which foreign sellers will be allowed to bid for procurements.  Such thresholds differ for different procuring entities and types of procurements.  The proposal also includes procurements by some states and municipalities (with restrictions) as well as state-owned enterprises, but it excludes certain sensitive categories, such as financial services, strategic health products, and specific information technologies.  Brazil’s submission still must be negotiated with GPA members.

By statute, a Brazilian state enterprise may subcontract services to a foreign firm only if domestic expertise is unavailable.  Additionally, U.S. and other foreign firms may only bid to provide technical services where there are no qualified Brazilian firms. U.S. companies need to enter into partnerships with local firms or have operations in Brazil in order to be eligible for “margins of preference” offered to domestic firms participating in Brazil’s public sector procurement to help these firms win government tenders.  Nevertheless, foreign companies are often successful in obtaining subcontracting opportunities with large Brazilian firms that win government contracts and, since October 2020, foreign companies are allowed to participate in bids without the need for an in-country corporate presence (although establishing such a presence is mandatory if the bid is successful).  A revised Government Procurement Protocol of the trade bloc Mercosul (Mercosur in Spanish), signed in 2017, would entitle member nations Brazil, Argentina, Paraguay, and Uruguay to non-discriminatory treatment of government-procured goods, services, and public works originating from each other’s suppliers and providers.  However, none of the bloc’s members have yet ratified it, so it has not entered into force.

Other Investment Policy Reviews

The Organization for Economic Co-operation and Development’s (OECD) December 2020 Economic Forecast Summary of Brazil summarized that, despite new COVID-19 infections and fatalities remaining high, the economy started to recover across a wide range of sectors by the end of 2020.  Since the publication, Brazil’s economy is faltering due to the continuing pandemic’s financial impact.  The strong fiscal and monetary policy response managed to prevent a sharper economic contraction, cushioning the impact on household incomes and poverty.  Nonetheless, fiscal vulnerabilities have been exacerbated by these necessary policy responses and public debt has risen.  Failure to continue structural reform progress could hold back investment and future growth.  As of March 2021, forecasts are for economic recovery in 2021 and high unemployment.  The OECD report recommended reallocating some expenditures and raising spending efficiency to improve social protections, and resuming the fiscal adjustments under way before the pandemic.  The report also recommended structural reforms to enhance domestic and external competition and improve the investment climate.

The IMF’s 2020 Country Report No. 20/311 on Brazil highlighted the severe impact of the pandemic in Brazil’s economic recovery but praised the government’s response, which averted a deeper economic downturn, stabilized financial markets, and cushioned income loss for the poorest.  The IMF assessed that the lingering effects of the crisis will restrain consumption while investment will be hampered by idle capacity and high uncertainty.  The IMF projected inflation to stay below target until 2023, given significant slack in the economy, but with the sharp increase in the primary fiscal deficit, gross public debt is expected to rise to 100 percent of GDP and remain high over the medium-term.  The IMF noted that Brazil’s record low interest rate (Selic) helped the government reduce borrowing costs, but the steepening of the local currency yield curve highlighted market concerns over fiscal risks.  The WTO’s 2017 Trade Policy Review of Brazil noted the country’s open stance towards foreign investment, but also pointed to the many sector-specific limitations (see above).  All three reports highlighted the uncertainty regarding reform plans as the most significant political risk to the economy. These reports are located at the following links:

Business Facilitation

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

Overall, Brazil dropped in the World Bank’s Doing Business Report from 2019 to 2020; however, it improved in the following areas: registering property; starting a business; and resolving insolvency.  According to Doing Business, some Brazilian states (São Paulo and Rio de Janeiro) made starting a business easier by allowing expedited business registration and by decreasing the cost of the digital certificate.  On March 2021, the GoB enacted a Provisional Measure (MP) to simplify the opening of companies, the protection of minority investors, the facilitation of foreign trade in goods and services, and the streamlining of low-risk construction projects.  The Ministry of Economy expects the MP, together with previous actions by the government, to raise Brazil by 18 to 20 positions in the ranking.  Adopted in September 2019, the Economic Freedom Law 13.874 established the Economic Freedom Declaration of Rights and provided for free market guarantees.  The law includes several provisions to simplify regulations and establishes norms for the protection of free enterprise and free exercise of economic activity.

Through the digital transformation initiative in Brazil, foreign companies can open branches via the internet.  Since 2019, it has been easier for foreign businesspeople to request authorization from the Brazilian federal government.  After filling out the registration, creating an account, and sending the necessary documentation, they can make the request on the Brazilian government’s Portal through a legal representative.  The electronic documents will then be analyzed by the DREI (Brazilian National Department of Business Registration and Integration) team.  DREI will inform the applicant of any missing documentation via the portal and e-mail and give a 60-day period to meet the requirements.  The legal representative of the foreign company, or another third party who holds a power of attorney, may request registration through this link: https://acesso.gov.br/acesso/#/primeiro-acesso?clientDetails=eyJjbGllbnRVcmkiOiJodHRwczpcL1wvYWNlc3NvLmdvdi5iciIsImNsaWVudE5hbWUiOiJQb3J0YWwgZ292LmJyIiwiY2xpZW50VmVyaWZpZWRVc2VyIjp0cnVlfQ%3D%3D     

Regulation of foreign companies opening businesses in Brazil is governed by article 1,134 of the Brazilian Civil Code  and article 1 of DREI Normative Instruction 77/2020 .  English language general guidelines to open a foreign company in Brazil are not yet available, but the Portuguese version is available at the following link: https://www.gov.br/economia/pt-br/assuntos/drei/empresas-estrangeiras .

For foreign companies that will be a partner or shareholder of a Brazilian national company, the governing regulation is DREI Normative Instruction 81/2020 DREI Normative Instruction 81/2020.  The contact information of the DREI is drei@economia.gov.br and +55 (61) 2020-2302.

References:

Outward Investment

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

Brazil incentivizes outward investment.  Apex-Brasil organizes several initiatives aimed at promoting Brazilian investments abroad.  The Agency´s efforts comprised trade missions, business round tables, support for the participation of Brazilian companies in major international trade fairs, arranging technical visits of foreign buyers and opinion makers to learn about the Brazilian productive structure, and other select activities designed to strengthen the country’s branding abroad.

The main sectors of Brazilian investments abroad are financial services and assets (totaling 50.5 percent); holdings (11.6 percent); and oil and gas extraction (10.9 percent).  Including all sectors, $416.6 billion was invested abroad in 2019.  The regions with the largest share of Brazilian outward investments are the Caribbean (47 percent) and Europe (37.7 percent), specifically the Netherlands and Luxembourg.

Regulation on investments abroad are contained in BCB Ordinance 3,689/2013  (foreign capital in Brazil and Brazilian capital abroad): https://www.bcb.gov.br/pre/normativos/busca/downloadNormativo.asp?arquivo=/Lists/Normativos/Attachments/48812/Circ_3689_v1_O.pdf

Sale of cross-border mutual funds are only allowed to certain categories of investors, not to the general public.  International financial services companies active in Brazil submitted to Brazilian regulators in late 2020 a proposal to allow opening these mutual funds to the general public, and hope this will be approved in mid 2021.

2. Bilateral Investment Agreements and Taxation Treaties

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

In 2015, Brazil developed a state-to-state Cooperation and Facilitation Investment Agreement (CFIA) which, unlike traditional BITs, does not provide for an ISDS mechanism.  CFIAs instead outline progressive steps for the settlement of “issue[s] of interest to an investor”:  1) an ombudsmen and a Joint Committee appointed by the two governments will act as mediators to amicably settle any dispute; 2) if amicable settlement fails, either of the two governments may bring the dispute to the attention of the Joint Committee; 3) if the dispute is not settled within the Joint Committee, the two governments may resort to interstate arbitration mechanisms.  The GOB has signed several CFIAs since 2015 with:  Mozambique (2015), Angola (2015), Mexico (2015), Malawi (2015), Colombia (2015), Peru (2015), Chile (2015), Iran (2016), Azerbaijan (2016), Armenia (2017), Ethiopia (2018), Suriname (2018), Guyana (2018), the United Arab Emirates (2019), Ecuador (2019), and India (2020). The following CFIAs are in force:  Mexico, Angola, Armenia, Azerbaijan, and Peru.  A few CFIAs have received Congressional ratification in Brazil and are pending ratification by the other country:  Mozambique, Malawi, and Colombia (https://concordia.itamaraty.gov.br/ ).  Brazil also negotiated an intra-Mercosul Cooperation and Investment Facilitation Protocol (PCFI) similar to the CFIA in April 2017, which was ratified on December 21, 2018.  (See sections on responsible business conduct and dispute settlement.)

Brazil has a Social Security Agreement with the United States.  The agreement and the administrative arrangement were both signed in Washington on June 30, 2015 and entered into force on October 1, 2018.  Brazil signed a Tax Information Exchange Agreement (TIEA) with the United States in March 2007, which entered into force on May 15, 2013.  In September 2014, Brazil and the United States signed an intergovernmental agreement to improve international tax compliance and to implement the Foreign Account Tax Compliance Act (FATCA).  This agreement went into effect in August 2015.

In October 2020, Brazil signed a Protocol on Trade Rules and Transparency with the United States, which has three annexes aimed at expediting processes involving trade:  I) Customs Administration and Trade Facilitation; II) Good Regulatory Practices; and III) Anti-corruption.  The protocol and annexes provide a foundation for reducing border bureaucracy, improving regulatory processes and stakeholder contribution opportunities, and supporting integrity in public institutions.

Brazil does not have a double taxation treaty with the United States, but Brazil does maintain tax treaties to avoid double taxation with the following 33 countries:  Austria, Argentina, Belgium, Canada, Chile, China, Czech Republic, Denmark, Ecuador, Finland, France, Hungary, India, Israel, Italy, Japan, Luxembourg, Mexico, the Netherlands, Norway, Peru, Philippines, Portugal, Russia, Slovak Republic, South Africa, South Korea, Spain, Sweden, Trinidad & Tobago, Turkey, Ukraine, and Venezuela.  Treaties with Singapore, Switzerland, United Arab Emirates, and Uruguay are pending ratification.

Brazilian industry representatives have for years suggested a bilateral taxation treaty between Brazil and the United States would incentivize U.S. FDI.  A document produced by Brazil’s National Industry Confederation (CNI) and Amcham Brazil is available on this topic in Portuguese:  https://www.portaldaindustria.com.br/publicacoes/2019/10/acordo-para-evitar-dupla-tributacao-entre-o-brasil-e-os-estados-unidos-caminhos-para-uma-possivel-convergencia/

Brazil currently has pending tax reform legislation in Congress which is considered a priority by the government.  The current texts propose simplifying tax collection by unifying various taxes, and would generally maintain the tax burden at its current level which is high relative to other countries in the region.

3. Legal Regime

Transparency of the Regulatory System

In the 2020 World Bank Doing Business report, Brazil ranked 124th out of 190 countries in terms of overall ease of doing business in 2019, a decrease of 15 positions compared to the 2019 report.  According to the World Bank, it takes approximately 17 days to start a business in Brazil. Brazil is seeking to streamline the process and decrease the amount to time it takes to open a small or medium enterprise (SME) to five days through its RedeSimples Program.  Similarly, the government has reduced regulatory compliance burdens for SMEs through the continued use of the SIMPLES program, which simplifies the collection of up to eight federal, state, and municipal-level taxes into one single payment.

The 2020 World Bank study noted Brazil’s lowest score was in annual administrative burden for a medium-sized business to comply with Brazilian tax codes at an average of 1,501 hours, a significant improvement from 2019’s 1,958 hour average, but still much higher than the 160.7 hour average of OECD high-income economies.  The total tax rate for a medium-sized business is 65.1 percent of profits, compared to the average of 40.1 percent in OECD high-income economies.  Business managers often complain of not being able to understand complex — and sometimes contradictory — tax regulations, despite having large local tax and accounting departments in their companies.

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

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

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

In addition to these federal regulatory agencies, Brazil has dozens of state- and municipal-level regulatory agencies.

The United States and Brazil conduct regular discussions on customs and trade facilitation, good regulatory practices, standards and conformity assessment, digital issues, and intellectual property protection.  The 18th plenary of the Commercial Dialogue took place in May 2020, and regular exchanges at the working level between U.S. Department of Commerce, Brazil’s Ministry of Economy, and other agencies and regulators occur throughout the year.

Regulatory agencies complete Regulatory Impact Analyses (RIAs) on a voluntary basis. The Senate approved a bill on Governance and Accountability (PLS 52/2013 in the Senate, and PL 6621/2016 in the Chamber) into Law 13,848 in June 2019.  Among other provisions, the law makes RIAs mandatory for regulations that affect “the general interest.”

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

In 2020, the Department of State found that Brazil had met its minimum fiscal transparency requirements in its annual Fiscal Transparency Report.  The International Budget Partnership’s Open Budget Index ranked Brazil slightly ahead of the United States in terms of budget transparency in its most recent (2019) index.  The Brazilian government demonstrates adequate fiscal transparency in managing its federal accounts, although there is room for improvement in terms of completeness of federal budget documentation.  Brazil’s budget documents are publicly available, widely accessible, and sufficiently detailed.  They provide a relatively full picture of the GoB’s planned expenditures and revenue streams.  The information in publicly available budget documents is considered credible and reasonably accurate.

International Regulatory Considerations

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

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

Legal System and Judicial Independence

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

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

Laws and Regulations on Foreign Direct Investment

Brazil is in the process of setting up a “one-stop shop” for international investors. According to its website:  “The Direct Investments Ombudsman (DIO) is a ‘single window’ for investors, provided by the Executive Secretariat of CAMEX.  It is responsible for receiving requests and inquiries about investments, to be answered jointly with the public agency responsible for the matter (at the Federal, State and Municipal levels) involved in each case (the Network of Focal Points).  This new structure allows for supporting the investor, by a single governmental body, in charge of responding to demands within a short time.”  Private investors have noted this is better than the prior structure, but does not yet provide all the services of a true “one-stop shop” to facilitate international investment.  The DIO’s website in English is: http://oid.economia.gov.br/en/menus/8

Competition and Antitrust Laws

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

In 2020, CADE conducted 471 total formal investigations, of which 76 related to cases that allegedly challenged the promotion of the free market.  It approved 423 merger and/or acquisition requests and did not reject any requests.

Expropriation and Compensation

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

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

Contract disputes in Brazil can be lengthy and complex.  Brazil has both a federal and a state court system, and jurisprudence is based on civil code and contract law.  Federal judges hear most disputes in which one of the parties is the State and rule on lawsuits between a foreign State or international organization and a municipality or a person residing in Brazil.  Five regional federal courts hear appeals of federal judges’ decisions.  The 2020 World Bank Doing Business report found that on average it took 801 days to litigate a breach of contract.

International Commercial Arbitration and Foreign Courts

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

Bankruptcy Regulations

Brazil’s commercial code governs most aspects of commercial association, while the civil code governs professional services corporations.  In December 2020, Brazil approved a new bankruptcy law (Law 14,112), which largely models UNCITRAL Model Law on International Commercial Arbitration, and addresses criticisms that its previous bankruptcy legislation favored holders of equity over holders of debt.  The new law facilitates judicial and extrajudicial resolution between debtors and creditors, and accelerates reorganization and liquidation processes.  Both debtors and creditors are allowed to provide reorganization plans that would eliminate non-performing activities and sell-off assets, thus avoiding bankruptcy.  The new law also establishes a framework for cross-border insolvencies that recognizes legal proceedings outside of Brazil.  The World Bank’s 2020 Doing Business Report ranks Brazil 77th out of 190 countries for ease of “resolving insolvency.”

4. Industrial Policies

Investment Incentives

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

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

While local private sector banks are beginning to offer longer credit terms, the state-owned Brazilian National Development Bank (BNDES) is the traditional Brazilian source of long-term credit as well as export credits.  BNDES provides foreign- and domestically owned companies operating in Brazil financing for the manufacturing and marketing of capital goods and primary infrastructure projects.  BNDES provides much of its financing at subsidized interest rates. As part of its package of fiscal tightening, in December 2014, the GoB announced its intention to scale back the expansionary activities of BNDES and ended direct Treasury support to the bank.  Law 13483, from September 2017, created a new Long-Term Lending Rate (TLP) for BNDES. On January 1, 2018, BNDES began phasing in the TLP to replace the prior subsidized loan rates.  After a five-year phase in period, the TLP will float with the market and reflect a premium over Brazil’s five-year bond yield (which incorporates inflation).  Although the GoB plans to reduce BNDES’s role further as it continues to promote the development of long-term private capital markets, BNDES continues to play a large role, particularly in concession financing, such as Rio de Janeiro’s water and sanitation privatization projects, in which BNDES can finance up to 65 percent of direct investments.

In December 2018, Brazil approved a new auto sector incentive package – Rota 2030 – providing exemptions from Industrial Product Tax (IPI) for research and development (R&D) spending.  Rota 2030 replaced the Inovar-Auto program which was found to violate WTO rules.  Rota 2030 increases standards for energy efficiency, structural performance, and the availability of assistive technologies; provides exemptions for investments in R&D and manufacturing process automation; incentivizes the use of biofuels; and funds technical training and professional qualification in the mobility and logistics sectors.  To qualify for the tax incentives, businesses must meet conditions including demonstrating profit, minimum investments in R&D, and no outstanding tax liabilities.

Brazil’s Special Regime for the Reinstatement of Taxes for Exporters, or Reintegra Program, provides a tax subsidy of two percent of the value of goods exported.

Brazil provides tax reductions and exemptions on many domestically-produced information and communication technology (ICT) and digital goods that qualify for status under the Basic Production Process (Processo Produtivo Básico, or PPB).  The PPB is product-specific and stipulates which stages of the manufacturing process must be carried out in Brazil in order for an ICT product to be considered produced in Brazil.  Brazil’s Internet for All program, launched in 2018, aims to ensure broadband internet to all municipalities by offering tax incentives to operators in rural municipalities.

Law 12.598/2012 offers tax incentives to firms in the defense sector.  The law’s principal aspects are to:  1) establish special rules for the acquisition, contract, and development of defense products and systems; 2) establish incentives for the development of the strategic defense industry sector by creating the Special Tax Regime for the Defense Industry (RETID); and, 3) provide access to financing programs, projects, and actions related to Strategic Defense Products (PED).

A RETID beneficiary, known as a Strategic Defense Company (EED), is accredited by the Ministry of Defense.  An EED is a legal entity that produces or develops parts, tools, and components to be used in the production or development of defense assets. It can also be a legal entity that provides services used as inputs in the production or development of defense goods.  RETID benefits include sale price credit and tax rate reduction for the manufacturing supply chain, including taxes on imported components.  Additionally, RETID provides exemption from certain federal taxes on the purchase of materials for the manufacture of defense products, strategic defense products (PRODE / PED) and services provided by strategic defense companies (EED).

In April 2020, the Brazilian Defense and Security Industry Association (ABIMDE) requested the Minister of Defense to consider implementing improvements to Law 12.598 by allowing all its members to:  1) have access to special bidding terms (TLE) for defense and security materials; and, 2) automatically utilize their RETID status, rather than being required to individually apply to the Ministry of Defense for certification, as is currently the process.  However, as of April 2021, the law has not been changed.

Foreign Trade Zones/Free Ports/Trade Facilitation

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

Performance and Data Localization Requirements

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

  1. Tax incentives for locally-sourced information and communication technology (ICT) goods and equipment (Basic Production Process (PPB), Law 8248/91 (amended by Law 13969/2019), and Portaria 87/2013); and
  2. Government procurement preferences for local ICT hardware and software (2014 Decrees 8184, 8185, 8186, 8194, and 2013 Decree 7903); and the CERTICS Decree 8186, which aims to certify that software programs are the result of development and technological innovation in Brazil.

At the end of 2019, Brazil adopted a New Informatic Law, which revised the tax and incentives regime for the ICT sector.  The regime is aligned with the requirements of the World Trade Organization (WTO), following complaints from Japan and the European Union that numerous Brazilian tax programs favored domestic products in contravention of WTO rules.

The New Informatic Law provides for tax incentives to manufacturers of ICT goods that invest in research, development, and innovation (RD&I) in Brazil.  In order to receive the incentives, the companies must meet a minimum nationalization requirement for production, but the nationalization content is reduced commensurate with increasing investment in R&D.  At least 60% of the production process is required to take place in Brazil to ensure eligibility.

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

Investors in certain sectors in Brazil must adhere to the country’s regulated prices, which fall into one of two groups: those regulated at the federal level by a federal company or agency and those set by sub-national governments (states or municipalities).  Regulated prices managed at the federal level include telephone services, certain refined oil and gas products (such as bottled cooking gas), electricity, and healthcare plans.  Regulated prices controlled by sub-national governments include water and sewage fees, and most fees for public transportation, such as local bus and rail services.  For firms employing three or more persons, Brazilian nationals must constitute at least two-thirds of all employees and receive at least two-thirds of total payroll, according to Brazilian Labor Law Articles 352 to 354. This calculation excludes foreign specialists in fields where Brazilians are unavailable.  There is a draft bill in Congress (PL 2456/19) to remove the mandatory requirement for national employment; however, the bill would maintain preferential treatment for companies that continue to employ a majority of Brazilian nationals.

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

Brazil’s Marco Civil, an Internet law that determines user rights and company responsibilities, states that data collected or processed in Brazil must respect Brazilian law, even if the data is subsequently stored outside the country.  Penalties for non-compliance could include fines of up to 10 percent of gross Brazilian revenues and/or suspension or prohibition of related operations. Under the law, Internet connection and application providers must retain access logs for specified periods or face sanctions.  Brazil’s Lei Geral de Proteção de Dados Pessoais (LGPD) went into effect in August 2020.  The LGPD governs the processing of the personal data of subjects in Brazil by people or entities, regardless of the type of processing, the country where the data is located, or the headquarters of the entity processing the data.  It also established a National Data Protection Authority (ANPD) to administer the law’s provisions, responsible for oversight and sanctions (which will go into effect August 2021), which can total up to R$50 million (approximately $9 million) per infringement.

5. Protection of Property Rights

Real Property

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

Intellectual Property Rights

Intellectual property (IP) rights  holders in Brazil continue to face challenges.  Brazil has remained on the “Watch List” of the U.S. Trade Representative’s (USTR) Special 301 Report since 2007.  For more information, please see:  https://ustr.gov/sites/default/files/files/reports/2021/2021%20Special%20301%20Report%20(final).pdf.Brazil

Brazil has one physical market, located in Sao Paolo,  listed on USTR’s 2020 Review of Notorious Markets for Counterfeiting and Piracy.  The Rua 25 de Marco area  is reportedly a distribution center for counterfeit and pirated goods throughout Sao Paulo.  Enforcement actions in this region continue.  Authorities used these enforcement actions as a basis to take civil measures against some of the stores. For more information, please see: https://ustr.gov/sites/default/files/files/Press/Releases/2020%20Review%20of%20Notorious%20Markets%20for%20Counterfeiting%20and%20Piracy%20(final).pdf.

According to the National Forum Against Piracy, contraband, pirated, counterfeit, and stolen goods cost Brazil approximately $74 billion in 2019.  (http://www.fncp.org.br/forum/release/292 ) (Yearly average currency exchange rate: 1 USD = 3.946 R)

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

6. Financial Sector

Capital Markets and Portfolio Investment

The Brazil Central Bank (BCB) embarked in October 2016 on a sustained monetary easing cycle, lowering the Special Settlement and Custody System (Selic) baseline reference rate from a high of 14 percent in October 2016 to a record-low 2 percent by the end of 2020.  The downward trend was reversed by an increase to 2.75 percent in March 2021.  As of March 2021, Brazil’s banking sector projects the Selic will reach 5 percent by the end of 2021.  Inflation for 2020 was 4.52 percent, within the target of 4 percent plus/minus 1.5 percent.  The National Monetary Council (CMN) set the BCB’s inflation target at 3.75 percent for 2021, at 3.5 percent for 2022 and at 3.25 percent at 2023.  Because of a heavy public debt burden and other structural factors, most analysts expect the “neutral” policy rate will remain higher than target rates in Brazil’s emerging-market peers (around five percent) over the forecast period.

In 2020, the ratio of public debt to GDP reached 89.3 percent according to BCB, a new record for the country, although below original projections.  Analysts project that the debt/GDP ratio will be at or above92 percent by the end of 2021.

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

While local private sector banks are beginning to offer longer credit terms, state-owned development bank BNDES is a traditional source of long-term credit in Brazil.  BNDES also offers export financing.  Approvals of new financing by BNDES increased 40 percent in 2020 from 2019, with the infrastructure sector receiving the majority of new capital.

The São Paulo Stock Exchange (BOVESPA) is the sole stock market in Brazil, while trading of public securities takes place at the Rio de Janeiro market.  In 2008, the Brazilian Mercantile & Futures Exchange (BM&F) merged with the BOVESPA to form B3, the fourth largest exchange in the Western Hemisphere, after the NYSE, NASDAQ, and Canadian TSX Group exchanges.  In 2020, there were 407 companies traded on the B3 exchange.  The BOVESPA index increased only 2.92 percent in valuation during 2020, due to the economic impact of the COVID-19 pandemic.  Foreign investors, both institutional and individuals, can directly invest in equities, securities, and derivatives; however, they are limited to trading those investments on established markets.

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

Money and Banking System

The Brazilian financial sector is large and sophisticated. Banks lend at market rates that remain relatively high compared to other emerging economies.  Reasons cited by industry observers include high taxation, repayment risk, concern over inconsistent judicial enforcement of contracts, high mandatory reserve requirements, and administrative overhead, as well as persistently high real (net of inflation) interest rates.  According to BCB data collected for final quarter of 2019, the average rate offered by Brazilian banks to non-financial corporations was 13.87 percent.

The banking sector in Brazil is highly concentrated with BCB data indicating that the five largest commercial banks (excluding brokerages) account for approximately 80 percent of the commercial banking sector assets, totaling $1.58 trillion as of the final quarter of 2019.  Three of the five largest banks (by assets) in the country – Banco do Brasil, Caixa Econômica Federal, and BNDES – are partially or completely federally owned.  Large private banking institutions focus their lending on Brazil’s largest firms, while small- and medium-sized banks primarily serve small- and medium-sized companies.  Citibank sold its consumer business to Itaú Bank in 2016, but maintains its commercial banking interests in Brazil.  It is currently the sole U.S. bank operating in the country.  Increasing competitiveness in the financial sector, including in the emerging fintech space, is a vital part of the Brazilian government’s strategy to improve access to and the affordability of financial services in Brazil.

On November 16, 2020, Brazil’s Central Bank implemented a twenty-four hour per day instant payment and money transfer system called PIX.  The PIX system is supposed to deconcentrate the banking sector, increase financial inclusion, stimulate competitiveness, and improve efficiency in the payments market.

In recent years, the BCB has strengthened bank audits, implemented more stringent internal control requirements, and tightened capital adequacy rules to reflect risk more accurately.  It also established loan classification and provisioning requirements. These measures apply to private and publicly owned banks alike.  In December 2020, Moody’s upgraded a collection of 28 Brazilian banks and their affiliates to stable from negative after the agency had lowered the outlook on the Brazilian system in April 2020 due to the economic unrest.  The Brazilian Securities and Exchange Commission (CVM) independently regulates the stock exchanges, brokers, distributors, pension funds, mutual funds, and leasing companies with penalties against insider trading.

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

Foreign Exchange and Remittances

Foreign Exchange

Brazil’s foreign exchange market remains small.  The latest Triennial Survey by the Bank for International Settlements, conducted in December 2019, showed that the net daily turnover on Brazil’s market for OTC foreign exchange transactions (spot transactions, outright forwards, foreign-exchange swaps, currency swaps, and currency options) was $18.8 billion, down from $19.7 billion in 2016.  This was equivalent to around 0.22 percent of the global market in 2019 versus 0.3 percent in 2016.

Brazil’s banking system has adequate capitalization and has traditionally been highly profitable, reflecting high interest rate spreads and fees.  Per an October 2020 Central Bank Financial Stability Report, despite the economic difficulties caused by the pandemic, all banks exceeded required solvency ratios, and stress testing demonstrated that the banking system has adequate loss-absorption capacity in all simulated scenarios.  Furthermore, the report noted 99.9 percent of banks already met Basel III requirements and possess a projected Common Equity Tier 1 (CET1) capital ratio above the minimum 7 percent required at the end of 2019.

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

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

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

Remittance Policies

Brazilian Federal Revenue Service regulates withholding taxes (IRRF) applicable to earnings and capital gains realized by individuals and legal entities resident or domiciled outside Brazil.  Upon registering investments with the BCB, foreign investors are able to remit dividends, capital (including capital gains), and, if applicable, royalties.  Investors must register remittances with the BCB.  Dividends cannot exceed corporate profits.  Investors may carry out remittance transactions at any bank by documenting the source of the transaction (evidence of profit or sale of assets) and showing payment of applicable taxes.

Under Law 13259/2016 passed in March 2016, capital gain remittances are subject to a 15 to 22.5 percent income withholding tax, with the exception of capital gains and interest payments on tax-exempt domestically issued Brazilian bonds.  The capital gains marginal tax rates are: 15 percent up to $874,500 in gains; 17.5 percent for $874,500 to $1,749,000 in gains; 20 percent for $1,749,000 to $5,247,000 in gains; and 22.5 percent for more than $5,247,000 in gains.  (Note:  exchange rate used was 5.717 reais per dollar, based on March 30, 2021 values.)

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

Sovereign Wealth Funds

Brazil had a sovereign fund from 2008 – 2018, when it was abolished, and the money was used to repay foreign debt.

7. State-Owned Enterprises

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

Notable examples of majority government-owned and controlled firms include national oil and gas giant Petrobras and power conglomerate Eletrobras.  Both Petrobras and Eletrobras include non-government shareholders, are listed on both the Brazilian and American stock exchanges,  and are subject to the same accounting and audit regulations as all publicly traded Brazilian companies.

Privatization Program

Given limited public investment spending, the GoB has focused on privatizing state–owned energy, airport, road, railway, and port assets through long-term (up to 30 year) infrastructure concession agreements, although the pace of privatization efforts slowed in 2020 due to the COVID-19 pandemic.

In 2019, Petrobras sold its natural gas distribution pipeline network, started the divestment of eight oil refineries, sold its controlling stake in Brazil’s largest retail gas station chain, and is in the process of selling its shares in regional natural gas distributors.  While the pandemic resulted in a slowdown in the refinery divestments, momentum is increasing once again as of early 2021.  Since 2016, foreign companies have been allowed to conduct pre-salt exploration and production activities independently, and no longer must include Petrobras as a minority equity holder in pre-salt oil and gas operations.  Nevertheless, the 2016 law still gives Petrobras right –of first refusal in developing pre-salt offshore fields and obligates operators to share a percentage of production with the Brazilian state.  The GoB supports legislation currently in Congress to further liberalize the development of pre-salt fields by removing Petrobras’ right-of-first refusal as well as production sharing requirements.

In March 2021, Brazil approved legislation to reform Brazil’s natural gas markets, which aims to create competition by unbundling production, transportation, and distribution of natural gas, currently dominated by Petrobras and regional gas monopolies.  Creation of a truly competitive market, however, will still require lengthy state-level regulatory reform to liberalize intrastate gas distribution, in large part under state-owned distribution monopolies.

Eletrobras successfully sold its six principal, highly-indebted power distributors, and the GoB intends to privatize Eletrobras through issuance of new shares that would dilute the government’s majority stake and in early 2021 submitted a legislative proposal to Congress to advance this process.

In March 2021, the GoB included the state-owned postal service Correios in its National Divestment Plan (PND).  As in the case of Eletrobras, privatization will require further Congressional legislation.

In 2016, Brazil created the Investment Partnership Program (PPI) to accelerate the concession of public works projects to private enterprise and the privatization of some state entities.  PPI takes on priority federal concessions in road, rail, ports, airports, municipal water treatment, electricity transmission and distribution, and oil and gas exploration and production.  Since 2016, PPI has auctioned off 200 projects, collecting $35 billion in auction bonuses and securing private investment commitments of $179 billion, including 28 projects, $1.43 billion in auction bonuses, and commitments of $8.14 billion in 2020.  The full list of PPI projects is located at: https://www.ppi.gov.br/schedule-of-projects

While some subsidized financing through BNDES will be available, PPI emphasizes the use of private financing and debentures for projects.  All federal and state-level infrastructure concessions are open to foreign companies with no requirement to work with Brazilian partners.

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

8. Responsible Business Conduct

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

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

Additional Resources

Department of State

Department of Labor

9. Corruption

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

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

In 2020, Brazil ranked 94th out of 180 countries in Transparency International’s Corruption Perceptions Index.  The full report can be found at:  https://www.transparency.org/en/cpi/2020/index/nzl

From 2014-2021, the complex federal criminal investigation known as Operação Lava Jato (Operation Carwash) investigated and prosecuted a complex web of public sector corruption, contract fraud, money laundering, and tax evasion stemming from systematic overcharging for government contracts, particularly at parastatal oil company Petrobras.  The investigation led to the arrests and convictions of Petrobras executives, oil industry suppliers, including executives from Brazil’s largest construction companies, money launderers, former politicians, and political party operators.  Appeals of convictions and sentences continue to work their way through the Brazilian court system.  On December 25, 2019, Brazilian President Jair Bolsonaro signed a packet of anti-crime legislation into law, which included several anti-corruption measures.  The new measures include regulation of immunity agreements – information provided by a subject in exchange for reduced sentence – which were widely used during Operation Carwash.  The legislation also strengthens Brazil’s whistle blower mechanisms, permitting anonymous information about crimes against the public administration and related offenses.  Operation Carwash was dissolved in February 2021.  In March 2021, the OECD established a working group to monitor anticorruption efforts in Brazil.

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

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

Resources to Report Corruption

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

Setor de Autarquias Sul (SAS), Quadra 01, Bloco A; Brasilia/DF

stpc.dpc@cgu.gov.br

https://www.gov.br/cgu/pt-br/anticorrupcao

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

10. Political and Security Environment

Strikes and demonstrations occasionally occur in urban areas and may cause temporary disruption to public transportation.  Brazil has over 43,000 murders annually, with low rates of completion in murder investigations and conviction rates.

Non-violent pro- and anti-government demonstrations have occurred periodically in recent years.

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

11. Labor Policies and Practices

The Brazilian labor market is composed of approximately 100.1 million workers, including employed (86.2 million) and unemployed (13.9 million).  Among employed workers, 34 million (39.5 percent) work in the informal sector.  Brazil had an unemployment rate of 13.9 percent in the last quarter of 2020, although that rate was more than double (28.9 percent) for workers ages 18-24.  Low-skilled employment dominates Brazil’s labor market.  The nearly 40 million workers in the informal sector do not receive the full benefits formal workers enjoy under Brazil’s labor and social welfare system.  Since 2012, women have on average been unemployed at a higher rate (3.15 percentage points higher) than their male counterparts.  In 2020, the difference reached 4.5 percentage points.  Foreign workers made up less than one percent of the overall labor force, but the arrival of more than 260,000 economic migrants and refugees from Venezuela since 2016 has led to large local concentrations of foreign workers in the border state of Roraima and the city of Manaus.  Since April 2018, the government of Brazil, through Operation Welcome’s voluntary interiorization strategy, has relocated more than 49,000 Venezuelans away from the northern border region to cities with more economic opportunity.  Migrant workers from within Brazil play a significant role in the agricultural sector.

Workers in the formal sector contribute to the Time of Service Guarantee Fund (FGTS) that equates to one month’s salary over the course of a year. If a company terminates an employee, the employee can access the full amount of their FGTS contributions or 20 percent in the event they leave voluntarily.  Brazil’s labor code guarantees formal sector workers 30 days of annual leave and severance pay in the case of dismissal without cause.  Unemployment insurance also exists for laid off workers equal to the country’s minimum salary (or more depending on previous income levels) for six months.  The government does not waive labor laws to attract investment; they apply uniformly cross the country.

In April 2020, Provisional Measure 396/2020 (later ratified as Law 14020/2020) authorized employers to reduce working hours and wages in an effort to preserve employment during the economic crisis caused by the pandemic.  The law will maintain its validity only during the state of calamity caused by the pandemic and the reduction requires the employee’s concurrence.

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

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

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

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

Brazil has ratified 97 International Labor Organization (ILO) conventions and is party to the UN Convention on the Rights of the Child and major ILO conventions concerning the prohibition of child labor, forced labor, and discrimination.  For the past eight years (2010-2018), the Department of Labor, in its annual publication Findings on the Worst forms of Child Labor, has recognized Brazil for its significant advancement in efforts to eliminate the worst forms of child labor.  On January 1, 2019, newly-elected President Jair Bolsonaro eliminated the Ministry of Labor and divided its responsibilities between the Ministries of Economy, Justice, and Social Development. The GoB, in 2020, inspected 266 properties, resulting in the rescue of 942 victims of forced labor.  Additionally, GoB officials removed 1,040 child workers from situations of child labor compared to 1,409 children in 2018.  Of these, 20 children were rescued from situations of slavery-like conditions, compared to 28 in 2018.

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance and Development Finance Programs

Programs of the U.S. International Development Finance Corporation (DFC) are available, although DFC reports that certain new authorities established by the BUILD Act of 2018, including equity investments, technical assistance, grants, and feasibility studies, may require a new bilateral Investment Incentive Agreement with the Government of Brazil.  DFC stated in 2019 its intent to invest in infrastructure and women entrepreneurship projects as its primary focus in Brazil.  Brazil has been a member of the Multilateral Investment Guarantee Agency (MIGA) since 1992.  In October 2020, DFC announced $ 984 million in investments in Brazil, mostly focused on small and medium enterprises.  In October and November 2020, the DFC held two substantive discussions on the Investment Incentive Agreement (IIA) with over a dozen Brazilian government (GOB) agencies led by the Ministry of External Relations and the Ministry of Economy.

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) 2020 $1.43 trillion 2019 $1.84 trillion www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $145.1 billion 2018 $81.731 billion BEA data available at https://apps.bea.gov/international/
factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2019 $21.956 2019 $4.617 billion BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2019 $34.6% 2019 34.9% 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: https://www.bcb.gov.br and https://www.ipea.gov.br/portal/

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (U.S. Dollars, Billions)
Inward Direct Investment Outward Direct Investment
Total Inward 648.353 100% Total Outward 247.605 100%
The Netherlands 147.688 22.8% Cayman Islands 74.298 30%
United States 117.028 18.0% British Virgin Islands 56.184 22.7%
Spain 65.948 10.1% Bahamas 42.087 17%
Luxembourg 60.010 9.2% United States 20.177 8.1%
France 35.739 5.5% Luxembourg 10.630 4.3%
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 45,085 100% All Countries 36,161 100% All Countries 8,923 100%
United States 19,451 43% United States 15,754 44% United States 3,697 41%
Bahamas 6,631 15% Bahamas 6,573 18% Mexico 2,283 26%
Cayman Islands 4,727 10% Cayman Islands 4,378 12% Republic of Korea 863 10%
 Mexico 2,377 5% Luxembourg 2,026 6% Spain 391 4%
Luxembourg 2,211 5% Switzerland 1,433 4% Cayman Islands 349 4%

14. Contact for More Information

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

Mongolia

Executive Summary

Mongolia’s frontier market and vast mineral reserves represent potentially lucrative opportunities for investors but an undercapitalized banking sector and lack of input from stakeholders during rulemaking warrant caution.  Mongolia imposes few market-access barriers, and investors face few investment restrictions, enjoying mostly unfettered access to the market.  Franchises such as gyms, fast food, and convenience stores have outperformed expectations, suggesting investors can bring successful international business models to Mongolia’s services sector.  Mongolia’s cashmere-apparel and agricultural sectors also show strong promise.  However, investing into politically sensitive sectors of the Mongolian economy – such as mining – carries higher risk.

Economists’ average 2021 GDP growth forecast is 6.1 percent, but this figure understates the impact COVID-19 has had on the economy in 2021.  Despite experiencing declines, mining and agriculture have been relatively resilient in the face of the pandemic, meaning Mongolia’s broader economy may emerge less damaged than some of its peers.  Balance-of-payments concerns in 2020 have substantially abated in 2021, with central bank foreign-exchange reserves buoyed by increased minerals exports and higher commodity prices.  Continued economic growth will also in part depend on the resolution of a dispute over the Oyu Tolgoi mine without disruption to its underground operations.  If global interest rates rise, Mongolia could face the foreign-exchange pressures characteristic of comparable emerging markets.

Mongolia has committed to implementing the U.S.-Mongolia Agreement on Transparency in Matters Related to International Trade and Investment (known as the Transparency Agreement), which requires a public-comment period before new regulations become final.  It also requires ministries to respond to public comments or factor them into final rules.  Mongolia is four years behind implementing its Transparency Agreement public-notice and comment commitments but has formally reiterated its intention to make progress.

The government has taken steps to address growing concerns in recent years about threats to judicial independence, including by adopting constitutional amendments in 2019 and judicial reforms in 2020 and 2021 that improve transparency and reduce political influence in the appointment and removal of jurists.  Investors, however, continue to cite long delays in reaching court judgments in business disputes, followed by similarly long delays in enforcing these decisions, as well as reports that administrative inspection bodies, such as the tax authority, will fail to act on politically sensitive decisions.  Businesses note a substantial regulatory burden at the regional level as well, although the government’s “One-Stop-Shop for Investors” has helped investors navigate this process.

Table 1: Key Metrics and Rankings 
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 111 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 81 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 58 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2020 $806 https://www.mongolbank.mn/documents/statistic/
externalsector/pozits_report/shuud2010-2020Q3e.xlsx
World Bank GNI per capita 2019 3,790 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment 

Policies Towards Foreign Direct Investment

Mongolia generally does not discriminate against foreign investors with two major exceptions.  First, foreign investors must invest a minimum of $100,000 to establish a venture; in contrast, Mongolian investors face no investment minimums.  Second, only Mongolian adult citizens may own real estate.  Additionally, while foreign investors may obtain use rights for the underlying land, these rights last for five years with a one-time, five-year renewal.  The government imposes no such restriction on its nationals.  Investors may also avail themselves of the Mongolian National Development Agency’s “One-Stop-Shop for Investors,” which provides services on visas, taxation, notarization, business registration (see  http://nda.gov.mn/ ).  The Agency has said that in some cases municipal, provincial, and central government officials may waive land-use rights limits and recommends that investors contact it for more information on how to apply for these waivers.  Investors have also encouraged the government to develop a policy aimed at retaining existing foreign direct investment in country.

Limits on Foreign Control and Right to Private Ownership and Establishment

Except for real estate, foreign and domestic investors have the same rights to establish, sell, transfer, or securitize structures, shares, use rights, companies, and movable property.  Mongolia generally imposes no statutory or regulatory limits on foreign ownership and control of investments.  The Mining Law allows the government to acquire up to 50 percent of mineral deposits deemed of “strategic” value to the state by parliament.  Article 6.2 of Mongolia’s Constitution also requires the state to take a “majority” share of the “benefits” of strategic mining projects.  Investors are waiting for the government to clarify the meaning of “benefits” derived from mining activities, which in the Mongolian language is the same word as “profit,” but, according to government officials, may include such non-cash contributions as development programs, employment, or technology transfers.  Investors also observe that excessive regulatory discretion allows bureaucrats de facto control over the use of legally granted rights, corporate governance decisions, and ownership stakes, stating that in some cases regulators make up rules beyond their actual statutory remit.  Finally, Mongolia has no formal or informal investment-screening mechanism, although the National Security Council has barred investments from some foreign state-owned entities.

Other Investment Policy Reviews

The Mongolian Government has undergone several third-party investment policy reviews over the last three years by the OECD ( http://www.oecd.org/investment/countryreviews.htm ) and the WTO ( WTO | Mongolia ).

Business Facilitation

Consistent with the World Bank’s Doing Business Report, investors report Mongolia’s business registration process is reasonably clear.  All foreign and domestic enterprises must register with the State Registration Office ( https://burtgel.gov.mn/ ).  Registrants can obtain required forms online and submit them by email.  The State Registration Office aims at a two-day turnaround for the review and approval process.  Investors report bureaucratic discretion often adds weeks or even months to the process and state more transparent adherence to the relevant laws and regulations would yield a consistent, streamlined process.  Once approved by the State Registration Office, a company must register with the General Tax Authority ( http://en.mta.mn/ ).  Upon hiring its first employees, a company must register with the Social Insurance Agency ( http://www.ndaatgal.mn/v1/ ).  The State Registration Office reports that notarization is not required for its registration process.

The same ease of opening a business does not apply to closing a business, however.  Foreign investors and legal contacts report the onerous bureaucratic and judicial process of shutting down a firm takes no less than 18-24 months.

Outward Investment

While the Mongolian Government neither promotes nor incentivizes outward investment, it does not restrict domestic investors from investing abroad.

2. Bilateral Investment Agreements and Taxation Treaties

In force since 1997, the United States and Mongolia Bilateral Investment Treaty (BIT) protects U.S. investors and assists Mongolia’s development by creating conditions more favorable for U.S. and Mongolian investment.  BIT details are available from the U.S. Department of State at  US-Mongolia BIT .

While Mongolia has ratified the U.S.-Mongolia Agreement on Transparency in Matters Related to International Trade and Investment between the United States of America and Mongolia (Transparency Agreement), the government is more than four years behind in its commitment to implement public-notice and comment periods for new laws and regulations affecting international trade and investment.  A copy of the Transparency Agreement is available:   US-Mongolia Transparency Agreement .

Mongolia and the United States have no bilateral tax or free-trade agreements.  For Mongolia’s other agreements see UNCTAD:   Mongolia Trade and Tax Agreements .  The Economic Partnership Agreement between Japan and Mongolia entered into force in 2016.  Mongolia is negotiating a free-trade agreement with the Eurasian Economic Union.

Mongolia’s Taxation Regime

Mongolia imposes a license-transfer tax for resource-use rights of 10 percent on the gross value of the transfer of rights involving land possession or usage, including exploration and mining licenses and rights for water, timber, pasturage, and land use in urban areas.  Some investors believe the tax discourages investment in the resource sector.  Inconsistent and nontransparent enforcement, coupled with an onerous dispute resolution process particularly concern investors. The amendments also impose a tax of 5 percent on the interest income of commercial Mongolian banks to be paid on loans and debt instruments obtained from local and foreign stock markets; decrease the withholding tax on income provided to non-residents to 15 percent; lower from 20 percent to 5 percent the tax on dividends for foreign investors; and lower from 10 percent to 5 percent the tax on financing obtained through debt instruments from initial and secondary markets.  They also simplify reporting procedures and provide relief for companies experiencing financial difficulties.

While the Ministry of Finance has reached out to the private sector to seek their input in drafting implementing regulations for the new tax laws, investors report a need for greater and more regular input into the final rules.  Using a formal public notice and comment system – as outlined under the Transparency Agreement – would create an institutionalized framework that would improve the government’s ad hoc approach.

3. Legal Regime 

Transparency of the Regulatory System

The Law on Legislation sets out who may draft and submit legislation; the format of these bills; the respective roles of the Mongolian parliament, government, and president; and the procedures for obtaining and employing public comment on pending legislation.  The Law on Legislation states that law initiators – members of parliament, the president of Mongolia, or cabinet ministers – must fulfill these criteria:  (1) provide a clear process for developing and justifying the need for the draft legislation; (2) set out methodologies for estimating costs to the government related to the bill’s implementation; (3) evaluate the impact of the legislation on the public if implemented; and (4) conduct public outreach before submitting legislation to the parliament.

Law initiators must post draft legislation for public comment and publish reports evaluating costs and impacts on parliament’s official website ( Parliament of Mongolia/Projects ) at least 30 days prior to submitting bills to parliament.  Posts must explicitly state the time for public comment and review.  Initiators must solicit comments in writing, organize public meetings, seek comments through social media, and carry out public surveys.  No more than 30 days after the public comment period ends, initiators must prepare a matrix of all comments, including those used to revise the bill as well as those not used, which must be posted on parliament’s official web site.  After a law’s passage, parliament must monitor and evaluate its implementation and impacts.  Investors report that while legislators have not implemented all these requirements, most relevant legislation is posted on parliament’s website before passage.  Ministries and agencies lag in fulfilling these statutory requirements, according to businesses.

While General Administrative Law Article 6 aligns Mongolia’s regulatory drafting process with Transparency Agreement obligations, investors report the government is not generally enforcing it.  Under the Transparency Agreement, originators of regulations must seek public comment by posting draft regulations in a single journal of national circulation, which Mongolia has designated as LegalInfo.mn ( LegalInfo ).  Drafters must record, report, and respond to significant public comments.  Under Mongolian law, the Ministry of Justice and Home Affairs must certify that each regulatory drafting process complies with the General Administrative Law before a regulation enters force.  After approval, the statutorily responsible government agency monitors implementation and impacts.

Businesses also complain about a high regulatory burden at the local, or province and county, levels.  They note inconsistent application of regulations and statutes among central, provincial, and municipal jurisdictions; and a lack of knowledge among local inspectors.  Regional tax, health, and safety inspectors are cited as particularly problematic.  The Economic Policy and Competitiveness Research Center of Mongolia annually ranks local regulatory burdens:  http://en.aimagindex.mn/competitiveness .

Mongolia’s so-called Glass Budget Law requires all levels of government publicly post proposed and actual budget expenditures; and the law, according to businesses and transparency experts, has generally been followed.

International Regulatory Considerations

Mongolia, not part of any regional economic bloc, often seeks to adapt European standards and norms in such areas as construction materials, food, and environmental regulations; looks to U.S. standards in the hydrocarbon sector; and adopts a combination of Australian and Canadian standards and norms in the mining sector.  Mongolia also tends to employ World Organization for Animal Health standards for its animal health regulations.  Mongolia, a member of the WTO, asserts it will notify the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations.

Legal System and Judicial Independence

Investors state that judges frequently avoid controversial decisions in business disputes, preferring to delay judgment for as long as possible – sometimes years.  If a decision is made, businesses face similarly long delays in obtaining and enforcing court orders.  In some instances, cases have taken so long that by the time an enforcement order is executed, the counterparty has liquidated assets and vanished.  Investors note similarly long delays with respect to inspection agencies, such as the Tax Dispute Settlement Resolution Council as well as with other inspection agency panels, especially those related to mineral licenses and health matters.

Investors have praised recent reforms they say could help to restore judicial independence severely compromised by a 2019 parliamentary resolution that vested the president, parliamentary speaker, and prime minister with the power to remove judges and prosecutors.  In November 2019 parliament amended the constitution to include reforms to strengthen judicial independence and accountability, effectively rendering the 2019 resolution invalid.  Parliament, in 2021 revised the Law of the Judiciary to bring it into line with the amended constitution.  The amended law, which entered into force March 1, limits the powers of the government, parliament, and the president to influence the selection and removal of judges and relegates discipline of jurists to a newly created Judicial Disciplinary Council, except in matters involving criminal acts.

Under Mongolia’s hybrid civil law-common law system, trial judges may use prior rulings to adjudicate similar cases but have no obligation to follow legal precedent as such.  Mongolian laws, and even their implementing regulations, often lack the specificity needed for consistent judicial and prosecutorial interpretation and application.  All courts may rule on matters of fact as well as matters of law at any point in the judicial process.

Mongolia has specialized laws for contracts but no dedicated courts for commercial activities. Contractual disputes are usually adjudicated through the Civil Court division of the district court system.  Criminal Courts adjudicate crime cases brought by the General Prosecutors Office. Disputants may appeal to the City Court of Ulaanbaatar and ultimately to the Supreme Court of Mongolia.  Mongolia has several specialized administrative courts adjudicating cases brought by citizens, foreign residents, and businesses against official administrative acts.  Mongolia’s Constitutional Court, the Tsets, rules on constitutional issues.  The General Executive Agency for Court Decisions enforces judgments and orders.

Investors and legal sector experts say that the Administrative Court is procedurally competent, fair, and reliable but that the Civil Courts deliver highly inconsistent judgments, reflecting ignorance of judicial best practices in civil and criminal matters as well as potential corruption, especially in civil commercial cases.

Laws and Regulations on Foreign Direct Investment

The 2013 Investment Law sets the general statutory and regulatory frame for all investors in Mongolia.  Under the law, foreign investors may access the same investment opportunities as Mongolian citizens and receive the same protections as domestic investors.  Investment domicile, not investor nationality, determines if an investment is foreign or domestic.  The law provides for a more stable tax environment and offers tax and other incentives for investors; and authorizes a single point of registration, the State Registration Office ( www.burtgel.gov.mn ), for all investors.  The Investment Law offers tax incentives in the form of transferable tax-stabilization certificates, giving qualifying projects favorable tax treatment for up to 27 years.  Affected taxes may include the corporate-income tax, customs duties, value-added tax, and royalties.

Investors cite two primary national-treatment issues with respect to investment rules.  First, foreign nationals and companies may not own real estate; only Mongolian adult citizens may own real estate.  While foreign investors may obtain use rights for the underlying land, these rights expire after a set number of years with limited rights of renewal.  The National Development Agency ( http://nda.gov.mn/ ), responsible for assisting foreign investors has said that in some cases municipal, provincial, and central government officials may waive land-use rights limits and recommends that investors contact it for more information on how to apply for these waivers.  Foreign investors also object to the regulatory requirement that each foreign investor in any given venture must invest a minimum of $100,000.  Although the Investment Law has no such requirement, Mongolian regulators impose it on all foreign investors without requiring the same minimum from Mongolian investors.

The Mongolian National Development Agency’s “One-Stop-Shop for Investors” provides services on investment data, visas, taxation, notarization, business registration, and government-business dispute resolution ( http://nda.gov.mn/ ).

Competition and Antitrust Laws

Mongolia’s Agency for Fair Competition and Consumer Protection reviews domestic transactions for competition-related concerns.  For a description of the Agency go to  AFCCP .  The Agency for Fair Competition and Consumer Protection launched no 2020 competition cases affecting FDI.

Expropriation and Compensation

State entities at all levels may confiscate or modify land-use rights for purposes of economic development, national security, historical preservation, or environmental protection.  Mongolia’s constitution recognizes private real-property rights and derivative rights, and Mongolian law specifically bars the government from expropriating assets without payment of adequate, market-based compensation.  Investors express little disagreement with such takings in principle but worry a lack of clear lines of authority among the central, provincial, and municipal governments has led to loss of property and use rights.  For example, the Minerals Law provides no clear division of local, regional, and national jurisdictions for issuances of land-use permits and special-use rights.  Faced with unclear lines of authority and frequent differences in practices and interpretation of rules and regulations by different levels of government, investors may find themselves unable to fully exercise legally conferred rights.

Some expropriation cases involve court expropriations after third-party criminal trials at which investors are compelled to appear as “civil defendants” – but are not allowed to fully participate in the proceedings.  In these cases, government officials are convicted of corruption, and the court then orders the civil defendant to surrender a license or property, or pay a tax penalty or fine, for having received an alleged favor from the criminal defendant with no judicial proceedings to determine if property or licenses were obtained illegally.

Dispute Settlement

ICSID Convention and New York Convention

Mongolia ratified the Washington Convention and joined the International Centre for Settlement of Investment Disputes (ICSID) in 1991 and the New York Convention in 1994; and has accepted international arbitration in several disputes.  Mongolian law allows for domestic enforcement of awards under the ICSID and New York Conventions.

Investor-State Dispute Settlement

Under the 1997 U.S.-Mongolia Bilateral Investment Treaty ( US-Mongolia BIT ), both countries agree to respect international legal standards for state-facilitated property expropriation and compensation matters involving nationals of either country, providing U.S. investors in Mongolia with an extra measure of protection against financial loss.

In disputes involving the government, investors report some government officials and politicians interfere in administrative and judicial dispute resolution processes.  Foreign investors describe three general categories of disputes eliciting interference.  First, in disputes between private parties before judicial tribunals, investors warn that Mongolian private parties may exploit contacts in the government, the judiciary, law enforcement, the media, or the prosecutor’s office to coerce foreign private parties to accede to demands.  Second, in disputes between investors and the Mongolian government directly, the government may claim a sovereign right to intervene in the business venture, often because the Mongolian government itself operates or seeks to operate a competing state-owned enterprise (SOE); because officials have undisclosed business interests; or from ignorance of the relevant statutes and regulations.  Third are disputes with Mongolian tax officials or prosecutors levying highly inflated, statutorily deficient tax assessments against a foreign entity and demanding immediate payment on threat of civil or criminal prosecution.

Investors report local courts recognize and enforce court decisions – but problems exist with enforcement.  The thinly staffed General Executive Agency for Court Decisions (GEACD) implements civil and criminal court orders.  Its employees, often living in the jurisdictions in which they work, are subject to pressure from friends and professional acquaintances.  A complicated chain-of-command and opportunities for conflicts of interest may weaken GEACD’s resolve to execute court judgments on behalf of foreign and domestic investors.

Mongolia has been both plaintiff and defendant in several past and ongoing international arbitration suits over the expropriation of private sector mining rights or the imposition of excessive tax assessments.  Whenever the government has lost arbitration claims, it has satisfied each and every judgment after some negotiation with foreign investors.

Investors have reported no extrajudicial actions against their interests.

The Oyu Tolgoi copper and gold mine has resurfaced as a bellwether of Mongolia’s investment climate.  Upon reaching full production, the mine may produce as much as 25 percent of Mongolia’s GDP.  Resolving an ongoing investment dispute related to the mine between the government and multi-national shareholders is seen by many investors as essential to improving Mongolia’s investment climate image internationally.

International Commercial Arbitration and Foreign Courts

The Mongolian government has consistently honored international arbitral awards against it.

Mongolia’s Arbitration Law, based on the United Nations Commission on International Trade Law (UNCITRAL), provides a clear set of rules and protections for Mongolia-based arbitration. Any organization that satisfies the laws’ requirements can provide arbitral services.

Bankruptcy Regulations

Bankruptcy Law treats bankruptcy as a civil matter requiring judicial adjudication.  Mongolia allows registration of mortgages and other debt instruments backed by real estate, structures, immovable collateral (mining and exploration licenses, intellectual property rights, and other use rights) and movable property (cars, equipment, livestock, receivables, and other items of value).  Although investors may securitize movable and immovable assets, local law firms hold that the bankruptcy process remains too vague, onerous, and time consuming for practical use.  Mongolia’s constitution and statutes allow foreclosure and bankruptcy only through judicial proceedings.  Reporting that proceedings usually require no less than 18 months, with 36 months not uncommon, investors and legal advisors state that a lengthy appeals process, perceived corruption, and government interference may create years of delay.  Moreover, while in court, creditors face suspended interest payments and limited access to the asset.

4. Industrial Policies 

Investment Incentives

The government generally offers the same tax preferences to foreign and domestic investors; and occasionally waives tariffs for imports of essential fuel and food products or for imports in such targeted sectors as agriculture or energy.  Exemptions may apply to Mongolia’s 5-percent import duty and 10-percent value-added tax (VAT).  The government may also extend tax credits on a case-by-case basis to investments in such sectors as minerals processing, agriculture, and infrastructure.  Under the Investment Law, foreign-invested companies, properly registered and paying taxes in Mongolia, qualify as domestic Mongolian entities for investment incentive packages that, among other benefits, offer tax stabilization for a period of years.  While in theory the government can issue guarantees or jointly finance foreign direct investment projects, it seldom does so in practice.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Mongolian government has had a free-trade zone program since 2004.  Two free-trade zones are along the Mongolian spurs of the Trans-Siberian Highway and Railroad:  (1) the northern Mongolia-Russia border town of Altanbulag; and (2) the southern Mongolia-China border town of Zamiin-Uud.  Both free-trade zones are relatively inactive, requiring development.  A third free-trade zone is located at the port-of-entry of Tsagaannuur in the far western province of Bayan-Olgii bordering Russia.  Mongolian officials also suggest that the long-delayed new Ulaanbaatar International Airport may host a free-trade zone.

Performance and Data Localization Requirements

Mongolia does not generally require foreign investors to use local goods, services, or equity, or to engage in import substitution.  Neither foreign nor domestic businesses need to export a certain percentage of output or use foreign exchange to cover exports.  The government applies the same geographical restrictions to foreign and domestic investors, involving border security, environmental concerns, and local-use rights.  The government does not impose onerous or discriminatory visa, residence, or work permit requirements on U.S. investors – although foreign and domestic firms must meet certain industry-specific, local-hire requirements.

Investors may locate and hire workers without using hiring agencies so long as hiring practices follow the Labor Law.  This law requires companies to employ Mongolian workers in certain labor categories where the government determines Mongolians can perform the task as well as foreigners.  This law generally applies to unskilled-labor categories and not fields in which a high degree of technical expertise not existing in Mongolia is required.

The Mongolian government strongly encourages but does not legally compel domestic sourcing of inputs, especially for firms engaged in natural-resource extraction.  The Minerals Law states that holders of exploration and mining licenses should preferentially supply extracted minerals at market prices to Mongolian processing facilities and should procure goods and services and hire subcontractors from business entities registered in Mongolia.  Although facing no legal requirement to source locally, investors occasionally report that central, provincial, or municipal governments slow permitting and licensing until domestic and foreign enterprises make some effort to source locally.  Hiring Mongolians is often a de facto necessity because the government sometimes issues work visas for foreign employees only if employers have attempted to hire domestically.  The government had allowed companies to pay for waivers for domestic hiring requirements for expatriate expert labor and senior management staff but since 2019 has suspended the waiver process and imposed a requirement that companies hire five Mongolians for every non-Mongolian.  This requirement does not apply to members of boards of directors.

Despite pressure to source locally, foreign investors generally set their own export and production targets without concern for government-imposed quotas or requirements.  Mongolia does not require (but often encourages) technology transfers.  The government generally imposes no offset requirements for major procurements.  Investors, not the government, generally decide on technology, intellectual property, and finance as they see fit.  Except for an unenforced provision of the Minerals Law requiring mining companies to list 10 percent of the shares of the Mongolian-registered mining company on the Mongolian Stock Exchange, foreign-invested businesses are not required to sell shares into the Mongolian market.  Equity stakes are generally at the discretion of investors, Mongolian or foreign.  In cases where investments may have national economic, political, security, or social impacts, the government has, without a clear statutory basis, restricted the type of financing foreign investors may use, their choice of partners, or to whom they sell shares or equity stakes.

The government does not require localized data storage; nor legally compels IT providers to turn over source code or provide access for surveillance, except for criminal investigations.  Businesses may freely transmit customer or other business-related data abroad.

5. Protection of Property Rights 

Real Property

The Mongolian Constitution, per the 2019 amendments, provides that “the State shall recognize any forms of public and private properties.”  Statute limits real-estate ownership to adult citizens of Mongolia.  Mongolian civil law allows private Mongolian citizens or government agencies to assume property ownership or use rights if the current owner or holder of use rights does not use that property or those rights.  In the case of use rights, revocation and assumption is almost always written into the formal agreements covering the rights.  Squatters may, under certain circumstances, claim effective property ownership of unused structures.

Foreign investors may own permanent physical structures and obtain use rights to land and resources, but only Mongolian citizens may own real estate, and only in municipalities.  Land ownership does not convey ownership of, or necessarily access to, surface or subsurface resource rights, which remain with the state.  Outside municipalities, the state owns the land and resources in perpetuity and may lease those resources to public and private entities.

Ownership of a structure may vest the owner with control over the use rights of the land upon which the structure sits.  Use rights are granted from periods of 3 to 60 years, depending on the particular use right.  However, foreign nationals and foreign companies can lease land-use rights for no more than 10 years:  a five-year term and a single five-year renewal.

Although Mongolia has a well-established register for immovable property – structures and real estate – it lacks a central register for use rights; consequently, investors, particularly those investing in rural Mongolia, have no easy way to learn who might have conflicting rights.  Complicating matters, Mongolia’s civil-law system is still developing a formal process for apportioning multiple use rights on adjacent lands or adjudicating disputes arising from conflicting use rights.

Creditors may seize and dispose of property offered as collateral, although this process is often subject to lengthy legal delays.  Debt instruments backed by real estate, fixed structures, and other immovable collateral may be registered with the Immovable Property Office of the State Registration Office ( www.burtgel.gov.mn ).  Movable property (cars, equipment, livestock, receivables, and other items of value) may also be registered with the State Registration Office as collateral.  Investors report that the movable-property registration system, while generally reliable, experiences occasional technical capacity issues.

As of 2021, the Mongolian government has no accurate figure for land with clear titles.

Intellectual Property Rights

Film, television, and digital content from the United States enjoy strong copyright protection in Mongolia, while the music and publishing industry is steadily signing licensing agreements with organizations using U.S. and Mongolian content.  Mongolia’s Internet Service Providers (ISPs) will quickly block access to internet addresses of offending sites once listed by the Intellectual Property Office of Mongolia.  However, use of pirated software by Mongolian government ministries, home-use consumers, and businesses is rampant.  Patent protection for pharmaceutical and medical device importers is virtually non-existent, with trademark law generally the only recourse for rightsholders.  While enforcement agencies will seize trademark-infringing drugs, simply removing the infringing trademark still allows the importer to bring the drug despite it being patent-infringingt.  Medical devices encounter similar problems.  Trademarkinfringement also includes stores distributing counterfeit apparel and fake spare parts for heavy equipment.  However, the Intellectual Property Office of Mongolia has not focused on these areas because rightsholders have not filed complaints.

IPR violations below MNT 50 million ($18,000) are subject to administrative enforcement; those above MNT 50 million are subject to criminal enforcement.  Enforcement agencies do pursue criminal and civil intellectual property (IP) cases, highlighting a willingness by Mongolian prosecutors, administrative investigators, and police to attack the problem.

The new Law of Mongolia on Intellectual Property sets a framework for public and private enforcement of IP, which had previously been left to ad hoc administrative decrees and private sector efforts.  The law grants: (1) the Intellectual Property Office of Mongolia exclusive authority to administer IPR under the Minister of Justice and Home Affairs; (2) expands the human and material capacity of the Intellectual Property Office of Mongolia to cover all of Mongolia; (3) creates a Dispute Resolution Council to handle complaints arising from Intellectual Property Office of Mongolia administrative acts; and (4) lets the Intellectual Property Office of Mongolia authorize private-sector IP-related associations to assist members with copyright, trademark, and patent registrations and royalty collection as well with disputes.

For additional information about laws and points of contact at local IP offices, please see WIPO’s country profiles at  WIPO  or  IPOM .

6. Financial Sector 

Capital Markets and Portfolio Investment

Mongolia imposes few restrictions on capital flows and has respected IMF Article VIII by not restricting international payments and transfers.  However, capital markets remain underdeveloped, with little ability to trade futures or derivatives.  The state-owned Mongolian Stock Exchange ( MSE ) is the primary venue for domestic capital and portfolio investments.

Money and Banking System

Mongolia’s four-largest commercial banks – Khan, Trade and Development Bank (TDB), Khas, and Golomt – are majority owned by a combination of both Mongolian and foreign investors and collectively hold 83 percent of all banking assets, or about $10.6 billion (as of December 2020).  Mongolian commercial banks had rates of non-performing loans averaging 11.8 percent in December 2020, an increase from December 2019’s 9.9 percent.  Ongoing COVID-19 rules enabling the postponement of consumer-loan and mortgage payments may create some additional forbearance risk in the banking sector.  The Bank of Mongolia, Mongolia’s central bank, regulates banking operations.  The Bank of Mongolia allows foreigners to establish domestic accounts so long as they can prove lawful residence in Mongolia.

Parliament amended Mongolia’s Law on Banking in January 2021.  The amended law states that ownership by a shareholder and their related parties collectively and as certified by the Bank of Mongolia shall not exceed 20 percent. Banks have until December 31, 2023 to comply with this divestment requirement.  In addition, Mongolia’s four systemically important commercial banks – Khan, TDB, Khas, and Golomt – and the state-owned State Bank must list themselves on the Mongolian Stock Exchange through an IPO by June 30, 2022.  The new rules should improve bank governance by creating accountability to a broader group of shareholders.

The IMF has reported unaddressed macroprudential concerns regarding the relatively large banking system, resulting in the Extended Fund Facility’s unsuccessful completion in May 2020.  Mongolia’s banking system remains broadly undercapitalized, while commercial banking practices and regulatory supervision remain inadequate for ensuring macroeconomic stability.  Mongolia also has a significant number of illiquid banks.  Potential investors in Mongolia’s banking sector are advised to conduct careful due diligence as sector participants and regulators have expressed concerns that the balance sheets of certain systemically important banks may have been inflated or misreported to create the perception of higher capital-adequacy ratios than is accurate.

International and domestic sector participants observe that the Bank of Mongolia does not exercise adequate macroprudential oversight over banks, enabling these banks to misreport their assets.  It has also allowed insolvent smaller banks to continue operating despite not having enough assets to cover liabilities.  Investors contemplating IPO participation should carefully factor in the additional systemic risk associated with these regulatory concerns.

Mongolia’s 2020 removal from the Financial Action Task Force can give confidence to investors that the country takes seriously anti-money laundering and countering the financing of terrorism concerns.

Foreign Exchange and Remittances

Foreign Exchange

The government employs a liberal foreign exchange regime; its national currency, the tugrik (denoted as MNT), is fully convertible into a wide array of international currencies.  Foreign and domestic businesses have reported no problems converting or transferring funds aside from occasional, market-driven shortages of foreign reserves.

Mongolia’s Currency Law requires domestic transactions use MNT, unless exempted by the Bank of Mongolia.  Regulation prohibits listing of wholesale or retail prices in any way – including as an internal accounting practice – that effectively denominates or otherwise indexes prices to currencies other than MNT.  Hedging mechanisms available elsewhere to mitigate exchange risk are generally unavailable given the small size of the market.  Letters of credit in a variety of currencies are available for trade facilitation.  The government sometimes pays for goods and services with promissory notes that cannot be directly exchanged for other currencies.

Remittance Policies

Businesses report no chronic, government-induced delays remitting investment returns or receiving inbound funds, although challenges with correspondent-banking relationships sometimes slow remittances.  Most transfers are completed within a few days to a week; however, occasional currency shortages, most often of U.S. dollars, may cause commercial banks and the central bank to limit transfers temporarily.  Remittances sent abroad are subject to a 10-percent withholding tax to cover potential tax liabilities.

Sovereign Wealth Funds

Mongolia’s Ministry of Finance manages two sovereign wealth funds (SWF) funded through diversion of mining sector revenues: The Fiscal Stabilization Fund and the Future Heritage Fund.  The Fiscal Stabilization Fund diverts revenues that might promote boom and bust cycles of spending; however, Mongolia’s recent fiscal crises have depleted this fund.  The Future Heritage Fund, resembling Norway’s Global Pension Fund, accumulates mining revenues for the future and invests the proceeds exclusively outside Mongolia.  The Ministry of Finance and the IMF project the Future Heritage Fund should start accumulating $104-125 million annually in 2022, coinciding with increased revenues from the Oyu Tolgoi copper and gold mine.  These SWFs are not meaningfully funded as 2021, however.

7. State-Owned Enterprises 

Mongolia has state-owned enterprises (SOEs) in the banking and finance, energy production, mining, and transport sectors.  The Ministry of Finance manages the State Bank of Mongolia and the Mongolian Stock Exchange, and the SOE Erdenes Mongol holds most of the government’s mining assets.  The Ministry of Roads and Transport Development manages the Mongolian Railway Authority.  The Government Agency for Policy Coordination on State Property ( http://www.pcsp.gov.mn/en ) manages non-mining and non-financial assets.  The Agency for Policy Coordination on State Property does not provide a complete list of its SOEs.

Investors are concerned SOEs crowd out more efficient private-sector investment.  Investors can compete with SOEs, but an opaque regulatory framework limits competition.  Foreign and domestic private investors have observed that government regulators favor SOEs, such as streamlining the process for environmental-permit approvals or ignoring health and safety issues at SOEs.

Mongolian SOEs do not adhere to the OECD Corporate Governance Guidelines for SOEs.  Although technically required to follow the same international best practices on disclosure, accounting, and reporting used by private companies, SOEs tend to follow these rules only when seeking international investment and financing.  Many international best practices are not institutionalized in Mongolian law, and SOEs tend to follow existing Mongolian rules.  At the same time, foreign-invested firms follow the international rules, causing inconsistencies in corporate governance, management, disclosure, minority-shareholder rights, and finance.

Privatization Program

The government routinely floats privatization for such state-held assets as the Mongolian Stock Exchange, the national air carrier MIAT, the Mongol Post Office, and the Tavan Tolgoi coal mine through sales of shares or equity but has not identified how or when it would do so.

8. Responsible Business Conduct 

The practice of responsible business conduct in Mongolia has improved.  Most international companies make good-faith efforts to work with local communities.  Larger domestic firms tend to follow accepted international responsible business conduct practices and underwrite a range of related activities, while smaller companies, lacking resources, often limit responsible business conduct actions to the locales in which they work.  Locally, firms adopting responsible business conduct are perceived favorably by the communities in which they operate.  Nationally, responses range from praise from politicians to condemnation by certain civil-society groups alleging responsible business conduct nothing more than a cynical attempt to buy public approval.  Public awareness of responsible business conduct remains limited, with only a few NGOs involved in responsible business conduct promotion or monitoring, and those concentrated on such large projects as the Oyu Tolgoi mega-mine.

Given Mongolia’s high social-media penetration, businesses should be aware that discussions regarding their activities could be ongoing on international and domestic social media sites; and should monitor social media discussions to ensure their activities are portrayed accurately.

The government makes a good-faith effort to enforce legislation on human rights, labor rights, consumer protection, environmental protection, and other laws protecting individuals from adverse business impacts.  While the Company Law articulates rules of corporate governance, accounting requirements, and shareholder rights, it has no rules for executive compensation.

Mongolia has no official position on OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas and no domestic legislation on due diligence for companies sourcing minerals originating from conflict-affected areas.  The government has not adopted a requirement regarding Organization for Economic Co-operation and Development and UN principles on responsible business conduct (OECD:   http://www.oecd.org/about/ ).  Mongolia is a member in good standing of the Extractive Industries Transparency Initiative ( EITI ).

There have been no alleged/reported human or labor rights concerns relating to RBC of which foreign businesses should be aware.

Mongolia has a private security industry, and many public and private entities avail themselves of private security services.  However, Mongolia has not signed the Montreux Document on Private Military and Security Companies.  It is neither a supporter of the International Code of Conduct or Private Security Service Providers nor a participant in the International Code of Conduct for Private Security Service Providers’ Association (ICoCA).

Additional Resources 

Department of State

Department of Labor

9. Corruption 

Investors have acknowledged that corruption is widespread in Mongolia, leading some to exit Mongolia or decide against investing in it when less corrupt jurisdictions offer similar investment opportunities.  Given the level of corruption, U.S. businesses are advised to be especially diligent in complying with the U.S. Foreign Corrupt Practices Act.  Although Mongolian law penalizes corrupt officials, the government does not always implement the law effectively or evenhandedly.  Private enterprises report instances where officials and political operatives demand bribes to transfer-use rights, settle disputes, clear customs, ease tax obligations, act on applications, obtain permits, and complete registrations.  NGOs and private businesses report judicial corruption is also present.  Factors contributing to corruption include conflicts of interest, lack of transparency, limited access to information, an underfunded civil-service system, low salaries, and limited government control of key institutions.

Mongolia does not require companies to establish internal codes of conduct that, among other things, prohibit bribery of public officials.  U.S. and other foreign businesses have reported that they accept the need for and have adopted internal controls, ethics, and compliance programs to detect and prevent bribery of government officials.  (For Mongolia anti-corruption efforts:   https://www.state.gov/reports/2020-country-reports-on-human-rights-practices/mongolia/.

The Independent Agency Against Corruption (IAAC) has primary responsibility for investigating corruption, assisted at times by the National Police Agency’s Organized Crime Division.

Mongolia has signed and ratified the UN Anticorruption Convention ( UNAC ) but not the OECD Anti-Bribery Convention.

Resources to Report Corruption

Independent Agency Against Corruption (IAAC)
District 5, Seoul Street 41
Ulaanbaatar, Mongolia 14250
Telephone:  +976-70110251; 976-11-311919
Email:   contact@iaac.mn 
Web:     http://www.iaac.mn/home?lang=en 

Transparency International Mongolia
O. Batbayar, Executive Director, Mongolia Chapter
Office 803, 8th floor, Dalai Tower, Unesco Street,
Sukhbaatar District – Khoroo 1, Ulaanbaatar 14230
Web:    https://www.transparency.org/country/MNG 

10. Political and Security Environment 

Mongolia’s political and security environment is peaceful and stable.  Crime is low in the capital Ulaanbaatar but fluctuates from season to season.  Street-level petty theft and assault occur with some regularity, while more complex financial and fraud-based crimes are on the rise.  U.S. investors are generally welcomed by the Mongolian people; however, in small numbers and in specific areas, anti-foreign sentiment fueled by fringe nationalist groups has been observed. These sentiments do not focus on U.S. investors exclusively and are subject to current events.   Mining sector investors have reported that unlicensed, artisanal gold miners – locally know as ninja miners – may seek to mine gold on a legally licensed mine sites or sites where the ninja miners believe precious metals lie.  These intrusions can become disorderly and in rare cases lead to violence.

11. Labor Policies and Practices 

The National Statistics Office of Mongolia reports as of December 2020 official unemployment was 7.6 percent of Mongolia’s 1.22-million-person labor pool (92.100 people).  Youth unemployment hovers around 54 percent of total unemployed.  Approximately 4,039 foreign workers from 97 countries are officially registered with the Ministry of Labor, of whom two-thirds work in construction, mining, and manufacturing.  More than a half of the foreign workers come from China (51.2 percent), although COVID-19-related travel restrictions have likely diminished this total.  Out the 1.2 million labor pool, 45 percent (548,277) live in Ulaanbaatar and 55 percent (668,323) in rural areas.  Unskilled labor is abundant, but shortages persist in most professional categories requiring advanced degrees or vocational training, including all types of engineers and professional tradespeople in the construction, mining, and services sectors.  Foreign-invested companies address shortages by providing in-country training, increasing salaries and benefits to retain employees, or hiring expatriate workers with expertise unavailable in Mongolia.

The Labor Law requires companies to employ Mongolian workers in all labor categories where the Ministry of Labor and Social Protection determines a Mongolian can perform the task as well as a foreigner.  This provision primarily applies to unskilled labor categories.  Investors can locate and hire workers without hiring agencies, if hiring practices follow the Labor Law.  If employers want to hire expatriate laborers and cannot obtain a waiver from the Ministry of Labor and Social Protection for that employee, the employer can pay a monthly waiver fee.  Depending on a project’s importance, the Ministry of Labor and Social Protection can exempt employers from 50 percent of the waiver fees per worker.  However, employers report difficulty in obtaining waivers.  (For details on Mongolian labor laws:   https://www.state.gov/reports/2020-country-reports-on-human-rights-practices/mongolia/)

Because Mongolia’s winters limit operations in infrastructure development, construction, and mining, employers tend to use a higher degree of temporary contract labor than companies operating year-round.  The law allows employers and employees to use short-term contracts.

The Labor Law allows most workers to form or join independent unions and professional organizations and protects rights to strike; but denies these rights to foreign workers, certain public servants, and workers without formal employment contracts.  However, all groups have the right to organize.  The law protects the right to participate in trade union activities without retaliation, and the government has protected this right in practice.  The law provides for reinstatement of workers fired for union activity, but this provision is not always enforced.  Some employees occasionally face obstacles to forming or joining unions, and some employers have taken steps to weaken existing unions.  For example, some employers have prohibited workers from participating in union activities during working hours or refused to conclude collective bargaining agreements in contracts.

The Labor Law allows employers to fire or lay off workers for cause.  Depending on the circumstances, however, severance may be required, and workers may seek judicial review of their dismissal.  Employers and legal experts report that Mongolia’s courts usually support employee claims, especially if the plaintiff or defendant is a foreign business.  The severance laws requires employers to pay laid off workers one month of the contracted salary, but fired workers receive no severance.  Laid off or fired workers are entitled to three months of unemployment insurance from the Social Insurance Agency.

The Law on Collective Bargaining regulates relations among employers, employees, trade unions, and the government.  Wages and other conditions of employment are set between employers (whether public or private) and employees, with trade union input in some cases. Laws protecting the rights to collective bargaining and freedom of association are generally enforced.  The Mongolian Confederation of Trade Unions represents most workers in the resource extraction and construction-related sectors but not government and agricultural sector employees in collective bargaining activities.  The Confederation of Trade Unions also mediates specific grievances through the government-sanctioned Tripartite Labor Dispute Settlement Committees.  The Tripartite Labor Dispute Settlement Committees resolve most disputes between workers and management and consist of representatives Confederation of Trade Unions, employers, and the government.  Cases not resolved by these Committees may go to court.

Proposed amendments to the Labor Law would mandate employers, the government, and the Confederation of Mongolian Trade Unions to form committees to set work hours and conditions, rather than employers and employees contracting directly based on actual labor needs.  The bill also authorizes ministries to set sectoral quotas for foreign labor and imposes a more elaborate permitting requirements for foreign labor.

The International Labor Organization (ILO) is concerned about child-labor practices and variations between Mongolian law and international labor standards.  Authorities report employers often require minors to work more than weekly permitted hours, paying them less than the minimum wage.  The General Agency for Specialized Inspections ( GASI ) enforces all labor regulations but is understaffed.  For ILO conventions ratified by Mongolia:

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance and Development Finance Programs 

The United States Development Finance Corporation, formally OPIC, ( USDFC ) offers loans, grants, and political risk insurance to U.S. investors active in most sectors of the Mongolian economy.  DFC and Mongolia have an Investment Incentive Agreement that allows DFC-financed projects to receive national treatment.  The agreement is available:  OPIC/Mongolia Agreement .   The U.S. Export-Import Bank ( EXIM ) offers programs in Mongolia for short-, medium-, and long-term transactions in the public sector and for short- and medium-term transactions in the private sector.  Mongolia is also a member of the Multilateral Investment Guarantee Agency ( MIGA ).  South Korea, Canada, the Russian Federation, Japan, China, Poland, Hungary, and Austria have provided investment and trade financing for their firms in Mongolia.  In addition, the European Bank for Reconstruction and Development (EBRD:   EBRD/Mongolia ) and the International Finance Corporation (IFC:   IFC/Mongolia ) also support Mongolia-based investments.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics 

Note:  The Government of Mongolia does not track where beneficial ownership of a given investment terminates.  The government only records where the company claims its domicile.  The U.S. Embassy in Mongolia knows of numerous cases where foreign entities active in Mongolia do not incorporate in their countries of origin but rather in third countries for tax mitigation purposes.  Consequently, although Mongolia’s data and the IMF’s, respectively, suggest that much of Mongolia’s investment originates from such places as the Netherlands or Singapore, much of the investment comes from other jurisdictions, including but not limited to the United States, Australia, Canada, Russia, and PRC China.

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 $13,109 2019 $13,997 https://data.worldbank.org/
country/mongolia
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $751 2020 $806 Mongol Bank
Host country’s FDI in the United States ($M USD, stock positions) 2018 $-9 2019 NA 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 37% 2019 18% UNCTAD data available at
https://stats.unctad.org/
handbook/EconomicTrends/Fdi.html
Table 3: Sources and Destination of FDI 
2019 Direct Investment from/in Counterpart Economy Data: http://data.imf.org/CDIS
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 22,556 100% Total Outward NA 100%
Canada 7,805 35% NA NA NA
China, P.R.: Mainland 5,069 26% NA NA NA
Singapore 1,478 7% NA NA NA
Luxembourg 1,477 7% NA NA NA
China P.R. Hong Kong 1,145 5% NA NA NA
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment 
2019 Portfolio Investment Assets:  https://data.imf.org/?sk=B981B4E3-4E58-467E-9B90-9DE0C3367363&sId=1481577785817
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 284 100% All Countries 255 100% All Countries 29 100%
China P.R.: Hong Kong 87 31% China P.R.: Hong Kong 82 32% China P.R.: Mainland 5 19%
Singapore 34 12% Singapore 30 12% China P.R.: Hong Kong 5 18%
United States 33 12% United States 30 12% Turkey 5 17%
Canada 24  8% Canada 9 9% Singapore 4 13%
Australia 22  8% Australia 9 9% United States 3 12%

14. Contact for More Information 

The Economic and Commercial Section
U.S. Embassy
P.O. Box 341
Ulaanbaatar 14192, Mongolia
Telephone:  +976-7007-6001
Email:  Ulaanbaatar-Commercial 

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