Policies Towards Foreign Direct Investment

Australia is generally welcoming to foreign direct investment (FDI), with foreign investment widely considered to be an essential contributor to Australia’s economic growth. Other than certain required review and approval procedures for designated types of foreign investment described below, there are no laws that discriminate against foreign investors.

A number of investment promotion agencies operate in Australia. The Australian Trade Commission (often referred to as Austrade) is the Commonwealth Government’s national “gateway” agency to support investment into Australia. Austrade provides coordinated government assistance to promote, attract, and facilitate FDI, supports Australian companies to grow their business in international markets, and delivers advice to the Australian Government on its trade, tourism, international education and training, and investment policy agendas. Austrade operates through a number of international offices, with U.S. offices primarily focused on attracting foreign direct investment into Australia and promoting the Australian education sector in the United States. Austrade in the United States operates from offices in Boston, Chicago, Houston, New York, San Francisco, and Washington, DC. In addition, state and territory investment promotion agencies also support international investment at the state level and in key sectors.

Limits on Foreign Control and Right to Private Ownership and Establishment

Within Australia, foreign and domestic private entities may establish and own business enterprises and may engage in all forms of remunerative activity in accordance with national legislative and regulatory practices. See Section 4: Legal Regime – Laws and Regulations on Foreign Direct Investment below for information on Australia’s investment screening mechanism for inbound foreign investment.

Other than the screening process described in Section 4, there are few limits or restrictions on foreign investment in Australia. Foreign purchases of agricultural land greater than AUD 15 million (USD 11 million) are subject to screening. This threshold applies to the cumulative value of agricultural land owned by the foreign investor, including the proposed purchase. However, the agricultural land screening threshold does not affect investments made under the Australia-United States Free Trade Agreement (AUSFTA). The current threshold remains AUD 1.216 billion (USD 940 million) for U.S. non-government investors. Investments made by U.S. non-government investors are subject to inclusion on the foreign ownership register of agricultural land and to Australian Tax Office (ATO) information gathering activities on new foreign investment.

The Foreign Investment Review Board (FIRB), which advises Australia’s Treasurer, may impose conditions when approving foreign investments. These conditions can be diverse and may include: retention of a minimum proportion of Australian directors; certain requirements on business activities, such as the requirement not to divest certain assets; and certain taxation requirements. Such conditions are in keeping with Australia’s policy of ensuring foreign investments are in the national interest.

Other Investment Policy Reviews

Australia has not conducted an investment policy review in the last three years through either the OECD or UNCTAD system. The WTO reviewed Australia’s trade policies and practices in 2019, and the final report can be found at: https://www.wto.org/english/tratop_e/tpr_e/tp496_e.htm .

The Australian Trade Commission compiles an annual “Why Australia Benchmark Report” that presents comparative data on investing in Australia in the areas of Growth, Innovation, Talent, Location, and Business. The report also compares Australia’s investment credentials with other countries and provides a general snapshot on Australia’s investment climate. See: http://www.austrade.gov.au/International/Invest/Resources/Benchmark-Report .

Business Facilitation

Business registration in Australia is relatively straightforward and is facilitated through a number of government websites. The government’s business.gov.au website provides an online resource and is intended as a “whole-of-government” service providing essential information on planning, starting, and growing a business. Foreign entities intending to conduct business in Australia as a foreign company must be registered with the Australian Securities and Investments Commission (ASIC). As Australia’s corporate, markets, and financial services regulator, ASIC’s website provides information and guides on starting and managing a business or company in the country.

In registering a business, individuals and entities are required to register as a company with ASIC, which then gives the company an Australian Company Number, registers the company, and issues a Certificate of Registration. According to the World Bank “Starting a Business” indicator, registering a business in Australia takes two days, and Australia ranks 7th globally on this indicator.

Outward Investment

Australia generally looks positively towards outward investment as a way to grow its economy. There are no restrictions on investing abroad. Austrade, Export Finance Australia (EFA), and various other government agencies offer assistance to Australian businesses looking to invest abroad, and some sector-specific export and investment programs exist. The United States is the top destination, by far, for Australian investment overseas.

Transparency of the Regulatory System

The Australian Government utilizes transparent policies and effective laws to foster national competition and is consultative in its policy making process. The government generally allows for public comment of draft legislation and publishes legislation once it enters into force. Details of the Australian government’s approach to regulation and regulatory impact analysis can be found on the Department of Prime Minister and Cabinet’s website: https://www.pmc.gov.au/regulation 

Regulations drafted by Australian Government agencies must be accompanied by a Regulation Impact Statement when submitted to the final decision maker (which may be the Cabinet, a Minister, or another decision maker appointed by legislation.) All Regulation Impact Statements must first be approved by the Office of Best Practice Regulation (OBPR) which sits within the Department of Prime Minister and Cabinet, prior to being provided to the relevant decision maker. They are required to demonstrate the need for regulation, the alternative options available (including non-regulatory options), feedback from stakeholders, and a full cost-benefit analysis. Regulations are subsequently required to be reviewed periodically. All Regulation Impact Statements, second reading speeches, explanatory memoranda, and associated legislation are made publicly available on Government websites. Australia’s state and territory governments have similar processes when making new regulations.

The Australian Government has tended to prefer self-regulatory options where industry can demonstrate that the size of the risks are manageable and that there are mechanisms for industry to agree on, and comply with, self-regulatory options that will resolve the identified problem. This manifests in various ways across industries, including voluntary codes of conduct and similar agreements between industry players.

The Australian Government has recognized the impost of regulations and has undertaken a range of initiatives to reduce red tape. This has included specific red tape reduction targets for government agencies and various deregulatory groups within government agencies. In 2019, the Australian Government established a Deregulation Taskforce within its Treasury Department, stating its goal was to “drive improvements to the design, administration and effectiveness of the stock of government regulation to ensure it is fit for purpose.”

Australian accounting, legal, and regulatory procedures are transparent and consistent with international standards. Accounting standards are formulated by the Australian Accounting Standards Board (AASB), an Australian Government agency under the Australian Securities and Investments Commission Act 2001. Under that Act, the statutory functions of the AASB are to develop a conceptual framework for the purpose of evaluating proposed standards; make accounting standards under section 334 of the Corporations Act 2001, and advance and promote the main objects of Part 12 of the ASIC Act, which include reducing the cost of capital, enabling Australian entities to compete effectively overseas and maintaining investor confidence in the Australian economy. The Australian Government conducts regular reviews of proposed measures and legislative changes and holds public hearings into such matters.

Australian government financing arrangements are transparent and well governed. Legislation governing the type of financial arrangements the government and its agencies may enter into is publicly available and adhered to. Updates on the Government’s financial position are regularly posted on the Department of Finance and Treasury websites. Issuance of government debt is managed by the Australian Office of Financial Management, which holds regular tenders for the sale of government debt and the outcomes of these tenders are publicly available. The Australian Government also publishes and adheres to strict procurement guidelines. Australia formally joined the WTO Agreement on Government Procurement in 2019.

International Regulatory Considerations

Australia is a member of the WTO, G20, OECD, and the Asia-Pacific Economic Cooperation (APEC), and became the first Association of Southeast Nations (ASEAN) Dialogue Partner in 1974. While not a regional economic block, Australia’s free trade agreement with New Zealand provides for a high level of integration between the two economies with the ultimate goal of a single economic market. Details of Australia’s involvement in these international organizations can be found on the Department of Foreign Affairs and Trade’s website: https://www.dfat.gov.au/trade/organisations/Pages/wto-g20-oecd-apec 

Legal System and Judicial Independence

The Australian legal system is firmly grounded on the principles of equal treatment before the law, procedural fairness, judicial precedent, and the independence of the judiciary. Strong safeguards exist to ensure that people are not treated arbitrarily or unfairly by governments or officials. Property and contractual rights are enforced through the Australian court system, which is based on English Common Law. Australia’s judicial system is fully independent and separate from the executive branch of government.

Laws and Regulations on Foreign Direct Investment

Information regarding investing in Australia can be found in Austrade’s “Guide to Investing” at http://www.austrade.gov.au/International/Invest/Investor-guide . The guide is designed to help international investors and businesses navigate investing and operating in Australia.

Foreign investment in Australia is regulated by the Foreign Acquisitions and Takeovers Act 1975 and Australia’s Foreign Investment Policy. The Foreign Investment Review Board (FIRB) is a non-statutory body, comprising independent board members advised by a division within the Treasury Department, established to advise the Treasurer on Australia’s foreign investment policy and its administration. The FIRB screens potential foreign investments in Australia above threshold values, and based on advice from the FIRB, the Treasurer may deny or place conditions on the approval of particular investments above that threshold on national interest grounds. In March 2020 the Treasurer announced thresholds would be reduced to zero for the period covering the COVID-19 crisis. In effect, this meant that all foreign investment would be screening over this period. This lower threshold ended with the introduction in January 2021 of new legislation, the Foreign Investment Reform (Protecting Australia’s National Security) Act 2020, which tightened Australia’s investment screening rules with respect to investments in sensitive national security businesses.

The Australian Government applies a “national interest” consideration in reviewing foreign investment applications. “National interest” covers a broader set of considerations than national security alone, and may include tax or competition implications of an investment. Further information on foreign investment screening, including screening thresholds for certain sectors and countries, can be found at FIRB’s website: https://firb.gov.au/ . Under the AUSFTA agreement, all U.S. greenfield investments are exempt from FIRB screening.

Australia has recently taken steps to increase the analysis of national security implications of foreign investment in certain sectors, particularly critical infrastructure and investments in defense or other national security supply chains. The new Foreign Investment Reform (Protecting Australia’s National Security) Act 2020 introduced the concept of a “national security business” and “national security land,” the acquisition of either triggering a FIRB review. The legislation also allows the Treasurer to “call in” any investment for FIRB review, meaning any investment can be screened regardless of whether it meets the criteria for a mandatory review.

Competition and Antitrust Laws

The Australian Competition and Consumer Commission (ACCC) enforces the Competition and Consumer Act 2010 and a range of additional legislation, promotes competition, and fair trading, and regulates national infrastructure for the benefit of all Australians. The ACCC plays a key role in assessing mergers to determine whether they will lead to a substantial lessening of competition in any market. The ACCC also engages in consumer protection enforcement and has, in recent years, been given expanded responsibilities to monitor energy assets, the national gas market, and digital industries.

Expropriation and Compensation

Private property can be expropriated for public purposes in accordance with Australia’s constitution and established principles of international law. Property owners are entitled to compensation based on “just terms” for expropriated property. There is little history of expropriation in Australia.

Dispute Settlement

ICSID Convention and New York Convention

Australia is a member of the International Centre for the Settlement of Investment Disputes (ICSID Convention) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. The International Arbitration Act 1974 governs international arbitration and the enforcement of awards.

Investor-State Dispute Settlement

Investor-State Dispute Settlement (ISDS) is included in 11 of Australia’s 13 FTAs and 18 of its 21 BITs. AUSFTA establishes a dispute settlement mechanism for investment disputes arising under the Agreement. However, AUSFTA does not contain an investor-state dispute settlement (ISDS) mechanism that would allow individual investors to bring a case against the Australian government. Regardless of the presence or absence of ISDS mechanisms, there is no history of extrajudicial action against foreign investors in Australia.

International Commercial Arbitration and Foreign Courts

Australia has an established legal and court system for the conduct or supervision of litigation and arbitration, as well as alternate dispute resolutions. Australia is a leader in the development and provision of non-court dispute resolution mechanisms. It is a signatory to all the major international dispute resolution conventions and has organizations that provide international dispute resolution processes.

Bankruptcy Regulations

Bankruptcy is a legal status conferred under the Bankruptcy Act 1966 and operates in all of Australia’s states and territories. Only individuals can be made bankrupt, not businesses or companies. Where there is a partnership or person trading under a business name, it is the individual or individuals who make up that firm that are made bankrupt. Companies cannot become bankrupt under the Bankruptcy Act though similar provisions (called “administration and winding up”) exist under the Corporations Act 2001. Bankruptcy is not a criminal offense in Australia.

Creditor rights are established under the Bankruptcy Act 1966, the Corporations Act 2001, and the more recent Insolvency Law Reform Act 2016. The latter legislation commenced in two tranches over 2017 and aims to increase the efficiency of insolvency administrations, improve communications between parties, increase the corporate regulator’s oversight of the insolvency market, and “improve overall consumer confidence in the professionalism and competence of insolvency practitioners.” Under the combined legislation, creditors have the right to: request information during the administration process; give direction to a liquidator or trustee; appoint a liquidator to review the current appointee’s remuneration; and remove a liquidator and appoint a replacement.

The Australian parliament passed the Corporations Amendment (Corporation Insolvency Reforms) Act 2020 in December 2020. The legislation is a response to the economic impacts of the COVID-19 pandemic and is designed to both assist viable businesses remain solvent and simplify the liquidation process for insolvent businesses. The new insolvency process under this legislation came into effect in January 2021.

Australia ranks 20th globally on the World Bank’s Doing Business Report “resolving insolvency” measure.

Investment Incentives

The Commonwealth Government and state and territory governments provide a range of measures to assist investors with setting up and running a business and undertaking investment. Types of assistance available vary by location, industry, and the nature of the business activity. Austrade provides coordinated government assistance to attracting FDI and is intended to serve as the national point-of-contact for investment inquiries. State and territory governments similarly offer a suite of financial and non-financial incentives.

The Commonwealth Government also provides incentives for companies engaging in research and development (R&D) and delivers a tax offset for expenditure on eligible R&D activities undertaken during the year. R&D activities conducted overseas are also eligible under certain circumstances, and the program is jointly administered by government’s AusIndustry program and the Australian Taxation Office (ATO). The Australian Government typically does not offer guarantees on, or jointly finance projects with, foreign investors.

The Australian government announced a new USD 1.1 billion Modern Manufacturing Strategy in 2020 in response to the COVID-19 pandemic. The Strategy is primarily grants-based and provides funding to businesses to commercialize ideas and scale-up production in six target industries: resources technology and critical minerals processing; food and beverage; medical products; clean energy; defense; and space industry. Further details of the Strategy can be found on the Department of Industry, Science, Energy and Resources’ website: https://www.industry.gov.au/data-and-publications/make-it-happen-the-australian-governments-modern-manufacturing-strategy/our-modern-manufacturing-strategy 

Foreign Trade Zones/Free Ports/Trade Facilitation

Australia does not have any free trade zones or free ports.

Performance and Data Localization Requirements

As a general rule, foreign firms establishing themselves in Australia are not subject to local employment or forced localization requirements, performance requirements and incentives, including to senior management and board of directors. Proprietary companies must have at least one director resident in Australia, while public companies are required to have a minimum of two resident directors. See Section 12 below for further information on rules pertaining to the hiring of foreign labor.

Under the Telecommunications (Interception and Access) Amendment (Data Retention) Bill 2015, telecommunications service providers are required to: retain and secure, for two years, telecommunications data (not including content); protect retained data through encryption; and prevent unauthorized interference and access. The Bill limits the range of agencies allowed to access telecommunications data and stored communications, and establishes a “journalist information warrants regime.” Australia’s Personally Controlled Electronic Health Records Act prohibits the transfer of health data out of Australia in some situations.

The Australian parliament passed legislation in December 2018 that would require encrypted messaging services to provide decrypted communications to the government for selected national security purposes (the Telecommunications and Other Legislation Amendment (Assistance and Access) Act 2018). Companies relying on or manufacturing secure encryption technologies have expressed concern about the impacts of this legislation on the security of the products and the lack of sufficient judicial oversight in reviewing government requests for access to encrypted data.

Australia has a strong framework for the protection of intellectual property (IP), including software source code. Foreign providers are not required to provide source code to the government in exchange for operating in Australia. In February 2021, the Australian parliament passed the Treasury Laws Amendment (News Media and Digital Platforms Mandatory Bargaining Code) Bill 2021, which among other things requires designated digital platforms to notify media companies of significant changes to their algorithms with at least 14-days’ notice of such changes. However, technology companies are not required to provide source code for algorithms, or any other such IP, to the government for any purpose.

Companies are generally not restricted in terms of how they store or transmit data within their operations. The exception to this is the Personally Controlled Electronic Health Records Act (2012) which does require that certain personal health information is stored in Australia. The Privacy Act (1988) and associated legislation place restrictions on the communication of personal information between and within entities. The requirements placed on international companies, and the transmission of data outside of Australia, are not treated differently under this legislation. The Australian Attorney-General’s Department is the responsible agency for most legislation relating to data and storage requirements.

Real Property

Strong legal frameworks protect property rights in Australia and operate to police corruption. Mortgages are commercially available, and foreigners are allowed to buy real property subject to certain registration and approval requirements. Property lending may be securitized, and Australia has one of the most highly developed securitization sectors in the world. Beyond the private sector property market, securitization products are being developed to assist local and state government financing. Australia has no legislation specifically relating to securitization, although issuers are governed by a range of other financial sector legislation and disclosure requirements.

Intellectual Property Rights

Australia generally provides strong intellectual property rights (IPR) protection and enforcement through legislation that, among other things, criminalizes copyright piracy and trademark counterfeiting. Australia is not listed in USTR’s Special 301 report or on USTR’s Notorious Markets report.

Enforcement of counterfeit goods is overseen by the Australian Department of Home Affairs through the Notice of Objection Scheme, which allows the Australian Border Force to seize goods suspected of being counterfeit. Penalties for sale or importation of counterfeit goods include fines and up to five years imprisonment. The Australia Border Force reported seizing 190,000 individual items of counterfeit and pirated goods, worth approximately AUD 16.9 million (USD 11.8 million), during the fiscal year ending June 30, 2016, which is the last available year for which this data is provided.

IP Australia is the responsible agency for administering Australia’s responsibilities and treaties under the World Intellectual Property Organization (WIPO). Australia is a member of a range of international treaties developed through WIPO. Australia does not have specific legislation relating to trade secrets, however common law governs information protected through such means as confidentiality agreements or other means of illegally obtaining confidential or proprietary information.

Australia was an active participant in the Anti-Counterfeiting Trade Agreement (ACTA) negotiations and signed ACTA in October 2011. It has not yet ratified the agreement. ACTA would establish an international framework to assist Parties in their efforts to effectively combat the infringement of intellectual property rights, in particular the proliferation of counterfeiting and piracy.

Under the AUSFTA, Australia must notify the holder of a pharmaceutical patent of a request for marketing approval by a third party for a product claimed by that patent. U.S. and Australian pharmaceutical companies have raised concerns that unnecessary delays in this notification process restrict their options for action against third parties that would infringe their patents if granted marketing approval by the Australian Therapeutic Goods Administration (TGA). In March 2020 the government recommended changes to the notification process whereby generic product owners must notify the patent holder of an intent to market a new product at the point they lodge an application for evaluation with the TGA. These changes have not been legislated at the time of writing, however.

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

Capital Markets and Portfolio Investment

The Australian Government takes a favorable stance towards foreign portfolio investment with no restrictions on inward flows of debt or equity. Indeed, access to foreign capital markets is crucial to the Australian economy given its relatively small domestic savings. Australian capital markets are generally efficient and able to provide financing options to businesses. While the Australian equity market is one of the largest and most liquid in the world, non-financial firms face a number of barriers in accessing the corporate bond market. Large firms are more likely to use public equity, and smaller firms are more likely to use retained earnings and debt from banks and intermediaries. Australia’s corporate bond market is relatively small, driving many Australian companies to issue debt instruments in the U.S. market. Foreign investors are able to obtain credit from domestic institutions on market terms. Australia’s stock market is the Australian Securities Exchange (ASX).

Money and Banking System

Australia’s banking system is robust, highly evolved, and international in focus. Bank profitability is strong and has been supported by further improvements in asset performance. Total assets of Australian banks at the end of 2020 was USD4.1 trillion and the sector has delivered an annual average return on equity of around 10 percent.

According to Australia’s central bank, the Reserve Bank of Australia (RBA), the ratio of non-performing assets to total loans was approximately one percent at the end of 2020, having remained at around that level for the last five years after falling from highs of nearly two percent following the Global Financial Crisis. The RBA is responsible for monitoring and reporting on the stability of the financial sector, while the Australian Prudential Regulatory Authority (APRA) monitors individual institutions. The RBA is also responsible for monitoring and regulating payments systems in Australia.

Further details on the size and performance of Australia’s banking sector are available on the websites of the Australian Prudential Regulatory Authority (APRA) and the RBA:  https://www.apra.gov.au/statistics  https://www.rba.gov.au/chart-pack/banking-indicators.html 

Foreign banks are allowed to operate as a branch or a subsidiary in Australia. Australia has generally taken an open approach to allowing foreign companies to operate in the financial sector, largely to ensure sufficient competition in an otherwise small domestic market.

Foreign Exchange and Remittances

Foreign Exchange

The Commonwealth Government formulates exchange control policies with the advice of the Reserve Bank of Australia (RBA) and the Treasury. The RBA, charged with protecting the national currency, has the authority to implement exchange controls, although there are currently none in place.

The Australian dollar is a fully convertible and floating currency. The Commonwealth Government does not maintain currency controls or limit remittances. Such payments are processed through standard commercial channels, without governmental interference or delay.

Remittance Policies

Australia does not limit investment remittances.

Sovereign Wealth Funds

Australia’s main sovereign wealth fund, the Future Fund, is a financial asset investment fund owned by the Australian Government. The Fund’s objective is to enhance the ability of future Australian Governments to discharge unfunded superannuation (pension) liabilities. As a founding member of the International Forum of Sovereign Wealth Funds (IFSWF), the Future Fund’s structure, governance, and investment approach is in full alignment with the Generally Accepted Principles and Practices for Sovereign Wealth Funds (the “Santiago principles”).

The Future Fund’s investment mandate is to achieve a long-term return of at least inflation plus 4-5 percent per annum. As of December 2020, the Fund’s portfolio consists of: 29 percent global equities, 7 percent Australian equities, 28 percent private equity (including 7 percent in infrastructure), and the remaining 36 percent in debt, cash, and alternative investments.

In addition to the Future Fund, the Australian Government manages five other specific-purpose funds: the DisabilityCare Australia Fund; the Medical Research Future Fund; the Emergency Response Fund; the Future Drought Fund; and the Aboriginal and Torres Strait Islander Land and Sea Future Fund. In total, these five funds have assets of AUD 47 billion (USD 37 billion), while the main Future Fund has assets of AUD 171 billion (USD 132 billion) as of December 31, 2020.

Further details of these funds are available at: https://www.futurefund.gov.au/ 

In Australia, the term used for a Commonwealth Government State-Owned Enterprise (SOE) is “government business enterprise” (GBE). According to the Department of Finance, there are nine GBEs: two corporate Commonwealth entities and seven Commonwealth companies. (See: https://www.finance.gov.au/resource-management/governance/gbe/ ) Private enterprises are generally allowed to compete with public enterprises under the same terms and conditions with respect to markets, credit, and other business operations, such as licenses and supplies. Public enterprises are not generally accorded material advantages in Australia. Remaining GBEs do not exercise power in a manner that discriminates against or unfairly burdens foreign investors or foreign-owned enterprises.

Privatization Program

Australia does not have a formal and explicit national privatization program. Individual state and territory governments may have their own privatization programs. Foreign investors are welcome to participate in any privatization programs subject to the rules and approvals governing foreign investment.

There is general business awareness and promotion of responsible business conduct (RBC) in Australia. The Commonwealth Government states that companies operating in Australia and Australian companies operating overseas are expected to act in accordance with the principles set out in the OECD Guidelines for Multinational Enterprises and to perform to the standards they suggest. In seeking to promote the OECD Guidelines, the Commonwealth Government maintains a National Contact Point (NCP), the current NCP being currently the General Manager of the Foreign Investment and Trade Policy Division at the Commonwealth Treasury, who is able to draw on expertise from other government agencies through an informal inter-governmental network. An NCP Web site links to the “OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas” noting that the objective is to help companies respect human rights and avoid contributing to conflict through their mineral sourcing practices. The Commonwealth Government’s export credit agency, EFA, also promotes the OECD Guidelines as the key set of recommendations on responsible business conduct addressed by governments to multinational enterprises operating in or from adhering countries.

Australian companies have very few instances of human rights or labor rights abuses and domestic law prohibits such actions. In 2018 the Australian parliament passed the Modern Slavery Act, new legislation requiring large companies to assess risks of modern slavery in their supply chains and take action to limit these risks.

Australia began implementing the principles of the Extractive Industries Transparency Initiative (EITI) in 2016.

Australia has ratified the Montreux Document on Private Military and Security Companies, and was a founding member of the International Code of Conduct for Private Security Service Providers Association.

Additional Resources

Department of State

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

Department of Labor

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

Australia maintains a comprehensive system of laws and regulations designed to counter corruption. In addition, the government procurement system is generally transparent and well regulated. Corruption has not been a factor cited by U.S. businesses as a disincentive to investing in Australia, nor to exporting goods and services to Australia. Non-governmental organizations interested in monitoring the global development or anti-corruption measures, including Transparency International, operate freely in Australia, and Australia is perceived internationally as having low corruption levels.

Australia is an active participant in international efforts to end the bribery of foreign officials. Legislation exists to give effect to the anti-bribery convention stemming from the OECD 1996 Ministerial Commitment to Criminalize Transnational Bribery. Legislation explicitly disallows tax deductions for bribes of foreign officials. At the Commonwealth level, enforcement of anti-corruption laws and regulations is the responsibility of the Attorney General’s Department.

The Attorney-General’s Department plays an active role in combating corruption through developing domestic policy on anti-corruption and engagement in a range of international anti-corruption forums. These include the G20 Anti-Corruption Working Group, APEC Anti-Corruption and Transparency Working Group, and the United Nations Convention against Corruption Working Groups. Australia is a member of the OECD Working Group on Bribery and a party to the key international conventions concerned with combating foreign bribery, including the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Anti-Bribery Convention).

The legislation covering bribery of foreign officials is the Criminal Code Act 1995. Under Australian law, it is an offense to bribe a foreign public official, even if a bribe may be seen to be customary, necessary, or required. The maximum penalty for an individual is 10 years imprisonment and/or a fine of AUD 1.8 million (approximately USD 1.4 million). For a corporate entity, the maximum penalty is the greatest of: 1) AUD 18 million (approximately USD 14.0 million); 2) three times the value of the benefits obtained; or 3) 10 percent of the previous 12-month turnover of the company concerned.

A number of national and state-level agencies exist to combat corruption of public officials and ensure transparency and probity in government systems. The Australian Commission for Law Enforcement Integrity (ACLEI) has the mandate to prevent, detect, and investigate serious and systemic corruption issues in the Australian Crime Commission, the Australian Customs and Border Protection Service, the Australian Federal Police, the Australian Transaction Reports and Analysis Center, the CrimTrac Agency, and prescribed aspects of the Department of Agriculture.

Various independent commissions exist at the state level to investigate instances of corruption. Details of these bodies are provided below.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Australia has signed and ratified the United Nations Convention against Corruption and is a signatory to the OECD Anti-Bribery Convention.

Resources to Report Corruption

Western Australia – Corruption and Crime Commission
86 St Georges Terrace
Perth, Western Australia
Tel. +61 8 9215 4888
https://www.ccc.wa.gov.au/ 

Queensland – Corruption and Crime Commission
Level 2, North Tower Green Square
515 St Pauls Terrace
Fortitude Valley, Queensland
Tel. +61 7 3360 6060
https://www.ccc.qld.gov.au/ 

Victoria – Independent Broad-based Anti-corruption Commission
Level 1, North Tower, 459 Collins Street
Melbourne, Victoria
Tel. +61 1300 735 135
https://ibac.vic.gov.au 

New South Wales – Independent Commission against Corruption
Level 7, 255 Elizabeth Street
Sydney NSW 2000
Tel. +61 2 8281 5999
https://www.icac.nsw.gov.au/ 

South Australia – Independent Commission against Corruption
Level 1, 55 Currie Street
Adelaide, South Australia
Tel. +61 8 8463 5173
https://icac.sa.gov.au 

Political protests (including rallies, demonstrations, marches, public conflicts between competing interests) form an integral, though generally minor, part of Australian cultural life. Such protests rarely degenerate into violence.

Australia’s unemployment rate peaked at 7.5 percent during the COVID-19 pandemic and had fallen below 6 percent by early 2021. Average weekly earnings for full-time workers in Australia were AUD 1,767 (approximately USD 1,360) as of November 2020. The minimum wage is set annually and is significantly higher than that of the United States, currently sitting at AUD 19.50 (USD 15.20). Overall wage growth has been low in recent years, growing only slightly above the rate of inflation.

The Australian Government and its state and territory counterparts are active in assessing and forecasting labor skills gaps across industries. Tertiary education is subsidized by both levels of governments, and these subsidies are based in part on an assessment of the skills needed by industry. These assessments also inform immigration policy through the various working visas and associated skilled occupation lists. Occupations on these lists are updated annually based on assessment of the skills most needed by industry.

Immigration has always been an important source for skilled labor in Australia. The Department of Home Affairs publishes an annual list of occupations with skill shortages to be used by potential applicants seeking to work in Australia. The visas available to applicants, and length of stay allowed for, differ by occupation. The main working visa is the Temporary Skills Shortage visa (subclass 482). Applicants must have a nominated occupation when they apply which is applicable to their circumstances, and applications are subject to local labor market testing rules. These rules preference the hiring of Australian labor over foreign workers so long as local workers can be found to fill the advertised job. Immigration to Australia is currently not possible under COVID-19 border closures.

Most Australian workplaces are governed by a system created by the Fair Work Act 2009. Enterprise bargaining takes place through collective agreements made at an enterprise level covering terms and conditions of employment. Such agreements are widely used in Australia. A Fair Work Ombudsman assists employees, employers, contractors, and the community to understand and comply with the system. The Fair Work Act 2009 establishes a set of clear rules and obligations about how this process is to occur, including rules about bargaining, the content of enterprise agreements, and how an agreement is made and approved. Unfair dismissal laws also exist to protect workers who have been unfairly fired from a job. Australia is a founding member of the International Labour Organization (ILO) and has ratified 58 of the ILO’s conventions.

Chapter 18 of the AUSFTA agreement deals with labor market issues. The chapter sets out the responsibilities of each party, including the commitment of each country to uphold its obligations as a member of the ILO and the associated ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up (1998).

* Source for Host Country Data: Australian Bureau of Statistics

Economic Counselor Doug Sonnek
U.S. Embassy Canberra
21 Moonah Place, Yarralumla, ACT
+61 2 6214 5759
SonnekDE@state.gov 

Policies Towards Foreign Direct Investment

Canada actively encourages FDI and maintains a sound enabling environment (23 out of 190 countries on the World Bank’s 2020 Doing Business Report). Investors are attracted to Canada’s proximity to the United States, highly skilled workforce, strong legal protections, and abundant natural resources. Once established, foreign-owned investments are treated equally to domestic investments. As of 2019, the United States had a stock of USD 402 billion of foreign direct investment in Canada. U.S. FDI stock in Canada represents 47 percent of Canada’s total investment. Canada’s FDI stock in the United States totaled USD 496 billion.

The USMCA modernizes the previous NAFTA investment protection rules and investor-state dispute settlement provisions. Parties to the USMCA agree to treat investors and investments of the other Parties in accordance with the highest international standards, and consistent with U.S. law and practice, while safeguarding each Party’s sovereignty and promoting domestic investment.

Invest in Canada is Canada’s investment attraction and promotion agency. It provides information and advice on doing business in Canada, strategic market intelligence on specific industries, site visits, and introductions to provincial, territorial, and municipal investment promotion agencies. Still, non-tariff barriers to trade across provinces and territories contribute to structural issues that have held back the productivity and competitiveness of Canada’s business sector.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investment in Canada is regulated under the provisions of the Investment Canada Act (ICA). U.S. FDI in Canada is also subject to the provisions of the World Trade Organization (WTO), the USMCA, and the NAFTA. The ICA mandates the review of significant foreign investments to ensure they provide an economic net benefit and do not harm national security.

Canada is not a party to the USMCA’s chapter on investor-state dispute settlement (ISDS). Ongoing NAFTA arbitrations are not affected by the USMCA, and investors can file new NAFTA claims by July 1, 2023, provided the investment(s) were “established or acquired” when NAFTA was still in force and remained “in existence” on the date the USMCA entered into force. An ISDS mechanism between the United States and Canada will cease following a three-year window for NAFTA-protected legacy investments.

The Canadian government announced revised ICA foreign investment screening guidelines on March 24, 2021. The revised guidelines include additional national security considerations such as sensitive technology areas, critical minerals, and sensitive personal data. The new guidelines are aligned with Innovation, Science, and Economic Development Canada’s April 2020 update on greater scrutiny for foreign investments by state-owned investors, as well as investments involving the supply of critical goods and services.

Foreign ownership limits apply to Canadian telecommunication, airline, banking, and cultural sectors. Telecommunication carriers, including internet service providers, that own and operate transmission facilities are subject to foreign investment restrictions if they hold a 10 percent or greater share of total Canadian communication annual market revenues as mandated by The Telecommunications Act. These investments require Canadian ownership of 80 percent of voting shares, Canadians holding 80 percent of director positions, and no indirect control by non-Canadians. If the company is a subsidiary, the parent corporation must be incorporated in Canada and Canadians must hold a minimum of 66.6 percent of the parent’s voting shares. Foreign ownership of Canadian airlines is limited to 49 percent with no individual non-Canadian able to control more than 25 percent by mandate of the 2018 Transportation Modernization Act. Foreign banks can establish operations in Canada but are generally prohibited from accepting deposits of less than USD 112,000. Foreign banks must receive Department of Finance and the Office of the Superintendent of Financial Institutions (OSFI) approval to enter the Canadian market. Investment in cultural industries also carries restrictions, including a provision under the ICA that foreign investment in book publishing and distribution must be compatible with Canada’s national cultural policies and be of net benefit to Canada.

Other Investment Policy Reviews

The World Trade Organization conducted a trade policy review of Canada in 2019. The report is available at: https://www.wto.org/english/tratop_e/tpr_e/tp489_e.htm  . The Organization of Economic Development completed an Economic Forecast Summary and released the results in March 2021. The report is available at: http://www.oecd.org/economy/canada-economic-snapshot/ 

Business Facilitation

Canada ranks 3 out of 190 countries on starting a business in the 2020 World Bank’s Ease of Doing Business rankings. The Canadian government provides information necessary for starting a business at: https://www.canada.ca/en/services/business/start.html . Business registration requires federal or provincial government-based incorporation, the application of a federal business number and corporation income tax account from the Canada Revenue Agency, the registration as an extra-provincial or extra-territorial corporation in all other Canadian jurisdictions of business operations, and the application of relevant permits and licenses. In some cases, registration for these accounts is streamlined (a business can receive its business number, tax accounts, and provincial registrations as part of the incorporation process); however, this is not true for all provinces and territories.

Outward Investment

Canada prioritizes export promotion and inward investment. Outward investment has been identified as a tool to enhance future Canadian competitiveness and productivity. Canada does not restrict domestic investors from investing abroad except when recipient countries or businesses are designated under the government’s sanctions regime.

Transparency of the Regulatory System

Canada’s regulatory transparency is similar to the United States. Regulatory and accounting systems, including those related to debt obligations, are transparent and consistent with international norms. Proposed legislation is subject to parliamentary debate and public hearings, and regulations are issued in draft form for public comment prior to implementation in the Canada Gazette, the government’s official journal of record. While federal and/or provincial licenses or permits may be needed to engage in economic activities, regulation of these activities is generally for statistical or tax compliance reasons. Under the USMCA, parties agreed to make publicly available any written comments they receive, except to the extent necessary to protect confidential information or withhold personal identifying information or inappropriate content.

Canada publishes an annual budget and debt management report. According to the Ministry of Finance, the design and implementation of the domestic debt program are guided by the key principles of transparency, regularity, prudence, and liquidity.

International Regulatory Considerations

Canada addresses international regulatory norms through its FTAs and actively engages in bilateral and multilateral regulatory discussions. U.S.-Canada regulatory cooperation is guided by Chapter 28 of the USMCA “Good Regulatory Practices” and the bilateral Regulatory Cooperation Council (RCC). The USMCA aims to promote regulatory quality through greater transparency, objective analysis, accountability, and predictability. The RCC is a bilateral forum focused on harmonizing health, safety, and environmental regulatory differences. Canada-EU regulatory cooperation is guided by Chapter 21 “Regulatory Cooperation” of the CETA and the Regulatory Cooperation Forum (RCF). CETA encourages regulators to exchange experiences and information and identify areas of mutual cooperation. The RCF seeks to reconstitute regulatory cooperation under the previous Canada-EU Framework on Regulatory Cooperation and Transparency. The RCF is mandated to seek regulatory convergence where feasible to facilitate trade. CPTPP Chapter 25 “Regulatory Coherence” seeks to encourage the use of good regulatory practices to promote international trade and investment, economic growth, and employment. The CPTPP also established a Committee on Regulatory Coherence charged with considering developments to regulatory best practices in order to make recommendations to the CPTPP Commission for improving the chapter provisions and enhancing benefits to the trade agreement.

Canada is a member of the WTO and notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade. Canada is a signatory to the Trade Facilitation Agreement, which it ratified in December 2016.

Legal System and Judicial Independence

Canada’s legal system is based on English common law, except for Quebec, which follows civil law. Law-making responsibility is split between the Parliament of Canada (federal law) and provincial/territorial legislatures (provincial/territorial law). Canada has both written commercial law and contractual law, and specialized commercial and civil courts. Canada’s Commercial Law Directorate provides advisory and litigation services to federal departments and agencies whose mandate includes a commercial component and has legal counsel in Montréal and Ottawa.

The judicial branch of government is independent of the executive branch and the current judicial process is considered procedurally competent, fair, and reliable. The provinces administer justice in their jurisdictions, including management of civil and criminal provincial courts.

Laws and Regulations on Foreign Direct Investment

Foreign investment in Canada is regulated under the provisions of the ICA. U.S. FDI in Canada is also subject to the provisions of the WTO, the USMCA, and the NAFTA. The purpose of the ICA is to review significant foreign investments to ensure they provide an economic net benefit and do not harm national security.

Canada relies on its Invest In Canada promotion agency to provide relevant information to foreign investors: https://www.investcanada.ca/ 

Competition and Antitrust Laws

Competition Bureau Canada is an independent law enforcement agency charged with ensuring Canadian businesses and consumers prosper in a competitive and innovative marketplace as stipulated under the Competition Act, the Consumer Packaging and Labelling Act, the Textile Labelling Act, and the Precious Metals Marking Act. The Bureau is housed under the Department of Innovation, Science, and Economic Development (ISED) and is headed by a Commissioner of Competition. Competition cases, excluding criminal cases, are brought before the Competition Tribunal, an adjudicative body independent from the government. The Competition Bureau and Tribunal adhere to transparent norms and procedures. Appeals to Tribunal decisions may be filed with the Federal Court of Appeal as per section 13 of the Competition Tribunal Act. Criminal violations of competition law are investigated by the Competition Bureau and are referred to Canada’s Public Prosecution Service for prosecution in federal court.

Competition Bureau Canada assumed the rotating one-year presidency of the International Consumer Protection Enforcement Network (ICPEN), a global consumer protection law enforcement network, starting July 1, 2020. The Bureau has focused the ICPEN on COVID-19, artificial intelligence, digital platforms, and environmental issues during its presidency. As part of these efforts, the Bureau hosted the first annual Digital Enforcement Summit to share best practices, and explore new tools and strategies for tackling emerging enforcement issues in the digital era with international counterparts.

The Bureau announced a USD 6.7 million penalty settlement in May 2020 with A major U.S. social media company after the Competition Tribunal agreed with the Bureau’s claim the company made false or misleading claims about the privacy of Canadians’ personal information on its platform.

In September 2020, the Bureau signed the Multilateral Mutual Assistance and Cooperation Framework for Competition Authorities (MMAC) with the Australian Competition and Consumer Commission, the New Zealand Commerce Commission, the United Kingdom Competition & Markets Authority, the U.S. Department of Justice, and the U. S. Federal Trade Commission. The MMAC aims to improve international cooperation through information sharing and inter-organizational training.

Expropriation and Compensation

Canadian federal and provincial laws recognize both the right of the government to expropriate private property for a public purpose and the obligation to pay compensation. The federal government has not nationalized a foreign firm since the nationalization of Axis property during World War II. Both the federal and provincial governments have assumed control of private firms, usually financially distressed companies, after reaching agreement with the former owners.

The USMCA, like the NAFTA, requires expropriation only be used for a public purpose and done in a nondiscriminatory manner, with prompt, adequate, and effective compensation, and in accordance with due process of law.

Dispute Settlement

ICSID Convention and New York Convention

Canada ratified the International Centre for Settlement of Investment Disputes (ICSID) Convention on December 1, 2013 and is a signatory to the 1958 New York Convention, ratified on May 12, 1986. Canada signed the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (known as the Mauritius Convention on Transparency) in March 2015.

Investor-State Dispute Settlement

Canada accepts binding arbitration of investment disputes as obligated under its bilateral and multilateral agreements. As part of the USMCA, the United States and Canada agreed to phase out NAFTA’s investor state dispute settlement procedures over a three-year period. Under the USMCA, U.S. and Canadian investors rely on domestic courts and other mechanisms for dispute resolution. Ongoing NAFTA arbitrations are not affected by the USMCA and investors can file new NAFTA claims by July 1, 2023 provided the investment(s) were “established or acquired” when NAFTA was still in force and remained “in existence” on the date the USMCA entered into force.

Over the history of the NAFTA, 28 disputes have been filed against the Government of Canada. For more information about cases filed under NAFTA Chapter 11, please visit https://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/gov.aspx?lang=eng 

International Commercial Arbitration and Foreign Courts

Provinces have the primary responsibility for regulating arbitration within Canada. Each province, except Quebec, has legislation adopting the UNCITRAL Model Law. The Quebec Civil Code and Code of Civil Procedure are consistent with the UNCITRAL Model Law. The Canadian Supreme Court has ruled that arbitration agreements must be broadly interpreted and enforced. Canadian courts respect arbitral proceedings and have been willing to lend their enforcement powers to facilitate the effective conduct of arbitration proceedings, by requiring witnesses to attend and give evidence, and to produce documents and other evidence to arbitral tribunals.

Bankruptcy Regulations

Bankruptcy in Canada is governed at the federal level in accordance with the provisions of the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act. Each province also has specific laws for dealing with bankruptcy. Canada’s bankruptcy laws stipulate that unsecured creditors may apply for court-imposed bankruptcy orders. Debtors and unsecured creditors normally work through appointed trustees to resolve claims. Trustees will generally make payments to creditors after selling the debtors assets. Equity claimants are subordinate to all other creditor claims and are paid only after other creditors have been paid in full per Canada’s insolvency ladder. In all claims, provisions are made for cross-border insolvencies and the recognition of foreign proceedings. Secured creditors generally have the right to take independent actions and fall outside the scope of the BIA. Canada was ranked 13th for ease of “resolving insolvency” by the World Bank in 2020.

Investment Incentives

Federal and provincial governments offer a wide array of investment incentives designed to advance broader policy goals, such as boosting research and development, and promoting regional economies. The funds are available to qualified domestic and foreign investors. Export Development Canada offers financial support to inward investments under certain conditions. The government maintains a Strategic Innovation Fund that offers funding to firms advancing “the Canadian innovative ecosystem.” Canada also provides incentives through the Innovation Superclusters Initiative, which is investing more than USD 700 million over five years (2017‑2022) to accelerate economic and investment growth in Canada. The five superclusters focus on digital technology, protein industries, advanced manufacturing, artificial intelligence, and the ocean. Foreign firms may apply for supercluster funding. A 2020 Canada Parliamentary Budget Office report concluded Supercluster Initiative spending lagged budgetary targets and the Initiative was unlikely to meet its ten-year goal to increase GDP by USD 37 billion.

Several provinces also offer incentive programs available to foreign firms. These incentives are normally restricted to firms established in the province or that agree to establish a facility in the province. Quebec is implementing “Plan Nord” (Northern Plan), a 25-year program to incentivize natural resource development in its northern and Arctic regions. The program provides financing to facilitate infrastructure, mining, tourism, and other investments. Ontario’s Jobs and Prosperity Fund is providing USD 2 billion from 2013 to 2023 to enhance productivity, bolster innovation, and grow Ontario’s exports. To qualify, companies must have substantive operations (generally three years) and at least USD 5.6 million in eligible project costs. Alberta offers companies a provincial tax credit worth up to USD 220,000 annually for scientific research and experimental development, as well as Alberta Innovation Vouchers worth up to USD 75,000 to help small early-stage technology and knowledge-driven businesses get their ideas and products to market faster.

Incentives for investment in cultural industries at both the federal and provincial level are generally available only to Canadian-controlled firms. Incentives may take the form of grants, loans, loan guarantees, venture capital, or tax credits. Provincial incentive programs for film production in Canada are available to foreign filmmakers.

Foreign Trade Zones/Free Ports/Trade Facilitation

Under the USMCA, Canada operates as a free trade zone for products made in the United States. Most U.S.-made goods enter Canada duty free.

Performance and Data Localization Requirements

As a general rule, foreign firms establishing themselves in Canada are not subject to local employment or forced localization requirements, although Canada has some requirements on local employment for boards of directors. Ordinarily, at least 25 percent of the directors of a corporation must be resident Canadians. If a corporation has fewer than four directors, however, at least one of them must be a resident Canadian. In addition, corporations operating in sectors subject to ownership restrictions (such as airlines and telecommunications) or corporations in certain cultural sectors (such as book retailing, video, or film distribution) must have a majority resident Canadian director.

Data localization is an evolving issue in Canada. The federal government introduced draft privacy legislation (Bill C-11) in Parliament November 17, 2020 to modernize data protection and privacy standards. The provincial government of Quebec introduced draft privacy legislation (Bill 64) in June 2020, and the provinces of Ontario and British Columbia are in the early legislative processes of developing privacy legislation. Privacy rules in two Canadian provinces, British Columbia and Nova Scotia, mandate that personal information in the custody of a public body must be stored and accessed only in Canada unless one of a few limited exceptions applies. These laws prevent public bodies such as primary and secondary schools, universities, hospitals, government-owned utilities, and public agencies from using non-Canadian hosting services. Under the USMCA, parties are prevented from imposing data-localization requirements.

The Canada Revenue Agency stipulates that tax records must be kept at a filer’s place of business or residence in Canada. Current regulations were written over 30 years ago and do not consider current technical realities concerning data storage.

Real Property

Foreign investors have full and fair access to Canada’s legal system, with private property rights limited only by the rights of governments to establish monopolies and to expropriate for public purposes. Investors under the USMCA have mechanisms available for dispute resolution regarding property expropriation by the Government of Canada. The recording system for mortgages and liens is reliable. Canada is ranked 36 out of 190 countries in the World Bank’s “Ease of Registering Property” 2020 rankings. Approximately 89 percent of Canada’s land area is government owned (Crown Land). Ownership is divided between by federal (41 percent) and provincial (48 percent) governments. The remaining 11 percent of Canadian land is privately owned.

British Columbia and Ontario tax foreign buyers of real property. In British Colombia, foreign buyers of real property in Metro Vancouver, the Fraser Valley, the central Okanagan regional district, Nanaimo, and the Capital Regional District are taxed at 20 percent of the property’s fair market value. In 2018, British Columbia broadened taxation on foreign ownership in Metro Vancouver and enacted a 0.5 percent Speculation and Vacancy Tax, targeting vacant foreign-owned homes. In 2019, the British Colombia Ministry of Finance increased the tax to 2.0 percent. The tax includes foreign owners and satellite families defined as those who earn most of their income outside of Canada. In Ontario, non-resident buyers of real property in the Greater Golden Horseshoe Region (the urban region centered around the City of Toronto, located at the western end of Lake Ontario) are subject to a non-resident speculation tax (NRST) at 15 percent of the property’s fair market value. The federal government is considering imposing a national non-resident real property tax.

In terms of non-resident access to land, including farmland, Ontario, Newfoundland and Labrador, New Brunswick, and Nova Scotia have no restrictions on foreign ownership of land. Prince Edward Island, Quebec, Manitoba, Alberta, and Saskatchewan maintain measures aimed at prohibiting or limiting land acquisition by foreigners. The acreage limits vary by province, from as low as five acres in Prince Edward Island to as high as 40 acres in Manitoba. In certain cases, provincial authorities may grant exemptions from these limits, including for investment projects. In British Columbia, Crown land cannot be acquired by foreigners, while there are no restrictions on acquisition of other land.

Intellectual Property Rights

Canada took significant steps to improve its intellectual property (IP) provisions when the USMCA came into force July 1, 2020, addressing areas with long-standing concerns, including full national treatment for copyright protections, transparency and due process with respect to new geographical indications (GIs), more expansive trade secret protection, authority to seize counterfeit goods in transit to other countries, and enforcement measures in the digital environment. Canada must implement three additional provisions, including legislation to implement patent term adjustments to compensate for unreasonable patent prosecution delays by December 2024, legislation to extend copyright protections from 50 years to 70 years after the life of the author by December 2022, and accession to the Brussels Convention Relating to the Distribution of Program-Carrying Signals Transmitted by Satellite by July 2024. The Canadian courts have established meaningful penalties against circumvention devices and services. In 2019, Canada made positive reforms to the Copyright Board related to tariff-setting procedures for the use of copyrighted works, and efforts remain ongoing to implement those measures

Various challenges to IP protection in Canada remain despite this strong legal framework. Canadian IP enforcement of counterfeit and pirated goods at the border and within Canada remains limited. Canada’s system for providing patent term restoration for delays in obtaining marketing approval is also limited in duration, eligibility, and scope of protection. Canada’s ambiguous education-related exemption included in the 2012 copyright law undermines the market for educational publishers and authors.

Canada is on the 2021 Watch List in the Office of the U.S. Trade Representative’s (USTR) Special 301 Report to Congress. No Canadian markets were listed in USTR’s 2020 Review of Notorious Markets for Counterfeiting and Piracy

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

Capital Markets and Portfolio Investment

Canada’s capital markets are open, accessible, and regulated. Credit is allocated on market terms, the private sector has access to a variety of credit instruments, and foreign investors can get credit on the local market. Canada has several securities markets, the largest of which is the Toronto Stock Exchange, and there is sufficient liquidity in the markets to enter and exit sizeable positions. The Canadian government and Bank of Canada do not place restrictions on payments and transfers for current international transactions.

Money and Banking System

The Canadian banking system is composed of 36 domestic banks and18 foreign bank subsidiaries. Six major domestic banks are dominant players in the market and manage close to USD 5.2 trillion in assets. Many large international banks have a presence in Canada through a subsidiary, representative office, or branch. Ninety-nine percent of Canadians have an account with a financial institution. The Canadian banking system is viewed as very stable due to high capitalization rates that are well above the norms set by the Bank for International Settlements. The OSFI, Canada’s primary banking regulator, is working on implementing the Basel III Framework to strengthen Canadian banks and improve their ability to handle financial shocks. The OSFI is consulting with industry on proposed regulatory changes and plans to introduce final guidance in late 2021.

Foreign financial firms interested in investing submit their applications to the OSFI for approval by the Minister of Finance. U.S. and other foreign banks can establish banking subsidiaries in Canada. Several U.S. financial institutions maintain commercially focused operations, principally in the areas of lending, investment banking, and credit card issuance. Foreigners can open bank accounts in Canada with proper identification and residency information.

The Bank of Canada is the nation’s central bank. Its principal role is “to promote the economic and financial welfare of Canada,” as defined in the Bank of Canada Act. The Bank’s four main areas of responsibility are: monetary policy; promoting a safe, sound, and efficient financial system; issuing and distributing currency; and being the fiscal agent for Canada.

Foreign Exchange and Remittances

Foreign Exchange

The Canadian dollar is a free-floating currency with no restrictions on its transfer or conversion.

Remittance Policies

The Canadian dollar is fully convertible, and the central bank does not place time restrictions on remittances.

Sovereign Wealth Funds

Canada does not have a federal sovereign wealth fund. The province of Alberta maintains the Heritage Savings Trust Fund to manage the province’s share of non-renewable resource revenue. The fund’s net financial assets were valued at USD 13 billion as of December 31, 2020. The Fund invests in a globally diversified portfolio of public and private equity, fixed income, and real assets. The Fund follows the voluntary code of good practices known as the “Santiago Principles” and participates in the IMF-hosted International Working Group of SWFs. The Heritage Fund holds approximately 45 percent of its value in equity investments, seven percent of which are domestic.

Canada defines responsible business conduct (RBC) as “Canadian companies doing business abroad responsibly in an economic, social, and environmentally sustainable manner.” The Government of Canada has publicly committed to promoting RBC and expects and encourages Canadian companies working internationally to respect human rights and all applicable laws, to meet or exceed international RBC guidelines and standards, to operate transparently and in consultation with host governments and local communities, and to conduct their activities in a socially and environmentally sustainable manner.

Canada encourages RBC by providing RBC-related guidance to the Canadian business community, including through Canadian embassies and missions abroad. Through its Fund for RBC, Global Affairs Canada provides funding to roughly 50 projects and initiatives annually. Canada also promotes RBC multilaterally through the OECD, the G7 Asia Pacific Economic Co-operation, and the Organization of American States. Canada promotes RBC through its trade and investment agreements via voluntary provisions for corporate social responsibility. Global Affairs Canada and the Canadian Trade Commissioner Service issued an Advisory to Canadian companies active abroad or with ties to Xinjiang, China in January 2021. The Advisory set clear compliance expectations for Canadian businesses with respect to forced labor and human rights involving Xinjiang.

The Canadian Ombudsperson for Responsible Enterprise is charged with receiving and reviewing claims of alleged human rights abuses involving Canadian companies foreign operations in the mining, oil and gas, and garment sectors. Contact information for making a complaint is available at: https://core-ombuds.canada.ca/core_ombuds-ocre_ombuds/index.aspx?lang=eng  .

Canada is active in improving transparency and accountability in the extractive sector. The Extractive Sector Transparency Measures Act was brought into force on June 1, 2015. The Act requires extractive entities active in Canada to publicly disclose, on an annual basis, specific payments made to all governments in Canada and abroad. Canada joined the Extractive Industries Transparency Initiative (EITI) in February 2007, as a supporting country and donor. Canada’s Corporate Social Responsibility strategy, “Doing Business the Canadian Way: A Strategy to Advance Corporate Social Responsibility in Canada’s Extractive Sector Abroad” is available on the Global Affairs Canada website: http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/other-autre/csr-strat-rse.aspx?lang=eng .

A comprehensive overview of Canadian RBC information is available at: https://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/other-autre/csr-rse.aspx?lang=eng#:~:text=RBC%20is%20about%20Canadian%20companies,laws%20and%20internationally%20recognized%20standards  .

Additional Resources

Department of State

Country Reports on Human Rights Practices ( https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);

Trafficking in Persons Report ( https://www.state.gov/trafficking-in-persons-report/);

Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities ( https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;

North Korea Sanctions & Enforcement Actions Advisory ( https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf ).

Department of Labor

Findings on the Worst forms of Child Labor Report ( https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings  );

List of Goods Produced by Child Labor or Forced Labor ( https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods );

Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World ( https://www.dol.gov/general/apps/ilab ) and;

Comply Chain ( https://www.dol.gov/ilab/complychain/ ).

Corruption in Canada is low and similar to that found in the United States. Corruption is not an obstacle to foreign investment. Canada is a party to the UN Convention Against Corruption, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, and the Inter-American Convention Against Corruption.

Canada’s Criminal Code prohibits corruption, bribery, influence peddling, extortion, and abuse of office. The Corruption of Foreign Public Officials Act prohibits individuals and businesses from bribing foreign government officials to obtain influence and prohibits destruction or falsification of books and records to conceal corrupt payments. The law has extended jurisdiction that permits Canadian courts to prosecute corruption committed by Canadian companies and individuals abroad. Canada’s anti-corruption legislation is vigorously enforced, and companies and officials guilty of violating Canadian law are effectively investigated, prosecuted, and convicted of corruption-related crimes. In March 2014, Public Works and Government Services Canada (now Public Services and Procurement Canada, or PSPC) revised its Integrity Framework for government procurement to ban companies or their foreign affiliates for 10 years from winning government contracts if they have been convicted of corruption. In August 2015, the Canadian government revised the framework to allow suppliers to apply to have their ineligibility reduced to five years where the causes of conduct are addressed and no longer penalizes a supplier for the actions of an affiliate in which it was not involved. PSPC has a Code of Conduct for Procurement, which counters conflict-of-interest in awarding contracts. Canadian firms operating abroad must declare whether they or an affiliate are under charge or have been convicted under Canada’s anti-corruption laws during the past five years to receive assistance from the Trade Commissioner Service.

Resources to Report Corruption

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

Mario Dion
Conflict of Interest and Ethics Commissioner (for appointed and elected officials, House of Commons)
Office of the Conflict of Interest and Ethics Commissioner
Parliament of Canada
66 Slater Street, 22nd Floor
Ottawa, Ontario (Mailing address)

Office of the Conflict of Interest and Ethics Commissioner
Parliament of Canada
Centre Block, P.O. Box 16
Ottawa, Ontario
K1A 0A6

Pierre Legault
Office of the Senate Ethics Officer (for appointed Senators)
Thomas D’Arcy McGee Building
Parliament of Canada
90 Sparks St., Room 526
Ottawa, ON K1P 5B4

Canada is politically stable with rare instances of civil disturbance.

The federal government and provincial/territorial governments share jurisdiction for labor regulation and standards. Federal employees and those employed in federally regulated industries, including the railroad, airline, and banking sectors, are covered under the federally administered Canada Labor Code. Employees in other sectors are regulated by provincial labor codes. As the laws vary somewhat from one jurisdiction to another, it is advisable to contact a federal or provincial labor office for specifics, such as minimum wage and benefit requirements.

Although labor needs vary by province, Canada faces a national labor shortage in skilled trades professions such as carpenters, engineers, and electricians. Canada launched several initiatives such as the Global Skills Visa to address its skilled labor shortage, including through immigration reform, the inclusion of labor mobility provisions in free trade agreements, including the Canada-EU CETA agreement, the Temporary Foreign Worker Program (TFWP), and the International Mobility Program. The TFWP is jointly managed by Employment and Social Development Canada (ESDC) and Immigration, Refugees, and Citizenship Canada (IRCC). The International Mobility Program (IMP) primarily includes high skill/high wage professions and is not subject to a labor market impact assessment. The number of temporary foreign workers a business can employ is limited. For more information, see the TFWP website: https://www.canada.ca/en/employment-social-development/services/foreign-workers.html 

The impact of COVID-19 on the labor force has yet to be fully realized. As of February 2021, the unemployment rate was 8.2 percent (historical unemployment traditionally hovers between five and eight percent). Statistics indicate women and marginalized communities have been disproportionately affected by job and other economic losses. The Canadian government administered an emergency wage benefit in response to a significant increase in unemployment caused by the pandemic.

Canadian labor unions are independent from the government. Canada has labor dispute mechanisms in place and unions practice collective bargaining. As of 2015 (the most recent year of available data), there were 776 unions in Canada. Eight of those unions – five of which were national and three international – represented 100,000 or more workers each and comprised 45 percent of all unionized workers in Canada ( https://www.canada.ca/en/employment-social-development/services/collective-bargaining-data/reports/union-coverage.html ). Less than one third of Canadian employees belonged to a union or were covered by a collective agreement as of 2015. In June 2017, Parliament repealed legislation public service unions had claimed contravened International Labor Organization conventions by limiting the number of persons who could strike.

In August 2020, dockworkers at the Port of Montreal Port Authority participated in a 19-day strike over wages and scheduling. Statistics Canada estimates the strike resulted in more than USD 300 million in economic losses.

In March 2021, front line workers at an electric power and natural gas utility company in Manitoba participated in a two-day strike over wages and holiday benefits. The strike followed 28 months of stalled labor negotiations.

Economic Section
490 Sussex Drive, Ottawa, Ontario
613-688-5335
OttawaEconCounselor@state.gov

Policies Towards Foreign Direct Investment

The German government and industry actively encourage foreign investment. U.S. investment continues to account for a significant share of Germany’s FDI. The 1956 U.S.-Federal Republic of Germany Treaty of Friendship, Commerce and Navigation affords U.S. investors national treatment and provides for the free movement of capital between the United States and Germany. As an OECD member, Germany adheres to the OECD National Treatment Instrument and the OECD Codes of Liberalization of Capital Movements and of Invisible Operations.  The Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance provide the legal basis for the Federal Ministry for Economic Affairs and Energy to review acquisitions of domestic companies by foreign buyers, to assess whether these transactions pose a risk to the public order or national security (for example, when the investment pertains to critical infrastructure).  For many decades, Germany has experienced significant inbound investment, which is widely recognized as a considerable contributor to Germany’s growth and prosperity. The investment-related challenges facing foreign companies are broadly the same as face domestic firms, e.g relatively high tax rates, stringent environmental regulations, and labor laws that complicate hiring and dismissals. Germany Trade and Invest (GTAI), the country’s economic development agency, provides extensive information for investors: https://www.gtai.de/gtai-en/invest

Limits on Foreign Control and Right to Private Ownership and Establishment

Under German law, a foreign-owned company registered in the Federal Republic of Germany as a GmbH (limited liability company) or an AG (joint stock company) is treated the same as a German-owned company. There are no special nationality requirements for directors or shareholders.

Companies which seek to open a branch office in Germany without establishing a new legal entity, (e.g., for the provision of employee placement services, such as providing temporary office support, domestic help, or executive search services), must register and have at least one representative located in Germany.

Germany maintains an elaborate mechanism to screen foreign investments based on national security grounds. The legislative basis for the mechanism (the Foreign Trade and Payments Act and Foreign Trade and Payments Ordinance) has been amended several times in recent years in an effort to tighten parameters of the screening as technological threats evolve, particularly to address growing interest by foreign investors in both Mittelstand (mid-sized) and blue chip German companies. Amendments to implement the 2019 EU Screening Regulation are already in force or have been drafted as of March 2021. One major change in the amendments allows for authorities to make “prospective impairment” of public order and security the new trigger for an investment review, in place of the former standard (which requires a de facto threat).

Other Investment Policy Reviews

The World Bank Group’s “Doing Business 2020” Index provides additional information on Germany’s investment climate. The American Chamber of Commerce in Germany also publishes results of an annual survey of U.S. investors in Germany (“AmCham Germany Transatlantic Business Barometer”, https://www.amcham.de/publications).

Business Facilitation

Before engaging in commercial activities, companies and business operators must register in public directories, the two most significant of which are the commercial register (Handelsregister) and the trade office register (Gewerberegister).

Applications for registration at the commercial register, which is available under  www.handelsregister.de , are electronically filed in publicly certified form through a notary.  The commercial register provides information about all relevant relationships between merchants and commercial companies, including names of partners and managing directors, capital stock, liability limitations, and insolvency proceedings.  Registration costs vary depending on the size of the company. According to the World Bank’s Doing Business Report 2020, the median duration to register a business in Germany is 8 days.

Germany Trade and Invest (GTAI), the country’s economic development agency, can assist in the registration processes ( https://www.gtai.de/gtai-en/invest/investment-guide/establishing-a-company/business-registration-65532 ) and advises investors, including micro-, small-, and medium-sized enterprises (MSMEs), on how to obtain incentives.

In the EU, MSMEs are defined as follows:

• Micro-enterprises:  less than 10 employees and less than €2 million annual turnover or less than €2 million in balance sheet total.
• Small enterprises:  less than 50 employees and less than €10 million annual turnover or less than €10 million in balance sheet total.
• Medium-sized enterprises:  less than 250 employees and less than €50 million annual turnover or less than €43 million in balance sheet total.

U.S.-based traders, who seek to sell in Germany, e.g., via commercial platforms, are required to register with one specific tax authority in Bonn, which can lead to significant delays due to capacity issues.

Outward Investment

Germany’s federal government provides guarantees for investments by Germany-based companies in developing and emerging economies and countries in transition in order to insure them against political risks. In order to receive guarantees, the investment must have adequate legal protection in the host country. The Federal Government does not insure against commercial risks. In 2020, the government issued investment guarantees amounting to €900 million for investment projects in 13 countries, with the majority of those in China and India.

Transparency of the Regulatory System

Germany has transparent and effective laws and policies to promote competition, including antitrust laws. The legal, regulatory, and accounting systems are complex but transparent and consistent with international norms.

Public consultation by federal authorities is regulated by the Joint Rules of Procedure, which specify that ministries must consult early and extensively with a range of stakeholders on all new legislative proposals. In practice, laws and regulations in Germany are routinely published in draft for public comment. According to the Joint Rules of Procedure, ministries should consult the concerned industries’ associations , consumer organizations, environmental, and other NGOs. The consultation period generally takes two to eight weeks.

The German Institute for Standardization (DIN), Germany’s independent and sole national standards body representing Germany in non-governmental international standards organizations, is open to German subsidiaries of foreign companies.

International Regulatory Considerations

As a member of the European Union, Germany must observe and implement directives and regulations adopted by the EU. EU regulations are binding and enter into force as immediately applicable law. Directives, on the other hand, constitute a type of framework law that is to be transposed by the Member States in their respective legislative processes, which is regularly observed in Germany.

EU Member States must transpose directives within a specified period of time. Should a deadline not be met, the Member State may suffer the initiation of an infringement procedure, which could result in steep fines. Germany has a set of rules that prescribe how to break down any payment of fines devolving to the Federal Government and the federal states (Länder). Both bear part of the costs. Payment requirements by the individual states depend on the size of their population and the respective part they played in non-compliance.

The federal states have a say over European affairs through the Bundesrat (upper chamber of parliament). The Federal Government must inform the Bundesrat at an early stage of any new EU policies that are relevant for the federal states.

The Federal Government notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT) through the Federal Ministry of Economic Affairs and Energy.

Legal System and Judicial Independence

German law is both stable and predictable.  Companies can effectively enforce property and contractual rights.  Germany’s well-established enforcement laws and official enforcement services ensure that investors can assert their rights.  German courts are fully available to foreign investors in an investment dispute.

The judicial system is independent, and the government does not interfere in the court system.  The legislature sets the systemic and structural parameters, while lawyers and civil law notaries use the law to shape and organize specific situations.  Judges are highly competent and impartial. International studies and empirical data have attested that Germany offers an effective court system committed to due process and the rule of law.

In Germany, most important legal issues and matters are governed by comprehensive legislation in the form of statutes, codes and regulations.  Primary legislation in the area of business law includes: the Civil Code (Bürgerliches Gesetzbuch, abbreviated as BGB), which contains general rules on the formation, performance and enforcement of contracts and on the basic types of contractual agreements for legal transactions between private entities;

• the Civil Code (Bürgerliches Gesetzbuch, abbreviated as BGB), which contains general rules on the formation, performance and enforcement of contracts and on the basic types of contractual agreements for legal transactions between private entities;
• the Commercial Code (Handelsgesetzbuch, abbreviated as HGB), which contains special rules concerning transactions among businesses and commercial partnerships;
• the Private Limited Companies Act (GmbH-Gesetz) and the Public Limited Companies Act (Aktiengesetz), covering the two most common corporate structures in Germany – the ‘GmbH’ and the ‘Aktiengesellschaft’; and
• the Act on Unfair Competition (Gesetz gegen den unlauteren Wettbewerb, abbreviated as UWG), which prohibits misleading advertising and unfair business practices.

Apart from the regular courts, which hear civil and criminal cases, Germany has specialized courts for administrative law, labor law, social law, and finance and tax law.  Many civil regional courts have specialized chambers for commercial matters. In 2018, the first German regional courts for civil matters (in Frankfurt and Hamburg) established Chambers for International Commercial Disputes introducing the possibility to hear international trade disputes in English.  Other federal states are currently discussing plans to introduce these specialized chambers as well. In November 2020, Baden-Wuerttemberg opened the first commercial court in Germany with locations in Stuttgart and Mannheim, with the option to choose English language proceedings.

The Federal Patent Court hears cases on patents, trademarks, and utility rights which are related to decisions by the German Patent and Trademarks Office.  Both the German Patent Office (Deutsches Patentamt) and the European Patent Office are headquartered in Munich.

Laws and Regulations on Foreign Direct Investment

The Federal Ministry for Economic Affairs and Energy may review acquisitions of domestic companies by foreign buyers in cases where investors seek to acquire at least 25 percent of the voting rights to assess whether these transactions pose a risk to the public order or national security of the Federal Republic of Germany. In the case of acquisitions of critical infrastructure and companies in sensitive sectors, the threshold for triggering an investment review by the government is 10 percent. The Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance provide the legal basis for screening investments. In 2019, the Federal Ministry for Economic Affairs and Energy screened a total of 106 foreign acquisitions. In at least one case it prohibited an acquisition – the planned takeover of German wireless communications technology developer IMST GmbH by Chinese state-owned defense company CASIC in December 2020. However, even without a formal decision, the mere prospect of rejection has reportedly caused foreign investors to pull out of prospective deals in the past. All national security decisions by the ministry can be appealed in administrative courts.

There is no general requirement for investors to obtain approval for any acquisition unless the target company poses a potential national security risk, such as operating or providing services relating to critical infrastructure, , is a media company, or operates in the health sector. The threshold for initiating such an investment review is an acquisition of at least 10 percent of voting rights. The Federal Ministry for Economic Affairs and Energy may launch a review within three months after obtaining knowledge of the acquisition; the review must be concluded within four months after receipt of the full set of relevant documents. An investor may also request a binding certificate of non-objection from the Federal Ministry for Economic Affairs and Energy in advance of the planned acquisition to obtain legal certainty at an early stage. If the Federal Ministry for Economic Affairs and Energy does not open an in-depth review within two months from the receipt of the request, this certificate shall be deemed as granted.

Special rules additionally apply for the acquisition of companies that operate in sensitive security areas, including defense and IT security. In contrast to the cross-sectoral rules described above, all sensitive acquisitions must be notified in written form including basic information of the planned acquisition, the buyer, the domestic company that is subject of the acquisition and the respective fields of business. The Federal Ministry for Economic Affairs and Energy may open a formal review procedure if a foreign investor seeks to acquire at least 10 percent of voting rights of a German company in a sensitive security area within three months after receiving notification, or the acquisition shall be deemed as approved. If a review procedure is opened, the buyer is required to submit further documents. The acquisition may be restricted or prohibited within three months after the full set of documents has been submitted.

The German government has continuously amended domestic investment screening provisions in recent years to transpose the relevant EU framework and address evolving security risks. An amendment in June 2017 clarified the scope for review and gave the government more time to conduct reviews, in reaction to an increasing number of acquisitions of German companies by foreign investors with apparent ties to national governments. The amended provisions provide a clearer definition of sectors in which foreign investment can pose a threat to public order and security, including operators of critical infrastructure, developers of software to run critical infrastructure, telecommunications operators or companies involved in telecom surveillance, cloud computing network operators and service providers, and telematics companies, and which are subject to notification requirements. The new rules also extended the time to assess a cross-sector foreign investment from two to four months, and for investments in sensitive sectors, from one to three months, and introduced the possibility of retroactively initiating assessments for a period of five years after the conclusion of an acquisition. Indirect acquisitions such as those through a Germany- or EU-based affiliate company are now also explicitly subject to the new rules.

With further amendments in 2020, Germany implemented the 2019 EU Screening Regulation.

The amendments a) introduced a more pro-active screening based on “prospective impairment” of public order or security by an acquisition, rather than a de facto threat, b) take into account the impact on other EU member states, and c) formally suspend transactions during the screening process.

a) introduced a more pro-active screening based on “prospective impairment” of public order or security by an acquisition, rather than a de facto threat, b) take into account the impact on other EU member states, and c) formally suspend transactions during the screening process.

Furthermore, acquisitions by foreign government-owned or -funded entities now trigger a review, and the healthcare industry is now considered a sensitive sector to which the stricter 10% threshold applies. In May 2021, a further amendment entered into force which introduced a list of sensitive sectors and technologies (similar to the current list of critical infrastructures), including artificial intelligence, autonomous vehicles, specialized robots, semiconductors, additive manufacturing and quantum technology. Foreign investors who seek to acquire at least 10% of ownership rights of a German company in one those fields would be required to notify the government and potentially become subject to an investment review. The screening can now also take into account “stockpiling acquisitions” by the same investor, “atypical control investments” where an investor seeks additional influence in company operations via side contractual agreements, or combined acquisitions by multiple investors, if all are controlled by one foreign government.

The Ministry for Economic Affairs and Energy provides comprehensive information on Germany’s investment screening regime on its website in English: https://www.bmwi.de/Redaktion/EN/Artikel/Foreign-Trade/investment-screening.html 

https://www.bmwi.de/Redaktion/EN/Artikel/Foreign-Trade/investment-screening.html 

The German Economic Development Agency (GTAI) provides extensive information for investors, including about the legal framework, labor-related issues and incentive programs, on their website: http://www.gtai.de/GTAI/Navigation/EN/Invest/investment-guide.html .

The German government ensures competition on a level playing field on the basis of two main legal codes:

The Law against Limiting Competition (Gesetz gegen Wettbewerbsbeschränkungen – GWB) is the legal basis for limiting cartels, merger control, and monitoring abuse. State and Federal cartel authorities are in charge of enforcing anti-trust law. In exceptional cases, the Minister for Economic Affairs and Energy can provide a permit under specific conditions.

A June 2017 amendment to the GWB expanded the reach of the Federal Cartel Office (FCO) to include internet and data-based business models and the FCO has shown an interest in investigating large internet firms. A February 2019 FCO investigation found that Facebook had abused its dominant position in social media to harvest user data. Facebook challenged the FCO’s decision in court, but in June 2020, Germany’s highest court upheld the FCO’s action. In March 2021, the Higher Regional Court in Düsseldorf referred the case to the European Court of Justice for guidance. The FCO has been continued to challenge the conduct of large tech platforms, particularly with regard to the use of user data. Another FCO case against Facebook, initiated in December 2020, regards the integration of the company’s Oculus virtual reality platform into its broader platform, creating mandatory registration of Facebook accounts for all Oculus users. In November 2018, the FCO initiated an investigation of Amazon over alleged abuse of market power; a July 2019 decision by the FCO led Amazon to make the requested changes to their terms of business. The case was subsequently closed.

In 2021, a further amendment to the GWB, known as the Digitalization Act, entered into force codifying tools that allow greater scrutiny of digital platforms by the FCO, in order to “better counteract abusive behavior by companies with paramount cross-market significance for competition.” The law aims to prohibit large platforms from taking certain actions that put competitors at a disadvantage, including in markets for related services or up and down the supply chain – even before the large platform becomes dominant in those secondary markets. To achieve this goal, the amendments expand the powers of the FCO to act earlier and more broadly. Due to the relatively modest number of German platforms, the amendments will primarily affect U.S. companies. The FCO is already applying the new regulations in ongoing cases against Facebook and Amazon, and opened two new cases against Google.

While the focus of the GWB is to preserve market access, the Law against Unfair Competition seeks to protect competitors, consumers and other market participants against unfair competitive behavior by companies. This law is primarily invoked in regional courts by private claimants rather than by the FCO.

Expropriation and Compensation

German law provides that private property can be expropriated for public purposes only in a non-discriminatory manner and in accordance with established principles of constitutional and international law. There is due process and transparency of purpose, and investors and lenders to expropriated entities receive prompt, adequate, and effective compensation.

The Berlin state government is currently reviewing a petition for a referendum submitted by a citizens’ initiative which calls for the expropriation of residential apartments owned by large corporations. At least one party in the governing coalition officially supports the proposal. Certain long-running expropriation cases date back to the Nazi and communist regimes. During the 2008/9 global financial crisis, the parliament adopted a law allowing emergency expropriation if the insolvency of a bank would endanger the financial system, but the measure expired without having been used.

Dispute Settlement

ICSID Convention and New York Convention

Germany is a member of both the International Center for the Settlement of Investment Disputes (ICSID) and New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning local courts must enforce international arbitration awards under certain conditions.

Investor-State Dispute Settlement

Investment disputes involving U.S. or other foreign investors in Germany are extremely rare. According to the UNCTAD database of known treaty-based investor dispute settlement cases, Germany has been challenged a handful of times, none of which involved U.S. investors.

International Commercial Arbitration and Foreign Courts

Germany has a domestic arbitration body called the German Arbitration Institute (DIS). The body offers commercial arbitration in accordance with UNCITRAL arbitration standards. ”Book 10” of the German Code of Civil Procedure addresses arbitration proceedings. The International Chamber of Commerce has an office in Berlin. In addition, local chambers of commerce and industry offer arbitration services.

Bankruptcy Regulations

German insolvency law, as enshrined in the Insolvency Code, supports and promotes restructuring. If a business or the owner of a business becomes insolvent, or a business is over-indebted, insolvency proceedings can be initiated by filing for insolvency; legal persons are obliged to do so. Insolvency itself is not a crime, but deliberately late filing for insolvency is.

Under a regular insolvency procedure, the insolvent business is generally broken up in order to recover assets through the sale of individual items or rights or parts of the company. Proceeds can then be paid out to creditors in the insolvency proceedings. The distribution of monies to creditors follows detailed instructions in the Insolvency Code.

Equal treatment of creditors is enshrined in the Insolvency Code. Some creditors have the right to claim property back. Post-adjudication preferred creditors are served out of insolvency assets during the insolvency procedure. Ordinary creditors are served on the basis of quotas from the remaining insolvency assets. Secondary creditors, including shareholder loans, are only served if insolvency assets remain after all others have been served. Germany ranks fourth in the global ranking of “Resolving Insolvency” in the World Bank’s Doing Business Index, with a recovery rate of 79.8 cents on the dollar.

In December 2020, the Bundestag passed legislation implementing the EU Restructuring Directive, to modernize and make German restructuring and insolvency law more effective.

The Bundestag also passed legislation granting temporary relief to companies facing insolvency due to the COVID-19 pandemic, including temporary suspensions from the obligation to file for insolvency under strict requirements.

Investment Incentives

Federal and state investment incentives – including investment grants, labor-related and R&D incentives, public loans, and public guarantees – are available to domestic and foreign investors alike. Different incentives can be combined. In general, foreign and German investors must meet the same criteria for eligibility.

Germany Trade & Invest (GTAI), Germany’s federal economic development agency, provides comprehensive information on incentives in English at: https://www.gtai.de/gtai-en/invest/investment-guide/incentive-programs .

Foreign Trade Zones/Free Ports/Trade Facilitation

There are currently two free ports in Germany operating under EU law: Bremerhaven and Cuxhaven. The duty-free zones within the ports also permit value-added processing and manufacturing for EU-external markets, albeit with certain requirements. All are open to both domestic and foreign entities. In recent years, falling tariffs and the progressive enlargement of the EU have eroded much of the utility and attractiveness of duty-free zones.

Performance and Data Localization Requirements

In general, there are no requirements for local sourcing, export percentage, or local or national ownership. In some cases, however, there may be performance requirements tied to an incentive, such as creation of jobs or maintaining a certain level of employment for a prescribed length of time.

U.S. companies can generally obtain the visas and work permits required to do business in Germany. U.S. citizens may apply for work and residential permits from within Germany. Germany Trade & Invest offers detailed information online at https://www.gtai.de/gtai-en/invest/investment-guide/coming-to-germany .

There are no general localization requirements for data storage in Germany. However, the invalidation of the Privacy Shield by the European Court of Justice in July 2020 has led to increased calls for data storage in Germany, e.g., with regard to U.S. cloud service providers used by digital health app developers. In recent years, German and European cloud providers have also sought to market the domestic location of their servers as a competitive advantage.

Real Property

The German Government adheres to a policy of national treatment, which considers property owned by foreigners as fully protected under German law. In Germany, mortgage approvals are based on recognized and reliable collateral. Secured interests in property, both chattel and real, are recognized and enforced. According to the World Bank’s Doing Business Report, it takes an average of 52 days to register property in Germany.

The German Land Register Act dates back to 1897. The land register mirrors private real property rights and provides information on the legal relationship of the estate. It documents the owner, rights of third persons, as well as liabilities and restrictions. Any change in property of real estate must be registered in the land registry to make the contract effective. Land titles are now maintained in an electronic database and can be consulted by persons with a legitimate interest.

Intellectual Property Rights

Germany has a robust regime to protect intellectual property rights (IPR). Legal structures are strong and enforcement is good. Nonetheless, internet piracy and counterfeit goods remain issues, and specific infringing websites are occasionally included in USTR’s Notorious Markets Reviews. Germany has been a member of the World Intellectual Property Organization (WIPO) since 1970. The German Central Customs Authority annually publishes statistics on customs seizures of counterfeit and pirated goods. The statistics for 2019 can be found under: https://www.zoll.de/SharedDocs/Broschueren/DE/Die-Zollverwaltung/jahresstatistik_2019.html.

Germany is party to the major international IPR agreements: the Berne Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, the Universal Copyright Convention, the Geneva Phonograms Convention, the Patent Cooperation Treaty (PCT), the Brussels Satellite Convention, the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations, and the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Many of the latest developments in German IPR law are derived from European legislation with the objective to make applications less burdensome and allow for European IPR protection. Germany is currently drafting legislation to implement EU Directive 2019/790 on Copyright and Related Rights in the Digital Single Market, including an ancillary copyright law for publishers.

The following types of protection are available:

Copyrights: National treatment is granted to foreign copyright holders, including remuneration for private recordings. Under the TRIPS Agreement, Germany grants legal protection for U.S. performing artists against the commercial distribution of unauthorized live recordings in Germany. Germany is party to the World Intellectual Property Organization (WIPO) Copyright Treaty and WIPO Performances and Phonograms Treaty, which came into force in 2010. Most rights holder organizations regard German authorities’ enforcement of IP rights as effective. In 2008, Germany implemented the EU Directive (2004/48/EC) on IPR enforcement with a national bill, thereby strengthening the privileges of rights holders and allowing for improved enforcement action. Germany is currently drafting legislation to implement EU Directive 2019/790 on Copyright and Related Rights in the Digital Single Market.

Trademarks: National treatment is granted to foreigners seeking to register trademarks at the German Patent and Trade Mark Office. Protection is valid for a period of ten years and can be extended in ten-year periods. It is possible to register for trademark and design protection nationally in Germany or for an EU Trade Mark and/or Registered Community Design at the EU Intellectual Property Office (EUIPO). These provide protection for industrial design or trademarks in the entire EU market. Both national trademarks and European Union Trade Marks (EUTMs) can be applied for from the U.S. Patent and Trademark Office (USPTO) as part of an international trademark registration system, or the applicant may apply directly for those trademarks from EUIPO at https://euipo.europa.eu/ohimportal/en/home .

Patents: National treatment is granted to foreigners seeking to register patents at the German Patent and Trade Mark Office. Patents are granted for technical inventions that are new, involve an inventive step, and are industrially applicable. However, applicants having neither a domicile nor an establishment in Germany must appoint a patent attorney in Germany as a representative filing the patent application. The documents must be submitted in German or with a translation into German. The duration of a patent is 20 years from the patent application filing date. Patent applicants can request accelerated examination under the Global Patent Prosecution Highway (GPPH) when filing the application, provided that the patent application was previously filed at the USPTO and that at least one claim had been determined to be patentable. There are a number of differences between U.S. and German patent law, including the filing systems (“first-inventor-to-file” versus “first-to-file”, respectively), that a qualified patent attorney can explain to U.S. patent applicants. German law also offers the possibility to register designs and utility models.

If a U.S. applicant seeks to file a patent in multiple European countries, this may be accomplished through the European Patent Office (EPO) which grants European patents for the contracting states to the European Patent Convention (EPC). The 38 contracting states include the entire EU membership and several additional European countries; Germany joined the EPC in 1977. It should be noted that some EPC members require a translation of the granted European patent in their language for validation purposes. The EPO provides a convenient single point to file a patent in as many of these countries as an applicant would like: https://www.epo.org/applying/basics.html . U.S. applicants seeking patent rights in multiple countries can alternatively file an international Patent Coordination Treaty (PCT) application with the USPTO.

Trade Secrets: Trade secrets are protected in Germany by the Law for the Protection of Trade Secrets, which has been in force since April 2019 and implements the 2016 EU Directive (2016/943). According to the law, the illegal accessing, appropriation, and copying of trade secrets, including through social engineering, is prohibited. Explicitly exempt from the law is “reverse engineering” of a publicly available item, and appropriation, usage, or publication of a trade secret to protect a “legitimate interest”, including journalistic research and whistleblowing. The law requires that companies have to implement “adequate confidentiality measures” for information to be protected as a trade secret under the law. Owners of trade secrets are entitled to omission, compensation, and information about the culprit, as well as the destruction, return and recall, and ultimately the removal of the infringing products from the market.

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/ .

Country resources:

For additional information about how to protect IPR in Germany, please see Germany Trade & Invest website at https://www.gtai.de/gtai-en/invest/investment-guide/the-legal-framework/patents-licensing-trade-marks-65372 .

Statistics on the seizure of counterfeit goods are available through the German Customs Authority (Zoll): https://www.zoll.de/SharedDocs/Broschueren/DE/Die-Zollverwaltung/statistik_gew_rechtsschutz_2019.html;jsessionid=F8B0524DFF4F1ADF99DEBB858E4CAD31.internet412?nn=305648

https://www.zoll.de/SharedDocs/Broschueren/DE/Die-Zollverwaltung/statistik_gew_rechtsschutz_2019.html;jsessionid=F8B0524DFF4F1ADF99DEBB858E4CAD31.internet412?nn=305648

Investors can identify IPR lawyers in AmCham Germany’s Online Services Directory: https://www.amcham.de/services/overview/member-services/address-services-directory/  (under “legal references” select “intellectual property.”)

Businesses can also join the Anti-counterfeiting Association (APM) http://www.markenpiraterie-apm.de/index.php?article_id=1&clang=1 

http://www.markenpiraterie-apm.de/index.php?article_id=1&clang=1 

Capital Markets and Portfolio Investment

As an EU member state with a well-developed financial sector, Germany welcomes foreign portfolio investment and has an effective regulatory system. Germany has a very open economy, routinely ranking among the top countries in the world for exports and inward and outward foreign direct investment. As a member of the Eurozone, Germany does not have sole national authority over international payments, which are a shared task of the European Central Bank and the national central banks of the 19 member states, including the German Central Bank (Bundesbank). A European framework for national security screening of foreign investments, which entered into force in April 2019, provides a basis under European law to restrict capital movements into Germany on the basis of threats to national security. Global investors see Germany as a safe place to invest, as the real economy – up until the COVID-19 crisis– continued to outperform other EU countries.German sovereign bonds continue to retain their “safe haven” status.

Listed companies and market participants in Germany must comply with the Securities Trading Act, which bans insider trading and market manipulation. Compliance is monitored by the Federal Financial Supervisory Authority (BaFin) while oversight of stock exchanges is the responsibility of the state governments in Germany (with BaFin taking on any international responsibility). Investment fund management in Germany is regulated by the Capital Investment Code (KAGB), which entered into force on July 22, 2013. The KAGB represents the implementation of additional financial market regulatory reforms, committed to in the aftermath of the global financial crisis. The law went beyond the minimum requirements of the relevant EU directives and represents a comprehensive overhaul of all existing investment-related regulations in Germany with the aim of creating a system of rules to protect investors while also maintaining systemic financial stability.

Money and Banking System

Although corporate financing via capital markets is on the rise, Germany’s financial system remains mostly bank-based. Bank loans are still the predominant form of funding for firms, particularly the small- and medium-sized enterprises that comprise Germany’s “Mittelstand,” or mid-sized industrial market leaders. Credit is available at market-determined rates to both domestic and foreign investors, and a variety of credit instruments are available. Legal, regulatory and accounting systems are generally transparent and consistent with international banking norms. Germany has a universal banking system regulated by federal authorities, and there have been no reports of a shortage of credit in the German economy. After 2010, Germany banned some forms of speculative trading, most importantly “naked short selling.” In 2013, Germany passed a law requiring banks to separate riskier activities such as proprietary trading into a legally separate, fully capitalized unit that has no guarantee or access to financing from the deposit-taking part of the bank. Since the creation of the European single supervisory mechanism (SSM) in November 2014, the European Central Bank directly supervises 21 banks located in Germany (as of January 2021) among them four subsidiaries of foreign banks.

Germany supports a global financial transaction tax and is pursuing the introduction of such a tax along with other EU member states.

Germany has a modern and open banking sector that is characterized by a highly diversified and decentralized, small-scale structure. As a result, it is extremely competitive, profit margins notably in the retail sector are low and the banking sector considered “over-banked” and in need of consolidation. The country’s “three-pillar” banking system consists of private commercial banks, cooperative banks, and public banks (savings banks/Sparkassen and the regional state-owned banks/Landesbanken). This structure has remained unchanged despite marked consolidation within each “pillar” since the financial crisis in 2008/9. The number of state banks (Landesbanken) dropped from 12 to 5, that of savings banks from 446 in 2007 to 374 at the end of 2019 and the number of cooperative banks has dropped from 1,234 to 814. Two of the five large private sector banks have exited the market (Dresdner, Postbank). The balance sheet total of German banks dropped from 304 percent of GDP in 2007 to about 265 percent of end-2019 GDP with banking sector assets worth €9.1 trillion. Market shares in corporate finance of the banking groups remained largely unchanged (all figures for end of 2019): Credit institutions 27 percent (domestic 17 percent, foreign banks 10 percent), savings banks 31 percent, state banks 10 percent, credit cooperative banks 21 percent, promotional banks 6 percent.

The private bank sector is dominated by globally active banks Deutsche Bank (Germany’s largest bank by balance sheet total) and Commerzbank (fourth largest bank), with balance sheets of €1.3 trillion and €466.6 billion respectively (2019 figures). Commerzbank received €18 billion in financial assistance from the federal government in 2009, for which the government took a 25 percent stake in the bank (now reduced to 15.6 percent). Merger talks between Deutsche Bank and Commerzbank failed in 2019. The second largest of the top ten German banks is DZ Bank, the central institution of the Cooperative Finance Group (after its merger with WGZ Bank in July 2016), followed by German branches of large international banks (UniCredit Bank or HVB, ING-Diba), development banks (KfW Group, NRW.Bank), and state banks (LBBW, Bayern LB, Helaba, NordLB).

German banks’ profitability deteriorated in the years prior to the COVID-19 crisis due to the prevailing low and negative interest rate environment that narrowed margins on new loans irrespective of debtors’ credit worthiness, poor trading results and new competitors from the fintech sector, and low cost efficiency. In 2018, according to the latest data by the Deutsche Bundesbank (Germany’s central bank), German credit institutions reported a pre-tax profit of €18.9 billion or 0.23 percent of total assets. Their net interest income remained below its long-term average to €87.2 billion despite dynamic credit growth (19 percent since end-2014 until end-2019 in retail and 23 percent in corporate loans) on ongoing cost-reduction efforts. Thanks to continued favorable domestic economic conditions, their risk provisioning has been at an all time low. Their average return on equity before tax in 2018 slipped to 3.74 percent (after tax: 2.4 percent) (with savings banks generating a higher return, big banks a lower return, and Landesbanken a –2.45 percent return). Both return on equity and return on assets were at their lowest level since 2010.

Brexit promptedsome banking activities to relocate from the United Kingdom to the EU, with many foreign banks (notably U.S. and Japanese banks) choosing Frankfurt as their new EU headquarters. Their Core Tier 1 equity capital ratios improved as did their liquidity ratios, but no German large bank has been able to organically raise its capital for the past decade.

In 2020, the insolvency of financial services provider WireCard revealed certain weaknesses in German banking supervision. WireCard, which many viewed as a promising innovative format for the processing of credit card transactions, managed to conceal inadequate equity from supervisory authorities while also inflating its actual turnover. The Wirecard insolvency led to the replacement of the head of banking supervisory authority BaFin and triggered both an ongoing overhaul of the German banking supervision and a continuing parliamentary investigation.

It remains unclear how the COVID-19 crisis will affect the German banking sector. Prior to the pandemic, the bleaker German economic outlook prompted a greater need for value adjustment and write-downs in lending business. German banks’ ratio of non-performing loans was low going into the crisis (1.24 percent). In March 2020, the German government provided large-scale asset guarantees to banks (in certain instances covering 100 percent of the credit risk) via the German government owned KfW bank to avoid a credit crunch. So far, German banks have come through the crisis unscathed thanks to extensive liquidity assistance from the ECB, moratoria and fiscal support for the economy. Nevertheless, 25 German banks were downgraded in 2020 and many more were put on negative watch, though CDS spreads for the two largest private banks have fallen dramatically since the height of the crisis in March 2020 and are currently around pre-COVID levels. The second and third COVID-waves, however, are likely to take a toll on credit institutions and 2021 could prove to be the toughest test for banks since the 2008/9 global financial crisis. According to the Bundesbank, loan defaults by German banks could quadruple to 0.8 percent of the loan portfolio (or €13 billion). The Bundesbank’s focus in particular is on aircraft loans. According to Bloomberg’s calculations, the major German regional banks have lent €15 billion for aircraft financing. At Deka alone, the asset manager of the savings banks, the ratio of non-performing loans in aircraft financing is at a relatively high 7.7 percent.

Foreign Exchange and Remittances

Foreign Exchange

As a member of the Eurozone, Germany uses the euro as its currency, along with 18 other EU countries. The Eurozone has no restrictions on the transfer or conversion of its currency, and the exchange rate is freely determined in the foreign exchange market.

The Deutsche Bundesbank is the independent central bank of the Federal Republic of Germany. It has been a part of the Eurosystem since 1999, sharing responsibility with the other national central banks and the European Central Bank (ECB) for the single currency, and thus has no scope to manipulate the bloc’s exchange rate. Germany’s persistently high current account surplus – the world’s second largest in 2020 at USD 261 billion (6.9 percent of GDP) – has shrunk for the fifth year in a row. Despite the decrease, the persistence of Germany’s surplus remains a matter of international controversy. German policymakers view the large surplus as the result of market forces rather than active government policies, while the European Commission (EC) and IMF have called on authorities to rebalance towards domestic sources of economic growth by expanding public investment, using available fiscal space, and other policy choices that boost domestic demand.

Germany is a member of the Financial Action Task Force (FATF) and is committed to further strengthening its national system for the prevention, detection and suppression of money laundering and terrorist financing. Federal law is enforced by regional state prosecutors. Investigations are conducted by the Federal and State Offices of Criminal Investigations (BKA/LKA). The administrative authority for imposing anti-money laundering requirements on financial institutions is the Federal Financial Supervisory Authority (BaFin).

The Financial Intelligence Unit (FIU) – located at the General Customs Directorate in the Federal Ministry of Finance – is the national central authority for receiving, collecting and analyzing reports of suspicious financial transactions that may be related to money laundering or terrorist financing. On January 1, 2020, legislation to implement the 5th EU Money Laundering Directive and the European Funds Transfers Regulation (Geldtransfer-Verordnung) entered into force. The Act amends the German Money Laundering Act (Geldwäschegesetz – GwG) and a number of further laws. It provides, inter alia, the FIU and prosecutors with expanded access to data. On March 9, 2021 the Bundestag passed an anti-money laundering law seeking to improve Germany’s criminal legal framework for combating money laundering while simultaneously implementing the EU’s 6th Money Laundering Directive (EU 2018/1673 – hereafter “the Directive”). The Directive lays down minimum rules on the definition of criminal offenses and sanctions to combat money laundering. The law goes beyond the minimum standard set out in the Directive by broadening the definition of activities that could be prosecuted as money laundering offenses. Previously, the money laundering section in the German Criminal Code was designed to criminalize acts in connection with a list of serious “predicate offenses,” the underlying crime generating illicit funds, e.g., drug trafficking. The new law dispenses with the previously defined list, allowing any crime to be considered as a “predicate offense” to money laundering (the “All- Crimes Approach”). This is a paradigm shift in German criminal law, and implements an additional priority laid out in Germany’s “Strategy to Combat Money Laundering and Terrorist Financing” adopted in 2019.

The number of suspected money laundering and terrorist financing cases rose sharply in 2019 from 77.000 suspicious activity reports (SARs) to 114.914 according to the 2019 annual report of FIU (a new record and 12-fold that of 2009). The vast majority (98 percent) of suspicious transaction reports were filed by German banks and other financial institutions in order to avoid legal risks after a court ruling that held anti-money laundering (AML) officers personally liable, thus including many “false positives”. At the same time, the activities resulted in just 156 criminal charges, 133 indictments and only 54 verdicts.

In its annual report 2018, the FIU noted an “extreme vulnerability” in Germany’s real estate market to money laundering activities. Transparency International found that about €30 billion in illicit funds were funneled into German real estate in 2017. The results of the first concerted action by supervisory authorities of the German federal states in the automotive industry in 2019, for example, were sobering: only 15 percent of car dealers had implemented AML provisions, the rest had deficiencies, showing the “need for further sensitization.” The report also noted a slight upward trend in the number of SARs related to crypto assets. Around 760 SARs cited “anomalies in connection with cryptocurrencies”, as reporting noted, especially the forwarding of funds to trading platforms abroad for the exchange of funds into cryptocurrencies. However, the FIU itself has come under criticism. Financial institutions deplore the quality of its staff and the effectiveness of its work. The Institute of Public Auditors in Germany (IDW) criticizes that the precautions taken to prevent money laundering in high-risk industries outside the financial sector are monitored much less intensively. A review of the FIU scheduled for 2020 has been postponed due to the pandemic.

There is no difficulty in obtaining foreign exchange.

Remittance Policies

There are no restrictions or delays on investment remittances or the inflow or outflow of profits.

Germany is the largest remittance-sending country in the EU, making up almost 18% of all outbound personal remittances of the EU-27 (Eurostat). Migrants in Germany posted USD 25.1 billion (0.6 percent of GDP) abroad in 2019 (World Bank). Remittance flows into Germany amounted to around USD 16.5 billion in 2019, approximately 0.4 percent of Germany’s GDP.

The issue of remittances played a role during the German G20 Presidency in 2017. During its presidency, Germany passed an updated version of its “G20 National Remittance Plan.” The document states that Germany’s focus will remain on “consumer protection, linking remittances to financial inclusion, creating enabling regulatory frameworks and generating research and data on diaspora and remittances dynamics.” The 2017 “G20 National Remittance Plan” can be found at https://www.gpfi.org/publications/2017-g20-national-remittance-plans-overview 

Sovereign Wealth Funds

The German government does not currently have a sovereign wealth fund or an asset management bureau.

The formal term for state-owned enterprises (SOEs) in Germany translates as “public funds, institutions, or companies,” and refers to entities whose budget and administration are separate from those of the government, but in which the government has more than 50 percent of the capital shares or voting rights. Appropriations for SOEs are included in public budgets, and SOEs can take two forms, either public or private law entities. Public law entities are recognized as legal personalities whose goal, tasks, and organization are established and defined via specific acts of legislation, with the best-known example being the publicly-owned promotional bank KfW (Kreditanstalt für Wiederaufbau). KfW’s mandate is to promote global development. The government can also resort to ownership or participation in an entity governed by private law if the following conditions are met: doing so fulfills an important state interest, there is no better or more economical alternative, the financial responsibility of the federal government is limited, the government has appropriate supervisory influence, and yearly reports are published.

Government oversight of SOEs is decentralized and handled by the ministry with the appropriate technical area of expertise. The primary goal of such involvement is promoting public interests rather than generating profits. The government is required to close its ownership stake in a private entity if tasks change or technological progress provides more effective alternatives, though certain areas, particularly science and culture, remain permanent core government obligations. German SOEs are subject to the same taxes and the same value added tax rebate policies as their private sector competitors. There are no laws or rules that seek to ensure a primary or leading role for SOEs in certain sectors or industries. However, a white paper drafted by the Ministry of Economic Affairs and Energy in November 2019 outlines elements of a national industrial strategy, which includes the option of a temporary state participation in key technology companies as “last resort”. Private enterprises have the same access to financing as SOEs, including access to state-owned banks such as KfW.

The Federal Statistics Office maintains a database of SOEs from all three levels of government (federal, state, and municipal) listing a total of 18,566 entities for 2018, or 0.5 percent of the total 3.5 million companies in Germany. SOEs in 2018 had €609 billion in revenue and €583 billion in expenditures. 41 percent of SOEs’ revenue was generated by water and energy suppliers, 12 percent by health and social services, and 11 percent by transportation-related entities. Measured by number of companies rather than size, 88 percent of SOEs are owned by municipalities, 10 percent are owned by Germany’s 16 states, and 2 percent are owned by the federal government.

The Federal Finance Ministry is required to publish a detailed annual report on public funds, institutions, and companies in which the federal government has direct participation (including a minority share) or an indirect participation greater than 25 percent and with a nominal capital share worth more than €50,000. The federal government held a direct participation in 104 companies and an indirect participation in 433 companies at the end of 2018, most prominently Deutsche Bahn (100 percent share), Deutsche Telekom (32 percent share), and Deutsche Post (21 percent share). Federal government ownership is concentrated in the areas of infrastructure, economic development, science, administration/increasing efficiency, defense, development policy, culture. As the result of federal financial assistance packages from the federally-controlled Financial Market Stability Fund during the global financial crisis of 2008/9, the federal government still has a partial stake in several commercial banks, including a 15.6 percent share in Commerzbank, Germany’s second largest commercial bank. In 2020, in the wake of the COVID-19 pandemic, the German government acquired shares of several large German companies, including CureVac, TUI and Lufthansa, in an attempt to prevent companies from filing for insolvency or, in the case of CureVac, support vaccine research in Germany.

The 2019 annual report (with 2018 data) can be found here: https://www.bundesfinanzministerium.de/Content/DE/Downloads/Broschueren_Bestellservice/2020-05-14-beteiligungsbericht-des-bundes-2019.pdf?__blob=publicationFile&v=28

https://www.bundesfinanzministerium.de/Content/DE/Downloads/Broschueren_Bestellservice/2020-05-14-beteiligungsbericht-des-bundes-2019.pdf?__blob=publicationFile&v=28

Publicly-owned banks constitute one of the three pillars of Germany’s banking system (cooperative and commercial banks are the other two). Germany’s savings banks are mainly owned by the municipalities, while the so-called Landesbanken are typically owned by regional savings bank associations and the state governments. Given their joint market share, about 40 percent of the German banking sector is publicly owned. There are also many state-owned promotional/development banks which have taken on larger governmental roles in financing infrastructure. This increased role removes expenditures from public budgets, particularly helpful in light of Germany’s balanced budget rules, which took effect for the states in 2020.

A longstanding, prominent case of a partially state-owned enterprise is automotive manufacturer Volkswagen, in which the state of Lower Saxony owns the third-largest share in the company of around 12 percent but controls 20 percent of the voting rights. The so-called Volkswagen Law, passed in 1960, limited individual shareholder’s voting rights in Volkswagen to a maximum of 20 percent regardless of the actual number of shares owned, so that Lower Saxony could veto any takeover attempts. In 2005, the European Commission successfully sued Germany at the European Court of Justice (ECJ), claiming the law impeded the free flow of capital. The law was subsequently amended to remove the cap on voting rights, but Lower Saxony’s 20 percent share of voting rights was maintained, preserving its ability to block hostile takeovers.

Privatization Program

Germany does not have any privatization programs at this time. German authorities treat foreigners equally in privatizations of state-owned enterprises.

In December 2016, the Federal Government passed the National Action Plan for Business and Human Rights (NAP). The action plan aims to apply the UN Guiding Principles for Business and Human Rights to the activities of German companies nationally as well as globally in their value and supply chains. The 2018 coalition agreement for the 19th legislative period between the governing Christian Democratic parties, CDU/CSU, and the Social Democratic Party of Germany (SPD) stated its commitment to the action plan, including the principles on public procurement. It further stated that, if the NAP 2020’s effective and comprehensive review came to the conclusion that the voluntary due diligence approach of enterprises was insufficient, the government would initiate legislation for an EU-wide regulation. With results of the review showing a majority of companies do not sufficiently fulfill due diligence requirements, the government has since sought to pass a national supply chain law to ensure businesses take responsibility for their supply chains and their operations do not impinge upon human rights. Draft legislation passed by the government in March 2021 is currently in the parliamentary process.

Germany adheres to the OECD Guidelines for Multinational Enterprises; the National Contact Point (NCP) is housed in the Federal Ministry of Economic Affairs and Energy. The NCP is supported by an advisory board composed of several ministries, business organizations, trade unions, and NGOs. This working group usually meets once a year to discuss all Guidelines-related issues. The German NCP can be contacted through the Ministry’s website: https://www.bmwi.de/Redaktion/EN/Textsammlungen/Foreign-Trade/national-contact-point-ncp.html .

There is general awareness of environmental, social, and governance issues among both producers and consumers in Germany, and surveys suggest that consumers increasingly care about the ecological and social impacts of the products they purchase. In order to encourage businesses to factor environmental, social, and governance impacts into their decision-making, the government provides information online and in hard copy. The federal government encourages corporate social responsibility (CSR) through awards and prizes, business fairs, and reports and newsletters. The government also organizes so called “sector dialogues” to connect companies and facilitate the exchange of best practices, and offers practice days to help nationally as well as internationally operating small- and medium-sized companies discern and implement their entrepreneurial due diligence under the NAP. To this end it has created a website on CSR in Germany ( http://www.csr-in-deutschland.de/EN/Home/home.html  in English). The German government maintains and enforces domestic laws with respect to labor and employment rights, consumer protections, and environmental protections. The German government does not waive labor and environmental laws to attract investment.

Social reporting is voluntary, but publicly listed companies frequently include information on their CSR policies in annual shareholder reports and on their websites.

Civil society groups that work on CSR include Amnesty International Germany, Bund für Umwelt und Naturschutz Deutschland e. V. (BUND), CorA Corporate Accountability – Netzwerk Unternehmensverantwortung, Forest Stewardship Council (FSC), Germanwatch, Greenpeace Germany, Naturschutzbund Deutschland (NABU), Sneep (Studentisches Netzwerk zu Wirtschafts- und Unternehmensethik), Stiftung Warentest, Südwind – Institut für Ökonomie und Ökumene, TransFair – Verein zur Förderung des Fairen Handels mit der „Dritten Welt“ e. V., Transparency International, Verbraucherzentrale Bundesverband e.V., Bundesverband Die Verbraucher Initiative e.V., and the World Wide Fund for Nature (WWF, known as the „World Wildlife Fund“ in the United States).

Additional Resources 

Department of State

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

Department of Labor

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

Among industrialized countries, Germany ranks 9th out of 180, according to Transparency International’s 2020 Corruption Perceptions Index. Some sectors including the automotive industry, construction sector, and public contracting, exert political influence and political party finance remains only partially transparent. Nevertheless, U.S. firms have not identified corruption as an impediment to investment in Germany. Germany is a signatory of the OECD Anti-Bribery Convention and a participating member of the OECD Working Group on Bribery.

Over the last two decades, Germany has increased penalties for the bribery of German officials, corrupt practices between companies, and price-fixing by companies competing for public contracts. It has also strengthened anti-corruption provisions on financial support extended by the official export credit agency and has tightened the rules for public tenders. Government officials are forbidden from accepting gifts linked to their jobs. Most state governments and local authorities have contact points for whistle-blowing and provisions for rotating personnel in areas prone to corruption. There are serious penalties for bribing officials and price fixing by companies competing for public contracts.

According to the Federal Criminal Office, in 2019, 50 percent of all corruption cases were directed towards the public administration (down from 73 percent in 2018), 39 percent towards the business sector (up from 18 percent in 2018), 9 percent towards law enforcement and judicial authorities (up from 7 percent in 2018), and 2 percent to political officials (unchanged compared to 2018).

Parliamentarians are subject to financial disclosure laws that require them to publish earnings from outside employment. Disclosures are available to the public via the Bundestag website (next to the parliamentarians’ biographies) and in the Official Handbook of the Bundestag. Penalties for noncompliance can range from an administrative fine to as much as half of a parliamentarian’s annual salary. In early 2021, several parliamentarians stepped down due to inappropriate financial gains made through personal relationships to businesses involved in the procurement of face masks during the initial stages of the pandemic.

Donations by private persons or entities to political parties are legally permitted. However, if they exceed €50,000, they must be reported to the President of the Bundestag, who is required to immediately publish the name of the party, the amount of the donation, the name of the donor, the date of the donation, and the date the recipient reported the donation. Donations of €10,000 or more must be included in the party’s annual accountability report to the President of the Bundestag.

State prosecutors are generally responsible for investigating corruption cases, but not all state governments have prosecutors specializing in corruption. Germany has successfully prosecuted hundreds of domestic corruption cases over the years, including large scale cases against major companies.

Media reports in past years about bribery investigations against Siemens, Daimler, Deutsche Telekom, Deutsche Bank, and Ferrostaal have increased awareness of the problem of corruption. As a result, listed companies and multinationals have expanded compliance departments, tightened internal codes of conduct, and offered more training to employees.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Germany was a signatory to the UN Anti-Corruption Convention in 2003. The Bundestag ratified the Convention in November 2014.

Germany adheres to and actively enforces the OECD Anti-Bribery Convention which criminalizes bribery of foreign public officials by German citizens and firms. The necessary tax reform legislation ending the tax write-off for bribes in Germany and abroad became law in 1999.

Germany participates in the relevant EU anti-corruption measures and signed two EU conventions against corruption. However, while Germany ratified the Council of Europe Criminal Law Convention on Corruption in 2017, it has not yet ratified the Civil Law Convention on Corruption.

Resources to Report Corruption

There is no central government anti-corruption agency in Germany. Responsibilities in fighting corruption lies with the federal states.

Contact at “watchdog” organization:

Hartmut Bäumer, Chair
Transparency International Germany
Alte Schönhauser Str. 44, 10119 Berlin
+49 30 549 898 0
office@transparency.de 
https://www.transparency.de/en/ 

The Federal Criminal Office publishes an annual report on corruption: “Bundeslagebild Korruption” – the latest one covers 2019. https://www.bka.de/DE/AktuelleInformationen/StatistikenLagebilder/Lagebilder/Korruption/korruption_node.html;jsessionid=95B370E07C3C5702B4A4AAEE8EAC8B3F.live0601

https://www.bka.de/DE/AktuelleInformationen/StatistikenLagebilder/Lagebilder/Korruption/korruption_node.html;jsessionid=95B370E07C3C5702B4A4AAEE8EAC8B3F.live0601

Political acts of violence against either foreign or domestic business enterprises are extremely rare. Isolated cases of violence directed at certain minorities and asylum seekers have not targeted U.S. investments or investors.

The German labor force is generally highly skilled, well-educated, and productive. Before the economic downturn caused by COVID-19, employment in Germany had risen for the thirteenth consecutive year and reached an all-time high of 45.3 million in 2019, an increase of 402,000 (or 0.9 percent) from 2018—the highest level since German reunification in 1990. As a result of the COVID-19 pandemic, employment fell to 44.8 million in 2020.

Simultaneously, unemployment had fallen by more than half since 2005, and, in 2019, reached the lowest average annual value since German reunification. In 2019, around 2.34 million people were registered as unemployed, corresponding to an unemployment rate of 5.2 percent, according to Germany Federal Employment Agency calculations. Using internationally comparable data from the European Union’s statistical office Eurostat, Germany had an average annual unemployment rate of 3.2 percent in 2019, the second lowest rate in the European Union. For the pandemic year 2020, the Federal Employment Agency reports an average unemployment rate of 5.9% with an average 2.7 million unemployed in 2020. This is an increase of 429,000 over 2019. However, long-term effects on the labor market, and the economy as a whole, due to COVID-19 are not yet fully observable. All employees are by law covered by the federal unemployment insurance that compensates for the lack of income for up to 24 months. A government-funded temporary furlough program allows companies to decrease their workforce and labor costs with layoffs and has helped mitigate a negative labor market impact in the short term. The government made intense use of this program, which enrolled at peak times in 2020 more than six million employees. The government, through the national employment agency, has spent more than 22 billion euros on this program, which it considers the main tool to keep unemployment low during the COVID-19 economic crisis. The government extended the program for all companies already meeting its conditions by the end of 2020 to December 31, 2021.

Germany’s national youth unemployment rate was 5.8 percent in 2019, the lowest in the EU. The German vocational training system has gained international interest as a key contributor to Germany’s highly skilled workforce and its sustainably low youth unemployment rate. Germany’s so-called “dual vocational training,” a combination of theoretical courses taught at schools and practical application in the workplace, teaches and develops many of the skills employers need. Each year, there are more than 500,000 apprenticeship positions available in more than 340 recognized training professions, in all sectors of the economy and public administration. Approximately 50 percent of students choose to start an apprenticeship. The government is promoting apprenticeship opportunities, in partnership with industry, through the “National Pact to Promote Training and Young Skilled Workers.”

An element of growing concern for German business is the aging and shrinking of the population, which (absent large-scale immigration) will likely result in labor shortages. Official forecasts at the behest of the Federal Ministry of Labor and Social Affairs predict that the current working age population will shrink by almost 3 million between 2010 and 2030, resulting in an overall shortage of workforce and skilled labor. Labor bottlenecks already constrain activity in many industries, occupations, and regions. The government has begun to enhance its efforts to ensure an adequate labor supply by improving programs to integrate women, elderly, young people, and foreign nationals into the labor market. The government has also facilitated the immigration of qualified workers.

Labor Relations

Germans consider the cooperation between labor unions and employer associations to be a fundamental principle of their social market economy and believe this has contributed to the country’s resilience during the economic and financial crisis. Insofar as job security for members is a core objective for German labor unions, unions often show restraint in collective bargaining in weak economic times and often can negotiate higher wages in strong economic conditions. In an international comparison, Germany is in the lower midrange with regards to strike numbers and intensity. All workers have the right to strike, except for civil servants (including teachers and police) and staff in sensitive or essential positions, such as members of the armed forces.

Germany’s constitution, federal legislation, and government regulations contain provisions designed to protect the right of employees to form and join independent unions of their choice. The overwhelming majority of unionized workers are members of one of the eight largest unions — largely grouped by industry or service sector — which are affiliates of the German Trade Union Confederation (Deutscher Gewerkschaftsbund, DGB). Several smaller unions exist outside the DGB. Overall trade union membership has, however, been in decline over the last several years. In 2020, total DGB union membership amounted to less than 6 million. IG Metall is the largest German labor union with 2.2 million members, followed by the influential service sector union Ver.di (1.9 million members).

The constitution and enabling legislation protect the right to collective bargaining, and agreements are legally binding to the parties. In 2019, 52 percent of non-self-employed workers were covered by a collective wage agreement.

By law, workers can elect a works council in any private company employing at least five people. The rights of the works council include the right to be informed, to be consulted, and to participate in company decisions. Works councils often help labor and management to settle problems before they become disputes and disrupt work. In addition, “co-determination” laws give the workforce in medium-sized or large companies (corporations, limited liability companies, partnerships limited by shares, co-operatives, and mutual insurance companies) significant voting representation on the firms’ supervisory boards. This co-determination in the supervisory board extends to all company activities.

From 2010 to 2019, real wages grew by 1.2 percent on average. Generous collective bargaining wage increases in 2019 (+3.2 percent) and the increase of the federal Germany-wide statutory minimum wage to €9.35 (USD 10.15) on January 1, 2020, led to 2.6 percent nominal wage increase. Real wages grew by 1.2 percent in 2019. As a result of the COVID-19 pandemic, real wages fell in 2020 by 1% over the previous year (preliminary figures).

Labor costs increased by 3.4 percent in 2019. With an average labor cost of €35 (USD 41.20) per hour, Germany ranked seventh among the 27 EU-members states (EU average: €27.40/USD 32.26) in 2019.

* Source for Host Country Data: Federal Statistical Office, www.destatis.de; Bundesbank, www.bundesbank.de   

Foreign Commercial Service
Pariser Platz 2, 14191 Berlin, Germany
+49-(0)30-8305-2940
Email: feedback@usembassy.de 

Policies toward Foreign Direct Investment

Changes in India’s foreign investment rules are notified in two different ways: (1) Press Notes issued by the Department for Promotion of Industry and Internal Trade (DPIIT) for most sectors, and (2) legislative action for insurance, pension funds, and state-owned enterprises in the coal sector. FDI proposals in sensitive sectors, however, require the additional approval of the Home Ministry.

DPIIT, under the Ministry of Commerce and Industry, is India’s chief investment regulator and policy maker. It compiles all policies related to India’s FDI regime into a single document to make it easier for investors to understand, and this consolidated policy is updated every year. The updated policy can be accessed at: http://dipp.nic.in/foreign-direct–investment/foreign–direct–investment-policy.  DPIIT, through the Foreign Investment Implementation Authority (FIIA), plays an active role in resolving foreign investors’ project implementation problems and disseminates information about the Indian investment climate to promote investments. The Department establishes bilateral economic cooperation agreements in the region and encourages and facilitates foreign technology collaborations with Indian companies and DPIIT oftentimes consults with lead ministries and stakeholders. There however have been multiple incidents where relevant stakeholders reported being left out of consultations.

Limits on Foreign Control and Right to Private Ownership and Establishment

In most sectors, foreign and domestic private entities can establish and own businesses and engage in remunerative activities. Several sectors of the economy continue to retain equity limits for foreign capital as well as management and control restrictions, which deter investment. For example, the 2015 Insurance Act raised FDI caps from 26 percent to 49 percent, but also mandated that insurance companies retain “Indian management and control.” In the parliament’s 2021 budget session, the Indian government approved increasing the FDI caps in the insurance sector to 74 percent from 49 percent. However, the legislation retained the “Indian management and control” rider. In the August 2020 session of parliament, the government approved reforms that opened the agriculture sector to FDI, as well as allowed direct sales of products and contract farming, though implementation of these changes was temporarily suspended in the wake of widespread protests. In 2016, India allowed up to 100 percent FDI in domestic airlines; however, the issue of substantial ownership and effective control (SOEC) rules that mandate majority control by Indian nationals have not yet been clarified. A list of investment caps is accessible at: http://dipp.nic.in/foreign-direct–investment/foreign-direct–investment-policy .

Screening of FDI

All FDI must be reviewed under either an “Automatic Route” or “Government Route” process. The Automatic Route simply requires a foreign investor to notify the Reserve Bank of India of the investment and applies in most sectors. In contrast, investments requiring review under the Government Route must obtain the approval of the ministry with jurisdiction over the appropriate sector along with the concurrence of DPIIT. The government route includes sectors deemed as strategic including defense, telecommunications, media, pharmaceuticals, and insurance. In August 2019, the government announced a new package of liberalization measures and brought a number of sectors including coal mining and contract manufacturing under the automatic route.

FDI inflows were mostly directed towards the largest metropolitan areas – Delhi, Mumbai, Bangalore, Hyderabad, Chennai – and the state of Gujarat. The services sector garnered the largest percentage of FDI. Further FDI statistics are available at: http://dipp.nic.in/publications/fdi–statistics. 

Other Investment Policy Reviews

OECD’s Indian Economic Snapshot: http://www.oecd.org/economy/india-economic-snapshot/ 

WTO Trade Policy Review: https://www.wto.org/english/tratop_e/tpr_e/tp503_e.htm 

2015-2020 Government of India Foreign Trade Policy: http://dgft.gov.in/ForeignTradePolicy 

Business Facilitation

DPIIT is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view national priorities and socio- economic objectives. While individual lead ministries look after the production, distribution, development and planning aspects of specific industries allocated to them, DPIIT is responsible for overall industrial policy. It is also responsible for facilitating and increasing the FDI flows to the country.

Invest India  is the official investment promotion and facilitation agency of the Government of India, which is managed in partnership with DPIIT, state governments, and business chambers. Invest India specialists work with investors through their investment lifecycle to provide support with market entry strategies, industry analysis, partner search, and policy advocacy as required. Businesses can register online through the Ministry of Corporate Affairs website: http://www.mca.gov.in/ . After the registration, all new investments require industrial approvals and clearances from relevant authorities, including regulatory bodies and local governments. To fast-track the approval process, especially in the case of major projects, Prime Minister Modi started the Pro-Active Governance and Timely Implementation (PRAGATI initiative) – a digital, multi-modal platform to speed the government’s approval process. As of January 2020, a total of 275 project proposals worth around $173 billion across ten states were cleared through PRAGATI. Prime Minister Modi personally monitors the process to ensure compliance in meeting PRAGATI project deadlines. The government also launched an Inter-Ministerial Committee in late 2014, led by the DPIIT, to help track investment proposals that require inter-ministerial approvals. Business and government sources report this committee meets informally and on an ad hoc basis as they receive reports of stalled projects from business chambers and affected companies.

Outward Investment

The Ministry of Commerce’s India Brand Equity Foundation (IBEF) claimed in March 2020 that outbound investment from India had undergone a considerable change in recent years in terms of magnitude, geographical spread, and sectorial composition. Indian firms invest in foreign markets primarily through mergers and acquisition (M&A). According to a Care Ratings study, corporate India invested around $12.25 billion in overseas markets between April and December 2020. The investment was mostly into wholly owned subsidiaries of companies. In terms of country distribution, the dominant destinations were the Unites States ($2.36 billion), Singapore ($2.07 billion), Netherlands ($1.50 billion), British Virgin Islands ($1.37 billion), and Mauritius ($1.30 million).

India adopted a new model Bilateral Investment Treaty (BIT) in December 2015, following several adverse rulings in international arbitration proceedings. The new model BIT does not allow foreign investors to use investor-state dispute settlement methods, and instead requires foreign investors first to exhaust all local judicial and administrative remedies before entering international arbitration. The Indian government also served termination notices for existing BITs with 73 countries.

In September 2018, Belarus became the first country to execute a new BIT with India, based on the new model BIT, followed by the Taipei Cultural & Economic Centre (TECC) in December 2019, and Brazil in January 2020. India has also entered into a BIT negotiation with the Philippines and joint interpretative statements are under discussion with Iran, Switzerland, Morocco, Kuwait, Ukraine, UAE, San Marino, Hong Kong, Israel, Mauritius, and Oman.

Currently 14 BITs are in force. The Ministry of Finance said the revised model BIT will be used for the renegotiation of existing and any future BITs and will form the investment chapter in any Comprehensive Economic Cooperation Agreements (CECAs)/Comprehensive Economic Partnership Agreements (CEPAs)/Free Trade Agreements (FTAs).

The complete list of agreements can be found at: https://investmentpolicy.unctad.org/international-investment-agreements/countries/96/india 

Bilateral Taxation Treaties

India has a bilateral taxation treaty with the United States, available at: https://www.irs.gov/pub/irs–trty/india.pdf

https://www.irs.gov/pub/irs–trty/india.pdf

Transparency of the Regulatory System

Some government policies are written in a way that can be discriminatory to foreign investors or favor domestic industry. For example, approval in 2021 for higher FDI thresholds in the insurance sector came with a requirement of “Indian management and control.” On most occasions the rules are framed after thorough discussions by government authorities and require the approval of the cabinet and, in some cases, the Parliament as well. Policies pertaining to foreign investments are framed by DPIIT, and implementation is undertaken by lead federal ministries and sub-national counterparts. However, in some instances the rules have been framed without following any consultative process.

In 2017, India began assessing a six percent “equalization levy,” or withholding tax, on foreign online advertising platforms with the ostensible goal of “equalizing the playing field” between resident service suppliers and non-resident service suppliers. However, its provisions did not provide credit for taxes paid in other countries for services supplied in India. In February 2020, the FY 2020-21 budget included an expansion of the “equalization levy,” adding a two percent tax to the equalization levy on foreign e-commerce and digital services provider companies. Neither the original 2017 levy, nor the additional 2020 two percent tax applied to Indian firms. In February 2021, the FY 2021-22 budget included three amendments “clarifying” the 2020 equalization levy expansion that will significantly extend the scope and potential liability for U.S. digital and e-commerce firms. The changes to the levy announced in 2021 will be implemented retroactively from April 2020. The 2020 and 2021 changes were enacted without prior notification or an opportunity for public comment.

The Indian Accounting Standards were issued under the supervision and control of the Accounting Standards Board, a committee under the Institute of Chartered Accountants of India (ICAI), and has government, academic, and professional representatives. The Indian Accounting Standards are named and numbered in the same way as the corresponding International Financial Reporting Standards. The National Advisory Committee on Accounting Standards recommends these standards to the Ministry of Corporate Affairs, which all listed companies must then adopt. These can be accessed at: http://www.mca.gov.in/MinistryV2/Stand.html 

International Regulatory Considerations

India is a member of the South Asia Association for Regional Cooperation (SAARC), an eight- member regional block in South Asia. India’s regulatory systems are aligned with SAARC’s economic agreements, visa regimes, and investment rules. Dispute resolution in India has been through tribunals, which are quasi-judicial bodies. India has been a member of the WTO since 1995, and generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade; however, at times there are delays in publishing the notifications. The Governments of India and the United States cooperate in areas such as standards, trade facilitation, competition, and antidumping practices.

Legal System and Judicial Independence

India adopted its legal system from English law and the basic principles of the Common Law as applied in the UK are largely prevalent in India. However, foreign companies need to make adaptations for Indian Law and the Indian business culture when negotiating and drafting contracts in India to ensure adequate protection in case of breach of contract. The Indian judiciary provides for an integrated system of courts to administer both central and state laws. The judicial system includes the Supreme Court as the highest national court, as well as a High Court in each state or a group of states which covers a hierarchy of subordinate courts. Article 141 of the Constitution of India provides that a decision declared by the Supreme Court shall be binding on all courts within the territory of India. Apart from courts, tribunals are also vested with judicial or quasi-judicial powers by special statutes to decide controversies or disputes relating to specified areas.

Courts have maintained that the independence of the judiciary is a basic feature of the Constitution, which provides the judiciary institutional independence from the executive and legislative branches.

The government has a policy framework on FDI, which is updated every year and formally notified as the Consolidated FDI Policy ( http://dipp.nic.in/foreign-direct–investment/foreign-direct–investment-policy ). DPIIT makes policy pronouncements on FDI through Consolidated FDI Policy Circular/Press Notes/Press Releases which are notified by the Ministry of Finance as amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 under the Foreign Exchange Management Act, 1999 (42 of 1999) (FEMA). These notifications take effect from the date of issuance of the Press Notes/ Press Releases, unless specified otherwise therein. In case of any conflict, the relevant Notification under Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 will prevail. The payment of inward remittance and reporting requirements are stipulated under the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 issued by the Reserve Bank of India (RBI). The regulatory framework, over a period, thus, consists of FEMA and Rules/Regulations thereunder, Consolidated FDI Policy Circulars, Press Notes, Press Releases, and Clarifications.

The government has introduced a “Make in India” program. “Self-Reliant India” program, as well as investment policies designed to promote domestic manufacturing and attract foreign investment. “Digital India” aimed to open up new avenues for the growth of the information technology sector. The “Start-up India” program created incentives to enable start-ups to become commercially viable businesses and grow. The “Smart Cities” project was launched to open new avenues for industrial technological investment opportunities in select urban areas.

Competition and Anti-Trust Laws

The central government has been successful in establishing independent and effective regulators in telecommunications, banking, securities, insurance, and pensions. The Competition Commission of India (CCI), India’s antitrust body, reviews cases against cartelization and abuse of dominance as well as conducts capacity-building programs for bureaucrats and business officials. Currently, the Commission’s investigations wing is required to seek the approval of the local chief metropolitan magistrate for any search and seizure operations. The Securities and Exchange Bureau of India (SEBI) enforces corporate governance standards and is well-regarded by foreign institutional investors. The RBI, which regulates the Indian banking sector, is also held in high regard. Some Indian regulators, including SEBI and the RBI, engage with industry stakeholders through periods of public comment, but the practice is not consistent across the government.

Expropriation and Compensation

Tax experts confirm that India does not have domestic expropriation laws in place. Legislative authority does exist in the form of the retroactive taxation, a measure introduced in 2012 and that has been defended despite government assurances of not introducing new retroactive taxes. The Indian government has been divesting from state owned enterprises (SOEs) since 1991. In February 2021, the Finance Minister detailed an ambitious program to privatize roughly $24 billion in SOEs and public sector assets to both help finance the FY 2021-22 budget without increasing taxes and reducing the role of the government in the economy.

Dispute Settlement

India made resolving contract disputes and insolvency easier with the enactment and implementation of the Insolvency and Bankruptcy Code (IBC). Among the areas where India has improved the most in the World Bank’s Ease of Doing Business Ranking the past three years has been under the resolving insolvency metric. The World Bank Report noted that the 2016 law introduced the option of insolvency resolution for commercial entities as an alternative to liquidation or other mechanisms of debt enforcement, reshaping the way insolvent companies can restore their financial well-being or close down. The Code put in place effective tools for creditors to successfully negotiate and increased their ability to receive payments. As a result, the overall recovery rate for creditors jumped from 26.5 to 71.6 cents on the dollar and the time taken for resolving insolvency also was reduced significantly from 4.3 years to 1.6 years. With these changes, India became the highest performer in South Asia in this category and exceeded the average for OECD high-income economies

India enacted the Arbitration and Conciliation Act in 1996, based on the United Nations Commission on International Trade Law model, as an attempt to align its adjudication of commercial contract dispute resolution mechanisms with global standards. The government established the International Center for Alternative Dispute Resolution (ICADR) as an autonomous organization under the Ministry of Law and Justice to promote the settlement of domestic and international disputes through alternate dispute resolution. The World Bank has also funded ICADR to conduct training for mediators in commercial dispute settlement.

Judgments of foreign courts have been enforced under multilateral conventions, including the Geneva Convention. India is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). It is not unusual for Indian firms to file lawsuits in domestic courts in order to delay paying an arbitral award. Several cases are currently pending, the oldest of which dates to 1983, and the latest case is that of Amazon Vs. Future Retail, in which Amazon also received an interim award in its favour from the Singapore International Arbitration Centre. Future Retail refused to accept the findings and initiated litigation in Indian courts. India is not a member state to the International Centre for the Settlement of Investment Disputes (ICSID).

The Permanent Court of Arbitration (PCA) at The Hague and the Indian Law Ministry agreed in 2007 to establish a regional PCA office in New Delhi, although it remains pending. The office would provide an arbitration forum to match the facilities offered at The Hague but at a lower cost.

In November 2009, the Department of Revenue’s Central Board of Direct Taxes established eight dispute resolution panels across the country to settle the transfer-pricing tax disputes of domestic and foreign companies. In 2016 the government also presented amendments to the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act to establish specialized commercial divisions within domestic courts to settle long-pending commercial disputes.

Investor-State Dispute Settlement

According to the United Nations Conference on Trade and Development, India has been a respondent state for 25 investment dispute settlement cases, of which 13 remain pending. Case details can be accessed at https://investmentpolicy.unctad.org/investment-dispute-settlement/country/96/india .

Though India is not a signatory to the ICSID Convention, current claims by foreign investors against India can be pursued through the ICSID Additional Facility Rules, the UN Commission on International Trade Law (UNCITRAL Model Law) rules, or via ad hoc proceedings.

International Commercial Arbitration and Foreign Courts

Alternate Dispute Resolution (ADR)

Since formal dispute resolution is expensive and time consuming, many businesses choose methods, including ADR, for resolving disputes. The most used ADRs are arbitration and mediation. India has enacted the Arbitration and Conciliation Act based on the UNCITRAL Model Laws of Arbitration. Experts agree that the ADR techniques are extra-judicial in character and emphasize that ADR cannot displace litigation. In cases that involve constitutional or criminal law, traditional litigation remains necessary.

Dispute Resolutions Pending

An increasing backlog of cases at all levels reflects the need for reform of the dispute resolution system, whose infrastructure is characterized by an inadequate number of courts, benches, and judges; inordinate delays in filling judicial vacancies; and a very low rate of 14 judges per one million people.

Bankruptcy Regulations

The introduction and implementation of the IBC in 2016 led to an overhaul of the previous framework on insolvency and paved the way for much-needed reforms. The IBC created a uniform and comprehensive creditor-driven insolvency resolution process that encompasses all companies, partnerships, and individuals (other than financial firms). According to the World Bank Doing Business Report, after the implementation of the IBC, the time taken to for resolving insolvency was reduced significantly from 4.3 years to 1.6 years. The law, however, does not provide for U.S. style Chapter 11 bankruptcy provisions.

In August 2016, the Indian Parliament passed amendments to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and the Debt Recovery Tribunals Act. These amendments targeted helping banks and financial institutions recover loans more effectively, encouraging the establishment of more asset reconstruction companies (ARCs), and revamping debt recovery tribunals. Union Finance Minister Nirmala Sitharaman, while presenting the FY 2021-22 budget, proposed setting up an ARC, or “bad bank”, to address perennial non-performing assets (NPAs) in the public banking sector.

The regulatory environment in terms of foreign investment has been eased to make it investor friendly. The measures taken by the Government are directed to open new sectors for foreign direct investment, increase the sectoral limit of existing sectors, and simplifying other conditions of the FDI policy. The Indian government has issued guarantees to investments but only in cases of strategic industries.

Foreign Trade Zones/Free Ports/Trade Facilitation

The government established several foreign trade zone initiatives to encourage export-oriented production. These include Special Economic Zones (SEZs), Export Processing Zones (EPZs), Software Technology Parks (STPs), and Export Oriented Units (EOUs). EPZs are industrial parks with incentives for foreign investors in export-oriented businesses. STPs are special zones with similar incentives for software exports. EOUs are industrial companies, established anywhere in India, that export their entire production and are granted the following: duty-free import of intermediate goods, income tax holidays, exemption from excise tax on capital goods, components, and raw materials, and a waiver on sales taxes. According to the Ministry of Commerce and Industry, as of October 2020, 426 SEZ’s have been approved and 262 SEZs were operational. SEZs are treated as foreign territory — businesses operating within SEZs are not subject to customs regulations nor have FDI equity caps. They also receive exemptions from industrial licensing requirements and enjoy tax holidays and other tax breaks. In 2018, the Indian government announced guidelines for the establishment of the National Industrial and Manufacturing Zones (NIMZs), envisaged as integrated industrial townships to be managed by a special purpose vehicle and headed by a government official. So far, three NIMZs have been accorded final approval and 13 have been accorded in-principal approval. In addition, eight investment regions along the Delhi-Mumbai Industrial Corridor (DIMC) have also been established as NIMZs. These initiatives are governed by separate rules and granted different benefits, details of which can be found at: http://www.sezindia.nic.in,   https://www.stpi.in/   http://www.fisme.org.in/export_schemes/DOCS/B–

1/EXPORT%20ORIENTED%20UNIT%20SCHEME.pdf and http://www.makeinindia.com/home. 

The GOI’s revised Foreign Trade Policy, which will be effective for five years starting April 1, 2021, is expected to include a new regionally focused District Export Hubs initiative in addition to existing SEZs and NIMZs

Performance and Data Localization Requirements

Preferential Market Access (PMA) for government procurement has created substantial challenges for foreign firms operating in India. State-owned “Public Sector Undertakings” and the government accord a 20 percent price preference to vendors utilizing more than 50 percent local content. However, PMA for government procurement limits access to the most cost effective and advanced ICT products available. In December 2014, PMA guidelines were revised and reflect the following updates:

1. Current guidelines emphasize that the promotion of domestic manufacturing is the objective of PMA, while the original premise focused on the linkages between equipment procurement and national security.

2. Current guidelines on PMA implementation are limited to hardware procurement only. Former guidelines were applicable to both products and services.

3. Current guidelines widen the pool of eligible PMA bidders, to include authorized distributors, sole selling agents, authorized dealers or authorized supply houses of the domestic manufacturers of electronic products, in addition to OEMs, provided they comply with the following terms:

a. The bidder shall furnish the authorization certificate by the domestic manufacturer for selling domestically manufactured electronic products.

b. The bidder shall furnish the affidavit of self-certification issued by the domestic manufacturer to the procuring agency declaring that the electronic product is domestically manufactured in terms of the domestic value addition prescribed.

c. It shall be the responsibility of the bidder to furnish other requisite documents required to be issued by the domestic manufacturer to the procuring agency as per the policy.

4. The current guidelines establish a ceiling on fees linked with the complaint procedure. There would be a complaint fee of INR 200,000 ($3,000) or one percent of the value of the Domestically Manufactured Electronic Product being procured, subject to a maximum of INR 500,000 ($7,500), whichever is higher.

In January 2017, the Ministry of Electronics & Information Technology (MeitY) issued a draft notification under the PMA policy, stating a preference for domestically manufactured servers in government procurement. A current list of PMA guidelines, notified products, and tendering templates can be found on MeitY’s website: http://meity.gov.in/esdm/pma. 

Research and Development

The Government of India allows for 100 percent FDI in research and development through the automatic route.

Data Storage & Localization

In April 2018, the RBI, announced, without prior stakeholder consultation, that all payment system providers must store their Indian transaction data only in India. The RBI mandate went into effect on October 15, 2018, despite repeated requests by industry and U.S. officials for a delay to allow for more consultations. In July 2019, the RBI, again without prior stakeholder consultation, retroactively expanded the scope of its 2018 data localization requirement to include banks, creating potential liabilities going back to late 2018. RBI policy overwhelmingly and disproportionately has affected U.S. banks and investors, who depend on the free flow of data to both achieve economies of scale and to protect customers by providing global real-time monitoring and analysis of fraud trends and cybersecurity. U.S. payments companies have been able to implement the mandate for the most part, though at great cost and potential damage to the long-term security of their Indian customer base, which will receive fewer services and no longer benefit from global fraud detection and anti-money-laundering/combatting the financing of terrorism (AML/CFT) protocols. Similarly, U.S. banks have been able to comply with RBI’s expanded mandate, though incurring significant compliance costs and increased risk of cybersecurity vulnerabilities.

In addition to the RBI data localization directive for payments companies and banks, the government formally introduced its draft Personal Data Protection Bill (PDPB) in December 2019 which has remained pending in Parliament. The PDPB would require “explicit consent” as a condition for the cross-border transfer of sensitive personal data, requiring users to fill out separate forms for each company that held their data. Additionally, Section 33 of the bill would require a copy of all “sensitive personal data” and “critical personal data” to be stored in India, potentially creating redundant local data storage. The localization of all “sensitive personal data” being processed in India could directly impact IT exports. In the current draft no clear criteria for the classification of “critical personal data” has been included. The PDPB also would grant wide authority for a newly created Data Protection Authority to define terms, develop regulations, or otherwise provide specifics on key aspects of the bill after it becomes a law. Reports on Non-Personal Data and the implementation of a New Information Technology Rule 2021 with Intermediary Guidelines and Digital Media Ethics Code added further uncertainty to how existing rules will interact with the PDPB and how non-personal data will be handled. 5.Protection of Property Rights

Real Property

In India, a registered sales deed does not confer title of land ownership and is merely a record of the sales transaction. It only confers presumptive ownership, which can still be disputed. The title is established through a chain of historical transfer documents that originate from the land’s original established owner. Accordingly, before purchasing land, buyers should examine all the documents that establish title from the original owner. Many owners, particularly in urban areas, do not have access to the necessary chain of documents. This increases uncertainty and risks in land transactions.

Several cities, including the metropolitan cities of Delhi, Kolkata, Mumbai, and Chennai, have grown according to a master plan registered with the central government’s Ministry of Urban Development. Property rights are generally well-enforced in such places, and district magistrates — normally senior local government officials — notify land and property registrations. Banks and financial institutions provide mortgages and liens against such registered property.

In other urban areas, and in areas where illegal settlements have been established, titling often remains unclear. As per the Department of Land Resources, in 2008 the government launched the National Land Records Modernization Program (NLRMP) to clarify land records and provide landholders with legal titles. The program requires the government to survey an area of approximately 2.16 million square miles, including over 430 million rural households, 55 million urban households, and 430 million land records. Initially scheduled for completion in 2016, the program is now scheduled to conclude in 2021.

Though land is a state government (sub-national) subject, “acquisition and requisitioning of property” is in the concurrent list and so both the Indian Parliament and state legislatures can make laws on this subject. Land acquisition in India is governed by the Land Acquisition Act (2013), which entered into force in 2014, and continues to be a complicated process due to the lack of an effective legal framework. Land sales require adequate compensation, resettlement of displaced citizens, and 70 percent approval from landowners. The displacement of poorer citizens is politically challenging for local governments.

Foreign and domestic private entities are permitted to establish and own businesses in trading companies, subsidiaries, joint ventures, branch offices, project offices, and liaison offices, subject to certain sector-specific restrictions. The government does not permit foreign investment in real estate, other than company property used to conduct business and for the development of most types of new commercial and residential properties. Foreign Institutional Investors (FIIs) can now invest in initial public offerings (IPOs) of companies engaged in real estate. They can also participate in pre-IPO placements undertaken by such real estate companies without regard to FDI stipulations.

Businesses that intend to build facilities on land they own are also required to take the following steps: register the land, seek land use permission if the industry is located outside an industrially zoned area, obtain environmental site approval, seek authorization for electricity and financing, and obtain appropriate approvals for construction plans from the respective state and municipal authorities. Promoters must also obtain industry-specific environmental approvals in compliance with the Water and Air Pollution Control Acts. Petrochemical complexes, petroleum refineries, thermal power plants, bulk drug makers, and manufacturers of fertilizers, dyes, and paper, among others, must obtain clearance from the Ministry of Environment and Forests.

In 2016, India introduced its first regulator in the real estate sector in the form of the Real Estate Act. The Real Estate Act, 2016 aims to protect the rights and interests of consumers and promote uniformity and standardization of business practices and transactions in the real estate sector. Details are available at: http://mohua.gov.in/cms/TheRealEstateAct2016.php 

The Foreign Exchange Management Regulations and the Foreign Exchange Management Act set forth the rules that allow foreign entities to own immoveable property in India and convert foreign currencies for the purposes of investing in India. These regulations can be found at: https://www.rbi.org.in/scripts/Fema.aspx . Foreign investors operating under the automatic route are allowed the same rights as an Indian citizen for the purchase of immovable property in India in connection with an approved business activity.

Traditional land use rights, including communal rights to forests, pastures, and agricultural land, are sanctioned according to various laws, depending on the land category and community residing on it. Relevant legislation includes the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act 2006, the Tribal Rights Act, and the Tribal Land Act.

Intellectual Property Rights

India remained on the Priority Watch List in the 2020 Special 301 Report due to concerns over weak intellectual property (IP) protection and enforcement.  The 2020 Review of Notorious Markets for Counterfeiting and Piracy includes physical and online marketplaces located in or connected to India.  The United States and India have continued to engage on a range of IP challenges facing U.S. companies in India with the intention of creating stronger IP protection and enforcement in India.

In the field of copyright, procedural hurdles, problematic policies, and effective enforcement remained concerns.  In February 2019, the Cinematograph (Amendment) Bill, which would criminalize illicit camcording of films, was tabled in Parliament and remains pending.  The expansive granting of licenses under Chapter VI of the Indian Copyright Act and overly broad exceptions for certain uses have raised concerns regarding the strength of copyright protection and complicated the market for music licensing.  In June 2020, the Copyright Board was merged with the Intellectual Property Appellate Board.  The lack of a functional copyright board had previously created uncertainty regarding how IP royalties were collected and distributed.

In 2019, the DPIIT proposed draft Copyright Amendment Rules that would broaden the scope of statutory licensing to encompass not only radio and television broadcasting but also online broadcasting, despite a high court ruling earlier in 2019 that held that statutory broadcast licensing does not include online broadcasts.  If implemented, the Amendment Rules would have severe implications for Internet content-related right holders.

In the area of patents, a number of factors negatively affect stakeholders’ perception of India’s overall IP regime, investment climate, and innovation goals.  The potential threat of compulsory licenses and patent revocations, and the narrow patentability criteria under the Indian Patent Act, burden companies across different sectors.  Patent applications continue to face expensive and time consuming pre- and post-grant oppositions and excessive reporting requirements.  In October 2020, India issued a revised “Statement of Working of Patents” (Form 27).  The United States is monitoring whether the revision addresses concerns previously raised by innovators over Form 27’s burdensome nature and required disclosure of sensitive business information.

While certain administrative decisions in past years have upheld patent rights, and specific tools and remedies do exist in India to support the rights of a patent holder, concerns remain over revocations and other challenges to patents, especially patents for agriculture biotechnology and pharmaceutical products. In particular, the United States continues to monitor India’s application of its compulsory licensing law. Moreover, the Indian Supreme Court’s 2013 decision that India’s Patent Law created a second tier of requirements for patenting certain technologies, such as pharmaceuticals, continues to be of concern as it may limit the patentability in India for an array of potentially beneficial innovations.

India currently lacks an effective system for protecting against unfair commercial use, as well as unauthorized disclosure, of undisclosed tests or other data generated to obtain marketing approval for pharmaceutical and agricultural products. The U.S. government and stakeholders have also raised concerns with respect to allegedly infringing pharmaceuticals being marketed without advance notice or opportunity for parties to resolve their IP disputes.

U.S. and Indian companies have expressed interest in eliminating gaps in India’s trade secrets regime, such as through the adoption of standalone trade secrets legislation. In 2016, India’s National Intellectual Property Rights Policy called for trade secrets to serve as an “important area of study for future policy development,” but India has not yet prioritized this work.

Developments Strengthening the Rights of IP Holders

In terms of progress in patent examination, India issued a revised Manual of Patent Office Practice and Procedure in November 2019 that requires patent examiners to look to the World Intellectual Property Organization’s Centralized Access to Search and Examination (CASE) system and Digital Access Service (DAS) to find prior art and other information filed by patent applicants in other jurisdictions.

Other developments over the past year strengthening the rights of IP holders include India’s continued efforts to reduce delays and backlogs of patent and trademark applications, the Cell for IPR Promotion and Management’s (CIPAM) promotion of IP awareness and commercialization throughout India, and ongoing efforts to improve IP enforcement, particularly at the state level. However, state-level IP enforcement remains uneven in India, with some states conducting enforcement activities and others falling short in this regard.

Capital Markets and Portfolio Investment

According to media reports, India climbed two notches in 2020 to take the eighth spot among the world’s top stock markets as equities crossed the $2.5 trillion market capitalization mark on December 28, 2020 for the first time. The previous high was in January 2018 when market capitalization reached $2.47 trillion. 2020 saw 15 initial public offer (IPO) issues raising over $3.8 billion (INR 266.11 billion), a 115.3 percent rise over $1.77 billion (INR 123.61 billion) raised in 2019 through 16 IPO issues.

The Securities and Exchange Board of India (SEBI) is considered one of the most progressive and well-run of India’s regulatory bodies.  It regulates India’s securities markets, including enforcement activities, and is India’s direct counterpart to the U.S. Securities and Exchange Commission (SEC).  SEBI oversees three national exchanges: the BSE Ltd. (formerly the Bombay Stock Exchange), the National Stock Exchange (NSE), and the Metropolitan Stock Exchange. SEBI also regulates the three national commodity exchanges: the Multi Commodity Exchange (MCX), the National Commodity & Derivatives Exchange Limited, and the National Multi-Commodity Exchange.

Foreign venture capital investors (FVCIs) must register with SEBI to invest in Indian firms. They can also set up domestic asset management companies to manage funds. All such investments are allowed under the automatic route, subject to SEBI and RBI regulations, and to FDI policy. FVCIs can invest in many sectors, including software, information technology, pharmaceuticals and drugs, biotechnology, nanotechnology, biofuels, agriculture, and infrastructure.

Companies incorporated outside India can raise capital in India’s capital markets through the issuance of Indian Depository Receipts (IDRs) based on SEBI guidelines. Standard Chartered Bank, a British bank which was the first and only foreign entity to list in India in June 2010, delisted from the domestic exchanges in June 2020. Experts attribute the lack of interest in IDR to initial entry barriers, lack of clarity on conversion of the IDR holding into overseas shares, lack of tax clarity, and the regulator’s failure to popularize the product.

External commercial borrowing (ECB), or direct lending to Indian entities by foreign institutions, is allowed if it conforms to parameters such as minimum maturity; permitted and non-permitted end-uses; maximum all-in-cost ceiling as prescribed by the RBI; funds are used for outward FDI or for domestic investment in industry, infrastructure, hotels, hospitals, software, self-help groups or microfinance activities, or to buy shares in the disinvestment of public sector entities. The rules are published by the RBI: https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=47736.

According to RBI data, external commercial borrowings (ECBs) by corporations reached $36.35 billion in 2020. This was the second highest inflow of offshore loans in a calendar year, following $50.51 billion raised in 2019. The monthly borrowing dropped to a multi-year low of $0.9 billion in April when the lockdown brought both economic and lending activities to a standstill. It then improved to $5.22 billion in September, driven by funds-raising by Reliance Industries. Non-banking financial companies (NBFC) also increased borrowing and corporations raised $1.6 billion through the issuance of rupee-denominated bonds.

The RBI has taken a number of steps in the past few years to bring the activities of the offshore Indian rupee market in Non-Deliverable Forwards (NDF) onshore, in order to deepen domestic markets, enhance downstream benefits, and generally obviate the need for an NDF market. FPIs with access to currency futures or the exchange-traded currency options market can hedge onshore currency risks in India and may directly trade in corporate bonds.

The RBI allowed banks to freely offer foreign exchange quotes to non-resident Indians at all times and said trading on rupee derivatives would be allowed and settled in foreign currencies in the International Financial Services Centers (IFSCs). In June 2020, the RBI allowed foreign branches of Indian banks and branches located in the IFSC to participate in the NDF. With the rupee trading volume in the offshore market higher than the onshore market, RBI felt the need to limit the impact of the NDF market and curb volatility in the movement of the rupee.

The International Financial Services Centre at Gujarat International Financial Tech-City (GIFT City) in Gujarat is being developed to compete with global financial hubs. The BSE was the first to start operations there, in January 2016. NSE domestic banks and foreign banks have started IFSC banking units in GIFT city. As part of its Budget 2020 proposal, the government proposed establishing an international bullion exchange at IFSC, which would lead to better price discovery of gold, create more jobs, and enhance India’s position in such markets.

Money and Banking System

The public sector remains predominant in the banking sector, with public sector banks (PSBs) accounting for about 66 percent of total banking sector assets. However, the share of public banks has fallen sharply in the last five years (from 74.2 percent in 2015 to 59.8 percent in 2020), primarily driven by stressed balance sheets and non-performing loans. Also, several new licenses were granted to private financial entities (two new universal bank licenses and 10 small finance bank licenses) in the past few years. The government announced plans in 2021 to privatize two PSBs. This follows Indian authorities consolidating 10 public sector banks into four in 2019, which reduced the total number of public sector banks from 18 to 12. Although most large PSBs are listed on exchanges, the government’s stakes in these banks often exceeds the 51 percent legal minimum. Aside from the large number of state-owned banks, directed lending and mandatory holdings of government paper are key facets of the banking sector. The RBI requires commercial banks and foreign banks with more than 20 branches to allocate 40 percent of their loans to priority sectors which include agriculture, small and medium enterprises, export-oriented companies, and social infrastructure. Additionally, all banks are required to invest 18 percent of their net demand and time liabilities in government securities.

PSBs continue to face two significant hurdles: capital constraints and poor asset quality. As of September 2020, gross non-performing loans represented 7.5 percent of total loans in the banking system, with the public sector banks having a larger share at 9.7 percent of their loan portfolio. The PSBs’ asset quality deterioration in recent years has been driven by their exposure to a broad range of industrial sectors including infrastructure, metals and mining, textiles, and aviation. The COVID-19 crisis further exacerbated the stress, with NPAs likely to rise as the forbearance period ends. The government announced its intention to set up an asset reconstruction company to take over legacy stressed assets from bank balance sheets. With IBC in place, banks were making progress in non-performing asset recognition and resolution. However, the IBC Code was suspended following the onset of COVID-19 through March 2021 to help businesses cope with the economic disruptions caused by the pandemic.

To address asset quality challenges faced by public sector banks, the government injected $32 billion into public sector banks in recent years. The capitalization largely aimed to address the capital inadequacy of public sector banks and marginally provide for growth capital. Following the recapitalization, public sector banks’ total capital adequacy ratio (CAR) improved to 13.5 percent in September 2020 from 12.9 in March 2020.

Women in the Financial Sector

Women’s lack of sufficient access to finance remained a major impediment to women’s entrepreneurship and participation in the workforce. According to experts, women are more likely than men to lack financial awareness, confidence to approach a financial institution, or possess adequate collateral, often leaving them vulnerable to poor terms of finance. Despite legal protections against discrimination, some banks reportedly remained unwelcoming towards women as customers. The International Finance Corporation (IFC) analysts described Indian women-led Micro, Small, and Medium Enterprises (MSME) as a large but untapped market that has a total finance requirement of $29 billion (72 percent for working capital). However, 70 percent of this demand remained unmet, creating a shortfall of $20 billion. The IFC argued that financial institutions should view this market as a compelling, profitable business segment, not corporate social responsibility or charitable activity.

The government-affiliated think tank NITI Aayog provides information on networking, mentorship, and financing to more than 18,000 members via its Women Entrepreneurship Platform (WEP). The WEP was launched in March 2018, following the 2017 Global Entrepreneurship Summit, that India hosted in partnership with the United States, focused on “Women First and Prosperity for All.” The GOI’s financial inclusion scheme Pradhan Mantri Jan Dhan Yojana (PMJDY) provides universal access to banking facilities with at least one basic banking account for every adult, financial literacy, access to credit, insurance, and pension. As of March 3, 2021, 233 million out of 420 million beneficiaries are women (55 percent.)  In 2015, the Modi government started the Micro Units Development and Refinance Agency Ltd. (MUDRA), which supports the development of micro-enterprises. The initiative encourages women’s participation and offers collateral-free loans of around $15,000 — 70 percent of the beneficiaries are women.

Foreign Exchange and Remittances

Foreign Exchange

The RBI, under the Liberalized Remittance Scheme, allows individuals to remit up to $250,000 per fiscal year (April-March) out of the country for permitted current account transactions (private visit, gift/donation, going abroad on employment, emigration, maintenance of close relatives abroad, business trip, medical treatment abroad, studies abroad) and certain capital account transactions (opening of foreign currency account abroad with a bank, purchase of property abroad, making investments abroad, setting up Wholly Owned Subsidiaries and Joint Ventures outside of India, extending loans). The Indian Rupee or INR is fully convertible only in current account transactions, as regulated under the Foreign Exchange Management Act regulations of 2000 ( https://www.rbi.org.in/Scripts/Fema.aspx ).

Foreign exchange withdrawal is prohibited for remittance of lottery winnings; income from racing, riding or any other hobby; purchase of lottery tickets, banned or proscribed magazines; football pools and sweepstakes; payment of commission on exports made towards equity investment in Joint Ventures or Wholly Owned Subsidiaries of Indian companies abroad; and remittance of interest income on funds held in a Non-Resident Special Rupee Scheme Account ( https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10193#sdi ). Furthermore, the following transactions require the approval of the Central Government: cultural tours; remittance of hiring charges for transponders for television channels under the Ministry of Information and Broadcasting, and Internet Service Providers under the Ministry of Communication and Information Technology; remittance of prize money and sponsorship of sports activity abroad if the amount involved exceeds $100,000; advertisement in foreign print media for purposes other than promotion of tourism, foreign investments and international bidding (over $10,000) by a state government and its public sector undertakings (PSUs); and multi-modal transport operators paying remittances to their agents abroad. RBI approval is required for acquiring foreign currency above certain limits for specific purposes including remittances for: maintenance of close relatives abroad; any consultancy services; funds exceeding 5 percent of investment brought into India or $100,000, whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.

Capital account transactions are open to foreign investors, though subject to various clearances. Non-resident Indian investment in real estate, remittance of proceeds from the sale of assets, and remittance of proceeds from the sale of shares may be subject to approval by the RBI or FIPB.

FIIs may transfer funds from INR to foreign currency accounts and back at market exchange rates. They may also repatriate capital, capital gains, dividends, interest income, and compensation from the sale of rights offerings without RBI approval. The RBI also authorizes automatic approval to Indian industry for payments associated with foreign collaboration agreements, royalties, and lump sum fees for technology transfer, and payments for the use of trademarks and brand names. Royalties and lump sum payments are taxed at 10 percent.

The RBI has periodically released guidelines to all banks, financial institutions, NBFCs, and payment system providers regarding Know Your Customer (KYC) and reporting requirements under Foreign Account Tax Compliance Act (FATCA)/Common Reporting Standards (CRS). The government’s July 7, 2015 notification ( https://rbidocs.rbi.org.in/rdocs/content/pdfs/CKYCR2611215_AN.pdf ) amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, (Rules), for setting up of the Central KYC Records Registry (CKYCR)—a registry to receive, store, safeguard and retrieve the KYC records in digital form of clients.

Remittance Policies

Remittances are permitted on all investments and profits earned by foreign companies in India once taxes have been paid. Nonetheless, certain sectors are subject to special conditions, including construction, development projects, and defense, wherein the foreign investment is subject to a lock-in period. Profits and dividend remittances as current account transactions are permitted without RBI approval following payment of a dividend distribution tax.

Foreign banks may remit profits and surpluses to their headquarters, subject to compliance with the Banking Regulation Act, 1949. Banks are permitted to offer foreign currency-INR swaps without limits for the purpose of hedging customers’ foreign currency liabilities. They may also offer forward coverage to non-resident entities on FDI deployed since 1993.

Sovereign Wealth Funds

In 2016 the Indian government established the National Infrastructure Investment Fund (NIIF), touted as India’s first sovereign wealth fund to promote investments in the infrastructure sector. The government agreed to contribute $3 billion to the fund, while an additional $3 billion will be raised from the private sector primarily from sovereign wealth funds, multilateral agencies, endowment funds, pension funds, insurers, and foreign central banks. In December 2020, NIIF officially closed the Master Fund with $2.34 billion in commitments from other Sovereign Wealth Funds and global pension funds. The NIIF Master Fund is focused on investing in core infrastructure sectors including transportation, energy, and urban infrastructure.

The government owns or controls interests in key sectors with significant economic impact, including infrastructure, oil, gas, mining, and manufacturing. The Department of Public Enterprises ( http://dpe.gov.in ) controls and formulates all the policies pertaining to SOEs and is headed by a minister to whom the senior management reports. The Comptroller and Auditor General audits the SOEs. The government has taken several steps to improve the performance of SOEs, also called Central Public Sector Enterprises (CPSEs), including improvements to corporate governance. This was necessary as the government planned to disinvest its stake from these entities. All the CPSE’s are listed on stock exchanges as the government partially divested its equity from these entities.

According to the Public Enterprise Survey 2018-19, as of March 2019 there were 348 central public sector enterprises (CPSEs) with a total investment of $234 billion, of which 248 are operating CPSEs. The report puts the number of profit-making CPSEs at 178, while 70 CPSEs were incurring losses.

Foreign investments are allowed in CPSEs in all sectors. The Master List of CPSEs can be accessed at http://www.bsepsu.com/list-cpse.asp. While the CPSEs face the same tax burden as the private sector, on issues like procurement of land they receive streamlined licensing that private sector enterprises do not.

Privatization Program

Despite the financial upside to disinvestment in loss-making SOEs, the government has not generally privatized its assets as they have led to job losses in the past, and therefore engendered political risks. Instead, the government adopted a gradual disinvestment policy that dilutes government stakes in public enterprises without sacrificing control. Such disinvestment has been undertaken both as fiscal support and as a means of improving the efficiency of SOEs.

In the FY 2021-22 budget, however, Finance Minister Nirmala Sitharaman unveiled a new Disinvestment/Strategic Disinvestment Policy detailing the government’s intent to privatize most state-owned companies in a phased manner. A few sectors were categorized as strategic sectors where the government plans to maintain a minimal presence. The budget established a disinvestment target of $24 billion for FY2021-22 after disinvestments planned for the prior fiscal year were not completed, many of which the government claimed were negatively impacted by the COVID-19 pandemic.

Foreign institutional investors can participate in the disinvestment programs. The earlier limits for foreign investors were 24 percent of the paid-up capital of the Indian company and 10 percent for non-resident Indians and persons of Indian origin. In the case of public sector banks, the limit is 20 percent of the paid-up capital. For many SOEs there is no bidding process as the shares of the entities being disinvested are sold in the open market. Certain SOEs, however, such as Air India are subject to a structure bidding process.

Among Indian companies there is a general awareness of standards for responsible business conduct. The Ministry of Corporate Affairs (MCA) administers the Companies Act of 2013 and is responsible for regulating the corporate sector in accordance with the law. The MCA is also responsible for protecting the interests of consumers by ensuring competitive markets.

The Companies Act of 2013 also established the framework for India’s corporate social responsibility (CSR) laws. While the CSR obligations are mandated by law, non-government organizations (NGOs) in India also track CSR activities and provide recommendations in some cases for effective use of CSR funds. MCA released the National Guidelines on Responsible Business Conduct, 2018 (NGRBC) on March 13, 2019 to improve the 2011 National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business. The NGRBC aligned with the United Nations Guiding Principles on Business & Human Rights (UNGPs).

Per the Ministry of Corporate Affairs, corporations used all or most of their CSR money in 2020 to combat the COVID-19 pandemic, be it through contributions to the PM CARES Fund or other relief funds; distribution of food, masks, personal protective equipment (PPE) kits; or providing relief material to the needy. About $1 billion was spent during March-May 2020 that was classified as CSR. The tally of eligible companies that spent on CSR in FY 2019 and duly reported it rose to 1,276, compared with 1,246 the previous fiscal and their total CSR spend increased by around 14 percent year on year. Over two-thirds of these spent 2 percent or more of their net profits. (Note: The Companies Act, 2013 mandates that companies spend an average of 2 percent of their average net profit of the preceding three fiscal years. End Note).

India does not adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. There are provisions to promote responsible business conduct throughout the supply chain.

India is not a member of Extractive Industries Transparency Initiative (EITI) nor is it a member of Voluntary Principles on Security and Human Rights.

Additional Resources

Department of State

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

Department of Labor

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

India is a signatory to the United Nation’s Conventions Against Corruption and is a member of the G20 Working Group against corruption. India, with a score of 40, ranked 86 among 180 countries in Transparency International’s 2020 Corruption Perception Index.

Corruption is addressed by the following laws: The Companies Act, 2013; the Prevention of Money Laundering Act, 2002; the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Indian Contract Act, 1872; and the Indian Penal Code of 1860. Anti- corruption laws amended since 2004 have granted additional powers to vigilance departments in government ministries at the central and state levels and elevated the Central Vigilance Commission (CVC) to be a statutory body. In addition, the Comptroller and Auditor General is charged with performing audits on public-private-partnership contracts in the infrastructure sector based on allegations of revenue loss to the exchequer.

Other statutes approved by parliament to tackle corruption include:

The Benami Transactions (Prohibition) Amendment Act of 2016

The Real Estate (Regulation and Development) Act, 2016, enacted in 2017

The Whistleblower Protection Act, 2011 was passed in 2014 but has yet to be operationalized

The Companies Act of 2013 established rules related to corruption in the private sector by mandating mechanisms for the protection of whistle blowers, industry codes of conduct, and the appointment of independent directors to company boards. However, the government has not established any monitoring mechanism, and it is unclear the extent to which these protections have been instituted. No legislation focuses particularly on the protection of NGOs working on corruption issues, though the Whistleblowers Protection Act of 2011 may afford some protection once implemented.

In 2013, Parliament enacted the Lokpal and Lokayuktas Act, which created a national anti- corruption ombudsman and required states to create state-level ombudsmen within one year of the law’s passage. A national ombudsman was finally appointed in March 2019.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

India is a signatory to the United Nations Conventions against Corruption and is a member of the G20 Working Group against Corruption. India is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

The Indian chapter of Transparency International was closed in 2019.

Resources to Report Corruption at the Embassy

Matt Ingeneri

Economic Growth Unit Chief U.S. Embassy New Delhi Shantipath, Chanakyapuri New Delhi +91 11 2419 8000 ingeneripm@state.gov

India is a multiparty, federal, parliamentary democracy with a bicameral legislature.  The president, elected by an electoral college composed of the state assemblies and parliament, is the head of state, and the prime minister is the head of government.  National parliamentary elections are held every five years.  Under the constitution, the country’s 28 states and eight union territories have a high degree of autonomy and have primary responsibility for law and order.  Electors chose President Ram Nath Kovind in 2017 to serve a five-year term.  Following the May 2019 national elections, Prime Minister Modi’s Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) received a larger majority in the lower house of Parliament, or Lok Sabha, than it had won in the 2014 elections and returning Modi for a second term as prime minister.   Observers considered the parliamentary elections, which included more than 600 million voters, to be free and fair, although there were reports of isolated instances of violence.

The government’s first 100 days of its second term were marked by two controversial decisions.  The removal of special constitutional status from the state of Jammu and Kashmir (J&K) and the passage of the Citizenship Amendment Act (CAA).  Protests followed the enactment of the CAA but ended with the onset of COVID-19 in March 2020 and the imposition of a strict national lockdown.  The management of COVID-19 became the dominant issue in 2020 including the drop in economic activity and by December 2020, economic activity started to show signs of positive growth.  The BJP-led government has faced some criticism for its response to the recent surge in COVID-19 cases.

Travelers to India are invited to visit the U.S. Department of State travel advisory website at: https://travel.state.gov/content/passports/en/country/india.html for the latest information and travel resources.

Although there are more than 20 million unionized workers in India, unions still represent less than 5 percent of the total work force. Most of these unions are linked to political parties. Unions are typically strong in state-owned enterprises. A majority of the unionized work force can be found in the railroads, port and dock, banking, and insurance sectors. According to provisional figures form the Ministry of Labor and Employment (MOLE), over 1.74 million workdays were lost to strikes and lockouts during 2018. Labor unrest occurs throughout India, though the reasons and affected sectors vary widely. A majority of the labor problems are the result of workplace disagreements over pay, working conditions, and union representation.

In an effort to reduce the number of labor related statutes, the Indian parliament passed the Code on Wages in 2019. During 2020, the parliament passed the Industrial Relations Code; the Occupational Safety, Health and Working Conditions Code; and the Code on Social Security. Along with the 2019 Code on Wages, the four codes harmonize and simplify India’s 29 existing labor laws with the aim of improving the business environment for both industry and workers. The changes expanded the potential use of contract labor, raised the threshold for small and medium sized enterprise exemptions from 100 to 300 employees, and expanded minimum wage and social security coverage to informal sector workers in agriculture and the growing gig economy, and gave employers greater hiring and firing flexibility. Details of the laws approved by parliament can be accessed at https://labour.gov.in/labour-law-reforms .

In March 2017, the Maternity Benefits Act was amended to increase the paid maternity leave for women from 12 weeks to 26 weeks. The amendment also made it mandatory for all industrial establishments employing 50 or more workers to have a creche for babies to enable nursing mothers to feed the child up to 4 times in a day.

In August 2016, the Child Labor Act was amended establishing a minimum age of 14 years for work and 18 years as the minimum age for hazardous work. In December 2016, the government promulgated legislation enabling employers to pay worker salaries through checks or e-payment in addition to the prevailing practice of cash payment.

There are no reliable unemployment statistics for India due to the informal nature of most employment. During the COVID-19 pandemic experts claimed the unemployment rate spiraled as people in the informal sector lost their jobs. The Centre for Monitoring Indian Economy (CMIE) reported that the average unemployment in the April-June period of 2020 was around 24 percent. during a stringent national lockdown imposed in response to COVID-19. As the lockdown was eased, CMIE estimated the unemployment rate during the August-October period improved to around 7.9 percent.

The government has acknowledged a shortage of skilled labor in high-growth sectors of the economy, including information technology and manufacturing. In response, the government established a Ministry of Skill Development and embarked on a national program to increase skilled labor.

The United States and India signed an Investment Incentive Agreement in 1997. This agreement covered the Overseas Private Investment Corporation (OPIC) and its successor agency, the U.S. International Development Finance Corporation (DFC). The DFC is the U.S. Government’s development finance institution, launched in December 2019, to incorporate OPIC’s programs as well as the Direct Credit Authority of the U.S. Agency for International Development. Since 1974 the DFC (under its predecessor agency, OPIC) has provided support to over 200 projects in India in the form of loans, investment funds, and political risk insurance.

As of March 2021, DFC’s current outstanding portfolio in India comprised more than $2.5 billion across 50 projects. These commitments were concentrated in renewable energy, financial services (including microfinance), and impact investments that include agribusiness and healthcare.

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) 

Cumulative FDI April 2000 to December 2020      

(in USD million)

Source: Inward FDI DIPP, Ministry of Commerce and Industry

Outward investments from India (April – November 2020)

(in USD millions)

Matt Ingeneri
Economic Growth Unit Chief
U.S. Embassy New Delhi
Shantipath, Chanakyapuri New Delhi
+91 11 2419 8000
IngeneriPM@state. gov 

Policies Towards Foreign Direct Investment

Israel is open to foreign investment and the government actively encourages and supports the inflow of foreign capital.

The Israeli Ministry of Economy and Industry’s ‘Invest in Israel’ office serves as the government’s investment promotion agency facilitating foreign investment. ‘Invest in Israel’ offers a wide range of services including guidance on Israeli laws, regulation, taxes, incentives, and costs, and facilitation of business connections with peer companies and industry leaders for new investors. ‘Invest in Israel’ also organizes familiarization tours for potential investors and employs a team of advisors for each region of the world.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Israeli legal system protects the rights of both foreign and domestic entities to establish and own business enterprises, as well as the right to engage in remunerative activity. Private enterprises are free to establish, acquire, and dispose of interests in business enterprises. As part of ongoing privatization efforts, the Israeli government encourages foreign investment in privatizing government-owned entities.

Israel’s policies aim to equalize competition between private and public enterprises, although the existence of monopolies and oligopolies in several sectors, including communications infrastructure, food manufacturing and marketing, and some manufacturing segments, stifles competition. In the case of designated monopolies, defined as entities that supply more than 50 percent of the market, the government controls prices.

Israel established a centralized investment screening (approval) mechanism for certain inbound foreign investments in October 2019. Investments in regulated industries (e.g., banking and insurance) require approval by the relevant regulator. Investments in certain sectors may require a government license. Other regulations may apply, usually on a national treatment basis.

Other Investment Policy Reviews

The World Trade Organization (WTO) conducted its fifth and latest trade policy review of Israel in July 2018. In the past three years, the Israeli government has not conducted any investment policy reviews through the Organization for Economic Cooperation and Development (OECD) or the United Nations Conference on Trade and Development (UNCTAD). The OECD concluded an Economic Survey of Israel in 2020.

The 2020 OECD Economic Survey of Israel can be found at https://www.gov.il/BlobFolder/news/press_23092020_b/he/PressReleases_files_press_23092020_b_file.pdf 

Business Facilitation

The Israeli government is fairly open and receptive to companies wishing to register businesses in Israel. Israel ranked 28th in the “Starting a Business” category of the World Bank’s 2020 Doing Business Report, rising seventeen places from its 2019 ranking. Israel continues to institute reforms to make it easier to do business in Israel, but some challenges remain.

The business registration process in Israel is relatively clear and straightforward. Four procedures are required to register a standard private limited company and take 12 days to complete, on average, according to the Israeli Ministry of Finance. The foreign investor must obtain company registration documents through a recognized attorney with the Israeli Ministry of Justice and obtain a tax identification number for company taxation and for value added taxes (VAT) from the Israeli Ministry of Finance. The cost to register a company averages around USD 1,000 depending on attorney and legal fees.

The Israeli Ministry of Economy and Industry’s “Invest in Israel” website provides useful information for companies interested in starting a business or investing in Israel. The website is http://www.investinisrael.gov.il/Pages/default.aspx .

The Israel Export and International Cooperation Institute is an Israeli government agency operating independently, under the Ministry of Economy, that helps facilitate trade and business opportunities between Israeli and foreign companies. More information on their activities is available at http://www.export.gov.il/eng/About/About/ .

In general, there are no restrictions on Israeli investors seeking to invest abroad. However, investing abroad may be restricted on national security grounds or in certain countries or sectors where the Israeli government deems such investment is not in the national interest.

Israel has bilateral investment treaties in force with Japan, Myanmar, Ukraine, Azerbaijan, Guatemala, China, Ethiopia, Serbia, Montenegro, Uruguay, Mongolia, Thailand, Belarus, Romania, Croatia, El Salvador, Armenia, Slovakia, South Korea, Cyprus, Slovenia, Czech Republic, Moldova, Turkey, Argentina, Kazakhstan, Albania, Georgia, Turkmenistan, Uzbekistan, Bulgaria, Lithuania, Estonia, Latvia, and Poland. Israel has signed bilateral investment treaties with the United Arab Emirates, South Africa, and Germany that are not yet in force.

Israel has free trade agreements with the European Union (EU), European Free Trade Association (a regional trade organization and free trade area consisting of Iceland, Liechtenstein, Norway, and Switzerland), Turkey, Mexico, Canada, Jordan, Egypt, Panama, Ukraine, Colombia, the United Kingdom, and Mercosur (an economic and political bloc comprising Argentina, Brazil, Paraguay, and Uruguay).

The United States and Israel signed a free trade agreement in 1985.

Israel has a bilateral tax treaty with United States. Israel signed its Income Tax Treaty with the United States in 1975.

Transparency of the Regulatory System

Israel promotes open governance and has joined the International Open Government Partnership. The government’s policy is to pursue the goals of transparency and active reporting to the public, public participation, and accountability.

Israel’s regulatory system is transparent. Ministries and regulatory agencies give notice of proposed regulations to the public on a government web site: http://www.knesset.gov.il . The texts of proposed regulations are also published (in Hebrew) on this web site. The government requests comments from the public about proposed regulations.

Israel is a signatory to the WTO Agreement on Government Procurement (GPA), which covers most Israeli government entities and government-owned corporations. Most of the country’s open international public tenders are published in the local press. U.S. companies have won a limited number of government tenders, notably in the energy and communications sectors. However, government-owned corporations make extensive use of selective tendering procedures. In addition, the lack of transparency in the public procurement process discourages U.S. companies from participating in major projects and disadvantages those that choose to compete. Enforcement of the public procurement laws and regulations is not consistent.

Israel is a member of UNCTAD’s international network of transparent investment procedures. ( http://unctad.org/en/pages/home.aspx  ). Foreign and national investors can find detailed information on administrative procedures applicable to investment and income generating operations including the number of steps, name and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time, and legal basis justifying the procedures.

International Regulatory Considerations

Israel is not a member of any major economic bloc but maintains strong economic relations with other economic blocs.

Israeli regulatory bodies in the Ministry of Economy (Standards Institute of Israel), Ministry of Health (Food Control Services), and the Ministry of Agriculture (Veterinary Services and the Plant Protection Service) often adopt standards developed by European standards organizations. Israel’s adoption of European standards rather than international standards results in the market exclusion of certain U.S. products and added costs for U.S. exports to Israel.

Israel became a member of the WTO in 1995. The Ministry of Economy and Industry’s Standardization Administration is responsible for notifying the WTO Committee on Technical Barriers to Trade, and regularly does so.

Legal System and Judicial Independence

Israel has a written and consistently applied commercial law based on the British Companies Act of 1948, as amended. The judiciary is independent, but businesses complain about the length of time required to obtain judgments. The Supreme Court is an appellate court that also functions as the High Court of Justice. Israel does not employ a jury system. Israel established other tribunals to regulate specific issues and disputes in a specific area of law, including labor courts, antitrust issues, and intellectual property related issues.

Laws and Regulations on Foreign Direct Investment

There are few restrictions on foreign investors, except for parts of defense or other industries closed to outside investors on national security grounds. Foreign investors are welcome to participate in Israel’s privatization program.

Israeli courts exercise authority in cases within the jurisdiction of Israel. However, if an agreement between involved parties contains an exclusively foreign jurisdiction, the Israeli courts will generally decline to exercise their authority.

Israel’s Ministry of Economy sponsors the web site “Invest in Israel” at www.investinisrael.gov.il 

The Investment Promotion Center of the Ministry of Economy seeks to encourage investment in Israel. The center stresses Israel’s high marks in innovation, entrepreneurship, and Israel’s creative, skilled, and ambitious workforce. The center also promotes Israel’s strong ties to the United States and Europe.

Competition and Antitrust Laws

Israel adopted its comprehensive competition law in 1988. Israel created the Israel Competition Authority (originally called the Israel Antitrust Authority) in 1994 to enforce the competition law.

Expropriation and Compensation

There have been no known expropriations of U.S.-owned businesses in Israel. Israeli law requires adequate payment, with interest from the day of expropriation until final payment, in cases of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Israel is a member of the International Center for the Settlement of Investment Disputes (ICSID) of the World Bank and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Israel ratified the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958 in 1959.

Investor-State Dispute Settlement

The Israeli government accepts binding international arbitration of investment disputes between foreign investors and the state. Israel’s Arbitration Law of 1968 governs both domestic and international arbitration proceedings in the country. The Israeli Knesset amended the law most recently in 2008. There are no known extrajudicial actions against foreign investors.

International Commercial Arbitration and Foreign Courts

Israel formally institutionalized mediation in 1992 with the amendment of the Courts Law of 1984. The amendment granted courts the authority to refer civil disputes to mediation or arbitration with party consent. The Israeli courts tend to uphold and enforce arbitration agreements. Israel’s Arbitration Law predates the United Nations Commission on International Trade Law.

Bankruptcy Regulations

Israeli Bankruptcy Law is based on several layers, some rooted in Common Law, when Palestine was under the British mandate in 1917-1948. Bankruptcy Law in Israel is mostly based on British law enacted in Palestine in 1936 during the British mandate.

Bankruptcy proceedings are based on the bankruptcy ordinance (1980), which replaced the mandatory ordinance enacted in 1936. Therefore, the bankruptcy law in Israel resembles the British law as it was more or less in 1936. Israel ranks 29th in the World Bank’s 2020 Doing Business Report’s “resolving insolvency” category.

Investment Incentives

The State of Israel encourages both local and foreign investment by offering a wide range of incentives and benefits to investors in industry, tourism, and real estate. Israel’s Ministry of Economy places a priority on investments in hi-tech companies and R&D activities.

Most investment incentives available to Israeli citizens are also available to foreign investors. Israel’s Encouragement of Capital Investments Law, 5719-1959, outlines Israel’s investment incentive programs. The Israel Investment Center (IIC) coordinates the country’s investment incentive programs.

For complete information, potential investors should contact:

Investment Promotion Center
Ministry of Economy
5 Bank of Israel Street,
Jerusalem 91036
Tel: +972-2-666-2607
Website: www.investinisrael.gov.il 
E-mail: investinisrael@economy.gov.il 

Israel Investment Center
Ministry of Economy
5 Bank of Israel Street,
Jerusalem 91036 490
http://economy.gov.il/English/About/Units/Pages/IsraelInvestmentCenter.aspx 
Tel: +972-2-666-2828
Fax: +972-2-666-2905

Foreign Trade Zones/Free Ports/Trade Facilitation

Israel has bilateral Qualifying Industrial Zone (QIZ) Agreements with Egypt and Jordan. The QIZ initiative allows Egypt and Jordan to export products to the United States duty-free, as long as these products contain inputs from Israel (8 percent in the Israel-Jordan QIZ agreement, 10.5 percent in the Israel-Egypt QIZ agreement). Products manufactured in QIZs must comply with strict rules of origin. More information is available at the Israeli Ministry of Economy’s Foreign Trade Administration website: http://economy.gov.il/English/InternationalAffairs/ForeignTradeAdministration/Pages/RegionalCooperation.aspx 

Israel has one free trade zone, the Red Sea port city of Eilat. More information on the Eilat Free Zone is available at: http://economy.gov.il/English/Industry/DevelopmentZoneIndustryPromotion/ZoneIndustryInfo/Pages/EilatNShachoret.aspx  

Performance and Data Localization Requirements

There are no universal performance requirements on investments, but “offset” requirements are often included in sales contracts with the government. In some sectors, there is a requirement that Israelis own a percentage of a company. Israel’s visa and residency requirements are transparent. The Israeli government does not impose preferential policies on exports by foreign investors.

Real Property

Israel has a modern legal system based on British common law that provides effective means for enforcing property and contractual rights. Courts are independent. Israeli civil procedures provide that judgments of foreign courts may be accepted and enforced by local courts. The Israeli judicial system recognizes and enforces secured interests in property. A reliable system of recording such secured interests exists. The Israeli Land Administration, which manages land in Israel on behalf of the government, registers property transactions. Registering or obtaining land rights is a cumbersome process and Israel currently ranks 75th in “Registering Property” according to the World Bank’s 2020 Doing Business Report.

Intellectual Property Rights

The Intellectual Property Law Division and the Israel Patent Office (ILPO), both within the Ministry of Justice, are the principal government authorities overseeing the legal protection and enforcement of intellectual property rights (IPR) in Israel. IPR protection in Israel has undergone many changes in recent decades as the Israeli economy has rapidly transformed into a knowledge-based economy.

In recent years, Israel revised its IPR legal framework several times to comply with newly signed international treaties. Israel took stronger, more comprehensive steps towards protecting IPR, and the government acknowledges that IPR theft costs rights holders millions of dollars per year, reducing tax revenues and slowing economic growth.

The United States removed Israel from the United States Trade Representative (USTR) Special 301 Report in 2014 after Israel passed patent legislation that satisfied the remaining commitments Israel made in a Memorandum of Understanding with the United States in 2010 concerning several longstanding issues regarding Israel’s IPR regime for pharmaceutical products. Israel has not been included in the Special 301 Report or the Notorious Markets List since.

Israel’s Knesset approved Amendment No. 5 to Israel’s Copyright Law of 2007 on January 1, 2019. The amendment aims to establish measures to combat copyright infringement on the internet while preserving the balance among copyright owners, internet users, and the free flow of information and free speech.

In July 2017, the Israeli Knesset passed the New Designs Bill, replacing Israel’s existing but obsolete ordinance governing industrial design. The bill, which came into force in August 2018, brings Israel into compliance with The Hague System for International Registration of Industrial designs.

Nevertheless, the United States remains concerned with the limitations of Israel’s copyright legislation, particularly related to digital copyright matters and with Israel’s interpretation of its commitment to protect data derived from pharmaceutical testing conducted in anticipation of the future marketing of biological products, also known as biologics.

While Israel has instituted several legislative improvements in recent years, the United States continues to urge Israel to strengthen and improve its IPR enforcement regime. Israel lacks specialized courts, common in other countries with advanced IPR regimes. General civil or administrative courts in Israel typically adjudicate IPR cases.

IPR theft, including trade secret misappropriation, can be common and relatively sophisticated in Israel. The European Commission “closely monitors” IP enforcement in Israel. The EC cites inadequate protection of innovative pharmaceutical products and end-user software piracy as the main issues with IPR enforcement in Israel.

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

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

Resources for Rights Holders

Mr. Peter Mehravari
Intellectual Property Attaché for the Middle East & North Africa
U.S. Embassy Abu Dhabi
Tel: +965 2259 1455
E-mail: Peter.Mehravari@trade.gov 

Capital Markets and Portfolio Investment

The Israeli government is supportive of foreign portfolio investment. The Tel Aviv Stock Exchange (TASE) is Israel’s only public stock exchange.

Financial institutions in Israel allocate credit on market terms. For many years, banks issued credit to only a handful of individuals and corporate entities, some of whom held controlling interests in banks. However, in recent years, banks significantly reduced their exposure to large borrowers following the introduction of stronger regulatory restrictions on preferential lending practices.

The primary profit center for Israeli banks is consumer-banking fees. Various credit instruments are available to the private sector and foreign investors can receive credit on the local market. Legal, regulatory, and accounting systems are transparent and conform to international norms, although the prevalence of inflation-adjusted accounting means there are differences from U.S. accounting principles.

In the case of publicly traded firms where ownership is widely dispersed, the practice of “cross-shareholding” and “stable shareholder” arrangements to prevent mergers and acquisitions is common, but not directed particularly at preventing potential foreign investment. Israel has no laws or regulations regarding the adoption by private firms of articles of incorporation or association that limit or prohibit foreign investment, participation, or control.

Money and Banking System

The Bank of Israel (BOI) is Israel’s Central Bank and regulates all banking activity and monetary policy. In general, Israel has a healthy banking system that offers most of the same services as the U.S. banking system. Fees for normal banking transactions are significantly higher in Israel than in the United States and some services do not meet U.S. standards. There are 12 commercial banks and four foreign banks operating in Israel, according to the BOI. Five major banks, led by Bank Hapoalim and Bank Leumi, the two largest banks, dominate Israel’s banking sector. Bank Hapoalim and Bank Leumi control nearly 60 percent of Israel’s credit market. The State of Israel holds 6 percent of Bank Leumi’s shares. All of Israel’s other banks are privatized.

Foreign Exchange and Remittances

Foreign Exchange

Israel completed its foreign exchange liberalization process on January 1, 2003, when it removed the last restrictions on the freedom of institutional investors to invest abroad. The Israeli shekel is a freely convertible currency and there are no foreign currency controls. The BOI maintains the option to intervene in foreign currency trading in the event of movements in the exchange rate not in line with fundamental economic conditions, or if the BOI assesses the foreign exchange market is not functioning appropriately. Israeli citizens can invest without restriction in foreign markets. Foreign investors can open shekel accounts that allow them to invest freely in Israeli companies and securities. These shekel accounts are fully convertible into foreign exchange. Israel’s foreign exchange reserves totaled USD 185 billion at the end of February 2021.

Transfers of currency are protected by Article VII of the International Monetary Fund (IMF) Articles of Agreement: http://www.imf.org/External/Pubs/FT/AA/index.htm#art7 

Remittance Policies

Most foreign currency transactions must be carried out through an authorized dealer. An authorized dealer is a banking institution licensed to arrange, inter alia, foreign currency transactions for its clients. The authorized dealer must report large foreign exchange transactions to the Controller of Foreign Currency. There are no limitations or significant delays in the remittance of profits, debt service, or capital gains.

Sovereign Wealth Funds

Israel passed legislation to establish the Israel Citizens’ Fund, a sovereign wealth fund managed by the BOI, in 2014 to offset the effect of natural gas production on the exchange rate. The original date for beginning the fund’s operations was 2018 but has been postponed until late 2021. The law establishing the fund states that it will begin operating a month after the state’s tax revenues from natural gas exceed USD 307 million (1 billion New Israeli Shekels).

Israel established the Government Companies Authority (GCA) following the passage of the Government Companies Law. The GCA is an auxiliary unit of the Ministry of Finance. It is the administrative agency for state-owned companies in charge of supervision, privatization, and implementation of structural changes. The Israeli state only provides support for commercial SOEs in exceptional cases. The GCA leads the recruitment process for SOE board members. Board appointments are subject to the approval of a committee, which confirms whether candidates meet the minimum board member criteria set forth by law.

The GCA oversees some 100 companies, including commercial and noncommercial companies, government subsidiaries, and companies under mixed government-private ownership. Among these companies are some of the biggest and most complex in the Israeli economy, such as the Israel Electric Corporation, Israel Aerospace Industries, Rafael Advanced Defense Systems, Israel Postal Company, Mekorot Israel National Water Company, Israel Natural Gas Lines, the Ashdod, Haifa, and Eilat Port Companies, Israel Railways, Petroleum and Energy Infrastructures and the Israel National Roads Company. The GCA does not publish a publicly available list of SOEs.

Israel is party to the Government Procurement Agreement (GPA) of the World Trade Organization.

Privatization Program

In late 2014, Israel’s cabinet approved a privatization plan allowing the government to issue minority stakes of up to 49 percent in state-owned companies on the Tel Aviv Stock Exchange over a three-year period, a plan estimated to increase government revenue by USD 4.1 billion. The plan aimed to sell stakes in Israel’s electric company, water provider, railway, post office and some defense-related contractors. The GCA will likely auction minority stakes in a public bidding process without formal restrictions on the participation of foreign investors. Restrictions on foreign investors could be possible in the case of companies deemed to be of strategic significance.

Israel’s interministerial privatization committee approved plans in January 2020 to sell off the Port of Haifa, Israel’s largest shipping hub. The privatization process is underway now. The incoming owner will be required to invest approximately USD 280 million (1 billion NIS) in the port, including the cost of upgrading infrastructure and financing the layoff of an estimated 200 workers. That same committee voted to enable private investment in Israel Post in an effort to sell up to 40 percent of the government’s shares in Israel Post.

There is awareness of responsible business conduct among enterprises and civil society in Israel. Israel adheres to the OECD Guidelines for Multinational Enterprises and a National Contact Point is operating in the Foreign Trade Administration. Israel is not a member of the Extractive Industries Transparency Initiative.

Israel’s National Contact Point sits in the Responsible Business Conduct unit in the OECD Department of the Foreign Trade Administration in the Ministry of Economy and Industry. An advisory committee, including representatives from the Ministries of Economy, Finance, Foreign Affairs, Justice, and the Environment, assist the National Contact Point. The National Contact Point also works in cooperation with the Manufacturer’s Association of Israel, workers’ organizations, and civil society to promote awareness of the guidelines.

Israel is not a signatory of the Montreux Document on Private Military and Security Companies. One Israeli company is a member of the International Code of Conduct for Private Security Service Providers’ Association.

Additional Resources

Department of State

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

Department of Labor

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

Bribery and other forms of corruption are illegal under several Israeli laws and Civil Service regulations. Israel became a signatory to the OECD Bribery convention in November 2008 and a full member of the OECD in May 2010. Israel ranks 35 out of 180 countries in Transparency International’s 2019 Corruption Perceptions Index, dropping one place from its 2018 ranking. Several Israeli NGOs focus on public sector ethics in Israel and Transparency International has a local chapter.

Israel is a signatory of the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions.

The Israeli National Police, state comptroller, Attorney General, and Accountant General are responsible for combating official corruption. These entities operate effectively and independently and are sufficiently resourced. NGOs that focus on anticorruption efforts operate freely without government interference.

The international NGO Transparency International closely monitors corruption in Israel.

Resources to Report Corruption

Ministry of Justice
Office of the Director General
29 Salah a-Din Street Jerusalem
02-6466533, 02-6466534, 02-6466535
mancal@justice.gov.il 

Transparency International IsraelIfat Zamir
Tel Aviv University, Faculty of Management
+972 3 640 9176
ifat@ti-israel.org 

For the latest safety and security information regarding Israel and the current travel advisory level, see the Travel Advisory for Israel, the West Bank, and Gaza ( https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/israel-west-bank-and-gaza-travel-advisory.html).

The security situation remains complex in Israel and the West Bank, and can change quickly depending on the political environment, recent events, and geographic location. Terrorist groups and lone-wolf terrorists continue plotting possible attacks in Israel, the West Bank, and Gaza. Terrorists may attack with little or no warning, targeting tourist locations, transportation hubs, markets or shopping malls, and local government facilities. Violence can occur in Jerusalem and the West Bank without warning. Terror attacks in Jerusalem and the West Bank have resulted in the deaths and injury of U.S. citizens and others. Hamas, a U.S. government-designated foreign terrorist organization, controls security in Gaza. The security environment within Gaza and on its borders is dangerous and volatile.

The most recent Central Bureau of Statistics data from the fourth quarter of 2020 indicate there are 4.1 million people active in the Israeli labor force. According to OECD data, 48 percent of Israelis aged between 25 and 34 years have a tertiary education. Many university students specialize in fields with high industrial R&D potential, including engineering, computer science, mathematics, physical sciences, and medicine. According to the Investment Promotion Center, there are more than 145 scientists out of every 10,000 workers in Israel, one of the highest rates in the world. The rapid growth of Israel’s high-tech sector in the late 1990s increased the demand for workers with specialized skills.

The unemployment rate among 25-64 year-olds was 4.7 percent at the end of the fourth quarter of 2020, according to the Israeli Central Bureau of Statistics.

According to the Bank of Israel, at the end of the fourth quarter of 2020 there were 283,600 non-Israelis employed in Israel.

The national labor federation, the Histadrut, organizes about 17 percent of all Israeli workers. Collective bargaining negotiations in the public sector take place between the Histadrut and representatives from the Ministry of Finance. The number of strikes has declined significantly as the public sector has gotten smaller. However, strikes remain a common and viable negotiating vehicle in many difficult wage negotiations.

Israel strictly observes the Friday afternoon to Saturday afternoon Jewish Sabbath and special permits must be obtained from the government authorizing Sabbath employment. At the age of 18, most Israelis are required to perform 2-3 years of national service in the military or in select civilian institutions. Until their mid-40s, Israeli males are required to perform about a month of military reserve duty annually, during which time they receive compensation from national insurance companies.

* Source for Host Country Data:

Israel’s Central Bureau of Statistics released final 2018 FDI data on March 23, 2020.

https://www.cbs.gov.il/en/mediarelease/Pages/2020/Foreign-Direct-Investment-in-Israel-and-Direct-Investment-Abroad-by-Industries-and-Countries-2016-2018.aspx

Russ Headlee
Economic Officer
U.S. Embassy Jerusalem – Tel Aviv Branch Office
HeadleeRC@state.gov

Policies Towards Foreign Direct Investment

Direct inward investment into Japan by foreign investors has been open and free since amendment of the Foreign Exchange and Foreign Trade Act (FEFTA) in 1998. In general, the only requirement for foreign investors making investments in Japan is to submit an ex post facto report to the relevant ministries. The Act was amended in 2019, updating Japan’s foreign investment review regime.  The legislation became effective in May 2020 and lowered the ownership threshold for pre-approval notification to the government for foreign investors from ten percent to one percent in industries that could pose risks to Japanese national security. There are waivers for certain categories of investors.

The Japanese Government explicitly promotes inward FDI and has established formal programs to attract it. In 2013, the government of Prime Minister Shinzo Abe announced its intention to double Japan’s inward FDI stock to JPY 35 trillion (USD 318 billion) by 2020 and reiterated that commitment in its revised Japan Revitalization Strategy issued in August 2016. At the end of 2019, Japan’s inward FDI stock was JPY 33.9 trillion (USD 310 billion), a 10.4 percent increase over the previous year. The Suga Administration’s interest in attracting FDI is one component of the government’s strategy to reform and revitalize the Japanese economy, which continues to face the long-term challenges of low growth, an aging population, and a shrinking workforce.

The government’s “FDI Promotion Council,” composed of government ministers and private sector advisors, releases recommendations on improving Japan’s FDI environment. In a May 2018 report ( http://www.invest-japan.go.jp/documents/pdf/support_program_en.pdf ), the council decided to launch the Support Program for Regional Foreign Direct Investment in Japan, recommending that local governments formulate a plan to attract foreign companies to their regions.

The Ministry of Economy, Trade and Industry (METI) and the Japan External Trade Organization (JETRO) are the lead agencies responsible for assisting foreign firms wishing to invest in Japan. METI and JETRO have together created a “one-stop shop” for foreign investors, providing a single Tokyo location—with language assistance—where those seeking to establish a company in Japan can process the necessary paperwork (details are available at http://www.jetro.go.jp/en/invest/ibsc/ ). Prefectural and city governments also have active programs to attract foreign investors, but they lack many of the financial tools U.S. states and municipalities use to attract investment.

Foreign investors seeking a presence in the Japanese market or seeking to acquire a Japanese firm through corporate takeovers may face additional challenges, many of which relate more to prevailing business practices rather than to government regulations, although this varies by sector. These challenges include an insular and consensual business culture that has traditionally resisted unsolicited mergers and acquisitions (M&A), especially when initiated by non-Japanese entities; a lack of multiple independent directors on many company boards (even though board composition is changing); exclusive supplier networks and alliances between business groups that can restrict competition from foreign firms and domestic newcomers; cultural and linguistic challenges; and labor practices that tend to inhibit labor mobility. Business leaders have communicated to the Embassy that regulatory and governmental barriers are more likely to exist in mature, heavily regulated sectors than in new industries.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private enterprises have the right to establish and own business enterprises and engage in all forms of remunerative activity. Japan has gradually eliminated most formal restrictions governing FDI. One remaining restriction limits foreign ownership in Japan’s former land-line monopoly telephone operator, Nippon Telegraph and Telephone (NTT), to 33 percent. Japan’s Radio Law and separate Broadcasting Law also limit foreign investment in broadcasters to 20 percent, or 33 percent for broadcasters categorized as providers of broadcast infrastructure. Foreign ownership of Japanese companies invested in terrestrial broadcasters will be counted against these limits. These limits do not apply to communication satellite facility owners, program suppliers or cable television operators.

The Foreign Exchange and Foreign Trade Act, as amended, governs investment in sectors deemed to have national security or economic stability implications. If a foreign investor wants to acquire over one percent of the shares of a listed company in the sectors set out below, it must provide prior notification and obtain approval from the Ministry of Finance and the ministry that regulates the specific industry. Designated sectors include weapons manufacturers, nuclear power, agriculture, aerospace, forestry, petroleum, electric/gas/water utilities, telecommunications, and leather manufacturing. There are waivers for certain categories of investors.

U.S. investors, relative to other foreign investors, are not disadvantaged or singled out by any ownership or control mechanisms, sector restrictions, or investment screening mechanisms.

Other Investment Policy Reviews

The World Trade Organization (WTO) conducted its most recent review of Japan’s trade policies in November 2020 (available at directdoc.aspx (wto.org) ).

The OECD released its biennial Japan economic survey results on April 15, 2019 (available at http://www.oecd.org/japan/economic-survey-japan.htm ).

Business Facilitation

The Japan External Trade Organization is Japan’s investment promotion and facilitation agency. JETRO operates six Invest Japan Business Support Centers (IBSCs) across Japan that provide consultation services on Japanese incorporation types, business registration, human resources, office establishment, and visa/residency issues. Through its website ( https://www.jetro.go.jp/en/invest/setting_up/ ), the organization provides English-language information on Japanese business registration, visas, taxes, recruiting, labor regulations, and trademark/design systems and procedures in Japan. While registration of corporate names and addresses can be completed online, most business registration procedures must be completed in person. In addition, corporate seals and articles of incorporation of newly established companies must be verified by a notary, although there are indications of change underway. When he took office in September 2020, Prime Minister Suga called for reforms to eliminate use of seals and paper-based process along with establishment of a new Digital Agency as part of his policy agenda of digitizing the provision of government services.

According to the 2020 World Bank “Doing Business” Report, it takes eleven days to establish a local limited liability company in Japan. JETRO reports that establishing a branch office of a foreign company requires one month, while setting up a subsidiary company takes two months. While requirements vary according to the type of incorporation, a typical business must register with the Legal Affairs Bureau (Ministry of Justice), the Labor Standards Inspection Office (Ministry of Health, Labor, and Welfare), the Japan Pension Service, the district Public Employment Security Office, and the district tax bureau. JETRO operates a one-stop business support center in Tokyo so that foreign companies can complete all necessary legal and administrative procedures in one location. In 2017, JETRO launched an online business registration system that allows businesses to register company documents but not immigration documentation.

No laws exist to explicitly prevent discrimination against women and minorities regarding registering and establishing a business. Neither special assistance nor mechanisms exist to aid women or underrepresented minorities.

Outward Investment

The Japan Bank for International Cooperation (JBIC) provides a variety of support for outward Japanese foreign direct investment. Most such support comes in the form of “overseas investment loans,” which can be provided to Japanese companies (investors), overseas Japanese affiliates (including joint ventures), and foreign governments in support of projects with Japanese content, typically infrastructure projects. JBIC often supports outward FDI projects to develop or secure overseas resources that are of strategic importance to Japan, for example, construction of liquefied natural gas (LNG) export terminals to facilitate sales to Japan and third countries in Asia. More information is available at https://www.jbic.go.jp/en/index.html .

Nippon Export and Investment Insurance (NEXI) supports outward investment by providing exporters and investors insurance that protects them against risks and uncertainty in foreign countries that is not covered by private-sector insurers. Together, JBIC and NEXI act as Japan’s export credit agency.

Japan also employs specialized agencies and public-private partnerships to target outward investment in specific sectors.  For example, the Fund Corporation for the Overseas Development of Japan’s Information and Communications Technology and Postal Services (JICT) supports overseas investment in global telecommunications, broadcasting, and postal businesses.

Similarly, the Japan Overseas Infrastructure Investment Corporation for Transport and Urban Development (JOIN) is a government-funded corporation to invest and participate in transport and urban development projects that involve Japanese companies.  The fund specializes in overseas infrastructure investment projects such as high-speed rail, airports, and smart city projects with Japanese companies, banks, governments, and other institutions (e.g., JICA, JBIC, NEXI).

Finally, the Japan Oil, Gas and Metals National Corporation (JOGMEC) is a Japanese government entity administered by the Agency for Natural Resources and Energy under METI.  JOGMEC provides equity capital and liability guarantees to Japanese companies for oil and natural gas exploration and production projects.

Japan places no restrictions on outbound investment.

The 1953 U.S.-Japan Treaty of Friendship, Commerce, and Navigation gives national treatment and most favored nation treatment to U.S. investments in Japan.

On January 1, 2021, the Japan-UK Comprehensive Economic Partnership Agreement entered into force, which includes a chapter on investment liberalization. The text of the agreement is available online ( https://www.mofa.go.jp/files/100111408.pdf ). In November 2020, Japan signed the Regional Comprehensive Economic Partnership (RCEP) with the ten ASEAN nations, Australia, China, the Republic of Korea, and New Zealand. RCEP also includes a chapter on investment. The text of the agreement is available online (https://rcepsec.org/legal-text/).

As of February 2021, Japan had concluded 35 bilateral investment treaties (BITs) (Argentina, Armenia, Bangladesh, Cambodia, China, Colombia, Egypt, Georgia, Hong Kong SAR, Iran, Iraq, Israel, Jordan, Kazakhstan, the Republic of Korea, Kuwait, Laos, Mongolia, Morocco, Mozambique, Myanmar, Pakistan, Papua New Guinea, Peru, Russia, Saudi Arabia, Sri Lanka, Turkey, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Vietnam, Oman, and Kenya). In addition, Japan has a trilateral investment agreement with China and the Republic of Korea. Japan also has 18 economic partnership agreements (EPA) that include investment chapters (with Singapore, ASEAN, Mexico, Malaysia, Philippines, Chile, Thailand, Brunei, Indonesia, Switzerland, Vietnam, India, Peru, Australia and Mongolia, the Comprehensive and Progressive Partnership for Trans-Pacific Partnership (CPTPP), UK and RCEP).

On February 1, 2019, the Japan – European Union Economic Partnership Agreement entered into force, which includes provisions related to investment. The text of the agreement is available online ( http://trade.ec.europa.eu/doclib/press/index.cfm?id=1684&title=EU-Japan-Economic-Partnership-Agreement-texts-of-the-agreement ). The Comprehensive and Progressive Agreement for Trans-Pacific Partnership went into effect on December 30, 2018. This agreement includes an investment chapter. The United States is not a signatory to this agreement. Japan is the current chair of the CPTPP commission, its second time since the agreement went into effect.

The United States and Japan have a double taxation treaty, which allows Japan to tax the business profits of a U.S. resident only to the extent that those profits are attributable to a permanent establishment in Japan. It also provides measures to mitigate double taxation. This permanent establishment provision, combined with Japan’s corporate tax rate that nears 30 percent, serves to encourage foreign and investment funds to keep their trading and investment operations offshore.

In January 2013, the United States and Japan signed a revision to the bilateral income tax treaty, to bring it into closer conformity with the current tax treaty policies of the United States and Japan. The revision went into effect in August 2019 after ratification by the U.S Congress.

Japan has concluded 79 double taxation treaties that cover 142 countries and jurisdictions, as of February 1, 2021. More information is available from the Ministry of Finance: http://www.mof.go.jp/english/tax_policy/tax_conventions/international_182.htm .

Transparency of the Regulatory System

Japan operates a highly centralized regulatory system in which national-level ministries and government organs play a dominant role. Regulators are generally sophisticated and there is little evidence of explicit discrimination against foreign firms. Most draft regulations and impact assessments are released for public comment before implementation and are accessible through a unified portal ( http://www.e-gov.go.jp/ ). Law, regulations, and administrative procedures are generally available online in Japanese along with regular publication in an official gazette. The Japanese government also actively maintains a body of unofficial English translations of some Japanese laws ( http://www.japaneselawtranslation.go.jp/ ).

Some members of the foreign business community in Japan continue to express concern that Japanese regulators do not seek sufficient formal input from industry stakeholders, instead relying on formal and informal connections between regulators and domestic firms to arrive at regulatory decisions. This may have the effect of disadvantaging foreign firms that lack the benefit of deep relationships with local regulators. The United States has encouraged the Japanese government to improve public notice and comment procedures to ensure consistency and transparency in rule-making, and to give fair consideration to comments received. The National Trade Estimate Report on Foreign Trade Barriers (NTE), issued by the Office of the U.S. Trade Representative (USTR), contains a description of Japan’s regulatory regime as it affects foreign exporters and investors.

International Regulatory Considerations

The Japanese Industrial Standards Committee (JISC), administered by the Ministry of Economy, Trade, and Industry, plays a central role in maintaining Japan Industrial Standards (JIS). JISC aims to align JIS with international standards. According to JISC, as of March 31, 2020, 58 percent of Japan’s standards were harmonized with their international counterparts. Nonetheless, Japan maintains a large number of Japan-specific standards that can complicate efforts to introduce new products to the country. Japan is a member of the WTO and notifies the WTO Committee on Technical Barriers to Trade (TBT) of proposed regulations.

Legal System and Judicial Independence

Japan is primarily a civil law country based on codified law. The Constitution and the five major legal codes (Civil, Civil Procedure, Commercial, Criminal, and Criminal Procedure) form the legal basis of the system. Japan has a fully independent judiciary and a consistently applied body of commercial law. An Intellectual Property High Court was established in 2005 to expedite trial proceedings in IP cases. Foreign judgments are recognized and enforced by Japanese courts under certain conditions.

Laws and Regulations on Foreign Direct Investment

Major laws affecting foreign direct investment into Japan include the Foreign Exchange and Foreign Trade Act, the Companies Act, and the Financial Instruments and Exchange Act. The Japanese government actively encourages FDI into Japan and has sought over the past decades to ease legal and administrative burdens on foreign investors, including with major reforms to the Companies Act in 2005 and the Financial Instruments and Exchange Act in 2008. The Japanese government amended the Foreign Exchange and Foreign Trade Act in 2019.

Competition and Antitrust Laws

The Japan Fair Trade Commission (JFTC) holds sole responsibility for enforcing Japanese competition and anti-trust law, although public prosecutors may file criminal charges related to a JFTC finding. In fiscal year 2019, the JFTC investigated 99 suspected Antimonopoly Act (AMA) violations and completed 81 investigations. During this same time period, the JFTC issued 11 cease and desist orders and issued a total of 69.2 billion yen (USD 659 million) surcharge payment orders to 37 companies. In 2019, an amendment to the AMA passed the Diet that granted the JFTC discretion to incentivize cooperation with investigations and adjust surcharges according to the nature and extent of the violation.

The JFTC also reviews proposed “business combinations” (i.e., mergers, acquisitions, increased shareholdings, etc.) to ensure that transactions do not “substantially … restrain competition in any particular field of trade.” In December 2019, amended merger guidelines and policies were put into force to “deal with business combinations in the digital market.” Data is given consideration as a competitive asset under these new guidelines along with the network effects characteristic of digital businesses. The JFTC has expanded authority to review merger cases, including “Non-Notifiable Cases,” when the transaction value is more than JPY40 billion (USD 370 million) and the merger is expected to affect domestic consumers. Further, the amended policies suggest that parties consult with the JFTC voluntarily when the transaction value exceeds JPY40 billion and when one or more of the following factors is met: (i) When an acquired company has an office in Japan and/or conducts research and development in Japan;

(i) When an acquired company has an office in Japan and/or conducts research and development in Japan; (ii) When an acquired company conducts sales activities targeting domestic consumers, such as developing marketing materials (website, brochures, etc.) in the Japanese language; or

(ii) When an acquired company conducts sales activities targeting domestic consumers, such as developing marketing materials (website, brochures, etc.) in the Japanese language; or (iii) When the total domestic sales of an acquired company exceed JPY100 million (USD 920,000)

(iii) When the total domestic sales of an acquired company exceed JPY100 million (USD 920,000)

Expropriation and Compensation

Since 1945, the Japanese government has not expropriated any enterprise, and the expropriation or nationalization of foreign investments in Japan is highly unlikely.

Dispute Settlement

ICSID Convention and New York Convention

Japan has been a member of the International Centre for the Settlement of Investment Disputes (ICSID Convention) since 1967 and is also a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

Enforcement of arbitral awards in Japan are provided for in Japan’s Arbitration Law. Enforcement in other contracting states is also possible. The Supreme Court of Japan has denied the enforceability of awards for punitive damages, however. The Arbitration Law provides that an arbitral award (irrespective of whether or not the seat of arbitration is in Japan) has the same effect as a final and binding judgment. The Arbitration Law does not distinguish awards rendered in contracting states of the New York Convention and in non-contracting states.

Investor-State Dispute Settlement

International Commercial Arbitration and Foreign Courts

The Japan Commercial Arbitration Association (JCAA) is the sole permanent commercial arbitral institution in Japan. Japan’s Arbitration Law is based on the United Nations Commission on International Trade Law “Model Law on International Commercial Arbitration” (UNCITRAL Model Law). Local courts recognize and enforce foreign arbitral awards.

A wide range of Alternate Dispute Resolution (ADR) organizations also exist in Japan. The Ministry of Justice (MOJ) has responsibility for regulating and accrediting ADR groups. A Japanese-language list of accredited organizations is available on the MOJ website: http://www.moj.go.jp/KANBOU/ADR/index.html .

Bankruptcy Regulations

The World Bank 2020 “Doing Business” Report ranked Japan third worldwide for resolving insolvency. An insolvent company in Japan can face liquidation under the Bankruptcy Act or take one of four roads to reorganization: the Civil Rehabilitation Law; the Corporate Reorganization Law; corporate reorganization under the Commercial Code; or an out-of-court creditor agreement. The Civil Rehabilitation Law focuses on corporate restructuring in contrast to liquidation, provides stronger protection of debtor assets prior to the start of restructuring procedures, eases requirements for initiating restructuring procedures, simplifies and rationalizes procedures for the examination and determination of liabilities, and improves procedures for approval of rehabilitation plans.

Out-of-court settlements in Japan tend to save time and expense but can lack transparency. In practice, because 100 percent creditor consensus is required for out-of-court settlements and courts can sanction a reorganization plan with only a majority of creditors’ approval, the last stage of an out-of-court settlement is often a request for a judicial seal of approval.

There are three domestic credit reporting/ credit-monitoring agencies in Japan. They are not government-run.  They are: Japan Credit Information Reference Center Corp. (JICC, https://www.jicc.co.jp/english/index.html ‘, member companies deal in consumer loans, finance, and credit); Credit Information Center (CIC, https://www.cic.co.jp/en/index.html , member companies deal in credit cards and credit); and Japan Bankers Association (JBA, https://www.zenginkyo.or.jp/pcic/ , member companies deal in banking and bank-issued credit cards). Credit card companies, such as Japan Credit Bureau (JCB), and large banks, such as Mitsubishi UFJ Financial Group (MUFG), also maintain independent databases to monitor and assess credit.

Per Japan’s Banking Act, data and scores from credit reports and credit monitoring databases must be used solely by financial institutions for financial lending purposes.  This information is provided to credit card holders themselves through services provided by credit reporting/credit monitoring agencies.   Increasingly, however, to get around the law, real estate companies partner with a “credit guarantee association” and encourage or effectively require tenants to use its services. According to a 2017 report from the Japan Property Management Association (JPMA), roughly 80 percent of renters in Japan used such a service. While financial institutions can share data to the databases and receive credit reports by joining the membership of a credit monitoring agency, the agencies themselves, as well as credit card companies and large banks, generally do not necessarily share data with each other.  As such, consumer credit information is generally underutilized and vertically siloed.

A government-operated database, the Juminhyo or the “citizen documentation database,” is used for voter registration; confirmation of eligibility for national health insurance, national social security, and child allowances; and checks and registrations related to scholarships, welfare protection, stamp seals (signatures), and immunizations. The database is strictly confidential, government-controlled, and not shared with third parties or private companies.

For the credit rating of businesses, there are at least seven credit rating agencies (CRAs) in Japan, including Moody’s Japan, Standard & Poor’s Ratings Japan, Tokyo Shoko Research, and Teikoku Databank. See Section 9 for more information on business vetting in Japan.

Investment Incentives

The Japan External Trade Organization (JETRO) maintains an English-language list of national and local investment incentives available to foreign investors on their website: https://www.jetro.go.jp/en/invest/incentive_programs/ .

Foreign Trade Zones/Free Ports/Trade Facilitation

Japan no longer has free-trade zones or free ports. Customs authorities allow the bonding of warehousing and processing facilities adjacent to ports on a case-by-case basis.

The National Strategic Special Zones Advisory Council chaired by the Prime Minister has established a total of ten National Strategic Special Zones (NSSZ) to implement selected deregulation measures intended to attract new investment and boost regional growth. Under the NSSZ framework, designated regions request regulatory exceptions from the central government in support of specific strategic goals defined in each zone’s “master plan,” which focuses on a potential growth area such as labor, education, technology, agriculture, or healthcare. Foreign-owned businesses receive equal treatment in the NSSZs; some measures aim specifically to ease customs and immigration restrictions for foreign investors, such as the “Startup Visa” adopted by the Fukuoka NSSZ.

The Japanese government has also sought to encourage investment in the Tohoku (northeast) region, which was devastated by the earthquake, tsunami, and nuclear “triple disaster” of March 11, 2011. Areas affected by the disaster have been included in a “Special Zone for Reconstruction” that features eased regulatory burdens, tax incentives, and financial support to encourage heightened participation in the region’s economic recovery.

A revision to add “advanced data technologies” as one of targeted growth areas for NSSZs, was approved by the Diet in May 2020 and went into effect on September 1, 2020. The revision will allow regions to create “Super City National Strategic Zones,” on the condition that the zone will provide advanced services to its citizens through utilizing artificial intelligence (AI), big data or other data linkage platforms. The Cabinet Office website cited remote schooling/healthcare, cashless payment services, and one-stop administrative services as examples of such projects. The Japanese government is accepting applications for “Super City Strategic Zone Project ” as well as requests for related regulatory reforms until April 16, 2021.

Performance and Data Localization Requirements

Japan does not maintain performance requirements or requirements for local management participation or local control in joint ventures.

Japan has no general restrictions on data storage. On January 1, 2020, the U.S.-Japan Digital Trade Agreement went into effect and specifically prohibits data localization measures that restrict where data can be stored and processed. These rules are extended to financial service suppliers, in circumstances where a financial regulator has the access to data needed to fulfill its regulatory and supervisory mandate.

Real Property

Secured interests in real property are recognized and enforced. Mortgages are a standard lien on real property and must be recorded to be enforceable. Japan has a reliable recording system. Property can be rented or leased but no sub-lease is legal without the owner’s consent. In the World Bank 2020 “Doing Business” Report, Japan ranks 43 out of 190 economies in the category of Ease of Registering Property. There are bureaucratic steps and fees associated with purchasing improved real property in Japan, even when it is already registered and has a clear title. The required documentation for property purchases can be burdensome. Additionally, it is common practice in Japan for property appraisal values to be lower than the actual sale value, increasing the deposit required of the purchaser, as the bank will provide financing only up to the appraisal value.

The Japanese Government is unsure of the titleholders to 4.1 million hectares of land in Japan, roughly 20 percent of all land and an area equivalent in size to the island of Kyushu. According to a think tank expert on land use, 25 percent of all the land in Japan is registered to people who are no longer alive or otherwise unreachable. In 2015, the Ministry of Land, Infrastructure, Transportation and Tourism (MLIT) found that, of 400 randomly selected tracts of land, 46 percent was registered more than 30 years ago, and 20 percent was registered more than 50 years ago. A similar survey by the Ministry of Agriculture, Forestry and Fisheries (MAFF) found that 20 percent of farmland had a deceased owner and had not been re-registered. The government appointed a group of experts to study the matter, and the Unknown Land Owners Problem Study Group announced the results in a midterm report on June 26, 2017, and in a final report on December 13, 2017 ( http://www.kok.or.jp/project/fumei.html ). It estimated that by 2040 the amount of land without titleholders will increase to 7.2 million hectares. There are a number of reasons beyond the administrative difficulties of a title transfer as to why land lacks a clear title holder. They include: population decline, especially in rural areas; the difficulty of locating heirs, particularly if there are multiple heirs or if the deceased had no children; and the cost of reregistering land under a new name due to tax costs. Virtually all the large banks, as well as some other private companies, offer loans to purchase property in Japan.

Intellectual Property Rights

Japan maintains a comprehensive and sophisticated intellectual property (IP) regime recognized as among the strongest in the world. In 2020, Japan ranked sixth out of 53 countries evaluated by the U.S. Chamber of Commerce on the strength of IP environments. The government has operated a dedicated “Intellectual Property High Court” to adjudicate IP-related cases since 2005, providing judges with enhanced access to technical experts and the ability to specialize in intellectual property law. However, certain shortcomings remain, notably in the transparency and predictability of its system for pricing on-patent pharmaceuticals. The discriminatory effect of healthcare reimbursement pricing measures implemented by the Japanese government continues to raise serious concerns about the ability of U.S. pharmaceutical companies to have full and fair opportunity to use and profit from their IP in the Japanese market. More generally, the weak deterrent effect of Japan’s relatively modest penalties for IP infringement remains a cause for concern.

U.S. Embassy Tokyo is aware of isolated claims of U.S. IP misappropriation by Japanese state-owned or affiliated entities and presumes, given the vast volume of bilateral trade, that additional cases across public and private sectors may exist. That said, the Japanese government has taken several steps in recent years to improve protection of trade secrets. Revisions to the Unfair Competition Prevention Act (UCPA) went into effect July 2019, which classifies the improper acquisition, disclosure, and use of specified protected data as an act of unfair competition, offering civil and criminal remedies to stakeholders. The revisions also extend the scope of unfair competition to include attempts to circumvent technological restriction measures. Japan has taken a leading role in promoting the expansion of IP rights in recent regional trade agreements, including:

• RCEP: On November 15, 2020, Japan joined 10 ASEAN member states, plus Australia, China, New Zealand, and the Republic of Korea, in signing the Regional Comprehensive Economic Partnership. This regional trade agreement includes a comprehensive IP chapter, much of it repeating norms set out in TRIPS, but also offering unique protections for genetic resources, traditional knowledge, and folklore.
• Japan-UK CEPA: The Japan-UK Comprehensive Economic Partnership Agreement signed on October 23, 2020, and in force beginning January 1, 2021, contains an IP chapter including provisions on copyrights, trademarks, geographical indications, industrial designs, patents, regulatory test data exclusivity, new plant varieties, trade secrets, domain names, and enforcement.
• Japan-EU EPA: The Japan-EU Economic Partnership Agreement, which went into effect February 1, 2019, also includes a substantial IP chapter.
• CPTPP: As part of its 2018 accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Japan passed several substantive amendments to its copyright law, including measures that extended the term of copyright protection and strengthened technological protection rules.

Japan’s Customs and Tariff Bureau publishes a yearly report on goods seizures, available online in English ( http://www.customs.go.jp/mizugiwa/chiteki/pages/g_001_e.htm ). Japan seized an estimated $121.2 million worth of IP-infringing goods in 2019, a decrease of 5.2 percent over 2018. In June 2020, the Customs and Tariff Bureau of the Ministry of Finance announced the “SMART Customs Initiative 2020,” which aims to utilize cutting-edge technologies such as AI to improve the sophistication and efficiency of its operations. For additional information about national laws and points of contact at local IP offices, please see the World Intellectual Property Organization’s country profiles at http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

Japan maintains no formal restrictions on inward portfolio investment except for certain provisions covering national security. Foreign capital plays an important role in Japan’s financial markets, with foreign investors accounting for the majority of trading shares in the country’s stock market. Historically, many company managers and directors have resisted the actions of activist shareholders, especially foreign private equity funds, potentially limiting the attractiveness of Japan’s equity market to large-scale foreign portfolio investment, although there are signs of change. Some firms have taken steps to facilitate the exercise of shareholder rights by foreign investors, including the use of electronic proxy voting. The Tokyo Stock Exchange (TSE) maintains an Electronic Voting Platform for Foreign and Institutional Investors. All holdings of TSE-listed stocks are required to transfer paper stock certificates into electronic form.

The Japan Exchange Group (JPX) operates Japan’s two largest stock exchanges – in Tokyo and Osaka – with cash equity trading consolidated on the TSE since July 2013 and derivatives trading consolidated on the Osaka Exchange since March 2014.

In January 2014, the TSE and Nikkei launched the JPX Nikkei 400 Index. The index puts a premium on company performance, particularly return on equity (ROE). Companies included are determined by such factors as three-year average returns on equity, three-year accumulated operating profits and market capitalization, along with others such as the number of external board members. Inclusion in the index has become an unofficial “seal of approval” in corporate Japan, and many companies have taken steps, including undertaking share buybacks, to improve their ROE. The Bank of Japan has purchased JPX-Nikkei 400 exchange traded funds (ETFs) as part of its monetary operations, and Japan’s massive Government Pension Investment Fund (GPIF) has also invested in JPX-Nikkei 400 ETFs, putting an additional premium on membership in the index.

Japan does not restrict financial flows and accepts obligations under IMF Article VIII.

Credit is available via multiple instruments, both public and private, although access by foreigners often depends upon visa status and the type of investment.

Money and Banking System

Banking services are easily accessible throughout Japan; it is home to many of the world’s largest private commercial banks as well as an extensive network of regional and local banks. Most major international commercial banks are also present in Japan, and other quasi-governmental and non-governmental entities, such as the postal service and cooperative industry associations, also offer banking services. For example, the Japan Agriculture Union offers services through its bank (Norinchukin Bank) to members of the organization. Japan’s financial sector is generally acknowledged to be sound and resilient, with good capitalization and with a declining ratio of non-performing loans. While still healthy, most banks have experienced pressure on interest margins and profitability as a result of an extended period of low interest rates capped by the Bank of Japan’s introduction of a negative interest rate policy in 2016.

The country’s three largest private commercial banks, often collectively referred to as the “megabanks,” are Mitsubishi UFJ Financial, Mizuho Financial, and Sumitomo Mitsui Financial. Collectively, they hold assets approaching close to USD 8 trillion at 2020 year end. Japan’s third largest bank by assets – with more than USD 2 trillion – is Japan Post Bank, a financial subsidiary of the Japan Post Group that is still majority state-owned, 56.9 percent as of September 2020. Japan Post Bank offers services via 23,831 Japan Post office branches, at which Japan Post Bank services can be conducted, as well as Japan Post’s network of about 32,000 ATMs nationwide.

A large number of foreign banks operate in Japan offering both banking and other financial services. Like their domestic counterparts, foreign banks are regulated by the Japan Financial Services Agency (FSA). According to the IMF, there have been no observations of reduced or lost correspondent banking relationships in Japan. There are 518 correspondent financial institutions that have current accounts at the country’s central bank (including 123 main banks; 11 trust banks; 50 foreign banks; and 247 credit unions).

Foreigners wishing to establish bank accounts must show a passport, visa, and foreigner residence card; temporary visitors may not open bank accounts in Japan. Other requirements (e.g., evidence of utility registration and payment, Japanese-style signature seal, etc.) may vary according to institution. Language may be a barrier to obtaining services at some institutions; foreigners who do not speak Japanese should research in advance which banks are more likely to offer bilingual services.

Japanese regulators are encouraging “open banking” interactions between financial institutions and third-party developers of financial technology applications through application programming interfaces (“APIs”) when customers “opt-in” to share their information.  As a result of the government having set a target to have 80 banks adopt API standards by 2020, more than 100 subject banks reportedly have done so  Many of the largest banks are participating in various proofs of concept using blockchain technology.  While commercial banks have not yet formally adopted blockchain-powered systems for fund settlement, they are actively exploring options, and the largest banks have announced intentions to produce their own virtual currencies at some point.  The Bank of Japan is researching blockchain and its applications for national accounts and established a “Fintech Center” to lead this effort.  The main banking regulator, the Japan Financial Services Agency also encourages innovation with financial technologies, including sponsoring an annual conference on “fintech” in Japan.  In April 2017, amendments to the Act on Settlements of Funds went into effect, permitting the use of virtual currencies as a form of payment in Japan, but virtual currency is still not considered legal tender (e.g., commercial vendors may opt to accept virtual currencies for transactional payments, though virtual currency cannot be used as payment for taxes owed to the government).  The law also requires the registration of virtual currency exchange businesses.  There are currently 27-registered virtual currency exchanges in Japan. In 2017, Japan accounted for approximately half of the world’s trades of Bitcoin, the most prevalent blockchain currency (digital decentralized cryptographic currency).

Foreign Exchange and Remittances

Foreign Exchange

Generally, all foreign exchange transactions to and from Japan—including transfers of profits and dividends, interest, royalties and fees, repatriation of capital, and repayment of principal—are freely permitted. Japan maintains an ex-post facto notification system for foreign exchange transactions that prohibits specified transactions, including certain foreign direct investments (e.g., from countries under international sanctions) or others that are listed in the appendix of the Foreign Exchange and Foreign Trade Act.

Japan has a floating exchange rate and has not intervened in the foreign exchange markets since November 2011. It has joined statements of the G-7 and G-20 affirming that countries would not target exchange rates for competitive purposes.

Remittance Policies

Investment remittances are freely permitted.

Sovereign Wealth Funds

Japan does not operate a sovereign wealth fund.

Japan has privatized most former state-owned enterprises (SOEs). Under the Postal Privatization Law, privatization of Japan Post group started in October 2007 by turning the public corporation into stock companies. The stock sale of the Japan Post Holdings Co. and its two financial subsidiaries, Japan Post Insurance (JPI) and Japan Post Bank (JPB), began in November 2015 with an IPO that sold 11 percent of available shares in each of the three entities. The postal service subsidiary, Japan Post Co., remains a wholly owned subsidiary of JPH. The Japanese government conducted an additional public offering of stock in September 2017, reducing the government ownership in the holding company to approximately 57 percent. There were no additional offerings of the stock in the bank, but there was an offering in the insurance subsidiary in April 2019. JPH currently owns 88.99 percent of the banking subsidiary and 64.48 percent of the insurance subsidiary. Follow-on sales of shares in the three companies will take place over time, as the Postal Privatization Law requires the government to sell a majority share (up to two-thirds of all shares) in JPH, and JPH to sell all shares of JPB and JPI, as soon as possible. The government planned to implement the third sale of its JPH share holdings in 2019 but did not do so due to sluggish share performance.

These offerings mark the final stage of Japan Post privatization begun under former Prime Minister Junichiro Koizumi more than a decade ago and respond to long-standing criticism from commercial banks and insurers—both foreign and Japanese—that their government-owned Japan Post rivals have an unfair advantage.

While there has been significant progress since 2013 with regard to private suppliers’ access to the postal insurance network, the U.S. government has continued to raise concerns about the preferential treatment given to Japan Post and some quasi-governmental entities compared to private sector competitors and the impact of these advantages on the ability of private companies to compete on a level playing field. A full description of U.S. government concerns with regard to the insurance sector and efforts to address these concerns is available in the annual United States Trade Representative’s National Trade Estimate on Foreign Trade Barriers report for Japan.

Privatization Program

In sectors previously dominated by state-owned enterprises but now privatized, such as transportation, telecommunications, and package delivery, U.S. businesses report that Japanese firms sometimes receive favorable treatment in the form of improved market access and government cooperation.

Deregulation of Japan’s power sector took a step forward in April 2016 with the full liberalization of the retail electricity sector. This change has led to increased competition from new entrants. While the generation and transmission of electricity remain mostly in the hands of the legacy power utilities, new electricity retailers reached a 20- percent market share of the total volume of electricity sold as of January 2021. Japan implemented the third phase of its power sector reforms in April 2020 by requiring vertically integrated regional monopolies to “legally unbundle” the electricity transmission and distribution portions of their businesses from the power generation and retailing portions. The transmission and distribution businesses retain ownership of, and operational control over, the power grid in their regional service territories. In addition, many of the former vertically integrated regional monopolies created electricity retailers to compete in the fully deregulated retail market.

American energy companies have reported increased opportunities in this sector, but also report that the regional power utilities have advantages over new entrants with regard to understanding the regulatory regime, securing sufficient low-cost generation in the wholesale market, and accessing infrastructure. For example, while a wholesale market allows new retailers to buy electricity for sale to customers, legacy utilities, which control most of the generation, sell very little power into that market. This limits the supply and increases the cost of electricity that new retailers can sell to consumers. While the liquidity of the wholesale electricity market has increased in recent years, new entrants — including American companies — report that they have few other options for cost-effectively securing the electricity they need to meet their supply obligations. These market dynamics were exacerbated in January 2021, when high electricity demand and constrained LNG supply during a cold spell led to record-high wholesale electricity prices over the course of several days. In addition, as the large power utilities still control transmission and distribution lines, new entrants in power generation are not able to compete due to limited access to power grids.

More information on the power sector from the Japanese Government can be obtained at: http://www.enecho.meti.go.jp/en/category/electricity_and_gas/electric/electricity_liberalization/what/ 

Progress has been made through efforts by the Financial Services Agency (FSA) and Tokyo Stock Exchange (TSE) to introduce non-binding reforms through changes to Japan’s Companies Act in 2014 and adoption of a Corporate Governance Code (CSR) in 2015. Together with the Stewardship Code for institutional investors launched by the FSA in 2014, these initiatives have encouraged companies to put cash stockpiles to better use by increasing investment, raising dividends, and taking on more risk to boost Japan’s growth. Positive results of these efforts are evidenced by rising shareholder returns, unwinding of cross-shareholdings, and increasing numbers of independent board members.  According to a TSE survey conducted in December 2018, 85.3 percent of companies had a compliance rate of 90 percent out of the 66 principles of the new code. As of May 2019,  93.6 percent of TSE listed firms  have at least one independent director, according to TSE’s most recent White Paper on Corporate Governance. In December 2019, the Diet approved a revision of the Companies Act, which will enable companies to provide documents for shareholders’ meetings electronically. Listed companies will be obligated to have at least one outside director. The bill went into effect on March 1, 2021.

Following Stewardship Code revision in March 2020, TSE and FSA plan to revise the Corporate Governance Code in spring of 2021 to reflect the realignment of the TSE segmentations, which will be implemented in 2022. The revised guidelines are expected to require companies, to be listed in the “Prime Section,” a top-tier TSE section, to have more than one-third external directors. The guidelines are also expected to urge listed companies to have more diversity in mid-level and managerial posts, by hiring and training female and foreign workers. Awareness of corporate social responsibility (CSR) among both producers and consumers in Japan is high, and foreign and local enterprises generally follow accepted CSR principles. Business organizations also actively promote CSR. Japan encourages adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.

Additional Resources 

Department of State

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

Department of Labor

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

Japan’s penal code covers crimes of official corruption, and an individual convicted under these statutes is, depending on the nature of the crime, subject to prison sentences and possible fines. With respect to corporate officers who accept bribes, Japanese law also provides for company directors to be subject to fines and/or imprisonment, and some judgments have been rendered against company directors.

The direct exchange of cash for favors from government officials in Japan is extremely rare. However, the web of close relationships between Japanese companies, politicians, government organizations, and universities has been criticized for fostering an inwardly “cooperative”—or insular—business climate that is conducive to the awarding of contracts, positions, etc. within a tight circle of local players. This phenomenon manifests itself most frequently and seriously in Japan through the rigging of bids on government public works projects. However, instances of bid rigging appear to have decreased over the past decade. Alleged bid rigging between construction companies was discovered on the Tokyo-Nagoya-Osaka maglev high-speed rail project in 2017, and the case was prosecuted in March 2018.

Japan’s Act on Elimination and Prevention of Involvement in Bid-Rigging authorizes the Japan Fair Trade Commission to demand that central and local government commissioning agencies take corrective measures to prevent continued complicity of officials in bid rigging activities and to report such measures to the JFTC. The Act also contains provisions concerning disciplinary action against officials participating in bid rigging and compensation for overcharges when the officials caused damage to the government due to willful or grave negligence. Nevertheless, questions remain as to whether the Act’s disciplinary provisions are strong enough to ensure officials involved in illegal bid rigging are held accountable.

Japan has ratified the Organisation for Economic Co-Operation and Development (OECD) Anti-Bribery Convention, which bans bribing foreign government officials.

For vetting potential local investment partners, companies may review credit reports on foreign companies available from many private-sector sources, including, in the United States, Dun & Bradstreet and Graydon International.  Additionally, a company may inquire about the International Company Profile (ICP), which is a background report on a specific foreign company that is prepared by commercial officers of the U.S. Commercial Service at the U.S. Embassy, Tokyo.

Resources to Report Corruption

Businesses or individuals may contact the Japan Fair Trade Commission (JFTC), with contact details at: http://www.jftc.go.jp/en/about_jftc/contact_us.html .

Political violence is rare in Japan. Acts of political violence involving U.S. business interests are virtually unknown.

The Government of Japan has provided extensive and expanded employment subsidies to companies to encourage them to maintain employment during the COVID-19 pandemic. Despite the pandemic, worker shortages still remain in sectors such as construction, transportation, and nursing care. The unemployment rate as of December 2020 was 2.9 percent. The fact that Japan’s unemployment rate has risen so slowly during the pandemic is remarkable and likely due to the social contract between worker and employer in Japan, as well as the continued government subsidies. Traditionally, Japanese workers have been classified as either regular or non-regular employees. Companies recruit regular employees directly from schools or universities and provide an employment contract with no fixed duration, effectively guaranteeing them lifetime employment. Non-regular employees are hired for a fixed period. Companies have increasingly relied on such non-regular workers to fill short-term labor requirements and to reduce labor costs. The pandemic has particularly hurt non-regular workers whose employment was concentrated in hard-hit service sectors such as tourism, hospitality, restaurants, and entertainment.

Major employers and labor unions engage in collective bargaining in nearly every industry. Union members as of June 2020 made up 17.1 percent of employees (“koyo-sha”), up slightly compared to 2019 and an increase for the first time in 11 years, but still in decline from 25 percent of the workforce in 1990. The government provides benefits for workers laid off for economic reasons through a national employment insurance program. Some National Strategic Special Zones allow for special employment of foreign workers in certain fields, but those and all other foreign workers are still subject to the same national labor laws and standards as Japanese workers. Japan has comprehensive labor dispute resolution mechanisms, including labor tribunals, mediation, and civil lawsuits. A Labor Standards Bureau oversees the enforcement of labor standards through a national network of Labor Bureaus and Labor Standards Inspection Offices.

The number of foreign workers is rising, but at just over 1.72 million as of October 2020, they still represent a fraction of Japan’s 69-million-worker labor force. The Japanese government has made changes to labor and immigration laws to facilitate the entry of larger numbers of skilled foreign workers in selected sectors. A revision to the Immigration Control and Refugee Recognition Law in December 2018, implemented in April 2019, created the “Specified Skilled” worker program designed specifically for lower-skilled foreign workers. Prior to this change, Japan had never created a visa category for lower-skilled foreign workers and this law created two. Category 1 grants five-year residency to low-skilled workers who pass skills exams and meet Japanese language criteria and permits them to work in 14 designated industries identified by the Japanese government to be experiencing severe labor shortage. Category 2 is for skilled workers with more experience, granting them long-term residency and a path to long-term employment, but currently permitted only in a few designated industries.

The Japanese government also operates the Technical Intern Training Program (TITP). Originally intended as an international skills-transfer program for workers from developing countries, TITP is currently used to address immediate labor shortages in over 80 designated occupations , such as jobs in the construction, agriculture, fishery, and elderly nursing care industries. As noted previously, the 2018 Immigration Control Law revision enabled TITP beneficiaries with at least three years of experience to qualify to apply for the Category 1 status of the Specified Skilled worker program without any exams.

To address the labor shortage resulting from population decline and a rapidly aging society, Japan’s government has pursued measures to increase participation and retention of older workers and women in the labor force. A law that went into force in April 2013 requires companies to introduce employment systems allowing employees reaching retirement age (generally set at 60) to continue working until 65. The law was revised again in March 2020 and will enter into force in April 2021, asking companies to “make efforts” to secure employment for workers between 65 and 70. Since 2013, the government has committed to increasing women’s economic participation. The Women’s Empowerment Law passed in 2015 requires large companies to disclose statistics about the hiring and promotion of women and to adopt action plans to improve the numbers. The COVID-19 pandemic has, however, had a disproportionate effect on women in Japan. Women were more likely than men to occupy non-regular positions, work in industries hardest hit by the downturn, and face greater pressure to prioritize family over work. As a result, women have experienced reductions in working hours, departure from the labor force, or furloughs in greater numbers than men, erasing part of the rise in their workforce participation through 2019. The Government of Japan has acknowledged this impact on women’s economic participation and has convened a study group to consider solutions.

In May 2019, a package law that revised the Women’s Empowerment Law, expanded the reporting requirements to SMEs that employ at least 101 persons (starting in April 2022) and increasing the number of disclosure items for larger companies ( as of June 2020). The package law also included several labor law revisions requiring companies to take preventive measures for power and sexual harassment in the workplace.

In June 2018, the Diet passed the Workstyle Reform package.  The three key provisions are:  (1) the “white collar exemption,” which eliminates overtime for a small number of highly paid professionals; (2) a formal overtime cap of 100 hours/month or 720 hours/year, with imprisonment and/or fines for violators; and (3) new “equal-pay-for-equal-work” principles to reduce gaps between regular and non-regular employees.

Japan has ratified 49 International Labor Organization (ILO) Conventions (including six of the eight fundamental conventions). As part of its agreement in principle on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership Japan agreed to adopt the fundamental labor rights stated in the ILO Declaration including freedom of association and the recognition of the right to collective bargaining, the elimination of forced labor and employment discrimination, and the abolition of child labor. The CPTPP entered into force on December 30, 2018.

U.S. International Development Finance Corporation (DFC) insurance and finance programs are not available in Japan. However, U.S. companies seeking to invest in other foreign countries with Japanese partners may have access to DFC programs and benefit from cooperative memorandums that the DFC has signed with Japanese Government entities to fund projects in third countries.

Japan is a member of the Multilateral Investment Guarantee Agency (MIGA). Japan’s capital subscription to MIGA is the second largest, after the United States.

Other foreign governments have very limited involvement in Japan’s domestic infrastructure development, and most financing and insurance is managed domestically.

* Source for Host Country Data: *2019 Nominal GDP data from “Annual Report on National Accounts for 2019”, Economic and Social Research Institute, Cabinet Office, Japanese Government.  December, 2020. (Note: uses exchange rate of 109.01 Yen to 1 U.S. Dollar and Calendar Year Data)

The discrepancy between Japan’s accounting of U.S. FDI into Japan and U.S. accounting of that FDI can be attributed to methodological differences, specifically with regard to indirect investors, profits generated from reinvested earnings, and differing standards for which companies must report FDI. 

Jerome Ryan
Economic Section
U.S. Embassy Tokyo
1-10-5 Akasaka, Minato-ku,
Tokyo 107-8420
Japan
+81 03-3224-5485
ryanej@state.gov

Policies Towards Foreign Direct Investment

Foreign investment in New Zealand is generally encouraged without discrimination. New Zealand has an open and transparent economy. Some restrictions do apply in a few areas of critical interest including certain types of land, significant business assets, and fishing quotas. These restrictions are facilitated by a screening process conducted by the Overseas Investment Office (OIO), described in the next section.

New Zealand has a rapidly expanding network of bilateral investment treaties and free trade agreements that include investment components. New Zealand also has a well-developed legal framework and regulatory system, and the judicial system is generally effective in enforcing property and contractual rights. Investment disputes are rare, and there have been no major disputes in recent years involving U.S. companies.

The Labour Party-led government elected in 2017 and re-elected in 2020 has continued its program of tighter screening of some forms of foreign investment and has moved to restrict the availability of permits for oil and gas exploration. It has also focused on different aspects of trade agreement negotiation compared with the previous government, such as an aversion to investor-state dispute settlement provisions.

The implementation of the CPTPP has eased the criteria for partner nations to seek approval for certain investments in New Zealand by increasing the monetary threshold when government approval is required. This has also been triggered by New Zealand’s ‘most favored nation’ obligation in their FTA with China once the upgrade to the 2008 agreement enters into force. A separate bilateral agreement with Australia allows for its threshold to be reviewed each year and is significantly higher before triggering the need for approval. Separate agreements with Australia and Singapore exempt their respective citizens from restrictions introduced in 2018 on the purchase of New Zealand residential property by non-residents. In this respect in the absence of a similar free-trade agreement with New Zealand, certain investments by United States citizens can be subject to higher scrutiny.

In 2019 the OIO approved 139 overseas investment applications, up from 94 the previous year. Net investment increased slightly from NZD 3.5 billion (USD 2.3 billion) to NZD 3.8 billion (USD 2.5 billion) while the total value of assets of approved applications more than doubled to NZD 2.3 billion (USD 1.5 billion) in 2018 to NZD 5.2 billion (USD 3.4 billion) in 2019. Over 22,000 hectares [86.7 square miles; 55,500 acres] of land was sold, leased, or granted forestry rights from 119 approvals. In 2018 there were fewer approvals (64) securing more land area of almost 50,000 hectares [193.1 square miles; 123,600 acres].

Crown entity New Zealand Trade and Enterprise (NZTE) is New Zealand’s primary investment promotion agency. In addition to its New Zealand central and regional presence, it has 40 international locations, including four offices in the United States. Approximately half of the NZTE staff is based overseas. The NZTE helps investors develop their plans, access opportunities, and facilitate connections with New Zealand-based private sector advisors: https://www.nzte.govt.nz/page/how-nzte-works-with-customers Once investors independently complete their negotiations, due diligence, and receive confirmation of their investment, the NZTE offers aftercare advice. The NZTE aims to channel investment into regional areas of New Zealand to build capability and to promote opportunities outside of the country’s main cities.

Under certain conditions, foreign investors can bid alongside New Zealand businesses for contestable government funding for research and development (R&D) grants. For more see: https://www.mbie.govt.nz/science-and-technology/science-and-innovation/international-opportunities/new-zealand-r-d/ . Most of the programs which are operated by NZTE, the Ministry of Business, Innovation, and Employment (MBIE), and Callaghan Innovation, provide financial assistance, and support through skills and knowledge, or supporting innovative business ventures in the early stages of operation. For more see: https://www.business.govt.nz/how-to-grow/getting-government-grants/what-can-i-get-help-with/ .

The New Zealand-United States Council, established in 2001, is a non-partisan organization funded by business and the government. It fosters a strong and mutually beneficial relationship between New Zealand and the United States through both government-to-government contacts, and business-to-business links. The American Chamber of Commerce in Auckland provides a platform for New Zealand and U.S. businesses to network among themselves and with government agencies.

Limits on Foreign Control and Right to Private Ownership and Establishment

The New Zealand government does not discriminate against U.S. or other foreign investors in their rights to establish and own business enterprises.  It has placed separate limitations on foreign ownership of airline Air New Zealand and telecommunications infrastructure provider Chorus Limited.

Air New Zealand’s constitution requires that no person who is not a New Zealand national hold 10 percent or more of the voting rights without the consent of the Minister of Transport. There must be between five and eight board directors, at least three of which must reside in New Zealand. In 2013 the government sold a partial stake in Air New Zealand reducing its equity interest from 73 percent to 53 percent.

The establishment of telecommunications infrastructure provider Chorus resulted from a demerger of provider Spark New Zealand Limited (Spark) in 2011. In 2019, Spark amended its constitution removing the requirement that half of the Spark Board be New Zealand citizens and in accordance with NZX Listing Rules, requires at least two directors be ordinarily resident in New Zealand.

Chorus owns most of the telephone infrastructure in New Zealand, and provides wholesale services to telecommunications retailers, including Spark. The demerger freed Spark from its foreign ownership restrictions allowing it to compete with other retail providers which do not have such restrictions. The foreign ownership restrictions apply to Chorus as a natural monopoly and infrastructure provider.

Chorus’s constitution requires at least half of its Board be New Zealand citizens. It requires no single shareholder may own more than 10 percent of the shares and no person who is not a New Zealand national may own more than 49.9 percent of the shares without the approval of the Minister of Finance. To date, approval has been granted to two private entities to exceed the 10 percent threshold, increasing their interest in Chorus up to 15 percent.

New Zealand otherwise screens overseas investment to ensure quality investments are made that benefit New Zealand. Failure to obtain consent before purchase can lead to significant financial penalties. The Overseas Investment Office (OIO) is responsible for screening foreign investment that falls within certain criteria specified in the Overseas Investment Act 2005.

The OIO requires consent be obtained by overseas persons wishing to acquire or invest in significant business assets, sensitive land, farmland, or fishing quota, as defined below.

A “significant business asset” includes: acquiring 25 percent or more ownership or controlling interest in a New Zealand company with assets exceeding NZD 100 million (USD 65 million); establishing a business in New Zealand that will be operational more than 90 days per year and expected costs of establishing the business exceeds NZD 100 million; or acquiring business assets in New Zealand that exceed NZD 100 million.

OIO consent is required for overseas investors to purchase “sensitive land” either directly or acquiring a controlling interest of 25 percent or more in a person who owns the land. Non-residential sensitive land includes land that: is non-urban and exceeds five hectares (12.35 acres); is part of or adjoins the foreshore or seabed; exceeds 0.4 hectares (1 acre) and falls under of the Conservation Act of 1987 or it is land proposed for a reserve or public park; is subject to a Heritage Order, or is a historic or wahi tapu area (sacred Maori land); or is considered “special land” that is defined as including the foreshore, seabed, riverbed, or lakebed and must first be offered to the Crown. If the Crown accepts the offer, the Crown can only acquire the part of the “sensitive land” that is “special land,” and can acquire it only if the overseas person completes the process for acquisition of the sensitive land.

Where a proposed acquisition involves “farm land” (land used principally for agricultural, horticultural, or pastoral purposes, or for the keeping of bees, poultry, or livestock), the OIO can only grant approval if the land is first advertised and offered on the open market in New Zealand to citizens and residents. The Crown can waive this requirement in special circumstances at the discretion of the relevant government Minister.

Commercial fishing in New Zealand is controlled by the Fisheries Act, which sets out a quota management system that prohibits commercial fishing of certain species without the ownership of a fishing quota which specifies the quantity of fish that may be taken. OIO legislation together with the Fisheries Act, requires consent from the relevant Ministers in order for an overseas person to obtain an interest in a fishing quota, or an interest of 25 percent or more in a business that owns or controls a fishing quota.

Investors subject to OIO screening must demonstrate in their application they meet the criteria for the “Investor Test” and the “Benefit to New Zealand test.” The former requires the investor to display the necessary business experience and acumen to manage the investment, demonstrate financial commitment to the investment, and be of “good character” meaning a person who would be eligible for a permit under New Zealand immigration law.

The “Benefit to New Zealand test” requires the OIO assess the investment against 21 factors, which are set out in the Overseas Investment Act and Regulations. The OIO applies a counterfactual analysis to benefit factors where such analysis can be applied, and the onus is upon the investor to consider the likely counterfactual if the overseas investment does not proceed. Economic factors are given weighting, particularly if the investment will create new job opportunities, retain existing jobs, and lead to greater efficiency or productivity domestically.

The screening thresholds are significantly higher for Australian investors and are reviewed each year in accordance with the 2013 Protocol on Investment to the New Zealand-Australia Closer Economic Relations Trade Agreement. In the 2020 calendar year Australian non-government investors are screened at NZD 536 million (USD 348 million) and Australian government investors at NZD 112 million (USD 73 million).

New Zealand and the People’s Republic of China (PRC) concluded negotiations on an upgrade to their FTA in November 2019. A side letter confirms higher screening thresholds applicable to investments from the PRC in New Zealand significant business assets, following the entry into force of CPTPP. Due to New Zealand’s “Most Favored Nation” obligations in the existing 2008 bilateral FTA, PRC non-government investments in New Zealand significant business assets are screened at NZD 200 million (USD 130 million), and PRC government investments in New Zealand significant business assets are screened at NZD100 million (USD 65 million).

New Zealand screens overseas investment mainly for economic reasons but has legislation that outlines a framework to protect the national security of telecommunication networks. The Telecommunications (Interception and Security) Act 2013 (TICSA) sets out the process for network operators to work with the Government Communications Security Bureau (GCSB) – in accordance with Section 7 – to prevent, sufficiently mitigate, or remove security risks arising from the design, build, or operation of public telecommunications networks; and interconnections to or between public telecommunications networks in New Zealand or with networks overseas.

In 2019 as part of the second phase of overseas investment reform, the Government consulted on and released details for the addition of a National Interest test that will be added to the screening process to protect New Zealand assets deemed sensitive and “high-risk.” This will be discussed in the next chapter.

Other Investment Policy Reviews

New Zealand has not conducted an Investment Policy Review through the OECD or the United Nations Conference on Trade and Development (UNCTAD) in the past three years. New Zealand’s last Trade Policy Review was in 2015 and the next will take place in 2021: https://www.wto.org/english/tratop_e/tpr_e/tp416_e.htm .

Business Facilitation

The New Zealand government has shown a strong commitment to continue efforts to streamline business facilitation. According to the World Bank’s Ease of Doing Business 2020 report New Zealand is ranked first in “Starting a Business,” and “Getting Credit,” and is ranked second for “Registering Property.”

There are no restrictions on the movement of funds into or out of New Zealand, or on the repatriation of profits. No additional performance measures are imposed on foreign-owned enterprises, other than those that require OIO approval. Overseas investors must adhere to the normal legislative business framework for New Zealand-based companies, which includes the Commerce Act 1986, the Companies Act 1993, the Financial Markets Conduct Act 2013, the Financial Reporting Act 2013, and the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT). The Contract and Commercial Law Act 2017 was passed to modernize and consolidate existing legislation underpinning contracts and commercial transactions.

The tightening of anti-money laundering laws has impacted the cross-border movement of remittance orders from New Zealanders and migrant workers to the Pacific Islands. Banks, non-bank institutions, and people in occupations that typically handle large amounts of cash, are required to collect additional information about their customers and report any suspicious transactions to the New Zealand Police. If an entity is unable to comply with the AML/CFT in its dealings with a customer, it must not do business with that person. For banks this would mean not processing certain transactions, withdrawing the banking products and services it offers, and choosing not to have that person as a customer. This has resulted in some banks charging higher fees for remittance services in order to reduce their exposure to risks, which has led to the forced closing of accounts held by some money transfer operators. Phase 1 sectors which include financial institutions, remitters, trust and company service providers, casinos, payment providers, and lenders have had to comply with the AML/CFT since 2013. Phase 2 sectors which include lawyers, conveyancers, accountants, bookkeepers, and realtors have had to comply from January 2019.

In order to combat the increasing use of New Zealand shell companies for illegal activities, the Companies Amendment Act 2014 and the Limited Partnerships Amendment Act 2014 introduced new requirements for companies registering in New Zealand. Companies must have at least one director that either lives in New Zealand or lives in Australia and is a director of a company incorporated in Australia. New companies incorporated must provide the date and place of birth of all directors and provide details of any ultimate holding company. The Acts introduced offences for serious misconduct by directors that results in serious losses to the company or its creditors and aligns the company reconstruction provisions in the Companies Act with the Takeovers Act 1993 and the Takeovers Code Approval Order 2000.

The Companies Office holds an overseas business-related register and provides that information to persons in New Zealand who intend to deal with the company or to creditors in New Zealand. The information provided includes where and when the company was incorporated, if there is any restriction on its ability to trade contained in its constitutional documents, names of the directors, its principal place of business in New Zealand, and where and on whom documents can be served in New Zealand. For further information on how overseas companies can register in New Zealand: https://companies-register.companiesoffice.govt.nz/help-centre/starting-a-company/ 

The New Zealand Business Number (NZBN) Act 2016 allows the allocation of unique identifiers to eligible entities to enable them to conduct business more efficiently, interact more easily with the government, and to protect the entity’s security and confidentiality of information. All companies registered in New Zealand have had NZBNs since 2013 and are also available to other types of businesses such as sole traders and partnerships.

Tax registration is recommended when the investor incorporates the company with the Companies Office, but is required if the company is registering as an employer and if it intends to register for New Zealand’s consumption tax, the Goods and Services Tax (GST), which is currently 15 percent. Companies importing into New Zealand or exporting to other countries which have a turnover exceeding NZD 60,000 (USD 39,000) over a 12-month period or expect to pass NZD 60,000 in the next 12 months, must register for GST. Non-resident businesses that conduct a taxable activity supplying goods or services in New Zealand and make taxable supplies in New Zealand, must register for GST: https://www.ird.govt.nz/gst/registering-for-gst . From 2014, non-resident businesses that do not make taxable supplies in New Zealand have been able to claim GST if they meet certain criteria.

To comply with GST registration, overseas companies need two pieces of evidence to prove their customer is a resident in New Zealand, such as their billing address or IP address, and a GST return must be filed every quarter even if the company does not make any sales.

In 2016 mandatory GST registration was extended to non-resident suppliers of “remote services” to New Zealand customers, if they meet the NZD 60,000 annual sales threshold. In 2019 legislation was enacted that requires non-resident suppliers of “low-value” import goods destined for New Zealand to register for GST, if they meet the NZD 60,000 annual sales threshold. Both are discussed in a later section.

Outward Investment

The New Zealand government does not place restrictions on domestic investors to invest abroad.

NZTE is the government’s international business development agency. It promotes outward investment and provides resources and services for New Zealand businesses to prepare for export and advice on how to grow internationally. The Ministry of Foreign Affairs and Trade (MFAT) and Customs New Zealand each operates business outreach programs that advise businesses on how to maximize the benefit from FTAs to improve the competitiveness of their goods offshore, and provides information on how to meet requirements such as rules of origin.

Transparency of the Regulatory System

The New Zealand government policies and laws governing competition are transparent, non-discriminatory, and consistent with international norms. New Zealand ranks high on the World Bank’s Global Indicators of Regulatory Governance, scoring 4.25 out of a possible 5, but is marked down in part for a lack of transparency in some departments’ individual forward regulatory plans, and the development of the government’s annual legislative program (for primary laws), for which the Ministers responsible do not make public.

While regulations are not in a centralized location in a form similar to the United States Federal Register, the New Zealand government requires the major regulatory departments to publish an annual regulatory stewardship strategy.

Draft bills and regulations including those relating to FTAs and investment law, are generally made available for public comment, through a public consultation process. In a few instances there has been criticism of New Zealand governments choosing to follow a “truncated” or shortened public consultation process or adding a substantive legislative change after public consultation through the process of adding a Supplementary Order Paper to the Bill.

The Regulatory Quality Team within the New Zealand Treasury is responsible for the strategic coordination of the Government’s regulatory management system. Treasury exercises stewardship over the regulatory management system to maintain and enhance the quality of government-initiated regulation. The Treasury’s responsibilities include the oversight of the performance of the regulatory management system as a whole and making recommendations on changes to government and Parliamentary systems and processes. These functions complement the Treasury’s role as the government’s primary economic and fiscal advisor. New Zealand’s seven major regulatory departments are the Department of Internal Affairs, IRD, MBIE, Ministry for the Environment, Ministry of Justice, the Ministry for Primary Industries, and the Ministry of Transport.

In recent years there has been a revision to the Regulatory Impact Assessment (RIA) requirements in order to help New Zealand’s regulatory framework keep up with global standards. To improve transparency in the regulatory process, RIAs are published on the Treasury’s website at the time the relevant bill is introduced to Parliament or the regulation is published in the newspaper, or at the time of Ministerial release. An RIA provides a high-level summary of the problem being addressed, the options and their associated costs and benefits, the consultation undertaken, and the proposed arrangements for implementation and review.

MBIE is responsible for the stewardship of 16 regulatory systems covering about 140 statutes. In 2018 the government introduced three omnibus bills that contain amendments to legislation administered by MBIE, including economic development, employment relations, and housing: https://www.mbie.govt.nz/cross-government-functions/regulatory-stewardship/regulatory-systems-amendment-bills/. The government’s objective with this package of legislation is to ensure that they are effective, efficient, and accord with best regulatory practice by providing a process for making continuous improvements to regulatory systems that do not warrant standalone bills. In November 2019, the Regulatory Systems (Economic Development) Amendment Act 2019 passed and amended about 14 Acts including laws regarding business insolvency, takeovers, trademarks, and limited partnerships.

Most standards are developed through Standards New Zealand, which is a business unit within MBIE, operating on a cost-recovery basis rather than a membership subscription service as previously. The Standards and Accreditation Act 2015 set out the role and function of the Standards Approval Board which commenced from March 2016. Most standards in New Zealand are set in coordination with Australia.

The Resource Management Act 1991 (RMA) has drawn criticism from foreign and domestic investors as a barrier to investment in New Zealand. The RMA regulates access to natural and physical resources such as land and water. Critics contend that the resource management process mandated by the law is unpredictable, protracted, and subject to undue influence from competitors and lobby groups. In some cases, companies have been found to exploit the RMA’s objections submission process to stifle competition. Investors have raised concerns that the law is unequally applied between jurisdictions because of the lack of implementing guidelines. The Resource Management Amendment Act 2013 and the Resource Management (Simplifying and Streamlining) Amendment Act 2009 were passed to help address these concerns.

The Resource Legislation Amendment Act 2017 (RLAA) is considered the most comprehensive set of reforms to the RMA. It contains almost 40 amendments and makes significant changes to five different Acts including the RMA and the Public Works Act (PWA) 1981. Its aim is to balance environmental management with the need to increase capacity for housing development and to align resource consent processes in a consistent manner among New Zealand’s 78 local councils, by providing a stronger national direction, a more responsive planning process, and improved consistency with other legislation. Further amendments to the RMA are expected during 2020 to reduce regulatory barriers to reduce the time for significant infrastructure projects to gain approval.

The PWA enables the Crown to acquire land for public works by agreement or compulsory acquisition and prescribes landowner compensation. New Zealand continues to face a significant demand for large-scale infrastructure works and the PWA is designed to ensure project delivery and enable infrastructure development. In December 2019 a NZD 12 billion (USD 7.8 billion) upgrade fund was announced, amounting to 4 percent of New Zealand’s GDP. Further funding was added in the Government’s Budget delivered in May 2020. Compulsory acquisition of private land is exercised only after an acquiring authority has made all reasonable endeavors to negotiate in good faith the sale and purchase of the owner’s land, without reaching an agreement. The landowner retains the right to have their objection heard by the Environment Court, but only in relation to the taking of the land, not to the amount of compensation payable. The RLAA amendment to the PWA aims to improve the efficiency and fairness of the compensation, land acquisition, and Environment Court objection provisions.

The Land Transfer Act 2018 aims to simplify and modernize the law to make it more accessible and to add certainty around property rights. It empowers courts with limited discretion to restore a landowner’s registered title in cases of manifest injustice.

The Government of New Zealand is generally transparent about its public finances and debt obligations. The annual budget for the government and its departments publish assumptions, and implications of explicit and contingent liabilities on estimated government revenue and spending.

International Regulatory Considerations

In recent years, the Government of New Zealand has introduced laws to enhance regulatory coordination with Australia as part of their Single Economic Market agenda. In February 2017, the Patents (Trans-Tasman Patent Attorneys and Other Matters) Amendment Act took effect creating a single body to regulate patent attorneys in both countries. Other areas of regulatory coordination include insolvency law, financial reporting, food safety, competition policy, consumer policy and the 2013 Trans-Tasman Court Proceedings and Regulatory Enforcement Treaty, which allows the enforcement of civil judgements between both countries.

The Privacy Bill which if enacted will repeal the existing Privacy Act 1993 aims to bring New Zealand privacy law into line with international best practice, including the 2013 OECD Privacy Guidelines and the European General Data Protection Regulation (GDPR).

In 2016 the Financial Markets Authority issued the Disclosure Using Overseas Generally Accepted Accounting Principles (GAAP) Exemption and the Overseas Registered Banks and Licensed Insurers Exemption Notice. They ease compliance costs on overseas entities by allowing them under certain circumstances to use United States statutory accounting principles (overseas GAAP) rather than New Zealand GAAP, and the opportunity to use an overseas approved auditor rather than a New Zealand qualified auditor.

In August 2019, the government passed the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Act to better align New Zealand’s financial markets law with new international regulations, to help strengthen the resilience of global financial markets. The Act amended several pieces of legislation relating to financial market regulation to help financial institutions maintain access to offshore funding markets and help ensure institutions – that rely on derivatives to hedge against currency and other risks – can invest and raise funds efficiently.

New Zealand is a Party to WTO Agreement on Technical Barriers to Trade (TBT). Standards New Zealand is responsible for operating the TBT Enquiry Point on behalf of MFAT. From 2016, Standards New Zealand became a business unit within MBIE administered under the Standards and Accreditation Act 2015. Standards New Zealand establishes techniques and processes built from requirements under the Act and from the International Organization for Standardization.

The Standards New Zealand TBT Enquiry Point operates as a service for producers and exporters to search for proposed TBT Notifications and associated documents such as draft or actual regulations or standards. They also provide contact details for the Trade Negotiations Division of MFAT to respond to businesses concerned about proposed measures. https://www.standards.govt.nz/develop-standards/international-engagement/technical-barriers-to-trade-tbt/ 

The government has a dedicated website to provide a centralized point of contact for businesses to access information and support on non-tariff trade barriers (NTB). New Zealand exporters can report issues, seek government advice and assistance with NTBs and other export issues. Exporters can confidentially register a trade barrier, and the website serves to track and trace the assignment and resolution across agencies on their behalf. It also provides the government with an accurate and timely report of NTBs and other trade issues encountered by exporters, and involves the participation of Customs, MFAT, MPI, MBIE, and NZTE. For more see: https://tradebarriers.govt.nz/ 

New Zealand ratified the WTO Trade Facilitation Agreement (TFA) in 2015 and it entered into force in February 2017. New Zealand was already largely in compliance with the TFA which is expected to benefit New Zealand agricultural exporters and importers of perishable items to enhanced procedures for border clearances.

Legal System and Judicial Independence

New Zealand’s legal system is derived from the English system and comes from a mix of common law and statute law. The judicial system is independent of the executive branch and is generally transparent and effective in enforcing property and contractual rights. The highest appeals court is a domestic Supreme Court, which replaced the Privy Council in London and began hearing cases July 1, 2004. New Zealand courts can recognize and enforce a judgment of a foreign court if the foreign court is considered to have exercised proper jurisdiction over the defendant according to private international law rules. New Zealand has well defined and consistently applied commercial and bankruptcy laws. Arbitration is a widely used dispute resolution mechanism and is governed by the Arbitration Act of 1996, Arbitration (Foreign Agreements and Awards) Act of 1982, and the Arbitration (International Investment Disputes) Act 1979.

Legislation to modernize and consolidate laws underpinning contracts and commercial transactions came into effect in September 2017. The Contract and Commercial Law Act 2017 consolidates and repeals 12 acts that date between 1908 and 2002. The Private International Law (Choice of Law in Tort) Act, passed in December 2017, clarifies which jurisdiction’s law is applicable in actions of tort and abolishes certain common law rules, and establishes the general rule that the applicable law will be the law of the country in which the events constituting the tort in question occur.

Laws and Regulations on Foreign Direct Investment

Overseas investments in New Zealand assets are screened only if they are defined as sensitive according to the definitions within the Overseas Investment Act 2005, as mentioned in the previous section. The OIO, a dedicated unit located within Land Information New Zealand (LINZ), administers the Act. The Overseas Investment Regulations 2005 set out the criteria for assessing applications, provide the framework for applicable fees, and criteria to determine if the investment will benefit New Zealand. Ministerial Directive Letters are issued by the Government to instruct the OIO on their general policy approach, their functions, powers, and duties as regulator. Letters have been issued in December 2010 and November 2017. Substantive changes, such as inclusion of another asset type within “sensitive land,” requires a legislative amendment to the Act. New Zealand companies seeking capital injections from overseas investors that require OIO approval, must meet certain criteria regarding disclosure to shareholders and fulfil other responsibilities under the Companies Act 1993.

The government ministers for finance, land information, and primary industries (where applicable) are responsible for assessing OIO recommendations and can choose to override OIO recommendations on approved applications. Ministers’ decisions on OIO applications can be appealed by the applicant in the New Zealand High Court. Ministers have the power to confer a discretionary exemption from the requirement for a prospective investor to seek OIO consent under certain circumstances. For more see: http://www.linz.govt.nz/regulatory/overseas-investment 

The OIO Regulations set out the fee schedule for lodging new applications which can be costly and current processing times regularly exceed six months. In recent years, some foreign investors have abandoned their applications, due to the costs and time frames involved in obtaining OIO consent.

The OIO monitors foreign investments after approval. All consents are granted with reporting conditions, which are generally standard in nature. Investors must report regularly on their compliance with the terms of the consent. Offenses include: defeating, evading, or circumventing the OIO Act; failure to comply with notices, requirements, or conditions; and making false or misleading statements or omissions. If an offense has been committed under the Act, the High Court has the power to impose penalties, including monetary fines, ordering compliance, and ordering the disposal of the investor’s New Zealand holdings.

The LINZ website reports on enforcement actions they have taken against foreign investors, including the number of compliance letters issued, the number of warnings and their circumstances, referrals to professional conduct body in relation to an OIO breach, and disposal of investments. For more see: https://www.linz.govt.nz/overseas-investment/enforcement/enforcement-action-taken .

In February 2020 New Zealand reported its first conviction under the Overseas Investment Act. The offender was charged for obstructing an OIO investigation which was initiated because he had not obtained OIO consent for his property purchase and for later submitting a fraudulent application.

In 2017 the Government announced a reform of the Overseas Investment Act shortly after being elected and has already implemented Phase 1 reforms with strengthened requirements for screening foreign investment in residential houses, building residential housing developments, and farmland acreage. Screening for investments in forestry were eased slightly to help meet the Government’s One Billion Tree policy. Phase 2 began in 2019 when the Government consulted on and released details for the introduction of a National Interest test to the screening process to protect New Zealand assets deemed sensitive and “high-risk.”

In December 2017, the government introduced regulatory changes that place greater emphasis on the assessment of significant economic benefits to New Zealand. For forestry investments, the OIO is required to place importance on investments that result in increased domestic processing of wood and advance government strategies. For rural land, importance is placed on the generation of economic benefits which were previously seldom applied for lifestyle rural property purchases that previously relied on non-economic benefits to gain OIO approval.

New rules reduced the area threshold for foreign purchases of rural land so that OIO approval is required for rural land of an area over five hectares, rather than the previous metric of farm land “more than ten times the average farm size,” which was about 7,146 hectares for sheep and beef farms, and 1,987 hectares for dairy farms. Foreign investors can still purchase rural land less than five hectares, but the government said it intends to introduce other measures to discourage “land bankers,” or investors holding onto land for speculative purposes.

The government issued new rules regarding residency for overseas investors intending to reside in New Zealand, that they move within 12 months and become ordinarily resident within 24 months.

In 2018, the Overseas Investment Amendment Act passed in order to help address housing affordability and reduce speculative behavior in the housing market. The 2005 Act was amended to bring residential land within the category of “sensitive land.” Residential land is defined as land that has a category of residential or lifestyle within the relevant district valuation roll; and includes a residential flat (apartment) in a building owned by a flat-owning company which could be on residential or non-residential land.

Since October 2018, the Overseas Investment Act generally requires persons who are not ordinarily resident in New Zealand to get OIO consent to purchase residential homes on residential land. Australian and Singaporean citizens are exempt due to existing bilateral trade agreements. To avoid breaching the Act, contracts to purchase residential land must be conditional on getting consent under the Act – entering into an unconditional contract will breach the Act. All purchasers of residential land (including New Zealanders) will need to complete a statement confirming whether the Act applies, and solicitors/conveyancers cannot lodge land transfer documents without that statement.

Overseas persons wishing to purchase one home on residential land will need to fulfil a “Commitment to Reside Test.” Applicants must hold the appropriate non-temporary visa (those on student visas, work visas, or visitor visas cannot apply), have lived in New Zealand for the immediate preceding 12 months and intend to reside in the property being purchased. If the applicant stops living in New Zealand they will have to sell the property. OIO applicants not intending to reside will generally need to show: (1) they will convert the land to another use and demonstrate this would have wider benefits to New Zealand; or (2) they will be adding to New Zealand’s housing supply. Applicants seeking approval under the latter – the “Increased Housing Test” – must intend to increase the number of dwellings on the property by one or more, and they cannot live in the dwellings once built (the “non-occupation condition”). Applicants must then on-sell the dwellings, unless they are building 20 or more new residential dwellings and they intend to provide a shared equity, rent-to-buy, or rental arrangement (the “On-Sale Condition”).

The Amendment also imposes restrictions on overseas persons buying into new residential property developments. Where pre-sales of the new residential dwellings are an essential aspect of the development funding, overseas purchasers may be able to rely on the “Increased Housing” Test, although they will be subject to the on-sale and non-occupation conditions. Otherwise, individual purchasers must apply for OIO consent and meet the “commitment to reside test,” or make their purchase conditional on receiving an “exemption certificate” held by an apartment developer. According to the OIO Regulations, developers can apply for an exemption certificate allowing them to sell 60 percent of the apartments “off the plan” to overseas buyers without those buyers requiring OIO consent but whom would have to meet the non-occupation condition.

Ministers may exercise discretion to waive the on-sale condition if an overseas person is applying for consent to acquire an ownership interest in an entity that holds residential land in New Zealand; if they are acquiring less than a 50 percent ownership interest; or if they are acquiring an indirect ownership interest, (e.g. through another entity). Exemptions can also apply for long-term accommodation facilities, hotel lease-back arrangements, retirement village developments, and for network utility companies needing to acquire residential land to provide essential services. Over 2019 the OIO issued several warnings and fines to overseas buyers of residential property who had failed to apply for OIO consent.

The Labour-led government formed after 2017 elections (reelected in 2020) indicated that forestry would be a priority in boosting regional development. In March 2018, the government announced forestry cutting rights be brought into the OIO screening regime, similar to the requirements for investment in leasehold and freehold forestry land. In addition to residential land, the Overseas Investment Amendment Act 2018 classified “forestry rights” within the asset class of “sensitive land.”

Overseas investors wanting to purchase up to 1,000 hectares of forestry rights per year or any forestry right of less than three years duration, do not generally require OIO approval.

Overseas investors can apply for consent to buy or lease land that is in forestry, or land to be used for forestry, or to buy forestry rights. In addition to meeting the “Benefit to New Zealand Test,” applicants wishing to buy or lease land for forestry purposes, convert farmland to forestry land, or purchase forestry rights, must meet either the “Special Forestry Test,” or the “Modified Benefits Test.”

The Special Forestry Test is the most streamlined test, and is used to buy forestry land and continue to operate it with existing arrangements remaining in place, such as public access, protection of habitat for indigenous plants and animals, and historic places, as well as log supply arrangements. The investor would be required to replant after harvest, unless exempted, and use the land exclusively or nearly exclusively for forestry activities. The land can be used for accommodation only to support forestry activities.

The Modified Benefits Test is suitable for investors who will use the land only for forestry activities, but who cannot maintain existing arrangements relating to the land, such as public access. The investor would need to pass the Benefit to New Zealand Test, replant after harvest, and use the land exclusively or nearly exclusively for forestry activities.

By 2020 the OIO issued several warnings and fines to overseas investors purchasing forestry rights for failing to comply with conditions or failing to apply for OIO approval.

[Phase 2 Reforms]

In April 2019, the government signaled it would be considering a “national interest” restriction on foreign investment, and issued a document for public consultation, later agreeing upon New Zealand’s most strategically important assets in November. The government aims to bring New Zealand to apply a National Interest Test to overseas investors wishing to purchase New Zealand high-risk, sensitive or monopoly assets such as ports and airports, telecommunications infrastructure, electricity and other critical infrastructure.

Current legislation does not consider National Security or Public Order investments under NZD 100 million (USD 65 million).

A “call in” power would apply to the sale of New Zealand’s most strategically important assets, such as firms developing military technology and direct suppliers to New Zealand defense and security agencies. This will apply to assets not currently screened under the Overseas Investment Act. The tests could also be used to control investments in significant media entities if they are likely to damage New Zealand security or democracy.

Phase 2 includes other measures to protect New Zealand’s interests announced in November 2019, such as equipping the OIO with enhanced enforcement powers and increasing the maximum penalties for non-compliance NZD 300,000 (USD 195,000) to NZD 10 million (USD 6.5 million) for corporates. The legislation will also include a requirement that overseas investors in farmland show substantial benefit to New Zealand, by adding something substantially new or creating additional value to the New Zealand economy. In recognition of complaints regarding cost and time to gain OIO consent, the government will set specific timeframes to give investors greater certainty and exempt a range of low risk transactions, such as some involving companies that are majority owned and controlled by New Zealanders.

There has been controversy and concern about water extraction investment by overseas investors in New Zealand, particularly water bottling to export, earning overseas companies profits from a high-value New Zealand resource without paying a charge. Under Phase 2 the Government will require overseas investors in water extraction take into consideration the environmental, economic, and cultural impact of their investment, and its effect on local water quality and the overall sustainability of a water bottling enterprise.

In February 2020, Treasury released all documents online, including the Cabinet Paper that recommended the Phase 2 reform.

[Phase 2 Reforms – Fast-Tracked Legislation]

The Government of New Zealand was quick to recognize the risks posed by a COVID-19 recession and fast-tracked implementation of Overseas Investment Act (OIA) Phase 2 reforms, which went into effect on June 16. These reforms grant the government increased oversight and approval authority for foreign investments, which may have fallen in value during the pandemic, to protect critical infrastructure such as telecoms, ports, airports, and dual use/military related sensitive technology, as well as media.

The changes bring forward the introduction of a national interest test to strategically important assets, and the temporary application of that test to any foreign investments, regardless of dollar value that result in more than a 25 percent ownership interest, or that increases an existing interest to or beyond 50 percent, 75 percent or 100 percent in a New Zealand business.

This includes purchases by “fundamentally New Zealand companies” and small changes in existing shareholdings. In addition, the Government will use regulations to extend existing exemptions and remove screening from two further classes of low risk lending and portfolio management transactions.

In addition, as of March 22, 2021, the “New Investor Test” is in force which includes Twelve character and capability factors including a review for convictions resulting in imprisonment, penalties for tax evasion, corporate fines, and civil pecuniary penalties. The test is satisfied when none of these factors are established or, if a factor is met, the decision-maker is satisfied that this does not make an investor unsuitable to own or control a sensitive New Zealand asset.

[Non-OIO Legislation Governing Foreign Investment]

Outside of the OIO framework, the previous government passed the Taxation (Bright-line Test for Residential Land) Bill to apply to domestic and foreign purchasers of residential land in part to counter criticism New Zealand’s lack of tax on capital gains was fueling house price inflation. Under this Act, properties bought after October 1, 2015 will accrue tax on any gain earned if the house is bought and sold within two years, unless it is the owner’s main home. The bill requires foreign purchasers to have both a New Zealand bank account and an IRD tax number and will not be entitled to the “main home” exception. The purchaser must also submit other taxpayer identification number held in countries where they pay tax on income. To assist the IRD in ensuring investors – foreign and domestic – meet their tax obligations, legislation was passed in 2016 that empowered LINZ to collect additional information when residential property is bought and sold, and to pass this information to the IRD.

In March 2018, the new government passed legislation to extend the “bright-line test” from two to five years as a measure to further deter property speculation in the New Zealand housing market.

In November 2018, the government passed the Crown Minerals (Petroleum) Amendment Act, to stop new exploration permits being granted offshore and onshore outside of the Taranaki province on the west coast of the North Island. The policy is part of the government’s efforts to transition away from fossil fuels and achieve their goal to have net zero emissions by 2050. The annual Oil and Gas Block Offers program has been operational since 2012 to raise New Zealand’s profile among international investors in the energy and mining sector and has been a significant source of government revenue.

There are currently about 20 offshore permits covering 38,000 square miles that will have the same rights and privileges as before the law came into force and will continue operation until 2030. If those permit holders are successful in their exploration, the companies could extract oil and gas from the areas beyond 2030.

Competition and Anti-Trust Laws

The Commerce Act 1986 prohibits contracts, arrangements, or understandings that have the purpose, or effect, of substantially lessening competition in a market, unless authorized by the Commerce Commission, an independent Crown entity. Before granting such authorization, the Commerce Commission must be satisfied that the public benefit would outweigh the reduction of competition. The Commerce Commission has legislative power to deny an application for a merger or takeover if it would result in the new company gaining a dominant position in the New Zealand market.

In addition, the Commerce Commission enforces certain pieces of legislation that, through regulation, aim to provide the benefits of competition in markets with certain natural monopolies, such as the dairy, electricity, gas, airports, and telecommunications industries. In order to monitor the changing competitive landscapes in these industries, the Commerce Commission conducts independent studies, currently including fiber networks (https://comcom.govt.nz/regulated-industries/telecommunications/regulated-services/fibre-regulation/fibre-services-study ), mobile phones (https://comcom.govt.nz/regulated-industries/telecommunications/projects/mobile-market-study ), and retail petrol (https://comcom.govt.nz/about-us/our-role/competition-studies/market-study-into-retail-fuel ).

The Commerce Amendment Act of 2018 empowers the Commerce Commission to undertake market (“competition”) studies where this is in the public interest in order to improve the agency’s enforcement actions without having to go to court. The Government introduced a market studies power to align the Commerce Commission with competition authorities in similar jurisdictions. The Act allows settlements to be registered as enforceable undertakings so breaches can be quickly penalized by the courts and saves the Commission from the expense and uncertainty of litigation. The amendment also strengthens the information disclosure regulations for airports.

The Dairy Industry Restructuring Act of 2001 (DIR) established dairy co-operative Fonterra Co-operative Group Limited (Fonterra). The DIR is designed to manage Fonterra’s dominant position in the domestic dairy market, until sufficient competition has emerged. A review by the Commerce Commission in 2016 found competition insufficient, but the findings from a subsequent review in 2018 resulted in the introduction of the DIR Amendment Bill (No 3) which passed its first reading in August 2019, and was advanced to the Select Committee stage for scrutiny on March 20, 2020.

This amendment, if passed, will ease the requirement that Fonterra accept all milk from new suppliers, allowing the cooperative the option to refuse milk if it does not meet environmental standards or if it comes from newly converted dairy farms. The bill would also limit Fonterra’s discretion in calculating the base milk price.

The Commerce Commission is also charged with monitoring competition in the telecommunications sector. Under the 1997 WTO Basic Telecommunications Services Agreement, New Zealand has committed to the maintenance of an open, competitive environment in the telecommunications sector.

Following a four-year government review of the Telecommunications Act 2001, the Telecommunications (New Regulatory Framework) Amendment Act of 2018 establishes a regulatory framework for fiber fixed line access services; removes unnecessary copper fixed line access service regulation in areas where fiber is available; streamline regulatory processes; and provides more regulatory oversight of retail service quality. The amendment requires the Commerce Commission to implement the new regulatory regime by January 2022.

Chorus won government contracts to build 70 percent of New Zealand’s new ultra-fast broadband fiber-optic cable network and has received subsidies. Chorus is listed on the NZX stock exchange and the Australian Stock Exchange but is subject to foreign investment restrictions. From 2020, Chorus and the local fiber companies are required under their open access deeds to offer an unbundled mass-market fiber service on commercial terms.

The telecommunications service obligations (TSO) regulatory framework established under the Telecommunications Act of 2001 enables certain telecommunications services to be available and affordable. A TSO is established through an agreement under the Telecommunications Act between the Crown and a TSO provider. Currently there are two TSOs. Spark (supported by Chorus) is the TSO Provider for the local residential telephone service, which includes charge-free local calling. Sprint International is the TSO Provider for the New Zealand relay service for deaf, hearing impaired and speech impaired people. Under the Telecommunications (New Regulatory Framework) Amendment Act, the TSOs which apply to Chorus and Spark will cease to apply in areas which have fiber. Consumers in these areas will have access to affordable fiber-based landline and broadband services.

Radio Spectrum Management (RSM) is a business unit within MBIE that is responsible for providing advice to the government on the allocation of radio frequencies to meet the demands of emerging technologies and services. Spectrum is allocated in a manner intended to ensure that radio spectrum provides the greatest economic and social benefit to New Zealand society. The allocation of spectrum is a core regulatory issue for the deployment of 5G in New Zealand. The Commerce Commission completed a two-year study in September 2019 of mobile network operators (MNOs) in New Zealand in order to assess the process for 5G spectrum allocation and whether it will impact the ability of new mobile network operators to enter the market. It found no case to support regulatory intervention to promote a fourth national MNO to enter the market, but that the spectrum allocation process should not preclude new parties from obtaining spectrum.

In March 2019, the government announced it freed up space on the spectrum for a fourth mobile network operator to compete with the three existing ones. In order to do so, the three existing operators lost parts of their spectrum, for which sources criticized the government, claiming they supported competition in principle but questioned the ability of the New Zealand market to cope with another operator. The Government claims it needs to keep some of that spectrum in reserve to retain flexibility and it might be used for new technologies or by the emergency services network.

The Government’s first auction of 5G spectrum planned for 2020 – and ready for use by November 2022 – was cancelled in May 2020 due to the COVID-19 pandemic. The Government directly allocated spectrum to the three MNOs, with these rights expiring in October 2022 after which the scheme will switch to long-term rights that will be gained in a separate auction process. The government determined the allocations in such a way as to prevent a single operator to prevent monopolistic behavior, but it also to set aside spectrum to deal with potential Treaty of Waitangi issues. Vodafone announced in February 2021 Vodafone that they were the first telco in New Zealand to stage a widespread 5G fixed-wireless access 5G launch. New Zealand telecom 2degress announced on April 14, 2021 it has selected Ericsson as its partner for a 5G RAN (Radio Access Network) and Core nationwide network launch.

The Commerce Commission has a regulatory role to promote competition within the electricity industry under the Commerce Act 1986 and the Fair Trading Act 1986. As natural monopolies, the electricity transmission and distribution businesses are subject to specific additional regulations, regarding pricing, sales techniques, and ensuring sufficient competition in the industry. The Commerce Commission completed a project in March 2020 that set the default price-quality path to determine the price caps that will apply to the 17 electricity distributors in New Zealand from April 1, 2020 to March 31, 2025. Due to increased expenditure for distributors to accommodate new technology, the Commerce Commission also recommended new recoverable costs to incentivize ongoing innovation in the electricity sector.

The New Zealand motor fuel market became more concentrated after Shell New Zealand sold its transport fuels distribution business in 2010 and Chevron sold its retail brands Caltex and Challenge in 2016 to New Zealand fuel distributor Z-Energy. Z-Energy holds almost half of the market share in New Zealand. A two-year study by the Commerce Commission was completed in December 2019 that evaluated whether competition in the retail fuel market is promoting outcomes that benefit New Zealand consumers over the long-term. They found that the lack of an active wholesale market in New Zealand has weakened price competition in the retail market and that the major fuel companies’ joint infrastructure network and supply relationships gave them an advantage over other fuel importers. The wholesale supply relationships, including restrictive contract terms between the majors and resellers, limits the ability of resellers to switch supplier.

The Commerce (Cartels and Other Matters) Amendment Act of 2017 empowers the Commerce Commission with easier enforcement action against international cartels. It created a new clearance regime allowing firms to test their proposed collaboration with the Commerce Commission and get greater legal certainty before they enter into the arrangements. It expanded prohibited conduct to include price fixing, restricting output, and allocating markets, and expands competition oversight to the international liner shipping industry. It empowers the Commerce Commission to apply to the New Zealand High Court for a declaration to determine if the acquisition of a controlling interest in a New Zealand company by an overseas person will have an effect of “substantially lessening” competition in a market in New Zealand.

The Commerce (Criminalization of Cartels) Amendment Act was passed in April 2019 to align New Zealand law with other jurisdictions – particularly Australia – by criminalizing cartel behavior. Individuals convicted of engaging in cartel conduct – price fixing, restricting output, or allocating markets – will face fines of up to NZD 500,000 (USD 325,000) and/or up to seven years imprisonment. For companies, the fines can be up to NZD 10 million (USD 6.5 million), or higher based on turnover. Business have been given two years to ensure compliance before the criminal sanctions enter into force. While not a significant issue in New Zealand, the government believes criminalizing cartel behavior provides a certain and stable operating environment for businesses to compete, and aligns New Zealand with overseas jurisdictions that impose criminal sanctions for cartel conduct, enhancing the ability of the Commerce Commission to cooperate with its overseas counterparts in investigations of international cartels.

In January 2019, the Government announced proposed amendments to section 36 of the Commerce Act, which relates to the misuse of market power. The government is seeking consultation on repealing sections of the Commerce Act that shield some intellectual property arrangements from competition law, in order to prevent dominant firms misusing market power by enforcing their patent rights in a way they would not do if it was in a more competitive market. It also seeks to strengthen laws and enforcement powers against the misuse of market power by aligning it with Australia and other developed economies, particularly because New Zealand competition law currently does not prohibit dominant firms from engaging in conduct with an anti-competitive effect. Section 36 of the Act only prohibits conduct with certain anti-competitive purposes.

The Commerce Commission has international cooperation arrangements with Australia since 2013 and Canada since 2016, to allow the sharing of compulsorily acquired information, and provide investigative assistance. The arrangements help effective enforcement of both competition and consumer law.

In May 2020, the Commerce Commission issued guidance easing restrictions on businesses to collaborate in order to ensure the provision of essential goods and services to New Zealand consumers during the COVID-19 pandemic.

Expropriation and Compensation

Expropriation is generally not an issue in New Zealand, and there are no outstanding cases. New Zealand ranks second in the World Bank’s 2020 Doing Business report for “registering property” and third for “protecting minority investors.”

The government’s KiwiBuild program aims to build 100,000 affordable homes over ten years, with half being in Auckland. However, progress on KiwiBuild has been slow and well below targets. The government has indicated it will use compulsory acquisition under the PWA if necessary to achieve planned government housing development.

The lack of precedent for due process in the treatment of residents affected by liquefaction of residential land caused by the Canterbury earthquake in 2011 resulted in prolonged court cases against the Government based largely on the amount of compensation offered to insured home and/or land owners and the lack of any compensation for uninsured owners. Several large areas of residential land in Christchurch were deemed Residential Red Zones (RRZ) meaning there had to be significant and extensive area wide land damage, the extent of the damage required an area-wide solution, engineering solutions would be uncertain, disruptive, not timely, and not cost-effective. One offer made by the government to uninsured Christchurch RRZ landowners for 50 percent of the rated value of their property was deemed unlawful in the Court of Appeal in 2013. A later offer was made by the government to uninsured residents, but only for the value of their land and not their house.

In 2018, the government opted to settle with a group of uninsured home and landowners, but some objected to the compensation because it was based on 2007/08 rating valuations. There were also reports some insurance companies paid out less to policy holders than the full value of some houses if they found based on the structural characteristics of the house that it was repairable, even though the repairs would be legally prohibited if in the RRZ.

LINZ currently manages Crown-owned land in the RRZ and can temporarily agree short-term leases of this land under the Greater Christchurch Regeneration Act 2016 but does not make offers to buy properties from RRZ residents. From June 2020 ownership and management of the land is progressively transitioning from the Crown back to the Christchurch City Council, according to the terms under an agreement made in September 2019 and to be legislated as an amendment to the 2016 Act. LINZ must review the interests of each of the 5,500 titles in the RRZ to check if anyone has rights to the land, such as an easement, a covenant, or a mortgage. For more see: https://www.linz.govt.nz/crown-property/types-crown-property/christchurch-residential-red-zone .

Dispute Settlement

ICSID Convention and New York Convention

New Zealand is a party to both the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the Washington Convention), and to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.

Proceedings taken under the Washington Convention are administered under the Arbitration (International Investment Disputes) Act 1979. Proceedings taken under the New York Convention are now administered under the Arbitration Act 1996.

Investor-State Dispute Settlement

Investment disputes are rare, and there have been no major disputes in recent years involving U.S. companies. The mechanism for handling disputes is the judicial system, which is generally open, transparent and effective in enforcing property and contractual rights.

Most of New Zealand’s recently enacted FTAs contain Investor-State Dispute Settlement (ISDS) provisions, and to date no claims have been filed against New Zealand. The current Government has signaled it will seek to remove ISDS from future FTAs, having secured exemptions with several CPTPP signatories in the form of side letters. ISDS claims challenging New Zealand’s tobacco control measures – under the Smoke-free Environments (Tobacco Standardized Packaging) Amendment Act 2016 – cannot be made against New Zealand under CPTPP.

International Commercial Arbitration and Foreign Courts

Arbitrations taking place in New Zealand (including international arbitrations) are governed by the Arbitration Act 1996. The Arbitration Act includes rules based on the United Nations Commission on International Trade Law (UNCITRAL) and its 2006 amendments. Parties to an international arbitration can opt out of some of the rules, but the Arbitration Act provides the default position.

The Arbitration Act also gives effect to the New Zealand government’s obligations under the Protocol on Arbitration Clauses (1923), the Convention on the Execution of Foreign Arbitral Awards (1927), and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). Obligations under the Washington Convention are administered under the Arbitration (International Investment Disputes) Act 1979.

The New Zealand Dispute Resolution Centre (NZDRC) is the leading independent, nationwide provider of private commercial, family and relationship dispute resolution services in New Zealand. It also provides international dispute resolution services through its related entity, the New Zealand International Arbitration Centre (NZIAC). The NZDRC is willing to act as an appointing authority, as is the Arbitrators’ and Mediators’ Association of New Zealand (AMINZ).

Forms of dispute resolution available in New Zealand include formal negotiations, mediation, expert determination, court proceedings, arbitration, or a combination of these methods. Arbitration methods include ‘ad hoc,’ which allows the parties to select their arbitrator and agree to a set of rules, or institutional arbitration, which is run according to procedures set by the institution. Institutions recommended by the New Zealand government include the International Chamber of Commerce (ICC), the American Arbitration Association (AAA), and the London Court of International Arbitration (LCIA).

The Arbitration Amendment Act 2016 empowered the Minister of Justice to create an “appointed body” to exercise powers which were previously powers of the High Court. It also provides for the High Court to exercise the powers if the appointed body does not act, or there is a dispute about the process of the appointed body. The Minister of Justice has appointed the AMINZ the default authority for all arbitrations sited in New Zealand in place of the High Court. In 2017 AMINZ issued its own Arbitration Rules based on the latest editions of rules published in other Model Law jurisdictions, to be used in both domestic and international arbitrations, and consistent with the 1996 Act.

The Arbitration Amendment Act 2019 was passed to bring New Zealand’s policy of preserving the confidentiality of trust deed clauses in line with foreign arbitration legislation and case law. The amendment means arbitration clauses in trust deeds are given effect to extend the presumption of confidentiality in arbitration to the presumption of confidentiality in related court proceedings under the Act because often such cases arise from sensitive family disputes.

Bankruptcy Regulations

Bankruptcy is addressed in the Insolvency Act 2006, the Receiverships Act 1993, and the Companies Act 1993. The Insolvency (Cross-border) Act 2006 implements the Model Law on Cross-Border Insolvency adopted by the United Nations Commission on International Trade Law in 1997. It also provides the framework for facilitating insolvency proceedings when a person is subject to insolvency administration (whether personal or corporate) in one country, but has assets or debts in another country; or when more than one insolvency administration has commenced in more than one country in relation to a person. New Zealand bankrupts are subject to conditions on borrowing and international travel, and violations are considered offences and punishable by law.

The registration system operated by the Companies Office within MBIE, is designed to enable New Zealand creditors to sue an overseas company in New Zealand, rather than forcing them to sue in the country’s home jurisdiction. This avoids attendant costs, delays, possible language problems and uncertainty due to a different legal system. An overseas company’s assets in New Zealand can be liquidated for the benefit of creditors. All registered ‘large’ overseas companies are required to file financial statements under the Companies Act of 1993. See: https://companies-register.companiesoffice.govt.nz/help-centre/managing-an-overseas-company-in-nz/ 

The Insolvency and Trustee Service (the Official Assignee’s Office) is a business unit of MBIE. The Official Assignee is appointed under the State Sector Act of 1988 to administer the Insolvency Act of 2006, the insolvency provisions of the Companies Act of 1993 and the Criminal Proceeds (Recovery) Act of 2009. The Official Assignee administers all bankruptcies, No Asset Procedures, Summary Installment Orders, and some liquidations by collecting and selling assets to repay creditors. The bankrupt or company directors will be asked for information to help identify and deal with the assets. The money recovered is paid to creditors who have made a claim, in order according to the relevant Acts. Creditors can log in to the Insolvency and Trustee Service website to track the progress of their claim and how long it is likely to take.

In the World Bank’s Doing Business 2020 Report New Zealand slipped in the rankings for “resolving insolvency” from 31st last year to 36th. Despite a high recovery rate (79.7 cents per dollar compared with 70.2 cents for the average across high-income OECD countries), New Zealand scores lower based on the strength of its insolvency framework. Specific weaknesses identified in the survey include the management of debtors’ assets, the reorganization proceedings, and the participation of creditors.

The government has recognized the need for more insolvency law reform beyond the 2006 Act which repealed the Insolvency Act 1967. The Regulatory Systems (Economic Development) Amendment Act which passed in November 2019 included amendments to the Insolvency Act that strengthened some regulations and assigned more powers to the Official Assignee. After the previous government established an Insolvency Working Group in 2015, MBIE published a proposed set of reforms in November 2019, based on the group’s recommendations from 2017. The current government plans to introduce an insolvency law reform bill in early 2020. The omnibus COVID-19 Response (Further Management Measures) Legislation Bill passed on May 15, 2020, included provisions to provide temporary relief for businesses facing insolvency, and exemptions for compliance, due to the COVID-19 pandemic.

Investment Incentives

New Zealand has no specific economic incentive regime because of its free trade policy. The New Zealand government, through its bodies such as Tourism New Zealand and NZTE, assists certain sectors such as tourism and the export of locally manufactured goods. The government generally does not have a practice of jointly financing foreign direct investment projects.

In the Media and Entertainment sector, the New Zealand Film Commission administers a grant for international film and television productions on behalf of the Ministry for Culture and Heritage and MBIE. Established in 2014, the New Zealand Screen Production Grant provides rebates for international productions of 20 percent on specified goods and services purchased in New Zealand. An additional five percent is available for productions that meet a significant economic benefit points test for New Zealand.

Callaghan Innovation is a stand-alone Crown Entity established in February 2013. It connects businesses with research organizations offering services, and the opportunity to apply for government funding and grants that support business innovation and capability building. Callaghan Innovation requires businesses applying for any of their research and development grants to have at least one director who is resident in New Zealand and to have been incorporated in New Zealand, have a center of management in New Zealand, or have a head office in New Zealand. For more information see: http://www.business.govt.nz/support-and-advice/grants-incentives .

The government does not have a state policy on issuing guarantees on foreign direct investment projects. It provides some opportunities and initiatives for overseas investors to apply for joint financing mainly if the projects involve R&D, science and innovation that will ultimately benefit the New Zealand economy.

Foreign Trade Zones/Free Ports/Trade Facilitation

New Zealand does not have any foreign trade zones or duty-free ports.

Performance and Data Localization Requirements

The government of New Zealand does not maintain any measures that are alleged to violate the Trade Related Investment Measures text in the WTO. There are no government mandated requirements for company performance or local employment, and foreign investors that do not require OIO approval are treated equally with domestic investors. Overseas investors that require OIO approval must comply with legal obligations governing the OIO and the conditions of its approval including: satisfying the benefit to New Zealand test through local employment, using domestic content in goods, or promising the introduction of a new technology to New Zealand.

Investors requiring OIO approval also must maintain “good character” and meet reporting requirements. Investors are generally required to report annually to the OIO for up to five years from consent, but if benefits are expected to occur after that five-year period, monitoring will reflect the time span within which benefits will occur. Failure to meet obligations under the investors’ consent can result in fines, court orders, or forced disposal of their investment. A government-commissioned independent review in 2016 found the good character test to be robust after questions were asked whether it was being used consistently and accurately.

In 2019, the New Zealand High Court imposed civil penalties on a director for breaching the good character conditions of his company’s consent when it bought a controlling interest (50.2 percent) in New Zealand’s largest agricultural services company in 2011. The breach arose because the director was investigated by the United States Securities and Exchange Commission (SEC) and found to have violated United States securities law. As part of the settlement reached with the OIO, the director’s company agreed to divest its interest in the company below 50 percent (to 46.5 percent).

Businesses wanting to establish themselves in New Zealand and seeking to relocate their employees to New Zealand will need to apply for and satisfy the conditions of the Employees of Relocating Business Resident Visa: https://www.immigration.govt.nz/new-zealand-visas/apply-for-a-visa/about-visa/relocating-with-an-employer-resident-visa. These conditions include providing evidence the business is up and running, have the support of NZTE, and provide a letter from the business CEO. Immigration New Zealand may grant temporary work visas to key employees to get the business established and resident visas once the business is operating. Applicants must provide evidence the business is up and running, such as a certificate of incorporation, tax records, and documents showing a business site has been purchased or leased. Immigration New Zealand also considers if the relocation benefits New Zealand, if the business is trading profitably (or has the potential to do so in the next 12 months), and contributing to economic growth by, for example introducing new technology, management or technical skills; enhancing existing technology, management or technical skills; introducing new products or services; enhancing existing products or services; creating new export markets; expanding existing export markets; creating at least one full-time job for a New Zealander. Visa holders can bring family, and after meeting conditions of the visa may be eligible to live and work in New Zealand indefinitely.

As part of the KIWI Act U.S. Public Law 115-226, enacted on August 1, 2018, accorded nationals of New Zealand to E-1 and E-2 status for treaty trader/treaty investor purposes if the Government of New Zealand provides similar nonimmigrant status to nationals of the United States. The State Department confirmed that New Zealand offers similar nonimmigrant status to U.S. nationals and E visas may be issued to nationals of New Zealand beginning on June 10, 2019. See https://travel.state.gov/content/travel/en/us-visas/visa-information-resources/fees/treaty.html#16

New Zealand supports the ability to transfer data across borders, and does not force businesses to store their data within any particular jurisdiction. While data localization and cloud computing is not specifically legislated for, all businesses must comply with the Privacy Act 1993 to protect customers’ “personal information.” However, under certain circumstances the Commissioner of Inland Revenue must approve the storage electronic business and tax records outside of New Zealand. Alternatively, taxpayers can use an IRD authorized third party to store their information without having to seek individual approval. It remains the taxpayer’s responsibility to meet their obligations to retain business records for the retention period (usually seven years) required under the Act.

Under CPTPP, the New Zealand government has retained the ability to maintain and amend regulations related to data flows with CPTPP countries, but in such a way that does not create barriers to trade. These rules come with a “public policy safeguard”, which gives CPTPP governments the discretion to control the movement and storage of data for legitimate public policy objectives to ensure governments can respond to the changing technology in areas such as privacy, data protection, and cybersecurity.

As part of CPTPP, New Zealand has committed not to impose ‘localization requirements’ that would force businesses to build data storage centers or use local computing facilities in CPTPP markets. Another provision requires CPTPP countries not to impede companies delivering cloud computing and data storage services.

New Zealand is considering e-commerce issues in trade agreements beyond CPTPP, including upgrades of existing FTAs, and in January 2019 joined other WTO members to launch negotiations on E-Commerce.

The Digital Economy Partnership Agreement (DEPA), which came into effect on January 7, 2021 for Singapore, New Zealand, and Chile, includes a series of modules covering measures that affect the digital economy. Module 4 on Data Issues includes binding provisions on personal data protection and cross-border data flows that build on the CPTPP. In addition to the CPTPP obligations, DEPA encourages the adoption of data protection trust-marks for businesses to verify conformance with privacy standards. The agreement is an open plurilateral one that allows other countries to join the agreement as a whole, select specific modules to join, or replicate the modules in other trade agreements.

The Customs and Excise Act 2018 allows customers who are required to keep Customs-related records to apply to Customs New Zealand, to store their business records outside of New Zealand. Under the repealed 1996 Act it was an offence for businesses to not store physical records in New Zealand or their electronic records with a New Zealand-based cloud storage provider. Under the Act, a business can apply for permission to keep their Customs-related business records outside New Zealand, including in a cloud storage facility that is not based in New Zealand. Businesses denied permission must still be required to store business records in New Zealand, including with New Zealand-based cloud providers.

In March 2018, the government introduced the Privacy Bill to repeal and replace the Privacy Act 1993. The bill received Royal Assent to come into effect on June 30, 2020, and aims to strengthen the protection of confidential and personal information and modernize privacy regulations. It incorporate provisions included in the European General Data Protection Regulation (GDPR) but is not in strict alignment with the GDPR.

The provisions apply to all actions by a New Zealand agency regardless of where that agency is located, and apply to all personal information collected or held by a New Zealand agency regardless of where that information is collected or held, or where the relevant individual is located.

The provision extends the current law to apply to agencies located outside of New Zealand as long as that agency is “carrying on business in New Zealand.” It applies to personal information collected in the course of such business, again regardless of where the agency is located and where the information is held. Additionally, it will apply regardless of whether that agency charges monetary payment or makes a profit from its business in New Zealand. The intent is to ensure that global businesses doing business in New Zealand, irrespective of where the individual or the agency is located, comply with the new Privacy Act.

For most businesses, the most notable change in the new Act is the introduction of a requirement to report serious privacy breaches. Notifiable privacy breaches will require organizations to notify the Privacy Commissioner and any affected individuals if there is a breach that has caused serious harm or poses a risk of causing someone serious harm. In March 2020, an amendment to the bill was proposed to all the new legislation apply from November 1, 2020.

A provision affecting cloud service providers places the onus of liability for privacy breaches on the customer, as long as the provider is not using or disclosing that customer’s information for its own purposes. The Search and Surveillance Act 2012 includes powers to search and notification requirements of search power in connection to a “remote access search” defined in the Act as a search of a thing such as an Internet data storage facility that does not have a physical address that a person can enter and search. Such mandatory demands as mentioned are legal obligations that must be complied with and are made under a search warrant. The Privacy Act permits disclosure in such a case. The organization can only disclose the information requested and any excess information provided will be in breach of the Privacy Act unless it is able to be provided as part of a voluntary request.

New Zealand does not have any requirements for foreign information technology (IT) providers to turn over source code or provide access to encryption. There may be obligations on individuals to assist authorities under Section 130 of the Search and Surveillance Act 2012. An agency with search authority in terms of data held in a computer system or other data storage device may require a specified person to provide access information that is reasonable to allow the agency exercising the search power to access that data. This could include a requirement that they decrypt information which is necessary to access a particular device. The search power cannot be used to require the specified person to give information intending to incriminate them. Failure to assist a person exercising a search power under section 130(1), without reasonable excuse, is a criminal offence punishable with imprisonment for up to three months.

The Customs and Excise Act 2018 sets specific legal thresholds for Customs officers to search passengers’ electronic devices and imposes a fine of NZD 5,000 (USD 3,250) if they refuse to hand over passwords, pins, or encryption keys to access the device. The officer must have “reasonable cause to suspect,” that the passenger has been or is about to be involved in the commission of relevant offending.

There is not a particular government agency that enforces all privacy law, however the Office of the Privacy Commissioner is empowered through the Privacy Act 1993 and has a wide ability to consider developments or actions that affect personal privacy. Separately, New Zealand courts have developed a privacy tort allowing individuals to sue another for breach of privacy.

Real Property

New Zealand recognizes and enforces secured interest in property, both movable and real. Most privately owned land in New Zealand is regulated by the Land Transfer Act 2017. These provisions set forth the issuance of land titles, the registration of interest in land against land titles, and guarantee of title by the State. The Registrar-General of Land develops standards and sets an assurance program for the land rights registration system. New Zealand’s legal system protects and facilitates acquisition and disposition of all property rights.

The Land Transfer Act 2018 repealed law from 1952 but maintains the Torrens system of land title in which land ownership is transferred through registration of title instead of deeds, a system which has been in operation in New Zealand since the nineteenth century. The Act aims to improve the certainty of property rights, modernize, simplify and consolidate land transfer legislation. It empowers courts with limited discretion to restore a landowner’s registered title in rare cases, in the event of fraud or other illegality, where it is warranted to avoid a manifestly unjust result. The Act includes new provisions to prevent mortgage fraud, to protect Maori freehold land, and to extend the Registrar-General’s powers to withhold personal information to protect personal safety.

Land leasing by foreign or non-resident investors is governed by the OIO Act. About eight percent of New Zealand land is owned by the Crown. The Land Act of 1948 created pastoral leases which run for 33 years and can be continually renewed. Rent is reviewed every 11 years, basing the rent on how much stock the land can carry for pastoral farming. The Crown Pastoral Land Act 1998 and its amendments contain provisions governing pastoral leases that apply to foreign and domestic lease holders. Holders of pastoral leases have exclusive possession of the land, and the right to graze the land, but require permission to carry out other activities on their lease.

Foreign and domestic lessees can gain freehold title over part of the land under a voluntary process known as tenure review. Under this process, specified land areas of the lease can be restored to full Crown ownership, usually to be managed by the Department of Conservation. However, in February 2019 the government announced an end to tenure review because it has resulted in more intensive farming and subdivision on the 353,000 hectares of freehold land which has been affecting the landscape and biodiversity of the land. With tenure review ending, the remaining Crown pastoral lease properties, currently 171 covering 1.2 million hectares of Crown pastoral land which is just under 5 percent of New Zealand’s land area, will continue to be managed under the regulatory system for Crown pastoral lands. In April 2019 there had been 2,500 submissions for feedback to the government on the future management of the South Island high country.

The types of land ownership in New Zealand are: Freehold title, Leasehold title, Unit title, Strata title, and cross-lease. The majority of land in New Zealand is freehold. LINZ holds property title records that show a property’s proprietors, legal description and the rights and restrictions registered against the property title, such as a mortgage, easement or covenant. A title plan is the plan deposited by LINZ when the title was created. Property titles do not contain information about the value of the property.

No land tax is payable, but the local government authorities are empowered to levy taxes, termed as “rates,” on all properties within their territorial boundaries. Rates are assessed on either assessed annual rental value, land value or capital value. There is no stamp duty in New Zealand.

Mortgages and liens are available in New Zealand. There is no permanent government policy as such that discriminates lending to foreigners. However, the Reserve Bank of New Zealand (RBNZ) introduced a macro-prudential tool as a means to curb rising house prices. In October 2013, the RBNZ introduced temporary loan-to-valuation ratio restrictions on banks’ lending to (domestic and foreign) investors and owner-occupiers wanting to purchase residential housing. During 2018 and 2019 the RBNZ began easing these lending restrictions on banks.

In April 2020, the RBNZ announced a 12-month suspension of these restrictions on banks’ lending to investors and owner-occupiers to apply from May 1, in order to improve the equity positions of mortgage borrowers, so that fewer borrowers will have to sell their house or default on their mortgage as a result of the COVID-19 crisis.

A registered memorandum of mortgage is the usual form used to create a lien on real estate to secure an indebtedness. There is no mortgage recording or mortgage tax in New Zealand. However, since October 2018 all non-resident purchasers must complete a Residential Land Statement declaring they are eligible to buy residential property in New Zealand, before signing any sale and purchase agreement.

There are some statutory controls imposed on the amount of interest which may be charged on a loan secured by real property (and private and government agencies that monitor and report on interest charges) that ensure that interest rates and costs are not excessive or illegal. There are no laws that that restrict the ability to make a borrower or guarantor personally liable for indebtedness secured by real property.

Property legally purchased but unoccupied can generally not revert to other owners. The Land Transfer Act 2017 repealed an Act from 1963 which previously outlined the process for cases of “adverse possession” or “squatters’ rights.” Under Section 155 of the Act, a person can apply to the Registrar-General of Land for a record of title in that person’s name as owner of the freehold estate in land if: a record of title has already been created for the estate; the person has been in adverse possession of the land for a continuous period of at least 20 years and continues in adverse possession of the land; and the possession would have entitled the person to apply for a title to the freehold estate in the land if the land were not subject to the Act. The section applies to diverse instances, such as the case where an entire section is being occupied by someone unconnected to the registered owner, or in the case of a “boundary adjustment” between two properties. Section 159 of the Act lists instances when applications may not be made, such as land owned by the Crown, Māori land, or land occupied by the applicant – where the applicant owns an adjoining property – because of a mistaken marking of a boundary.

Intellectual Property Rights

New Zealand has a generally strong record on intellectual property rights (IPR) protection and is an active participant in international efforts to strengthen IPR enforcement globally. It is a party to nine World Intellectual Property Organization (WIPO) treaties and participates in the Trade Related Aspects of Intellectual Property Rights (TRIPS) Council.

In March 2019, New Zealand entered into force the WIPO Copyright Treaty, the WIPO Performances and Phonograms Treaty, the Budapest Treaty and the Berne Convention. It implemented the Madrid Treaty in December 2012, allowing New Zealand companies to file international trademarks through the Intellectual Property Office of New Zealand (IPONZ). Since 2013, an online portal hosted on the IPONZ and IP Australia websites has allowed applicants to apply for patent protection simultaneously in Australia and New Zealand with a single examiner assessing both applications according to the respective countries’ laws.

The New Zealand Government announced its intention to join the Marrakesh Treaty in June 2017 and the Copyright (Marrakesh Treaty Implementation) Amendment Act entered into force January 4, 2020. It amends the Copyright Act 1994 and the Copyright (General Matters) Regulations 1995 to implement New Zealand’s obligations under the Marrakesh Treaty. The legislation is administered by MBIE.

There are a number of statutes that provide civil and criminal enforcement procedures for IPR owners in New Zealand. The Copyright Act 1994 and the Trade Marks Act 2002 impose civil liability for activities that constitute copyright and trademark infringement. Both Acts also contain criminal offences for the infringement of copyright works in the course of business and the counterfeiting of registered trademarks for trade purposes. The Fair Trading Act 1986 imposes criminal liability for the forging of a trademark, falsely using a trademark or sign in a way that is likely to mislead or deceive, and trading in products bearing misleading and deceptive trade descriptions.

The government is reviewing the Copyright Act 1994 in light of significant technological changes since the last review in 2004. New Zealand had agreed to tougher IPR and copyright protections under the TPP agreement, but the CPTPP suspended some of the original TPP copyright obligations, such as increasing rights protection from 50 years to 70 years; requiring stronger protection for technological protection measures (TPMs) which act as “digital locks” to protect copyright work; nor alter its internet service provider liability provisions for copyright infringement.

In November 2018, MBIE, which administers the Act, released a 135-page Issues Paper which summarizes the operation of the New Zealand copyright regime, its shortcomings, and the wide range of issues that need to be addressed. MBIE is reviewing the issues raised from the public consultation which closed in April 2019. For more see: https://www.mbie.govt.nz/business-and-employment/business/intellectual-property/copyright/review-of-the-copyright-act-1994/ 

New Zealand has amended some legislation to comply with obligations under CPTPP. Customs New Zealand has authority to temporarily detain imported or exported goods that it suspects infringe copyright or trademarks and to inspect and detain any goods in its control that are suspected of being pirated. The New Zealand High Court has been empowered to award additional damages for trademark infringement, and unless exceptional circumstances exist, the courts must order the destruction of counterfeit goods. This is in addition to the existing availability of compensatory damages under the Trade Marks Act 2002.

The CPTPP will require New Zealand to provide a 12-month grace period for patent applicants. Under this requirement, inventors will not be deprived of a patent issuing in New Zealand if an inventor makes their invention public, provided the inventor files the patent application within 12 months of disclosure. In addition, pharmaceutical patent holders (who have provided their details to Medsafe) will have to be informed of someone seeking to use their drug’s clinical trial data before marketing approval is granted.

The Copyright Tribunal hears disputes about copyright licensing agreements under the Act and applications about illegal uploading and downloading of copyrighted work. The Copyright (Infringing File Sharing) Amendment Act 2011 implements a three-notice regime which gives alleged infringers up to three warnings before issuing a ruling that infringement has occurred. The legislation enables copyright owners to seek the suspension of the internet account for up to six months through the District Court.

The Smoke-free Environments (Tobacco Standardized Packaging) Amendment Act 2016 and from June 2018, all tobacco packets are required to be the same standard dark brown/green background color as Australia from June 2018. It requires the removal of all tobacco company marketing imagery. The Smoke-free Environments Regulations 2017 standardize the appearance of tobacco manufacturers’ brand names.

New Zealand meets the minimum requirements of the TRIPS Agreement, providing patent protection for 20 years from the date of filing. The Patents Act 2013 brought New Zealand patent law into substantial conformity with Australian law. Consistent with Australian patent law, an ‘absolute novelty’ standard is introduced as well as a requirement that all applications be examined for “obviousness” and utility. The Patents Act stops short of precluding from patentability all computer software and has a provision for patenting “embedded software.”

In June 2019, MBIE released a discussion paper regarding a proposed Intellectual Property Laws Amendment Bill. The omnibus bill intends to make technical amendments to the Patents Act 2013, the Trade Marks Act 2002, the Designs Act 1953, and their associated regulations. The Bill is not intended to be a full policy review of these Acts, or to review the criteria for granting patents, or registering trademarks and designs. For more see: https://www.mbie.govt.nz/business-and-employment/business/intellectual-property/proposed-intellectual-property-laws-amendment-bill 

New Zealand currently provides data exclusivity of five years from the date of marketing approval for a new pharmaceutical under Section 23B of the Medicines Act 1981. Data protection on pharmaceuticals applies from the date of marketing approval, regardless of whether it is granted before or after the expiration of the 20-year patent.

From July 2017 New Zealand wine and spirit makers can register the geographical origins of their products under the Geographical Indications (Wine and Spirits) Registration Act 2006 allows New Zealand wine and spirit makers to register the geographical origins of their products. The 2006 Act and its amendments are administered by IPONZ and aims to protect wine and spirit markers’ products, to allow the registration of New Zealand geographical indications (GIs) overseas, and to enforce action for falsely claiming a product comes from a certain region.

In 2019, MFAT released a discussion paper on proposed changes to New Zealand’s regulatory framework for protecting GIs as part of New Zealand’s free trade agreement negotiations with the European Union (EU). The EU has proposed that New Zealand adopt a regulatory framework for protecting GIs that is similar to the existing EU framework. The discussion paper, jointly prepared by MFAT and MBIE, outlines the EU’s proposals for protecting GIs and seeks public submissions until March 27, 2020. IF the EU framework is accepted it would require significant changes to New Zealand’s existing laws protecting GIs. For more see: https://www.mfat.govt.nz/en/trade/free-trade-agreements/agreements-under-negotiation/eu-fta/geographical-indications/ 

The most commonly intercepted counterfeit items by Customs New Zealand are fake toys according to an Official Information Act request. Electronics were the second most intercepted item, followed by clothing and accessories. Most items originate from China, the United Kingdom, Vietnam, and Hong Kong.

New Zealand is not on the USTR’s Special 301 report list.

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

Capital Markets and Portfolio Investment

New Zealand policies generally facilitate the free flow of financial resources to support the flow of resources in the product and factor markets. Credit is generally allocated on market terms, and foreigners are able to obtain credit on the local market. The private sector has access to a limited variety of credit instruments. New Zealand has a strong infrastructure of statutory law, policy, contracts, codes of conduct, corporate governance, and dispute resolution that support financial activity. The banking system, mostly dominated by foreign banks, is rapidly moving New Zealand into a “cashless” society.

New Zealand adheres to International Monetary Fund (IMF) Article VIII and does not place restrictions on payments and transfers for international transactions.

New Zealand has a range of other financial institutions, including a securities exchange, investment firms and trusts, insurance firms and other non-bank lenders. Non-bank finance institutions experienced difficulties during the global financial crisis (GFC) due to risky lending practices, and the government of New Zealand subsequently introduced legal changes to bring them into the regulatory framework. This included the introduction of the Non-bank Deposit Takers Act 2013 and associated regulations which impose requirements on exposure limits, minimum capital ratios, and governance. It requires non-bank institutions be licensed and have suitable directors and senior officers. It also provides the RBNZ with powers to detect and intervene if a non-bank institution becomes distressed or fails.

The RBNZ is the prudential regulator and supervisor of all insurers carrying on insurance business in New Zealand and is responsible for administering the Insurance (Prudential Supervision) Act 2010. The RBNZ administers the Act to promote the maintenance of a sound and efficient insurance sector; and promoting public confidence in the insurance sector.

The GFC also prompted New Zealand to introduce broad-based financial market law reform which included the establishment of the Financial Markets Authority (FMA) in 2014. The Financial Markets Conduct Act (FMC) 2013 provided a new licensing regime to bring New Zealand financial market regulations in line with international standards. It expanded the role of the FMA as the primary regulator of fair dealing conduct in financial markets, provided enforcement for parts of the Financial Advisers Act 2008, and made the FMA one of the three supervisors for AML/CFT, alongside the RBNZ and the Department of Internal Affairs. The FMA supervises approximately 800 reporting entities.

Legal, regulatory, and accounting systems are transparent. Financial accounting standards are issued by the New Zealand Accounting Standards Board (NZASB), which is a committee of the External Reporting Board established under the Crown Entities Act 2004. The NZASB has the delegated authority to develop, adopt and issue accounting standards for general purpose financial reporting in New Zealand and are based largely on international accounting standards, and GAAP.

Smaller companies (except issuers of securities and overseas companies) that meet proscribed criteria face less stringent reporting requirements. Entities listed on the stock exchange are required to produce annual financial reports for shareholders. Stocks in a number of New Zealand listed firms are also traded in Australia and in the United States. Small, publicly held companies not listed on the NZX may include in their constitution measures to restrict hostile takeovers by outside interests, domestic or foreign. However, NZX rules generally prohibit such measures by its listed companies.

In December 2019, the government introduced the Financial Market Infrastructure Bill to establish a new regulatory regime for financial market infrastructures (FMI), and to provide certain FMIs with legal protections relating to settlement finality, netting, and the enforceability of their rules. The bill aims to maintain a sound and efficient financial system; avoid significant damage to the financial system resulting from problems with an FMI, an operator of an FMI, or a participant of an FMI; promote the confident and informed participation of businesses, investors, and consumers in the financial markets; and promote and facilitate the development of fair, efficient, and transparent financial markets. The bill if passed would be administered jointly by the RBNZ and the FMA. The bill passed its first reading in February 2020 and is with the select committee.

In 2018, the market capitalization of listed domestic companies in New Zealand was 42 percent of GDP, at USD 86 billion. The small size of the market reflects in part the risk averse nature of New Zealand investors, preferring residential property and bank term deposits over equities or credit instruments for investment. New Zealand’s stock of investment in residential property is valued at NZD 1.19 trillion (USD 774 billion).

Money and Banking System

The Reserve Bank (RBNZ) regulates banks in New Zealand in accordance with the Reserve Bank of New Zealand Act 1989. The RBNZ is statutorily independent and is responsible for conducting monetary policy and maintaining a sound and efficient financial system. The New Zealand banking system consists of 26 registered banks, and more than 90 percent of their combined assets are owned by foreign banks, mostly Australian. There is no requirement in New Zealand for financial institutions to be registered to provide banking services, but an institution must be registered to call itself a bank.

In November 2017, the government announced it would undertake the first ever review of the RBNZ Act. In December 2018, the government passed an amendment to the Act to broaden the legislated objective of monetary policy beyond price stability, to include supporting maximum sustainable employment. It also requires that monetary policy be decided by a consensus of a Monetary Policy Committee, which must also publish records of its meetings. While policy decisions at the RBNZ have been made by the Governing Committee for several years before the amendment, the Act had laid individual accountability with the Governor, who could be removed from office for inadequate performance according to the goals set through the Policy Targets Agreement.

Applicants for bank registration must meet qualitative and quantitative criteria set out in the RBNZ Act. Applicants who are incorporated overseas are required to have the approval of their home supervisor to conduct banking business in New Zealand, and the applicant must meet the ongoing prudential requirements imposed on it by the overseas supervisor. Accordingly, the conditions of registration that apply to branch banks mainly focus on compliance with the overseas supervisor’s regulatory requirements.

The RBNZ introduced a Dual Registration Policy for Small Foreign Banks in December 2016. Foreign-owned banks are permitted to apply for dual registration – operating both a branch and a locally incorporated subsidiary in New Zealand – provided both entities comply with relevant prudential requirements. Locally incorporated subsidiaries are separate legal entities from the parent bank. They are required, among other things, to maintain minimum capital requirements in New Zealand and have their own board of directors, including independent directors. In contrast, bank branches are essentially an extension of the parent bank with the ability to leverage the global bank balance sheet for larger lending transactions. Capital and governance requirements for branch banks are established by the home regulatory authority. There are no local capital or governance requirements for registered bank branches in New Zealand.

In addition to registered banks, the RBNZ supervises and regulates insurance companies in accordance with the Insurance (Prudential Supervision) Act of 2010 and non-bank lending institutions. Non-bank deposit takers are regulated under the Non-bank Deposit Takers Act of 2013.

New Zealand has no permanent deposit insurance scheme and the RBNZ has no requirement to guarantee the viability of a registered bank. The RBNZ operates the Open Bank Resolution (OBR) which allows a distressed bank to be kept open for business, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors, rather than on taxpayers. While the scheme has been generally successful, in 2010 the government paid out NZD 1.6 billion (USD 1 billion) to cover investor losses when New Zealand’s largest locally-owned finance company at the time, went into receivership. There have since been bailouts of several insurance companies and other small finance companies.

New Zealand’s banking system relies on offshore wholesale funding markets as a result of low levels of domestic savings. Banks can raise funds in international markets relatively easily at reasonable cost, but are vulnerable to global market volatility, geopolitics, and domestic economic conditions. Domestically, banks face exposure due to the concentration of New Zealand exports in a small number of commodity-based sectors which can be subject to considerable price volatility. Residential mortgage and agricultural lending exposures have also presented risk.

The four largest banks (ASB, ANZ, BNZ and Westpac) control 88 percent of the retail and commercial banking market measured in terms of total banking assets. With the addition of Kiwibank, that rises to 91 percent. Kiwibank launched in 2002 and is majority owned by NZ Post (53 percent), with the NZ Superannuation Fund (25 percent), and the Accident Compensation Corporation (22 percent).

The RBNZ reports the total assets of registered banks to be about NZD 631 billion (USD 410 billion) as of March 2020. Assets of insurance companies’ assets were valued at NZD 81 billion (USD 53 billion) and NZD 14.4 billion (USD 9.4 billion) for non-bank lending institutions. The RBNZ estimates approximately 0.6 percent of bank loans are non-performing. Agriculture loans make up about 13 percent of bank lending and has seen higher rates of non-performing loans – particularly dairy farms – in 2019. The RBNZ expect non-performing to rise again having recovered only in the past few years from the Global Financial Crisis.

The four banks have capital generally above the regulatory requirements. The initial findings from a RBNZ review of bank capital requirements released in March 2017 found New Zealand banks to be “in the pack” in terms of capital ratios relative to international peers. There have since been subsequently four rounds of consultations revisiting capital requirements after the Australian Financial System Inquiry made recommendations that were subsequently accepted by the Australian Prudential Regulation Authority to improve the resilience of the Australian banks. While this contributes to the ultimate soundness of the New Zealand subsidiaries, it does not directly strengthen their balance sheets.

In February 2019, the RBNZ proposed to almost double capital requirements for the four big banks. The RBNZ proposed to require banks’ Tier 1 capital to be comprised solely of equity and to increase from the current minimum of 8.5 percent of total capital to 16 percent over five years. It also wants Tier 1 capital to be pure equity, rather than hybrid-type securities that usually behave as debt, but which can be converted into equity if required, and which are about a fifth of the cost of pure equity. Since the GFC, the minimum tier 1 capital has already been raised from 4 percent of risk-weighted assets to 8.5 percent.

In December 2019, the RBNZ announced the minimum total capital ratio will increase from 10.5 percent currently to 18 percent for the four largest banks, and 16 percent for the smaller local banks. For the largest banks, at least 16 percent must consist of tier 1 capital, and within this at least 13.5 percent must be common equity. For the small banks, the requirements are 14 percent and 11.5 percent respectively. Debt instruments that can be converted to equity will no longer count towards regulatory capital. However, banks will able to make greater use of redeemable preference shares. Initially in order to give the banks time to accumulate capital through retained earnings the changes were to be phased in over a seven-year period starting from July 2020. The RBNZ has delayed the introduction until July 1, 2021 due to the COVID-19 pandemic.

The penetration of New Zealand’s major banks has improved since the introduction of the voluntary superannuation scheme, KiwiSaver in 2007. The increase in their market share is also a result of the appointment of three additional banks as default KiwiSaver providers in 2014. People who start a new job are automatically enrolled in KiwiSaver and must opt-out if they do not want to be a member. Contributions are made by the employee, the employer and if eligible from the government in the form of a tax credit. At the start of 2021 there were more than 3 million KiwiSaver members, and the amount invested in KiwiSaver schemes is estimated to be NZD 62 billion (USD 40.3 billion). While funds can only be withdrawn at the age of 65 with very few exceptions, members can shift their funds. Over the course of 2020 as markets dropped, KiwiSavers shifted NZD 1.5 billion (USD 975 million) from share-heavy funds to cash or conservative funds.

There are some restrictions on opening a bank account in New Zealand that include providing proof of income and needing to be a permanent New Zealand resident of 18 years old or above. Access to money in the account will not be granted until the individual presents one form of photo ID and a proof of address in-person at a branch of the bank in New Zealand. Some banks will require a copy of the applicant’s visa. If the applicant does not apply for an IRD number, the tax rate on income earned will default to the highest rate of 33 percent. New Zealand banks typically have a dedicated branch for migrants and businesses to set up banking arrangements.

Foreign Exchange and Remittances

Foreign Exchange

New Zealand has revoked all foreign exchange controls. Accordingly, there are no such restrictions – beyond those that seek to prevent money laundering and financing of terrorism – on the transfer of capital, profits, dividends, royalties or interest into or from New Zealand. Full remittance of profits and capital is permitted through normal banking channels and there is no difficulty in obtaining foreign exchange. However, withholding taxes can apply to certain payments out of New Zealand including dividends, interest, and royalties, and may apply to capital gains for non-residents and on the payment of profits to certain non-resident contractors.

New Zealand operates a free-floating currency. As a small nation that relies heavily on trade and global financial and geopolitical conditions, the New Zealand currency experiences more fluctuation when compared with other developed high-income countries.

Remittance Policies

The Pacific Islands are the main destination of New Zealand remittances from residents and from temporary workers participating in the Recognized Seasonal Employer (RSE) scheme. The RSE allows the horticulture and viticulture industries to recruit workers from nine Pacific Island nations for seasonal work when there are not enough New Zealand workers. Other people who use remittance services include recently resettled refugees, and other migrant workers particularly in the hospitality and construction sectors.

Anti-money laundering and combatting terrorism financing laws have made access to cross-border financial services difficult for some Pacific island countries. Banks, non-bank institutions, and people in occupations that typically handle large amounts of cash, are required to collect additional information about their customers and report any suspicious transactions to the New Zealand Police.

Financial institutions have had to comply with the AML/CFT Act since 2013, including remitters, trust and company service providers, payment providers, and other lending institutions. If a bank is unable to comply with the Act in its dealings with a customer, it must not do business with that person. This would include not processing certain transactions, withdrawing the banking products and services it offers, and choosing not to have that person or entity as a customer. Since then New Zealand banks have been reducing their exposure to risks and charging higher fees for remittance services, which in some instances has led to the forced closing of accounts held by money transfer operators (MTOs).

The New Zealand government is working with banks to improve the bankability of small MTOs, and to develop low cost products for seasonal migrant workers in the RSE. New Zealand is also using its membership in global fora to encourage a coordinated approach to addressing high remittance costs, and is working with Pacific Island governments to find ways to lower costs in the receiving country, such as the adoption and use of an electronic payments systems infrastructure.

The New Zealand Treasury released a report in March 2017 to explore feasible policy options to address the issues in the New Zealand remittance market that would maintain access and reduce costs of remitting money from New Zealand to the Pacific. In 2018, the New Zealand and Australian governments hosted a series of roundtable meetings in Auckland, Sydney, and Tonga, with the Asian Development Bank and the International Monetary Fund that included officials from banks, MTOs, and regulators from Australia, New Zealand, and the Pacific, senior officials from international financial institutions, and training providers to discuss the issue and identify practical solutions to address the costs and risks of transferring remittances to Pacific countries and difficulties in undertaking cross-border transactions.

Barriers to remittances to Pacific nations remain a significant public policy issue during 2019, and work is underway led by MFAT and involving financial regulators in New Zealand and overseas, to address some of these barriers. A pilot of a Know Your Customer and Customer Due Diligence Utility is being planned for remittances between Samoa, Australia and New Zealand.

Sovereign Wealth Funds

The New Zealand Superannuation Fund was established in September 2003 under the New Zealand Superannuation and Retirement Income Act 2001. The fund was designed to partially provide for the future cost of New Zealand Superannuation, which is a universal benefit paid by the New Zealand government to eligible residents over the age of 65 years irrespective or income or asset levels.

The Act also created the Guardians of New Zealand Superannuation, a Crown entity charged with managing and administering the fund. It operates by investing government contributions and the associated returns in New Zealand and internationally, in order to grow the size of the fund over the long term. Between 2003 and 2009, the government contributed NZD 14.9 billion (USD 9.7 billion) to the fund, after which it temporarily halted contributions during the Global Financial Crisis. In December 2017, the newly elected government resumed contributions, with plans to resume contributions to the full amount according to the formula set out in the 2001 Act from 2022. The Fund received an estimated NZD 500 million (USD 325 million) payment in the year to June 2018, and a NZD 1 billion (USD 650 million) contribution in the year to June 2019.

Planned contributions for the year to June 2020 will be NZD 1.5 billion (USD 975 million) according to Budget 2020 announced in May. This increases to NZD 2.1 billion (USD 1.4 billion) in the year to June 2021 and NZD 2.4 billion (USD 1.6 billion) in the year to June 2022. The legislated formula suggests lower contributions be made due to the impact of COVID-19 on GDP forecasts. Between fiscal years 2019/20 and 2022/23, Budget 2020 transfers small amounts of the capital contributions to a new fund administered by the Guardians of New Zealand Superannuation, which will invest via the New Zealand Venture Investment Fund Limited (NZVIF). The government has not indicated it will suspend its contributions during the economic impact of the pandemic.

In June 2019, the fund was valued at NZD 43.1 billion (USD 28 billion) of which 48.8 percent was in North America, 17.3 percent in Europe, 12.9 percent in New Zealand, 10.9 percent in Asia excluding Japan, 6 percent in Japan, and 1.6 percent in Australia. During 2018/19 the fund earned a pre-tax return of 7 percent. In the first four months of 2020, the fund made losses of NZD 4.6 billion (USD 3 billion).

The guardians have a stated commitment to responsible investment, including environmental, social and governance factors, which is closely aligned to the United Nations Principles for Responsible Investment. It is a member of the International Forum of Sovereign Wealth Funds and is signed up to the Santiago Principles.

The fund operates its own environmental, social, and governance principles with a responsible investment framework. Companies that are directly involved in the following activities are excluded from the Fund: the manufacture of cluster munitions, testing of nuclear explosive devices, and anti-personnel mines; the manufacture of tobacco; the processing of whale meat; recreational cannabis; and the manufacture of civilian automatic and semi-automatic firearms, magazines or parts. As of December 2019, the fund does not make investments in 14 countries, mainly located in Africa and the Middle East.

Following the attack on two Christchurch mosques by a gunman using legally obtained guns on March 15, the fund divested NZD 19 million (USD 13 million) from seven companies (including four U.S. companies), involved in the manufacture of civilian automatic and semi-automatic firearms, magazines or parts that are prohibited under recently enacted New Zealand law. Due to the live-stream of the attack the NZSF announced on March 20, 2019 it had joined up with other New Zealand wealth funds as a shareholder of Facebook, Twitter, and YouTube owner Alphabet, to strengthen controls to prevent the live-streaming of objectionable content. The NZSF aims to achieve this from the collective action of New Zealand’s investor sector with a global coalition of shareholders as well as the pressure put on the companies by other stakeholder groups. The NZSF will undertake discussions with the companies concerned in confidence and will report on milestones achieved in future Annual Reports. For further information including a full list of participants see: https://www.nzsuperfund.nz/how-we-invest/ 

In recent years the NZSF has explicitly excluded companies that are directly involved in the manufacture of: cluster munitions, testing of nuclear explosive devices, anti-personnel mines, tobacco, recreational cannabis, and the processing of whale meat. In 2013, the fund divested a group of five U.S. companies due to their involvement with nuclear weapons. In 2007, the fund divested NZD 37.6 million (USD 24.4 million) in 20 tobacco companies.

In June 2017, the fund transitioned NZD 14 billion (USD 9 billion) passive global equity portfolio (constituting 40 percent of the fund) to low carbon, selling passive holdings in 297 companies worth NZD 950 million (USD 617 million). The aim of the Climate Change Investment Strategy is to reduce exposure to investments in carbon and fossil fuels. The guardians applied their carbon exclusion methodology again in June 2018 and June 2019.

The government manages two other wealth funds that also aim to reduce future liability and burden on New Zealanders. The Government Superannuation Fund (GSF) aims to meet the cost of 57,000 state sector employees who worked between 1948 to 1995 and are entitled to an additional fixed retirement income. The GSF was valued at NZD 4.5 billion (USD 2.9 billion) in June 2019. The Accident Compensation Corporation (ACC) covers all New Zealanders and visitors’ costs if they are injured in an accident under a no-fault scheme. In addition to ACC levies paid by workers and businesses, the ACC operates a fund to meet the future costs of injuries. As of June 2019, it was valued at NZD 44 billion (USD 29 billion), of which about 72 percent in New Zealand and 4 percent in Australia. Over 2018/19 the fund earned a return of 13.1 percent. ACC is one of the largest investors, owning about 2.6 percent of the market capitalization of the New Zealand share market, and directly owns 22 percent of Kiwibank.

The Commercial Operations group in the New Zealand Treasury is responsible for monitoring the Crown’s interests as a shareholder in, or owner of organizations that are required to operate as successful businesses, or that have mixed commercial and social objectives. Each entity monitored by the Treasury has a primary legislation that defines its organizational framework, which include: State-Owned Enterprises (SOEs), Crown-Owned Entity Companies, Crown Research Institutions, Crown Financial Institutions, Other Crown Entity Companies, and Mixed Ownership Model Companies.

SOEs are subject to the State-Owned Enterprises Act 1986, are registered as companies, and are bound by the provisions of the Companies Act 1993. The board of directors of each SOE reports to two ministers, the Minister of Finance and the relevant portfolio minister. A list of SOEs and information on the Crown’s financial interest in each SOE is made available in the financial statements of the government at the end of each fiscal year. For a list of the SOEs see: http://www.treasury.govt.nz/statesector/commercial/portfolio/bytype/soes 

In the 12 months to June 30, 2020 New Zealand State-Owned Enterprises had revenue of NZD 5.08 billion (USD 2.2 billion) and expenses of NZD 5.14 billion (USD 3.34 billion with an operating balance of NZD -27 million (USD -17.6 million). Entities saw operating losses of NZD 206 million (USD 134 million) from KiwiRail and fair value write down of NZD 1.1 billion (USD 715 million) in relation to the Air New Zealand aircraft fleet suffering from reduced service due to the pandemic.

Most of New Zealand’s SOEs are concentrated in the energy and transportation sectors. Private enterprises can compete with public enterprises under the same terms and conditions with respect to markets, credit, and other business operations. Under SOE Continuous Disclosure Rules, SOEs are required to continuously report on any matter that may materially affect their commercial value.

Privatization Program

New Zealand governments have embarked on several privatization programs since the 1980s, to reduce government debt, move non-strategic businesses to the private sector to improve efficiency, and raise economic growth.

In 2014, the government completed a program of asset sales to raise funds to reduce public debt. It involved the partial sale of three energy companies and Air New Zealand, with the government retaining its majority share in each. The bulk of the initial share float was made available to New Zealand share brokers and international institutions, and unsold shares were made available to foreign investors. Foreign investors are free to purchase shares on the secondary market.

New Zealand has been using the public private partnership (PPP) method of procurement and increasingly so where the public sector seeks to complete needed infrastructure assets faster than conventional methods of procuring and financing would achieve.

The New Zealand Treasury was previously responsible for the PPP program. It lists the other agencies that are involved in the planning, implementing, and advising on infrastructure, including MBIE (telecommunications and energy infrastructure), Department of Corrections, and the Ministry of Defence among others. https://treasury.govt.nz/information-and-services/nz-economy/infrastructure/other-government-agencies 

In 2019 the Infrastructure Transaction Unit was created within Treasury as an interim measure to provide support to agencies and local authorities in planning and delivering major infrastructure projects. This unit moved into the newly formed Crown entity the Infrastructure Commission (InfraCom) and provides the Major Projects function. The New Zealand Infrastructure Commission Act was passed in September 2019, to create Crown Entity InfraCom, and it will be responsible for delivering New Zealand’s Public Private Partnership (PPP) Program https://infracom.govt.nz/major-projects/public-private-partnerships/ 

The Infrastructure Commission will support government agencies, local authorities and others to procure and deliver major infrastructure projects, and it will be responsible for: developing PPP policy and processes; assisting agencies with PPP procurement; the Standard Form PPP Project Agreement; engaging with potential private sector participants; and monitoring the implementation of PPP projects. InfraCom is currently reviewing the Standard Form PPP Agreement. On its website InfraCom likens its establishment to those in Australia, the United Kingdom, Singapore, Hong Kong, and China’s National Development and Reform Commission https://infracom.govt.nz/strategy/international-context/ 

InfraCom will publish PPP guidance material and project information for businesses wanting to enter into a long term contract for the delivery of a service, where the provision of the service requires the construction of a new asset, or the enhancement of an existing asset, that is financed from external (private) sources on a non-recourse basis and where full legal ownership of the asset is retained by the Crown. The government is increasing its focus on PPP due to its significant NZD 15 billion (USD 9.8 billion) funding package announced in December 2019 and May 2020 which amounts to 5 percent of New Zealand’s GDP.

The government aims for its PPP procurement process to improve the delivery of service outcomes from major public infrastructure assets by: integrating asset and service design; incentivizing whole of life design and asset management; allocating risks to the parties who are best able to manage them; and only paying for services that meet pre-agreed performance standards.

In December 2019, the government introduced the Infrastructure Funding and Financing Bill, which was passed and was given royal assent on August 6, 2020. The provisions provides a funding and financing model to support the provision of infrastructure for housing and urban development that supports the functioning of urban land markets and reduces the impact of local authority financing and funding constraints. It makes several amendments to the Public Works Act 1981 and the Resource Management Act 1991. It also outlines the administration, obligations, and monitoring of Special Purpose Vehicles (SPVs) which are responsible for raising capital for a project, transferring the infrastructure to the relevant central or local government entity after completion, and its obligations to effectively and efficiently construct the infrastructure.

MBIE administers the procurement process. In October 2019 MBIE issued substantive changes to the New Zealand Government’s Procurement Rules. The MBIE Guide to Mastering Procurement explains the eight stages of the procurement lifecycle. It is available at: https://www.procurement.govt.nz/procurement/  . Contract opportunities must be listed on Government Electronic Tenders Service (GETS) at: https://www.gets.govt.nz/ExternalIndex.htm , publish a Notice of Procurement on GETS, and provide access to all relevant tender documents. The Notice of Procurement includes the request for a quote, a registration of interest, and requests for tender and for proposal. The New Zealand Government’s Procurement Rules contain a specific section on non-discrimination, which in part states “All suppliers must be given an equal opportunity to bid for contracts. Agencies must treat suppliers from another country no less favorably than New Zealand suppliers. Procurement decisions must be based on the best value for money, which isn’t always the cheapest price, over the whole-of-life of the goods, services or works. Suppliers must not be discriminated against because of: a. the country the goods, services or works come from [or] b. their degree of foreign ownership or foreign business affiliations.”

Where applicable foreign bidders who are ultimately successful, they may still be required to meet tax obligations and approval from the Overseas Investment Office. The New Zealand government has recently entered and completed infrastructure roading projects in partnership with companies from Australia, Japan, the United States, and China. New Zealand is one of several countries cooperating with China on infrastructure investment relating to their USD 2.5 trillion Belt and Road Initiative. Chinese banks with a presence in New Zealand use capital to invest in New Zealand infrastructure projects including infrastructure in the Christchurch rebuild and Wellington’s 17-mile Transmission Gully motorway.

The upgrade to the New Zealand-China FTA adds a Government Procurement chapter, which among other provisions, includes a built-in agreement to enter into market access negotiations with New Zealand once China completes its accession to the WTO Agreement on Government Procurement, or if it were to negotiate market access on government procurement with another country. This commitment puts New Zealand at the ‘front of the line’ if China were to open its government procurement market in the future.

Infrastructure New Zealand is an industry association founded in 2004, and addresses key strategic challenges including the reform of complex regulatory and environmental approval and the appropriate use of public and private sector debt to finance infrastructure investment opportunities. It is supported by a board of 12 members who are industry leaders in their professional fields.

The New Zealand government actively promotes corporate social responsibility (CSR), which is widely practiced throughout the country. There are New Zealand NGOs dedicated to facilitating and strengthening CSR, including the New Zealand Business Council for Sustainable Development, the Sustainable Business Network, and the American Chamber of Commerce in New Zealand.

New Zealand is committed to both the OECD due diligence guidance for responsible supply chains of minerals from conflict-affected and high-risk areas, and the OECD Guidelines for Multinational Enterprises. Multi-national businesses are the main focus, such as a New Zealand company that operates overseas, or a foreign-owned company operating in New Zealand. The guidance can also be applied to businesses with only domestic operations that form part of an international supply chain. Individuals wishing to complain about the activity of a multi-national business that happened in another country, will need to contact the National Contact Points of that country. In New Zealand, MBIE is the NCP to carry out the government’s responsibilities under the guidelines.

To help businesses meet their responsibilities, MBIE has developed a short version of the guidelines to assess the social responsibility ‘health’ of enterprises, and for assessing the actions of governments adhering to the guidelines. If further action is needed, MBIE provides resolution assistance, such as mediation, but do not adjudicate or duplicate other tribunals that assess compliance with New Zealand law. MBIE is assisted by a liaison group that meets once a year, with representatives from other government agencies, industry associations, and NGOs.

Additional Resources

Department of State

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

Department of Labor

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

U.S. firms have not identified corruption as an obstacle to investing in New Zealand. New Zealand is renowned for its efforts to ensure a transparent, competitive, and corruption-free government procurement system. Stiff penalties against bribery of government officials as well as those accepting bribes are strictly enforced. The Ministry of Justice provides guidance on its website for businesses to create their own anti-corruption policies, particularly improving understanding of the New Zealand laws on facilitation payments.

New Zealand consistently achieves top ratings in Transparency International’s Perceptions of Corruption Perception Index. In 2020 Transparency International ranked New Zealand 1st out of 180 countries and territories, scoring 88 out of 100. An area of concern noted by Transparency International is New Zealand being one of several top-ranking countries that conduct “moderate and limited enforcement of foreign bribery.”

Transparency International NZ has had concerns with the historical inconsistency in the level of public accessibility and Parliamentary oversight and application of secondary legislation which is law made under powers delegated by Parliament to 150 government agencies, entities, and local government. New Zealand has 550 Acts, which delegate power to make secondary legislation.

In December 2019 the government introduced the Secondary Legislation Bill to improve and support the law relating to the making of secondary legislation by applying and adjusting the framework of access to, and Parliamentary oversight of, secondary legislation provided for in the Legislation Act 2019. It is currently with at the select committee stage: https://www.parliament.nz/en/pb/bills-and-laws/bills-proposed-laws/document/BILL_93428/secondary-legislation-bill 

New Zealand joined the WTO Government Procurement Agreement (GPA) in 2012, citing benefits for exporters, while noting that there would be little change for foreign companies bidding within New Zealand’s totally deregulated government procurement system. New Zealand’s accession to the GPA came into effect in August 2015. New Zealand supports multilateral efforts to increase transparency of government procurement regimes. New Zealand also engages with Pacific island countries in capacity building projects to bolster transparency and anti-corruption efforts.

New Zealand has regulations to counter conflict-of-interest in awarding contracts and government procurement. As mentioned in the previous section, MBIE operates a transparent procurement process using the Government Electronic Tenders Service (GETS) platform and their revised Procurement Rules which must be followed by New Zealand government departments, the Police, the Defense Force, and most Crown entities. All other New Zealand government agencies are encouraged to follow the Rules.

New Zealand has signed and ratified the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, and the UN Convention against Transnational Organized Crime. In 2003, New Zealand signed the UN Convention against Corruption and ratified it in 2015.

The legal framework for combating corruption in New Zealand consists of domestic and international legal and administrative methods. Domestically, New Zealand’s criminal offences related to bribery are contained in the Crimes Act 1961 and the Secret Commissions Act 1910. For the bribery offences under sections 99 to 106 of the Crimes Act, New Zealand authorities have jurisdiction where any act or omission takes place in New Zealand. If the acts or omissions alleged relate to Person of Position and occur outside New Zealand , proceedings may be brought against them under the Crimes Act if they are a New Zealand citizen, ordinarily resident in New Zealand, have been found in New Zealand and not been extradited, or are a body corporate incorporated under the law of New Zealand. Penalties include imprisonment up to 14 years and foreign bribery offences can incur fines up to the greater of NZD 5 million (USD 3.3 million) or three times the value of the commercial gain obtained.

The New Zealand government has a strong code of conduct, the Standards of Integrity and Conduct, which applies to all State Services employees and is rigorously enforced. The Independent Police Conduct Authority considers complaints against New Zealand Police and the Office of the Judicial Conduct Commissioner was established in August 2005 to deal with complaints about the conduct of judges. New Zealand’s Office of the Controller and Auditor-General and the Office of the Ombudsman take an active role in uncovering and exposing corrupt practices. The Protected Disclosures Act 2000 was enacted to protect public and private sector employees who engage in “whistleblowing.”

The Ministry of Justice is responsible for drafting and administering the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) legislation and regulations. It also provides guidance online to companies and NGOs in how to combat corruption and bribery. The New Zealand Police Financial Intelligence Unit collates information required under AML/CFT legislation.

The Anti-Money Laundering and Countering Financing of Terrorism Amendment Act 2017 extends the 2009 Act to cover lawyers, conveyancers, accountants, real estate agents, and sports and racing betting. Businesses that deal in certain high-value goods, such as motor vehicles, jewelry and art, will also have obligations when they accept or make large cash transactions.

Businesses had two years to comply with the Act and compliance costs are estimated to be USD 554 million and USD 762 million over ten years. The New Zealand Police Financial Intelligence Unit estimate that NZD 1.35 billion (USD 878 million) of domestic criminal proceeds is generated for laundering in New Zealand each year, driven in part by New Zealand’s reputation as a safe and non-corrupt country. The Department of Internal Affairs is working on a solution for businesses that are facing difficulty meeting their AML/CFT obligations during COVID-19.

Following the “Panama Papers” incident in April 2016, an independent inquiry found New Zealand’s tax treatment of foreign trusts to be appropriate but recommended changes to the regime’s disclosure requirements, which were subsequently legislated to dispel concerns New Zealand was operating as a “tax haven”. The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act of 2017 changed foreign trust registration and disclosure to deter offshore parties from misusing New Zealand foreign trusts, and to reaffirm New Zealand’s reputation as being free of corruption.

In July 2019, the government passed the Trusts Act and repealed the Trustee Act of 1956 and the Perpetuities Act of 1964 to make trust law more accessible, clarify and simplify core trust principles and essential obligations for trustees. It also aims to preserve the flexibility of the common law to allow trust law to continue to evolve through the courts. It applies to all trusts including family trusts and those for corporate structures. New Zealand has one of the highest per capita number of trusts in the world due to favorable tax treatment and the absence of estate duty, gift duty, stamp duty, or capital gains tax. It is estimated that there are between 300,000 and 500,000 trusts in New Zealand.

After a standard review of the 2017 general election and 2016 local body elections, the Justice Select Committee conducted an inquiry in 2019 of the issue of foreign interference through politicized social media campaigns and from foreign donations to political candidates standing in New Zealand elections. New Zealand intelligence agencies acknowledged political donations as a legally sanctioned form of participation in New Zealand politics, but raised concerns when aspects of a donation is obscured or is channeled in a way that prevents scrutiny of the origin of the donation, when the goal is to covertly build and project influence.

In December 2019, the government passed the Electoral Amendment Act under urgency to ban donations from overseas persons to political parties and candidates over NZD 50 (USD 32.50) down from the previous NZD 1,500 (USD 975) maximum, to reduce the risk of foreign money influencing the election process. It also introduces a requirement for party secretaries “to take all reasonable steps to satisfy themselves that a donation over NZD 50 is not from an overseas person.”

The Act requires party secretaries to reside in New Zealand, and extending the existing offense of promoting anonymous advertisements relating to an election “so that it applies to all advertising mediums, including online advertising, in order to deter misleading anonymous online advertisements.”

Resources to Report Corruption

The Serious Fraud Office and the New Zealand Police investigate bribery and corruption matters. Agencies such as the Office of the Controller and Auditor-General and the Office of the Ombudsmen act as watchdogs for public sector corruption. These agencies independently report on and investigate state sector activities.

Serious Fraud Office
P.O. Box 7124 – Wellesley Street
Auckland, 1141
New Zealand
www.sfo.govt.nz 

Transparency International New Zealand is the recognized New Zealand representative of Transparency International, the global civil society organization against corruption.

Transparency International New Zealand
P.O. Box 5248 – Lambton Quay
Wellington, 6145
New Zealand
www.transparency.org.nz 

New Zealand is a stable liberal democracy with almost no record of political violence.

The New Zealand government raised its national security threat level for the first time from “low” to “high” after the terrorist attack on two mosques in Christchurch on March 15, 2019. One month later it lowered the risk to “medium” where a “terrorist attack, or violent criminal behavior, or violent protest activity is assessed as feasible and could well occur.” The incident led to wide-ranging gun law reform that restricts semi-automatic firearms and magazines with a capacity of more than ten rounds. An amnesty buy-back scheme of prohibited firearms administered by the NZ Police ran until December 20, 2019.

In 2019, the New Zealand labor market experienced a tightening in labor market conditions with the unemployment rate at historically low levels after a prolonged period of record population growth from record net migration. In the last quarter of 2019, the rate was 4 percent. The rise in net migration is comprised of international students, professionals, and returning New Zealand citizens. Youth unemployment has been a problem in New Zealand for at least a decade.

New Zealand operates a Recognized Seasonal Employer (RSE) scheme that allows the horticulture and viticulture industry to recruit workers from the Pacific Islands for seasonal work to supplement the New Zealand workforce. There have been prosecutions and convictions for the exploitation of migrant workers, with reports that the hospitality, agriculture, viticulture, and construction industries are most effected. New Zealand recruitment agencies that recruit workers from abroad must use a licensed immigration adviser.

Some foreign migrant workers were reported to have been charged excessive recruitment fees, experienced unjustified salary deductions, nonpayment or underpayment of wages, excessively long working hours, and restrictions on their movement. Reportedly, some had their passports confiscated and contracts altered.

New Zealand has consistently maintained an active and visible presence in the International Labour Organization (ILO), being a founding member in 1919, and its representatives have attended the annual International Labour Conferences since 1935. The ILO and the government of New Zealand have collaborated on several initiatives, including the elimination of child labor in Fiji, employment creation in Indonesia, and the improvement of labor laws in Cambodia.

The government has taken a more proactive approach to enforcing employment law in New Zealand, because the migrant worker population has increased rapidly in recent years and the resources to protect those workers have not kept up with the increase. The government has been steadily increasing the number of labor inspectorates – situated within MBIE – to double the number in 2017.

Immigration NZ reports and updates three different lists of Essential Skills in Demand. If an occupation is on a shortage list a visa applicant is exempt from an individual labor market test, and the employer does not need to demonstrate that no suitable New Zealanders are available to fill or be trained for each individual position. The Long-Term Shortage List contains occupations experiencing a sustained shortage and offers visa holders a chance to apply for residency after two years. The Regional Skill Shortage List – which replaced the Immediate Skill Shortage List in 2019 – identifies the regions with occupations that have an immediate shortage of skilled workers by 15 regions. The Construction and Infrastructure Skill Shortage List contains immediate short-term skill shortages in the construction labor market that are designed to meet the industry’s labor requirements and is also split into 15 regions.

There is no stated government policy on the hiring of New Zealand nationals, however certain jobs within government agencies that handle sensitive information may have a citizenship requirement, minimum duration of residency, and require background checks.

Labor laws are generally well enforced, and disputes are usually handled by the New Zealand Employment Relations Authority. Its decisions may be appealed in an Employment Court. MBIE is responsible for enforcement of laws governing work conditions. A number of employment statutes govern the workplace in New Zealand. The most important is the Employment Relations Act (ERA) of 2000, the Health and Safety at Work Act of 2015, the Holidays Act of 2003, Minimum Wage Act of 1983, the Equal Pay Act of 1972, the Parental Leave and Employment Protection Act of 1987, and Wages Protection Act of 1983.

MBIE provides guidance for employers on minimum standards of employment mandated by law, guidelines to help promote the employment relationship, and optional guidelines that are useful in some roles or industries. Agreements on severance and redundancy packages are usually negotiated in individual agreements. For more see: https://www.employment.govt.nz/ 

The Employment Relations Amendment Act 2018 repeals some laws made under the previous government, such as restricting the mandatory 90-day no-fault trial period to businesses with 19 employees or fewer and mandating set rest and meal breaks for employees based on the number of hours worked. The amendment also empowers contractors with more rights and allows employees in specified ‘vulnerable industries’ to transfer their existing terms and conditions in their employment contract if their work is restructured. If requested, reinstatement back to their job must be the first course of action considered by the Employment Relations Authority for employees who have found to be unfairly dismissed.

After a three-year review and consultation, the government introduced the Screen Industry Workers Bill in February 2020. The previous government passed the Employment Relations (Film Production Work) Amendment Act 2010 – commonly referred to as the “Hobbit law” -which put limits on the ability of workers on film productions to collective bargaining. The new bill if passed aims to provide clarity about the employment status of people doing screen production work, introduce a duty of good faith and mandatory terms for contracting relationships in the industry, allow collective bargaining at the occupation and enterprise levels, and create processes for resolving disputes arising from contracting relations or collective bargaining.

New Zealand law provides for the right of workers to form and join independent unions of their choice without previous authorization or excessive requirements, to bargain collectively, and to conduct legal strikes, with some restrictions. Contractors cannot join unions, bargain collectively, or conduct strike action. Police have the right to organize and bargain collectively but sworn police officers do not have the right to strike or take any form of industrial action. In November 2019 MBIE sought feedback on a discussion document entitled “Better protections for contractors” to strengthen legal protections for contractors. They aim to ensure that contractors receive their minimum rights and entitlements, reduce the imbalance of bargaining power between firms and contractors who are vulnerable to poor outcomes, and ensure that system settings encourage inclusive economic growth and competition. Submissions closed in February 2020.

The ERA requires registered unions to file annual membership returns with the Companies Office. MBIE estimates total union membership at 399,800 for the September 2019 quarter, representing about 18.7 percent of all employees in New Zealand.

Industrial action by employees who work for providers of key services are subject to certain procedural requirements, such as mandatory notice of a period determined by the service. New Zealand considers a broader range of key “essential services” than international standards, including: the production and supply of petroleum products; utilities, emergency workers; the manufacture of certain pharmaceuticals, workers in corrections and penal institutions; airports; dairy production; and animal slaughtering, processing, and related inspection services.

The number of work stoppages has been on a downward trend until the Labour-led government took office in 2017. The number of work stoppages has increased from 3 in 2016 (involving 430 employees causing 195 lost work days), to 143 in 2018 (involving 11,109 employees causing 192 lost work days and NZD 1.2 million (USD 780,000) in lost wages), to 159 in 2019 (involving 53,771 employees causing 142,670 lost work days and NZD 9.2 million (USD 6 million) in lost wages). In 2020 there were 112 work stoppages involving 595 employees causing 613 lost work days and NZD 120,00 (USD 78,000) in lost wages.

Work stoppages include strikes initiated by unions and lockouts initiated by employers, compiled from the record of strike or lockout forms submitted to MBIE under the Employment Relations Act 2000. The data does not cover other forms of industrial action such as authorized stop-work meetings, strike notices, protest marches, and public rallies which have also increased in recent years. Several strikes during the year involved employees of United States businesses or franchises particularly within the fast food industry. The New Zealand government does not get involved in individual work disputes unless the striking employees violate their legislated responsibilities.

The Labour-led government campaigned on a promise to lift the minimum wage to NZD20 (USD 13) by April 2021. From April 1, 2020 the minimum wage for adult employees who are 16 and over and are not new entrants or trainees is NZD 18.90 (USD12.29) per hour. The new entrants and training minimum wage is NZD 15.12 (USD 9.83) per hour. In recent years some local government agencies have raised minimum wages for their staff up from the government mandated rate to a “living wage” of nearly NZD 22.10 (USD 14.37) as of 2020. All businesses in New Zealand affected by COVID-19 have been eligible to receive from the government a wage subsidy from March, to pay their employees 80 percent of their salary to stem job losses.

The Health and Safety at Work Act 2015 sets out the health and safety duties for work carried out by a New Zealand business. The Act contains provisions that affect how duties apply where the work involves foreign vessels. These provisions take account of the international law principle that foreign vessels are subject to the law that applies in the flag state they are registered under. Generally New Zealand law does not apply to the management of a foreign-flagged vessel but does apply to a New Zealand business that does work on that vessel. Two exceptions when the law does apply, if the New Zealand business is operating a foreign-flagged vessel under a “demise charter” arrangement, or when the foreign flagged vessel is operating between New Zealand and a workplace in the New Zealand exclusive economic zone or on the continental shelf; and that workplace is carrying out an activity associated with mineral extraction (e.g. a drilling platform or fixed ship) that is regulated under the Exclusive Economic Zone (Environmental Effects) Act 2012 or the Crown Minerals Act 1991.

The Fisheries (Foreign Charter Vessels and Other Matters) Bill of 2014 has required all foreign charter fishing vessels to reflag to New Zealand and operate under New Zealand’s full legal jurisdiction since May 2016. The legislation was part of a range of measures that followed a Ministerial inquiry in 2012 into questionable safety, labor and fishing practices on some foreign-owned vessels. Other measures the government introduced include: compulsory individual New Zealand bank accounts for crew members; observers on all foreign-owned fishing vessels; and independent audits of charter parties to ensure crew visa requirements – including wages – are being adhered to.

In March 2017, the New Zealand government’s ratification of the ILO’s Maritime Labor Convention (MLC) came into effect. While New Zealand law is already largely consistent with the MLC, ratification gives the Government jurisdiction to inspect and verify working conditions of crews on foreign ships in New Zealand waters. More than 99 percent of New Zealand’s export goods by volume are transported on foreign ships. About 890 foreign commercial cargo and cruise ships visit New Zealand each year.

The Maritime Transport Amendment Act 2017 implements New Zealand’s accession to the intergovernmental International Oil Pollution Compensation’s Supplementary Fund Protocol, 2003. The fund gives New Zealand access to compensation in the event of a major marine oil spill from an oil tanker, and exercises New Zealand’s right to exclude the costs of wreck removal, cargo removal and remediating damage due to hazardous substances from liability limits. Accession to the Protocol was prompted in part by New Zealand’s worst maritime environmental disaster in October 2011 when a Greek flagged cargo ship ran aground creating a 331 ton oil spill resulting in NZD 500 million (USD 300 million) in clean-up costs.

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

* Source for Host Country Data: Host country statistics differ from USG and international sources due to calculation methodologies, and timing of exchange rate conversions.  Almost a third of inbound foreign direct investment in New Zealand is in the financial and insurance services sector. Foreign direct investment data for March 2020 s released in September 2020.   Statistics New Zealand data available at www.stats.govt.nz

Economic Officer
U.S. Embassy Wellington
PO Box 1190
Wellington 6140
New Zealand
+64-4-462-6000

Policies Toward Foreign Direct Investment

Poland welcomes foreign investment as a source of capital, growth, and jobs, and as a vehicle for technology transfer, research and development (R&D), and integration into global supply chains. The government’s Strategy for Responsible Development identified key goals for attracting investment, including improving the investment climate, a stable macroeconomic and regulatory environment, and high-quality corporate governance, including in state-controlled companies. By the end of 2019, according to IMF and National Bank of Poland data, Poland attracted around $234.9 billion (cumulative) in foreign direct investment (FDI), principally from Western Europe and the United States. In 2019, reinvested profits again dominated the net inflow of FDI to Poland. The greatest reinvestment of profits occurred in services and manufacturing, reflecting the change of Poland’s economy to a more service-oriented and less capital-intensive structure.

Foreign companies generally enjoy unrestricted access to the Polish market. However, Polish law limits foreign ownership of companies in selected strategic sectors, and limits acquisition of real estate, especially agricultural and forest land. Additionally, the current government has expressed a desire to increase the percentage of domestic ownership in some industries such as media, banking and retail which have large holdings by foreign companies, and has employed sectoral taxes and other measures to advance this aim. In March 2018, Sunday trading ban legislation went into effect, which has gradually phased out Sunday retail commerce in Poland, especially for large retailers. From 2020, the trade ban applies to all but seven Sundays a year. In 2020, a law was adopted requiring producers and importers of sugary and sweetened beverages to pay a fee. The government is planning to introduce (in mid-2021) an advertising tax – hailed as a “solidarity fee”- covering a wide array of entities including publishers, tech companies and cinemas. Only small media businesses would be exempt from the new levy. The revenue would support the National Health Fund, the National Fund for the Protection of National Monuments, and establish a new fund, the Media Support Fund for Culture and National Heritage, to support Polish culture and creators struggling due to the pandemic. Polish authorities have also publicly favored introducing a comprehensive digital services tax. The details of such a tax are unknown because no draft has been publicly released, but it would presumably affect mainly large foreign digital companies.

There are a variety of agencies involved in investment promotion:

The Ministry of Development has two departments involved in investment promotion and facilitation: the Investment Development and the Trade and International Relations Departments. The Deputy Minister supervising the Investment Development Department is also the ombudsman for foreign investors. https://www.gov.pl/web/przedsiebiorczosc-technologia/ 

The Ministry of Foreign Affairs (MFA) promotes Poland’s foreign relations including economic relations, and along with the Polish Chamber of Commerce (KIG), organizes missions of Polish firms abroad and hosts foreign trade missions to Poland. https://www.msz.gov.pl/ ; https://kig.pl/ 

The Polish Investment and Trade Agency (PAIH) is the main institution responsible for promotion and facilitation of foreign investment. The agency is responsible for promoting Polish exports, for inward foreign investment and for Polish investments abroad. The agency operates as part of the Polish Development Fund, which integrates government development agencies. PAIH coordinates all operational instruments, such as commercial diplomatic missions, commercial fairs and programs dedicated to specific markets and sectors. The Agency has opened offices abroad including in the United States (San Francisco and Washington, D.C, Los Angeles, Chicago, Houston and New York). PAIH’s services are available to all investors. https://www.paih.gov.pl/en 

The American Chamber of Commerce has established the American Investor Desk – an investor-dedicated know-how gateway providing comprehensive information on investing in Poland and investing in the USA: https://amcham.pl/american-investor-desk 

Limits on Foreign Control and Right to Private Ownership and Establishment

Poland allows both foreign and domestic entities to establish and own business enterprises and engage in most forms of remunerative activity per the Entrepreneurs’ Law which went into effect on April 30, 2018. Forms of business activity are described in the Commercial Companies Code. Poland does place limits on foreign ownership and foreign equity for a limited number of sectors. Polish law limits non-EU citizens to 49 percent ownership of a company’s capital shares in the air transport, radio and television broadcasting, and airport and seaport operations sectors. Licenses and concessions for defense production and management of seaports are granted on the basis of national treatment for investors from OECD countries.

Pursuant to the Broadcasting Law, a television broadcasting company may only receive a license if the voting share of foreign owners does not exceed 49 percent and if the majority of the members of the management and supervisory boards are Polish citizens and hold permanent residence in Poland. In 2017, a team comprised of officials from the Ministry of Culture and National Heritage, the National Broadcasting Council (KRRiT) and the Office of Competition and Consumer Protection (UOKiK) was created in order to review and tighten restrictions on large media and limit foreign ownership of the media. While no legislation has been introduced, there is concern that possible future proposals may limit foreign ownership of the media sector as suggested by governing party politicians.

Over the past five years, Poland’s ranking on Reporters without Borders’ Press Freedom Index has dropped from 18th to 62nd. The governing Law and Justice (PiS) party aims to decrease foreign ownership of media, particularly outlets critical of their governing coalition. Approaches have included proposals to set caps on foreign ownership, the use of a state-controlled companies to purchase media, and the application of economic tools (taxes, fines, advertising revenue) to pressure foreign and independent media. In the insurance sector, at least two management board members, including the chair, must speak Polish. The Law on Freedom of Economic Activity (LFEA) requires companies to obtain government concessions, licenses, or permits to conduct business in certain sectors, such as broadcasting, aviation, energy, weapons/military equipment, mining, and private security services. The LFEA also requires a permit from the Ministry of Development for certain major capital transactions (i.e., to establish a company when a wholly or partially Polish-owned enterprise has contributed in-kind to a company with foreign ownership by incorporating liabilities in equity, contributing assets, receivables, etc.). A detailed description of business activities that require concessions and licenses can be found here: https://www.paih.gov.pl/publications/how_to_do_business_in_Poland 

Polish law restricts foreign investment in certain land and real estate. Land usage types such as technology and industrial parks, business and logistic centers, transport, housing plots, farmland in special economic zones, household gardens and plots up to two hectares are exempt from agricultural land purchase restrictions. Since May 2016, foreign citizens from European Economic Area member states, Iceland, Liechtenstein, and Norway, as well as Switzerland, do not need permission to purchase any type of real estate including agricultural land. Investors from outside of the EEA or Switzerland need to obtain a permit from the Ministry of Internal Affairs and Administration (with the consent of the Defense and Agriculture Ministries), pursuant to the Act on Acquisition of Real Estate by Foreigners, prior to the acquisition of real estate or shares which give control of a company holding or leasing real estate. The permit is valid for two years from the day of issuance, and the ministry can issue a preliminary document valid for one year. Permits may be refused for reasons of social policy or public security. The exceptions to this rule include purchases of an apartment or garage, up to 0.4 hectares of undeveloped urban land, and “other cases provided for by law” (generally: proving a particularly close connection with Poland). Laws to restrict farmland and forest purchases (with subsequent amendments) came into force April 30, 2016 and are addressed in more detail in Section 5, Protection of Property Rights.

Since September 2015, the Act on the Control of Certain Investments has provided for the national security-related screening of acquisitions in high-risk sectors including: energy generation and distribution; petroleum production, processing and distribution; telecommunications; media; mining; and manufacturing and trade of explosives, weapons and ammunition. Poland maintains a list of strategic companies which can be amended at any time, but is updated at least once a year, usually in late December. The national security review mechanism does not appear to constitute a de facto barrier for investment and does not unduly target U.S. investment. According to the Act, prior to the acquisition of shares of strategic companies (including the acquisition of proprietary interests in entities and/or their enterprises) the purchaser (foreign or local) must notify the controlling government body and receive approval. The obligation to inform the controlling government body applies to transactions involving the acquisition of a “material stake” in companies subject to special protection. The Act stipulates that failure to notify carries a fine of up to PLN 100,000,000 ($25,000,000) or a penalty of imprisonment between six months and five years (or both penalties together) for a person acting on behalf of a legal person or organizational unit that acquires a material stake without prior notification.

As part of the COVID-19 Anti-Crisis Shield, on June 24, 2020, new legislation entered into force extending significantly the FDI screening mechanism in Poland for 24 months. An acquisition from a country that is not a member of the EU, the EEA, or the OECD requires prior clearance from the President of the Polish Competition Authority if it targets a company generating turnover exceeding EUR 10 million (almost $12 million) that either: 1) is a publicly-listed company, 2) controls assets classified as critical infrastructure, 3) develops or maintains software crucial for vital processes (e.g., utilities systems, financial transactions, food distribution, transport and logistics, health care systems); 4) conducts business in one of 21 specific industries, including energy, gas and oil production, storage, distribution and transportation; manufacture of chemicals, pharmaceuticals and medical instruments; telecommunications; and food processing. The State Assets Ministry is preparing similar and more permanent measures.

In November 2019, the governing Law and Justice party reestablished a treasury ministry, known as the State Assets Ministry, to consolidate the government’s control over state-owned enterprises. The government dissolved Poland’s energy ministry, transferring that agency’s mandate to the State Assets Ministry. The Deputy Prime Minister and Minister of State Assets announced he would seek to consolidate state-owned companies with similar profiles, including merging Poland’s largest state-owned oil and gas firm PKN Orlen with state-owned Lotos Group. At the same time, the government is working on changing the rules of governing state-owned companies to have better control over the firms’ activities. In September 2020, a new government plenipotentiary for the transformation of energy companies and coal mining was appointed.

Other Investment Policy Reviews

The government has not undergone any third-party investment policy review through a multilateral organization,

The OECD published its 2020 survey of Poland. It can be found here: https://www.oecd.org/economy/poland-economic-snapshot/ 

Additionally, the OECD Working Group on Bribery has provided recommendations on the implementation of the OECD Anti-Bribery Convention in Poland here:  https://www.oecd.org/poland/poland-should-urgently-implement-reforms-to-boost-fight-against-foreign-bribery-and-preserve-independence-of-prosecutors-and-judges.htm 

Business Facilitation

In 2020, government activities and regulations focused primarily on addressing challenges related to the outbreak of the pandemic.

The Polish government has continued to implement reforms aimed at improving the investment climate with a special focus on the SME sector and innovations. Poland reformed its R&D tax incentives with new regulations and changes encouraging wider use of the R&D tax breaks. As of January 1, 2019, a new mechanism reducing the tax rate on income derived from intellectual property rights (IP Box) was introduced. Please see Section 5, Protection of Property Rights of this report for more information.

A package of five laws referred to as the “Business Constitution”—intended to facilitate the operation of small domestic enterprises—was gradually introduced in 2018. The main principle of the Business Constitution is the presumption of innocence of business owners in dealings with the government.

Poland made enforcing contracts easier by introducing an automated system to assign cases to judges randomly. Despite these reforms and others, some investors have expressed serious concerns regarding over-regulation, over-burdened courts and prosecutors, and overly burdensome bureaucratic processes. Tax audit methods have changed considerably. For instance, in many cases an appeal against the findings of an audit must now be lodged with the authority that issued the initial finding rather than a higher authority or third party. Poland also enabled businesses to get electricity service faster by implementing a new customer service platform that allows the utility to better track applications for new commercial connections.

The Ministry of Finance and the National Tax Administration have launched an e-Tax Office, available online at https://www.podatki.gov.pl/ . The website, which will be constructed in stages through September 2022, will make it possible to settle all tax matters in a single user-friendly digital location. digital location.

In Poland, business activity may be conducted in the forms of a sole proprietor, civil law partnership, as well as commercial partnerships and companies regulated in provisions of the Commercial Partnerships and Companies Code. Sole proprietor and civil law partnerships are registered in the Central Registration and Information on Business (CEIDG), which is housed with the Ministry of Development here:  https://prod.ceidg.gov.pl/CEIDG.CMS.ENGINE/?D;f124ce8a-3e72-4588-8380-63e8ad33621f 

Commercial companies are classified as partnerships (registered partnership, professional partnership, limited partnership, and limited joint-stock partnership) and companies (limited liability company and joint-stock company). A partnership or company is registered in the National Court Register (KRS) and maintained by the competent district court for the registered office of the established partnership or company. Local corporate lawyers report that starting a business remains costly in terms of time and money, though KRS registration in the National Court Register averages less than two weeks according to the Ministry of Justice and four weeks according to the World Bank’s 2020 Doing Business Report. A 2018 law introduced a new type of company—PSA (Prosta Spółka Akcyjna – Simple Joint Stock Company). PSAs are meant to facilitate start-ups with simpler and cheaper registration procedures. The minimum initial capitalization is 1 PLN ($0.25) while other types of registration require 5,000 PLN ($1,274) or 50,000 PLN ($12,737). A PSA has a board of directors, which merges the responsibilities of a management board and a supervisory board. The provision for PSAs will enter into force in July 2021.

On August 5, 2020, the Government Legislation Center published the detailed assumptions of a draft amendment to the Commercial Companies Code developed by the Commission for Owner Oversight Reform with the Ministry of State Assets. The draft amendment’s primary assumption is to enact a so-called “holding law,” laying down the principles of how a parent company may instruct its subsidiaries, as well as stipulating the parent company’s liability and the principles of creditor, officer, and minority shareholder protections. Apart from introducing the holding law, the draft provides for several additional regulations, including those enhancing the supervisory board’s position, both within the holding law framework and for companies not comprising any group. The amendment is projected to come into force sometime in 2021.

On January 1, 2021, a new law on public procurement entered into force. This law was adopted by the Polish Parliament on September 11, 2019. The new law aims to reorganize the public procurement system and further harmonize it with EU law. The new public procurement law is also more transparent than the previous act.

Beginning in July 2021, an electronic system must be used for all applications submitted in registration proceedings by commercial companies disclosed in the National Court Register, i.e., both applications for registration, deletion, and any changes in the register.

A certified e-signature may be obtained from one of the commercial e-signature providers listed on the following website:  https://www.nccert.pl/ 

National Court Register (KRS): https://www.gov.pl/web/gov/uslugi-dla-przedsiebiorcy 

Agencies with which a business will need to file in order to register in the KRS include:

Central Statistical Office to register for a business identification number (REGON) for civil-law partnership http://bip.stat.gov.pl/en/regon/subjects-and-data-included-in-the-register/ 

ZUS – Social Insurance Agency http://www.zus.pl/pl/pue/rejestracja 

Ministry of Finance http://www.mf.gov.pl/web/bip/wyniki-wyszukiwania/?q=business percent20registration 

Both registers (KRS and REGON) are available in English and foreign companies may use them.

Poland’s Single Point of Contact site for business registration and information is: https://www.biznes.gov.pl/en/ 

Outward Investment

The Polish Agency for Investment and Trade (PAIH), under the umbrella of the Polish Development Fund (PFR), plays a key role in promoting Polish investment abroad. More information on PFR can be found in Section 7, State-Owned Enterprises and at its website: https://pfr.pl/ 

PAIH has 70 offices worldwide, including six in the United States.

PAIH assists entrepreneurs with administrative and legal procedures related to specific projects as well as with the development of legal solutions and with finding suitable locations, and reliable partners and suppliers.

The Agency implements pro-export projects such as “Polish Tech Bridges” dedicated to the outward expansion of innovative Polish SMEs.

Poland is a founding member of the Asian Infrastructure Investment Bank (AIIB). Poland co-founded and actively supports the Three Seas Initiative, which seeks to improve north-south connections in road, energy, and telecom infrastructure in 12 countries on NATO’s and the EU’s eastern flank.

Under the Government Financial Support for Exports Program, the national development bank BGK (Bank Gospodarstwa Krajowego) grants foreign buyers financing for the purchase of Polish goods and services. The program provides the following financing instruments: credit for buyers granted through the buyers’ bank; credit for buyers granted directly from BGK; the purchase of receivables on credit from the supplier under an export contract; documentary letters of credit post-financing; the discounting of receivables from documentary letters of credit; confirmation of documentary letters of credit; and export pre-financing. BGK has international offices in London and Frankfurt.

In May 2019, BGK and the Romanian development bank EximBank founded the Three Seas Fund, a commercial initiative to support the development of transport, energy and digital infrastructure in Central and Eastern Europe. As of March 2021, there were nine core sponsors involved in the Fund.

In July 2019, BGK, the European Investment Bank, and four other development banks (French Deposits and Consignments Fund, Italian Deposits and Loans Fund, the Spanish Official Credit Institute, and German Credit Institute for Reconstruction), began the implementation of the “Joint Initiative on Circular Economy” (JICE), the goal of which is to eliminate waste, prevent its generation and increase the efficiency of resource management. PFR TFI S.A, an entity also under the umbrella of PFR, supports Polish investors planning to or already operating abroad. PFR TFI manages the Foreign Expansion Fund (FEZ), which provides loans, on market terms, to foreign entities owned by Polish entrepreneurs. See https://www.pfrtfi.pl/  and https://pfr.pl/en/offer/foreign-expansion-fund.html 

A current list of all Poland’s BITs, including the documents themselves, can be found at: https://investmentpolicy.unctad.org/international-investment-agreements/countries/168/poland 

The United States and Poland signed a Treaty Concerning Business and Economic Relations in 1990 that was amended and re-ratified in October 2004 due to Poland’s entrance into the EU. In May 2020, all EU-member states, except Sweden, Finland, Austria and Ireland (Ireland is not a party to any intra-EU BITs), signed an agreement on the termination of intra-EU BITs. This agreement will terminate several intra-EU BITs which Poland still has or terminate the sunset clauses of the treaties already denounced by Poland. Sweden, Finland and Austria have announced their intention to sign bilateral agreements with Poland terminating the “sunset clauses” of the BITs denounced by Poland.     Poland has signed double taxation treaties with over 80 countries. The United States shares a double taxation treaty with Poland; an updated bilateral tax treaty was signed in February 2013 and is awaiting U.S. ratification. The “Agreement between the United States of America and the Republic of Poland on Social Security” prevents double taxation, enables resumption of payments to suspended beneficiaries, and allows transfer of benefit eligibility. The double taxation treaty does not cover stock options as part of remuneration packages, according to some investors.The Polish tax system underwent significant changes in 2018, many of which became effective in 2019, 2020 or will become effective in 2021. The most important changes involved:

• An obligatory split payment mechanism;
• A “White List” of VAT taxpayers (along with their VAT numbers and bank account details) and tax-deductible costs;
  Relief from income taxes for bad debts;
• Major changes to the processes for “withholding tax” (postponed until 30 June 2021);
• A new matrix of VAT rates;
• The replacement of VAT returns with a new Uniform Control File (JPK) structure;
• An agreement on cooperation in tax matters;
• Incentives for registering intellectual property, a.k.a. “IP Box” (See Section 5 for more details); and
  New rules for accounting for tax loss.

More information can be found at http://taxsummaries.pwc.com/ID/Poland-Overview 

With a regulatory update in November 2020, Poland adopted several major changes on the taxation of businesses. The changes include the double taxation of some partnerships; deferral of corporate income tax (CIT) for small companies owned by individuals; an obligation for large companies to publish their tax strategies; and a new model of taxation for real estate companies.

Limited partnerships: The key update on limited partnerships (spolka komandytowa) imposes the status of “corporate profits taxpayer” for those with a seat or place of management in Poland, which previously had been tax transparent. The model results in double taxation: firstly on the level of the partnership’s profit, and secondly at the level of profit distribution to the partners. Limited partners will be entitled to an exemption on 50% of received distributions, but only up to approximately PLN 60,000 ($16,000 per year per limited partnership.

General partners (those with unlimited liability) will be entitled to credit proportionally for the entire income tax paid by the partnership, but only within five years. Thus, the new system will differentiate the tax position of limited and unlimited partners. The above regulations entered into force on January 1 2021. These rules will also apply to general partnerships (spolka jawaa) but only if the partners are not individuals, or if the taxpayers participating in their profits are not disclosed. General partnerships with disclosed partners will still be tax transparent.

Deferral of corporate income tax: Lump sum taxation, being a sort of deferral of income tax until the moment of dividend distribution, will apply to companies which select such a system for four years. Companies will have to be owned by individuals, have an annual turnover in the preceding year of up to approximately EUR 25 million, and not have shares in other entities or passive income exceeding 50% of turnover. There are other requirements and conditions for this system to apply, including consideration of employment, and investments in new assets.

Tax Strategies: Companies with a turnover exceeding EUR 50 million per year and tax capital groups will be obliged to prepare and publish strategy reports on the execution of their tax policy on their websites within 12 months following the end of the tax year.

Real estate companies – New model of taxation: Real estate companies will have a series of new duties to perform. For example, when a shareholder in the company sells shares, the company is required to pay any capital gains tax. Some real estate companies will be obliged to appoint a formal tax representative, and many will have to report information about their shareholders (those holding over 5 percent of shares).

Other changes include:

• Entities operating in special economic zones (SEZs) will not be entitled to change the depreciation rates for new assets.
• Losses carried forward will not be possible after further reorganizations.
• Transfer pricing documentation will be required when the beneficial owner of the party to a transaction is from a tax haven.
• A reduced 9 percent CIT rate will apply to companies with a turnover of up to EUR 2 million (increased from EUR 1.2 million).

As of January 1, 2021, retail outlets with high sales volume are required to pay additional taxes in Poland. While the Retail Sales Tax Act technically entered into force on September 1, 2016, no taxes were collected prior to 2021 due to questions from the European Commission (EC) about the legality of the tax. On March 16, 2021, the Court of Justice of the European Union (ECJ) issued a judgment on the compatibility of Poland’s tax on retail sales with the EU law on state aid. The ECJ found that the Polish retail sales tax does not infringe EU law. The European Commission has announced that it will carefully analyze the ECJ’s verdict. This tax is levied on revenues from retail sales exceeding PLN 17 million ($4.3 million) in a given month. Two tax rates apply:

• 0.8 percent of the tax base – applicable to revenues between PLN 17 million and PLN 170 million ($43 million);
• 1.4 percent of the tax base over PLN 170 million ($43 million).

The retail sales tax is payable on a monthly basis, no later than the 25th day of the month following the month in which the revenue was earned.

Some U.S. investors have expressed concern that Poland’s tax authorities do not consistently uphold presumably binding tax decisions and sometimes seek retroactive payments after a reversal. Over the last three years, changes to the regulations on transfer pricing, withholding tax and value added tax (VAT) reporting have significantly increased the obligations on the part of taxpayers, in line with a long-term government strategy of increasing tax collection and the effectiveness of inspections. In 2020, tax offices carried out nearly one-fifth fewer audits than in 2019. Lower activity was the effect of restrictions and staffing problems during the pandemic. Irregularities were found more often, but the amount recovered to the budget was lower. This trend has been observed for a few years and shows that the tax system is being effectively sealed and taxpayers are more accurately selected for audits. The number of tax inspections is likely to increase in 2021 to confirm funds from Anti-Crisis Shield programs were not misused.

On February 2, the Polish government published a draft bill for a tax on revenues earned from digital and conventional advertising. Officially the bill was titled “the Act on additional revenue for the National Health Fund, the National Fund for the Protection of Historical Monuments, and the creation of a Media Support Fund for Culture and National Heritage.” The government has claimed the tax, which it refers to as a “solidarity levy,” is necessary to address the long-term consequences of the COVID-19 pandemic, with economic winners supporting economic losers. The tax would apply rates from 2 to 15 percent of revenues earned and would enter into force on July 1, 2021. Media and digital companies have protested the proposed tax, and some have expressed concern that it could irreparably harm struggling media outlets and adversely affect independent journalism in Poland. The government continues to work on the bill.

Transparency of the Regulatory System

The Polish Constitution contains a number of provisions related to administrative law and procedures.  It states administrative bodies have a duty to observe and comply with the law of Poland.  The Code of Administrative Procedures (CAP) states rules and principles concerning participation and involvement of citizens in processes affecting them, the giving of reasons for decisions, and forms of appeal and review.

As a member of the EU, Poland complies with EU directives by harmonizing rules or translating them into national legislation.  Rule-making and regulatory authority exists at the central, regional, and municipal levels.  Various ministries are engaged in rule-making that affects foreign business, such as pharmaceutical reimbursement at the Ministry of Health or incentives for R&D at the Ministry of Development, Labor, and Technology.  Regional and municipal level governments can levy certain taxes and affect foreign investors through permitting and zoning.

Polish accounting standards do not differ significantly from international standards.  Major international accounting firms provide services in Poland.  In cases where there is no national accounting standard, the appropriate International Accounting Standard may be applied.  However, investors have complained of regulatory unpredictability and high levels of administrative red tape.  Foreign and domestic investors must comply with a variety of laws concerning taxation, labor practices, health and safety, and the environment.  Complaints about these laws, especially the tax system, center on frequent changes, lack of clarity, and strict penalties for minor errors.

Poland has improved its regulatory policy system over the last several years.  The government introduced a central online system to provide access for the general public to regulatory impact assessments (RIA) and other documents sent for consultation to selected groups such as trade unions and business.  Proposed laws and regulations are published in draft form for public comment, and ministries must conduct public consultations.  Poland follows OECD recognized good regulatory practices, but investors say the lack of regulations governing the role of stakeholders in the legislative process is a problem.  Participation in public consultations and the window for comments are often limited.

New guidelines for RIA, consultation and ex post evaluation were adopted under the Better Regulation Program in 2015, providing more detailed guidance and stronger emphasis on public consultation.  Like many countries, Poland faces challenges to fully implement its regulatory policy requirements and to ensure that RIA and consultation comments are used to improve decision making.  The OECD suggests Poland extend its online public consultation system and consider using instruments such as green papers more systematically for early-stage consultation to identify options for addressing a policy problem.  OECD considers steps taken to introduce ex post evaluation of regulations encouraging.

Bills can be submitted to Parliament for debate as “citizens’ bills” if authors collect 100,000 signatures in support for the draft legislation.  NGOs and private sector associations most often take advantage of this avenue.  Parliamentary bills can also be submitted by a group of parliamentarians, a mechanism that bypasses public consultation and which both domestic and foreign investors have criticized.  Changes to the government’s rules of procedure introduced in June 2016 reduced the requirements for RIA for preparations of new legislation.

Administrative authorities are subject to oversight by courts and other bodies (e.g., the Supreme Audit Chamber – NIK), the Office of the Human Rights Ombudsperson, special commissions and agencies, inspectorates, the Prosecutor and parliamentary committees.  Polish parliamentary committees utilize a distinct system to examine and instruct ministries and administrative agency heads.  Committees’ oversight of administrative matters consists of: reports on state budgets implementation and preparation of new budgets, citizens’ complaints, and reports from the NIK.  In addition, courts and prosecutors’ offices sometimes bring cases to parliament’s attention.

The Ombudsperson’s institution works relatively well in Poland.  Polish citizens have a right to complain and to put forward grievances before administrative bodies.  Proposed legislation can be tracked on the Prime Minister’s webpage,  https://legislacja.rcl.gov.pl/  and the Parliament’s webpage:  https://www.sejm.gov.pl/sejm9.nsf/proces.xsp . Poland has consistently met or exceeded the Department of State’s minimum requirements for fiscal transparency: https://www.state.gov/2020-fiscal-transparency-report/

Poland’s budget and information on debt obligations were widely and easily accessible to the general public, including online. The budget was substantially complete and considered generally reliable. NIK audited the government’s accounts and made its reports publicly available, including online. The budget structure and classifications are complex, and the Polish authorities agree more work is needed to address deficiencies in the process of budgetary planning and procedures. State budgets encompass only part of the public finances sector.

The European Commission regularly assesses the public finance sustainability of Member States based on fiscal gap ratios. In 2021, Poland’s public finances will continue to be exposed to a high general government deficit, uncertainty in financial markets resulting primarily from the macroeconomic environment, the effects of the fight against the COVID-19 epidemic, and the monetary policy of the NBP and major central banks, including the European Central Bank and the U.S. Federal Reserve.

International Regulatory Considerations

Since its EU accession in May 2004, Poland has been transposing European legislation and reforming its regulations in compliance with the EU system. Poland sometimes disagrees with EU regulations related to renewable energy and emissions due to its important domestic coal industry.

Poland participates in the process of creation of European norms. There is strong encouragement for non-governmental organizations, such as environmental and consumer groups, to actively participate in European standardization. In areas not covered by European normalization, the Polish Committee for Standardization (PKN) introduces norms identical with international norms, i.e., PN-ISO and PN-IEC. PKN actively cooperates with international and European standards organizations and with standards bodies from other countries. PKN has been a founding member of the International Organization for Standardization (ISO) and a member of the International Electro-technical Commission (IEC) since 1923.

PKN also cooperates with the American Society for Testing and Materials (ASTM) International and the World Trade Organization’s (WTO) Agreement on Technical Barriers to Trade (TBT). Poland has been a member of the WTO since July 1, 1995 and was a member of GATT from October 18, 1967. All EU member states are WTO members, as is the EU in its own right. While the member states coordinate their position in Brussels and Geneva, the European Commission alone speaks for the EU and its members in almost all WTO affairs. PKN runs the WTO/TBT National Information Point in order to apply the provisions of the TBT with respect to information exchange concerning national standardization.

Useful Links:
http://ec.europa.eu/growth/single-market/european-standards/harmonised-standards/ 
http://eur-lex.europa.eu/oj/direct-access.html?locale=en )

Legal System and Judicial Independence

The Polish legal system is code-based and prosecutorial.  The main source of the country’s law is the Constitution of 1997.  The legal system is a mix of Continental civil law (Napoleonic) and remnants of communist legal theory.  Poland accepts the obligatory jurisdiction of the ECJ, but with reservations.  In civil and commercial matters, first instance courts sit in single-judge panels, while courts handling appeals sit in three-judge panels. District Courts (Sad Rejonowy) handle the majority of disputes in the first instance.  When the value of a dispute exceeds a certain amount or the subject matter requires more expertise (such as those regarding intellectual property rights), Circuit Courts (Sad Okregowy) serve as first instance courts.  Circuit Courts also handle appeals from District Court verdicts.  Courts of Appeal (Sad Apelacyjny) handle appeals from verdicts of Circuit Courts as well as generally supervise the courts in their region.

The Polish judicial system generally upholds the sanctity of contracts.  Foreign court judgements, under the Polish Civil Procedure Code and European Community regulation, can be recognized.  There are many foreign court judgments, however, which Polish courts do not accept or accept partially.  There can also be delays in the recognition of judgments of foreign courts due to an insufficient number of judges with specialized expertise.  Generally, foreign firms are wary of the slow and over-burdened Polish court system, preferring other means to defend their rights.  Contracts involving foreign parties often include a clause specifying that disputes will be resolved in a third-country court or through offshore arbitration.  (More detail in Section 4, Dispute Settlement.)

Since coming to power in 2015, the PiS government has pursued far-reaching reforms to Poland’s judicial system. The reforms have led to legal disputes with the European Commission over threats to judicial independence. The reforms have also drawn criticism from legal experts, NGOs, and international organizations. Poland’s government contends the reforms are needed to purge the old Communist guard and increase efficiency and democratic oversight in the judiciary.

Observers noted in particular the introduction of an extraordinary appeal mechanism in the 2017 Supreme Court Law.  The extraordinary appeal mechanism states:  final judgments issued since 1997 can be challenged and overturned in whole or in part for a three-year period starting from the day the legislation entered into force on April 3, 2018.  On February 25, 2021, the Sejm passed an amendment to the law on the Supreme Court, which extended by two years (until April 2023) the deadline for submitting extraordinary complaints.  The bill is now waiting for review by the opposition-controlled Senate.  During 2020, the Extraordinary Appeals Chamber received 217 new complaints. During 2020, the Chamber reviewed 166 complaints, of which 18 were accepted, and 13 were rejected. Seventy-three cases were pending at the end of 2020 the status of the remaining cases was unavailable.

On April 8, 2020, the European Court of Justice (ECJ) issued interim measures ordering the government to suspend the work of the Supreme Court Disciplinary Chamber with regard to disciplinary cases against judges. The ECJ is evaluating an infringement proceeding launched by the European Commission in April 2019 and referred to the ECJ in October 2019. The commission argued that the country’s disciplinary regime for judges “undermines the judicial independence of…judges and does not ensure the necessary guarantees to protect judges from political control, as required by the Court of Justice of the EU.” The commission stated the disciplinary regime did not provide for the independence and impartiality of the Disciplinary Chamber, which is composed solely of judges selected by the restructured National Council of the Judiciary, which is appointed by the Sejm. The ECJ has yet to make a final ruling. The European Commission and judicial experts complained the government has ignored the ECJ’s interim measures.

On April 29, 2020, the European Commission launched a new infringement procedure regarding a law that came into effect on February 14, 2020. The law allows judges to be disciplined for impeding the functioning of the legal system or questioning a judge’s professional state or the effectiveness of his or her appointment. It also requires judges to disclose memberships in associations. The commission’s announcement stated the law “undermines the judicial independence of Polish judges and is incompatible with the primacy of EU law.” It also stated the law “prevents Polish courts from directly applying certain provisions of EU law protecting judicial independence and from putting references for preliminary rulings on such questions to the [European] Court of Justice.” On December 3, the commission expanded its April 29 complaint to include the continued functioning of the Disciplinary Chamber in apparent disregard of the ECJ’s interim measures in the prior infringement procedure.  On January 27, 2021, the European Commission sent a reasoned opinion to the Polish government for response. If not satisfied, the Commission noted it would refer the matter to the ECJ.

Laws and Regulations on Foreign Direct Investment

Foreign nationals can expect to obtain impartial proceedings in legal matters. Polish is the official language and must be used in all legal proceedings. It is possible to obtain an interpreter. The basic legal framework for establishing and operating companies in Poland, including companies with foreign investors, is found in the Commercial Companies Code. The Code provides for establishment of joint-stock companies, limited liability companies, or partnerships (e.g., limited joint-stock partnerships, professional partnerships). These corporate forms are available to foreign investors who come from an EU or European Free Trade Association (EFTA) member state or from a country that offers reciprocity to Polish enterprises, including the United States.

With few exceptions, foreign investors are guaranteed national treatment. Companies that establish an EU subsidiary after May 1, 2004 and conduct or plan to commence business operations in Poland must observe all EU regulations. However, in some cases they may not be able to benefit from all privileges afforded to EU companies. Foreign investors without permanent residence and the right to work in Poland may be restricted from participating in day-to-day operations of a company. Parties can freely determine the content of contracts within the limits of European contract law. All parties must agree on essential terms, including the price and the subject matter of the contract. Written agreements, although not always mandatory, may enable an investor to avoid future disputes. Civil Code is the law applicable to contracts.

Useful websites (in English) to help navigate laws, rules, procedures and reporting requirements for foreign investors:

Polish Investment and Trade Agency: https://www.paih.gov.pl/en 
Polish Financial Supervision Authority (KNF):  https://www.knf.gov.pl/en/ 
Office of Competition and Consumer Protection (UOKIK):  https://uokik.gov.pl/legal_regulations.php 

Biznes.gov.pl is intended for people who plan to start a new business in Poland. The portal is designed to simplify the formalities of setting up and running a business. It provides up-to-date regulations and procedures for running a business in Poland and the EU; it supports electronic application submission to state institutions; and it answers questions regarding running a business. Information is available in Polish and English. https://www.biznes.gov.pl/en/przedsiebiorcy/ 

Competition and Antitrust Laws

Poland has a high level of nominal convergence with the EU on competition policy in accordance with Articles 101 and 102 of the Lisbon Treaty. Poland’s Office of Competition and Consumer Protection (UOKiK) is well within EU norms for structure and functioning, with the exception that the Prime Minister both appoints and dismisses the head of UOKiK. This is supposed to change to be in line with EU norms, however, as of March 2021, the Prime Minister was still exercising his right to remove and nominate UOKiK’s presidents.

The Act on Competition and Consumer Protection  was amended in mid-2019. The most important changes, which concern geo-blocking and access to fiscal and banking secrets, came into force on September 17, 2019. Other minor changes took effect in January 2020. The amendments result from the need to align national law with new EU laws.

Starting in January 2020, UOKiK may intervene in cases when delays in payment are excessive. UOKiK can take action when the sum of outstanding payments due to an entrepreneur for three subsequent months amounts to at least PLN 5 million ($1.7 million). In 2022, the minimum amount will decrease to PLN 2 million ($510,000).

The President of UOKiK issues approximately 100 decisions per year regarding practices restricting competition and infringing on collective interests of consumers. Enterprises have the right to appeal against those decisions to the court. In the first instance, the case is examined by the Court of Competition and Consumer Protection and in the second instance, by the Appellate Court. The decision of the Appellate Court may be challenged by way of a cassation appeal filed to the Supreme Court. In major cases, the General Counsel to the Republic of Poland will act as the legal representative in proceedings concerning an appeal against a decision of the President of UOKiK.

As part of new COVID-related measures, the Polish Parliament adopted legislation amending the Act of July 24, 2015, on the Control of Certain Investments, introducing full-fledged foreign direct investment control in Poland and giving new responsibilities to UOKiK. Entities from outside the EEA and/or the OECD have to notify the Polish Competition Authority of the intention to make an investment resulting in acquisition, achievement or obtaining directly or indirectly: “significant participation” (defined briefly as 20 percent or 40 percent of share in the total number of votes, capital, or profits or purchasing or leasing of an enterprise or its organized part) or the status of a dominant entity within the meaning of the Act of July 24, 2015, on the Control of Certain Investments in an entity subject to protection. The new law entered into force on July 24, 2020 and is valid for 24 months.

On October 28, 2020, the government proposed new legislation by virtue of which the tasks pursued by the Financial Ombudsman will be taken over by UOKiK. According to the justification of this legislation, the objective of the draft is to enhance the efficiency of protection, in terms of both group and individual interests of financial market entities’ clients. According to the new regulations, a new position of coordinator conducting out-of-court procedures in matters of resolving disputes between financial market entities and their clients will be established. Such a coordinator will be appointed by UOKiK for a four-year term. Moreover, the new proposal provides for creating the Financial Education Fund (FEF), a special-purpose fund managed by UOKiK.

Additional provisions in the proposed legislation concern the UOKiK’s investigative powers, cooperation between anti-monopoly authorities, and changes to fine imposition and leniency programs. One of the amendments also stipulates that the President of UOKiK will be elected to a 5-year term and the dismissal of the anti-monopoly authority will only be possible in precisely defined situations, such as: legally valid conviction for a criminal offense caused by intentional conduct and the deprivation of public rights or of Polish citizenship. Adoption of these solutions is linked to the implementation of the EU’s ECN+ directive.

All multinational companies must notify UOKiK of a proposed merger if any party to it has subsidiaries, distribution networks or permanent sales in Poland.

Examples of competition reviews can be found at:
https://www.uokik.gov.pl/news.php?news_id=16649  (Gazprom NS2)
https://www.uokik.gov.pl/news.php?news_id=17198  (Agora/Eurozet)
https://www.uokik.gov.pl/news.php?news_id=17202  (Orlen/Polska Press)
https://www.uokik.gov.pl/news.php?news_id=17198  (BPH Bank spread clauses)

Decisions made by the President of UOKiK can be searched here:
https://decyzje.uokik.gov.pl/bp/dec_prez.nsf 

The President of UOKiK has the power to impose significant fines on individuals in management positions at companies that violate the prohibition of anticompetitive agreements. The amendment to the law governing UOKiK’s operation, which entered into force on December 15, 2018, provides for a similar power to impose significant fines on the management of companies in the case of violations of consumer rights. The maximum fine that can be imposed on a manager may amount to PLN 2 million ($510,000) and, in the case of managers in the financial sector, up to PLN 5 million ($1.27 million).

Expropriation and Compensation

Article 21 of the Polish Constitution states: “expropriation is admissible only for public purposes and upon equitable compensation.”  The Law on Land Management and Expropriation of Real Estate states that property may be expropriated only in accordance with statutory provisions such as construction of public works, national security considerations, or other specified cases of public interest.  The government must pay full compensation at market value for expropriated property.  Acquiring land for road construction investment and recently also for the Central Airport and the Vistula Spit projects has been liberalized and simplified to accelerate property acquisition, particularly through a special legislative act. Most acquisitions for road construction are resolved without problems.  However, there have been a few cases in which the inability to reach agreement on remuneration has resulted in disputes.  Post is not aware of any recent expropriation actions against U.S. investors, companies, or representatives.

Dispute Settlement

ICSID Convention and New York Convention

Poland is not a party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Washington Convention). Poland is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).

Investor-State Dispute Settlement

Poland is party to the following international agreements on dispute resolution, with the Ministry of Finance acting as the government’s representative: the 1923 Geneva Protocol on Arbitration Clauses; the 1961 Geneva European Convention on International Trade Arbitration; the 1972 Moscow Convention on Arbitration Resolution of Civil Law Disputes in Economic and Scientific Cooperation Claims under the U.S.-Poland Bilateral Investment Treaty (BIT) (with further amendments).

The United Nations Conference on Trade and Development (UNCTAD) database for treaty-based disputes lists three cases for Poland involving a U.S. party over the last decade. The majority of Poland’s investment disputes are with companies from other EU member states. According to the UNCTAD database, over the last decade, there have been 16 known disputes with foreign investors.

There is no distinction in law between domestic and international arbitration. The law only distinguishes between foreign and domestic arbitral awards for the purpose of their recognition and enforcement. The decisions of arbitration entities are not automatically enforceable in Poland, but must be confirmed and upheld in a Polish court. Under Polish Civil Code, local courts accept and enforce the judgments of foreign courts; in practice, however, the acceptance of foreign court decisions varies. Investors say the timely process of energy policy consolidation has made the legal, regulatory and investment environment for the energy sector uncertain in terms of how the Polish judicial system deals with questions and disputes around energy investments by foreign investors, and in foreign investor interactions with state-owned or affiliated energy enterprises.

A Civil Procedures Code amendment in January 2016, with further amendments in July 2019, implements internationally recognized arbitration standards and creates an arbitration-friendly legal regime in Poland. The amendment applies to arbitral proceedings initiated on or after January 1, 2016 and introduced one-instance proceedings to repeal an arbitration award (instead of two-instance proceedings). This change encourages mediation and arbitration to solve commercial disputes and aims to strengthen expeditious procedure. The Courts of Appeal (instead of District Courts) handle complaints. In cases of foreign arbitral awards, the Court of Appeal is the only instance. In certain cases, it is possible to file a cassation (or extraordinary) appeal with the Supreme Court of the Republic of Poland. In the case of a domestic arbitral award, it will be possible to file an appeal to a different panel of the Court of Appeal.

International Commercial Arbitration and Foreign Courts

Poland does not have an arbitration law, but provisions in the Polish Code of Civil Procedures of 1964, as amended, are based to a large extent on UNCITRAL Model Law. Under the Code of Civil Procedure, an arbitration agreement must be concluded in writing. Commercial contracts between Polish and foreign companies often contain an arbitration clause. Arbitration tribunals operate through the Polish Chamber of Commerce, and other sector-specific organizations. A permanent court of arbitration also functions at the business organization Confederation Lewiatan in Warsaw and at the General Counsel to the Republic of Poland (GCRP). GCRP took over arbitral cases from external counsels in 2017 and began representing state-owned commercial companies in litigation and arbitration matters for amounts in dispute over PLN 5 million ($1.27 million). The list of these entities includes major Polish state-owned enterprises in the airline, energy, banking, chemical, insurance, military, oil and rail industries as well as other entities such as museums, state-owned media and universities.

The Court of Arbitration at the Polish Chamber of Commerce in Warsaw, the biggest permanent arbitration court in Poland, operates based on arbitration rules complying with the latest international standards, implementing new provisions on expedited procedure. In recent years, numerous efforts have been made to increase use of arbitration in Poland. In 2019, online arbitration courts appeared on the Polish market. Their presence reflects the need for reliable, fast and affordable alternatives to state courts in smaller disputes. Online arbitration is becoming increasingly popular with exporting companies. One of the reasons is the possibility to file claims faster for overdue payments to foreign courts.

Polish state courts generally respect the wide autonomy of arbitration courts and show little inclination to interfere with their decisions as to the merits of the case. The arbitral awards are likely to be set aside only in rare cases. As a rule, in post-arbitral proceedings, Polish courts do not address the merits of the cases decided by the arbitration courts. An arbitration-friendly approach is also visible in other aspects, such as in the broad interpretation of arbitration clauses.

In mid-2018, the Polish Supreme Court introduced a new legal instrument into the Polish legal field: an extraordinary complaint. Although this new instrument does not refer directly to arbitration proceedings, it may be applied to any procedures before Polish state courts, including post-arbitration proceedings (see Section 3 for more details).

Bankruptcy Regulations

Poland’s bankruptcy law has undergone significant change and modernization in recent years. There is now a bankruptcy law and a separate, distinct restructuring law. Poland ranks 25th for ease of resolving insolvency in the World Bank’s Doing Business report 2020. Bankruptcy in Poland is criminalized if a company’s management does not file a petition to declare bankruptcy when a company becomes illiquid for an extended period of time or if a company ceases to pay its liabilities. https://www.paih.gov.pl/polish_law/bankruptcy_law_and_restructuring_proceedings 

In order to reduce the risk of overwhelming the bankruptcy courts with an excess of cases resulting from the pandemic, changes have been introduced in the bankruptcy process for consumers, shifting part of the duties to a trustee. A second significant change is the introduction of simplified restructuring proceedings. During restructuring proceedings, a company appoints an interim supervisor and is guaranteed protection against debt collection while seeking approval for specific restructuring plans from creditors. The simplified proceedings enjoy great support among entities at risk of insolvency, but are limited in time until June 30, 2021. Some of the solutions provided in the simplified restructuring procedure are the implementation of recommendations from Directive 2019/1023 of the European Parliament and of the Council (EU) of June 20, 2019. It is likely that, taking advantage of the state of the epidemic, the government is testing new solutions, which may continue to be applied after the economic situation has returned to normal.

Investment Incentives

Poland’s Plan for Responsible Development identified eight industries for development and incentives: aviation, defense, automotive parts manufacturing, ship building, information technology, chemicals, furniture manufacturing and food processing.  More information about the plan can be found at this link:  https://www.gov.pl/web/fundusze-regiony/plan-na-rzecz-odpowiedzialnego-rozwoju.  Poland encourages energy sector development through its energy policy, outlined in the November 2018 published draft report “Energy Policy of Poland until 2040” (PEP2040) and finally adopted by the government in February 2021.  The policy can be found at:  https://www.gov.pl/web/klimat/polityka-energetyczna-polski.

The policy foresees a primary role for fossil fuels until 2040 as well as strong growth in electricity production.  The government will continue to pursue developing nuclear energy and offshore wind power generation, as well as distributed generation.  The policy remains skeptical of onshore wind.  Poland’s National Energy and Climate Plan for years 2021-2030 (NECP PL) developed in line with the EU Regulation on the Governance of the Energy and Climate Action, together with PEP2040, pave the road to the new European Green Deal.  Poland may spend approximately $420 billion on the transformation of its energy sector in 2021-2040, according to the energy policy.  These investments would include about $230 billion in the fuel and energy sectors and about $90 billion in the generation segment, of which 80 percent will be spent on nuclear energy and renewables investments.

A new economic program called the “New Deal” (Nowy Lad), still awaiting public presentation as of March 2020, is likely to include proposals of significant changes to the tax system including incentives to attract capital to Poland.  The government claims the program consists of support schemes for domestic enterprises, new investment and development projects, as well as reforms of the healthcare system, social welfare, education, environmental, and energy policies.

A government strategy aims for a commercial 5G network to be operational in all cities by 2025.

The Ministry of Development has finished public consultations on its Industry Development White Paper, which identifies the government’s views on its most significant barriers to industrial activity.  This document will serve as a foundation for Poland’s Industrial Policy (PIP). The majority of public comments received focused on issues related to the education system not being tailored to the needs of industry, a workforce deficit, difficulties in obtaining funding, for R&D, environmental regulations, complex administrative procedures and legislation, labor regulations, and high energy prices.  The PIP is slated to become a strategic document, setting the direction for long-term industrial development.  The PIP will focus on five areas:  digitization, security, industrial production location, the Green Deal, and modern society.  The Ministry expects to finalize this strategic plan during the second quarter of 2021.  The government has not yet clarified how Poland’s Industrial Policy will align with other strategic documents, including the National Recovery Plan and the New Deal.

A company investing in Poland, either foreign or domestic, may receive assistance from the Polish government.  Foreign investors have the potential to access certain incentives such as:  income tax and real estate tax exemptions; investment grants of up to 50 percent of investment costs (70 percent for small and medium-sized enterprises); grants for research and development; grants for other activities such as environmental protection, training, logistics, or use of renewable energy sources.

Large priority-sector investments may qualify for the “Program for Supporting Investment of Considerable Importance for the Polish Economy for 2011-2030.”  The program, amended in October 2019, is one of the instruments enabling support for new investment projects, particularly relevant for the Polish economy.  Its main goal is to increase innovation and the competitiveness of the Polish economy.  Under the amended program, it is possible to co-finance large strategic investments as well as medium-sized innovative projects.  Projects that adapt modern technologies and provide for research and development activities are awarded.  The program is also conducive to establishing cooperation between the economic sector and academic centers.  The support is granted in the form of a subsidy, based on an agreement concluded between the Minister of Development and the investor.  The agreement regulates the conditions for the payment of subsidies and the investment implementation schedule.  Under the program, investment support may be granted in two categories: eligible costs for creating new jobs and investment costs in tangible and intangible assets.  Companies can learn more at: https://www.paih.gov.pl/why_poland/investment_incentives/programme_for_supporting_investments_of_major_importance_to_the_polish_economy_for_2011_-_2030

https://www.gov.pl/web/rozwoj/program-wspierania-inwestycji-o-istotnym-znaczeniu-dla-gospodarki-polskiej-na-lata-2011-2030

The Polish Investment Zone (PSI), the new system of tax incentives for investors which replaced the previous system of special economic zones (SEZ), was launched September 5, 2018.  Under the new law on the PSI, companies can apply for a corporate income tax (CIT) exemption for a new investment to be placed anywhere in Poland.  The CIT exemption is calculated based on the value of the investment multiplied by the percentage of public aid allocated for a given region based on its level of development (set percentage).  The CIT exemption is for 10-15 years, depending on the location of the investment.  Special treatment is available for investment in new business services and research and development (R&D).  A point system determines eligibility for the incentives.  Entities operating in special economic zones will not be entitled to change the depreciation rates for new assets starting 2021.

The deadline for utilizing available tax credits from the previous SEZ system is the end of 2026 (extended from 2020).  The new regulations also contain important changes for entities already operating in SEZs, even if they do not plan new investment projects.  This includes the possibility of losing the right to tax incentives in the event of fraud or tax evasion.  Investors should consider carefully the potential benefits of the CIT exemption in assessing new investments or expansion of existing investments in Poland.

More information on government financial support:  https://www.paih.gov.pl/why_poland/investment_incentives

The Polish government is seeking to increase Poland’s economic competitiveness by shifting toward a knowledge-based economy.  Public and private sector investment in R&D has been steadily growing since 2016, supported by EU funds dedicated to R&D and innovation.  Businesses may also take advantage of the EU primary research funding program, Horizon 2020 and its successor Horizon Europe.  The EU institutions set the 2021–2027 budget for Horizon Europe at EUR 95.5 billion (including EUR 5.4 billion from the Next Generation of the EU  Recovery Fund).  The first Horizon Europe Strategic Plan (2021-2024), which sets out key strategic orientations for the support of research and innovation, was adopted on March 15, 2021.  According to the European Commission, the program will start “as soon as possible in 2021.”  A few months’ delay in the start should not have a big impact on potential grantees because the Commission had already been making contingency plans and will still be spending money left over from Horizon 2020 over the next few years.  The conditions for participation, funding and other related formalities remain unchanged.

More information is available at:

Ministry of Funds and Regional Development:  https://www.gov.pl/web/fundusze-regiony/otwarte-konkursy-nabory-dotacje-i-dofinansowania

Ministry of Economic Development: https://www.gov.pl/web/rozwoj/programy-i-projekty

Horizon Europe 2021-2027:  https://ec.europa.eu/info/horizon-europe_en#proposal

As of January 1, 2019, the Innovation Box, or IP Box, reduces the tax rate applicable to income derived from intellectual property rights to 5 percent.  Taxpayers applying the IP Box shall be entitled to benefit from the tax preference until a given right expires (in case of a patented invention – 20 years).  In order to benefit from the program, taxpayers will be obliged to separately account for the relevant income.  Foreign investors may take advantage of this benefit as long as the relevant IP is registered in Poland.

The update of the National Reform Program (NRP) heralds the introduction of a new incentive measure for enterprises in the form of tax relief related to investments in automation and robotization (robotization relief).  According to an announcement from the Ministry of Finance, robotization relief should apply as of the first half of 2021.  Robotization relief is intended as a tax incentive available to all entities subject to income tax.  At the same time, eligibility for the relief will not depend on the business sector in which the enterprise operates or business size, making this solution available to all.  The new tax relief will operate in a similar manner as the existing research & development tax relief enabling taxpayers to make an additional deduction of eligible costs (expenses detailed in an exhaustive list) from the tax base.  Within the framework of robotization relief, it will be possible to deduct 50 percent of the eligible costs. According to the draft, the relief will apply within a specific time frame.  It has been announced that robotization relief will apply to expenses incurred on business robotization and automation in the years 2021-2025.  The deductions can be made in these years and in the six consecutive years thereafter.  It means that the last deductions of eligible expenses can be made in 2031.

There are numerous grants, preferential loans, and other financial instruments to encourage investment that protects the environment by increasing energy efficiency and to promote renewable energy sources and cogeneration systems.  Incentives are available mostly from EU funds and national funds and can cover up to 85 percent of eligible costs.

The Polish government does not issue sovereign guarantees for FDI projects.  Co-financing may be possible for partnering on large FDI projects, such as the planned central airport project or a nuclear power plant project.

Foreign Trade Zones/Free Ports/Trade Facilitation

Foreign-owned firms have the same opportunities as Polish firms to benefit from foreign trade zones (FTZs), free ports, and special economic zones (since January 2019, they make up the Polish Investment Zone).  The 2004 Customs Law (with later amendments) regulates operation of FTZs in Poland.  The Minister of Finance establishes duty-free zones.  The Ministers designate the zone’s managing authorities, usually provincial governors, who issue operating permits to interested companies for a given zone.

Most activity in FTZs involves storage, packaging, and repackaging.  As of April 2019, there were seven FTZs:  Gliwice, near Poland’s southern border; Terespol, near Poland’s border with Belarus; Mszczonow, near Warsaw; Warsaw’s Frederic Chopin International Airport; Szczecin; Swinoujscie; and Gdansk.  Duty-free shops are available only for travelers to non-EU countries.

There are bonded warehouses in:  Bydgoszcz-Szwederowo; Krakow-Balice; Wroclaw-Strachowice; Katowice-Pyrzowice; Gdansk-Trojmiasto; Lodz -Lublinek; Poznan-Lawica; Rzeszow-Jasionka, Warszawa-Modlin, Lublin, Szczecin-Goleniow; Radom-Sadkow, Olsztyn-Mazury.  Commercial companies can operate bonded warehouses.  Customs and storage facilities must operate pursuant to custom authorities’ permission.  Only legal persons established in the EU can receive authorization to operate a customs warehouse.

Performance and Data Localization Requirements

Poland has no policy of “forced localization” designed to force foreign investors to use domestic content in goods or technology.  Investment incentives apply equally to foreign and domestic firms.  Over 40 percent of firms in Special Economic Zones are Polish.  There is little data on localization requirements in Poland and there are no requirements for foreign information technology (IT) providers to turn over source code and/or provide access to surveillance (backdoors into hardware and software or turn over keys for encryption).  Exceptions exist in sectors where data are important for national security such as critical telecommunications infrastructure and in gambling.  The cross-border transfer rules in Poland are reasonable and follow international best practices, although some companies have criticized registration requirements as cumbersome.  In Poland, the Telecommunications Law (Act of 16 July 2004 – unified text, Journal of Laws 2018, item 1954) includes data retention provisions.  The data retention period is 12 months.

In the telecommunication sector, the Office of Electronic Communication (UKE) ensures telecommunication operators fulfill their obligations.  In radio and television, the National Broadcasting Council (KRRiT) acts as the regulator.  Polish regulations protect an individual’s personal data that are collected in Poland regardless of where the data are physically stored.  The Personal Data Protection Office (UODO) enforces personal data regulations.

Work is underway at the national level on the draft of a new Act on Open Data and Re-use of Public Sector Information.  This work follows adoption of the new Open Data Directive (Directive (EU) 2019/1024 on open data and the re-use of public sector information), which should be implemented into Polish law by July 17, 2021.

Post is not aware of excessively onerous visa, residence permit or similar requirements inhibiting mobility of foreign investors and their employees, though investors regularly note long processing times due to understaffing at regional employment offices.  U.S. companies have reported difficulties obtaining work permits for their non-EU citizen employees.  Both regulatory challenges and administrative delays result in permit processing times of 3 to 12 months.  This affects the hiring of new employees as well as the transfer of existing employees from outside Poland.  U.S. companies have complained they are losing highly-qualified employees to other destinations, such as Germany, where labor markets are more accessible.  The problem is especially acute in southern Poland.

Generally, Poland does not mandate local employment, but there are a few regulations that place de facto restrictions e.g., a certain number of board members of insurance companies must speak Polish.

Polish law limits non-EU citizens to 49 percent ownership of a company’s capital shares in the air transport, radio and television broadcasting sectors as well as airport and seaport operations.  There are also legal limits on foreign ownership of farm and forest lands as outlined in Section 2 of this report under Limits on Foreign Control and Right to Private Ownership and Establishment.  Pursuant to the Broadcasting Law, a TV broadcasting company may only receive a license if the voting share of its foreign owners does not exceed 49 percent and if they hold permanent residence in Poland.  In the insurance sector, at least two members of management boards, including the chair, must speak Polish.

Real Property

Poland recognizes and enforces secured interests in property, movable and real. The concept of a mortgage exists in Poland, and there is a recognized system of recording such secured interests. There are two types of publicly available land registers in Poland: the land and mortgage register (ksiegi wieczyste), the purpose of which is to register titles to land and encumbrances thereon; and the land and buildings register (ewidencja gruntow i budynkow), the function of which is more technical as it contains information concerning physical features of the land, class of land and its use. Generally, real estate in Poland is registered and legal title can be identified on the basis of entries in the land and mortgage registers which are maintained by relevant district courts. Each register is accessible to the public and excerpts are available on application, subject to a nominal fee. The registers are available online.

Poland has a non-discriminatory legal system accessible to foreign investors that protects and facilitates acquisition and disposition of all property rights, including land, buildings, and mortgages. However, foreigners (both individuals and entities) must obtain a permit to acquire property (See Section 1 Limits on Foreign Control and Right to Private Ownership and Establishment). Many investors, foreign and domestic, complain the judicial system is slow in adjudicating property rights cases. Under the Polish Civil Code, a contract to buy real property must be made in the form of a notary deed. Foreign companies and individuals may lease real property in Poland without having to obtain a permit.

Widespread nationalization of property during and after World War II has complicated the ability to establish clear title to land in Poland, especially in major municipalities.  While the Polish government has an administrative system for reviewing claims for the restitution of communal property, former individual property owners must file and pursue claims in the Polish court system in order to receive restitution.  There is no general statute of limitations regarding the filing or litigation of private property restitution claims, but there are exceptions for specific cases.  For example, in cases involving the communist-era nationalization of Warsaw under the Bierut Decree, there were claims deadlines that have now passed, and under current law, those who did not meet the deadlines would no longer be able to make a claim for either restitution or compensation.  During 2020, Warsaw city authorities continued implementing a 2015 Law dubbed the Small Reprivatization Act.  This Law aimed to stop the problem of speculators purchasing Warsaw property claims for low values from the original owners or their heirs and then applying for a perpetual usufruct or compensation as the new legal owner.  On September 17, 2020, Parliament adopted further amendments to the 2015 law.  The revised legislation established new grounds on which the City of Warsaw must refuse the return of properties, for reasons outside claimants’ control. The president signed the legislation on September 29. NGOs and advocacy groups expressed serious concerns that the 2015 law fell short of providing just compensation to former owners who lost property as a result of the nationalization of properties by the communist-era government, and also properties taken during the Holocaust era. Legal experts expressed concern that the law limited the ability of petitioners to reclaim property unjustly taken from their lawful owners. The World Jewish Restitution Organization asserted that the time limits included in the law were insufficient for potential claimants, particularly Holocaust survivors and their heirs, to meet difficult documentary requirements.

Critics state the law might extinguish potential claims by private individuals of properties seized during World War II or the communist era, if no one comes forward to pursue a restitution claim within the time limit.  Any potential claimants who come forward within six months after publication of the affected property by the City of Warsaw will have an additional three months to establish their claim.  The city began publishing lists in 2017 and continued to do so during 2021.  The city’s website contains further information on these cases and the process to pursue a claim:  https://bip.warszawa.pl/Menu_podmiotowe/biura_urzedu/SD/ogloszenia/default.htm 

It is sometimes difficult to establish clear title to properties.  There are no comprehensive estimates of land without clear title in Poland.

The 2016 Agricultural Land Law banned the sale of state-owned farmland under the administration of the National Center for Support of Agriculture (NCSA) for five years.  Long-term state-owned farmland leases are available for farmers looking to expand their operations up to 300 hectares.  Foreign investors can (and do) lease agricultural land.  The 2016 Agricultural Land Law also imposed restrictions on sales of privately-owned farmland, giving the NCSA preemptive right of purchase.

The 2011 amendment to the law of Management of Farmland Administered by NCSA and 2016 Agricultural Land Law adversely affected tenants with long-term state-owned land leases.  According to the law, renters who did not return 30 percent of the land under lease to NCSA would not be eligible to have their leases extended beyond the current terms of the contract.  Currently, several entities, including U.S. companies, face the prospect of returning some currently leased land to the Polish government over the coming years.  Three of these entities appealed to the Ombudsman, who requested the Constitutional Tribunal (CT) to verify the law’s compliance with the constitution, but the cases were dismissed by the CT in the fall of 2020.  In June 2019, the Polish Parliament amended the Agricultural Land Law to loosen land sale requirements.  The amendment increased the size of private agricultural land, from 0.3 to 1.0 hectare that could be sold without the approval of the NCSA.  The new owner is not allowed to sell the land for five years.  The 2019 amendment did not change the land lease situation for larger operators, many of whom continue to remain ineligible to have their land leases extended.  The Law on Forest Land similarly prevents Polish and foreign investors from purchasing privately-held forests and gives state-owned entities (Lasy Panstwowe) preemptive right to buy privately-held forest land.

On March 9, 2021, the Council of Ministers approved a draft law amending the 2016 Agricultural Land Law. The amendment extends the ban on selling state-owned farmland under the administration of the NCSA for another five years, until May 1, 2026. If the draft amendment of the Agricultural Land Law is approved by Parliament, it will enter into force on May 1, 2021. The 2021 amendment will not change the land lease situation for larger operators, who will remain ineligible to have their land leases extended.

Intellectual Property Rights

Polish intellectual property rights (IPR) law is more strict than European Commission directives require.  Poland is a member of the World Intellectual Property Organization (WIPO) and a party to many of its treaties, including the Berne Convention, the Paris Convention, the Patent Cooperation Treaty, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty. Enforcement is improving across all sectors of Poland’s IPR regime.  Physical piracy (e.g., optical discs) is not a significant problem in Poland.  However, despite progress in enforcement, online piracy continues to be widespread as site blocking is still not possible in Poland due to lack of implementation of relevant EU legislation. A popular Polish cyberlocker platform is included on the 2020 Notorious Markets List. Poland does not appear in the U.S. Trade Representative’s Special 301 Report.

Polish law requires a rights holder to start the prosecution process.  In Poland, authors’ and creators’ organizations and associations track violations and share these with prosecutors.  Rights holders express concern that penalties for digital IPR infringement are not high enough to deter violators.

In March 2019, amendments to the Act on Industrial Property Law came into force which are intended to implement EU Trademark Directive 2015/2436. The legislation introduced, inter alia, the abandonment of the graphical representation requirement, a new mechanism for trademark protection renewals, extended licensee’s rights, as well as remedies against counterfeit goods in transit and against infringing preparatory acts. The changes provide new tools to fight against infringement of trademark rights.

In April 2019, the EU adopted two directives on copyright, including: 2019/790 on copyright and related rights in the digital single market and 2019/789 regarding online broadcasting and re-broadcasting. Member states are required to transpose the reforms into national legislation by June 2021. The Ministry of Culture and National Heritage is responsible for drafting and implementing the legislation which has not yet been made available for public consultations.

In February 2020, additional amendments to the Act on Industrial Property entered into force which adapt Polish standards on inventions to those of the EU so as to streamline and speed up proceedings before the Polish Patent Office. The amendments to the Act also extend the exemption from patent and trademark renewal fees to support start-up entrepreneurs. The legislation complies with relevant provisions of the European Patent Convention and the WIPO Patent Cooperation Treaty.

In July 2020, amendments to the Code of Civil Procedure entered into force which, among other things, creates and operationalizes specialized IPR courts.  Poland’s new specialized courts will oversee cases related to all types of IPR, including copyright, and trademarks, industrial property rights, and unfair competition. New departments for IPR matters will be created at the District Courts in Gdansk, Katowice, Poznan, and Warsaw, and specialized departments will be established in the Courts of Appeal in Warsaw and Katowice. This will replace the current system in which IPR matters, including those relating to highly specialized issues such as patents, plant varieties, and trademarks, are examined by commercial departments of common courts.

A specialized court that was previously established within the 22nd Department of the District Court in Warsaw for cases involving EU trademarks and community designs will lose the exclusive competence to deal with those cases and will consider IPR claims regarding computer programs, inventions, designs utility, topography of integrated circuits, plant varieties, and trade secrets of a technical nature (i.e., matters of advanced complexity).  In order to conduct proceedings in these cases, it will be necessary to have highly trained judges who are familiar with IPR/IT issues. The new rules also require parties in IPR cases to be represented by professional lawyers, legal advisers, and patent attorneys. The changes represent a positive step for the court system, further contributing to the speed and efficiency of proceedings.

Tax incentives for IPR known collectively as “IP Box” or “Innovation Box,” included in the November 2018 tax amendment, have been applicable since January 2019. See Section 4 – Investment Incentives.

Polish customs tracks seizures of counterfeit goods but statistics for the reporting period are currently unavailable.

General information on copyright in Poland: http://www.copyright.gov.pl/pages/main-page/copyright-in-poland/general-information.php 

Polish Patent Office: http://www.uprp.pl/o-urzedzie/Lead03,14,56,1,index,pl,text/ 

Chancellery of the Prime Minister: https://www.gov.pl/cyfryzacja/co-robimy 

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

Capital Markets and Portfolio Investment

The Polish regulatory system is effective in encouraging and facilitating portfolio investment.  Both foreign and domestic investors may place funds in demand and time deposits, stocks, bonds, futures, and derivatives.  Poland’s equity markets facilitate the free flow of financial resources.  Poland’s stock market is the largest and most developed in Central Europe.  In September 2018, it was reclassified as developed market status by FTSE Russell’s country classification report.  The stock market’s capitalization amounts to less than 40 percent of GDP.  Although the Warsaw Stock Exchange (WSE) is itself a publicly traded company with shares listed on its own exchange after its partial privatization in 2010, the state retains a significant percentage of shares which allows it to control the company.  WSE has become a hub for foreign institutional investors targeting equity investments in the region.  It has also become an increasingly significant source of capital.

In addition to the equity market, Poland has a wholesale market dedicated to the trading of treasury bills and bonds (Treasury BondSpot Poland).  This treasury market is an integral part of the Primary Dealers System organized by the Finance Ministry and part of the pan-European bond platform.  Wholesale treasury bonds and bills denominated in zlotys and some securities denominated in euros are traded on the Treasury BondSpot market.  Non-government bonds are traded on Catalyst, a WSE managed platform.  The capital market is a source of funding for Polish companies.  While securities markets continue to play a subordinate role to banks in the provision of finance, the need for medium-term financial support for the modernization of the electricity and gas sectors is likely to lead to an increase in the importance of the corporate bond market.  The Polish government acknowledges the capital market’s role in the economy in its development plan.  Foreigners may invest in listed Polish shares, but they are subject to some restrictions in buying large packages of shares.  Liquidity remains tight on the exchange.

The Capital Markets Development Strategy, published in 2018, identifies 20 key barriers and offers 60 solutions.  Some key challenges include low levels of savings and investment, insufficient efficiency, transparency and liquidity of many market segments, and lack of taxation incentives for issuers and investors.  The primary aim of the strategy is to improve access of Polish enterprises to financing.  The strategy focuses on strengthening trust in the market, improving the protection of individual investors, the stabilization of the regulatory and supervisory environment and the use of competitive new technologies.  The strategy is not a law, but sets the direction for further regulatory proposals.  The Ministry of Finance assumes in its development directions for 2021-2024, the liquidation of approximately 50 percent of barriers to the development of the financial market identified in the strategy and an increase in the capitalization of companies listed on the WSE to 50 percent of GDP.  The WSE has signed an agreement with the European Bank for Reconstruction and Development (EBRD) on cooperation in the promotion of advanced environmental reporting by listed companies in Poland and the region of Central and Southeast Europe.  Poland is one of the most rigorously supervised capital markets in Europe according to the European Commission.

The Employee Capital Plans program (PPK)—which is designed to increase household saving to augment individual incomes in retirement—could provide a boost to Poland’s capital markets and reduce dependence on foreign saving as a source for investment financing.  The program has been delayed due to the outbreak of the COVID-19 pandemic.

High-risk venture capital funds are becoming an increasingly important segment of the capital market.  The market is still shallow, however, and one major transaction may affect the value of the market in a given year.  The funds remain active and Poland is a leader in this respect in Central and Eastern Europe.

In 2020, Poland saw an almost 70 percent increase in venture capital (VC) funding, with around $500 million flowing into Polish startups throughout the year, according to a report by PFR Ventures and Inovo Venture Partners.  This marks a new record for Poland, which is increasingly emerging as an important startup hub.  According to the report, a quarter of Polish startups that received VC funding in 2020 were involved in or around healthcare.

In 2020, WSE strengthened its position as the global leader when it comes to the number of listed companies from the game developers sector.  The WSE’s main and start-up markets list a total of 58 game development companies.

Poland provides full IMF Article VIII convertibility for current transactions.  Banks can and do lend to foreign and domestic companies.  Companies can and do borrow abroad and issue commercial paper, but the market is less robust than in Western European countries or the United States.  The Act on Investment Funds allows for open-end, closed-end, and mixed investment funds, and the development of securitization instruments in Poland.  In general, no special restrictions apply to foreign investors purchasing Polish securities.

Credit allocation is on market terms.  The government maintains some programs offering below-market rate loans to certain domestic groups, such as farmers and homeowners.  Foreign investors and domestic investors have equal access to Polish financial markets.  Private Polish investment is usually financed from retained earnings and credits, while foreign investors utilize funds obtained outside of Poland as well as retained earnings.  Polish firms raise capital in Poland and abroad.

Recent changes in the governance structure of the Polish Financial Supervisory Authority (KNF) are aimed at increasing cross governmental coordination and a better-targeted response in case of financial shocks, while achieving greater institutional effectiveness through enhanced resource allocation.  KNF’s supplementary powers have increased, allowing it to authorize the swift acquisition of a failing or likely to fail lender by a stronger financial institution.

Money and Banking System

The Polish financial sector entered the pandemic with strong capital and liquidity buffers and without significant imbalances.  The COVID-19 pandemic presents risks for the Polish financial sector resulting from a sharp economic slowdown and an increase in the number of business failures.  Loosening of reserve requirements, government-provided loan guarantees, and fiscal support measures should help to mitigate losses faced by financial sector firms including banks.

The banking sector plays a dominant role in the financial system, accounting for about 70 percent of financial sector assets.  The sector is mostly privately owned, with the state controlling about 40 percent of the banking sector and the biggest insurance company.  Poland had 30 locally incorporated commercial banks at the end of August 2020, according to KNF.  The number of locally-incorporated banks has been declining over the last five years.  Poland’s 533 cooperative banks play a secondary role in the financial system, but are widespread.  The state owns eight banks.  Over the last few years, growing capital requirements, lower prospects for profit generation and uncertainty about legislation addressing foreign currency mortgages has pushed banks towards mergers and acquisitions.  KNF welcomes this consolidation process, seeing it as a “natural” way to create an efficient banking sector.

The Polish National Bank (NBP) is Poland’s central bank.  At the end of 2020, the banking sector was overall well capitalized and solid.  Poland’s banking sector meets European Banking Authority regulatory requirements.  The share of non-performing loans is close to the EU average and recently has been rising, but modestly.  In December 2020, non-performing loans were 6.8 percent of portfolios.  Poland’s central bank is willing and able to provide liquidity support to the banking sector, in local and foreign currencies, if needed.  The NBP responded swiftly to the COVID-19 pandemic.  It cut rates in early 2020 to 0.1 percent from 1.5 percent over the previous five years and started buying government bonds.  To support liquidity in the banking sector, the central bank has lowered reserve requirements, introduced repo operations, and offered bill discount credit aimed at refinancing loans granted to enterprises by banks.

The banking sector is liquid, still profitable, and major banks are well capitalized, although disparities exist among banks.  This was confirmed by NBP’s Financial Stability Report and stress tests conducted by the central bank.  In 2020, the net profit of the banking sector amounted to PLN 7.8 billion ($2 billion), decreasing on an annual basis by around 44 percent – according to the data of the Polish Financial Supervision Authority.  Returns on equity fell to around 3 percent in 2020 vs 6.7 percent in 2019.  The level of write-offs and provisions as well as the net commission income increased significantly.  The need to make allowances to cover the costs of the pandemic and loans in Swiss francs had a significant impact on the decline in business profitability – the result from impairment losses and provisions increased by 33 percent up to PLN 12.7 billion ($3.2 billion).  Profits remain under pressure due to low interest rates, the issue of conversion of Swiss francs mortgage portfolios into Polish zlotys, and a special levy on financial institutions (0.44 percent of the value of assets excluding equity and Polish sovereign bonds).

The ECJ issued a judgement in October 2019 on mortgages in Swiss francs, taking the side of borrowers.  The ECJ annulled the loan agreements, noting an imbalance between the parties and the use of prohibited clauses.  The legal risk arising from the portfolio of foreign exchange mortgage loans has risen and is substantial.  The number of borrowers who have filed lawsuits against banks and the percentage of court rulings in favor of borrowers has increased.  In December 2020, the head of Poland’s financial market regulator KNF proposed a plan for banks to convert foreign currency loans into zlotys as if they had been taken out in the local currency originally.  This solution could cost the banking sector PLN 34.5 billion ($8.8 billion).  While some observers initially expected banks to finalize a plan for such out-of-court settlements before the Supreme Court sitting, scheduled for April 2021, lenders appear to be waiting for guidelines that could prove crucial to clients trying to decide whether they should go to court.  An additional financial burden for banks resulted from the necessity to return any additional fees they charged customers who repaid loans ahead of schedule.

Since 2015, the Polish government established an active campaign aiming to increase the market share of national financial institutions.  Since 2017, Polish investors’ share in the banking sector’s total assets exceeds the foreign share in the sector.  The State controls around 40 percent of total assets, including the two largest banks in Poland.  These two lenders control about one third of the market.  Rating agencies warn that an increasing state share in the banking sector might impact competitiveness and profits in the entire financial sector.  There is concern that lending decisions at state-owned banks could come under political pressure.  Nevertheless, Poland’s strong fundamentals and the size of its internal market mean that many foreign banks will want to retain their positions.

The financial regulator has restricted the availability of loans in euros or Swiss francs in order to minimize the banking system’s exposure to exchange risk resulting from fluctuations.  Only individuals who earn salaries denominated in these currencies continue to enjoy easy access to loans in foreign currencies.

In 2020, NBP had relationships with 27 commercial and central banks and was not concerned about losing any of them.

The coronavirus-driven recession will likely depress business volumes and increase loan losses, but Polish banks seem to have strong enough capital and liquidity positions to persevere.

Foreign Exchange and Remittances

Foreign Exchange

Poland is not a member of the Eurozone; its currency is the Polish zloty.  The current government has shown little desire to adopt the euro (EUR).  The Polish zloty (PLN) is a floating currency; it has largely tracked the EUR at approximately PLN 4.2-4.3 to EUR 1 in recent years and PLN 3.7 – 3.8 to $1.  Foreign exchange is available through commercial banks and exchange offices.  Payments and remittances in convertible currency may be made and received through a bank authorized to engage in foreign exchange transactions, and most banks have authorization.  Foreign investors have not complained of significant difficulties or delays in remitting investment returns such as dividends, return of capital, interest and principal on private foreign debt, lease payments, royalties, or management fees.  Foreign currencies can be freely used for settling accounts.

Poland provides full IMF Article VIII convertibility for currency transactions.  The Polish Foreign Exchange Law, as amended, fully conforms to OECD Codes of Liberalization of Capital Movements and Current Invisible Operations.  In general, foreign exchange transactions with the EU, OECD, and European Economic Area (EEA) are accorded equal treatment and are not restricted.

Except in limited cases which require a permit, foreigners may convert or transfer currency to make payments abroad for goods or services and may transfer abroad their shares of after-tax profit from operations in Poland.  In general, foreign investors may freely withdraw their capital from Poland, however, the November 2018 tax bill included an exit tax.  Full repatriation of profits and dividend payments is allowed without obtaining a permit.  A Polish company (including a Polish subsidiary of a foreign company), however, must pay withholding taxes to Polish tax authorities on distributable dividends unless a double taxation treaty is in effect, which is the case for the United States.  Changes to the withholding tax in the 2018 tax bill increased the bureaucratic burden for some foreign investors (see Section 2).  The United States and Poland signed an updated bilateral tax treaty in February 2013 that the United States has not yet ratified.  As a rule, a company headquartered outside of Poland is subject to corporate income tax on income earned in Poland, under the same rules as Polish companies.

Foreign exchange regulations require non-bank entities dealing in foreign exchange or acting as a currency exchange bureau to submit reports electronically to NBP at: http://sprawozdawczosc.nbp.pl.

An exporter may open foreign exchange accounts in the currency the exporter chooses.

Remittance Policies

Poland does not prohibit remittance through legal parallel markets utilizing convertible negotiable instruments (such as dollar-denominated Polish bonds in lieu of immediate payment in dollars).  As a practical matter, such payment methods are rarely, if ever, used.

Sovereign Wealth Funds

The Polish Development Fund (PFR) is often referred to as Poland’s Sovereign Wealth Fund.   PFR is an umbrella organization pooling resources of several governmental agencies and departments, including EU funds.  A strategy for the Fund was adopted in September 2016, and it was registered in February 2017.  PFR supports the implementation of the Responsible Development Strategy.  The PFR operates as a group of state-owned banks and insurers, investment bodies, and promotion agencies.  The budget of the PFR Group initially reached PLN 14 billion ($3.6 billion), which managers estimate is sufficient to raise capital worth PLN 90-100 billion ($23-25 billion).  Various actors within the organization can invest through acquisition of shares, through direct financing, seed funding, and co-financing venture capital.  Depending on the instruments, PFR expects different rates of return.

In July 2019, the President of Poland signed the Act on the System of Development Institutions.  Its main goal is to formalize and improve the cooperation of institutions that make up the PFR Group, strengthen the position of the Fund’s president and secure additional funding from the Finance Ministry.  The group will have one common strategy.  The introduction of new legal solutions will increase the efficiency and availability of financial and consulting instruments.  An almost four-fold increase in the share capital will enable PFR to significantly increase the scale of investment in innovation and infrastructure and will help Polish companies expand into foreign markets.  While supportive of overseas expansion by Polish companies, the Fund’s mission is domestic.

PFR plans to invest PLN 2.2 billion ($560 million) jointly with private-equity and venture-capital firms and PLN 600 million ($153 million) into a so-called fund of funds intended to kickstart investment in midsize companies.

Since its inception, PFR has carried out over 30 capital transactions, investing a total of PLN 8.3 billion ($2.1 billion) directly or through managed funds.  PFR, together with the support of other partners, has implemented investment projects with a total value of PLN 26.2 billion ($6.7 billion).  The most significant transactions carried out together with state-controlled insurance company PZU S.A. include the acquisition of 32.8 percent of the shares of Bank Pekao S.A. (PFR’s share is 12.8 percent); the acquisition of 100 percent of the shares in PESA Bydgoszcz S.A. (a rolling stock producer); and the acquisition of 99.77 percent of the shares of Polskie Koleje Linowe S.A.  PFR has also completed the purchase, together with PSA International Ptd Ltd and IFM Investors, of DCT Gdansk, the largest container terminal in Poland (PFR’s share is 30 percent).  Also, 59 funds supported by PFR Ventures have invested almost PLN 3.5 billion ($1.0 billion) () in nearly 400 companies.  Over one third of this sum went to innovative, young start-ups and the rest for financing mature companies.  In April 2020, the President of Poland signed into law an amendment to the law on development institution systems, expanding the competencies of PFR as part of the government’s Anti-Crisis Shield.  The Act assumes that, in the years 2020-2029, the maximum limit of government budget expenditures resulting from the financial effects of the amendment will be PLN 11.7 billion ($3.0 billion).

The amendment expands the competencies of PFR so that it can more efficiently support businesses in the face of the coronavirus epidemic.  The fund has been charged with management of the Financial Shield, a loan and subsidies government scheme worth approximately PLN 100 billion ($25.0 billion) for firms to maintain liquidity and protect jobs.  The scheme is accessible to small, medium and large firms.

State-owned enterprises (SOEs) exist mainly in the defense, energy, transport, banking and insurance sectors.  The main Warsaw stock index (WIG) is dominated by state-controlled companies. The government intends to keep majority share ownership and/or state-control of economically and strategically important firms and is expanding the role of the state in the economy, particularly in the banking and energy sectors.  Some U.S. investors have expressed concern that the government favors SOEs by offering loans from the national budget as a capital injection and unfairly favoring SOEs in investment disputes.  Since Poland’s EU accession, government activity favoring state-owned firms has received careful scrutiny from Brussels.  Since the Law and Justice government came to power in 2015, there has been a considerable increase in turnover in managerial positions of state-owned companies (although this has also occurred in previous changes of government, but to a lesser degree) and increased focus on building national champions in strategic industries to be able to compete internationally.  There have also been cases of takeovers of foreign private companies by state-controlled companies the viability of which has raised doubts.  SOEs are governed by a board of directors and most pay an annual dividend to the government, as well as prepare and disclose annual reports.

A list of companies classified as “important for the economy” is at this link:  https://nadzor.kprm.gov.pl/spolki-z-udzialem-skarbu-panstwa

Among them are companies of “strategic importance” whose shares cannot be sold, including:  Grupa Azoty S.A., Grupa LOTOS S.A., KGHM Polska Miedz S.A., Energa S.A, and the Central Communication Port.

The government sees SOEs as drivers and leaders of its innovation policy agenda.  For example, several energy SOEs established a company to develop electro mobility.  The performance of SOEs has remained strong overall and broadly similar to that of private companies.  International evidence suggests, however, that a dominant role of SOEs can pose fiscal, financial, and macro-stability risks.

As of June 2020, there were over 349 companies in partnership with state authorities.  Among them there are companies under bankruptcy proceedings and in liquidation and in which the State Treasury held residual shares.  Here is a link to the list of companies, including under the control of which ministry they fall:  http://nadzor.kprm.gov.pl/spolki-z-udzialem-skarbu-panstwa.

The Ministry of State Assets, established after the October 2019 post-election cabinet reshuffle, has control over almost 180 enterprises.  Their aggregate value reaches several dozens of billions of Polish zlotys.  Among these companies are the largest chemical, energy, and mining groups; firms in the banking and insurance sectors; and transport companies.  This list does not include state-controlled public media, which are under the supervision of the Ministry of Culture or the State Securities Printing Company (PWPW) supervised by the Interior Ministry.  Supervision over defense industry companies has been shifted from the Ministry of Defense to the Ministry of State Assets.

According to the latest data from the National Bank of Poland, at the end of September 2019. stocks and shares held by state (and local government) institutions amounted to just over PLN 261 billion ($66 billion).

The same standards are generally applied to private and public companies with respect to access to markets, credit, and other business operations such as licenses and supplies.  Government officials occasionally exercise discretionary authority to assist SOEs.  In general, SOEs are expected to pay their own way, finance their operations, and fund further expansion through profits generated from their own operations.

On February 21, 2019, an amendment to the Act on the principles of management of state-owned property was adopted, which provides for the establishment of a new public special-purpose fund – the Capital Investment Fund.  The Fund is a source of financing for the purchase and subscription of shares in companies.  The Fund is managed by the Prime Minister’s office and financed by dividends from state-controlled companies.

A commission for the reform of corporate governance was established on February 10, 2020, by the Minister of State Assets.  The commission developed recommendations regarding the introduction of a law on consortia/holdings; changes in the powers of supervisory boards and their members, with particular emphasis on the rights and obligations of parent companies’ supervisory boards; changes in the scope of information obligations of companies towards partners or shareholders; and other changes, including in the Commercial Companies Code.  The Ministry of State Assets plans to introduce the regulations of the holding law into the Polish legal system in 2021, which is a part of a draft reform of commercial law prepared by the commission.  Some law offices expressed concerns that the solutions provided for in the amendment may impose new obligations on entrepreneurs conducting business activity in this form. Since coming to power in 2015, the governing Law and Justice party (PiS) has increased control over Poland’s banking and energy sectors

Proposed legislation to “deconcentrate” and “repolonize” Poland’s media landscape, including through the possible forced sale of existing investments, has met with domestic and international protest.  Critical observers allege that PiS and its allies are running a pressure campaign against foreign and independent media outlets aimed at destabilizing and undermining their businesses.  These efforts include blocking mergers through antimonopoly decisions, changes to licensing requirements, and the proposed new advertising tax.  Increasing government control over state regulatory bodies, advertising agencies and infrastructure such as printing presses and newsstands, are other possible avenues.  Since 2015, state institutions and state-owned and controlled companies have ceased to subscribe to or place advertising in independent media, cutting off an important source of funding for those media companies.  At the same time, public media has received generous support from the state budget.

In December 2020, state-controlled energy firm PKN Orlen, headed by PiS appointees, acquired control of Polska Press in a deal that gives the governing party indirect control over 20 of Poland’s 24 regional newspapers.  Because this acquisition was achieved without legislative changes, it has not provoked diplomatic repercussions with other EU member states or a head-on collision with Brussels over the rule of law.  Having successfully taken over a foreign-owned media company with this model, there are concerns PKN Orlen will continue to be used for capturing independent media not supportive of the government.

OECD Guidelines on Corporate Governance of SOEs

In Poland, the same rules apply to SOEs and publicly-listed companies unless statutes provide otherwise.  The state exercises its influence through its rights as a shareholder in proportion to the number of voting shares it holds (or through shareholder proxies).  In some cases, an SOE is afforded special rights as specified in the company’s articles, and in compliance with Polish and EU laws.  In some non-strategic companies, the state exercises special rights as a result of its majority ownership but not as a result of any specific strategic interest.  Despite some of these specific rights, the state’s aim is to create long-term value for shareholders of its listed companies by adhering to the OECD’s SOE Guidelines.  State representatives who sit on supervisory boards must comply with the Commercial Companies Code and are expected to act in the best interests of the company and its shareholders.  The European Commission noted that “Polska Fundacja Narodowa” (an organization established to promote Polish culture worldwide and funded by Polish SOEs) was involved in the organization and financing of a campaign supporting the controversial judiciary changes by the government.  The commission stated this was broadly against OECD recommendations on SOE involvement in financing political activities.

SOE employees can designate two fifths of the SOE’s Supervisory Board’s members.  In addition, according to Poland’s privatization law, in wholly state-owned enterprises with more than 500 employees, the employees are allowed to elect one member of the Management Board.  SOEs are subject to a series of additional disclosure requirements above those set forth in the Company Law.  The supervising ministry prepares specific guidelines on annual financial reporting to explain and clarify these requirements.  SOEs must prepare detailed reports on management board activity, plus a report on the previous financial year’s activity, and a report on the result of the examination of financial reports.  In practice, detailed reporting data for non-listed SOEs is not easily accessible.  State representatives to supervisory boards must go through examinations to be able to apply for a board position.  Many major state-controlled companies are listed on the Warsaw Stock Exchange and are subject to the “Code of Best Practice for WSE Listed Companies.”

On September 30, 2015, the Act on Control of Certain Investments entered into force.  The law creates mechanisms to protect against hostile takeovers of companies operating in strategic sectors (gas, power generation, chemical, copper mining, petrochemical and telecoms) of the Polish economy (see Section 2 on Investment Screening), most of which are SOEs or state-controlled.  In 2020, the government amended the legislation preventing hostile take overs.  The amendments will be in force for 24 months.  They are a part of the pandemic-related measures introduced by the Polish government. The SOE governance law of 2017 (with subsequent amendments) is being implemented gradually.  The framework formally keeps the oversight of SOEs centralized.  The Ministry of State Assets exercises ownership functions for the majority of SOEs.  A few sector-specific ministries (e.g., Culture and Infrastructure) also exercise ownership for SOEs with public policy objectives.  The Prime Minister’s Office oversees development agencies such as the Polish Development Fund and the Industry Development Agency.

Privatization Program

The Polish government has completed the privatization of most of the SOEs it deems not to be of national strategic importance.  With few exceptions, the Polish government has invited foreign investors to participate in major privatization projects.  In general, privatization bidding criteria have been clear and the process transparent.

The majority of SOEs classified as “economically important” or “strategically important” is in the energy, mining, media, telecommunications, and financial sectors.  The government intends to keep majority share ownership of these firms, or to sell tranches of shares in a manner that maintains state control.  The government is currently focused on consolidating and improving the efficiency of the remaining SOEs.

The results of the study “CSR in practice – a barometer of the French-Polish Chamber of Commerce” show that the pandemic mobilized not only state institutions, but also businesses which actively joined the fight against COVID-19.  Activities focused to a great extent on companies own employees and clients, and every third enterprise was involved in helping hospitals and nursing homes.  Fifty-seven percent of companies donated money to fight the pandemic, 59 percent material resources and services, and 67 percent the time and skills of employees.  Sixty-one percent of adult Poles expect an active attitude of businesses towards the epidemic.

Poland’s Ministry of Funds and Regional Development supports implementation of responsible business conduct (RBC) and corporate social responsibility (CSR) programs.  The Ordinance of the Minister of Investment and Development of May 10, 2018, established working groups responsible for sustainable development and corporate social responsibility.  The chief function of the working groups is to create space for dialogue and exchange of experiences between the public administration, social partners, NGOs, and the academic environment in CSR/RBC.  Experts cooperate within 5 working groups:  1) Innovation for CSR and sustainable development; 2) Business and human rights; 3) Sustainable production and consumption; 4) Socially responsible administration, and 5) Socially responsible universities.  The greater team issues recommendations concerning implementation of the CSR/RBC policy, in particular the objectives of the Strategy for Responsible Development.  More information on recent developments in the CSR area and future events is available under this link: https://www.gov.pl/web/fundusze-regiony/spoleczna-odpowiedzialnosc-przedsiebiorstw-csr2

In 2017, on the initiative of the then existent Ministry of Economic Development, a partnership was established for the translation into Polish of the Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector.  The parties involved included representatives of the business sector, industry organizations and NGOs.  The Polish version of the Guidelines was announced on June 29, 2018.  The document, available on the OECD NCP website, is a practical tool explaining how to implement the principles of due diligence, taking into account risks related to child labor, forced labor, water use, hazardous waste, etc.

In May 2017, the Council of Ministers adopted the National Action Plan (NAP) for the Implementation of the United Nations Guiding Principles on Business and Human Rights 2017-2020 (UNBHR-GPs).  In December 2018, the Midterm report from the implementation of National Action Plan for UN Business and Human Rights Guidelines was adopted by the Council of Ministers.  Here is the link to this document: https://www.gov.pl/documents/1149181/1150183/Raport_ percentC5 percent9Ar percentC3 percentB3dokresowy_z_realizacji_KPD.pdf/029a9586-2f1a-e655-4d18-00b6abe4a5a1

The mission is not aware of reports of human or labor rights concerns relating to RBC in Poland.

An increasing number of Polish enterprises are implementing the principles of CSR/RBC in their activities.  One of these principles is to openly inform the public, employees, and local communities about the company’s activities by publishing non-financial reports.  Sharing experience in the field of integration of social and environmental factors in everyday business activities helps build credibility and transparency of the Polish market.

The attitude of Poles to environmental issues is changing, and so are their expectations regarding business.  According to a recent study by ARC Rynek i Opinia for the Warsaw School of Economics, 59 percent of Poles consciously choose domestic products more often and 57 percent avoid products that harm the environment.  In Poland, provisions relating to responsible business conduct are contained within the Public Procurement law and are the result of transposition of very similar provisions contained in the EU directives.  For example, there is a provision for reserved contracts, where the contracting authority may limit competition for sheltered workshops and other economic operators whose activities include social and professional integration of people belonging to socially marginalized groups.

Independent organizations including NGOs, business and employee associations promote CSR in Poland.  The Responsible Business Forum (RBF), founded in 2000, is the oldest and largest NGO in Poland focusing on corporate social responsibility:  http://odpowiedzialnybiznes.pl/english/.  CSR Watch Coalition Poland, part of the OECD Watch international network aims to advance respect for human rights in the context of business activity in Poland in line with the spirit of the UNBHR-GPs and the OECD Guidelines for Multinational Enterprises (MNEs):  http://pihrb.org/koalicja/

Research shows that sustainability and CSR are increasingly translating into consumer choices in Poland.  According to SW Research for Stena Recycling, nearly 70 percent of Poles would like their favorite products to come from sustainable production and are willing to switch to more sustainably produced products.  More than half believe that the circular economy can have a direct, positive impact on the environment.  Starting in 2018, approximately 300 Polish companies were required to publish a non-financial information statement alongside their business activity report.  This requirement is tied to the January 26, 2017, amendment of the Act on Accounting, which implements the directive 2014/95/UE into Polish law.  The rules of the act concern companies that fulfill two out of the three of the following criteria: the average annual number of employed persons numbers over 500; the company’s balance sheet totals over PLN 85 million ($22 million), or gross earnings from the sale of commodities and products for the fiscal year amount to at least PLN 170 million ($43 million).  Directive 2014/95/EU will soon be amended and will introduce a uniform European standard of reporting on sustainable development issues.  Many companies voluntarily compile CSR activity reports based on international reporting standards.

The European Bank for Reconstruction and Development (EBRD) and the Warsaw Stock Exchange (WSE) have partnered to support Polish and Central and Eastern European listed companies with environmental, social, and governance (ESG) reporting.  The EBRD and WSE hope to facilitate engagement with policy makers, regulators, and other stakeholders to ensure development of a coherent, robust, and transparent framework in compliance with legislation and in line with the EU Green Deal for ESG disclosure.  The framework will also provide investors with comparability in terms of monitoring different companies.

In February 2020, the Responsible Business Forum presented its 2019 “Responsible Business in Poland. Good Practices” report, which is the most comprehensive CSR review in Poland, with a record number of responsible business activities featured.  (The 2020 report is expected to be presented in mid-April 2021.)  In total, the 2019 report contains 1,696 practices reported by 214 companies.  Environmental practices are the most dynamically growing area – an increase of over 35 percent in relation to the previous report.  Examples of activities include activities related to reducing the consumption of plastic, a circular economy, conservation of biodiversity, environmental education, and counteracting the climate crisis.  Poland maintains a National Contact Point (NCP) for OECD Guidelines for Multinational Enterprises: https://www.gov.pl/web/fundusze-regiony/krajowy-punkt-kontaktowy-oecd

Starting in March 2021, the EU regulation SFDR 2019/2088 on disclosure of information related to sustainable development (environmental, labor, human rights, and anti-corruption) in the financial services sector will apply in Poland and other EU countries.

The NCP promotes the OECD MNE Guidelines through seminars and workshops.  Investors can obtain information about the Guidelines and their implementation through Regional Investor Assistance Centers.

Information on the OECD NCP activities is under this link: https://www.gov.pl/web/fundusze-regiony/oecd-national-contact-point Poland is not a member of the Extractive Industries Transparency Initiative (EITI) or the Voluntary Principles on Security and Human Rights.  The primary extractive industries in Poland are coal and copper mining.  Onshore, there is also hydrocarbon extraction, primarily conventional natural gas, with limited exploration for shale gas.  The Polish government exercises legal authority and receives revenues from the extraction of natural resources and from infrastructure related to extractive industries such as oil and gas pipelines through a concessions-granting system, and in most cases through shareholder rights in state-owned enterprises.  The Polish government has two revenue streams from natural resources: 1) from concession licenses; and 2) from corporate taxes on the concession holders.  License and tax requirements apply equally to both state-owned and private companies.  Natural resources are brought to market through market-based mechanisms by both state-owned enterprises and private companies. Poland was among the original ratifiers of the Montreux Document on Private Military and Security Companies in 2008.  One company from Poland is a member of the International Code of Conduct for Private Security Service Providers’ Association (ICoCA).

Additional Resources

Department of State

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

Department of Labor

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

Poland has laws, regulations, and penalties aimed at combating corruption of public officials and counteracting conflicts of interest.  Anti-corruption laws extend to family members of officials and to members of political parties who are members of parliament.  There are also anti-corruption laws regulating the finances of political parties.  According to a local NGO, an increasing number of companies are implementing voluntary internal codes of ethics.  In 2020, the Transparency International (TI) index of perceived public corruption ranked Poland as the 45th  (four places lower than in 2019 TI index) least corrupt among 180 countries/territories.

UN Anticorruption Convention, OECD Convention on Combatting Bribery 

The Polish Central Anti-Corruption Bureau (CBA) and national police investigate public corruption.  The Justice Ministry and the police are responsible for enforcing Poland’s anti-corruption criminal laws.  The Finance Ministry administers tax collection and is responsible for denying the tax deductibility of bribes.  Reports of alleged corruption most frequently appear in connection with government contracting and the issuance of a regulation or permit that benefits a particular company.  Allegations of corruption by customs and border guard officials, tax authorities, and local government officials show a decreasing trend.  If such corruption is proven, it is usually punished.

Overall, U.S. firms have found that maintaining policies of full compliance with the U.S. Foreign Corrupt Practices Act (FCPA) is effective in building a reputation for good corporate governance and that doing so is not an impediment to profitable operations in Poland.  Poland ratified the UN Anticorruption Convention in 2006 and the OECD Convention on Combating Bribery in 2000.  Polish law classifies the payment of a bribe to a foreign official as a criminal offense, the same as if it were a bribe to a Polish official.

On November 9-10, 2020, a high-level mission of the OECD Working Group on Bribery met with senior Polish officials in virtual meetings to urge Poland to reform its laws to ensure it can effectively investigate and prosecute foreign bribery.

For more information on the implementation of the OECD Anti-Bribery Convention in Poland, please visit:  http://www.oecd.org/daf/anti-bribery/poland-oecdanti-briberyconvention.htm

Resources to Report Corruption 

Centralne Biuro Antykorupcyjne (Central Anti-Corruption Bureau – CBA)
al. Ujazdowskie 9, 00-583 Warszawa
+48 800 808 808
kontakt@cba.gov.pl

www.cba.gov.pl; link: https://www.cba.gov.pl/pl/zglos-korupcje/445,Zglos-korupcje-osobiscie-lub-pisemnie.html  (report corruption)

The Batory Foundation, as part of a broader operational program (ForumIdei), continues to monitor public corruption, carries out research into this area and publishes reports on various aspects of the government’s transparency.  Contact information for Batory Foundation is: batory@batory.org.pl; 22 536 02 00.

Poland is a politically stable country.  Constitutional transfers of power are orderly.  The last presidential elections took place in June 2020 and parliamentary elections took place in October 2019; observers considered both elections free and fair.  The Organization for Security and Cooperation in Europe, which conducted the election observation during June 2020 presidential elections, found the presidential elections were administered professionally, despite legal uncertainty during the electoral process due to the outbreak of the COVID-19 epidemic.  Prime Minister Morawiecki’s government was re-appointed in November 2019.  Local elections took place in October 2018.  Elections to the European Parliament took place in May 2019.  The next parliamentary elections are scheduled for the fall of 2023.  There have been no confirmed incidents of politically motivated violence toward foreign investment projects in recent years.  Poland has neither insurgent groups nor belligerent neighbors.  The U.S. International Development Finance Corporation (DFC) provides political risk insurance for Poland but it is not frequently used, as competitive private sector financing and insurance are readily available.

Poland has a well-educated, skilled labor force.  Productivity, however, remains below OECD averages but is rising rapidly and unit costs are competitive.  In the last quarter of 2020, according to the Polish Central Statistical Office (GUS), the average gross wage in Poland was PLN 5,458 ($1,390 per month) compared to 5,198 ($1,324) in the last quarter of 2019.  Poland’s economy employed roughly 16.512 million people in the third quarter of 2020.  Eurostat measured total Polish unemployment at 3.3 percent, with youth unemployment at 11.5 percent in December 2020.  GUS reports unemployment rates differently and tends to be higher than Eurostat figures.  Unemployment varied substantially among regions:  the highest rate was 10.1 percent (according to GUS) in the north-eastern part of Poland (Warmia and Mazury), and the lowest was 3.7 percent (GUS) in the western province of Wielkopolska, at the end of the fourth quarter of 2020.  Unemployment was lowest in major urban areas.  Polish workers are usually eager to work for foreign companies, in Poland and abroad.  Since Poland joined the EU, up to two million Poles have sought work in other EU member states.

According to the Ministry of Development, Labor, and Technology, 1.5 million “simplified procedure” work declarations were registered in 2020, of which 1.3 million were for Ukrainian workers (compared to 1.5 million a year earlier).  Under the revised procedure, local authorities may verify if potential employers have actual job positions for potential foreign workers.  The law also authorizes local authorities to refuse declarations from employers with a history of abuse, as well as to ban employers previously convicted of human trafficking from hiring foreign workers.  The January 2018 revision also introduced a new type of work permit for foreign workers, the so-called seasonal work permit, which allow for legal work up to nine months in agriculture, horticulture, tourism and similar industries.  Ministry of Development, Labor, and Technology statistics show that during by August 2020, 137,403 seasonal work permits of this type were issued, of which 135,482 went to Ukrainians.  Ministry of Development, Labor, and Technology statistics also show that in 2020, 295,272 thousand Ukrainians received work permits, compared with 330,495 in 2019.

Polish companies suffer from a shortage of qualified workers.  According to a 2021 report, “Barometer of Professions,” commissioned by the Ministry of Development, Labor, and Technology, several industries suffer shortages, including the construction, manufacturing, -healthcare, and transportation industries.  The most sought-after workers in the construction industry include concrete workers, steel fixers, carpenters, and bricklayers.  Manufacturing companies seek electricians, electromechanical engineers, tailors, welders, woodworkers, machinery operators, and locksmiths.  Employment has expanded in service industries such as information technology, manufacturing, and administrative and support service activities.  The business process outsourcing industry in Poland has experienced dynamic growth.  The state-owned sector employs about a quarter of the work force, although employment in coal mining and steel are declining.

Since 2017, the minimum retirement age for men has been 65 and 60 for women.  Labor laws differentiate between layoffs and dismissal for cause (firing).  In the case of layoffs (when workers are dismissed for economic reasons in companies which employ more than 20 employees), employers are required to offer severance pay.  In the case of dismissal for cause, the labor law does not require severance pay.

Most workers hired under labor contracts have the legal right to establish and join independent trade unions and to bargain collectively.  Since 2020, the revised law on trade unions has expanded the right to form a union to persons who entered into an employment relationship based on a civil law contract and to persons who were self-employed.  Trade union influence is declining, though unions remain powerful among miners, shipyard workers, government employees, and teachers.  The Polish labor code outlines employee and employer rights in all sectors, both public and private, and has been gradually revised to adapt to EU standards.  However, employers tend to use temporary and contract workers for jobs that are not temporary in nature.  Employers have used short-term contracts because they allow firing with two weeks’ notice and without consulting trade unions.  Employers also tend to use civil instead of labor contracts because of ease of hiring and firing, even in situations where work performed meets all the requirements of a regular labor contract.

Polish law requires equal pay for equal work and equal treatment with respect to signing labor contracts, employment conditions, promotion, and access to training.  The law defines equal treatment as nondiscrimination in any way, directly or indirectly on the grounds of gender, age, disability, race, religion, nationality, political opinion, ethnic origin, denomination, sexual orientation, whether or not the person is employed temporarily or permanently, full time or part time.

The 1991 Law on Conflict Resolution defines the mechanism for labor dispute resolution.  It consists of four stages: first, the employer is obliged to conduct negotiations with employees; the second stage is a mediation process, including an independent mediator; if an agreement is not reached through mediation, the third stage is arbitration, which takes place at the regional court; the fourth stage of conflict resolution is a strike.

The Polish government adheres to the International Labor Organization’s (ILO) core conventions and generally complies with international labor standards.  However, there are several gaps in enforcing these standards, including legal restrictions on the rights of workers to form and join independent unions.  Cumbersome procedures make it difficult for workers to meet all of the technical requirements for a legal strike.  The law prohibits collective bargaining for key civil servants, appointed or elected employees of state and municipal bodies, court judges, and prosecutors.  There were some limitations with respect to identification of victims of forced labor.  Despite prohibitions against discrimination with respect to employment or occupation, such discrimination occurs.  Authorities do not consistently enforce minimum wage, hours of work, and occupational health and safety, either in the formal or informal sectors.

The National Labor Inspectorate (NLI) is responsible for identifying possible labor violations; it may issue fines and notify the prosecutor’s office in cases of severe violations.  According to labor unions, however, the NLI does not have adequate tools to hold violators accountable and the small fines imposed as punishment are an ineffective deterrent to most employers.

The United States has no FTA or preference program (such as GSP) with Poland that includes labor standards.

In 2020, the provisions on the posting of workers were significantly modified and Poland implemented the EU Posted Workers Directive (2018/957/EU).

In 2020, Poland was among the top 10 countries in the Mastercard Index of Women Entrepreneurs (MIWE) ranking offering women good conditions for running a business. According to the Mastercard report, 28 percent of companies in Poland are run by women.  At the end of 2019, however, the share of women on the boards of the 140 largest companies on the Warsaw Stock Exchange was less than 14 percent.

The COVID-19 pandemic dominated 2020, affecting the business world and forcing employers and employees to adapt to new working conditions.  Due to the growing popularity of remote work, the Ministry of Development, Labor, and Technology has commenced works aimed at introducing remote work to the provisions of the Labor Code for good.  New solutions will be introduced in 2021.

* Source for Host Country Data: In Poland, the National Bank of Poland (NBP) collects data on FDI. An annual FDI report and data are published at the end of the following year. GDP data are published by the Central Statistical Office. Final annual data are available at the end of May of the following year.

D/ Suppressed to avoid disclosure of data of individual companies.