Policies Toward Foreign Direct Investment

Under the Private Investment Law of 2005 (PIL), qualified domestic or foreign entities may invest in all sectors of the economy.  Article 16 of the PIL states that approved domestic and foreign companies with similar objectives are subject to the same rights under Afghan law and the same protections against discriminatory governmental actions.

The Ministry of Commerce and Industries (MOCI) has taken on the role of promoting business growth, investment, and trade.  The High Commission on Investment (HCI) is responsible for investment policy making. The HCI includes the Ministers of Agriculture, Finance, Foreign Affairs, Mines and Petroleum, and the Governor of the Central Bank (Da Afghanistan Bank). The Minister of Commerce and Industries chairs the HCI.  The High Economic Council (HEC), which is chaired by the President and includes both the HCI members and representatives from academia and the private sector, also plays a role in investment policy development.

The HEC, HCI, MOCI, and the Afghan Chamber of Commerce and Industries are tasked with maintaining a dialogue and resolving business disputes with the government.

On July 29, 2016, Afghanistan was formally admitted to the WTO, which could bring about a number of benefits for Afghanistan after full implementation, including improving prospects for foreign direct investment.

Limits on Foreign Control and Right to Private Ownership and Establishment

Under the PIL, foreign and domestic private entities have equal standing and may establish and own business enterprises, engage in all forms of remunerative activity, and freely acquire and dispose of interests in business enterprises.

While there is no requirement for foreigners to secure Afghan partners, the Afghan Constitution and the PIL prohibit foreign ownership of land.  In practice most foreign firms find it necessary to work with an Afghan partner. Foreign land ownership is not permitted, however, foreigners may lease land for up to 50 years.

Although the HCI has authority to limit the share of foreign investment in some industries, specific economic sectors, and specific companies, that authority has never been exercised.  In practice, investments may be 100 percent foreign owned.

Article 5 of the PIL prohibits investment in nuclear energy and gambling establishments.

Investment in certain sectors, such as production and sales of weapons and explosives, non-banking financial activities, insurance, natural resources, and infrastructure (defined as power, water, sewage, waste-treatment, airports, telecommunications, and health and education facilities) is subject to special consideration by the HCI, in consultation with relevant government ministries.  The HCI may choose to apply specific requirements for investments in restricted sectors. Direct investment exceeding USD 3,000,000 requires HCI approval of the investment application.

Other Investment Policy Reviews

There have been no third-party investment policy reviews by the OECD, WTO, or UNCTAD in the past six years.

Afghanistan’s last major investment policy review was the Afghanistan National Development Strategy (ANDS), which was developed with the assistance of the United Nations Development Program (UNDP) and covered the period 2008-2013.  That strategy attempted to guide development investments in the focus areas of (1) agriculture and rural rehabilitation, (2) human capacity development, and (3) economic development and infrastructure, through high-priority programs chosen for contributions to job creation, broad geographic impact, and likelihood of attracting additional investment.

Business Facilitation

The Ministry of Commerce and Industry (MoCI) is responsible for business facilitation.  The HCI and HEC are responsible for investment and economic policy making.

Foreign or domestic companies investing in Afghanistan must obtain a corporate registration from the Afghanistan Central Business Registry (ACBR) and a Tax Identification Number issued by the Department of Revenue.

The websites for registration are:

• http://www.acbr.gov.af/registration.html  
• http://ard.mof.gov.af/en/page/information/service-standards/issue-of-taxpayer-identification-number  

Companies operating in the security, telecommunications, agriculture, and health sectors require additional licenses from relevant ministries.  Companies seeking licenses to provide consultancy, legal, or audit services must meet requirements for education or related experience for top officers.

To begin the process for initial issuance of licenses, renewals, and material changes to the license, foreign firms must submit a letter of interest to the Afghan Center of Business Registers.  From there, the Ministry of Commerce and Industry (MoCI) will process the request, and notify the foreign firm how to proceed in obtaining the license.

While registering a business can take as little as two days, it often takes longer and may require a local attorney’s help.

Ease of doing business reforms in 2016 led MOCI to begin issuing licenses for three years, as opposed to one year, to attract investment.  Obtaining a business license is relatively simple, however, applications for renewal are contingent upon certification from the Ministry of Finance (MOF) that all tax obligations have been met.  Some companies have seen MOCI license renewals delayed while the MOF audits their tax status, despite MOF assurances that an ongoing tax audit should not impede license renewal.

Outward Investment

The government does not promote or incentivize outward investment.  Due to the security situation capital flight is a concern.

Private investors have the right to transfer capital and profits out of Afghanistan, including for off-shore loan debt service.  There are no restrictions on converting, remitting, or transferring funds associated with investment, such as dividends, return on capital, interest and principal on private foreign debt, lease payments, or royalties and management fees, into a freely usable currency at a legal market-clearing rate.

The PIL states that an investor may freely transfer investment dividends or proceeds from the sale of an approved enterprise abroad.  The MOF has in some instances frozen the domestic bank accounts of companies over tax disputes, which has effectively served to prohibit transfers of capital.

In 2004, Afghanistan signed a Trade and Investment Framework Agreement (TIFA) with the United States.  Afghanistan does not have a bilateral investment treaty (BIT) with the United States. Afghanistan has BITs with Germany, Iran, and Turkey.

Afghanistan has signed multiple trade, economic, and investment agreements/memoranda of understanding with other countries.  The most significant is the Afghanistan Pakistan Transit Trade Agreement (APTTA), signed in 2010.

The United States, European Union, Canada, India, and Japan have granted Afghan exports preferential import tariffs under their Generalized Systems of Preference.  Afghanistan is a member of the Economic Cooperation Organization (ECO), the South Asia Free Trade Area (SAFTA), the South Asian Association for Regional Cooperation (SAARC), and of Central Asian Regional Economic Cooperation (CAREC).  The Afghan government has stated its intent to formally join the Transport Corridor Europe Caucasus Asia organization (TRACECA).

Afghanistan does not have a bilateral taxation treaty with the United States.

The Embassy believes many U.S. firms and U.S.-related entities are working with the Afghan government to resolve persistent differences over dividend taxes, vendor withholding tax obligations, taxation of U.S. government assistance, and other tax and contract disputes.

Transparency of the Regulatory System

Afghanistan’s Law on Publication and Enforcement of Legislation requires that official declarations, laws, decrees, and other legislative documents be published in the Official Gazette.  There is no legal requirement or practice for publication and comment for domestic laws, regulations, or other measures of application that will become legally enforceable.

In general, the Afghan government shares draft legislation with interested parties for comment and some ministries publish draft legislation in national newspapers for public comment.  Foreign firms in Afghanistan follow accounting procedures consistent with international norms. The government uses ministerial orders to enforce regulatory compliance. For example, ministries have in the past taken action to freeze accounts or limit travel for companies until they comply with regulations.

International Regulatory Considerations

Afghanistan became a WTO member in 2016.  The government is working to build its capacity to meet the notification requirements of the WTO.

Legal System and Judicial Independence

The legal system of Afghanistan consists of Islamic, statutory, and customary (Shura) rules.  The supreme law of the land is the Constitution. The judiciary system is composed of the Supreme Court, the Courts of Appeal, and the Primary Courts.  There are trial and appellate courts that specialize on commercial disputes. Since 2002, NGOs have been working to strengthen the rule of law in Afghanistan by identifying peaceful means for dispute resolutions and developing partnerships between state and community actors in the hopes of improving access to justice.

Despite these efforts, many legal disputes are still resolved outside the formal justice system by community based tribal leaders.  Contract law in Afghanistan is set out in the Afghanistan Commercial Code 1955 and the Afghanistan Civil Code 1977. Under these codes, parties are generally free to:  a) enter into and perform a contract on any commercial subject matter provided that subject matter or performance is not contrary to law, public policy, or sharia; and b) agree to have the law of a foreign state govern their contract.

According to credible contacts, civil cases in the commercial court system can sometimes take more than 18 months for parties to obtain resolutions.  Cases are frequently resolved more quickly through an informal system or, in some cases, pursuant to negotiations facilitated by formal justice system actors or private lawyers.

Because access to the formal legal system is limited in rural areas, local elders and shuras (consultative gatherings, usually of men selected by the community) are often the primary means of settling both criminal matters and civil disputes, and they are known to levy unsanctioned punishments.  According to the 2018 Asia Foundation Survey of the Afghan People, shuras were used to resolve 45 percent of all disputes and represent the predominant form of dispute resolution employed by Afghans (up from 43 percent in 2017).

Investors should be aware that the 2018 Human Rights Report noted that arbitrary arrests occur in most provinces, and that authorities frequently detain citizens without respecting essential procedural protections.  Local law enforcement officials reportedly detain persons illegally on charges not specified under local criminal law. While the law gives defendants the right to object to his or her pretrial detention and receive a court hearing on the matter, authorities generally do not observe this requirement.

Laws and Regulations on Foreign Direct Investment

Under the PIL, investment is defined as currency and contributions in kind, including, without limitation, licenses, leases, machinery, equipment, and industrial and intellectual-property rights provided for the purpose of acquiring shares of stock or other ownership interests in a registered enterprise.  The PIL permits investments in nearly all sectors except nuclear power, gambling, and production of narcotics and intoxicants. There are also limitations on the total value of service transactions or assets with respect to motion pictures, road transport (passenger and freight), and on the total number of people that can be employed in security companies.

Foreign investors have complained of irregularities in the court system, arbitration, and tax disputes.  As a result of the various legal and regulatory challenges, companies operating in Afghanistan may want to seek local legal counsel to help navigate licensing and permitting requirements and conforming to tax regulations.

Competition and Anti-Trust Laws

Afghanistan does not have anti-trust laws.  The Afghan government enacted a law to protect sound competition in markets and prevent unfair competition in 2010.

Expropriation and Compensation

The PIL allows for expropriation of investments or assets by the government on a non-discriminatory basis for the purposes of public interest.  The law stipulates that the government shall provide prompt, adequate, and effective compensation in conformity with the principles of international law.

In cases of investment in a foreign currency, the law requires compensation to be made in that currency.  The government may also confiscate private property to settle debts. According to the PIL, investors with an ownership share of more than 25 percent may challenge the expropriation.  There have been no reports of government expropriation of foreign assets.

The Ministry of Finance may freeze assets to collect taxes.

Dispute Settlement

ICSID Convention and New York Convention

In 2005, Afghanistan became a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).  Under the New York Convention, Afghanistan has agreed to (a) recognize and enforce awards made in another contracted state, and (b) apply the convention to commercial disputes.

Under the PIL and the Commercial Arbitration Law of 2007, (a) parties can agree to have foreign law govern their contract and agree to have their disputes resolved through arbitration or other mechanisms inside or outside of Afghanistan, and (b) Afghan courts must enforce any resulting award or agreement.

Afghanistan has been a member state to the International Centre for Settlement of Investment Disputes (ICSID convention) since 1966.

Investor-State Dispute Settlement

Afghanistan does not have a Bilateral Investment Treaty or Free Trade Agreement with the United States.  There are several disputes between the government and investors, typically about tax assessments and license requirements.

International Commercial Arbitration and Foreign Courts

Since 2005, Afghan law has expressly recognized alternative dispute resolution provisions.  In 2014, the Afghanistan Centre for Dispute Resolution (ACDR), whose decisions are non-binding, was established with support from USAID and the Department of Commerce Commercial Law Development Program (CLDP).  The ACDR offers mediation, expert witness services, and award calculation services in a limited number of cases referred by the commercial courts and plans to expand its services to include arbitration.

Bankruptcy Regulations

Provisions in the Banking Law provide special procedures for bank insolvency.  The Afghan government enacted a new insolvency law in 2018 to provide a uniform and fair procedure for the payment of debts to creditors.  The text of the law can be found at https://www.ahg.af/wp-content/uploads/2015/04/Draft-Insolvency-Law-English.pdf .

Investment Incentives

The Public Procurement Law, revised in 2016, retains the preference for national sources and domestic products that was codified in the Public Procurement Law of 2005.  In public statements since ratification, President Ghani has continued to emphasize the importance of giving preference to domestic products in order to create jobs. Foreign firms can receive the benefit of a domestic firm by partnering with a domestic firm.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Afghan Airfield Economic Development Commission (AAEDC), established in 2015, has taken the lead on drafting a new Special Economic Zone (SEZ) law, which was released for public comment in early 2019.  If passed, the law will provide the legal foundation for all types of export processing zones.

Performance and Data Localization Requirements

The Afghan government does not require the use of domestic content in goods or technology related to data storage.  There are no requirements for foreign IT providers to turn over source code and/or provide access for surveillance purposes.

Real Property

Property rights protection is weak due to a lack of cadasters or a comprehensive land titling system, disputed land titles, incapacity of commercial courts, and widespread corruption.  Land laws in Afghanistan are inconsistent, overlapping, incomplete, or silent with regard to details of effective land management. Judges and attorneys are often without expertise in land matters.  According to the World Bank, less than 20 percent of land in Afghanistan is formally titled. An estimated 80 percent of land is held and transferred informally, without legally recognized deeds, titles, or a simple means to prove ownership.

The acquisition of a clear land title to purchase real estate or a registered leasehold interest is complicated and cumbersome.  The World Bank estimated in its 2018 “Doing Business Report” that it takes an average of 155 days to register property, and entails extensive legal fees.  Investment disputes are common in the areas of land titling and contracts. Many documents evidencing land ownership are not archived in any official registry.

Frequently, multiple “owners” claim the same piece of land, each asserting rights from a different source.  These disputes hinder the development of commercial and agricultural enterprises. Real estate agents are not reliable.  Instances of parties falsely claiming title to land that they do not own undermines investor confidence. Mortgages and liens are at an early stage of development.  Foreign investors seeking to work with Afghan citizens to purchase property should conduct thorough due diligence to identify reliable partners.

Intellectual Property Rights

Prior to 2012, Afghanistan did not have fully operational intellectual property rights (IPR) offices at the Ministry of Information and Culture (MOIC), which focuses on copyrights, or at the Ministry of Industry and Commerce (MOCI), which focuses on all other intellectual property areas.  Since 2012, laws on copyrights, patents, trademarks, and geographical indications have been adopted.

To fully comply with the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), laws related to other IPR substantive areas (e.g., industrial designs, trade secrets, and layout designs) are in the process of adoption.  Afghanistan’s IPR regime provides investors with access to the judicial system and, in certain areas such as copyrights, to administrative appeals.

Afghanistan has limited experience regarding IPR and needs significant capacity building to effectively enforce and administer IPR laws.  Afghanistan is not included in the United States Trade Representative’s (USTR) Special 301 Report or the Notorious Markets List. Afghanistan has been a member of the World Intellectual Property Organization (WIPO) since 2005.

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

Resources for Rights Holders

Contact at U.S. Embassy Kabul:

Economic Section, Embassy of the United States of America
Kabul, Afghanistan
+93 (0) 700-108-001
Email KabulEcon@State.gov

American Chamber of Commerce in Afghanistan: www.amcham.af  
Email: info@amcham.af

A list of local lawyers is at https://af.usembassy.gov/u-s-citizen-services/attorneys/

Capital Markets and Portfolio Investment

Afghanistan is in principle welcoming toward foreign portfolio investment, but financial institutions and markets are at an early stage of development.  Afghanistan does not have a stock market. There are no limitations of foreign investors obtaining credit. The banking sector generally only provides short term loans.

Afghanistan joined the IMF on July 14, 1955.  As confirmed in the May 2018 IMF Country Report, Afghanistan maintains an exchange system that is free of multiple currency practices and restrictions on the making of payments and transfers for current international transactions.

Money and Banking System

The penetration of banking services is described in the below tables based on Q3 2018 data from the Afghan Central Bank (Da Afghanistan Bank, DAB):

Most Afghans remain outside the formal banking sector.  Afghans continue to rely on an informal trust-based process referred to as Hawala to access finance and transfer money, due in part to religious acceptance, unfamiliarity with a formal banking system, and limited access to banks in rural areas.  Three of the four major mobile network operators – Etisalat, AWCC, and Roshan – offer mobile money services. The Afghan government will launch a mobile money salary payment system for 5,000 employees in the Ministry of Labor in mid-2019.

Finance is Afghanistan’s second-largest service industry behind telecommunications and is potentially an important driver of private investment and economic growth.  There are 14 commercial banks operating in Afghanistan.

There are three state banks: Bank-e Millie Afghan (Afghan National Bank), Pashtany Bank, and New Kabul Bank (formerly the privately owned Kabul Bank).  There are also branch offices of foreign banks, including Alfalah Bank (Pakistan), Habib Bank of Pakistan, and National Bank of Pakistan.

As of September 2018, the total assets of the banking sector was USD 4.16 billion.  Banking remains highly centralized, with a considerable majority of total loans made in Kabul.  Bank lending is undermined by the legal and regulatory infrastructure that impedes the enforcement of property rights and development of collateral.

As of December 2018, the banking sector gross Non-Performing Loans (NPL) ratio was 11.3 percent, while the net ratio stands at 5.9 percent.

Formal credit to the private sector stands at less than 10 percent of GDP, significantly lower than other countries in the region.  Afghanistan ranks 105 out of 190 economies for ease of obtaining credit in the World Bank’s Doing Business 2019. Afghan entrepreneurs complain interest rates for commercial loans from local banks are high, averaging around 15.5 percent.  In response to this situation, investment funds, leasing, micro-financing, and SME-financing companies have entered the market. USAID is working with the Afghan banking sector to promote improved access to finance and the expansion of financial inclusion.

Afghanistan has lost many correspondent banking relationships in the past few years due to risk aversion and lack of profitability.  The full extent of impact has yet to be quantified, but the unmeasured effects have been a loss in the ease of basic international transactions.

The Afghan Central Bank (Da Afghanistan Bank, DAB) has made improvements in monitoring and supervising the banking sector, following the 2010 Kabul Bank crisis.  President Ghani also took steps to hold those responsible accountable. The Afghan Government has a plan to recover assets from perpetrators of the large-scale bank fraud, though progress on its implementation remains slow.

Foreigners can open bank accounts with Afghanistan banks if they have valid visas, work permits, and in the case of a legal entity, a valid business license.  Afghan banks do not open bank accounts for non-resident customers.

Foreign Exchange and Remittances

Foreign Exchange Policies

Private investors have the right to transfer capital and profits out of Afghanistan, including for off-shore loan debt service.  There are no restrictions on converting, remitting, or transferring funds associated with investment, such as dividends, return on capital, interest and principal on private foreign debt, lease payments, or royalties and management fees, into a freely usable currency at a legal market clearing rate.  The PIL states that an investor may freely transfer investment dividends or proceeds from the sale of an approved enterprise abroad.

Major transactions in Afghanistan, such as the sale of autos or property, are frequently conducted in dollars or in the currency of neighboring countries.  Afghanistan does not maintain a dual-exchange-rate policy, currency controls, capital controls, or any other restrictions on the free flow of funds abroad. Afghanistan uses a managed floating exchange rate regime under which the rate is determined by market forces.  It is illegal to transport more than USD 20,000 or its equivalent in other currencies out of Afghanistan via land or air. Amounts over USD 10,000 but less than USD 20,000 must be declared. Enforcement is reported to be inconsistent.

Remittance Policies

Access to foreign exchange for investment is not restricted by any law or regulation.  There are large, yet informal, foreign exchange markets in major cities and provinces where U.S. dollars, British pounds, and euros are readily available.  Entities wishing to buy and sell foreign exchange in Afghanistan must register with the Afghan Central Bank (Da Afghanistan Bank, DAB), and thousands of licensed, as well as unlicensed, Hawalas continue to practice their trade.  Non-official money service providers often cite the lack of enforcement in the currency exchange sector, and the resulting competitive disadvantage to licensed exchangers, as a disincentive to becoming licensed.

Over the past several years, Afghanistan has made significant progress in improving Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) controls and is no longer subject to Financial Action Task Force (FATF) monitoring.  The FATF report can be found at http://www.fatf-gafi.org/countries/a-c/afghanistan/documents/fatf-compliance-june-2017.html  .

Sovereign Wealth Funds

Afghanistan does not have a sovereign wealth fund.

The Government of Afghanistan operates over 30 active state-owned enterprises (SOEs), almost all of which are wholly-owned.  About 11,000 people are employed in sectors including public security, construction, transport, telecommunications, agriculture, and extractives.  Net income for all the SOEs is around USD 13 million; few are profitable. All SOEs are overseen and regulated by the Ministry of Finance and directly operated by specific ministries depending on the nature of the operations.  The Law on State Owned Enterprises includes specific targets for research and development investment, social development measures, and employee profit sharing, but compliance is negligible.

The Afghan government is also a stakeholder in 13 state-owned corporations (SOCs), entities that have independent boards and are not operated or directly supervised by the government.  SOEs and SOCs make up a small share of overall economic activity, although a few SOCs have significant market share in their sectors, including Afghan Telecom (Aftel), Ariana Afghan Airlines, and the electrical utility DABS (Da Afghanistan Breshna Sherkat).

Afghanistan does not have a centralized ownership entity for SOEs; the Ministry of Finance is responsible for all SOE oversight.

Afghan awareness of the term “Responsible Business Conduct” is nascent, but the government has encouraged large companies and foreign investors to invest in corporate social responsibility (CSR).  Large mining contracts include stipulations for environmental protection and community inclusion. A new Minerals Law enacted by decree in October 2018, and published in the Official Gazette in December 2018, requires mining contract holders to consult with communities that will be affected by mining projects and to implement a community development agreement that includes details of the firm’s environmental and social impact assessment.  The law also requires extractive sector companies to safeguard and maintain any archeological and cultural relics they come across during the extraction operations until the Afghan government removes them.

Afghanistan is an Extractive Industries Transparency Initiative (EITI) candidate country.  The 2018 Minerals Law requires the Ministry of Mines and Petroleum to comply with the financial reporting requirements and standards of EITI.

A number of the competing mobile network operators have well-developed CSR outreach programs that include health, education, job creation, environmental protection, and outreach to refugees.  For example, the largest telecom operator in Afghanistan, Roshan, whose majority owner is the Aga Khan Fund for Economic Development, has received recognition for its social responsibility mission.  In addition, some Afghan entrepreneurs, such as Ihsanullah Bayat, the Barakat Group, the Ghazanfar Group, Hotak Azizi, and the Alokozay Group, have foundations that provide assistance in the fields of health, education, and the eradication of poverty.

OECD Guidelines for Multinational Enterprises

Afghanistan is not a subscriber to the OECD Declaration and Decisions on International Investment and Multinational Enterprises.

Afghan and foreign firms routinely cite corruption as an obstacle to doing business, whether in permitting and licensing, government procurement, meeting regulatory requirements, or taxation.  Various corruption watchdog reports regularly indicate corruption is endemic throughout society. For example, systemic corruption at border crossings hampers development of the licit market economy.  Afghan officials collect bribes in exchange for undervaluing, under-weighing, or not scanning shipments, which facilitates smuggling of illegal goods and the illicit trade of legal goods, while also weakening Afghan revenue collection and regulatory institutions.

The practice of criminalizing commercial complaints is commonly used to settle business disputes or to extort money from wealthy international investors.  The government does not implement criminal penalties for official corruption effectively, and officials are reported to frequently engage in corrupt practices with impunity.  There are reports of low-profile corruption cases successfully tried and of lower-level officials removed for corruption.

President Ghani has made anti-corruption efforts a high priority, and the government has seen some success in reform of procurements and customs.  In 2016, the government opened the Anti-Corruption Justice Center (ACJC) to investigate and try corruption cases. The ACJC has successfully convicted some government officials for corruption.  These high-level initiatives are positive steps though corruption remains a major issue. Disputes over land and land grabbing have risen over the last decade. Press reports indicate that government officials take land without compensation in exchange for contracts or political favors.  Occasionally, provincial governments confiscate land without due process or compensation to build public facilities.

UN Anticorruption Convention, OECD Convention on Combating Bribery

Afghanistan has signed and ratified the UN Anticorruption Convention. Afghanistan is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

The Afghan Government body responsible for combating corruption is the High Office of Oversight & Anti-Corruption. Prosecutorial authority resides with the Attorney General’s Office.

Afghan Government Point of Contact:

Dr. Yama Torabi
Head of Secretariat of High Council on Rule of Law and Anti-Corruption: (HCRoLAC)
+93 799 271 624)
Email: yama.torabi@gmail.com

Watchdog Organization Contact:

Sayed Ikram Afzali, Executive Director
Integrity Watch Afghanistan
Emal: ikram.afzali@iwaweb.org

The U.S. Department of State continues to warn Americans against travel to Afghanistan.  U.S. citizens should review the Consular Information Sheet and Travel Warning for Afghanistan for the most up-to-date information on the security situation and possible threats.

Anti-government and political violence are common and public concerns regarding security constrain economic activity.  Security is a primary concern for investors. Foreign firms operating in country report spending a significant percentage of revenues on security infrastructure and operating expenses.

Afghanistan suffers a critical shortage of skilled labor.  Only 31 percent of the population over the age of 15 can read and write.  Decades of war, emigration, low education levels, and a lack of training facilities have resulted in a scarcity of skilled labor, qualified managers, and educated professionals.  The Central Statistical Organization reports the 2018 unemployment rate was 8.8 percent, although the youth unemployment rate is estimated to be as high as 40 percent.

A 2005 labor regulation allows for the employment of foreign workers but requires priority be given to equally qualified Afghan workers.  Under the law on Foreigners Employment in Afghanistan, foreigners can be employed on the basis of a work permit issued by the Ministry of Labor and Social Affairs.  Work permits are issued for one year and are renewable. Foreign citizens traveling to Afghanistan for employment are required to obtain business visas and work permits.

The formal sector labor law contains some restrictions on termination of employment.  The law provides for the right of workers to join and form independent unions and to conduct legal strikes and bargain collectively, and the government generally respects these rights.  Broadly, labor-management relations are undeveloped. Freedom of association and the right to bargain collectively are generally respected, but most workers and employers are not aware of these rights.  This was particularly true of workers in rural areas or agriculture. In urban areas, the majority of workers participate in the informal sector as day laborers in construction, where there are neither unions nor collective bargaining.  The 2007 Labor Law guarantees basic workers’ rights, such as wages, overtime, leave, and other benefits, and bans forced labor and child labor. The 2017 Trafficking in Persons law punishes forced and child labor with a maximum 12-year sentence.

Comprehensive data on workplace accidents are unavailable, though there have been several reports of poor and dangerous working conditions.  Although the law prohibits children under 14 from working, UNESCO reported 7.5 percent of children under 14 work, primarily in agriculture, domestic work, carpet-making, and brick kilns.

Since 2003, OPIC has committed more than USD 295 million in financing and political risk insurance to support 38 projects in Afghanistan.  OPIC operates its programs in Afghanistan under the Investment Incentive Agreement, which the Afghan government signed in 2004.

Table 1: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Table 3: Sources and Destination of FDI

Data not available.

Table 4: Sources of Portfolio Investment

Data not available.

Economic Section
Embassy of the United States of America
Kabul, Afghanistan
+93 (0) 700-108-001

Policies Towards Foreign Direct Investment

While the Government of Belize is interested in attracting foreign direct investment, certain regulatory requirements serve to impede growth and transparency.  There are no laws that explicitly discriminate against foreign investors. In practice, however, investors complain that they do not always receive the full extent of the incentives available, that land titles are not always secure, and that bureaucratic delays or corruption can hinder starting a business in Belize.

According to the International Monetary Fund (IMF), improving the business climate, reducing crime and facilitating access to credit would increase growth by one percentage point on a yearly basis.  They also note that lowering the debt burden and greater climate resilience would support growth by another percentage point per year.

The Belize Trade and Investment Development Service (BELTRAIDE; www.belizeinvest.org.bz  ), a statutory body, is the investment and export promotion agency.  It promotes FDI through various types of incentive packages and identified priority sectors for investment as agriculture, agro-processing, fisheries and aquaculture, logistics and light manufacturing, tourism and tourism-related industries, offshore outsourcing (BPOs), and sustainable energy.

The Government created the Economic Development Council to increase the national dialogue on private sector development and better inform policies for growth and development.  The Cabinet has also created a Sub–Committee on Investment composed of Ministers whose portfolios are directly involved in considering and approving investment proposals.

Limits on Foreign Control and Right to Private Ownership and Establishment

Generally, Belize has no restrictions on foreign ownership and control of companies; however, foreign investments must be registered at the Central Bank of Belize.  In addition, foreigners need to apply with a Belizean partner or someone with a permanent residence to register a business name.

Some investment incentives show preference to Belizean-owned companies.  For example, to qualify for a tour operator license, a business must be majority owned by Belizeans or permanent residents of Belize (http://www.belizetourismboard.org  ).  This qualification is negotiable particularly where a tour operation would expand into a new sector of the market and does not result in competition with local operators.

Foreign investments must be registered and obtain an “Approved Status” from the Central Bank in order to facilitate inflows and outflows of foreign currency.  “Approved Status” investments will ordinarily be granted approval for repatriation of funds from profits, dividends, loan payments and interest. The Central Bank also reserves the right to request evidence-supporting applications for repatriation.

Additionally, persons seeking to open a bank account must also comply with Central Bank regulations.  These may differ based on residency status and whether the individual is seeking to establish a local or foreign currency account.

The Government’s Cabinet Sub-Committee on Investment considers investment projects which do not fall within Belize’s incentive regime or which may require special considerations.  For example, an investment may require legislative changes, a customized memorandum of understanding or agreement from the government, or a public–private partnership. Proposals are generally assessed based on size, scope, and the incentives requested.  In addition, proposals are assessed on a five-point system that analyses socio-economic acceptability of the project, revenues to the government, employment, foreign exchange earnings and environmental considerations. The Cabinet Sub-Committee is composed of five Cabinet Minsiters, including the minister with responsibility for Investment, Trade and Commerce as Chairperson.  The other members include the ministers with responsibility for Tourism and Culture; the Environment and Sustainable Development; and Natural Resources and Immigration, along with the Attorney General. There is no set timeframe for considering projects as it largely depends on the nature and complexity of the project.

When considering investment, foreign investors undertaking large capital investments must be aware of environmental laws and regulations.  There is a requirement to prepare an Environmental Impact Assessment (EIA) when a project meets certain land area, location, and/or industry criteria.  When purchasing land or planning to develop in or near an ecologically sensitive zone, it is recommended that the EIA fully address any measures by the investor to mitigate environmental risks.  Environmental clearance must be obtained prior to the start of site development. The Department of Environment website, http://www.doe.gov.bz   has more information on the Environmental Protection Act and other regulations, applications and guidelines.

Other Investment Policy Reviews

In the past three years, there has been no investment policy review of Belize by the Organization for Economic Cooperation and Development (OECD) or the United Nations Conference on Trade and Development (UNCTAD).  Belize concluded its third Trade Policy Review in the World Trade Organization (WTO) in April 2017.

Business Facilitation

Belize does not operate a single window registration process.  BELTRAIDE (http://www.belizeinvest.org.bz), a statutory body of the Government of Belize, operates as the country’s investment and export promotion agency.  Its investment facilitation services are open to all investors. While there are support measures to advance greater inclusion of women and minorities in entrepreneurial initiatives and training, the business facilitation measures do not distinguish by gender or economic status.

The Belize Companies Corporate Affairs Registry (tel: (501) 822 0421; email: belizecompaniesregistry@yahoo.com; website: www.belizecompaniesregistry.gov.bz) is responsible for the registration process of all local business and companies.

Businesses must register with the tax department to pay business and general sales tax. They must also register with their local city council or town board to obtain a trade license to operate a business.  An employer should also register employees for social security. The 2019 Doing Business report (http://www.doingbusiness.org   ) estimates it takes on average 43 days to start up a company in Belize.  The same report ranks Belize at 162 of 190 economies on the ease of starting a business.

Outward Investment

The government does not promote or incentivize outward investments.  Domestic investors are not restricted from investing abroad. However, the Central Bank places currency controls that limit foreign currency outflows unless given prior approval.

Belize has Bilateral Investment Treaties with Austria, Cuba, El Salvador, Italy, the Netherlands, Taiwan, United Arab Emirates, and the United Kingdom.  It also has a Partial Scope Agreement (PSA) with Guatemala on a small number of goods.

The country does not have a bilateral investment treaty nor is it a party to a Free Trade Agreement with the United States.  It is a qualifying country under the U.S. Generalized System of Preference (GSP) as well as the U.S.-Caribbean Basin Trade Partnership Act (CBTPA).  For additional information on Belize’s Bilateral Investment Treaties, see http://www.sice.oas.org  

Taxation Treaties

Belize has signed nineteen Tax Information Exchange Agreements (TIEA) with Australia, Belgium, Czech Republic, Denmark, Faroe Islands, Finland, France, Greenland, Iceland, India, Ireland, Netherlands, Norway, Poland, Portugal, South Africa, Sweden, Switzerland, and the United Kingdom.  Belize has no bilateral taxation treaties with the United States. See https://www.world.tax/countries/belize/belize-tax-treaties  .

Belize became the 86th jurisdiction to sign on to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) in January 2019.  See https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-beps.htm  

Transparency of the Regulatory System

Regulatory authority exists both at the local and national levels with national laws and regulations being most relevant to foreign businesses.  Despite these measures, some investors complain that the regime for incentives did not always meet their needs, that land titles are not always reliable and secure, and that bureaucratic delays or corruption can be hindrances to doing business in Belize.

There are quasi-governmental organizations mandated by law to manage specified regulatory processes on behalf of the Government of Belize, e.g. the Belize Tourism Board, BELTRAIDE, and the Belize Agricultural Health Authority.  There are no reports that these processes significantly distort or discriminate against foreign investors.

The cabinet dictates government policies that are enacted by the legislature and implemented by the various government ministries.  Regulations exist at the local level, primarily relating to property taxes and registering for trade licenses to operate businesses in the municipality.

Accounting, legal, and regulatory systems are consistent with international norms. Publicly owned companies are generally audited annually and the reports are prepared in accordance with International Financial Reporting Standards and International Standards on Auditing.

The mechanism for drafting bills, regulations and enacting legislation generally apply across the board and apply to investment laws and regulations.  The government publishes in the Gazette, proposed as well as enacted laws and regulations that are publicly available for a minimal fee.

Draft bills are generally open to public comment.  Once introduced in the House of Representatives, they are sent to Standing Committees of the House of Representatives, which then meet and invite the public and interested persons to review, recommend changes, or object to draft laws prior to further debate.  Public comments on draft legislation are not generally posted online nor made publicly available. It would be the prerogative of an interested party to attend public consultations, committee meetings, or to request the public comments from the National Assembly or relevant Ministry.  Additionally, laws are sometimes passed quickly without meaningful publication, public review or public debate; as was the case with the Central Bank of Belize (International Immunities Act) and the Crown Proceedings (Amendment Act) of 2017.

Government ministries also make available policies, laws, and regulations pertinent to their portfolio available on their respective ministry websites.  Since 2016, enacted laws have been published on the website of the National Assembly. There is however, a delay in updating the website.

Regulations and enforcement actions are appealable with regulatory decisions subject to judicial review.  There have been no regulatory systems including enforcement reforms announced in the last year.

Information on the public finance, the government’s budget and debt obligations (including explicit and contingent liabilities) are widely accessible to the general public, with most documents available online.

International Regulatory Considerations

As a full member of the Caribbean Community (CARICOM), Belize’s foreign, economic and trade policies vis-a-vis non-members are coordinated regionally.  The country’s import tariffs are largely defined by CARICOM’s Common External Tariff.

Belize is also a member of several other treaties because of its CARICOM membership.  A primary example is the Economic Partnership Agreement (EPA) between CARIFORUM and the European Union (EU).  In the wake of Brexit, these countries also signed a CARIFORUM – United Kingdom Economic Partnership Agreement in March 2019.  The latter agreement is expected to come into effect by January 2021or soon after the UK leaves the EU.

Outside of CARICOM, Belize is a member of the Central American Integration System (SICA) at a political level, but is not a part of the Secretariat of Central American Economic Integration (SIECA) that supports economic integration of Central America.

Belize is also a member of the WTO and adheres to the organization’s agreements and reporting system.  The Belize Bureau of Standards (BBS) is the national standards body responsible for preparing, promoting and implementing standards for goods, services, and processes.  The BBS operates in in accordance with the WTO Agreement on Technical Barriers to Trade and the CARICOM Regional Organization for Standards and Quality. The BBS is also a member of the International Electrotechnical Commission (IEC), the International Organization for Standardization (ISO), and Codex Alimentarius.

Legal System and Judicial Independence

The Belize Constitution, is the supreme law and is founded on the principle of separation of powers with independence of the judiciary from the executive and legislative branches of government.  As a former British colony, Belize follows the English Common Law legal system, which is based on established case law. Belize has a written Contract Act, supported by precedents from the national courts as well as from the wider English speaking and Commonwealth case law.  Contracts are enforced through the courts.

General information relating to Belize’s judicial and legal system, including links to Belize’s Constitution, Laws and judicial decisions are available at the Judiciary of Belize website www.belizejudiciary.org  .  There are specialized courts that deal with family related matters including divorce and child custody, but no specialized courts to deal with commercial disputes or cases.

The current judicial process continues to face challenges including frequent adjournments, delays, and a backlog of cases.  Several measures are being implemented to improve the country’s judiciary. The training of mediators and the introduction of court-connected mediation support alternative methods to dispute settlement.  This effort along with better case management procedures is expected to decrease the court’s caseload, time delays, and cost particularly for smaller claim civil cases.

Regulations and enforcement actions are appealable.  Regulatory decisions are also subject to judicial review.  Judgments by the Belize Supreme Court and the Court of Appeal are available at http://www.belizejudiciary.org  .  In 2010, Belize adopted the Caribbean Court of Justice (CCJ) as its final appellate court on civil and criminal matters, replacing the Judicial Committee of the Privy Council of the United Kingdom.  Judgments by the Caribbean Court of Justice, are available at http://www.caribbeancourtofjustice.org  .

Laws and Regulations on Foreign Direct Investment

The country has an English Common Law legal system supplemented by local legislation and regulations.  Enacted laws are generally available in the National Assembly’s website at www.nationalassembly.gov.bz  .  Examples of key legislation passed in 2018 include:

• Designated Processing Areas Act, 2018
• Income and Business Tax (Amendment) Act, 2018
• Stamp Duties (Amendment) Act, 2018
• International Business Companies (Amendment) Act, 2018
• Bill of Sales (Amendment) Act, 2018
• General Sales Tax (Amendment) Act, 2018
• Customs Excise Duties (Amendment), 2018
• International Financial Services Commission, 2018

The laws, rules, procedures, and reporting requirements related to investors differ depending on the nature of the investment.  BELTRAIDE provides advisory services for foreign investors relating to procedures for doing business in Belize and incentives available to qualifying investors.  Further information is available at the BELTRAIDE website: http://www.belizeinvest.org.bz  

Competition and Anti-Trust Laws

Belize does not have any laws governing competition, but there are attempts to limit outside competition in certain industries (such as food and agriculture) by levying high import duties.

Expropriation and Compensation

The Government has used the right of eminent domain in several cases to appropriate private property, including land belonging to foreign investors.  There were no new expropriation cases in 2018. However, there are allegations that several previous expropriations were done for personal or political gain.  Belizean law requires that the government assess and compensate according to fair market value. Such expropriation cases can take several years to settle and there are a few cases where compensation is still pending.  In the cases of expropriations, the claimants assert that the Government failed to adhere to agreements entered into by a previous administration.

The process to acquire land titles is open to abuse with numerous cases of land title manipulation involving foreigners and Belizeans.  The government continues efforts at improving the land title system and in addressing delays in processing land transactions.

Dispute Settlement

ICSID Convention and New York Convention

The Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) was extended to Belize by an act of the United Kingdom when Belize was a colony.  After independence, Belize did not ratify the Convention nor is it listed as a contracting state. Nevertheless, the Arbitration Act governs arbitration and expressly incorporates three international conventions into domestic law.  These conventions include the 1923 Geneva Protocol on Arbitration Clauses; the Convention on the Execution of Foreign Arbitral Awards; and the New York Convention. A 2013 Caribbean Court of Justice judgment also upheld the Arbitration Act giving effect to the New York Convention in domestic law.

Belize signed but has not ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID convention).  For more information visit http://sice.oas.org/dispute/comarb/icsid/w_conv1.asp  

Investor-State Dispute Settlement

Belize is signatory to various investment agreements which make provisions for the settlement of investor-state disputes.  Belize is also a member of the CARICOM Single Market and Economy, as well as a party to two regional Economic Partnership Agreements (EPA): 1) between CARIFORUM and the EU; and 2) CARIFORUM and the United Kingdom.  These regional arrangements make provisions for the settlement of investor-state disputes.

Since Belize is not a party to any Bilateral Investment Treaty (BIT) or Free Trade Agreement (FTA) with the United States, investment disputes involving U.S. persons are taken either before the courts or before international arbitration panels.

Local courts are empowered to recognize and enforce foreign arbitral awards against the government but these are generally challenged up to the CCJ.  In January 2017, the Crown Proceedings (Amendment) Act and the Central Bank of Belize (International Immunities) Act were passed, which also affect the enforcement of foreign arbitral awards against the government.  Essentially, the Crown Proceedings Amendment Act provides that if a foreign judgment is entered against the government and later declared as “unlawful, void or otherwise invalid” by a court in Belize, the foreign judgement would not be enforced in or outside Belize.  The Act also provides for hefty penalties of fines and/or imprisonment on a person, individual or legal, seeking to enforce the foreign judgment. The Central Bank (International Immunities) Act restates the immunity of the Central Bank of Belize assets “from legal proceedings in other states.”  This Act similarly provides for penalties of fines and/or imprisonment on a person, individual or legal, which initiates any such proceedings. Despite these legislative acts, there has not been a history of extrajudicial actions against foreign investors.

Over the past decade, the Government of Belize has been involved in numerous investment disputes with one involving a U.S. company.  Most cases were initially entered in arbitration panels, but were eventually appealed either before the U.S. District Court of Colombia or the CCJ.  The majority of the judgements went against the Government, which has settled some and continues to settle other cases.

International Commercial Arbitration and Foreign Courts

Belize’s Arbitration Act allows the Supreme Court of Belize to support and supervise dispute settlement between private parties by arbitration.  In 2013, the Supreme Court also introduced the process of court-connected mediation as an alternative method to dispute settlement between private parties and as a means of reducing costs and duration of litigation.

Local courts are empowered to recognize and enforce foreign arbitral but these are generally challenged up to the CCJ, Belize’s highest appellate court.

There are numerous instances of cases involving State Owned Enterprises (SOEs) which went before domestic courts with rulings both in favor and against the SOE.

Bankruptcy Regulations

Chapter 244 of the Laws of Belize (Bankruptcy Act) provides and allows for bankruptcy filings. The Act provides for the establishment of receivership, trustees, adjudication and seizures of the property of the bankrupt.  The court may order the arrest of the debtor as well as the seizure of assets and documents in the event the debtor may flee or avoid payment to creditors. The Act also provides for imprisonment on conviction of certain specified offenses.  The Director of Public Prosecutions may also institute proceedings for offenses related to the bankruptcy proceedings.

Investment Incentives

The legal framework authorizing and providing for investment incentives include the Fiscal Incentives Act, the Designated Processing Areas Act, the Commercial Free Zone Act, the International Business Companies Act, the Retired Persons Incentives Act, the Trusts Act, the Offshore Banking Act, and the Gaming Control Act.

The Government of Belize enacted the Designated Processing Areas Act, 2018, which replaces the Export Processing Zone incentive program.  Additionally, legislative review of the Fiscal Incentives and the Commercial Free Zone programs continue. Investors seeking to take advantage of these programs should be aware of these developments when discussing investment concessions.

In exceptional circumstances, the current administration issues government guarantees from development institutions.  While government policies support public private partnership, there are not recent examples of joint financing of foreign direct investment projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Designated Processing Areas Act (DPA) was passed in 2018 to replace the former Export Processing Zone Act.  While the program is being fully implemented, it remains a tool to attract local and foreign investments to boost production for export markets.  Approved companies under this program receive a DPA status for a period of up to ten years and may quality for various tax exemptions. These may include exemptions from Custom and Excise duties as well as from taxes on imported goods, namely the General Sales Tax, the Environmental Tax, and the Revenue Replacement Duties.  Similarly, property and land tax may be waived on the designated area. In addition, approved companies are given certain exemptions, including from the Trade Licensing Act requirements for operating in a municipality and the Supplies Control Act, in relation to the importation of raw materials for production that are not for sale in Belize.  Companies may maintain a foreign currency account in a domestic or international bank located in Belize as well as sell, lease, or transfer goods and services between DPA companies. While subject to the Income and Business Tax, businesses may qualify for a preferential tax rate on chargeable income. They may also be eligible for an annual quota for fuel solely for specified uses.

A Commercial Free Zone (CFZ) is a specifically designated area for the conduct of business operations, including for example, manufacturing, commercial offices, insurance services, banking and financial services, offshore financial services, professional or related services, processing, packaging, warehousing, and the distribution of goods and services.  Belize currently has two CFZs, one on the northern border with Mexico and a small zone on the western border with Guatemala. Goods originating from these free zones can only be sold into Belize’s national customs territory after the necessary duties and taxes have been assessed and paid. The Commercial Free Zone Management Agency (CFZMA) monitors and administers the free zones.  Incentives include exemptions from import duties, income tax, taxes on dividends, capital gains tax, or any new corporate tax levied by the Government during the first 10 years of operation. In addition, imports and exports of a CFZ are exempt from customs duties, consumption taxes, excise taxes, or in-transit taxes, except those destined for or directly entering areas subject to the national customs territory. Additionally, CFZ businesses incurring a net loss over the five-year tax holiday may deduct losses from profits in the three years following the tax holiday period.

Performance and Data Localization Requirements

The Fiscal Incentives Act awards a qualified entity a development concession during the start-up or expansion stages to foster growth by offsetting custom duties. According to BELTRAIDE (www.belizeinvest.org.bz   ), two programs are offered under this Act, the Regular Program for investments exceeding USD150,000 and the Small and Medium Enterprise (SME) program for investments of less than USD150,000.  In general, the legal framework allows for full Customs Duties exemptions and Tax Holidays for up to 15 years for approved enterprises. The length and extent of a development concession are determined by several factors, including: (a) the extent of local value added; (b) the projected profitability of the enterprise; (c) foreign exchange earnings or savings; (d) transfer of skills and technology; and (e) new employment opportunities.

The Fiscal Incentives SME Program is aimed at smaller enterprises with a minimum of 51 percent Belizean ownership. The SME Program offers the same benefits of the Regular Program, with the exception of the allowable timeframe for duty exemptions.  Under this program, companies are allowed a maximum of five years of development concessions, with the expectation that after this period, companies can mature into the Regular Program.

The International Business Companies (Amendment) Act was passed in December 2018 largely to satisfy OECD base erosion and profit sharing requirements (BEPS).  The main change is that IBCs are no longer ring-fenced, with both residents and non-residents allowed to take part in the regime and IBCs no longer restricted from carrying on business with residents.  Additionally, IBCs are now liable for both income tax and stamp duty and required to file annual returns. Another important change is that IBC companies must be conducted and controlled from Belize with least two resident directors.  Certain activities are now also excluded, including those related to banking, fund management, or insurance business. See http://www.ibcbelize.com   and www.ifsc.gov.bz   for more information.

The Qualified Retirement Program (QRP) was created to facilitate eligible persons who have met the income requirements to permanently live and retire in Belize.  The Belize Tourism Board overseas this program designed to benefit retired persons over 45 years of age. To qualify, applicants need proof of income not less than USD2,000 per month through a pension or annuity generated outside of Belize.  An approved QRP is allowed to import personal effects as well as approved means of transportation, free of customs duties and taxes. All income generated outside of Belize is also free of taxes. An approved QRP is given one year to import all personal and household effects into Belize, using multiple shipments as necessary.  Duty and tax-free importation of an automobile, light aircraft or boat is allowed, with vehicles allowed to be replaced every three years. Effects and items imported under this program can only be sold, given away, or leased after the appropriate payment of applicable duties and taxes. For more information, visit http://www.belizetourismboard.org  

Real Property

The Preamble of the Belize Constitution preserves the right of the individual to the ownership of private property and the right to operate private businesses.  Private entities, whether foreign or local, have the right to freely establish, acquire, and dispose of interests in property and business enterprises. Generally, the country has no restrictions on foreign ownership and control; however, foreign investments in Belize must be registered at the Central Bank of Belize.

Mortgages and liens do exist and related real estate would be recorded with the registry of the Lands and Survey Department.  There have been cases of land fraud, abuses, and corruption in the Lands and Survey Department. Investors are strongly advised to do their due diligence prior to purchasing property.

Foreign and/or non-resident investors are not allowed to acquire national lease property but may acquire titled privately owned property.  Central Bank regulations require real estate transactions between residents and non-residents to be in Belize dollars. Additionally, the rate of stamp duty chargeable on land transfers involving foreign persons or a foreign controlled company is eight percent for land transfers valued in excess of USD10,000.  The rate of such transactions involving Belizeans and CARICOM nationals, however, is five percent.

There are three different types of titles to freehold property in Belize: Deed of Conveyance, Transfer of Certificate of Title, and Land Certificate.  Leasehold property from the government is available to Belizeans who can then apply for conversion to a fee simple title. The government is in the process of re-registering all freehold lands to achieve a uniform system of nationwide land ownership.

Squatters’ rights are only enforceable by order of the Supreme Court after having proven uninterrupted possession for at least 30 years on National and Conveyed lands or at least 12 years on registered lands.

Intellectual Property Rights

Belize is a party to the WTO and has implemented the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS).  Generally, Intellectual Property Rights (IPR) must be registered and enforced in Belize. IPR protections are enforceable through civil proceedings initiated by the IPR right holder.  BELIPO (http://belipo.bz  ) was established to administer IPR laws and functions as the country’s national intellectual property registry.  Its mandate covers the protection of copyrights, industrial designs, patents, trademarks, new plant varieties, and layout designs (topographies) of integrated circuits.

In practice, however, enforcement is largely non-existent.  Illegally copied CDs and DVDs are widespread and continue to be marketed throughout the country.  In an effort to halt IPR infringements, Home Box Office, Inc. (HBO) concluded negotiations with cable operators in March 2019, outlining the terms for local cable providers to legally access the company’s entertainment content.

During the last year, Belize acceded to six major Intellectual Property treaties that will provide enhanced protection to copyright owners, with added impact on live performers, music producers and broadcasters.  Five treaties are copyright-related and include:

• The International Convention for the Protection of Performers, Producers of Phonograms & Broadcasting Organizations (“Rome Convention”);
• The WIPO Copyright Treaty (“WCT”);
• The WIPO Performances & Phonograms Treaty (“WPPT”);
• The Beijing Treaty on Audiovisual Performances (“Beijing Treaty”); and
• The Marrakesh Treaty to Facilitate Access to Published Works for Persons who are Blind, Visually Disabled or Otherwise Print Disabled (“Marrakesh Treaty”)

The sixth treaty, the Geneva (1999) Act of the Hague Agreement concerning the International Registration of Industrial Designs, allows applications for industrial design protection to be filed into an international database.

While the Customs Department of Belize does track seizures of counterfeit goods, it does not properly document IPR and contraband seizures.

Belize is not listed in the 2018 USTR’s Special 301 report nor the 2018 notorious market report.

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

Belize’s financial system is small with limited to non-existent foreign portfolio investment transactions. It does not have its own stock market and capital market operations are rudimentary.  Private sector participation as both suppliers and buyers of securities in the financial market is generally not significant.

Foreign investments must be registered at the Central Bank, but the government does not restrict payments for international transactions.  Additionally, credit is made available on market terms with interest rates largely set by local market conditions prevailing within the commercial banks.

The Development Finance Corporation (DFC), a state owned development bank, offers loan financing services in various sectors. To qualify for a loan from DFC, an individual must be a Belizean resident or citizen, while a company must be majority 51 percent Belizean owned.  The National Bank of Belize is a state owned bank that provides concessionary credit primarily to public officers, teachers, and low income Belizeans.

Money and Banking System

The Central Bank of Belize (CBB) (https://www.centralbank.org.bz) is responsible for formulating and implementing monetary policy focusing on the stability of the exchange rate and economic growth.  Belize’s financial system remains underdeveloped with a banking sector may be characterized as stable but fragile.

Non-performing loans stood at 2.7 percent of total loans at the end of 2018, significantly below the 5.0 percent threshold.  Additionally, the aggregate capital adequacy ratio of domestic banks improved to 24.6 percent, well above the 9.0 percent regulatory requirement. The CBB also registered a new credit union, which commenced operations in August 2018.  In the international banking sector, the Central Bank revoked the license of one bank in June 2018 and another requested support in March 2019 to wind up voluntarily. 

Persons seeking to open a bank account must comply with Central Bank regulations, which differ based on residency status and whether the individual is seeking to establish a local bank account or a foreign currency account.  Like many countries with fixed currency rates, the Belize banking sector is split into two branches: onshore (domestic banks that cater only to residents) and offshore (international banks intended for non-residents of Belize to freely move foreign exchange in and out of the country).  The Government asserts this design is to prevent disruptions of the local economy, to maintain the peg to the US dollar and avoid large foreign exchange fluctuations.

Foreign banks and branches are allowed to operate in the country with all banks subject to Central Bank measures and regulations.  While all banks have current correspondent banking relations, there is still uncertainty with regard to the longevity of those relationships, delay in transactions, and fewer services offered at higher costs.

In the last few years, Belize has enacted a number of reforms to strengthen the anti-money laundering and counterterrorism-financing regime, including amendments to the Money Laundering and Terrorism (Prevention) Amendment Act and the International Business Companies (Amendment) Act.  In addition, the National Anti-Money Laundering Committee (NAMLC) is headed by the Financial Intelligence Unit with inter-agency support from key financial and law enforcement authorities.

Foreign Exchange and Remittances

Foreign Exchange

There are currency controls in Belize and foreign investors seeking to convert, transfer, or repatriate funds must comply with Central Bank regulations.  Foreign investments must be registered at the Central Bank to facilitate inflows and outflows of foreign currency transactions. Foreign investors must register their inflow of funds to obtain an “Approved Status” for their investment and generally are approved for repatriation of funds thereafter.  The Central Bank does, however, reserve the right to request evidence supporting applications for repatriation.

The Belize dollar has been pegged to the United States Dollar since May 1976 at a fixed exchange rate of BZ USD2.00 to the USD1.00.  There are reports of shortages and delays in obtaining foreign exchange.

Remittance Policies

There are no changes to investment remittance policies.  As mentioned above, foreign investors should obtain an “Approved Status” for their investment and register their inflow and outflow of funds with the Central Bank.

Sovereign Wealth Funds

Belize does not have a sovereign wealth fund.

State Owned Enterprises (SOEs) are active in the utilities sectors.  The Government is the majority shareholder in the Belize Water Services Limited, the country’s sole provider of water services, the Belize Electricity Limited, the sole distributor electricity, and the Belize Telemedia Limited, the largest telecommunications provider in the country.

SOEs usually engage senior government officials, and at times include members of local business bureaus and chambers of commerce, labor organizations, and quasi-governmental agencies, as a part of their management and board of directors.  The board guides the direction, policies, and decisions of the SOE that ostensibly is independent, but in practice has included high-ranking government officials as well as close relatives of government officials. Current and previous administrations are accused of nepotism in staffing as well as conflicts of interest when board members or directors are also represented in organizations that do business with the SOEs.

There is no published list of SOEs.  The following are the major SOEs operating in the country. Information relating to their operations are available on their website, including their audited financial reports:

• Belize Telemedia Limited at http://www.belizetelemedia.net ;
• Belize Electricity Limited at http://www.bel.com.bz ;
• Belize Waters Services Limited at http://www.bws.bz .

There are no third party market analysis sources that evaluate whether SOEs receive non-market advantages by the government.  The Belize Electricity Limited and the Belize Water Services Limited are the only service providers in their respective sectors.  The Belize Telemedia Services, on the other hand, competes with one other provider for mobile connectivity and there are multiple players that provide internet and data services.  The Public Utilities Commission regulates all utilities.

Privatization Program

The Government does not currently have a privatization program.

Belize generally lacks general awareness of the expectations and standards for responsible business conduct (RBC).  However, many foreign and local companies engage in responsible corporate behaviors, particularly from a social perspective.  Companies sponsor, inter alia, educational scholarships, sports related activities, community enhancement projects, or entrepreneurship activities.  There are no formal government measures or policies to promote RBC.

Several civil society agencies seek to protect individuals and address human rights, labor rights, consumer protection, and environmental concerns.  For example, the Office of the Ombudsman is responsible for investigating complaints of official corruption and abuse of power. As required by law, the Ombudsman is active in filing annual reports to the National Assembly and investigating incidents of alleged misconduct, particularly of police abuses.   This Office continues to be constrained by the lack of enforcement powers, political pressure, and limited resources.

In the area of environment, certain projects require the Department of the Environment’s approval for Environmental Impact Assessments or Environmental Compliance Plans. The Department of Environment website, http://www.doe.gov.bz  , has more information on the Environmental Protection Act, various regulations, applications and guidelines.

There are no government measures relating to corporate governance, accounting, and executive compensation standards and RBC policies are not factored into procurement decisions.

There have been no recent cases of private sector impact on human rights and no NGOs, investment funds, worker organizations/unions, or business associations specifically promoting or monitoring RBC.  In recent years, labor unions and business associations have become actively engaged in advocating for stronger measures against corruption.

Belize does not have a highly developed mineral sector and is not a conflict or high-risk country.  As such, it does not adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.  Belize’s extractive/mining industry is not highly developed and it does not participate in the Extractive Industries Transparency Initiative (EITI) and/or the Voluntary Principles on Security and Human Rights.

Belize has anti-corruption laws that are seldom enforced.  Under the Prevention of Corruption in Public Life Act, public officials are required to make annual financial disclosures.  The Act also criminalizes acts of corruption by public officials and includes measures on the use of office for private gain, code of conduct breaches, the use of public funds, and bribery.  Section 24 of the Act covers punishment for breach, which may include a fine of up to USD5,000, severe reprimand, forfeiture of property acquired by corruption, and removal from office. This Act also established an Integrity Commission mandated to monitor, prevent, and combat corruption by examining declarations of physical assets and financial positions filed by public officers.  The Commission is able to investigate allegations of corrupt activities, including by members of the National Assembly, Mayors and Councilors of all cities, and Town Boards. In 2018, a new chair was appointed to the Commission and published 42 names of persons in public life in accordance with the Act.

The Money Laundering and Terrorism (Prevention) Act identifies “politically exposed persons” to include family members or close associates of the politically exposed person.  The policies and procedures for government procurement are outlined in Belize Stores Orders and Financial Orders issued by the Ministry of Finance. There is a Manual for the Control of Public Finances that provides the framework for the registration and use of public funds to procure goods and services.

Despite these legislative and regulatory measures, many businesspeople complain that both major political parties can and do practice partisanship bias that affects businesses in terms of receiving needed licenses, winning government contracts for procurement of goods and services, and the granting of government land to private owners.  Some middle-class citizens and business owners throughout the country have complained of government officials, including police and others, soliciting bribes. Additionally, there are allegations of prominent members from the two main political parties engaging in corrupt practices to acquire land. A Select Senate Committee on Immigration deliberated for most of 2017 on such allegations.  It concluded its inquiry in December 2017, but has yet to publish its findings.

Private companies are not required to establish internal codes of conduct.  There are few non-governmental institutions that monitor government activities; two of them are Citizens Organized for Liberty through Action (COLA) and the National Trade Union Congress of Belize (NTUCB).  The first is comprised of concerned private citizens; the latter is an umbrella organization comprised of the various Belizean workers’ unions. Environmental NGOs and the Belize Chamber of Commerce and Industry often make statements regarding government policy as it affects their respective spheres of activity.

Private companies do not use internal controls, ethics or compliance programs to detect and prevent bribery of government officials.

In June 2001, the Government of Belize signed the Organization of American States (OAS) Inter-American Convention on Corruption, which undergoes periodic review as provided for under the Convention.

In December 2016, Belize acceded to the United Nations Convention Against Corruption (UNCAC) amid public pressure and demonstrations from the teachers’ unions but full implementation remains ongoing.

Bribery is officially considered a criminal act in Belize, but laws against bribery are rarely enforced.  There are complaints of government corruption particularly related to customs, land, and immigration transactions.

Resources to Report Corruption

Contact for the government agency or agencies responsible for combating corruption:

Office of the Ombudsman
91 Freetown Road
Belize City, Belize
T: +501-223-3594
E: ombudsman@btl.net
W: www.ombudsman.gov.bz  

For specific complaints within the police force:

Professional Standards Branch
1902 Constitutions Drive
Belmopan, Belize
T: +501-822-2218 or 822-2674

Belize has traditionally enjoyed one of the most stable political environments in the region, having held peaceful and transparent democratic elections since independence on September 21, 1981.  In general elections, the two major political parties generally trade leadership but the current United Democratic Party has held on to power since 2008 spanning three consecutive elections. At the municipal level, elections were held in March 2018 and while the opposition People’s United Party gained ground, the ruling United Democratic Party maintained its majority in six of the nine municipalities.

Incidents including damage to projects or installations affecting investments in Belize are rare.  In November 2014, the Belize Sugar Cane Farmers Association (BSCFA) and American Sugar Refineries (ASR) failed to reach a contract agreement before the harvesting season.  While the dispute was eventually resolved, there were some reports of fields being burned and farmers being threatened for breaking ranks with BSCFA.

There is political insecurity because of neighboring Guatemala’s territorial claim on Belize that has existed for almost two centuries.  In 2008, both countries signed a special agreement, with the facilitation of the OAS, on a process to present the matter to the International Court of Justice (ICJ).  After simultaneous referenda failed to materialize in 2013, Guatemala voted to take the matter to the ICJ in April 2018. Belize was scheduled to hold its referendum in April 2019, but the process is delayed by a legal challenge.  Despite efforts to increase confidence building measures between the two countries, there continue to be incursions by Guatemalan citizens along bordering areas resulting in deforestation, illegal logging and extraction of exotic hardwoods, illegal harvesting of xate palm leaves (a decorative plant used in flower arrangements), panning for gold, wildlife poaching, and agriculture development.  These activities have resulted in confrontations between Guatemalan nationals and Belize law enforcement authorities on Belizean territory. Tensions have also flared along the Sarstoon River, which forms the disputed southern border. Guatemala has increased its naval presence in the area and detained or questioned Belizean citizens wishing to navigate the river.

There are also security concerns related to the high level of crime, which are mainly gang related or random targets against innocent civilians and tourists.  Turf and gang related crimes are often concentrated in south side Belize City.

According to the Statistical Institute of Belize (SIB), as of September 2018, the population is an estimated 395,882 persons of which 155,950 were in the labor force.  The rate of unemployment stood at 9.4 percent percent in April 2018, representing a fall of 1.7 percent over the previous year. New entrants into the labor force for this period were primarily from urban areas and almost two-thirds of new entrants were females.  Males continue to comprise the majority of the labor force, accounting for 60 percent and were generally paid more.

The Ministry of Labor is charged with enforcing the minimum wage.  In May 2012, the national minimum wage was increased to BZ USD3.30 (USD1.65) per hour. The average graduate, with at least an Associate is Degree, would be paid a minimum of USD2.22 to USD3.13 an hour.

Belize is both a receiving and a sending country for migrant workers.  As a receiving country, it does not have a structured temporary employment program for migrant workers, but it has an established procedure for issuing work permits.  The majority of approved work permits are for Central Americans seeking seasonal employment in the agricultural industry, particularly in the banana, citrus, and sugar industries.  Additionally, a number of Caribbean professionals obtain a Certificate of Recognition of CARICOM Skills Qualification, which allows them to work in Belize under the Caribbean Single Market and Economy’s free movement of skilled labor initiative.

The labor force is largely unskilled, with 52 percent of employed persons engaged in sales or other elementary work occupations.  The education system continues to be poorly equipped in preparing labor force entrants to become entrepreneurs and adapt to a technology-driven global environment.  Compulsory education ends at age 14.

There are several agencies seeking to provide soft skills needed to enter the labor market.  BELTRAIDE hosts on-going trainings for small and micro enterprises on a wide range of basic skills related to customer service, business development, and management.  Additionally, more targeted training is conducted to meet employer demand in business process outsourcing and tourism related sectors.

Foreign investors who have a development concession are permitted to bring in skilled personnel to complement their local labor force and if appropriate, training programs for Belizean nationals are established.  Most of the unskilled or semi-skilled workers in commercial agriculture are recent immigrants or migrant workers from neighboring Spanish-speaking countries.

Employers in the agriculture sector tend to use temporary workers even for jobs that are not temporary in nature.  These jobs may be opened to workers from Central American countries and may be attributed to a shortage of local labor force in the rural areas where these jobs are concentrated.  Workers permits and other immigration related documents are processed by a labor committee, which has inter-ministerial representation from various Ministries including Labor, Immigration, and Human Development.

In general, there are no restrictions on employers adjusting their labor force in response to fluctuating market conditions.  Employers are flexible in offering salary increases, which are normally justified based on cost of living and prevailing practice consideration.  Severance payment is subject to local labor law, the Labor Amendment Act of 2011.

This Act differentiates between layoffs (voluntary termination and redundancy) and firing (dismissal).  In the cases of voluntary termination and redundancy, the law provides for an appropriate notice period to be provided, payment in lieu of notice, severance etc.  In the case of redundancy, the employer must notify where applicable the recognized trade union or workers’ representative as well as the Labor Commissioner.

The law also provides for dismissal by the employer but distinguishes between termination for “good and sufficient cause,” “termination for misconduct,” “unfair dismissal,” “constructive dismissal where the employer’s conduct makes it unreasonable to work,” and “summary dismissal where the employee commits an act of gross misconduct.”

In addition to the general Social Security system, the government maintains a National Health Insurance scheme in certain marginalized communities throughout the country.  They also provide some assistance to unemployed persons who represent marginalized sectors of the community, e.g. single women, single mothers, and young unemployed persons.  These services are not mandated by law.

Labor laws are not generally waived to attract or retain investment.  There are no additional/ different labor law provisions for Designated Processing Areas operating in Belize.

Where employees are unionized, employers must refer to the laws relating to the operation of unions, namely the Trade Union and Employee’s Organizations Act and the Settlement of Disputes in Essential Services Act, as well as the terms of existing collective bargaining agreements between the employer and unions.

Belize has nine trade unions and an umbrella organization, the National Trade Union Congress of Belize (NTUCB).  Belize has ratified 50 International Labor Organization (ILO) conventions, of which 45 are in force, including Convention 182 against the worst forms of child labor.

Trade Unions are independent of the government and employers both in practice and in law.  The Ministry of Labor recognizes unions and employers’ associations after they are registered.  Trade Union laws establish procedures for the registration and status of trade unions and employers’ organizations and for collective bargaining.  Unions are common in the public sector (teachers, general public servants), the social security board, the utility sectors (water, telecommunications and electricity), and port stevedores.

The law allows authorities to refer disputes involving public and private sector employees who provide “essential services” to compulsory arbitration, prohibit strikes, and terminate actions. The national fire service, postal service, monetary and financial services, civil aviation and airport security services, and port authority pilots and security services are deemed essential services outside of the International Labor Organization definition.  During the last year, there were no strikes that posed a risk to either local businesses or foreign investments.

Belize does have laws and regulations relating to international labor standards.  There is also a system in place for labor inspectors to advocate on labor related concerns and complaints as well as to visit and inspect business facilities to ensure adherence to local labor laws.

There are several gaps identified in relation to international labor standards.  Belize’s legislation does not address a situation in which child labor is contracted between a parent and the employer.  While there is need for better data, it does not seem likely that the penalties, remediation, and inspections sufficiently deter violations.  The penalty for employing a child below minimum age is a fine not exceeding USD10 or imprisonment not exceeding two months.

Additionally, while there are laws that prohibit a wide range of discrimination in the work place, they are not effectively enforced and do not explicitly provide protections for persons with disability or against discrimination related to sexual orientation and/or gender identity.  Finally, there is anecdotal evidence that certain vulnerable sectors, particularly undocumented persons, young service workers, and agricultural laborers, were regularly paid below the minimum wage.

There were no labor related laws or regulations enacted during the last year. The passage of an Occupational Health and Safety Bill has been delayed for a number of years due to lack of consensus between tripartite stakeholders representing the government, private sector and unions.

Belize is not a party to any trade agreements with the United States.  It is it is a qualifying country under the U.S. Generalized System of Preference (GSP) as well as the U.S. – Caribbean Basin Trade Partnership Act (CBTPA).

There is an Overseas Private Investment Corporation (OPIC) Agreement between Belize and the United States, which predates Belize’s independence.  Additionally, OPIC was involved in two projects in Belize, one in 2002 and the other in 2006. While Belize qualifies for OPIC support under the Clean Energy Security Initiative, there are no OPIC-related projects.  The country benefitted from two United States Trade and Development Agency (USTDA) projects in the last four years to investigate the potential of adopting clean energy technologies in the utilities sector.

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

* Source for Host Country Data: Statistical Institute of Belize, Central Bank of Belize

Table 3: Sources and Destination of FDI

Statistics on foreign direct investments in Belize by country of origin is limited, including the total invested by U.S. investors.  The Central Bank of Belize recorded total inflows of FDI at USD152.48 million in 2018 and outflows at USD32.933 million in the same period.  Major sources of FDI include the United States, Canada and the United Kingdom. FDI inflows are traditionally concentrated primarily in real estate, construction, reinvested earnings and the agriculture sectors.

Table 4: Sources of Portfolio Investment

Data not available.

Beverly Mather-Marcus
Political and Economic Chief
4 Floral Park Road
Belmopan, Belize
T: +501-822-4011
belmopancommercialservices@state.gov

Carmen Silva
Economic/Commercial Assistant
4 Floral Park Road
Belmopan, Belize
T: +501-822-4011
belmopancommercialservices@state.gov

Policies Towards Foreign Direct Investment

China continues to be one of the largest recipients of global FDI due to a relatively high economic growth rate, growing middle class, and an expanding consumer base that demands diverse, high quality products.  FDI has historically played an essential role in China’s economic development. In recent years, due to stagnant FDI growth and gaps in China’s domestic technology and labor capabilities, Chinese government officials have prioritized promoting relatively friendly FDI policies promising market access expansion and national treatment for foreign enterprises through general improvements to the business environment. They also have made efforts to strengthen China’s legal and regulatory framework to enhance broader market-based competition.  Despite these efforts, the on-the-ground reality for foreign investors in China is that the operating environment still remains closed to many foreign investments across a wide range of industries.

In 2018, China issued the nationwide negative list that opened up a few new sectors to foreign investment and promised future improvements to the investment climate, such as leveling the playing field and providing equal treatment to foreign enterprises.  However, despite these reforms, FDI to China has remained relatively stagnant in the past few years. According to MOFCOM, total FDI flows to China slightly increased from about USD126 billion in 2017 to just over USD135 billion in 2018, signaling that modest market openings have been insufficient to generate significant foreign investor interest in the market.  Rather, foreign investors have continued to perceive that the playing field is tilted towards domestic companies. Foreign investors have continued to express frustration that China, despite continued promises of providing national treatment for foreign investors, has continued to selectively apply administrative approvals and licenses and broadly employ industrial policies to protect domestic firms through subsidies, preferential financing, and selective legal and regulatory enforcement.  They also have continued to express frustration over China’s weak protection and enforcement of IPR; corruption; discriminatory and non-transparent anti-monopoly enforcement that forces foreign companies to license technology at below-market prices; excessive cybersecurity and personal data-related requirements; increased emphasis on requirements to include CCP cells in foreign enterprises; and an unreliable legal system lacking in both transparency and rule of law.

China seeks to support inbound FDI through the MOFCOM “Invest in China” website (www.fdi.gov.cn  ).  MOFCOM publishes on this site laws and regulations, economic statistics, investment projects, news articles, and other relevant information about investing in China.  In addition, each province has a provincial-level investment promotion agency that operates under the guidance of local-level commerce departments.

• American Chamber of Commerce China 2019 American Business in China White Paper: https://www.amchamchina.org/policy-advocacy/white-paper/  
• American Chamber of Commerce China 2019 Business Climate Survey: https://www.amchamchina.org/policy-advocacy/business-climate-survey/  
• U.S.-China Business Council’s 2018 China Business Environment Member Survey: https://www.uschina.org/reports/uscbc-2018-member-survey  
• EU Chamber’s 2018 Business Confidence Survey: http://www.europeanchamber.com.cn/en/publications-business-confidence-survey  .
• MOFCOM’s Investment Promotion Website: http://www.fdi.gov.cn/1800000121_10000161_8.html  

Limits on Foreign Control and Right to Private Ownership and Establishment

In June 2018, the Chinese government issued the nationwide negative list for foreign investment that replaced the Foreign Investment Catalogue.  The negative list identifies industries and economic sectors restricted or prohibited to foreign investment. Unlike the previous catalogue that used a “positive list” approach for foreign investment, the negative list removed “encouraged” investment categories and restructured the document to group restrictions and prohibitions by industry and economic sector.  Foreign investors wanting to invest in industries not on the negative list are no longer required to obtain pre-approval from MOFCOM and only need to register their investment.

The 2018 foreign investment negative list made minor modifications to some industries, reducing the number of restrictions and prohibitions from 63 to 48 sectors.  Changes included: some openings in automobile manufacturing and financial services; removal of restrictions on seed production (except for wheat and corn) and wholesale merchandizing of rice, wheat, and corn; removal of Chinese control requirements for power grids, building rail trunk lines, and operating passenger rail services; removal of joint venture requirements for rare earth processing and international shipping; removal of control requirements for international shipping agencies and surveying firms; and removal of the prohibition on internet cafés.  While market openings are always welcomed by U.S. businesses, many foreign investors remain underwhelmed and disappointed by Chinese government’s lack of ambition and refusal to provide more significant liberalization. Foreign investors continue to point out these openings should have happened years ago and now have occurred mainly in industries that domestic Chinese companies already dominate.

The Chinese language version of the 2018 Nationwide Negative List: http://www.ndrc.gov.cn/zcfb/zcfbl/201806/W020180628640822720353.pdf .

Ownership Restrictions

The foreign investment negative list restricts investments in certain industries by requiring foreign companies enter into joint ventures with a Chinese partner, imposing control requirements to ensure control is maintained by a Chinese national, and applying specific equity caps.  Below are just a few examples of these investment restrictions:

Examples of foreign investments that require an equity joint venture or cooperative joint venture for foreign investment include:

• Exploration and development of oil and natural gas;
• Printing publications;
• Foreign invested automobile companies are limited to two or fewer JVs for the same type of vehicle;
• Market research;
• Preschool, general high school, and higher education institutes (which are also required to be led by a Chinese partner);
• General Aviation;
• Companies for forestry, agriculture, and fisheries;
• Establishment of medical institutions; and
• Commercial and passenger vehicle manufacturing.

Examples of foreign investments requiring Chinese control include:

• Selective breeding and seed production for new varieties of wheat and corn;
• Construction and operation of nuclear power plants;
• The construction and operation of the city gas, heat, and water supply and drainage pipe networks in cities with a population of more than 500,000;
• Water transport companies (domestic);
• Domestic shipping agencies;
• General aviation companies;
• The construction and operation of civilian airports;
• The establishment and operation of cinemas;
• Basic telecommunication services;
• Radio and television listenership and viewership market research; and
• Performance agencies.

Examples of foreign investment equity caps include:

• 50 percent in automobile manufacturing (except special and new energy vehicles);
• 50 percent in value-added telecom services (excepting e-commerce);
• 51 percent in life insurance firms;
• 51 percent in securities companies;
• 51 percent futures companies;
• 51 percent in security investment fund management companies; and
• 50 percent in manufacturing of commercial and passenger vehicles.

Investment restrictions that require Chinese control or force a U.S. company to form a joint venture partnership with a Chinese counterpart are often used as a pretext to compel foreign investors to transfer technology against the threat of forfeiting the opportunity to participate in China’s market.  Foreign companies have reported these dictates and decisions often are not made in writing but rather behind closed doors and are thus difficult to attribute as official Chinese government policy. Establishing a foreign investment requires passing through an extensive and non-transparent approval process to gain licensing and other necessary approvals, which gives broad discretion to Chinese authorities to impose deal-specific conditions beyond written legal requirements in a blatant effort to support industrial policy goals that bolster the technological capabilities of local competitors.  Foreign investors are also often deterred from publicly raising instances of technology coercion for fear of retaliation by the Chinese government.

Other Investment Policy Reviews

Organization for Economic Cooperation and Development (OECD)

China is not a member of the OECD.  The OECD Council decided to establish a country program of dialogue and co-operation with China in October 1995.  The most recent OECD Investment Policy Review for China was completed in 2008 and a new review is currently underway.

OECD 2008 report: http://www.oecd.org/daf/inv/investment-policy/oecdinvestmentpolicyreviews-china2008encouragingresponsiblebusinessconduct.htm  .

In 2013, the OECD published a working paper entitled “China Investment Policy: An Update,” which provided updates on China’s investment policy since the publication of the 2008 Investment Policy Review.

• OECD 2013 Update: http://www.oecd.org/china/WP-2013_1.pdf 
• OECD Regulatory Restrictiveness Survey: http://www.oecd.org/investment/fdiindex.htm  

World Trade Organization (WTO)

China became a member of the WTO in 2001.  WTO membership boosted China’s economic growth and advanced its legal and governmental reforms.  The sixth and most recent WTO Investment Trade Review for China was completed in 2018. The report highlighted that China continues to be one of the largest destinations for FDI with inflows mainly in manufacturing, real-estate, leasing and business services, and wholesale and retail trade.  The report noted changes to China’s foreign investment regime that now relies on the nationwide negative list and also noted that pilot FTZs use a less restrictive negative list as a testbed for reform and opening.

• WTO Investment Trade Review for China: https://www.wto.org/english/tratop_e/tpr_e/tp475_e.htm  
• International Monetary Fund (IMF) information on China: http://www.imf.org/external/country/Chn/  
• FDI Statistics from MOFCOM: http://www.fdi.gov.cn/1800000121_10000177_8.html  

Business Facilitation

China made progress in the World Bank’s Ease of Doing Business Survey by moving from 78th in 2017 up to 46th place in 2018 out of 190 economies.  This was accomplished through regulatory reforms that helped streamline some business processes including improvements related to cross-border trading, setting up electricity, electronic tax payments, and land registration.  This ranking, while highlighting business registration improvements that benefit both domestic and foreign companies, does not account for major challenges U.S. businesses face in China like IPR protection and forced technology transfer.

• World Bank Ease of Doing Business: http://www.doingbusiness.org/rankings  
• World Bank Investing Across Borders: http://iab.worldbank.org/data/exploreeconomies/china  

The Government Enterprise Registration (GER), an initiative of the United Nations Conference on Trade and Development (UNCTAD), gave China a low score of 1.5 out of 10 on its website for registering and obtaining a business license.  In previous years, the State Administration for Industry and Commerce (SAIC) was responsible for business license approval. In March 2018, the Chinese government announced a major restructuring of government agencies and created the State Administration for Market Regulation (SAMR) that is now responsible for business registration processes.  According to GER, SAMR’s Chinese website lacks even basic information, such as what registrations are required and how they are to be conducted.

• UNCTAD GER: https://ger.co/  
• SAMR Business Registration Information: http://www.saic.gov.cn/  

The State Council, which is China’s chief administrative authority, in recent years has reduced red tape by eliminating hundreds of administrative licenses and delegating administrative approval power across a range of sectors.  The number of investment projects subject to central government approval has reportedly dropped significantly. The State Council also has set up a website in English, which is more user-friendly than SAMR’s website, to help foreign investors looking to do business in China.

The State Council Information on Doing Business in China: http://english.gov.cn/services/doingbusiness  

The Department of Foreign Investment Administration within MOFCOM is responsible for foreign investment promotion in China, including promotion activities, coordinating with investment promotion agencies at the provincial and municipal levels, engaging with international economic organizations and business associations, and conducting research related to FDI into China.  MOFCOM also maintains the “Invest in China” website.

MOFCOM “Invest in China” Information: http://www.fdi.gov.cn/1800000121_10000041_8.html  

Despite recent efforts by the Chinese government to streamline business registration procedures, foreign companies still complain about the challenges they face when setting up a business.  In addition, U.S. companies complain they are treated differently from domestic companies when setting up an investment, which is an added market access barrier for U.S. companies. Numerous companies offer consulting, legal, and accounting services for establishing wholly foreign-owned enterprises, partnership enterprises, joint ventures, and representative offices in China.  The differences among these corporate entities are significant, and investors should review their options carefully with an experienced advisor before choosing a particular Chinese corporate entity or investment vehicle.

Outward Investment

Since 2001, China has initiated a “going-out” investment policy that has evolved over the past two decades.  At first, the Chinese government mainly encouraged SOEs to go abroad and acquire primarily energy investments to facilitate greater market access for Chinese exports in certain foreign markets.  As Chinese investors gained experience, and as China’s economy grew and diversified, China’s investments also have diversified with both state and private enterprise investments in all industries and economic sectors.  While China’s outbound investment levels in 2018 were significantly less than the record-setting investments levels in 2016, China was still one of the largest global outbound investors in the world. According to MOFCOM outbound investment data, 2018 total outbound direct investment (ODI) increased less than one percent compared to 2017 figures.  There was a significant drop in Chinese outbound investment to the United States and other North American countries that traditionally have accounted for a significant portion of China’s ODI. In some European countries, especially the United Kingdom, ODI generally increased. In One Belt, One Road (OBOR) countries, there has been a general increase in investment activity; however, OBOR investment deals were generally relatively small dollar amounts and constituted only a small percentage of overall Chinese ODI.

In August 2017, in reaction to concerns about capital outflows and exchange rate volatility, the Chinese government issued guidance to curb what it deemed to be “irrational” outbound investments and created “encouraged,” “restricted,” and “prohibited” outbound investment categories to guide Chinese investors.  The guidelines restricted Chinese outbound investment in sectors like property, hotels, cinemas, entertainment, sports teams, and “financial investments that create funds that are not tied to specific investment projects.” The guidance encouraged outbound investment in sectors that supported Chinese industrial policy, such as Strategic Emerging Industries (SEI) and MIC 2025, by acquiring advanced manufacturing and high-technology assets.  MIC 2025’s main aim is to transform China into an innovation-based economy that can better compete against – and eventually outperform – advanced economies in 10 key high-tech sectors, including: new energy vehicles, next-generation IT, biotechnology, new materials, aerospace, oceans engineering and ships, railway, robotics, power equipment, and agriculture machinery. Chinese firms in MIC 2025 industries often receive preferential treatment in the form of preferred financing, subsidies, and access to an opaque network of investors to promote and provide incentives for outbound investment in key sectors.  The outbound investment guidance also encourages investments that promote China’s OBOR development strategy, which seeks to create connectivity and cooperation agreements between China and countries along the Chinese-designated “Silk Road Economic Belt and the 21st-century Maritime Silk Road” through an expansion of infrastructure investment, construction materials, real estate, power grids, etc.

China has 109 Bilateral Investment Treaties (BITs) in force and multiple Free Trade Agreements (FTAs) with investment chapters.  Generally speaking, these agreements cover topics like expropriation, most-favored-nation treatment, repatriation of investment proceeds, and arbitration mechanisms.  Relative to U.S.-negotiated BITs and FTA investment chapters, Chinese agreements are generally considered to be weaker and offer less protections to foreign investors.

A list of China’s signed BITs:

• http://tfs.mofcom.gov.cn/article/Nocategory/201111/20111107819474.shtml  
• http://investmentpolicyhub.unctad.org/IIA/IiasByCountry#iiaInnerMenu  .

The United States and China last held BIT negotiations in January 2017.  China has been in active bilateral investment agreement negotiations with the EU since 2013.  The two sides have exchanged market access offers and have expressed an intent to conclude talks by 2020.  China also has negotiated 17 FTAs with trade and investment partners, is currently negotiating 14 FTAs and FTA-upgrades, and is considering eight further potential FTA and FTA-upgrade negotiations.  China’s existing FTA partners are Maldives, Georgia, ASEAN, Republic of Korea, Pakistan, Australia, Singapore, Pakistan, New Zealand, Chile, Peru, Costa Rica, Iceland, Switzerland, Hong Kong, Macao, and Taiwan.  China concluded its FTAs with Maldives and Georgia in 2017.

China’s signed FTAs:

• http://fta.mofcom.gov.cn/index.shtml  
• http://fta.mofcom.gov.cn/english/index.shtml  

The United States and China concluded a bilateral taxation treaty in 1984.

Transparency of the Regulatory System

In assessing China’s regulatory governance effectiveness, the World Bank Global Indicators of Regulatory Governance gave China a composite score of 1.75 out 5 points.  The World Bank attributed China’s relatively low score to the futility of foreign companies appealing administrative authorities’ decisions, given partial courts; not having laws and regulations in one accessible place that is updated regularly; the lack of impact assessments conducted prior to issuing new laws; and other concerns about public comments and transparency.

World Bank Rule Making Information: http://rulemaking.worldbank.org/en/data/explorecountries/china  

In various business climate surveys, U.S. businesses operating in China consistently cite arbitrary legal enforcement and the lack of regulatory transparency among the top challenges of doing business in China.  These challenges stem from a complex legal and regulatory system that provides government regulators and authorities broad discretion to selectively enforce regulations, rules, and other guidelines in an inconsistent and impartial manner, often to the detriment of foreign investor interests.  Moreover, regulators are often allowed to hinder fair competition by allowing authorities to ignore Chinese legal transgressors while at the same time strictly enforcing regulations selectively against foreign companies.

Another compounding problem is that Chinese government agencies rely on rules and enforcement guidelines that often are not published or even part of the formal legal and regulatory system.  “Normative Documents” (opinions, circulars, notices, etc.), or quasi-legal measures used to address situations where there is no explicit law or administrative regulation, are often not made available for public comment or even published, yet are binding in practice upon parties active in the Chinese market.  As a result, foreign investors are often confronted with a regulatory system rife with inconsistencies that hinders business confidence and generates confusion for U.S. businesses operating in China.

One of China’s WTO accession commitments was to establish an official journal dedicated to the publication of laws, regulations, and other measures pertaining to or affecting trade in goods, services, Trade Related Aspects of Intellectual Property Rights (TRIPS), or the control of foreign exchange.  The State Council’s Legislative Affairs Office (SCLAO) issued two regulations instructing Chinese agencies to comply with this WTO obligation and also issued Interim Measures on Public Comment Solicitation of Laws and Regulations and the Circular on Public Comment Solicitation of Department Rules, which required government agencies to post draft regulations and departmental rules on the official SCLAO website for a 30-day public comment period.  Despite the fact this requirement has been mandated by Chinese law and was part of the China’s WTO accession commitments, Chinese ministries under the State Council continue to post only some draft administrative regulations and departmental rules on the SCLAO website.  When drafts are posted for public comment, the comment period often is less than the required 30 days.

China’s proposed draft regulations are often drafted without using scientific studies or quantitative analysis to assess the regulation’s impact.  When Chinese officials claim an assessment was made, the methodology of the study and the results are not made available to the public. When draft regulations are available for public comment, it is unclear what impact third-party comments have on the final regulation.  Many U.S. stakeholders have complained of the futility of the public comment process in China, often concluding that the lack of transparency in regulation drafting is purposeful and driven primarily by industrial policy goals and other anti-competitive factors that are often inconsistent with market-based principles.  In addition, foreign parties are often restricted from full participation in Chinese standardization activities, potentially providing Chinese competitors opportunity to develop standards inconsistent with international norms and detrimental to foreign investor interests.

In China’s state-dominated economic system, it is impossible to assess the motivating factors behind state action.  The relationships are often blurred between the CCP, the Chinese government, Chinese business (state and private owned), and other Chinese stakeholders that make up the domestic economy.  Foreign invested enterprises perceive that China prioritizes political goals, industrial policies, and a desire to protect social stability at the expense of foreign investors, fairness, and overall rule of law.  These blurred lines are on full display in some industries that have Chinese Self-Regulatory Organizations (SROs) that make licensing decisions. For instance, a Chinese financial institution who is a direct competitor to a foreign enterprise applying for a license may be a voting member of the governing SRO and can either influence other SRO members or even directly adjudicate the application of the foreign license.  To protect market share and competitive position, this company likely has an incentive to disapprove the license application, further hindering fair competition in the industry or economic sector.

For accounting standards, Chinese companies use the Chinese Accounting Standards for Business Enterprises (ASBE) for all financial reporting within mainland China.  Companies listed overseas (including in Hong Kong) may choose to use ASBE, the International Financial Reporting Standards, or Hong Kong Financial Reporting Standards.

International Regulatory Considerations

China has been a member of the WTO since 2001.  As part of its accession agreement, China agreed to notify the WTO Committee on Technical Barriers to Trade (TBT Committee) of all draft technical regulations.  Compliance with this WTO commitment is something Chinese officials have promised in previous dialogues with U.S. government officials. The United States remains concerned that China continues to issue draft technical regulations without proper notification to the TBT Committee

Legal System and Judicial Independence

The Chinese legal system is based on a civil law model that borrowed heavily from the legal systems of Germany and France but retains Chinese legal characteristics.  The rules governing commercial activities are found in various laws, regulations, and judicial interpretations, including China’s civil law, contract law, partnership enterprises law, security law, insurance law, enterprises bankruptcy law, labor law, and several interpretations and regulations issued by the Supreme People’s Court (SPC).  While China does not have specialized commercial courts, it has created specialized courts and tribunals for the hearing of intellectual property disputes. In 2014, China launched three intellectual property (IP) courts in Beijing, Guangzhou, and Shanghai. In October 2018, the National People’s Congress approved the establishment of an national-level appellate tribunal within the SPC to hear civil and administrative appeals of technically complex IP cases .

China’s Constitution and various laws provide contradictory statements about court independence and the right of judges to exercise adjudicative power free from interference by administrative organs, public organizations, and/or powerful individuals.  However in practice, courts are heavily influenced by Chinese regulators. Moreover, the Chinese Constitution established that the “leadership of the Communist Party” is supreme, which in practices makes judges susceptible to party pressure on commercial decisions impacting foreign investors.  This trend of central party influence in all areas, not just in the legal system, has only been strengthened by President Xi Jinping’s efforts to consolidate political power and promote the role of the party in all economic activities. Other reasons for judicial interference may include:

• Courts fall under the jurisdiction of local governments;
• Court budgets are appropriated by local administrative authorities;
• Judges in China have administrative ranks and are managed as administrative officials;
• The CCP is in charge of the appointment, dismissal, transfer, and promotion of administrative officials;
• China’s Constitution stipulates that local legislatures appoint and supervise the courts; and
• Corruption may also influence local court decisions.

While in limited cases U.S. companies have received favorable outcomes from China’s courts, the U.S. business community consistently reports that Chinese courts, particularly at lower levels, are susceptible to outside political influence (particularly from local governments), lack the sophistication and educational background needed to understand complex commercial disputes, and operate without transparency.  U.S. companies often avoid challenging administrative decisions or bringing commercial disputes before a local court because of perceptions that these efforts would be futile and for fear of future retaliation by government officials.

Reports of business disputes involving violence, death threats, hostage-taking, and travel bans involving Americans continue to be prevalent.  However, American citizens and foreigners in general do not appear to be more likely than Chinese nationals to be subject to this kind of coercive treatment.  Police are often reluctant to intervene in what they consider internal contract disputes.

Laws and Regulations on Foreign Direct Investment

The legal and regulatory framework in China controlling foreign direct investment activities is more restrictive and less transparent across-the-board compared to the investment frameworks of developed countries, including the United States.  China has made efforts to unify its foreign investment laws and clarify prohibited and restricted industries in the negative list.

On March 17, 2019 China’s National People’s Congress passed the Foreign Investment Law (FIL) that intends to replace existing foreign investment laws.  This law will go into effect on January 1, 2020 and will replace the previous foreign investment framework based on three foreign-invested entity laws: the China-Foreign Equity Joint Venture Enterprise Law, the China-Foreign Cooperative Joint Venture Enterprise Law, and the Foreign-Invested Enterprise (FIE) Law.  The FIL provides a five-year transition period for foreign enterprises established under previous foreign investment laws, after which all foreign enterprises will be subject to similar laws as domestic companies, like the company law, the enterprise law, etc.

In addition to these foreign investment laws, multiple implementation guidelines and other administrative regulations issued by the State Council that are directly derived from the law also affect foreign investment.  Under the three current foreign investment laws, such implementation guidelines include:

• Implementation Regulations of the China-Foreign Equity Joint Venture Enterprises Law;
• Implementation Regulations of the China-Foreign Cooperative Joint Venture Enterprise Law;
• Implementation Regulations of the FIE Law;
• State Council Provisions on Encouraging Foreign Investment;
• Provisions on Guiding the Direction of Foreign Investment; and
• Administrative Provisions on Foreign Investment to Telecom Enterprises.

In addition to the three central-level laws mentioned above, there are also over 1,000 rules and regulatory documents related to foreign investment in China,  issued by government ministries, including:

• the Foreign Investment Negative List;
• Provisions on Mergers and Acquisition (M&A) of Domestic Enterprises by Foreign Investors;
• Administrative Provisions on Foreign Investment in Road Transportation Industry;
• Interim Provisions on Foreign Investment in Cinemas;
• Administrative Measures on Foreign Investment in Commercial Areas;
• Administrative Measures on Ratification of Foreign Invested Projects;
• Administrative Measures on Foreign Investment in Distribution Enterprises of Books, Newspapers, and Periodicals;
• Provision on the Establishment of Investment Companies by Foreign Investors; and
• Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors.

The State Council has yet to provide a timeframe for new implementation guidelines for the Foreign Investment Law that will replace the implementation guidelines under the previous foreign investment system.  While the FIL reiterates existing Chinese commitments in regards to certain elements of the business environment, including IP protection for foreign-invested enterprises, details on implementation and the enforcement mechanisms available to foreign investors have yet to be provided.

In addition to central-level laws and implementation guidelines, local regulators and governments also enact their own regulations, rules, and guidelines that directly impact foreign investment in their geographical area.  Examples include the Wuhan Administration Regulation on Foreign-Invested Enterprises and Shanghai’s Municipal Administration Measures on Land Usage of Foreign-Invested Enterprises.

A Chinese language list of Chinese laws and regulations, at both the central and local levels: http://www.gov.cn/zhengce/  .

FDI Laws on Investment Approvals

Foreign investments in industries and economic sectors that are not explicitly restricted or prohibited on the foreign investment negative list are not subject to MOFCOM pre-approval, but notification is required on proposed foreign investments.  In practice, investing in an industry not on the negative list does not guarantee a foreign investor national treatment in establishing an foreign investment as investors must comply with other steps and approvals like receiving land rights, business licenses, and other necessary permits.  In some industries, such as telecommunications, foreign investors will also need to receive approval from regulators or relevant ministries like the Ministry of Industry and Information Technology (MIIT).

The Market Access Negative List issued December 2018 incorporated the previously issued State Council catalogue for investment projects called the Decision on Investment Regime Reform and the Catalogue of Investment Projects subject to Government Ratification (Ratification Catalogue).  Both foreign enterprises and domestic firms are subject to this negative list and both are required to receive government ratification of investment projects listed in the catalogue.  The Ratification Catalogue was first issued in 2004 and has since undergone various reiterations that have shortened the number of investment projects needed for ratification and removed previous requirements that made foreign investors file for record all investment activities.  The most recent version was last issued in 2016. Projects still needing ratification by NDRC and/or local DRCs include investments surpassing a specific dollar threshold, in industries experiencing overcapacity issues, or in industries that promote outdated technologies that may cause environmental hazards.  For foreign investments over USD300 million, NDRC must ratify the investment. For industries in specific sectors, the local Development and Reform Commission (DRC) is in charge of the ratification.

Ratification Catalogue: http://www.gov.cn/zhengce/content/2016-12/20/content_5150587.htm  

When a foreign investment needs ratification from the NDRC or a local DRC, that administrative body is in charge of assessing the project’s compliance with China’s laws and regulations; the proposed investment’s compliance with the foreign investment and market access negative lists and various industrial policy documents; its national security, environmental safety, and public interest implications; its use of resources and energy; and its economic development ramifications.  In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and “consulting agencies,” which may include industry associations that represent Chinese domestic firms. This presents potential conflicts of interest that can disadvantage foreign investors seeking to receive project approval. The State Council may also weigh in on high-value projects in “restricted” sectors.

If a foreign investor has established an investment not on the foreign investment negative list and has received NDRC approval for the investment project if needed, the investor then can apply for a business license with a new ministry announced in March 2018, the State Administration for Market Regulation (SAMR).  Once a license is obtained, the investor registers with China’s tax and foreign exchange agencies. Greenfield investment projects must also seek approval from China’s Ministry of Ecology and Environment and the Ministry of Natural Resources. In several sectors, subsequent industry regulatory permits are required. The specific approvals process may vary from case to case, depending on the details of a particular investment proposal and local rules and practices.

For investments made via merger or acquisition with a Chinese domestic enterprise, an anti-monopoly review and national security review may be required by SAMR if there are competition concerns about the foreign transaction.  The anti-monopoly review is detailed in a later section of this report, on competition policy.

Article 12 of MOFCOM’s Rules on Mergers and Acquisitions of Domestic Enterprises by Foreign Investment stipulates that parties are required to report a transaction to SAMR if:

• Foreign investors obtain actual control, via merger or acquisition, of a domestic enterprise in a key industry;
• The merger or acquisition affects or may affect “national economic security”; or
• The merger or acquisition would cause the transfer of actual control of a domestic enterprise with a famous trademark or a Chinese time-honored brand.

If SAMR determines the parties did not report a merger or acquisition that affects or could affect national economic security, it may, together with other government agencies, require the parties to terminate the transaction or adopt other measures to eliminate the impact on national economic security.  They may also assess fines.

In February 2011, China released the State Council Notice Regarding the Establishment of a Security Review Mechanism for Foreign Investors Acquiring Domestic Enterprises.  The notice established an interagency Joint Conference, led by NDRC and MOFCOM, with authority to block foreign M&As of domestic firms that it believes may impact national security.  The Joint Conference is instructed to consider not just national security, but also “national economic security” and “social order” when reviewing transactions. China has not disclosed any instances in which it invoked this formal review mechanism.  A national security review process for foreign investments was written into China’s new Foreign Investment Law, but with very few details on how the process would be implemented.

Chinese local commerce departments are responsible for flagging transactions that require a national security review when they review them in an early stage of China’s foreign investment approval process.  Some provincial and municipal departments of commerce have published online a Security Review Industry Table listing non-defense industries where transactions may trigger a national security review, but MOFCOM has declined to confirm whether these lists reflect official policy.  In addition, third parties such as other governmental agencies, industry associations, and companies in the same industry can seek MOFCOM’s review of transactions, which can pose conflicts of interest that disadvantage foreign investors.  Investors may also voluntarily file for a national security review.

U.S.  Chamber of Commerce report on Approval Process for Inbound Foreign Direct Investment: http://www.uschamber.com/sites/default/files/reports/020021_China_InvestmentPaper_hires.pdf .

Foreign Investment Law

On March 15, 2019 the National People’s Congress passed the Foreign Investment Law (FIL) that replaced all existing foreign investment laws, including the China-Foreign Joint Venture Law, the Contract Joint Venture Law, and the Wholly Foreign-Owned Enterprises Law.  The FIL is significantly shorter than the 2015 draft version issued for public comment and the text is vague and provides loopholes through which regulators could potentially discriminate against foreign investors. While the law made policy declarations on important issues to U.S. and other foreign investors (e.g.,  equal protection of intellectual property, prohibitions again certain kinds of forced technology transer, and greater market access,), specifics on implementation and enforcement were lacking.  The law goes into effect on January 1, 2020. Many high-level Chinese officials have stated that the implementation guidelines and other corresponding legal changes will be developed prior to the law going into effect.  The content of these guidelines and future corresponding changes to other laws to become consistent with the FIL will largely determine the impact it will have on the investment climate.

Free Trade Zone Foreign Investment Laws

China issued in 2015 the Interim Measures on the National Security Review of Foreign Investment in Free Trade Zones.  The definition of “national security” is broad, covering investments in military, national defense, agriculture, energy, infrastructure, transportation, culture, information technology products and services, key technology, and manufacturing.

In addition, MOFCOM issued the Administrative Measures for the Record-Filing of Foreign Investment in Free Trade Zones, outlining a more streamlined process that foreign investors need to follow to register investments in the FTZs.

Competition and Anti-Trust Laws

China uses a complex system of laws, regulations, and agency specific guidelines at both the central and provincial levels that impacts an economic sector’s makeup, sometimes as a monopoly, near-monopoly, or authorized oligopoly.  These measures are particularly common in resource-intensive sectors such as electricity and transportation, as well as in industries seeking unified national coverage like telecommunication and postal services. The measures also target sectors the government deems vital to national security and economic stability, including defense, energy, and banking.  Examples of such laws and regulations include the Law on Electricity (1996), Civil Aviation Law (1995), Regulations on Telecommunication (2000), Postal Law (amended in 2009), Railroad Law (1991), and Commercial Bank Law (amended in 2003), among others.

Anti-Monopoly Law

China’s Anti-Monopoly Law (AML) went into effect on August 1, 2008.  The National People Congress in March 2018 announced that AML enforcement authorities previously held by three government ministries would be consolidated into a new ministry called the State Administration for Market Regulation (SAMR).  This new agency would still be responsible for AML enforcement and cover issues like concentrations review (M&As), cartel agreements, abuse of dominant market position, and abuse of administrative powers. To fill in some of the gaps from the original AML and to address new commercial trends in China’s market, SAMR has started the process of issuing draft implementation guidelines to clarify enforcement on issues like merger penalties, implementation of abuse of market dominant position, etc.  By unifying antitrust enforcement under one agency, the Chinese government hopes to consolidate guidelines from the three previous agencies and provide greater clarity for businesses operating in China. Generally, the AML enforcement agencies have sought public comment on proposed measures and guidelines, although comment periods can be less than 30 days.

In addition to the AML, the State Council in June 2016 issued guidelines for the Fair Competition Review Mechanism that targets administrative monopolies created by government agents, primarily at the local level.  The mechanism not only requires government agencies to conduct a fair competition review prior to issuing new laws, regulations, and guidelines, to certify that proposed measures do not inhibit competition, but also requires government agencies to conduct a review of all existing rules, regulations, and guidelines, to eliminate existing laws and regulations that are competition inhibiting.  In October 2017, the State Council, State Council Legislative Affairs Office, Ministry of Finance, and three AML agencies issued implementation rules for the fair competition review system to strengthen review procedures, provide review criteria, enhance coordination among government entities, and improve overall competition-based supervision in new laws and regulations. While local government bodies have reported a completed review of over 100,000 different administrative documents, it is unclear what changes have been made and what impact it has had on actually improving the competitive landscape in China.

While procedural developments such as those outlined above are seen as generally positive, the actual enforcement of competition laws and regulations is uneven.  Inconsistent central and provincial enforcement of antitrust law often exacerbates local protectionism by restricting inter-provincial trade, limiting market access for certain imported products, using measures that raise production costs, and limiting opportunities for foreign investment.  Government authorities at all levels in China may also restrict competition to insulate favored firms from competition through various forms of regulations and industrial policies. While at times the ultimate benefactor of such policies is unclear, foreign companies have expressed concern that the central government’s use of AML enforcement is often selectively used to target foreign companies, becoming an extension of other industrial policies that favor SOEs and Chinese companies deemed potential “national champions.”

Since the AML went into effect, the number of M&A transactions reviewed each year by Chinese officials has continued to grow.  U.S. companies and other observers have expressed concerns that SAMR is required to consult with other Chinese agencies when reviewing a potential transaction and that other agencies can raise concerns that are often not related to competition to either block, delay, or force one or more of the parties to comply with a condition in order to receive approval.  There is also suspicion that Chinese regulators rarely approve “on condition” any transactions involving two Chinese companies, thus signaling an inherent AML bias against foreign enterprises.

Under NDRC’s previous enforcement of price-related monopolies, some procedural progress in AML enforcement was made, as they started to release aggregate data on investigations and publicize case decisions.  However, many U.S. companies complained that NDRC discouraged companies from having legal representation during informal discussions or even during formal investigations. In addition, the investigative process reportedly lacked basic transparency or specific best practice guidance on procedures like evidence gathering.  Observers continue to raise concern over the use of “dawn raids” that can be used at any time as a means of intimidation or to prop up a local Chinese company against a competing foreign company in an effort to push forward specific industrial policy goals. Observers also remain concerned that Chinese officials during an investigation will fail to protect commercial secrets and have access to secret and proprietary information that could be given to Chinese competitors.

In prior bilateral dialogues, China committed to strengthening IP protection and enforcement.  However, concerns remain on how China views the intersection of IP protection and antitrust. Previous AML guidelines issued by antitrust regulators for public comment disproportionately impacted foreign firms (generally IP rights holders) by requiring an IP rights holder to license technology at a “fair price” so as not to allow abuse of the company’s “dominant market position.”  Foreign companies have long complained that China’s enforcement of AML serves industrial policy goals of, among other things, forcing technology transfer to local competitors. In other more developed antitrust jurisdictions, companies are free to exclude competitors and set prices, and the right to do so is recognized as the foundation of the incentive to innovate.

Another consistent area of concern expressed by foreign companies deals with the degree to which the AML applies – or fails to apply – to SOEs and other government monopolies, which are permitted in some industries.  While SAMR has said AML enforcement applies to SOEs the same as domestic or foreign firms, the reality is that only a few minor punitive actions have been taken against provincial level SOEs. In addition, the AML explicitly protects the lawful operations of SOEs and government monopolies in industries deemed nationally important.  While SOEs have not been entirely immune from AML investigations, the number of investigations is not commensurate with the significant role SOEs play in China’s economy. The CCP’s proactive orchestration of mergers and consolidation of SOEs in industries like rail, marine shipping, metals, and other strategic sectors, which in most instances only further insulates SOEs from both private and foreign competition, signaling that enforcement against SOEs will likely remain limited despite potential negative impacts on consumer welfare.

Expropriation and Compensation

Chinese law prohibits nationalization of foreign-invested enterprises, except under “special circumstances.”  Chinese laws, such as the Foreign Investment Law, states there are circumstances for expropriation of foreign assets that may include national security or a public interest needs, such as large civil engineering projects.  However, the law does not specify circumstances that would lead to the nationalization of a foreign investment. Chinese law requires fair compensation for an expropriated foreign investment but does not provide details on the method or formula used to calculate the value of the foreign investment.  The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, although the Department has notified Congress through the annual 527 Investment Dispute Report of several cases of concern.

Dispute Settlement

ICSID Convention and New York Convention

China is a contracting state to the Convention on the Settlement of Investment Disputes (ICSID Convention) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).  The domestic legislation that provides for enforcement of foreign arbitral awards related to these two Conventions includes the Arbitration Law adopted in 1994, the Civil Procedure Law adopted in 1991 (later amended in 2012), the Law on Chinese-Foreign Equity Joint Ventures adopted in 1979 (amended most recently in 2001), and a number of other laws with similar provisions.  China’s Arbitration Law has embraced many of the fundamental principles of The United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration.

Investor-State Dispute Settlement

Chinese officials typically urge private parties to resolve commercial disputes through informal conciliation.  If formal mediation is necessary, Chinese parties and the authorities typically prefer arbitration to litigation.  Many contract disputes require arbitration by the Beijing-based China International Economic and Trade Arbitration Commission (CIETAC).  Established by the State Council in 1956 under the auspices of the China Council for the Promotion of International Trade (CCPIT), CIETAC is China’s most widely-utilized arbitral body in China for foreign-related disputes.  Some foreign parties have obtained favorable rulings from CIETAC, while others have questioned CIETAC’s fairness and effectiveness.

CIETAC also had four sub-commissions located in Shanghai, Shenzhen, Tianjin, and Chongqing.  CCPIT, under the authority of the State Council, issued new arbitration rules in 2012 that granted CIETAC headquarters greater authority to hear cases than the sub-commissions.  As a result, CIETAC Shanghai and CIETAC Shenzhen declared independence from the Beijing authority, issued new rules, and changed their names. This split led to CIETAC disqualifying the former Shanghai and Shenzhen affiliates from administering arbitration disputes, raising serious concerns among the U.S. business and legal communities over the validity of arbitration agreements arrived at under different arbitration procedures and the enforceability of arbitral awards issued by the sub-commissions.  In 2013, the Supreme People’s Court issued a notice clarifying that any lower court that hears a case arising out of the CIETAC split must report the case to the court before making a decision. However, this notice is brief and lacks detail like the timeframe for the lower court to refer and the timeframe for the Supreme People’s Court to issue an opinion.

Beside the central-level arbitration commission, there are also provincial and municipal arbitration commissions that have emerged as serious domestic competitors to CIETAC.  A foreign party may also seek arbitration in some instances from an offshore commission. Foreign companies often encounter challenges in enforcing arbitration decisions issued by Chinese and foreign arbitration bodies.  In these instances, foreign investors may appeal to higher courts.

The Chinese government and judicial bodies do not maintain a public record of investment disputes.  The Supreme People’s Court maintains an annual count of the number of cases involving foreigners but does not provide details about the cases, identify civil or commercial disputes, or note foreign investment disputes.  Rulings in some cases are open to the public.

International Commercial Arbitration and Foreign Courts

Articles 281 and 282 of China’s Civil Procedural Law governs the enforcement of judgments issued by foreign courts.  The law states that Chinese courts should consider factors like China’s treaty obligations, reciprocity principles, basic Chinese law, Chinese sovereignty, Chinese social and public interests, and national security before determining if the foreign court judgment should be recognized.  As a result of this broad criteria, there are few examples of Chinese courts recognizing and enforcing a foreign court judgment. China has bilateral agreements with 27 countries on the recognition and enforcement of foreign court judgments, but not with the United States.

Article 270 of China’s Civil Procedure Law also states that time limits in civil cases do not apply to cases involving foreign investment.  According to the 2012 CIETAC Arbitration Rules, in an ordinary procedure case, the arbitral tribunal shall render an arbitral award within six months (in foreign-related cases) from the date on which the arbitral tribunal is formed.  In a summary procedure case, the arbitral tribunal shall make an award within three months from the date on which the arbitral tribunal is formed.

Bankruptcy Regulations

China’s Enterprise Bankruptcy Law took effect on June 1, 2007 and applies to all companies incorporated under Chinese laws and subject to Chinese regulations.  This includes private companies, public companies, SOEs, foreign invested enterprises (FIEs), and financial institutions.  China’s primary bankruptcy legislation generally is commensurate with developed countries’ bankruptcy laws and provides for reorganization or restructuring, rather than liquidation.  However, due to the lack of implementation guidelines and the limited number of previous cases that could provide legal precedent, the law has never been fully enforced.  Most corporate debt disputes are settled through negotiations led by local governments.  In addition, companies are disincentivized from pursing bankruptcy because of the potential for local government interference and fear of losing control over the bankruptcy outcome.  According to experts, Chinese courts not only lack the resources and capacity to handle bankruptcy cases, but bankruptcy administrators, clerks, and judges all lack relevant experience.

In the October 2016 State Council Guiding Opinion on Reducing Enterprises’ Leverage Ratio, bankruptcy was identified as a tool to manage China’s corporate debt problems.  This was consistent with increased government rhetoric throughout the year in support of bankruptcy.  For example, in June 2016, the Supreme People’s Court issued a notice to establish bankruptcy divisions at intermediate courts and to increase the number of judges and support staff to handle liquidation and bankruptcy issues.  On August 1, 2016, the court also launched a new bankruptcy and reorganization electronic information platform: http://pccz.court.gov.cn/pcajxxw/index/xxwsy  .

The number of bankruptcy cases has continued to grow rapidly since 2015.  According to a National People’s Congress (NPC) official, in 2018, 18,823 liquidation and bankruptcy cases were accepted by Chinese courts, an increase of over 95 percent from last year.  11,669 of those cases were closed, an increase of 86.5 percent from the year before.  The Supreme People’s Court (SPC) reported that in 2017, 9,542 bankruptcy cases were accepted by the Chinese courts, representing a 68.4 percent year-on-year increase from 2016, and 6,257 cases were closed, representing a 73.7 percent year-on-year increase from 2016. The SPC has continued to issue clarifications and new implementing measures to improve bankruptcy procedures.

Investment Incentives

To attract foreign investment, different provinces and municipalities offer preferential packages like a temporary reduction in taxes, resources and land use benefits, reduction in import and/or export duties, special treatment in obtaining basic infrastructure services, streamlined government approvals, research and development subsidies, and funding for initial startups.  Often, these packages stipulate that foreign investors must meet certain benchmarks for exports, local content, technology transfer, and other requirements.  Preferential treatment often occurs in specific sectors that the government has identified for policy support, like technology and advanced manufacturing, and will be specific to a geographic location like a special economic zone (like FTZs), development zone, or a science park.  The Chinese government has also prioritized foreign investment in inland China by providing incentives to invest in seven new FTZs located in inland regions (2017) and offering more liberalizations to foreign investment through its Catalogue of Priority Industries for Foreign Investment in Central and Western China that provides greater market access to foreign investors willing to invest in less developed areas in Central and Western China.

While state subsidies has long been an area that foreign investors have criticized for distorting competition in certain industries, Chinese officials have publicly pledged that foreign investors willing to manufacture products in China can equally participate in the research and development programs financed by the Chinese government.  The Chinese government has also said foreign investors have equal access to preferential policies under initiatives like Made in China 2025 and Strategic Emerging Industries that seek to transform China’s economy into an innovation-based economy that becomes a global leader in future growth sectors.  In these high-tech and advanced manufacturing sectors, China needs foreign investment because it lacks the capacity, expertise, and technological know-how to conduct advanced research or manufacture advanced technology on par with other developed economies.  Announced in 2015, China’s MIC 2025 roadmap has prioritized the following industries: new-generation information technology, advanced numerical-control machine tools and robotics, aerospace equipment, maritime engineering equipment and vessels, advanced rail, new-energy vehicles, energy equipment, agricultural equipment, new materials, and biopharmaceuticals and medical equipment.  While mentions of MIC 2025 have all but disappeared from public discourse, a raft of policy announcements at the national and sub-national level indicate China’s continued commitment to developing these sectors.  Foreign investment plays an important role in helping China move up the manufacturing value chain.  However, there are a large number of economic sectors that China deems sensitive due to broadly defined national security concerns, including “economic security,” which can effectively close off foreign investment to those sectors.

Foreign Trade Zones/Free Ports/Trade Facilitation

China has customs-bonded areas in Shanghai, Tianjin, Shantou, Guangzhou, Dalian, Xiamen, Ningbo, Zhuhai, Fuzhou, and parts of Shenzhen.  In addition to these official duty-free zones identified by China’s State Council, there are also numerous economic development zones and “open cities” that offer preferential treatment and benefits to investors, including foreign investors.

In September 2013, the State Council in conjunction with the Shanghai municipal government, announced the Shanghai Pilot Free Trade Zone that consolidated the geographical area of four previous bonded areas into a single FTZ.  In April 2015, the State Council expanded the pilot to include new FTZs in Tianjin, Guangdong, and Fujian. In March 2017, the State Council approved seven new FTZs in Chongqing, Henan, Hubei, Liaoning, Shaanxi, Sichuan, and Zhejiang, with the stated purpose to integrate these areas more closely with the OBOR initiative – the Chinese government’s plan to enhance global economic interconnectivity through joint infrastructure and investment projects that connect China’s inland and border regions to the rest of the world.  In October 2018, the Chinese government rolled out plans to convert the entire island province of Hainan into an FTZ that will take effect in 2020. This FTZ aims to provide a more open and high-standard trade and investment hub focused on improved rule of law and financial services. In addition to encourage tourism development, the Hainan FTZ will also seek to develop high-tech industries while preserving the ecology of the island. The goal of all China’s FTZs is to provide a trial ground for trade and investment liberalization measures and to introduce service sector reforms, especially in financial services, that China expects eventually to introduce in other parts of the domestic economy.

The FTZs should offer foreign investors “national treatment” for the market access phase of an investment in industries and sectors not listed on the FTZ “negative list,” or on the list of industries and economic sectors restricted or prohibited for foreign investment.  The State Council published an updated FTZ negative list in June 2018 that reduced the number of restrictions and prohibitions on foreign investment from 95 items down to 45. The most recent negative list did not remove many commercially significant restrictions or prohibitions compared to the nationwide negative list also released in June 2018.

Although the FTZ negative list in theory provides greater market access for foreign investment in the FTZs, many foreign firms have reported that in practice, the degree of liberalization in the FTZs is comparable to other opportunities in other parts of China.  According to Chinese officials, over 18,000 entities have registered in the FTZs. The municipal and central governments have released a number of administrative and sector-specific regulations and circulars that outline the procedures and regulations in the zones.

Performance and Data Localization Requirements

As part of China’s WTO accession agreement, China promised to revise its foreign investment laws to eliminate sections that imposed export performance, local content, balanced foreign exchange through trade, technology transfer, and create research and development center requirements on foreign investors as a prerequisite to enter China’s market.  As part of these revisions, China committed to only enforce technology transfer requirements that do not violate WTO standards on IP and trade-related investment measures. In practice, however, China has not completely lived up to these promises with some U.S. businesses reporting that local officials and regulators sometimes only accept investments with “voluntary” performance requirements or technology transfer that helps develop certain domestic industries and support the local job market.  Provincial and municipal governments will sometimes restrict access to local markets, government procurement, and public works projects even for foreign firms that have already invested in the province or municipality. In addition, Chinese regulators have reportedly pressured foreign firms in some sectors to disclose IP content or provide IP licenses to Chinese firms, often at below market rates. These practices not only run contrary to WTO principles but hurt the competitive position of foreign investors.

China also called to restrict the ability of both domestic and foreign operators of “critical information infrastructure” to transfer personal data and important information outside of China while also requiring those same operators to only store data physically in China.  These potential restrictions have prompted many firms to review how their networks manage data. Foreign firms also fear that calls for use of “secure and controllable,” “secure and trustworthy,” etc. technologies will curtail sales opportunities for foreign firms or that foreign companies may be pressured to disclose source code and other proprietary information, putting IP at risk.  In addition, prescriptive technology adoption requirements, often in the form of domestic standards that diverge from global norms, in effect gives preference to domestic firms and their technology. These requirements not only hinder operational effectiveness but also potentially puts in jeopardy IP protection and overall competitiveness of foreign firms operating in China.

Real Property

Foreign companies have long complained that the Chinese legal system, responsible for mediating acquisition and disposition of property, has inconsistently protected the legal real property rights of foreigners.

Urban land is entirely owned by the State.  The State can issue long-term land leases to individuals and companies, including foreigners, subject to many restrictions.  China’s Property Law stipulates that residential property rights will renew automatically, while commercial and industrial grants shall be renewed if the renewal does not conflict with other public interest claims.  A number of foreign investors have reported that their land use rights were revoked and given to developers to build neighborhoods designated for building projects by government officials. Investors often complain that compensation in these cases has been nominal.

In rural China, collectively-owned land use rights are more complicated.  The registration system chronically suffers from unclear ownership lines and disputed border claims, often at the expense of local farmers who are excluded from the process by village leaders making “handshake deals” with commercial interests.  The central government announced in 2016, and reiterated in 2017 and 2018, plans to reform the rural land registration system so as to put more control in the hands of farmers, but some experts remain skeptical that changes will be properly implemented and enforced.

China’s Securities Law defines debtor and guarantor rights, including rights to mortgage certain types of property and other tangible assets, including long-term leases.  Chinese law does not prohibit foreigners from buying non-performing debt, which can only be acquired through state-owned asset management firms. However, in practice, Chinese official often use bureaucratic hurdles that limit foreigners’ ability to liquidate assets, further discouraging foreign purchase of non-performing debt.

Intellectual Property Rights

Following WTO accession, China updated many laws and regulations to comply with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and other international agreements.  However, despite the changes to China’s legal and regulatory regime, some aspects of China’s IP protection regime fall short of international best practices.  In addition, enforcement ineffectiveness of Chinese laws and regulations remains a significant challenge for foreign investors trying to protect their IPR.

Major impediments to effective IP enforcement include the unavailability of deterrent-level penalties for infringement, a lack of transparency, unclear standards for establishing criminal investigations, the absence of evidence production methods to compel evidence from infringers, and local protectionism, among others.  Chinese government officials tout the success of China’s specialized IP courts – including the establishment of a new appellate tribunal within the SPC – as evidence of its commitment to IP protection; however, while this shows a growing awareness of IPR in China’s legal system, civil litigation against IP infringement will remain an option with limited effect until there is an increase in the amount of damages an infringer pays for IP violations.

Chinese-based companies remain the largest IP infringers of U.S. products.  Goods shipped from China (including those transshipped through Hong Kong) accounted for an estimated 87 percent of IPR-infringing goods seized at U.S. borders.  (Note: This U.S.  Customs statistic does not specify where the fake goods were made.)  China imposes requirements that U.S. firms develop their IP in China or transfer their IP to Chinese entities as a condition to accessing the Chinese market, or to obtain tax and other preferential benefits available to domestic companies.  Chinese policies can effectively require U.S. firms to localize research and development activities, practices documented in the March 2018 Section 301 Report released by the Office of the U.S. Trade Representative (USTR).  China remained on the Priority Watch List in the 2019 USTR Special 301 Report, and several Chinese physical and online markets were included in the 2018 USTR Notorious Markets Report.  For detailed information on China’s environment for IPR protection and enforcement, please see the following reports:

• USTR Section 301 Report on China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation: https://ustr.gov/sites/default/files/Section percent20301 percent20FINAL.PDF 
• USTR Update Concerning China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation: https://ustr.gov/sites/default/files/enforcement/301Investigations/301 percent20Report percent20Update.pdf  
• USTR 2019 Special 301 Report (see section on China): https://ustr.gov/about-us/policy-offices/press-office/reports-and-publications/2019/2019-special-301-report  
• USTR’s 2018 National Trade Estimate Report on Foreign Trade Barriers in China (see section on China): https://ustr.gov/sites/default/files/files/Press/Reports/2018 percent20National percent20Trade percent20Estimate percent20Report.pdf 
• USTR’s 2018 Report to Congress on China’s WTO Compliance: https://ustr.gov/sites/default/files/2018-USTR-Report-to-Congress-on-China percent27s-WTO-Compliance.pdf 
• USTR’s 2018 Notorious Market Report (see China): https://ustr.gov/sites/default/files/2018_Notorious_Markets_List.pdf 

For additional information about national laws and points of contact at local intellectual property offices, please see the World Intellectual Property Organization’s country profiles at http://www.wipo.int/directory/en  

Capital Markets and Portfolio Investment

China’s leadership has stated that it seeks to build a modern, highly developed, and multi-tiered capital market.  Bank loans continue to provide the majority of credit options (reportedly around 81.4 percent in 2018) for Chinese companies, although other sources of capital, such as corporate bonds, equity financing, and private equity are quickly expanding their scope, reach, and sophistication in China.  In the past three years, Chinese regulators have taken measures to rein in the rapid growth of China’s “shadow banking” sector, which includes vehicles such as wealth management and trust products.  The measures have achieved positive results. The share of trust loans, entrust loans and undiscounted bankers’ acceptances dropped a total of 15.2 percent in total social financing (TSF) – a broad measure of available credit in China, most of which was comprised of corporate bonds. TSF’s share of corporate bonds jumped from a negative 2.31 percent in 2017 to 12.9 percent in 2018. Chinese regulators regularly use administrative methods to control credit growth, although market-based tools such as interest rate policy and adjusting the reserve requirement ratio (RRR) play an increasingly important role.

The People’s Bank of China (PBOC), China’s central bank, has gradually increased flexibility for banks in setting interest rates, formally removing the floor on the lending rate in 2013 and the deposit rate cap in 2015 – but is understood to still influence bank’s interest rates through “window guidance.”  Favored borrowers, particularly SOEs, benefit from greater access to capital and lower financing costs, as they can use political influence to secure bank loans, and lenders perceive these entities to have an implicit government guarantee.  Small- and medium-sized enterprises, by contrast, have the most difficulty obtaining financing, often forced to rely on retained earnings or informal investment channels.

In 2018, Chinese regulators have taken measures to improve financing for the private sector, particularly small, medium and micro-sized enterprises (SMEs).  On November 1, 2018, Xi Jinping held an unprecedented meeting with private companies on how to support the development of private enterprises. Xi emphasized to the importance of resolving difficult and expensive financing problems for private firms and pledged to create a fair and competitive business environment.  He encouraged banks to lend more to private firms, as well as urged local governments to provide more financial support for credit-worthy private companies. Provincial and municipal governments could raise funds to bailout private enterprises if needed. The PBOC increased the relending and rediscount quota of RMB 300 billion for SMEs and private enterprises at the end of 2018.  The government also introduced bond financing supportive instruments for private enterprises, and the PBOC began promoting qualified PE funds, securities firms, and financial asset management companies to provide financing for private companies. The China Banking and Insurance Regulatory Commission’s (CBIRC) Chairman said in an interview that one-third of new corporate loans issued by big banks and two-thirds of new corporate loans issued by small and medium-sized banks should be granted to private enterprises, and that 50 percent of new corporate loans shall be issued to private enterprises in the next three years.  At the end of 2018, loans issued to SMEs accounted for 24.6 percent of total RMB loan issuance. The share dropped 1 percent from 25.6 percent in 2017. Interest rates on loans issued by the six big state-owned banks – Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC), Agriculture Bank of China (ABC), Bank of Communications and China Postal Savings Bank – to SMEs averaged 4.8 percent, in the fourth quarter of 2018, down from 6 percent in the first quarter of 2018.

Direct financing has expanded over the last few years, including through public listings on stock exchanges, both inside and outside of China, and issuing more corporate and local government bonds.  The majority of foreign portfolio investment in Chinese companies occurs on foreign exchanges, primarily in the United States and Hong Kong.  In addition, China has significantly expanded quotas for certain foreign institutional investors to invest in domestic stock markets; opened up direct access for foreign investors into China’s interbank bond market; and approved a two-way, cross-border equity direct investment scheme between Shanghai and Hong Kong and Shenzhen and Hong Kong that allows Chinese investors to trade designated Hong Kong-listed stocks through the Shanghai and Shenzhen Exchanges, and vice versa.  Direct investment by private equity and venture capital firms is also rising, although from a small base, and has faced setbacks due to China’s capital controls that complicate the repatriation of returns

Money and Banking System

After several years of rapid credit growth, China’s banking sector faces asset quality concerns.  For 2018, the China Banking Regulatory Commission reported a non-performing loans (NPL) ratio of 1.83 percent, higher than the 1.74 percent of NPL ratio reported the last quarter of 2017.  The outstanding balance of commercial bank NPLs in 2018 reached 2.03 trillion RMB (approximately USD295.1 billion).  China’s total banking assets surpassed 268 trillion RMB (approximately USD39.1 trillion) in December 2018, a 6.27 percent year-on-year increase.  Experts estimate Chinese banking assets account for over 20 percent of global banking assets.  In 2018, China’s credit and broad money supply slowed to 8.1 percent growth, the lowest published rate since the PBOC first started publishing M2 money supply data in 1986.

Foreign Exchange and Remittances

Foreign Exchange Policies

While the central bank’s official position is that companies with proper documentation should be able to freely conduct business, in practice, companies have reported challenges and delays in getting foreign currency transactions approved by sub-national regulatory branches.  In 2017, several foreign companies complained about administrative delays in remitting large sums of money from China, even after completing all of the documentation requirements.  Such incidents come amid announcements that the State Administration of Foreign Exchange (SAFE) had issued guidance to tighten scrutiny of foreign currency outflows due to China’s rapidly decreasing foreign currency exchange.  China has since announced that it will gradually reduce those controls, but market analysts expect they would be re-imposed if capital outflows accelerate again.

Under Chinese law, FIEs do not need pre-approval to open foreign exchange accounts and are allowed to retain income as foreign exchange or to convert it into RMB without quota requirements.  Foreign exchange transactions related to China’s capital account activities do not require review by SAFE, but designated foreign exchange banks review and directly conduct foreign exchange settlements.  Chinese officials register all commercial foreign debt and will limit foreign firms’ accumulated medium- and long-term debt from abroad to the difference between total investment and registered capital.  China issued guidelines in February 2015 that allow, on a pilot basis, a more flexible approach to foreign debt within several specific geographic areas, including the Shanghai Pilot FTZ.  The main change under this new approach is to allow FIEs to expand their foreign debt above the difference between total investment and registered capital, so long as they have sufficient net assets.

Chinese foreign exchange rules cap the maximum amount of RMB individuals are allowed to convert into other currencies at approximately USD50,000 each year and restrict them from directly transferring RMB abroad without prior approval from SAFE.  In 2017, authorities further restricted overseas currency withdrawals by banning sales of life insurance products and capping credit card withdrawals at USD5,000 per transaction.  SAFE has not reduced this quota, but during periods of higher than normal capital outflows, banks are reportedly instructed by SAFE to increase scrutiny over individuals’ requests for foreign currency and to require additional paperwork clarifying the intended use of the funds, with the express intent of slowing capital outflows.

China’s exchange rate regime is managed within a band that allows the currency to rise or fall by 2 percent per day from the “reference rate” set each morning.  In August 2015, China announced that the reference rate would more closely reflect the previous day’s closing spot rate.  Since that change, daily volatility of the RMB has at times been higher than in recent years, but for the most part, remains below what is typical for other currencies.  In 2017, the PBOC took additional measures to reduce volatility, introducing a “countercyclical factor” into its daily RMB exchange rate calculation.  Although the PBOC reportedly suspended the countercyclical factor in January 2018, the tool remains available to policymakers if volatility re-emerges.

Remittance Policies

The remittance of profits and dividends by FIEs is not subject to time limitations, but FIEs need to submit a series of documents to designated banks for review and approval.  The review period is not fixed, and is frequently completed within one or two working days of the submission of complete documents.  In the past year, this period has lengthened during periods of higher than normal capital outflows, when the government strengthens capital controls.

Remittance policies have not changed substantially since SAFE simplified some regulations in January 2014, devolving many review and approval procedures to banks.  Firms that remit profits at or below USD50,000 dollars can do so without submitting documents to the banks for review.

For remittances above USD50,000, the firm must submit tax documents, as well as the formal decision by its management to distribute profits.

For remittance of interest and principle on private foreign debt, firms must submit an application form, a foreign debt agreement, and the notice on repayment of the principle and interest.  Banks will then check if the repayment volume is within the repayable principle.

The remittance of financial lease payments falls under foreign debt management rules.  There are no specific rules on the remittance of royalties and management fees.  In August 2018, SAFE raised the reserve requirement for foreign currency transactions from zero to 20 percent, significantly increasing the cost of foreign currency transactions.  The reserve ratio was introduced in October 2015 at 20 percent, which was lowered to zero in September 2017.

The Financial Action Task Force has identified China as a country of primary concern.  Global Financial Integrity (GFI) estimates that over S1 trillion of illicit money left China between 2003 and 2012, making China the world leader in illicit capital flows.  In 2013, GFI estimated that another USD260 billion left the country.

Sovereign Wealth Funds

China officially has only one sovereign wealth fund (SWF), the China Investment Corporation (CIC).  Established in 2007, CIC manages over USD941.4 billion in assets (as of 2017) and invests on a 10-year time horizon.  China’s sovereign wealth is also invested by a subsidiary of SAFE, the government agency that manages China’s foreign currency reserves, and reports directly to the PBOC.  The SAFE Administrator also serves concurrently as a PBOC Deputy Governor.

CIC publishes an annual report containing information on its structure, investments, and returns.  CIC invests in diverse sectors like financial, consumer products, information technology, high-end manufacturing, healthcare, energy, telecommunication services, and utilities.

China also operates other funds that function in part like sovereign wealth funds, including: China’s National Social Security Fund, with an estimate USD341.4 billion in assets; the China-Africa Development Fund (solely funded by the China Development Bank), with an estimated USD5 billion; the SAFE Investment Company, with an estimated USD439.8 billion; and China’s state-owned Silk Road Fund, established in December 2014 with USD40 billion to foster investment in OBOR partner countries.  Chinese SWFs do not report the percentage of their assets that are invested domestically.

Chinese SWFs follow the voluntary code of good practices known as the Santiago Principles and participate in the IMF-hosted International Working Group on SWFs.  The Chinese government does not have any formal policies specifying that CIC invest funds consistent with industrial policies or in government-designated projects, although CIC is expected to pursue government objectives.  The SWF generally adopts a “passive” role as a portfolio investor.

China has approximately 150,000 SOEs which are wholly owned by the state.  Around 50,000 (33 percent) are owned by the central government and the remainder by local governments.  The central government directly controls and manages 96 strategic SOEs through the State-owned Assets Supervision and Administration Commission (SASAC), of which around 60 are listed on stock exchanges domestically and/or internationally.  SOEs, both central and local, account for 30 to 40 percent of total GDP and about 20 percent of China’s total employment.  SOEs can be found in all sectors of the economy, from tourism to heavy industries.

SASAC regulated SOEs: http://www.sasac.gov.cn/n2588035/n2641579/n2641645/c4451749/content.html  .

China’s leading SOEs benefit from preferential government policies aimed at developing bigger and stronger “national champions.”  SOEs enjoy favored access to essential economic inputs (land, hydrocarbons, finance, telecoms, and electricity) and exercise considerable power in markets like steel and minerals.  SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt.

During the November 2013 Third Plenum of the 18th Party Congress – a hallmark session that announced economic reforms, including calling for the market to play a more decisive role in the allocation of resources – President Xi Jinping called for broad SOE reforms.  Cautioning that SOEs still will remain a key part of China’s economic system, Xi emphasized improved SOE operational transparency and legal reforms that would subject SOEs to greater competition by opening up more industry sectors to domestic and foreign competitors and by reducing provincial and central government preferential treatment of SOEs.  The Third Plenum also called for “mixed ownership” economic structures, providing greater economic balance between private and state-owned businesses in certain industries, including equal access to factors of production, competition on a level playing field, and equal legal protection.

At the 2018 Central Economic Work Conference, Chinese leaders said in 2019 they will promote a greater role for the market, as well as renewed efforts on reforming SOEs – to include mixed ownership reform.  In delivering the 2019 Government Work Report, Premier Li Keqiang pledged to improve corporate governance, including allowing SOE company boards, rather than SASAC, to appoint senior leadership. 

OECD Guidelines on Corporate Governance

SASAC participates in the OECD Working Party on State Ownership and Privatization Practices (WPSOPP).  Chinese officials have indicated China intends to utilize OECD SOE guidelines to improve the professionalism and independence of SOEs, including relying on Boards of Directors that are independent from political influence.  However, despite China’s Third Plenum commitments in 2013 (i.e., to foster “market-oriented” reforms in China’s state sectors), Chinese officials and SASAC have made minimal progress in fundamentally changing the regulation and business conduct of SOEs.  China has also committed to implement the G-20/OECD Principles of Corporate Governance, which apply to all publicly-listed companies, including listed SOEs.

Chinese law lacks unified guidelines or a governance code for SOEs, especially among provincial or locally-controlled SOEs.  Among central SOEs managed by SASAC, senior management positions are mainly filled by senior CCP members who report directly to the CCP, and double as the company’s Party secretary

The lack of management independence and the controlling ownership interest of the State make SOEs de facto arms of the government, subject to government direction and interference.  SOEs are rarely the defendant in legal disputes, and when they are, they almost always prevail, presumably due to the close relationship with the CCP.  U.S. companies often complain about the lack of transparency and objectivity in commercial disputes with SOEs.  In addition, SOEs enjoy preferential access to a disproportionate share of available capital, whether in the form of loans or equity.

In its September 2015 Guiding Opinions on Deepening the Reform of State-Owned Enterprises, the State Council instituted a system for classifying SOEs as “public service” or “commercial enterprises.”  Some commercial enterprise SOEs were further sub-classified into “strategic” or “critically important” sectors (i.e., with strong national economic or security importance).  SASAC has said the new classification system would allow the government to reduce support for commercial enterprises competing with private firms and instead channel resources toward public service SOEs.

Other recent reforms have included salary caps, limits on employee benefits, and attempts to create stock incentive programs for managers that have produced mixed results.  However, analysts believe minor reforms will be ineffective as long as SOE administration and government policy are intertwined.

A major stumbling block to SOE reform is that SOE regulators are outranked in the CCP party structure by SOE executives, which minimizes SASAC and other government regulators’ effectiveness at implementing reforms.  In addition, SOE executives are often promoted to high-ranking positions in the CCP or local government, further complicating the work of regulators.

During the Third Plenum of the CCP’s 18th Central Committee, in 2013, the CCP leadership announced that the market would play a “decisive role” in economic decision making and emphasized that SOEs needed to focus resources in areas that “serve state strategic objectives.”  However, experts point out that despite these new SOE distinctions, SOEs continue to hold dominant shares in their respective industries, regardless of whether they are strategic, which may further restrain private investment in the economy.  Moreover, the application of China’s Anti-Monopoly Law, together with other industrial policies and practices that are selectively enforced by the authorities, protects SOEs from private sector competition.

China is not a party to the Government Procurement Agreement (GPA) within the framework of the WTO, although Hong Kong is listed.  During China’s WTO accession negotiations, Beijing signaled its intention to join GPA.  And, in April 2018, President Xi announced his intent to join GPA, but no timeline has been given for accession.

Investment Restrictions in “Vital Industries and Key Fields”

The intended purpose of China’s State Assets Law is to safeguard and protect China’s economic system, promoting “socialist market economy” principles that fortify and develop a strong, state-owned economy.  A key component of the State Assets Law is enabling SOEs to play the leading role in China’s economic development, especially in “vital industries and key fields.”  To accomplish this, the law encourages Chinese regulators to adopt policies that consolidate SOE concentrations to ensure dominance in industries deemed vital to “national security” and “national economic security.” This principle is further reinforced by the December 2006 State Council announcement of the Guiding Opinions Concerning the Advancement of Adjustments of State Capital and the Restructuring of State-Owned Enterprises, which called for more SOE consolidation to advance the development of the state-owned economy, including enhancing and expanding the role of the State in controlling and influencing “vital industries and key fields relating to national security and national economic lifelines.”  These guidelines defined “vital industries and key fields” as “industries concerning national security, major infrastructure and important mineral resources, industries that provide essential public goods and services, and key enterprises in pillar industries and high-tech industries.”

Around the time the guidelines were published, the SASAC Chairman also listed industries where the State should maintain “absolute control” (e.g., aviation, coal, defense, electric power and the state grid, oil and petrochemicals, shipping, and telecommunications) and “relative control” (e.g., automotive, chemical, construction, exploration and design, electronic information, equipment manufacturing, iron and steel, nonferrous metal, and science and technology).  China has said these lists do not reflect its official policy on SOEs.  In fact, in some cases, regulators have allowed for more than 50 percent private ownership in some of the listed industries on a case-by-case basis, especially in industries where Chinese firms lack expertise and capabilities in a given technology Chinese officials deemed important at the time.

Parts of the agricultural sector have traditionally been dominated by SOEs.  Current agriculture trade rules, regulations, and limitations placed on foreign investment severely restrict the contributions of U.S. agricultural companies, depriving China’s consumers of the many potential benefits additional foreign investment could provide.  These investment restrictions in the agricultural sectors are at odds with China’s objective of shifting more resources to agriculture and food production in order to improve Chinese lives, food security, and food safety.

Privatization Program

At the November 2013 Third Plenum, the Chinese government announced reforms to SOEs that included selling shares of SOEs to outside investors.  This approach is an effort to improve SOE management structures, emphasize the use of financial benchmarks, and gradually take steps that will bring private capital into some sectors traditionally monopolized by SOEs like energy, telecommunications, and finance.  In practice, these reforms have been gradual, as the Chinese government has struggled to implement its SOE reform vision and often opted to utilize a preferred SOE consolidation approach. In the past few years, the Chinese government has listed several large SOEs and their assets on the Hong Kong stock exchange, subjecting SOEs to greater transparency requirements and heightened regulatory scrutiny.  This approach is a possible mechanism to improve SOE corporate governance and transparency. Starting in 2017, the government began pushing the mixed ownership model, in which private companies invest in SOEs and outside managers are hired, as a possible solution, although analysts note that ultimately the government (and therefore the CCP) remains in full control regardless of the private share percentage.  Over the last year, President Xi and other senior leaders have increasingly focused reform efforts on strengthening the role of the State as an investor or owner of capital, instead of the old SOE model in which the state was more directly involved in managing operations.

General awareness of Responsible Business Conduct (RBC) standards (including environmental, social, and governance issues) is a relatively new concept to most Chinese companies, especially companies that exclusively operate in China’s domestic market.  Chinese laws that regulate business conduct use voluntary compliance, are often limited in scope and are frequently cast aside when RBC priorities are superseded by other economic priorities. In addition, China lacks mature and independent NGOs, investment funds, worker unions, worker organizations, and other business associations that promote RBC, further contributing to the general lack of awareness in Chinese business practices.

The Foreign NGO Law remains a concern for U.S. organizations due to the restrictions on many NGO activities, including promotion of RBC and corporate social responsibility (CSR) best practices.  For U.S. investors looking to partner with a Chinese company or to expand operations by bringing in Chinese suppliers, finding partners that meet internationally recognized standards in areas like labor, environmental protection, worker safety, and manufacturing best practices can be a challenge.  However, the Chinese government has placed greater emphasis on protecting the environment and elevating sustainability as a key priority, resulting in more Chinese companies adding environmental concerns to their CSR initiatives.

In 2014, China signed a memorandum of understanding (MOU) with the OECD to cooperate on RBC initiatives.  This MOU, however, does not require or necessarily mean that Chinese companies will adhere to the OECD Guidelines for Multinational Enterprises.  Industry leaders have pushed for China to comply with OECD guidelines and establish a national contact point or RBC center.  As a result, MOFCOM in 2016 launched the RBC Platform, which serves as the national contact point on RBC issues and supplies information to companies about RBC best practices in China.

In 2014, China participated in the OECD’s RBC Global Forum, including hosting a workshop in Beijing in May 2015.  Policy developments from the workshops included incorporation of human rights into social responsibility guidelines for the electronics industry; referencing the United Nations Guiding Principles on Business and Human Rights; mandating social impact assessments for large footprint projects; and agreeing to draft a new law on public participation in environmental protection and impact assessments.

The MOFCOM-affiliated Chinese Chamber of Commerce of Metals, Minerals, and Chemical Importers and Exporters (CCCMC) also signed a separate MOU with the OECD in October 2014, to help Chinese companies implement RBC policies in global mineral supply chains.  In December 2015, CCCMC released Due Diligence Guidelines for Responsible Mineral Supply Chains, which draw heavily from the OECD Due Diligence Guidelines.  China is currently drafting legislation to regulate the sourcing of minerals, including tin, tungsten, tantalum, and gold, from conflict areas.  China is not a member of the Extractive Industries Transparency Initiative (EITI), but Chinese investors participate in EITI schemes where these are mandated by the host country.

Corruption remains endemic in China.  The lack of an independent press, along with the lack of independence of corruption investigators, who answer to and are managed by the CCP, all hamper the transparent and consistent application of anti-corruption efforts.

Chinese anti-corruption laws have strict penalties for bribes, including accepting a bribe, which is a criminal offense punishable up to life imprisonment or death in “especially serious” circumstances.  Offering a bribe carries a maximum punishment of up to five years in prison, except in cases with “especially serious” circumstances, when punishment can extend up to life in prison.

In August 2015, the NPC amended several corruption-related parts of China’s Criminal Law.  For instance, bribing civil servants’ relatives or other close relationships is a crime with monetary fines imposed on both the bribe-givers and the bribe-takers; bribe-givers, mainly in minor cases, who aid authorities can be given more lenient punishments; and instead of basing punishments solely on the specific amount of money involved in a bribe, authorities now have more discretion to impose punishments based on other factors.

In February 2011, an amendment was made to the Criminal Law, criminalizing the bribing of foreign officials or officials of international organizations.  However, to date, there have not been any known cases in which someone was successfully prosecuted for offering this type of bribe.

In March 2018, the NPC approved the creation of the National Supervisory Commission (NSC), a new government anti-corruption agency that resulted from the merger of the Ministry of Supervision and the CCP’s Central Commission for Discipline Inspection (CCDI).  The NSC absorbed the anti-corruption units of the Supreme People’s Procuratorate, and those of the National Bureau of Corruption Prevention.  In addition to China’s 89 million CCP members, the new commission has jurisdiction over all civil servants and employees of state enterprises, as well as managers in public schools, hospitals, research institutes, and other public service institutions.  Lower-level supervisory commissions have been set up in all provinces, autonomous regions, municipalities, and the Xinjiang Production and Construction Corps.  The NPC also passed the State Supervision Law, which provides the NSC with its legal authorities to investigate, detain, and punish public servants.

The CCDI remains the primary body for enforcing ethics guidelines and party discipline, and refers criminal corruption cases to the NSC for further investigation.

President Xi Jinping’s Anti-Corruption Efforts

Since President Xi’s rise to power in 2012, China has undergone an intensive and large-scale anti-corruption campaign, with investigations reaching into all sectors of the government, military, and economy.  President Xi labeled endemic corruption as an “existential threat” to the very survival of the CCP that must be addressed.  Since then, each CCP annual plenum has touched on judicial, administrative, and CCP discipline reforms needed to thoroughly root out corruption.  Judicial reforms are viewed as necessary to institutionalize the fight against corruption and reduce the arbitrary power of CCP investigators, but concrete measures have emerged slowly.  To enhance regional anti-corruption cooperation, the 26th Asia-Pacific Economic Cooperation (APEC) Ministers Meeting adopted the Beijing Declaration on Fighting Corruption in November 2014.

According to official statistics, from 2012 to 2018 the CCDI investigated 2.17 million cases – more than the total of the preceding ten years.  In 2018 alone, the CCP disciplined around 621,000 individuals, up almost 95,000 from 2017.  However, the majority of officials only ended up receiving internal CCP discipline and were not passed forward for formal prosecution and trial.  A total of 195,000 corruption and bribery cases involving 263,000 people were heard in courts between 2013 and 2017, according to the Supreme People’s Court.  Of these, 101 were officials at or above the rank of minister or head of province.  In 2018, a large uptick of 51 officials at or above the provincial/ministerial level were disciplined by the NSC.  One group heavily disciplined in recent years has been the discipline inspectors themselves, with the CCP punishing more than 7,900 inspectors since late-2012.  This led to new regulations being implemented in 2016 by CCDI that increased overall supervision of its investigators.

China’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of more than 5,000 fugitives suspected of corruption.  In 2018 alone, CCDI reported that 1,335 fugitives suspected of official crimes were apprehended, including 307 corrupt officials mainly suspected for graft.  Anecdotal information suggests the Chinese government’s anti-corruption crackdown oftentimes is inconsistently and discretionarily applied, raising concerns among foreign companies in China.  For example, to fight rampant commercial corruption in the medical/pharmaceutical sector, China’s health authority issued “black lists” of firms and agents involved in commercial bribery.  Several blacklisted firms were foreign companies.  Additionally, anecdotal information suggests many Chinese government officials responsible for approving foreign investment projects, as well as some routine business transactions, are slowing approvals to not arouse corruption suspicions, making it increasingly difficult to conduct normal commercial activity.

While central government leadership has welcomed increased public participation in reporting suspected corruption at lower levels, direct criticism of central government leadership or policies remains off-limits and is seen as an existential threat to China’s political and social stability.  Some citizens who have called for officials to provide transparency and public accountability by disclosing public and personal assets, or who have campaigned against officials’ misuse of public resources, have been subject to criminal prosecution.

United Nations Anti-Corruption Convention, OECD Convention on Combating Bribery

China ratified the United Nations Convention against Corruption in 2005 and participates in APEC and OECD anti-corruption initiatives.  China has not signed the OECD Convention on Combating Bribery, although Chinese officials have expressed interest in participating in the OECD Working Group on Bribery meetings as an observer.

Resources to Report Corruption

The following government organization receives public reports of corruption:

Anti-Corruption Reporting Center of the CCP Central Commission for Discipline Inspection and the Ministry of Supervision, Telephone Number: +86 10 12388.

The risk of political violence directed at foreign companies operating in China remains low.  Each year, government watchdog organizations report tens of thousands of protests throughout China.  The government is adept at handling protests without violence, but given the volume of protests annually, the potential for violent flare-ups is real.  Violent protests, while rare, have generally involved ethnic tensions, local residents protesting corrupt officials, environmental and food safety concerns, confiscated property, and disputes over unpaid wages.

In recent years, the growing number of protests over corporate M&A transactions has increased, often because disenfranchised workers and mid-level managers feel they were not included in the decision process.  China’s non-transparent legal and regulatory system allows the CCP to pressure or punish foreign companies for the actions of their governments. The government has also encouraged protests or boycotts of products from certain countries, like Korea, Japan, Norway, Canada, and the Philippines, in retaliation for unrelated policy decisions.  Examples of politically motivated economic retaliation against foreign firms include boycott campaigns against Korean retailer Lotte in 2016 and 2017 in retaliation for the decision to deploy the Thermal High Altitude Area Defense (THAAD) to the Korean Peninsula, which led to Lotte closing and selling its China operations; and high-profile cases of gross mistreatment of Japanese firms and brands in 2011 and 2012 following disputes over islands in the East China Sea.  Recently, some reports suggest China has retaliated against some Canadian companies and products as a result of a domestic Canadian legal issue that impacted a large Chinese enterprise.

There have also been some cases of foreign businesspeople that were refused permission to leave China over pending commercial contract disputes.  Chinese authorities have broad authority to prohibit travelers from leaving China (known as an “exit ban”) and have imposed exit bans to compel U.S. citizens to resolve business disputes, force settlement of court orders, or facilitate government investigations.  Individuals not directly involved in legal proceedings or suspected of wrongdoing have also been subject to lengthy exit bans in order to compel family members or colleagues to cooperate with Chinese courts or investigations. Exit bans are often issued without notification to the foreign citizen or without a clear legal recourse to appeal the exit ban decision.

In the past few years, Chinese authorities have detained or arrested several foreign nationals, including American citizens, and have refused to notify the U.S. Embassy or allow access to the American citizens detained for consular officers to visit.  These trends are in direct contravention of recognized international agreements and conventions.

For U.S. companies operating in China, finding adequate human resources remains a major challenge.  Finding, developing, and retaining domestic talent, particularly at the management and highly-skilled technical staff levels, remain difficult challenges often cited by foreign firms.  In addition, labor costs continue to be a concern, as salaries along with other inputs of production have continued to rise. Foreign companies also continue to cite air pollution concerns as a major hurdle in attracting and retaining qualified foreign talent to relocate to China.  These labor concerns contribute to a small, but growing, number of foreign companies relocating from China to the United States, Canada, Mexico, or other parts of Asia.

Chinese labor law does not protect rights such as freedom of association and the right of workers to strike.  China to date has not ratified the United Nations International Labor Organization conventions on freedom of association, collective bargaining, and forced labor, but it has ratified conventions prohibiting child labor and employment discrimination.  Foreign companies often complain of difficulty navigating China’s ever-evolving labor laws, social insurance laws, and different agencies’ implementation guidelines on labor issues. Compounding the complexity, local characteristics and the application by different localities of national labor laws often vary.

Although required by national law, labor contracts are often not used by domestic employers with local employees.  Without written contracts, employees struggle to prove employment, thus losing basic labor rights like claiming severance and unemployment compensation if terminated, as well as access to publicly-provided labor dispute settlement mechanisms.  Similarly, regulations on agencies that provide temporary labor (referred to as “labor dispatch” in China) have tightened, and some domestic employers have switched to hiring independent service provider contractors in order to skirt the protective intent of these regulations.  These loopholes incentivize employers to skirt the law because compliance leads to substantially higher labor costs. This is one of many factors contributing to an uneven playing field for foreign firms that compete against domestic firms that circumvent local labor laws.

Establishing independent trade unions is illegal in China.  The law allows for worker “collective bargaining”; however, in practice, collective bargaining focuses solely on collective wage negotiations – and even this practice is uncommon.  The Trade Union Law gives the All-China Federation of Trade Unions (ACFTU), a CCP organ chaired by a member of the Politburo, control over all union organizations and activities, including enterprise-level unions.  The ACFTU’s priority task is to “uphold the leadership of the Communist Party,” not to protect workers’ rights or improve their welfare. The ACFTU and its provincial and local branches aggressively organize new constituent unions and add new members, especially in large multinational enterprises, but in general, these enterprise-level unions do not actively participate in employee-employer relations.  The absence of independent unions that advocate on behalf of workers has resulted in an increased number of strikes and walkouts in recent years.

ACFTU enterprise unions issue a mandatory employer-borne cost of 2 percent of payroll for membership.  While labor laws do not protect the right to strike, “spontaneous” worker protests and work stoppages occur with increasing regularity, especially in labor intensive and “sunset” industries (i.e., old and declining industries such as low-end manufacturing).  Official forums for mediation, arbitration, and other similar mechanisms of alternative dispute resolution have generally been ineffective in resolving labor disputes in China.  Some localities actively discourage acceptance of labor disputes for arbitration or legal resolution. Even when an arbitration award or legal judgment is obtained, getting local authorities to enforce judgments is problematic.

In the aftermath of the Chinese crackdown on Tiananmen Square demonstrations in June 1989, the United States suspended Overseas Private Investment Corporation (OPIC) programs in China.  OPIC honors outstanding political risk insurance contracts. The Multilateral Investment Guarantee Agency, an organization affiliated with the World Bank, provides political risk insurance for investors in China.  Some foreign commercial insurance companies also offer political risk insurance, as does the People’s Insurance Company of China.

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

*China’s National Bureau of Statistics (90.031 trillion RMB converted at 6.8 RMB/USD estimate)
** Statistics gathered from China’s Ministry of Commerce official data

Table 3: Sources and Destination of FDI

Source: IMF Coordinated Direct Investment Survey (CDIS)

Table 4: Sources of Portfolio Investment

Data not available.

Nissa Felton
Investment Officer – U.S.  Embassy Beijing Economic Section
55 Anjialou Road, Chaoyang District, Beijing, P.R.  China
+86 10 8531 3000
EMail: beijinginvestmentteam@state.gov

Other Useful Online Resources

Chinese Government

• Chinese Embassy in Washington, D.C.: http://www.china-embassy.org/eng  ;
• Ministry of Commerce: http://english.mofcom.gov.cn  
• Invest in China: http://www.fdi.gov.cn/pub/FDI_EN/default.htm  
• National Development and Reform Commission: http://en.ndrc.gov.cn  
• State Administration of Foreign Exchange: http://www.safe.gov.cn  
• State Administration of Taxation: http://www.chinatax.gov.cn/2013/n2925  

United States Government

• U.S. Embassy in Beijing (Doing Business in China) http://beijing.usembassy-china.org.cn/business.html  
• U.S. Department of State travel information: http://travel.state.gov
• U.S. Trade Representative: http://www.ustr.gov  
• U.S. Department of Commerce: http://www.export.gov  
• U.S. Department of the Treasury: http://www.treasury.gov  
• Export Import Bank: http://www.exim.gov  
• Overseas Private Investment Corporation (OPIC): http://www.opic.gov  
• U.S. Trade and Development Agency: http://www.ustda.gov  

Policies Towards Foreign Direct Investment

Germany has an open and welcoming attitude towards 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 German government and industry actively encourage foreign investment. U.S. investment continues to account for a significant share of Germany’s FDI. The investment-related challenges foreign companies face are generally the same as for domestic firms, for example, high marginal income tax rates and labor laws that complicate hiring and dismissals.

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.

However, Germany does prohibit the foreign provision of employee placement services, such as providing temporary office support, domestic help, or executive search services.

While Germany’s Foreign Economic Law permits national security screening of inbound direct investment in individual transactions, in practice no investments have been blocked to date.  Growing Chinese investment activities and acquisitions of German businesses in recent years – including of Mittelstand (mid-sized) industrial market leaders – led German authorities to amend domestic investment screening provisions in 2017, clarifying their scope and giving authorities more time to conduct reviews.  The government further lowered the threshold for the screening of acquisitions in critical infrastructure and sensitive sectors in 2018, to 10 percent of voting rights of a German company. The amendment also added media companies to the list of sensitive sectors to which the lower threshold applies, to prevent foreign actors from engaging in disinformation.  In a prominent case in 2016, the German government withdrew its approval and announced a re-examination of the acquisition of German semi-conductor producer Aixtron by China’s Fujian Grand Chip Investment Fund based on national security concerns.

Other Investment Policy Reviews

The World Bank Group’s “Doing Business 2019” and Economist Intelligence Unit both provide additional information on Germany investment climate.  The American Chamber of Commerce in Germany publishes results of an annual survey of U.S. investors in Germany on business and investment sentiment (“AmCham Germany Transatlantic Business Barometer”).

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 publically 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.

Germany Trade and Invest (GTAI), the country’s economic development agency, can assist in the registration processes (https://www.gtai.de/GTAI/Navigation/EN/Invest/Investment-guide/Establishing-a-company/business-registration.html  ) and advise 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.

Outward Investment

The Federal Government provides guarantees for investments by German-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.

Germany does not have a bilateral investment treaty (BIT) with the United States. However, a Friendship, Commerce and Navigation (FCN) treaty dating from 1956 contains many BIT-relevant provisions including national treatment, most-favored nation, free capital flows, and full protection and security.

Germany has bilateral investment treaties in force with 126 countries and territories.  Treaties with former sovereign entities (including Czechoslovakia, the Soviet Union, Sudan, and Yugoslavia) continue to apply in an additional seven cases.  These are indicated with an asterisk (*) and have not been taken into account in regard to the total number of treaties. Treaties are in force with the following states, territories, or former sovereign entities.  For a full list of treaties containing investment provisions that are currently in force, see the UNCTAD Navigator at http://investmentpolicyhub.unctad.org/IIA/CountryBits/78#iiaInnerMenu  .

Afghanistan; Albania; Algeria; Angola; Antigua and Barbuda; Argentina; Armenia; Azerbaijan; Bahrain; Bangladesh; Barbados; Belarus; Benin; Bosnia and Herzegovina; Botswana; Brunei; Bulgaria; Burkina Faso; Burundi; Cambodia; Cameroon; Cape Verde; Central African Republic; Chad; Chile; China (People’s Republic); Congo (Republic); Congo (Democratic Republic); Costa Rica; Croatia; Cuba; Czechoslovakia; Czech Republic*; Dominica; Egypt; El Salvador; Estonia; Eswatini; Ethiopia; Gabon; Georgia; Ghana; Greece; Guatemala; Guinea; Guyana; Haiti; Honduras; Hong Kong; Hungary; Iran; Ivory Coast; Jamaica; Jordan; Kazakhstan; Kenya; Republic of Korea; Kosovo*; Kuwait; Kyrgyzstan; Laos; Latvia; Lebanon; Lesotho; Liberia; Libya; Lithuania; Madagascar; Malaysia; Mali; Malta; Mauritania; Mauritius; Mexico; Moldova; Mongolia; Montenegro*; Morocco; Mozambique; Namibia; Nepal; Nicaragua; Niger; Nigeria; North Macedonia; Oman; Pakistan; Palestinian Territories; Panama; Papua New Guinea; Paraguay; Peru; Philippines; Poland; Portugal; Qatar; Romania; Russia*; Rwanda; Saudi Arabia; Senegal; Serbia*; Sierra Leone; Singapore; Slovak Republic*; Slovenia; Somalia; South Sudan*; Soviet Union; Sri Lanka; St. Lucia; St. Vincent and the Grenadines; Sudan; Syria; Tajikistan; Tanzania; Thailand; Togo; Trinidad & Tobago; Tunisia; Turkey; Turkmenistan; Uganda; Ukraine; United Arab Emirates; Uruguay; Uzbekistan; Venezuela; Vietnam; Yemen; Yugoslavia; Zambia; and Zimbabwe.

A BIT with Bolivia was terminated in May 2014, a BIT with South Africa was terminated in October 2014, BITs with India and Indonesia were terminated in June 2017, and a BIT with Ecuador was terminated in May 2018.  The current BIT with Poland will be terminated in October 2019.

Germany has ratified treaties with the following countries and territories that have not yet entered into force:

Bilateral Taxation Treaties:

Taxation of U.S. firms within Germany is governed by the “Convention for the Avoidance of Double Taxation with Respect to Taxes on Income.” This treaty has been in effect since 1989 and was extended in 1991 to the territory of the former German Democratic Republic. With respect to income taxes, both countries agreed to grant credit for their respective federal income taxes on taxes paid on profits by enterprises located in each other’s territory.  A Protocol of 2006 updates the existing tax treaty and includes several changes, including a zero-rate provision for subsidiary-parent dividends, a more restrictive limitation on benefits provision, and a mandatory binding arbitration provision. In 2013, Germany and the United States signed an agreement on legal and administrative cooperation and information exchange with regard to the U.S. Foreign Account Tax Compliance Act. (Full document at https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Internationales_
Steuerrecht/Staatenbezogene_Informationen/Laender_A_Z/Verein_Staaten/2013-10-15-USA-Abkommen-FATCA.html  ).

As of January 2019, Germany had bilateral tax treaties with a total of 96 countries, including with the United States, and, regarding inheritance taxes, with 6 countries.  It has special bilateral treaties with respect to income and assets by shipping and aerospace companies with 10 countries and has treaties relating to the exchange of information and administrative assistance with 27 countries.  Germany has initiated and/or is renegotiating new income and wealth tax treaties with 64 countries, special bilateral treaties with respect to income and assets by shipping and aerospace companies with 2 countries, and information exchange and administrative assistance treaties with 7 countries.

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.

Formally, the public consultation by the federal government 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, and public comments are solicited. According to the Joint Procedural Rules, ministries should consult the concerned industries’ associations (rather than single companies), consumer organizations, environmental, and other NGOs.  The consultation period generally takes two to eight weeks.

The German Institute for Standardization (DIN) is open to foreign members.

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 implemented by the Member States in their respective legislative processes, which is regularly observed in Germany.

EU Member States must implement 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 high fines.  Germany has a set of rules that prescribe how to break down any payment of fines devolving on the Federal Government and the federal states (Länder).  Both bear part of the costs depending on their responsibility within legislation 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 is required to instruct the Bundesrat at an early stage on all EU plans 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 predictable and reliable.  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 federal 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. International studies and empirical data have attested that Germany offers an efficient 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 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.

Germany has specialized courts for administrative law, labor law, social law, and finance and tax law.  In 2019, the first German district court for civil matters (in Frankfurt) introduced the possibility to hear international trade disputes in English.  Other federal states are currently discussing plans to introduce these specialized chambers as well. 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. To our knowledge, the Federal Ministry for Economic Affairs and Energy had not prohibited any acquisitions as of April 2019.

There is no requirement for investors to obtain approval for any acquisition, but they must notify the Federal Ministry for Economic Affairs and Energy if the target company operates critical infrastructure.  In that case, or if the company provides services related to critical infrastructure or is a media company, the threshold for initiating an investment review is the 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, the certificate shall be deemed as granted.

Special rules apply for the acquisition of companies that operate in sensitive security areas, including defense and IT security.  In contrast to the cross-sectoral rules, the 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 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 amended domestic investment screening provisions, effective June 2017, clarifying the scope for review and giving the government more time to conduct reviews, in reaction to an increasing number of acquisitions of German companies by foreign investors, particularly from China.  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.  All non-EU entities are now required to notify Federal Ministry for Economic Affairs and Energy in writing of any acquisition of or significant investment in a German company active in the above sectors. The new rules also extend 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 introduce 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.  In 2018, the government further lowered the threshold for the screening of investments, allowing authorities to screen acquisitions by foreign entities of at least 10 percent of voting rights of German companies that operate critical infrastructure (down from 25 percent), as well as companies providing services related to critical infrastructure. The amendment also added media companies to the list of sensitive businesses to which the lower threshold applies, to prevent foreign actors to engage in disinformation.

Any decisions resulting from review procedures are subject to judicial review by the administrative courts.  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.

Competition and Anti-Trust Laws

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

The Law against Limiting Competition is the legal basis for the fight against 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 Economics and Energy can provide a permit under specific conditions.  The last case was a merger of two retailers (Kaisers/Tengelmann and Edeka) to which a ministerial permit was granted in March 2016. A July 2017 amendment to the Cartel Law expanded the reach of the Federal Cartel Authority (FCA) to include internet and data-based business models; as a result, the FCA investigated Facebook’s data collection practices regarding potential abuse of market power.  A February 2019 decision affirming abuse by the FCA has been challenged by Facebook at a regional court.  In November 2018, the FCA initiated an investigation of Amazon over potential abuse of market power; a decision was pending as of April 2019.

The Law against Unfair Competition (amended last in 2016) can be invoked in regional courts.

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, whereas the others remain undecided. 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 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 Institution for Dispute Settlement. ”Book 10” of the German Code of Civil Procedure addresses arbitration proceedings. The International Chamber of Commerce has an office in Berlin. In addition, 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 release as much money as possible through the sale of individual items or rights or parts of the company.  Proceeds can then be paid out to the creditors in the insolvency proceedings. The distribution of the monies to the creditors follows the detailed instructions of 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 Report, with a recovery rate of 80.4 cents on the dollar.

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 have to meet the same criteria for eligibility.

Germany Trade & Invest, Germany’s federal economic development agency, provides comprehensive information on incentives in English at:  www.gtai.com/incentives-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 the 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 www.gtai.com/coming-to-germany  .

There are no localization requirements for data storage in Germany.  However, in recent years German and European cloud providers have 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, mortgages 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 and was last amended in 2017.  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, liabilities and restrictions and how these rights relate to each other. 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 (IP) rights.  Legal structures are strong and enforcement is good. Nonetheless, internet piracy and counterfeit goods remain an issue, and specific infringing websites are included in the 2018 Notorious Markets List.  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 2018 can be found under: https://www.zoll.de/SharedDocs/Broschueren/DE/Die-Zollverwaltung/jahresstatistik_2018.html?nn=287024  .  

Germany is also a party to the major international intellectual property protection agreements: the Bern 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, the Brussels Satellite Convention, the Treaty of Rome on Neighboring Rights, and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).  Many of the latest developments in German IP law are derived from European legislation with the objective to make applications less burdensome and allow for European IP protection.

The following types of protection are available:

Copyrights:  National treatment is also granted to foreign copyright holders, including remuneration for private recordings.  Under the World Trade Organization (WTO) TRIPS Agreement, Germany also grants legal protection for U.S. performing artists against the commercial distribution of unauthorized live recordings in Germany.  Germany signed the World Intellectual Property Organization (WIPO)_Copyright Treaty and ratified it in 2003. Most rights holder organizations regard German authorities’ enforcement of intellectual property protections as effective.  In 2008, Germany implemented the EU enforcement directive with a national bill, thereby strengthening the privileges of rights holders and allowing for improved enforcement action.

Trademarks:  Foreigners may register trademarks subject to exactly the same terms as German nationals 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.

Patents:  Foreigners may register patents subject to the same terms as German nationals at the German Patent and Trade Mark Office.  Patents are granted for technical inventions which 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, beginning on the day following the invention patent application. Patent applicants can request accelerated examination when filing the application provided that the patent application was previously filed at the U.S. patent authority and that at least one claim had been determined to be allowable. There are a number of differences in patent law that a qualified patent attorney can explain to U.S. patent applicants.

Trade Secrets: Both technical and commercial trade secrets are protected in Germany by the Law Against Unfair Competition.  According to the law, the illegal passing of trade secrets to third parties – including the attempt to do so – for reasons related to competition, self-interest, the benefit of a third party, or with the intent to harm the business owner, is punishable with prison sentences of up to three years or a monetary fine.  In severe cases, including commercial-scale theft and those that involve passing trade secrets to foreign countries, courts can impose prison sentences of up to five years or a monetary fine.

U.S. grants of IP rights are valid in the United States only.  U.S. IPR owners should note that the EU operates on a “first-to-file” principle and not on the “first-inventor-to-file” principle, used in the United States.  It is possible to register for trademark and design protection nationally in Germany or with the European Union Trade Mark and/or Registered Community Design. These provide protection for industrial design or trademark in the entire EU market.  Both national trademarks and European Community Trade Marks (CTMs) can be applied for from the U.S. Patent and Trademark Office as part of an international trademark registration system (http://www.uspto.gov  ), or the applicant may apply directly for those trademarks from the European Union Intellectual Property Office (EUIPO) at https://euipo.europa.eu/ohimportal/en/home  .

For patents, the situation is slightly different but protection can still be gained via the U.S. Patent and Trademark Office (USPTO).  Although there is not yet a single EU-wide patent system, the European Patent Office (EPO) does grant individual European patents for the contracting states to the European Patent Convention (EPC), which entered into force in 1977.  The 38 contracting states include the entire EU membership and several additional European countries. As an alternative to filing patents for European protection with the USPTO, 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/index.html.

In addition, German law offers the possibility to register designs and utility models.

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/.

Country resources:

For additional information about how to protect intellectual property in Germany, please see Germany Trade & Invest website at http://www.gtai.de/GTAI/Navigation/EN/Invest/Investment-guide/The-legal-framework/patents-licensing-trade-marks.html  .

Statistics on the seizure of counterfeit goods are available through the German Customs Authority (Zoll):

https://www.zoll.de/SharedDocs/Broschueren/DE/Die-Zollverwaltung/jahresstatistik_2018.html?nn=287024  

Investors can identify IP 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   or the Association for the  Enforcement of Copyrights (GVU) http://www.gvu.de  .

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 Eurosystem, comprised of the European Central Bank and the national central banks of the 19 member states that are part of the eurozone, including the German Central Bank (Bundesbank).  A European framework for screening of foreign investments, which entered into force in April 2019, provides a basis under European law to restrict capital movements into Germany. Global investors see Germany as a safe place to invest, as the real economy continues to outperform other EU countries and German sovereign bonds 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.

Germany supports a worldwide financial transaction tax and is pursuing the introduction of such a tax along with several other Eurozone countries.

Germany has a modern banking sector but is considered “over-banked” resulting in low profit margins and a need for 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).  The private bank sector is dominated by Deutsche Bank and Commerzbank, with balance sheets of €1.35 trillion and €462 billion respectively (2018 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).  Deutsche Bank and Commerzbank confirmed in March 2019 that they are in merger talks, with the outcome unclear as of April 2019. A merger of the two institutions would create the Eurozone’s third-largest lender after HSBC and BNP Paribas with roughly €1.9 trillion in assets (USD 2.04 trillion), about 150,000 employees, about one-fifth of the private customers in Germany, but a market value of just €25 billion (USD 28.4 billion).  Germany’s regional state-owned banks (Landesbanken) were among the hardest hit by the global financial crisis and were forced to reduce their business activities but have lately stabilized again.

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.

German authorities respect the independence of the European Central Bank (ECB), and thus have no scope to manipulate the bloc’s exchange rate.  In a February 2019 report, the European Commission (EC) concluded Germany’s persistently high current account surplus – the world’s largest in 2018 at USD 294 billion (7.8 percent of GDP) – “has slightly narrowed since 2016 and is expected to gradually decline due to a pick-up in domestic demand in the coming years whilst remaining at historically high levels over the forecast horizon.”  While low commodity prices and the weak euro exchange rate explain some of the surplus’ increase in 2015-2016, the persistence of Germany’s surplus is a matter of international controversy. German policymakers view the large surplus is the result of market forces rather than active government policies, while the 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.  In 2017, Germany’s Financial Intelligence Unit (FIU) was restructured and given more staff. It was transferred to the General Customs Directorate in the Federal Ministry of Finance. At the same time, its tasks and competencies were redefined taking into account the provisions of the Fourth EU Money Laundering Directive.  One focus is now on operational and strategic analysis. On June 26, 2017, legislation to implement the Fourth 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).

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 sixth-largest remittance-sending country worldwide.  Migrants in Germany posted USD 22.09 billion (0.6 percent of GDP) abroad in 2018 (World Bank, Bilateral Remittances Matrix 2018).  The most important receiving states for remittances from Germany are EU neighbors such as France, Poland, and Italy. Around USD 8 billion was sent to developing countries, out of which Lebanon, Vietnam, China, Nigeria and Serbia were the biggest receivers.  Remittance flows into Germany amounted to around USD 17.36 billion in 2017, approximately 0.4 percent of Germany’s GDP.

The issue of remittances played a role during the German G20 Presidency.  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/sites/default/files/documents/2017 percent20G20 percent20Financial percent20Inclusion percent20Action percent20Plan percent20final.pdf    

Sovereign Wealth Funds

The German government does not currently have a sovereign wealth fund or an asset management bureau.  Following German reunification, the federal government set up a public agency to manage the privatization of assets held by the former East Germany.  In 2000, the agency, known as TLG Immobilien, underwent a strategic reorientation from a privatization-focused agency to a profit-focused active portfolio manager of commercial and residential property.  In 2012, the federal government sold TLG Immobilien to private investors.

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).  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, yearly reports are published, and such control is approved by the Federal Finance Ministry and the ministry responsible for the subject matter.

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. 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 16,833 entities for 2016, or 0.5 percent of the total 3.5 million companies in Germany.  SOEs in 2016 had €547 billion in revenue and €529 billion in expenditures. Almost 40 percent of SOEs’ revenue was generated by water and energy suppliers, 13 percent by health and social services, and 12 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 106 companies and an indirect participation in 469 companies at the end of 2016, 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 science, infrastructure, administration/increasing efficiency, economic development, 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. The 2017 annual report (with 2016 data) can be found here:

https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Bundesvermoegen/
Privatisierungs_und_Beteiligungspolitik/Beteiligungspolitik/Beteiligungsberichte/beteiligungsbericht-des-bundes-2017.pdf?__blob=publicationFile&v=7  

Publicly-owned banks also 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.  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 go into 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 fourth-largest share in the company at 12.7 percent share, 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.

The wholly federal government-owned railway company, Deutsche Bahn, was cleared by the European Commission in 2013 of allegations of abusing its dominant market position after Deutsche Bahn implemented a new, competitive pricing system.  A similar case brought by the German Federal Cartel Office against Deutsche Bahn was terminated in May 2016 after the company implemented a new pricing system.

Privatization Program

Germany does not have any privatization programs at this time.  German authorities treat foreigners equally in privatizations.

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 for 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) states its commitment to the action plan, including the principles on public procurement.  It further states that, if the NAP 2020’s effective and comprehensive review comes to the conclusion that the voluntary due diligence approach of enterprises is insufficient, the government will initiate legislation for an EU-wide regulation. The government is currently reviewing and evaluating the German companies’ voluntary measures to respect human rights in their business operations under the NAP.  

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 issues into their decision-making, the government provides information online and in hard copy. The federal government promotes corporate social responsibility (CSR) through awards and prizes, business fairs, and reports and newsletters.  The government also set up 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.

On the business side, the American Chamber of Commerce in Germany (AmCham Germany) is active in promoting standards of ecological, economic, and social responsibility and sustainability within their members’ entrepreneurial actions in keeping with the UN Sustainable Development Goals, adopted in 2015.  AmCham Germany issues publications on selected member companies’ approaches to CSR. Its Corporate Responsibility Committee serves as a platform to exchange best practices, identify trends, and discuss regulatory initiatives. Other business initiatives, platforms, and networks on sustainable corporate conduct and CSR exist.  In addition, Germany’s four leading business organizations regularly provide information on a common CSR internet portal to promote and illustrate companies’ engagement on CSR: www.csrgermany.de  .

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 3p Consortium for Sustainable Management, 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).

Among industrialized countries, Germany ranks 11th out of 180, according to Transparency International’s 2018 Corruption Perceptions Index.  Some sectors including the automotive industry, construction sector, and public contracting, exhibit political influence and 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 2017, 63 percent of all corruption cases were directed towards the public administration (up from 49 percent in 2016), 22 percent towards the business sector (down from 30 percent in 2016), 12 percent towards law enforcement and judicial authorities (down from 18 percent in 2016), and 3 percent to political officials (same as in 2016).

A prominent corruption case concerns the “BER” Berlin Airport construction project. Proceedings were opened in October 2015 against a manager of the airport operating company. In October 2016, the Cottbus district court sentenced the manager to 3.5 years in prison and a fine of €150,000 (USD 160,000) on the grounds of corruption.  Two leading employees of a technical company working on electricity, heating, and sanitary equipment received suspended jail sentences.

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.

Donations to political parties are legally permitted.  However, if they exceed €50,000, they must be reported to the President of the Bundestag.  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 recent years about bribery investigations against Siemens, Daimler, Deutsche Telekom, and Ferrostaal increased awareness of the problem of corruption.  As a result, an increasing number of listed companies and multinationals have expanded their compliance departments, tightened internal codes of conduct, established points of conducts, and offered more ethics training to employees.

The Federation of Germany Industries (BDI), the Association of German Chamber of Commerce and Industry (DIHK) and the International Chamber of Commerce (ICC) provide guidelines in paper and electronic format on how to prevent corruption in an effort to convince all including small- and medium- sized companies to catch up.  In addition, BDI provides model texts if companies with two different sets of compliance codes want to do business with each other.

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 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 actively enforces the convention and is increasingly better managing the risk of transnational corruption.

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.

Contact at “watchdog” organization:

Prof. Dr. Edda Muller, Chair
Transparency International Germany
Alte Schonhauser Str. 44, 10119 Berlin
+49 30 549 898 0
office@transparency.de

The Federal Criminal Office publishes an annual report: “Lagebild Korruption” – the latest one covers 2017.

https://www.bka.de/SharedDocs/Downloads/DE/Publikationen/JahresberichteUndLagebilder/
Korruption/korruptionBundeslagebild2017.pdf?__blob=publicationFile&v=6 10  

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.  Employment in Germany has continued to rise for the thirteenth consecutive year and reached an all-time high of 44.8 million in 2018, an increase of 562,000 (or 1.3 percent) from 2017—the highest level since German reunification in 1990.

Simultaneously, unemployment has fallen by more than half since 2005, and reached in 2018 the lowest average annual value since German reunification.  In 2018, around 2.34 million people were registered as unemployed, corresponding to an unemployment rate of 5.2 percent, according to the Germany Federal Employment Agency.  Using internationally comparable data from the European Union’s statistical office Eurostat, Germany had an average annual unemployment rate of 3.4 percent in 2018, the second lowest rate in the European Union.  All employees are by law covered by the federal unemployment insurance that compensates for the lack of income for up to 24 months.

Germany’s national youth unemployment rate was 6.2 percent in 2018, 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 will result in labor shortages in the future.  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. According to the Federal Employment Agency, doctors; medical and geriatric nurses; mechanical, automotive, and electrical engineers; and IT professionals are in particular short supply.  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. According to the Institute of Economic and Social Research (WSI), the number of workdays lost to labor actions increased significantly to 1 million in 2018, compared to 238,000 in 2017.  WSI assesses this unusual increase was mostly due to the labor conflict in the metal industry, which resulted in a large number of warning strikes at various companies and plants. However, 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 2016, about 18.5 percent of the workforce and 26 percent of the whole population belonged to unions. Since peaking at around 12 million members shortly after German reunification, total DGB union membership has dropped to 5.9 million, IG Metall being the largest German labor union with 2.3 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 2017, over three quarters (78 percent) of non-self-employed workers were directly or indirectly covered by a collective wage agreement, 59 percent of the labor force in the western part of the country and approximately 47 percent in the East.  On average, collective bargaining agreements in Germany were valid for 25 months in 2017.

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.

The strong collectively negotiated wage increases in 2018 and the rise of the federal Germany-wide statutory minimum wage to €9.19 (USD 10.32) on January 1, 2019, led to 3.1 percent nominal wage increase, the highest in Germany for eight years.

Labor costs increased by 2.6 percent in 2017.  With an average labor cost of €34.10 (USD 42.24) per hour, Germany ranked fifth among the 28 EU-members states (EU average: €26.80/USD 33.20) in 2017.  Since the introduction of the European common currency, the increases of the unit labor cost in Germany remained significantly below EU average.

OPIC programs were available for the new states of eastern Germany for several years during the early 1990s following reunification, but were later suspended due to economic and political progress which caused the region to “graduate” from OPIC coverage.

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

* Source for Host Country Data: Federal Statistical Office DESTATIS, Bundesbank; http://www.bundesbank.de   (German Central Bank, 2017 data to be published in April 2019, only available in €)

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

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

Policies Towards Foreign Direct Investment

The GOI has publicly stated its commitment to attract foreign investment in the Prime Minister’s National Program to strengthen local industries and promote the “Made in Iraq” brand.  In February 2018, the GOI partnered with the World Bank and the Kuwaiti government to host the Kuwait International Conference for the Reconstruction of Iraq. The GOI has not yet followed through on commitments made at the conference to reform processes and regulations that hinder investment.

In December 2015, the GOI passed an amended National Investment Law (NIL) that improves investment terms for foreign investors, allows them to purchase land in Iraq for certain projects, and speeds up the investment license process.  However, purchasing land for commercial or residential development is extremely difficult. In 2015, Iraq also joined the International Convention on the Settlement of Investment Disputes between States and Nations of Other States (ICSID).

Nevertheless, foreign investors continue to encounter bureaucratic challenges, corruption, and a weak banking sector, which make it difficult to successfully conclude investment deals.  State-owned banks in Iraq serve predominantly to settle the payroll of Iraq’s public sector and privately-owned banks, and until recently served almost entirely as currency exchange businesses.  Some of the privately-owned banks have begun commercial lending programs, but Iraq’s lack of a credit monitoring system, insufficient legal guarantees for lenders, and limited connections to international banks hinder commercial lending.  The financial sector in the IKR is still recovering from years of financial instability there, and the Central Bank of Iraq (CBI) levied sanctions against the IKR financial system immediately following the Kurdistan independence referendum in September 2017.

Recently, the GOI has been exploring financing options to pay for large-scale development projects rather than relying on its previous practice of funding investments entirely from current annual budget outlays.  According to the NIL, the GOI reserves the right to screen foreign direct investment. The U.S. Department of State is not aware of specific instances where this screening process has explicitly blocked foreign investments in Iraq, but the bureaucratic barriers to investment – including, for example, a requirement to place a significant portion of the capital investment in an Iraqi bank prior to receiving a license – remain significant.

The IKR has its own investment law (passed in 2006) and supporting regulations.  The KRG is working to put the business registration process and procedures online, and initial steps have been completed.  The KRG is generally open to public-private partnerships and is interested in modern, long-term financing, as demonstrated by the KRG’s oil and gas sector contracts that increase production.  Legislation to amend the investment law to broaden its reach to potential investors remains pending in the Iraqi Kurdistan Parliament (IKP).

According to Iraqi law, a foreign investor is entitled to make investments in Iraq on terms no less favorable than those applicable to an Iraqi investor, and the amount of foreign participation is not limited.  However, Iraq’s NIL limits foreign direct and indirect ownership of most natural resources, particularly the extraction and processing of any natural resources. It does allow foreign ownership of land to be used for residential projects and co-ownership of land to be used for industrial projects when an Iraqi partner is participating.

Iraq’s 2006 Investment Law Number 13 called for the establishment of a National Investment Commission (NIC) and a Provisional Investment Commission in each province.  The NIC, launched in 2007, is a cabinet-level organization which provides policy recommendations as well as support to current and potential investors in Iraq. The NIC’s “One Stop Shop” is intended to guide investors through the investment process, though investors have reported challenges using the NIC’s services.  The NIC can also grant investment licenses and facilitate visa and residency permit issuances for business travelers.

Limits on Foreign Control and Right to Private Ownership and Establishment

According to the National Investment Regulation No. 2 of 2009, if an investment license is granted to a project, at least 50 percent of the project’s workers must be Iraqi nationals.  The amended NIL also states that investors should give priority to Iraqi citizens before hiring non-Iraqi workers. As a result of popular protests in the summer of 2015, the GOI has applied pressure on foreign companies to hire more local employees.  In order to generate non-oil revenues, the GOI has also encouraged foreign companies to partner with local industries and purchase Iraqi-made products. The GOI generally favors SOEs and state-controlled banks in competitions for government tenders and investment.  This preference discriminates against both local and foreign investors.

Other Investment Policy Reviews

In the past three years, the GOI has not conducted any investment policy reviews through the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), or the United Nations Conference on Trade and Development (UNCTAD).

Business Facilitation

Foreign investors interested in establishing an office in Iraq or bidding on a public tender are required to register as a foreign business with the Ministry of Trade’s Companies Registration Department.  The procedure costs and time to obtain a business license can be found at https://baghdad.eregulations.org/procedure/21?l=en  .  The process for doing so is too complicated to do from overseas, so companies must register using a local agent or consultant.  Investors who will do business only in the IKR can register with the KRG directly. Companies that will do business in both the IKR and greater Iraq must register with the Ministry of Trade.  The KRG has been negotiating with the GOI to gain Ministry of Trade recognition outside the IKR for KRG-issued business registrations.

Under the NIL, the NIC and the Provincial Investment Commissions (PICs) are intended to be one-stop shops that can provide information, sign contracts, and facilitate registration for new foreign and domestic investors.  The NIC offers investor facilitation services on transactions including work permit applications, visa approval letters, customs procedures, and business registration. Investors can request these services through the NIC website:  http://investpromo.gov.iq/  .  However, the National and Provincial Investment Commissions struggle to operate amid unclear lines of authority, budget constraints, and an absence of regulations and standard operating procedures.  The Investment Commissions still generally lack the authority to intercede when investors encounter bureaucratic obstacles with other Iraqi ministries.

In order to incorporate a company in Iraq, an investor must obtain a statement from an Iraqi bank showing a minimum capital deposit.  All investors must also apply for an investment license from the appropriate national, regional, or provincial investment commission. Companies are required to register with the General Commission for Taxation and register employees for social security (if applicable).  Companies automatically should receive their tax identification number as part of registering their business with the Ministry of Trade. Companies that provide security are also required to register with the Ministry of the Interior. It takes an average of 10 working days to start a business in Iraq, according to the 2018 World Bank Ease of Doing Business report; online procedures accounted for only 0.5 days of that time.

The National Investment Commission does not exclude businesses from taking advantage of its services based on the number of employees or the size of the investment project.  The commission can also connect investments by micro-, small-, and medium-sized enterprises (MSMEs) with the appropriate provincial investment council.

The Kurdistan Board of Investment (BOI) manages a streamlined investment licensing process in the IKR whose policy is to acknowledge receipt of the license request within 30 days of the initial license application; however, the licensing process can take from three to six months and may involve more than one KRG ministry or entity, depending on the sector of investment.  Despite bureaucratic hurdles, on the whole, the BOI investment framework seems to work well. Because of oversaturated commercial and residential real estate markets, the BOI has moved away from approving licenses in these sectors but still approves them on a case-by-case basis. Businesses reported some difficulties establishing local connections, obtaining qualified staff, and meeting import regulations.  Businesses also report that the KRG has not provided all promised support infrastructure such as water, electricity, or wastewater services under the investment law framework. However, the BOI receives generally high marks for being helpful in resolving problems. Additional information is available at the BOI’s website: http://www.kurdistaninvestment.org/  .

Outward Investment

Iraq does not restrict domestic investors from investing abroad.

Iraq does not have a bilateral investment treaty (BIT) or a bilateral taxation treaty with the United States.  The United States and Iraq signed an Agreement for Economic and Technical Cooperation on July 11, 2005, and it entered into force December 18, 2013.  The U.S.-Iraq Strategic Framework Agreement (SFA) (available at the following website: http://photos.state.gov/libraries/iraq/216651/US-IRAQ/us-iraq-sfa-en.pdf ) provides intergovernmental forums to address impediments to investment and trade.  There was a bilateral Higher Coordinating Committee (HCC) meeting on January 28, 2018, under the auspices of the SFA.  At the HCC both sides committed to reinvigorate the TIFA process and to the formation of two bilateral working groups: 1) to simplify Iraq’s visa and residency permit process and 2) to resolve commercial disputes between American companies and the GOI.  The existing TIFA between the governments of Iraq and the United States entered into force in 2013 and the inaugural TIFA Council meeting took place in March 2014 in Washington, D.C. The second TIFA Council is scheduled to take place on June 14, 2019. The TIFA provides a framework for dialogue to increase trade and investment cooperation between the two countries.

Iraq is a signatory to investor protection agreements or memorandums of understanding with 35 bilateral partners and nine multilateral groups.  The agreements include arrangements within the Arab League, as well as arrangements with Afghanistan, Armenia, Bangladesh, France, Germany, India, Iran, Japan, Jordan, Kuwait, Mauritania, the Republic of Korea, Sri Lanka, Syria, Tunisia, Turkey, the United Kingdom, Vietnam, and Yemen.

Iraq currently has bilateral investment treaties with Armenia, France, Germany, Japan, Jordan, and Kuwait.  Only the BITs with Japan and Kuwait are in force. Iraq’s investment agreements include general provisions on promoting and protecting investments, including clauses on profit repatriation, access to arbitration and dispute settlements, fair expropriation rules, and compensation for losses.  However, the Iraqi government’s ability and willingness to enforce such provisions remains untested.

Iraq joined the Greater Arab Free Trade Area (GAFTA) in 1998 to better integrate economically with other Middle Eastern countries.  However, Iraq withdrew from GAFTA on November 17, 2016, choosing instead to implement tariffs on all the goods coming into the country.

U.S. companies have raised concerns about the Ministry of Finance (MOF)Tax Commission’s use of the “deemed tax” method to calculate corporate taxes, which can be disadvantageous for firms generating less than 20 percent profit, the standard percentage applied to every company, regardless of the firm’s actual profit.  U.S. investors also complain about the application of the social tax, equivalent to 5 percent of employees’ pay and a 12 percent employer contribution, to third country national employees who do not participate in or benefit from the Iraqi health or pension system, which the taxes are used to fund.

Transparency of the Regulatory System

Iraq’s overall regulatory environment remains opaque.  Corruption, unclear regulations, and bureaucratic bottlenecks are major challenges for investors that bid on public procurement contracts or seek to invest in major infrastructure projects.  The KRG rolled out procurement reform measures in 2016 that seek to address some of these issues, yet the efficacy of these measures remains unclear. Iraq’s commercial and civil laws generally fall short of international norms.  There are few provisions regarding commercial competition. The NIL does not establish a full legal framework governing investment.

The absence of other laws in areas of interest to foreign investors also creates ambiguity.  Iraq’s Legislative Action Plan for the Implementation of WTO Agreements – the legislative “road map” for Iraq’s eventual WTO accession – requires competition and consumer protection laws that are critical for leveling the business playing field.  The Council of Representatives (COR) passed a Competition Law and a Consumer Protection Law in 2010; however, the Competition and Consumer Protection Commissions authorized by these laws have yet to be formed. Without these commissions, investors do not have recourse against unfair business practices such as bid rigging or abuse of a dominant position in the market.

The way in which the Iraqi government promulgates regulations can be opaque and lends itself to arbitrary use.  Regulations imposing duties on citizens or private businesses are required to be published in the official government gazette.  However, there is no corresponding requirement for the publication of internal ministerial regulations. This loophole allows bureaucrats to create internal requirements or procedures with little or no oversight, which can result in additional burdens for investors and other businesspersons.

Regulations exist at both the national and the provincial level.  National regulations are the most relevant to foreign businesses. Lack of regulatory coordination between GOI ministries and national and provincial authorities can result in conflicting regulations, which makes it difficult for investors and business people to easily and accurately interpret the regulatory environment.

Publicly listed companies are governed by the Interim Law on Securities and Markets (Coalition Provisional Authority Order Number 74) which is consistent with international norms; however, enforcement of this law is often not effective.  Accounting, legal, and regulatory procedures are opaque, inconsistent, and generally do not meet international standards. Draft bills, including investment laws, are not available for public comment.

The GOI encourages private sector associations but private sector associations are generally not influential, given the dominant role of SOEs in Iraq’s economy.  In the IKR, private sector associations have more influence and many, such as the contractors’ union, are very active in advocacy with the KRG.

The promulgation of new regulations with little advance notice and requirements related to investment guarantees have also slowed projects.  While the Kurdistan Region Investment Law (KRIL) of 2006 does not stipulate that a local partner is necessary to acquire an investment license, government officials sometimes encourage this practice.

Iraq has limited transparency of its public finances or government held debt.  Publicly available budgets included expenditures broken down by ministry and revenues broken down by source and type.  The budget provided limited details regarding allocations to and earnings from state-owned enterprises (SOEs). Financial statements for most SOEs were generally not publicly available.  Limited information on debt obligations was available on the Central Bank and MOF websites. A detailed breakdown of government debt was not made publicly available. 

International Regulatory Considerations

Iraq is not a member of the WTO and is not a signatory to the Trade Facilitation Agreement.

Legal System and Judicial Independence

Iraq has a civil law system, although Iraqi commercial jurisprudence is relatively underdeveloped.  During decades of war and sanctions, Iraqi courts became isolated from developments in international commercial transactions.  Corruption and bureaucratic bottlenecks remain significant problems. As trade with foreign parties increases, Iraqi courts have seen a significant increase in complex commercial cases.  Contracts should be enforceable under Iraqi law. In practice, however, honoring contracts and contract enforcement remains a challenge due to unclear regulations, lack of decision-making authority, and rampant corruption.

Laws and Regulations on Foreign Direct Investment

Iraq is a signatory to the League of Arab States Convention on Commercial Arbitration (1987) and the Riyadh Convention on Judicial Cooperation (1983).  Iraq formally joined the ICSID Convention on December 17, 2015, and on February 18, 2017, Iraq joined the Investor-State Dispute Settlement (ISDS) process agreement between investors and states.

Additional information can be found in “A Legal Guide to Investment in Iraq” http://cldp.doc.gov/programs/cldp-in-action/details/1551  .

Competition and Anti-Trust Laws

The COR passed a Competition Law and a Consumer Protection Law in 2010.  However, the Competition and Consumer Protection Commissions authorized by these laws have yet to be formed.  The NIL is supposed to promote fair competition and “competitive capacities” in the local market. However, the NIL does not include provisions related to the competition legislation.  The prominent role of SOEs in Iraq and corruption issues undermine the competitive landscape.

Expropriation and Compensation

Article 23 of the Iraqi Constitution prohibits expropriation, unless done for the purpose of public benefit and in return for just compensation.  The Constitution stipulates that expropriation may be regulated by law, but specific legislation regarding expropriation has not been drafted. Article 9 of the amended NIL also guarantees non-seizure or nationalization of any investment project covered by the provisions of this law, except in cases where a final judicial judgment has been reached.  It prohibits expropriation of an investment project, except in cases of public benefit and with fair compensation. Iraq’s Commercial Court is charged with resolving expropriation cases. Over the past six years, there have not been any government actions or shifts in government policy that would indicate possible expropriations in the foreseeable future.

In the IKR, if the BOI determines that investors are using land awarded under investment licenses for purposes other than those outlined in the license, it can impose fines and potentially confiscate the land.  Article 17 of the IKR investment law outlines an investor’s arbitration rights, which fall under the civil court system. Arbitration clauses should be written into local contracts in order to facilitate enforcement in the event of a dispute.

Dispute Settlement

ICSID Convention and New York Convention

Iraq is considering, but has not yet signed or ratified, the convention on Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) and the ad hoc arbitration rules and procedures established by the UN Commission on International Trade Law (UNCITRAL Model Law).  The enforcement of arbitral awards must comply with the special requirements set forth in current Iraqi civil procedure law and other related laws.

Investor-State Dispute Settlement

In November 2010, Iraq’s Higher Judicial Council established the First Commercial Court of Iraq, a court of specialized jurisdiction for disputes involving foreign investors as part of a national strategy to improve Iraq’s investment climate.  This court began hearing cases in January 2011. In 2017, a Higher Judicial Council survey of the 16 federal courts of appeals that heard Iraq’s commercial cases showed that 1,565 commercial cases had been filed and 83 percent of those cases had been completed.  Given that all of Iraq’s ministries are located in the capital, and the vast majority of commercial cases involve a foreign party and an Iraqi government agency, the Baghdad Commercial Court reviews far more commercial cases than the general jurisdiction courts in the surrounding provinces.  In 2017, 982 commercial cases were filed with Baghdad’s Commercial Court, representing 63 percent of the total commercial cases filed. In the IKR, commercial disputes are handled through the civil court system.

Additional information can be found in “A Legal Guide to Investment in Iraq:”  http://cldp.doc.gov/programs/cldp-in-action/details/1551  

International Commercial Arbitration and Foreign Courts

Iraq is a signatory to the League of Arab States Convention on Commercial Arbitration (1987) and the Riyadh Convention on Judicial Cooperation (1983).  Iraq formally joined the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) on December 17, 2015, and on February 18, 2017, Iraq joined the Investor-State Dispute Settlement (ISDS) process agreement between investors and states.

Bankruptcy Regulations

Under Iraqi law, an Iraqi debtor may file for bankruptcy, and an Iraqi creditor may file for liquidation of the debtor.  Bankruptcy is not criminalized. The Iraqi Companies Law regulates the process for liquidation of legal entities. Nevertheless, the mechanism for resolving insolvency remains opaque.  Iraq ranks 168 out of 190 countries in the category of Resolving Insolvency, according to the World Bank’s 2018 Doing Business Report.

Investment Incentives

The amended NIL offers foreign investors several exemptions for qualified investments, including a ten-year exemption from taxes, exemptions from import duties for the necessary equipment and materials throughout the period of project implementation, and exemption from taxes and fees for primary materials imported for commercial operations.  The exemption increases to 15 years if Iraqi investors own more than 50 percent of the project. The NIL also allows investors to repatriate capital brought into Iraq, along with proceeds, in accordance with the law. The Embassy is unaware of any foreign companies that have successfully received these benefits. Foreign investors are able to trade in shares and securities listed on the Iraqi Stock Exchange.  Hotels, tourist institutions, hospitals, health institutions, schools, and colleges also are granted additional exemptions from duties and taxes on their imports of furniture, tools, equipment, machinery, and means of transportation, but foreign companies who sell goods or services to any entity in Iraqi may be subject to Iraqi taxes.

Foreign and domestic companies may also be exempted from taxes on profits if they have contracts with the GOI to execute projects within the National Investment Plan, which is prepared annually by the Ministry of Planning.  The GOI ministries overseeing investment projects are responsible for providing updates for the list of investment contracts to the Tax Commission in the MOF. Companies (foreign and domestic) that have registered businesses in order to execute contracts outside the National Investment Plan do not receive tax exemptions.  However, in some cases, GOI entities have negotiated partial or short-term tax exemptions for companies as part of a project contract.

Income tax language is included in GOI petroleum contracts with the Ministry of Oil (MOO) and applies to each consortium and its partners.  This contract language was ratified by the Council of Representatives and supersedes the Tax Code. Secondary contracts issued by consortiums holding primary petroleum contracts are treated differently.  The consortium is required to withhold 7 percent from secondary contracts for remittance to the GOI. Companies pay a profit tax in the amount of 15 percent unless they operate in the oil sector where a 35 percent tax profit rate applies.  Defining the activities which constitute “petroleum activities” (and are thus subject to the 35 percent vs. the 15 percent tax rate) is a gray area subject to interpretation. Any business or individual considering doing business in Iraq should obtain competent advice from an accountant or attorney.

Under the IKR’s investment law, foreign and national investors are treated equally and are eligible for the same benefits.  Foreign investors may choose to invest in the IKR with or without local partners, and full repatriation of profits is allowed.  While investors have the right to employ foreign employees in their projects, priority is given to awarding projects that employ a high share of local staff and ensure a high degree of knowledge transfer.  Additionally, the law allows an investor to transfer his investment totally or partially to another foreign investor with the approval of the BOI.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Free Zone Authority Law No. 3/1998 permitted investment in Free Zones (FZ; similar to a U.S. Foreign Trade Zone) through industrial, commercial, and service projects.  This law is implemented through the Instructions for Free Zone Management and the Regulation of Investors’ Business No. 4/1999 and is administered by the Free Zones Commission in the MOF.  Under the law, capital, profits, and investment income from projects in a FZ are exempt from all taxes and fees throughout the life of the project. Goods entering into Iraq’s market from FZs are subject to normal import tariffs; no duty is levied on exports from FZs.

Activities permitted in FZs include:  industrial activities such as assembly, installation, sorting, and refilling processes; storage, re-export, and trading operations; service and storage projects and transport of all kinds; banking, insurance, and reinsurance activities; and supplementary and auxiliary professional and service activities.  Prohibited activities include actions disallowed by other laws in force, such as weapons manufacture and environmentally-polluting industries.

Iraq currently has four FZs with tax exemptions and other incentives for the transportation, industrial, and logistics sectors.  Iraq’s largest FZ is the Basrah/Khor al-Zubair FZ, located 40 miles southwest of Basrah on the Arab Gulf at the Khor al-Zubair seaport.  This 18 square km zone has been operational since June 2004, and hosts a number of local and foreign companies. The Ninewa/Falafel Free Zone is located in the north, near roads and railways that reach Turkey, Syria, Jordan, and the Basrah ports.  An undeveloped zone in Fallujah is in the planning stages. However, none of these areas are operating as a significant focal point for investment or trade. The Falafel and Fallujah zones are located in formerly ISIS-held areas, and the possibility of continued political instability makes further development in the near future unlikely.  There is also a FZ in Baghdad. The Free Zone Commission lacks capacity and is further inhibited by being under the MOF, which lacks a specific mandate to develop the FZs.

In the IKR, there are currently no FZs.  The KRG has approved plans for zones in each of the IKR’s four provinces, however, due to the economic crisis, implementation has ceased.

Performance and Data Localization Requirements

In February 2016, the GOI implemented Labor Law No. 37 which allows for collective bargaining, further limits child labor, and provides improved protections against discrimination and sexual harassment at work.  The law also enshrines the right to strike, banned since 1987. Under the law, the GOI will no longer restrict workers to affiliate with only one union or federation, and coverage is expanded to include all workers not covered by Iraq’s civil service law.  The law describes two categories of workers: local Iraqis and foreign workers employed by Iraqi entities or working in the GOI. The law does not explain how or whether it applies to foreign workers employed by foreign companies in Iraq.

According to the 2015 amended NIL, foreign workers may be hired for investment projects, when needed, after priority has been given to Iraqi workers.  However, according to National Investment Regulation No. 2 of 2009, at least 50 percent of an investment project’s workers must be Iraqi nationals. International companies have noted that Iraq lacks a skilled labor force and it can be a challenge to meet this requirement.  Foreign investors are expected to help train Iraqi employees to increase their efficiency, skills, and capabilities.

In the IKR, hiring locally is encouraged, but not mandated by either the KRIL or the 2011 Employment Policy of the KRG Ministry of Labor and Social Affairs.  In the IKR, foreign employees must obtain a security clearance issued by the KRG Ministry of Interior, a medical clearance which includes an HIV test, and a work permit issued by the KRG Ministry of Labor and Social Affairs (MOLSA) before applying for the residency permit required for legal employment.  Some foreign companies have reported prolonged delays in obtaining necessary residency permits for foreign workers. Additional clearances are required in order to appoint foreign nationals as managers of foreign-owned limited liability companies.

Foreign investors can apply for a visa at Iraqi embassies, or in some cases, through the National Investment Commission.  In other cases, investors can apply for and receive visa approval letters from the Ministry of Interior. Visa approval letters authorize investors to receive a visa upon arrival from Ministry of Interior officials at Iraq’s airports.  Investors must be sponsored by an Iraqi government entity and receive an official invitation letter, approved by the Ministry of Interior, from that entity. Obtaining visas for foreign contractors regularly takes several months and allegations of corruption are commonplace.  In April, the Council of Ministers (COM) considered an official “decision” authorizing Ambassadors, or authorized officials, to grant six month, multiple entry visas. The COM decision would stipulate that the applicant must have at least USD 5,000 in his bank account and present a health certificate indicating that he is free from the Human Immunodeficiency Virus (HIV) as well as a letter from an accredited commercial or industrial chamber attesting to his bona fides as a businessperson.  According to the COM decision, the applicant is permitted to stay in Iraq for a period not exceeding 60 days from the date of entry.

All visitors and new residents to Iraq, with the exception of those traveling on a tourist visa, must have a blood test for HIV and complete the process to obtain a residency permit within 15 days of arrival or face fines.  Once in Iraq, foreign investors and employees must obtain work permits, the process for which is often lengthy and unpredictable. There are frequent instances when work or business travel is delayed because foreign employees are unable to receive a visa.

U.S. citizens traveling to the IKR can obtain an airport-issued IKR visa upon arrival that is valid for 30 days; however, this visa is not valid for travel in Iraq outside the IKR because the GOI does not honor the KRG-issued visa.  U.S. citizens who plan to stay for longer than 30 days require an extension to their IKR visa or must obtain residency permits. The KRG does not require HIV tests if the travel is shorter than 15 days.

Additional information can be found on the U.S. Department of State’s website:  www.travel.state.gov.

The GOI does not follow any forced localization policy in which foreign investors must use domestic content in their goods and technology.  There are no requirements for IT providers to turn over source code and/or provide access to surveillance.

The GOI strongly resists offering ownership or profit sharing with any potential foreign investor.  The government prefers to structure investments by foreign parties as contracts for which the government agrees to pay for services or equipment at a price not tied to profits or returns but which is guaranteed by a clause in the annual budget law.  The KRG, in contrast, has employed “build-own-operate” project structures and production sharing contracts in its management of the energy, oil, and gas sectors.

Real Property

Since 2009, Iraqi law allows foreigners to own land.  The amended NIL allows foreign interests to own land for the express purpose of developing residential real estate projects.  It also allows foreign investors to own land for industrial projects if they have an Iraqi partner. Additionally, foreign investors are permitted to rent or lease land for up to 50 years, with an option to renew.  In December 2010, the GOI approved implementing regulations to the NIL, in the form of a Prime Ministerial decree (regulation seven). The regulations allow investors to obtain land for residential housing projects free of charge on the condition that land value is excluded from the sales price.  The decree requires the Department of Real Estate to revoke the land registration from domestic or foreign investors who do not carry out the obligations of their agreement.

For non-residential, commercial investment projects – including agriculture, services, tourism, commercial, and industrial projects – the decree allows for leasing and allocation of government land, but not sole ownership.  The terms and duration of these leases will vary, depending on the type of project and negotiations between the parties. Land for non-residential projects will be leased free of initial down payment, and compensation will be either a percentage of pre-tax revenue or a specified percentage of the “rent allowance” for the land.  These smaller percentages of the “rent allowance” rate, ranging from one to 25 percent, amount to significant rent reductions for leased land, as specified by type of investment project in the decree.

In the IKR, foreign land ownership is allowed under Law Number 4 of 2006.  The BOI initially awarded more than half of all investment licenses to housing projects, though the lack of a clear sector strategy and speculation in housing properties prompted the board to freeze all new investment licenses issued in the sector in mid-2012, however, licenses are still issued on a case-by-case basis.  Investment licenses that include land ownership are more likely to be issued in the BOI’s priority sector development areas of agriculture, industry, and tourism. However, issues regarding timely transfer of land title have sometimes slowed projects.

Mortgages and liens exist in Iraq, and there is a national record system.  However, mortgages are not common. Iraq ranks 113 out of 190 countries on the 2018 World Bank’s “registering property” index.

Intellectual Property Rights

Legal structures that protect intellectual property  rights (IPR) in Iraq are inadequate, and infringements are common.  There is a significant presence of counterfeit products in the Iraqi marketplace, including pharmaceutical drugs.  According to a 2016 study by the Business Software Alliance on self-reported piracy, 85 percent of Iraq’s software was unlicensed in 2015, consistent with the levels found in each survey since 2009.  During the past year, no new IP-related laws or regulations have been enacted. The GOI attempts to track seizures of counterfeit medicines. Reporting is inconsistent.

The GOI’s ability to enforce IP protections remains weak, and IP responsibilities are currently spread across several ministries.  The Ministry of Culture handles copyrights, and the Ministry of Industry and Minerals (MIM) houses the office that registers trademarks.  The Central Organization for Standardization and Quality Control (COSQC), an agency under the Ministry of Planning, handles the patent registry and the industrial design registry.  The Ministry of Planning’s patent registry office has occasionally included Arab League Israel Boycott questionnaires in the patent registry application. U.S. companies are not allowed under U.S. law to complete Arab League Boycott questionnaires.  IP infringement cases are primarily heard in commercial courts, although on a relatively infrequent basis, cases may be transferred to the criminal courts.

A draft IP law, which would comply with the World Trade Organization’s Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and consolidate all IP responsibilities into a single body, was redrafted during the past year and sent for parliamentary legislative review in October 2017.  The original draft was completed in mid-2007, but has not moved forward.

In 2018, the Council of Ministers Secretariat (COMSEC) reviewed IP forms and processes for simplification and preparation of implementing eForms.  The patent application, updated in January 2018, is now based on World Intellectual Property Organization (WIPO) standards. However, the application processes for all classes of IP protection favor domestic applicants through requirements for local Iraqi-national agents and optional, but advantageous, in-person review committee meetings.

The U.S. government is continuing efforts to bolster understanding of IPR and build GOI capacity to protect them.  In June 2012, the Federal Court of Cassation, the highest civil court in Iraq, upheld a finding by the Baghdad Commercial Court that ruled in favor of a U.S. firm in a trademark dispute, setting a positive precedent for IP protection in Iraq.  The Commercial Court has jurisdiction over commercial disputes that involve at least one foreign party and disputes over various commerce-related issues including trade, real estate, banking, trademarks and intellectual property, transportation, and other areas.  It was established in November 2010 under the Higher Judicial Council with the assistance of the U.S. Department of Commerce’s Commercial Law Development Program (CLDP), which provided technical assistance and training to Iraqi judges who serve on the court. The head of the patent section and his deputies received training with the U.S. Patent and Trademark Office (USPTO) sponsored by the CLDP.

Iraq is a signatory to several international intellectual property conventions and to regional and bilateral arrangements, which include:  1) the Paris Convention for the Protection of Industrial Property (1967 Act), ratified by Law No. 212 of 1975; 2) the World Intellectual Property Organization (WIPO) Convention, ratified by Law No. 212 of 1975 (Iraq became a member of the WIPO in January 1976); 3) the Arab Agreement for the Protection of Copyrights, ratified by Law No. 41 of 1985; and 4) the Arab Intellectual Property Rights Treaty (Law No. 41 of 1985).

Iraq is not listed in USTR’s Special 301 report or notorious market report.

Iraq has more than one point of contact for IPR:

Ministry of Culture (Copyrights)
Director of the National Center for the Protection of Copyrights and Related Rights
Ms. Hind Al-Hadithi
Email:  henda84.com@gmail.com
Tel.:  (964) 770 335 0655
Official email:  copyrights.iq@gmail.com

Ministry of Planning (Patents)
Chief of Central Organization for Standardization and Quality Control (COSQC)
Registrar of Patents and Industrial Designs
Mr. Saad Abdul Wahab
Email:  cosqc@cosqc.gov.iq
Tel: (964)07901786768

Director of Industrial Property Division
Mr. Wisam Saeed A’asi
Tel.: (964) 770 974 7231
Email:  wisamsaeedipo@yahoo.com

Ministry of Industry and Minerals (Trademarks)
Industrial Organization and Development Directorate
Director General and Trademark Registrar
Mr. Alaa Mousa Ali

Director of Legal Section
Ms. Thanaa Mohan
Email:  thanaam2008@yahoo.com

A copy of a public list of local lawyers can be obtained by emailing BaghdadACS@state.gov.  The American Chamber of Commerce in Iraq can be reached at:  inquiries@amcham-iraq.org.

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  

Capital Markets and Portfolio Investment

Iraq remains one of the most under-banked countries in the Middle East.  The Iraqi banking system includes seven state-owned banks, with the three largest, Rafidain Bank, Rasheed Bank, and the Trade Bank of Iraq (TBI), accounting for roughly 85 percent of Iraq’s banking sector assets.  Rafidain and Rasheed offer standard banking products but primarily provide pension and government salary payments to individual Iraqis.  As of early 2018, 18 foreign banks have licensed branches in Iraq and several others have strategic investments in Iraqi banks.  By law, the CBI may only exchange currency to be used for purchases of legitimate goods and services.

Iraq’s economy remains primarily cash-based, with many banks acting as little more than ATMs.  Credit is difficult and expensive to obtain. However, the GOI is implementing a project to distribute public salaries using electronic payments.  Most trade-based letters of credit are with external banks. Iraq ranks 186 out of 190 in terms of ease of getting credit on the World Bank’s 2019 Doing Business Report.  Although the volume of lending by privately-owned banks is growing, most privately-owned banks do more business providing wire transfers and other fee-based exchange services than lending.  Only about 20 of the 50 privately-owned banks have participated in a Small-to-Medium Enterprise lending program funded by the Central Bank of Iraq since 2015. Businesses are largely self-financed or obtain credit from individuals in private transactions.  State-owned banks mainly make financial transfers from the government to provincial authorities or individuals, rather than business loans.

The main purpose of the TBI is to provide financial and related services to facilitate trade, particularly through letters of credit (LCs).  In 2009, the MOF opened the government LC market by granting private banks permission to issue LCs below USD 4 million. The ceiling was later raised to USD 10 million.  Virtually all government LCs are processed by the TBI, which has stated it transfers a number of LCs under USD 5 million to private banks.

The National Investment Law allows foreign investors to purchase shares and securities listed in the Iraqi Stock Exchange (ISX) and the GOI welcomes foreign portfolio investment.

Money and Banking System

The GOI has had little success reforming its two largest state-owned banks, Rafidain and Rasheed, however banking sector reform is a priority of Iraq’s IMF and World Bank programs.  Private banks are mostly active in currency exchanges and wire transfers. The CBI is Iraq’s central bank, headquartered in Baghdad, with branches in Basrah and Erbil. Work continued to fully reconnect CBI’s Erbil branch to the electronic CBI system, which would link the IKR’s state-owned banks.  In January 2018, the KRG MOF announced plans to consolidate the region’s 92 state-owned banks under a single bank, to be named “Nishtiman.”

Foreign Exchange and Remittances

Foreign Exchange

The currency of Iraq is the dinar (IQD).  Iraqi authorities confirm that in practice there are no restrictions on current and capital transactions involving currency exchange as long as underlying transactions are supported by valid documentation.  The NIL allows investors to repatriate capital brought into Iraq, along with proceeds. Funds can be associated with any form of investment and freely converted into any world currency. The NIL also contains provisions that allow investors to maintain accounts at banks licensed to operate in Iraq and transfer capital inside or outside of the country.

The GOI’s monetary policy since 2003 has focused on ensuring price stability primarily by maintaining a de facto peg between the IQD and the USD while seeking to maintain exchange rate predictability through supplying USD to the Iraqi market.  Banks may engage in spot transactions in any currency but are not allowed to engage in forward transactions in Iraqi dinars for speculative purposes. There are no taxes or subsidies on purchases or sales of foreign exchange.

Remittance Policies

There have not been any recent changes to Iraq’s remittance policies.  Foreign nationals are allowed to remit their earnings, including U.S. dollars, in compliance with Iraqi law.  Iraq does not engage in currency manipulation.  Iraq is listed as a jurisdiction with strategic deficiencies according to the Financial Action Task Force.

Sovereign Wealth Funds

Iraq does not have a sovereign wealth fund.

State-owned enterprises (SOEs) are active across all sectors in Iraq.  GOI ministries currently own and operate over 192 SOEs, a legacy of the state planning system.  Many Iraqi SOEs are unproductive, and the GOI’s continued support of unprofitable entities places a substantial fiscal burden on Iraq.  These firms employ over half a million Iraqis, many of whom are underemployed. The degree to which SOEs compete with private companies varies by sector; SOEs face the most competition in the market for consumer goods.  The GOI has expressed a commitment to reforming the SOEs and taking steps toward privatization as part of its international financing programs.

Law 22 of 1997 and the NIL provide the regulatory framework for the operations of SOEs and joint ventures between foreign companies and SOEs.  Law 22 is complex, and several articles are ambiguous regarding the rights and privileges that SOEs enjoy. Article 15.3 of Law 22 allows Iraqi SOEs to engage in partnership agreements or joint ventures with foreign companies.  However, the lack of clarifying regulations has created difficulty in implementation. Ministries have faced challenges in reviewing partnership agreements without sufficient criteria to determine if the agreements would be effective or successful.  When parent ministries wish to initiate a partnership for an SOE under their purview, they generally advertise the tender on their ministry’s website. Partnerships are negotiated on a case-by-case basis, and the minister’s approval is required. The Ministry of Industry and Minerals (MIM), which oversees the largest number of Iraq’s SOEs, received the Council of Ministers’ approval in 2013 to institute the following requirements for partnerships:  1) change the required minimum duration to three years; 2) add a requirement that the foreign company register a company office in Iraq; and 3) add a requirement that the foreign company participate in the production of goods.

According to the Prime Minister’s Advisory Council, foreign companies have faced challenges in partnerships because the GOI has at times cut subsidies to the SOE after partnerships were formed, the employment policies and salary decisions were dictated by the parent ministry, and gaps between the GOI’s official policy and practices affected their bottom line.  In addition, the MIM has often required that the foreign investor pay all SOE employees’ salaries regardless of whether they are working on the agreed project.

GOI entities are required to give preferential treatment to SOEs under multiple laws.  A 2009 Council of Ministers’ decision requires all Iraqi government agencies to procure goods from SOEs unless the SOE cannot fulfill the quality and quantity requirements of the tender.  A Board of Supreme Audit decision requires government agencies to award SOEs tenders if the SOE’s bid is no more than 10 percent higher than other bids. Furthermore, some GOI entities, including the MIM, have also issued their own internal regulations requiring tenders to select Iraqi SOEs, unless the Iraqi SOE states that it cannot fulfill the order.  Sometimes a foreign firm must form a partnership with an Iraqi firm to fulfill tenders promulgated by SOEs.

Under Article 16 of the 2008 Regulations for Implementing Government Contracts (Law No. 1), SOEs are exempt from bid bond and performance bond requirements.  While the Iraqi budget outlines the funds that the SOEs will receive, both for operational costs as well as for salary payments, the SOEs do not always receive the exact figure allocated.  As a result of years of sanctions and war, most of these SOEs suffer from sclerotic management and dependence on GOI contracts. Many of them are not commercially viable due to bloated payrolls and obsolete equipment, although some have adapted and are producing goods for the domestic market.

In 2015, the MIM developed a plan to restructure its 59 SOEs.  Under the proposed plan, the MIM would rate SOEs based on their profitability and degree of government dependence.  Unprofitable SOEs that are unable to cover payroll obligations would be sold or shut down. However, no action to implement this plan has been undertaken.  Article 14 of the 2017 Federal General Budget Law expanded the potential role of private investment in SOE reform, giving governorates the mandate to expand partnerships with the private sector “as much as possible” with approval of the governorate’s council.

Iraq is not party to the Government Procurement Agreement within the framework of the WTO.

Articles 20-25 of Law 22 specify the selection process of an SOE’s Board of Directors.  The law includes provisions to introduce a degree of autonomy. For example, it requires that the minister’s sole appointment to the Board of Directors receive the approval of an “Opinion Board.”  Nevertheless, in practice, the majority of board members have close personal and political connections to the parent ministry’s leadership.

SOEs do not adhere to OECD Guidelines.  Iraq does not have a centralized ownership entity that exercises ownership rights for each of the SOEs.  SOEs are required to seek their parent ministry’s approval for certain categories of financial decisions and operation expansions.  However, in practice, SOEs defer to the parent ministry for the vast majority of decisions. SOEs submit financial reports to their parent ministry’s audit departments and the Board of Supreme Audit.  These reports are not published and sometimes exclude salary expenses.

Privatization Program

The GOI has repeatedly announced that it plans to reorganize failing SOEs across multiple sectors.  Additionally, the GOI is eager to modernize Iraq’s financial and banking institutions. There are, however, no concrete timelines for these initiatives, and entrenched patronage networks tying SOEs to ministries remain a stumbling block.  Presumably, foreign investors would have an opportunity to invest in privatization projects. The IMF Stand-By Arrangement requires the GOI to conduct an audit of state-owned banks and the World Bank’s Development Policy Loan requires Iraq to audit SOEs.

The international oil companies active in Iraq are required to observe international best practices in corporate social responsibility (CSR) as part of their contracts with the GOI.  Nevertheless, the GOI does not have policies in place to promote CSR and raise awareness of environmental and social issues among investors. The concept of CSR is not widely recognized in Iraq and few NGOs and business associations are monitoring it.  Iraq has not subscribed to the OECD’s Guidelines for Multinational Enterprises. As security and business conditions improve in Iraq, awareness of CSR is likely to increase.

In the IKR, oil companies are mandated in their production sharing contracts with the KRG to give back to the communities in which they work through corporate responsibility agreements.  These agreements require yearly payments from which the KRG prioritizes and allocates funds for projects such as improved roads, university training for local youth in the geotechnical and energy fields, and health clinics.

According to the amended 2015 NIL, investors are required to protect the environment and adhere to quality control systems.  These include soil testing requirements on the land designated for the project as well as conducting an environmental impact study.  In practice, the GOI lacks a mechanism to enforce environmental protection laws and implementation is limited.

Iraq became a member of the Extractive Industries Transparency Initiative (EITI) in 2009.  The Government of Iraq established a 15-person committee to work on EITI, including several Directors General within the MOO, four representatives from NGOs, as well as oil company executives.  The committee provided required reports through 2013. In February 2017, the World Bank approved a USD 350,000 program to assist Iraq with carrying out its EITI obligations.  In November 2017, the EITI Board concluded Iraq had made inadequate progress and temporarily suspended Iraq’s membership and gave Iraq 18 months to carry out corrective actions.  The MOO continues to engage with the EITI Board as it prepares for its next review.

Iraq ranked 168 out of 180 on Transparency International’s 2017 Corruption Perception Index.  Public corruption is a major obstacle to the development of Iraq’s economy and to political stability.  Corruption is pervasive in government procurement, in the awarding of licenses or concessions, dispute settlement, and Iraq’s customs regime.

On January 29, Prime Minister AAM announced his plan to fight corruption through efforts to strengthen anti-corruption laws as outlined in the National Program.  He asked that the COR do its part in fighting corruption and strictly adhere to the disclosure of property belonging to members of parliament. The Prime Minister announced his intention to re-evaluate the Commission of Integrity (COI).

While large-scale investment opportunities exist in Iraq, particularly for sophisticated investors, corruption remains a significant impediment to conducting business, and foreign investors can expect to contend with corruption in many forms, and at all levels.  While the GOI has moved toward greater effectiveness in reducing opportunities for procurement corruption in sectors such as electricity, oil, and gas, credible reports of corruption in government procurement are widespread, with examples ranging from bribery and kickbacks to awards involving companies connected to political leaders.  Investors may come under pressure to take on well-connected local partners to avoid systemic bureaucratic hurdles to doing business. Similarly, there are credible reports of corruption involving large-scale problems with government payrolls, ranging from “ghost” employees and salary skimming to nepotism and patronage in personnel decisions.  Moving goods into and out of the country continues to be difficult, and bribery of port officials is commonplace; Iraq ranks 181 out of 190 countries in the category of “Trading Across Borders” in the World Bank’s 2018 Doing Business report.

U.S. firms frequently identify corruption as a significant obstacle to foreign direct investment, particularly in government contracts and procurement, as well as performance requirements and performance bonds.

There are three principal institutions specifically designated to address the problem of corruption in Iraq.  CPA Order 57 established Inspectors General (IGs) for each of Iraq’s ministries. Similar to the role of IGs in the U.S. government, these offices are responsible for inspections, audits, and investigations within their ministries.  The Commission of Integrity, initially established under the Coalition Provisional Authority (CPA), is an independent government agency responsible for pursuing anti-corruption investigations, upholding enforcement of laws, and preventing crime.  The COI investigates government corruption allegations and refers completed cases to the Iraqi judiciary. COI Law No. 30, passed in 2011, updated the CPA provisions by granting the COI broader responsibilities and jurisdiction through three newly created directorates:  asset recovery, research and studies, and the Anti-Corruption Academy.

The Board of Supreme Audit (BSA), established in 1927, is an analogue to the U.S. government’s General Accountability Office.  It is a financially and administratively independent body that derives its authority from Law 31 of 2011 – the Law of the Board of Supreme Audit.  It is charged with fiscal and regulatory oversight of all publicly-funded bodies in Iraq and auditing all federal revenues, including any revenues received from the IKR.

None of these organizations has provided an effective check on public corruption.

Neither the COI nor the IGs has effective jurisdiction within the IKR.  The Kurdistan Board of Supreme Audit audits regional revenues with IKP and GOI oversight.  The IKP passed the Commission on Public Integrity (Law No. 3) in 2011, which established a regional Commission of Integrity (KCOI) that began its work in late 2013.  The IKP passed an amendment to the law in May 2014 that gave the KCOI increased jurisdiction over other branches of government, and made the KCOI responsible for investigating money laundering.  The Commission launched an initiative in early 2014 to collect financial declaration forms from public officials at the director general-level and above. They received a 95 percent response rate and have begun to check the disclosure documents against other public records. According to the KCOI 2018 Annual Report, 191 corruption cases were investigated, including 116 that were referred for prosecution in court.  The cases came to the KCOI from different sources such as the Prosecutor’s office, KRG Intelligence, the KCOI Hot Line, and IKR media outlets. The KCOI settled 75 cases in 2018 with 55 ending in sentencing and 20 dismissed.

Iraq is a party but not a signatory to the UN Anticorruption Convention.  Iraq is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

According to Iraqi law, any person or legal entity has the right to submit corruption-related complaints to the COI or the inspector general of the GOI ministry or body engaging in corruption.

Commission for Integrity
Department of Complaints and Reports
Mobile: 07901988559
Landline: 07600000030
Hotline@nazaha.iq

On December 9, 2017, former PM Abadi announced all of Iraqi territory had been liberated from ISIS.  Much work remains to prevent the reemergence of ISIS, and Iraqi forces continue to carry out counter-terrorism operations against ISIS cells throughout the country.  Terrorist attacks within the IKR occur less frequently than in other parts of Iraq, although the KRG, U.S. government facilities, and western interests remain possible targets, as evidenced by the April 17, 2015, bombing in the public area outside U.S. Consulate General Erbil.  In addition, anti-U.S. sectarian militias may threaten U.S. citizens and western companies throughout Iraq.

The U.S. government considers the potential threat to USG personnel in Iraq to be serious enough to require them to live and work under strict security guidelines.  State Department guidance to U.S. businesses in Iraq advises the use of protective security details. Detailed security information is available on the U.S. Embassy website: http://iraq.usembassy.gov/.  Some U.S. and third-country business people travel throughout much of Iraq; however, in general their movement is restricted and most travel with security advisors and protective security teams.

Iraq continues to face high unemployment, a large informal sector, lack of satisfactory work standards, and a large unskilled labor force.  Domestic and foreign investors often cite the lack of skilled Iraqi labor as one of the major impediments to investing in Iraq. Political instability and violence led many highly-educated Iraqis to leave the country in recent years.  Although the Iraqi government’s campaign to defeat ISIS came to a successful end in late 2017, more than 1.7 million Iraqis remained displaced as of April, with most unable to find jobs or pursue livelihood activities to support their families.  Female IDPs continued to be vulnerable to economic exploitation and discriminatory employment conditions.

In 2018, the World Bank estimated the unemployment rate at 16.9 percent.  In 2015, UNDP reported that unemployment among Iraqi youth with higher education was above the national youth unemployment average.  According to UNDP data from 2014, the government accounted for 40 percent of all jobs, with a higher percentage in urban areas (45 percent) than in rural areas (28 percent).  Employment in the agricultural sector represented 23.4 percent and employment in the services sector represented 58.3 percent of all employment. While accounting for 65 percent of Iraq’s GDP and over 90 percent of government revenue, the oil sector employs only 1 percent of the total labor force.

Foreign investors tend to rely on foreign workers.  According to the 2015 amended NIL, foreign workers may be hired for investment projects, when needed, after priority has been given to Iraqi workers.  However, according to National Investment Regulation No. 2 of 2009, at least 50 percent of an investment project’s workers must be Iraqi nationals. International companies have noted that it can be a challenge to meet this requirement.  Foreign investors are expected to help train Iraqi employees to increase their efficiency, skills, and capabilities.

In the IKR, hiring locally is encouraged but not mandated by either the KRIL or the 2011 Employment Policy of the KRG Ministry of Labor and Social Affairs.  Foreign employees must obtain a security clearance issued by the KRG Ministry of Interior and a work permit issued by the KRG MOLSA before applying for the residency permit required for legal employment.  Some companies have reported prolonged delays in obtaining necessary residency permits for foreign workers.

The Iraqi Constitution states that citizens have the right to form and join unions and professional associations.  Iraq is a party to both International Labor Organization (ILO) conventions related to youth employment, including child labor.  Iraqi labor laws also regulate working conditions and prohibit all forms of forced or compulsory labor, including by children. However, the GOI has not effectively monitored or enforced the law, which has resulted in poor working conditions for many workers.

In February 2016, the GOI passed a new labor law that was drafted with the assistance of the ILO and is more consistent with current international standards.  Labor Law No. 37 allows for collective bargaining, further limits child labor, and provides improved protections against discrimination at work. For the first time, the labor law addresses sexual harassment at work and provides protection against it.  The law also enshrines the right to strike, banned since 1987. Under the law, the GOI no longer restricts workers to affiliate with only one union or federation, and coverage is expanded to include all workers not covered by Iraq’s civil service law.

The new labor law was not implemented in the IKR, and the KRG continues to use the previous 1987 labor law.  Demonstrations took place in December 2017 in Sulaimaniya and Erbil provinces to protest the KRG’s non-payment of government salaries and public corruption.  Demonstrations took place March 2018 throughout the IKR regarding the KRG’s payment of civil servant salaries at reduced austerity levels begun in 2015. In response to these protests, the KRG revised the austerity package later that month, though it remained three months in arrears on paying salaries.  On March 10, the KRG announced that it had ended the austerity program and paid the December 2018 salaries at full rates.

The MOLSA sets a minimum monthly wage for unskilled workers.  The private sector sets wages by contract, and the GOI sets wages for those working in the public sector.  The Council of Ministers approved changes to the public sector pay scale, which took effect in January 2015, to reduce the pay gap between low- and high-ranking employees.  The changes also reduced wage disparities among government ministries and canceled extra wages issued to employees in Baghdad’s International Zone. According to Iraqi law, all employers must provide some level of transport, accommodation, and food allowances for each employee.  The law does not fix these allowance amounts. In December 2013, the government launched a Social Safety Net program to assist the unemployed and persons with disabilities in gaining access to financial aid and benefits from the government; as of April 2018, MOLSA’s Directorate of People with Disabilities and Special Needs reported the program covers approximately 4 million individuals.

OPIC’s current outstanding commitment in Iraq in loans and insurance is USD 139 million with an additional USD 32 million in loans yet to be disbursed.  OPIC is currently reviewing a number of project proposals, including in the health care, tourism, energy, and housing sectors, and an expansion of a successful microfinance project.  OPIC has one investment project in the IKR and has provided funding for a small- and medium-sized enterprise credit organization. The Investment Incentive Agreement (IIA) between the United States and the GOI provides the basis for OPIC to provide financing and political risk insurance in Iraq.  OPIC has another project to build residential apartments in the Green Zone of Baghdad. The Project will consist of 12 buildings totaling 576 apartments. [Note: Iraq is a signatory to the Riyadh Convention; however, it is not a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the “New York Convention”), which is typically a requirement for OPIC’s political risk insurance.  End note.

The GOI collects and publishes limited statistics with which to compare international and U.S. investment data.  The NIC and Provincial Investment Commissions (PIC) granted 1067 licenses between 2008 and 2015, the latest statistics available, with a total potential value of USD 53.9 billion.  However, an investment license from the NIC or a PIC does not mean that the proposed investment will be implemented.

In the IKR, the Kurdistan BOI granted 51 licenses in 2018, with a total potential value of USD 3.13 billion.  Compared to 2017, the BOI granted licenses to 18 more projects, representing a capital increase of USD 2.4 billion (340 percent).  The granting of an investment license by the BOI does not mean that the proposed investment will be implemented. All of the licenses granted in 2018 were to national (i.e. Iraqi-owned) projects.

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

*Host Country Statistical Source:  Ministry of Planning; Central Bank of Iraq

Table 3: Sources and Destination of FDI

Data not available.

Table 4: Sources of Portfolio Investment

Data not available.

Embassy Baghdad Economic Section
Al-Kindi Street, International Zone, Baghdad
Office: +1-301-985-8841 x3013
USIraqTrade@state.gov
https://iq.usembassy.gov/business/getting-started-iraq/

Policies Towards Foreign Direct Investment

Mexico is open to foreign direct investment (FDI) in the vast majority of economic sectors and has consistently been one of the largest emerging market recipients of FDI.  Mexico’s macroeconomic stability, large domestic market, growing consumer base, rising skilled labor pool, welcoming business climate, and proximity to the United States all help attract foreign investors.

Historically, the United States has been one of the largest sources of FDI in Mexico.  According to Mexico’s Secretariat of Economy, FDI flows to Mexico from the United States totaled USD 12.3 billion in 2018, nearly 39 percent of all inflows to Mexico (USD 31.6 billion).  The automotive, aerospace, telecommunications, financial services, and electronics sectors typically receive large amounts of FDI. Most foreign investment flows to northern states near the U.S. border, where most maquiladoras (export-oriented manufacturing and assembly plants) are located, or to Mexico City and the nearby “El Bajio” (e.g. Guanajuato, Queretaro, etc.) region.  In the past, foreign investors have overlooked Mexico’s southern states, although that may change if the new administration’s focus on attracting investment to the region gain traction.

The 1993 Foreign Investment Law, last updated in March 2017, governs foreign investment in Mexico.  The law is consistent with the foreign investment chapter of NAFTA. It provides national treatment, eliminates performance requirements for most foreign investment projects, and liberalizes criteria for automatic approval of foreign investment.  The Foreign Investment Law provides details on which business sectors are open to foreign investors and to what extent. Mexico is also a party to several Organization for Economic Cooperation and Development (OECD) agreements covering foreign investment, notably the Codes of Liberalization of Capital Movements and the National Treatment Instrument.

The new administration stopped funding ProMexico, the government’s investment promotion agency, and is integrating its components into other ministries and offices.  PROMTEL, the government agency charged with encouraging investment in the telecom sector, is expected to continue operations with a more limited mandate. Its first director and four other senior staff recently left the agency.  In April 2019, the government sent robust participation to the 11th CEO Dialogue and Business Summit for Investment in Mexico sponsored by the U.S. Chamber of Commerce and its Mexican equivalent, CCE. Cabinet-level officials conveyed the Mexican government’s economic development and investment priorities to dozens of CEOs and business leaders.

Limits on Foreign Control and Right to Private Ownership and Establishment

Mexico reserves certain sectors, in whole or in part, for the State including:  petroleum and other hydrocarbons; control of the national electric system, radioactive materials, telegraphic and postal services; nuclear energy generation; coinage and printing of money; and control, supervision, and surveillance of ports of entry.  Certain professional and technical services, development banks, and the land transportation of passengers, tourists, and cargo (not including courier and parcel services) are reserved entirely for Mexican nationals. See section six for restrictions on foreign ownership of certain real estate.

Reforms in the energy, power generation, telecommunications, and retail fuel sales sectors have liberalized access for foreign investors.  While reforms have not led to the privatization of state-owned enterprises such as Pemex or the Federal Electricity Commission (CFE), they have allowed private firms to participate.

Hydrocarbons:  Private companies participate in hydrocarbon exploration and extraction activities through contracts with the government under four categories:  competitive contracts, joint ventures, profit sharing agreements, and license contracts. All contracts must include a clause stating subsoil hydrocarbons are owned by the State.  The government has held four separate bid sessions allowing private companies to bid on exploration and development of oil and gas resources in blocks around the country. In 2017, Mexico successfully auctioned 70 land, shallow, and deep water blocks with significant interest from international oil companies.  The Lopez Obrador administration decided to suspend all future auctions until 2022.

Telecommunications:  Mexican law states telecommunications and broadcasting activities are public services and the government will at all times maintain ownership of the radio spectrum.

Aviation:  The Foreign Investment Law limited foreign ownership of national air transportation to 25 percent until March 2017, when the limit was increased to 49 percent.

Under existing NAFTA provisions, U.S. and Canadian investors receive national and most-favored-nation treatment in setting up operations or acquiring firms in Mexico.  Exceptions exist for investments restricted under NAFTA. Currently, the United States, Canada, and Mexico have the right to settle any dispute or claim under NAFTA through international arbitration.  Local Mexican governments must also accord national treatment to investors from NAFTA countries.

Approximately 95 percent of all foreign investment transactions do not require government approval.  Foreign investments that require government authorization and do not exceed USD 165 million are automatically approved, unless the proposed investment is in a legally reserved sector.

The National Foreign Investment Commission under the Secretariat of the Economy is the government authority that determines whether an investment in restricted sectors may move forward.  The Commission has 45 business days after submission of an investment request to make a decision. Criteria for approval include employment and training considerations, and contributions to technology, productivity, and competitiveness.  The Commission may reject applications to acquire Mexican companies for national security reasons. The Secretariat of Foreign Relations (SRE) must issue a permit for foreigners to establish or change the nature of Mexican companies.

Other Investment Policy Reviews

The World Trade Organization (WTO) completed a trade policy review of Mexico in February 2017 covering the period to year-end 2016.  The review noted the positive contributions of reforms implemented 2013-2016 and cited Mexico’s development of “Digital Windows” for clearing customs procedures as a significant new development since the last review.

The full review can be accessed via:  https://www.wto.org/english/tratop_e/tpr_e/tp452_e.htm  .

Business Facilitation

According to the World Bank, on average registering a foreign-owned company in Mexico requires 11 procedures and 31 days.  In 2016, then-President Pena Nieto signed a law creating a new category of simplified businesses called Sociedad for Acciones Simplificadas (SAS).  Owners of SASs will be able to register a new company online in 24 hours.  The Government of Mexico maintains a business registration website:  www.tuempresa.gob.mx  .  Companies operating in Mexico must register with the tax authority (Servicio de Administration y Tributaria or SAT), the Secretariat of the Economy, and the Public Registry.  Additionally, companies engaging in international trade must register with the Registry of Importers, while foreign-owned companies must register with the National Registry of Foreign Investments.

Outward Investment

In the past, ProMexico was responsible for promoting Mexican outward investment and provided assistance to Mexican firms acquiring or establishing joint ventures with foreign firms, participating in international tenders, and establishing franchise operations, among other services.  Various offices at the Secretariat of Economy and the Secretariat of Foreign Affairs now handle these issues. Mexico does not restrict domestic investors from investing abroad.

Bilateral Investment Treaties

On November 30, 2018, leaders of the United States, Mexico, and Canada signed a trade agreement to replace and modernize NAFTA – the United States-Mexico-Canada Agreement.  The agreement is now pending ratification by all three countries’ legislatures. The agreement contains an investment chapter.

Mexico has signed 13 FTAs covering 50 countries and 32 Reciprocal Investment Promotion and Protection Agreements covering 33 countries.  Mexico is a member of Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which entered into force December 30, 2018.  Mexico currently has 29 Bilateral Investment Treaties in force. Mexico and the European Union signed an agreement in principle to revise its FTA.

Bilateral Taxation Treaties

The United States-Mexico Income Tax Convention, which came into effect January 1, 1994, governs bilateral taxation between the two nations.  Mexico has negotiated double taxation agreements with 55 countries. Recent reductions in U.S. corporate tax rates may drive a future change to the Mexican fiscal code, but there is no formal legislation under consideration.

International Regulatory Considerations

Generally speaking, the Mexican government has established legal, regulatory, and accounting systems that are transparent and consistent with international norms.  Still, the Lopez Obrador administration has publicly questioned the value of specific anti-trust and energy regulators. Furthermore, corruption continues to affect equal enforcement of some regulations.  The Lopez Obrador administration has an ambitious plan to centralize government procurement in an effort to root out corruption and generate efficiencies.  The administration estimates it can save up to USD 25 billion annually by consolidating government purchases in the Mexican Secretariat of Finance (Hacienda).  Under the current decentralized process, more than 70 percent of government contracts are sole-sourced, interagency consolidated purchases are uncommon, and the entire process is susceptible to corruption.  The Mexican government’s budget is published online and readily available.  The Bank of Mexico also publishes and maintains data about the country’s finances and debt obligations.

The Federal Commission on Regulatory Improvement (COFEMER), within the Secretariat of Economy, is the agency responsible for streamlining federal and sub-national regulation and reducing the regulatory burden on business.  Mexican law requires Secretariats and regulatory agencies to conduct impact assessments of proposed regulations. Assessments are made available for public comment via COFEMER’s website: www.cofemer.gob.mx  .  The official gazette of state and federal laws currently in force in Mexico is publicly available via:  http://www.ordenjuridico.gob.mx/  .

Mexico’s antitrust agency, the Federal Commission for Economic Competition (COFECE), plays a key role protecting, promoting, and ensuring a competitive free market in Mexico.  COFECE is responsible for eliminating barriers both to competition and free market entry across the economy (except for the telecommunications sector, which is governed by its own competition authority) and for identifying and regulating access to essential production inputs.

In addition to COFECE, the Energy Regulatory Commission (CRE) and National Hydrocarbon Commission (CNH) are both technically-oriented independent agencies that play important roles in regulating the energy and hydrocarbons sectors.  CRE regulates national electricity generation, coverage, distribution, and commercialization, as well as the transportation, distribution, and storage of oil, gas, and biofuels. CNH supervises and regulates oil and gas exploration and production and issues oil and gas upstream (exploration/production) concessions.

Investors are increasingly concerned the administration is undermining confidence in the “rules of the game,” particularly in the energy sector, by weakening the political autonomy of COFECE, CNH, and CRE.  The administration appointed four of seven CRE commissioners over the Senate’s objections, which voted twice to reject the nominees in part due to concerns their appointments would erode the CRE’s political autonomy.  The administration’s budget cuts resulted in significant layoffs, which has reportedly hampered the agencies’ ability to carry out its work, a key factor in investment decisions.

The Secretariat of Public Administration has made considerable strides in improving transparency in government, including government contracting and involvement of the private sector in enhancing transparency and fighting corruption.  The Mexican government has established four internet sites to increase transparency of government processes and to establish guidelines for the conduct of government officials: (1) Normateca (http://normatecainterna.sep.gob.mx  ) provides information on government regulations; (2) Compranet (https://compranet.funcionpublica.gob.mx  ) displays federal government procurement actions on-line; (3) Tramitanet (www.tramitanetmexico.com  ) permits electronic processing of transactions within the bureaucracy; and (4) Declaranet (https://declaranet.gob.mx/  ) allows federal employees to file income taxes online.

Legal System and Judicial Independence

Since the Spanish conquest in the 1500s, Mexico has had an inquisitorial system adopted from Europe in which proceedings were largely carried out in writing and sealed from public view.  Mexico amended its Constitution in 2008 to facilitate change to an oral accusatorial criminal justice system to better combat corruption, encourage transparency and efficiency, while ensuring respect for the fundamental rights of both the victim and the accused.  An ensuing National Code of Criminal Procedure passed in 2014, and is applicable to all 32 states. The national procedural code is coupled with each state’s criminal code to provide the legal framework for the new accusatorial system, which allows for oral, public trials with the right of the defendant to face his/her accuser and challenge evidence presented against him/her, right to counsel, due process and other guarantees.  Mexico fully adopted the new accusatorial criminal justice system at the state and federal levels in June 2016.

Mexico’s Commercial Code, which dates back to 1889, was most recently updated in 2014.  All commercial activities must abide by this code and other applicable mercantile laws, including commercial contracts and commercial dispute settlement measures.  Mexico has multiple specialized courts regarding fiscal, labor, economic competition, broadcasting, telecommunications, and agrarian law.

The judicial branch is nominally independent from the executive.  Following a reform passed in February 2014, the Attorney General’s Office (Procuraduria General de la Republica or PGR) became autonomous of the executive branch, as the Prosecutor General’s Office (Fiscalia General de la Republica or FGR).  The Mexican Senate confirmed Mexico’s first Fiscal on January 18, 2019.  The Fiscal will serve a nine-year term, intended to insulate his office from the executive branch, whose members serve six-year terms.

Laws and Regulations on Foreign Direct Investment

Mexico’s Foreign Investment Law sets the rules governing foreign investment into the country.  The National Commission for Foreign Investments, formed by several cabinet-level ministries including Interior (SEGOB), Foreign Relations (SRE), Finance (Hacienda), Economy (SE), and Social Development (SEDESOL), establishes the criteria for administering investment rules.

Competition and Anti-Trust Laws

Mexico has two constitutionally autonomous regulators to govern matters of competition – the Federal Telecommunications Institute (IFT) and the Federal Commission for Economic Competition (COFECE).  IFT governs broadcasting and telecommunications, while COFECE regulates all other sectors. For more information on competition issues in Mexico, please visit COFECE’s bilingual website at: www.cofece.mx  .

Expropriation and Compensation

Mexico may not expropriate property under NAFTA, except for public purpose and on a non-discriminatory basis.  Expropriations are governed by international law and require rapid fair market value compensation, including accrued interest.  Investors have the right to international arbitration for violations of this or any other rights included in the investment chapter of NAFTA.

Dispute Settlement

ICSID Convention and New York Convention

Mexico ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) in 1971 and has codified this into domestic law.  Mexico is also a signatory to the Inter-American Convention on International Commercial Arbitration (1975 Panama Convention) and the 1933 Montevideo Convention on the Rights and Duties of States.  Mexico is not a member of the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention), even though many of the investment agreements signed by Mexico include ICSID arbitration as a dispute settlement option.

Investor-State Dispute Settlement

Chapters 11, 19, and 20 of the existing NAFTA cover international dispute resolution.  Chapter 11 allows a NAFTA Party investor to seek monetary damages for violations of its provisions.  Investors may initiate arbitration against the NAFTA Party under the rules of the United Nations Commission on International Trade Law (UNCITRAL Model Law) or through the ICSID Convention.  A NAFTA investor may also choose to use the domestic court system to litigate their case. The USMCA contains revisions to these chapters, but will not enter into force until all three countries have ratified the agreement.

Since NAFTA’s inception, there have been 17 cases filed against Mexico by U.S. and Canadian investors who allege expropriation and/or other violations of Mexico’s NAFTA obligations.  Details of the cases can be found at: https://www.state.gov/s/l/c3742.htm.

International Commercial Arbitration and Foreign Courts

The Arbitration Center of Mexico (CAM) is a specialized, private institution administering commercial arbitration as an alternative dispute resolution mechanism.  The average duration of an arbitration process conducted by CAM is 14 months. The Commercial Code dictates an arbitral award, regardless of the country where it originated, must be recognized as binding.  The award must be enforced after a formal written petition is presented to a judge.

The internal laws of both Pemex and CFE state all national disputes of any nature will have to be resolved by federal courts.  State-owned Enterprises (SOEs) and their productive subsidiaries may opt for alternative dispute settlement mechanisms under applicable commercial legislation and international treaties of which Mexico is a signatory.  When contracts are executed in a foreign country, Pemex and CFE have the option to follow procedures governed by non-Mexican law, to use foreign courts, or to participate in arbitration.

Bankruptcy Regulations

Mexico’s Reorganization and Bankruptcy Law (Ley de Concursos Mercantiles) governs bankruptcy and insolvency.  Congress approved modifications in 2014 in order to shorten procedural filing times and convey greater juridical certainty to all parties, including creditors.  Declaring bankruptcy is legal in Mexico and it may be granted to a private citizen, a business, or an individual business partner. Debtors, creditors, or the Attorney General can file a bankruptcy claim.  Mexico ranked 32 out of 190 countries for resolving insolvency in the World Bank’s 2019 Doing Business report. The average bankruptcy filing takes 1.8 years to be resolved and recovers 64.7 cents per USD, which compares favorably to average recovery in Latin America and the Caribbean of just 30.9 cents per USD.  “Buró de Crédito” is Mexico’s main credit bureau.  More information on credit reports and ratings can be found at:  http://www.burodecredito.com.mx/  .

Investment Incentives

Land grants or discounts, tax deductions, and technology, innovation, and workforce development funding are commonly used incentives.  Additional federal foreign trade incentives include: (1) IMMEX: a promotion which allows manufacturing sector companies to temporarily import inputs without paying general import tax and value added tax; (2) Import tax rebates on goods incorporated into products destined for export; and (3) Sectoral promotion programs allowing for preferential ad-valorem tariffs on imports of selected inputs.  Industries typically receiving sectoral promotion benefits are footwear, mining, chemicals, steel, textiles, apparel, and electronics.

Foreign Trade Zones/Free Ports/Trade Facilitation

The new administration launched a two-year program in January 2019 that established a border economic zone (BEZ) in 43 municipalities in six northern border states within 15.5 miles from the U.S. border.  The BEZ program entails: 1) a fiscal stimulus decree reducing the Value Added Tax (VAT) from 16 percent to 8 percent and the Income Tax (ISR) from 30 percent to 20 percent, 2) a minimum wage increase to MXN 176.72 (USD 8.75) per day, and 3) the gradual harmonization of gasoline, diesel, natural gas, and electricity rates with neighboring U.S. states.  The purpose of the BEZ program is to boost investment, promote productivity, and create more jobs in the region.  Interested businesses or individuals must apply to the government’s “Beneficiary Registry” by March 31 demonstrating income from border business activities comprise at least 90 percent of total income.  The company headquarters or branch must be located in the border region for at least 18 months prior to the application.  Sectors excluded from the preferential ISR rate include financial institutions, the agricultural sector, and export manufacturing companies (maquilas).

Separately, the administration announced plans to review and possibly end the Special Economic Zones (SEZs) program throughout the country.

Performance and Data Localization Requirements

Mexican labor law requires at least 90 percent of a company’s employees be Mexican nationals.  Employers can hire foreign workers in specialized positions as long as foreigners do not exceed 10 percent of all workers in that specialized category.  Mexico does not follow a “forced localization” policy—foreign investors are not required by law to use domestic content in goods or technology. However, investors intending to produce goods in Mexico for export to the United States should take note of the rules of origin prescriptions contained within NAFTA if they wish to benefit from NAFTA treatment.

Mexico does not have any policy of forced localization for data storage, nor must foreign information technology (IT) providers turn over source code or provide backdoors into hardware or software.  Within the constraints of the Federal Law on the Protection of Personal Data, Mexico does not impede companies from freely transmitting customer or other business-related data outside the country.

Real Property

Mexico ranked 103 out of 190 countries for ease of registering property in the World Bank’s 2019 Doing Business report, falling four places from its 2018 report.  Article 27 of the Mexican Constitution guarantees the inviolable right to private property. Expropriation can only occur for public use and with due compensation.  Mexico has four categories of land tenure: private ownership, communal tenure (ejido), publicly owned, and ineligible for sale or transfer.

Mexico prohibits foreigners from acquiring title to residential real estate in so-called “restricted zones” within 50 kilometers (approximately 30 miles) of the nation’s coast and 100 kilometers (approximately 60 miles) of the borders.  “Restricted zones” cover roughly 40 percent of Mexico’s territory. Foreigners may acquire the effective use of residential property in “restricted zones” through the establishment of an extendable trust (fideicomiso) arranged through a Mexican financial institution.  Under this trust, the foreign investor obtains all property use rights, including the right to develop, sell, and transfer the property.  Real estate investors should be careful in performing due diligence to ensure that there are no other claimants to the property being purchased.  In some cases, fideicomiso arrangements have led to legal challenges.  U.S.-issued title insurance is available in Mexico and U.S. title insurers operate here.

Additionally, U.S. lending institutions have begun issuing mortgages to U.S. citizens purchasing real estate in Mexico.  The Public Register for Business and Property (Registro Publico de la Propiedad y de Comercio) maintains publicly available information online regarding land ownership, liens, mortgages, restrictions, etc.

Tenants and squatters are protected under Mexican law.  Property owners who encounter problems with tenants or squatters are advised to seek professional legal advice, as the legal process of eviction is complex.

Mexico has a nascent but growing financial securitization market for real estate and infrastructure investments, which investors can access via the purchase/sale of Fideocomisos de Infraestructura y Bienes Raíces (FIBRAs) and Certificates of Capital Development (CKDs) listed on Mexico’s BMV stock exchange.

Intellectual Property Rights

Intellectual Property Rights in Mexico are covered by the Industrial Property Law (Ley de la Propiedad Industrial) and the Federal Copyright Law (Ley Federal del Derecho de Autor).  Responsibility for the protection of IPR is spread across several government authorities.  The Office of the Attorney General (PGR) oversees a specialized unit that prosecutes IPR crimes.  The Mexican Institute of Industrial Property (IMPI), the equivalent to the U.S. Patent and Trademark Office, administers patent and trademark registrations, and handles administrative enforcement cases of IPR infringement.  The National Institute of Copyright (INDAUTOR) handles copyright registrations and mediates certain types of copyright disputes, while the Federal Commission for the Prevention from Sanitary Risks (COFEPRIS) regulates pharmaceuticals, medical devices, and processed foods.  The Mexican Customs Service’s mandate includes ensuring illegal goods do not cross Mexico’s borders.

The process for trademark registration in Mexico normally takes six to eight months.  The registration process begins by filing an application with IMPI, which is published in the Official Gazette.  IMPI first undertakes a formalities examination, followed by a substantive examination to determine if the application and supporting documentation fulfills the requirements established by law and regulation to grant the trademark registration.  Once the determination is made, IMPI then publishes the registration in the Official Gazette. A trademark registration in Mexico is valid for 10 years from the filing date, and is renewable for 10-year periods. Any party can challenge a trademark registration through the new opposition system, or post-grant through a cancellation proceeding.  IMPI employs the following administrative procedures: nullity, expiration, opposition, cancellation, trademark, patent and copyright (trade-based) infringement. Once IMPI issues a decision, the affected party may challenge it through an internal reconsideration process or go directly to the Specialized IP Court for a nullity trial. An aggrieved party can then file an appeal with a Federal Appeal Court based on the Specialized IP Court’s decision.  In cases with an identifiable constitutional challenge, the plaintiff may file an appeal before the Supreme Court of Justice.

The USPTO has a Patent Prosecution Highway (PPH) agreement with IMPI.  Under the PPH, an applicant receiving a ruling from either IMPI or the USPTO that at least one claim in an application is patentable may request that the other office expedite examination of the corresponding application.  The PPH leverages fast-track patent examination procedures already available in both offices to allow applicants in both countries to obtain corresponding patents faster and more efficiently. The PPH permits USPTO and IMPI to benefit from work previously done by the other office, which reduces the examination workload and improves patent quality.

Mexico is plagued by widespread commercial-scale infringement that results in significant losses to Mexican, U.S., and other IPR owners.  There are many issues that have made it difficult to improve IPR enforcement in Mexico, including legislative loopholes; lack of coordination between federal, state, and municipal authorities; a cumbersome and lengthy judicial process; and widespread cultural acceptance of piracy and counterfeiting.  In addition, the involvement of transnational criminal organizations (TCOs), which control the piracy and counterfeiting markets in parts of Mexico, continue to impede federal government efforts to improve IPR enforcement. TCO involvement has further illustrated the link between IPR crimes and illicit trafficking of other contraband, including arms and drugs.

Mexico remained on the Watch List in the 2019 Special 301 report.  Obstacles to U.S. trade include the wide availability of pirated and counterfeit goods in both physical and virtual notorious markets.  The 2018 USTR Out-Of-Cycle Review of Notorious Markets listed two Mexican markets: Tepito in Mexico City and San Juan de Dios in Guadalajara.

Mexico is a signatory to numerous international IP treaties, including the Paris Convention for the Protection of Industrial Property, the Bern Convention for the Protection of Literary and Artistic Works, and the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights.

Resources for Rights Holders

• Intellectual Property Rights Attaché for Mexico, Central America and the Caribbean

U.S. Trade Center
Liverpool No. 31 Col. Juárez
C.P. 06600 Mexico City
Tel: (52) 55 5080 2189

• National Institute of Copyright (INDAUTOR)

Puebla No. 143
Col. Roma, Del. Cuauhtémoc
06700 México, D.F.
Tel: (52) 55 3601 8270
Fax: (52) 55 3601 8214
Web: http://www.indautor.gob.mx/  

• Mexican Institute of Industrial Property (IMPI)

Periférico Sur No. 3106
Piso 9, Col. Jardines del Pedregal
Mexico, D.F., C.P. 01900
Tel: (52 55) 56 24 04 01 / 04
(52 55) 53 34 07 00
Fax: (52 55) 56 24 04 06
Web: http://www.impi.gob.mx/  

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 Mexican government is generally open to foreign portfolio investments, and foreign investors trade actively in various public and private asset classes.  Foreign entities may freely invest in federal government securities. The Foreign Investment Law establishes foreign investors may hold 100 percent of the capital stock of any Mexican corporation or partnership, except in those few areas expressly subject to limitations under that law.  Foreign investors may also purchase non-voting shares through mutual funds, trusts, offshore funds, and American Depositary Receipts. They also have the right to buy directly limited or nonvoting shares as well as free subscription shares, or “B” shares, which carry voting rights. Foreigners may purchase an interest in “A” shares, which are normally reserved for Mexican citizens, through a neutral fund operated by one of Mexico’s six development banks.  Finally, Mexico offers federal, state, and local governments bonds that are rated by international credit rating agencies. The market for these securities has expanded rapidly in past years and foreign investors hold a significant stake of total federal issuances. However, foreigners are limited in their ability to purchase sub-sovereign state and municipal debt. Liquidity across asset classes is relatively deep.

Mexico established a fiscally transparent trust structure known as a FICAP in 2006 to allow venture and private equity funds to incorporate locally.  The Securities Market Law (Ley de Mercado de Valores) established the creation of three special investment vehicles which can provide more corporate and economic rights to shareholders than a normal corporation.  These categories are: (1) Investment Promotion Corporation (Sociedad Anonima de Promotora de Inversion or SAPI); (2) Stock Exchange Investment Promotion Corporation (Sociedad Anonima Promotora de Inversion Bursatil or SAPIB); and (3) Stock Exchange Corporation (Sociedad Anonima Bursatil or SAB).  Mexico also has a growing real estate investment trust market, locally referred to as Fideicomisos de Infraestructura y Bienes Raíces (FIBRAS) as well as FIBRAS-E, which allow for investment in non-real estate investment projects.  FIBRAS are regulated under Articles 187 and 188 of Mexican Federal Income Tax Law.

Money and Banking System

Financial sector reforms signed into law in 2014 have improved regulation and supervision of financial intermediaries and have fostered greater competition between financial services providers.  While access to financial services – particularly personal credit for formal sector workers – has expanded in the past four years, bank and credit penetration in Mexico remains low compared to OECD and emerging market peers.  Coupled with sound macroeconomic fundamentals, reforms have created a positive environment for the financial sector and capital markets. According to the National Banking Commission (CNBV), the banking system remains healthy and well capitalized.  Non-performing loans have fallen sixty percent since 2001 and now account for 2.1 percent of all loans.

Mexico’s banking sector is heavily concentrated and majority foreign-owned:  the seven largest banks control 85 percent of system assets and foreign-owned institutions control 70 percent of total assets.  Under NAFTA’s national treatment guarantee, U.S. securities firms and investment funds, acting through local subsidiaries, have the right to engage in the full range of activities permitted in Mexico.

Banco de Mexico (Banxico), Mexico’s central bank, maintains independence in operations and management by constitutional mandate.  Its main function is to provide domestic currency to the Mexican economy and to safeguard the Mexican Peso’s purchasing power by gearing monetary policy toward meeting a 3 percent inflation target over the medium term.

Mexico’s Financial Technology (FinTech) law came into effect in March 2018, creating a broad rubric for the development and regulation of innovative financial technologies.  Although investors await important secondary regulations that will fully define the rules of the game for FinTech firms, the law covers both cryptocurrencies and a regulatory “sandbox” for start-ups to test the viability of products, placing Mexico among the FinTech policy vanguard.

Foreign Exchange and Remittances

Foreign Exchange

The Government of Mexico maintains a free-floating exchange rate.

Mexico maintains open conversion and transfer policies.  In general, capital and investment transactions, remittance of profits, dividends, royalties, technical service fees, and travel expenses are handled at market-determined exchange rates.  Mexican Peso (MXN)/USD exchange is available on same day, 24- and 48-hour settlement bases. In order to prevent money-laundering transactions, Mexico imposes limits on USD cash deposits. Border- and tourist-area businesses may deposit more than USD 14,000 per month subject to reporting rules and providing justification for their need to conduct USD cash transactions.  Individuals are subject to a USD 4,000 per month USD cash deposit limit. In 2016, Banxico launched a central clearing house to allow for USD clearing services wholly within Mexico, which should improve clearing services significantly for domestic companies with USD income.

Remittance Policies

There have been no recent changes in Mexico’s remittance policies.  Mexico continues to maintain open conversion and transfer policies.

Sovereign Wealth Funds

The Mexican Petroleum Fund for Stability and Development (FMP) was created as part of 2013 budgetary reforms.  Housed in Banxico, the fund distributes oil revenues to the national budget and a long-term savings account. The FMP incorporates the Santiago Principles for transparency, placing it among the most transparent Sovereign Wealth Funds in the world.  Both Banxico and Mexico’s Supreme Federal Auditor regularly audit the fund. Mexico is also a member of the International Working Group of Sovereign Wealth Funds. The Fund is expected to receive MXN 520.6 billion (approximately USD 26 billion) in income in 2019.  The FMP is required to publish quarterly and annual reports, which can be found at www.fmped.org.mx  .

There are two main SOEs in Mexico, both of them in the energy sector.  Petroleos Mexicanos (Pemex) is in charge of running the hydrocarbons (oil and gas) sector, which includes upstream, mid-stream, and downstream operations.  Pemex historically contributed one-third of the Mexican government’s budget, but falling output and global oil prices alongside improved revenue collection from other sources have diminished this amount over the past decade to about eight percent.  The Federal Electricity Commission (CFE) is the other main state-owned company and is in charge of the electricity sector. While the Mexican government maintains state ownership, the latest constitutional reforms granted Pemex and CFE management and budget autonomy and greater flexibility to engage in private contracting.

Pemex

As a result of Mexico’s historic energy reform, the private sector is now able to compete with Pemex or enter into competitive contracts, joint ventures, profit sharing agreements, and license contracts with Pemex for hydrocarbon exploration and extraction.  Liberalization of the retail fuel sales market, which Mexico completed in 2017, created significant opportunities for foreign businesses. Given Pemex frequently raises debt in international markets, its financial statements are regularly audited. The Natural Resource Governance Institute considers Pemex to be the second most transparent state-owned oil company after Norway’s Statoil.  Pemex’s nine-person Board of Directors contains five government ministers and four independent councilors. The administration has identified increasing Pemex’s oil, natural gas, and refined fuels production as its chief priority for Mexico’s hydrocarbon sector.

CFE

Changes to the Mexican constitution in 2013 and 2014 opened power generation and commercial supply to the private sector, allowing companies to compete with CFE.  Mexico has held three long-term power auctions since the reforms, in which over 40 contracts were awarded for 7,451 megawatts of energy supply and clean energy certificates.  CFE will remain the sole provider of distribution services and will own all distribution assets. The 2014 energy reform separated CFE from the National Energy Control Center (CENACE), which now controls the national wholesale electricity market and ensures non-discriminatory access to the grid for competitors.  Independent power generators were authorized to operate in 1992, but were required to sell their output to CFE or use it to self-supply. Under the reform, private power generators may now install and manage interconnections with CFE’s existing state-owned distribution infrastructure. The reform also requires the government to implement a National Program for the Sustainable Use of Energy as a transition strategy to encourage clean technology and fuel development and reduce pollutant emissions.  The administration has identified increasing CFE-owned power generation as its top priority for the utility, breaking from the firm’s recent practice of contracting private firms to build, own, and operate generation facilities. It has publicly called for private investors to “voluntarily renegotiate” gas supply contracts with CFE, which has raised significant concerns among investors about contract sanctity.

The main non-market-based advantage CFE and Pemex receive vis-a-vis private businesses in Mexico is related to access to capital.  In addition to receiving direct budget support from the Secretariat of Finance, both entities also receive implicit credit guarantees from the federal government.  As such, both are able to borrow funds on public markets at below the market rate their corporate risk profiles would normally suggest.

Privatization Program

Mexico’s 2014 energy reforms liberalized access to these sectors but did not privatize state owned enterprises.

Mexico’s private and public sectors have worked to promote and develop corporate social responsibility (CSR) during the past decade.  CSR in Mexico began as a philanthropic effort. It has evolved gradually to a more holistic approach, trying to match international standards such as the OECD Guidelines for Multinational Enterprises and the United Nations Global Compact.

Responsible business conduct reporting has made progress in the last few years with more companies developing a corporate responsibility strategy.  The government has also made an effort to implement CSR in state owned companies such as Pemex, which has published corporate responsibility reports since 1999.  Recognizing the importance of CSR issues, the Mexican Stock Exchange (Bolsa Mexicana de Valores) launched a sustainable companies index, which allows investors to specifically invest in those companies deemed to meet internationally accepted criteria for good corporate governance.

In October 2017, Mexico became the 53rd member of the Extractive Industries Transparency Initiative (EITI), which represents an important milestone in its effort to establish transparency and public trust in its energy sector.

Corruption exists in many forms in Mexican government and society, including corruption in the public sector (e.g., demand for bribes or kickbacks by government officials) and private sector (e.g., fraud, falsifying claims, etc.), as well as conflict of interest issues, which are not well defined in the Mexican legal framework.  A key pillar of President Lopez Obrador’s presidential campaign was combatting corruption at all levels of government.

Still, a significant concern is the complicity of government and law enforcement officials with criminal elements.  While public and private sector corruption is found in many countries, the collaboration of government actors (often due to intimidation and threats) with criminal organizations poses serious challenges for the rule of law in Mexico.  Some of the most common reports of official corruption involve government officials stealing from public coffers or demanding bribes in exchange for awarding public contracts. The current administration supported anti-corruption reforms (detailed below) and judicial proceedings in several high-profile corruption cases, including former governors.  However, Mexican civil society assert that the government must take more effective and frequent action to address corruption.

As described in Section 4, Mexico adopted a constitutional reform in 2014 to transform the current Office of the Attorney General into an Independent Prosecutor General’s office in order to shore up its independence.  President Lopez Obrador’s choice for Prosecutor General was confirmed by the Mexican Senate January 18, 2019. In 2015, Mexico passed a constitutional reform creating the National Anti-Corruption System (SNA) with an anti-corruption prosecutor and a citizens’ participation committee to oversee efforts.  The system is designed to provide a comprehensive framework for the prevention, investigation, and prosecution of corruption cases, including delineating acts of corruption considered criminal acts under the law. The legal framework establishes a basis for holding private actors and private firms legally liable for acts of corruption involving public officials and encourages private firms to develop internal codes of conduct.  Implementation of the mandatory state-level anti-corruption legislation varies. .

The new laws mandate a redesign of the Secretariat of Public Administration to give it additional auditing and investigative functions and capacities in combatting public sector corruption.  The Mexican Congress approved legislation to change economic institutions, assigning new responsibilities and in some instances creating new entities.  Reforms to the federal government’s structure included the creation of a General Coordination of Development Programs to manage the newly created federal state coordinators (“superdelegates”) in charge of federal programs in each state.  The law also created the Secretariat of Public Security and Citizen Protection, and significantly expanded the power of the president’s Legal Advisory Office (Consejería Jurídica) to name and remove each federal agency’s legal advisor and clear all executive branch legal reforms before their submission to Congress.  The law eliminated financial units from ministries, with the exception of the Secretariat of Finance (SHCP), the army (SEDENA), and the navy (SEMAR), and transferred control of contracting offices in other ministries to the SHCP.  Separately, the law replaced the previous Secretariat of Social Development (SEDESOL) with a Welfare Secretariat in charge of coordinating social policies, including those developed by other agencies such as health, education, and culture.  The Labor Secretariat gained additional tools to foster collective bargaining, union democracy, and to meet International Labor Organization (ILO) obligations.

Four opposition parties filed a legal challenge with the Supreme Court, which agreed January 18 to hear constitutional challenges to the law.  The legal challenge contends the reforms infringe on state powers and violate the balance of powers stipulated in the constitution.

Mexico ratified the OECD Convention on Combating Bribery and passed its implementing legislation in May 1999.  The legislation includes provisions making it a criminal offense to bribe foreign officials. Mexico is also a party to the Organization of American States (OAS) Convention against Corruption and has signed and ratified the United Nations Convention against Corruption.  The government has enacted or proposed strict laws attacking corruption and bribery, with average penalties of five to 10 years in prison.

Mexico is a member of the Open Government Partnership and enacted a Transparency and Access to Public Information Act in 2015, which revised the existing legal framework to expand national access to information.  Transparency in public administration at the federal level has noticeably improved, but access to information at the state and local level has been slow. According to Transparency International’s 2018 Corruption Perception Index, Mexico ranked 138 of 180 nations, and has fallen every year since 2012.  Civil society organizations focused on fighting corruption are increasingly influential at the federal level, but are few in number and less powerful at the state and local levels.

The World Economic Forum (WEF) Global Competitiveness Report for 2016-2017 found corruption is “the most problematic factor for doing business” in Mexico.  For example, the WEF notes bribes to facilitate procurement of necessary permits or government contracts can increase business costs by 10 percent. Business representatives, including from U.S. firms believe public funds are often diverted to private companies and individuals due to corruption and perceive favoritism to be widespread among government procurement officials.  The GAN Business Anti-Corruption Portal states compliance with procurement regulations by state bodies in Mexico is unreliable and that corruption is extensive, despite laws covering conflicts of interest, competitive bidding, and company blacklisting procedures.

The U.S. Embassy has engaged in a broad-based effort to work with Mexican agencies and civil society organizations in developing mechanisms to fight corruption and increase transparency and fair play in government procurement.  Efforts with specific business impact include government procurement best practices training and technical assistance under the U.S. Trade and Development Agency’s Global Procurement Initiative. In addition, USAID is working with SFP and Transparency International to drive adoption of the internationally accepted Open Contracting Data Standard (OCDS), as well as technical assistance to upgrade the Mexican government procurement system, CompraNet, to be based on OCDS and international best practices.  (CompraNet is also described in the regulatory transparency portion of Section 3, above.)

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Mexico ratified the UN Convention Against Corruption in 2004.  It ratified the OECD Anti-Bribery Convention in 1999.

Resources to Report Corruption

Contact at government agency:

Secretariat of Public Administration
Miguel Laurent 235, Mexico City
52-55-2000-1060

Contact at “watchdog” organization:

Transparencia Mexicana
Dulce Olivia 73, Mexico City
52-55-5659-4714
Email: info@tm.org.mx

Mass demonstrations are common in the larger metropolitan areas and in the southern Mexican states of Guerrero and Oaxaca.  While political violence is rare, drug and organized crime-related violence has increased significantly in recent years.

The USD 2.7 billion Merida Initiative, launched by Presidents Calderon and Bush in 2008 and supported by bipartisan leaders in Congress, remains our primary mechanism to support Mexico in addressing significant security challenges at an institutional level.  Merida Initiative programs aim to strengthen Mexico’s security and judicial institutions by applying international standards of certification and accreditation to personnel and institutions across the criminal justice system, from the accreditation of police academies and corrections facilities to advanced training for judges, prosecutors, criminal analysts, and forensic lab technicians.  In addition, Merida Initiative programs have expanded over the past year in the areas of border security and counternarcotics, in line with new priorities set out by the Trump administration.

Companies have reported general security concerns remain an issue for companies looking to invest in the country.  The American Chamber of Commerce in Mexico estimates in a biannual report that security costs business as much as 5 percent of operating budgets.  Many companies choose to take extra precautions for the protection of their executives. They also report increasing security costs for shipments of goods.  The Overseas Security Advisory Council (OSAC) monitors and reports on regional security for U.S. businesses operating overseas. OSAC constituency is available to any U.S.-owned, not-for-profit organization, or any enterprise incorporated in the United States (parent company, not subsidiaries or divisions) doing business overseas (https://www.osac.gov/  ).

The Department of State maintains a Travel Advisory for U.S. citizens traveling and living in Mexico, available at https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/mexico-travel-advisory.html

Mexico’s 57.4 percent rate of informality remains higher than countries with similar GDP per capita levels.  High informality, defined as those working in unregistered firms or without social security protection, distorts labor market dynamics, contributes to persistent wage depression, drags overall productivity, and slows economic growth.  Mexico’s efforts to increase formality over the past four years reduced the rate by 2.4 percentage points, a modest decrease given the scope of the problem. In the formal economy, there is a general surplus of labor but a shortage of technically skilled workers and engineers.  Manufacturing companies, particularly along the U.S.-Mexico border and in the states of Aguascalientes, Guanajuato, Jalisco, and Querétaro, report labor shortages and an inability to retain staff.

Mexico’s labor relations system has been widely criticized as skewed to represent the interests of employers and the government at the expense of workers.  Mexico’s legal framework governing collective bargaining created the possibility of negotiation and registration of initial collective bargaining agreements without the support or knowledge of the covered workers.  These agreements are commonly known as protection contracts and constitute a gap in practice with international labor standards regarding freedom of association. The percentage of the economy covered by collective bargaining agreements is between five and 10 percent.

The first element of a labor justice reform package was passed into law February 24, 2017, replacing biased tripartite dispute resolution entities (Conciliation and Arbitration Boards) with independent judicial bodies.  In terms of labor dispute resolution mechanisms, the Conciliation and Arbitration Boards (CABs) previously adjudicated all individual and collective labor conflicts. The constitutional labor reform requires complementary revisions to the existing labor law.  The lower house of the Mexican Congress approved a bill with the requisite revisions in April 2019. Full congressional approval is expected once the Senate has also considered the bill.

Labor experts predict approval and implementation of the labor reform legislation, as required under the United States-Mexico-Canada Agreement (USMCA), will likely result in a greater level of labor actionas well as inter-union and intra-union competition.  Employer association and organized labor representatives agree, but differ on how much and how quickly labor actions will spread. The increasingly friendly political and legal environment for independent unions is already changing the way established unions manage disputes with employers, prompting more authentic collective bargaining.  As independent unions compete with corporatist unions to represent worker interests, workers are likely to be further emboldened in demanding higher wages.

According to the International Labor Organization (ILO), government enforcement was reasonably effective in enforcing labor laws in large and medium-sized companies, especially in factories run by U.S. companies and in other industries under federal jurisdiction.  Enforcement was inadequate in many small companies and in the agriculture and construction sectors, and it was nearly absent in the informal sector. Workers organizations have made numerous complaints of poor working conditions in maquiladoras and in the agricultural production industry.  Low wages, poor labor conditions, long work hours, unjustified dismissals, lack of social security benefits and safety in the workplace, and lack of freedom of association were among the most common complaints.

Mexico and Overseas Private Investment Corporation (OPIC) finalized in 2004 the agreement enabling OPIC programs and services within the country.  Since then, OPIC has provided over USD 1 billion in financing and political risk insurance to support to more than 22 projects in Mexico. OPIC has announced a drive to catalyze an additional USD 1 billion in investments in Mexico and Central America by 2021.  In December 2018 OPIC announced the possibility of expanding its funding opportunities in Mexico to upwards of USD 5 billion. For more information on OPIC’s projects in Mexico, please consult OPIC’s website at https://www.opic.gov .

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

*Mexico does not report total FDI stock, only flows of FDI.  https://datos.gob.mx/busca/organization/se  

Table 3:  Sources and Destination of FDI

The data included in the IMF’s Coordinated Direct Investment Survey is consistent with Mexican government data.

Table 4:  Sources of Portfolio Investment

The data included in the IMF’s Coordinated Portfolio Investment Survey (CPIS) is consistent with Mexican government data.

Economic Section
Paseo de la Reforma 305, Colonia Cuauhtémoc, Mexico, D.F.  06500
Mexico City
Email: EconDL@state.gov
+52 55 5080 2000

Policies Towards Foreign Direct Investment

Panama depends heavily on foreign investment and has worked to make the investment process attractive and simple.  With few exceptions, the Government of Panama makes no distinction between domestic and foreign companies for investment purposes.  Panama benefits from stable and consistent economic policies, a dollarized economy, and a government that consistently supports trade and open markets.

The United States runs a multi-billion dollar trade surplus with Panama.  Both countries signed a Trade Promotion Agreement (TPA) that entered into force in October 2012.  The U.S.-Panama TPA has significantly liberalized trade in goods and services, including financial services.  The TPA also includes sections on customs administration and trade facilitation, sanitary and phyto-sanitary measures, technical barriers to trade, government procurement, investment, telecommunications, electronic commerce, intellectual property rights, and labor and environmental protection.

Panama has one of the few Latin American economies that is predominantly services-based.  Services represent nearly 90 percent of Panama’s GDP. The TPA has improved U.S. firms’ access to Panama’s services sector and gives U.S. investors better access than other WTO Members under the General Agreement on Trade in Services.  All services sectors are covered under the TPA, except where Panama has made specific exceptions. Under the agreement, Panama has provided improved access in sectors like express delivery, and granted new access in certain areas that had previously been reserved for Panamanian nationals.  In addition, Panama is a full participant in the WTO Information Technology Agreement.

The office of Panama’s Vice Minister of International Trade within the Ministry of Commerce and Industry is the principal entity responsible for promoting and facilitating foreign investment and exports.  Through its Proinvex service (http://proinvex.mici.gob.pa  ) the government provides investors with information, expedites specific projects, leads investment-seeking missions abroad, and supports foreign investment missions to Panama.  In some cases, other government offices may work with investors to ensure that regulations and requirements for land use, employment, special investment incentives, business licensing, and other requirements are met.  While there is no formal investment screening by the GOP, the government does monitor large foreign investments.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Panamanian government does impose some limitations on foreign ownership in the retail and media sectors where, in most cases, ownership must be Panamanian.  However, foreign investors can continue to use franchise arrangements to own retail within the confines of Panamanian law (under the TPA, direct U.S. ownership of consumer retail is allowed in limited circumstances).

In addition to limitations on ownership, the exercise of approximately 55 professions is reserved for Panamanian nationals.  Medical practitioners, lawyers, accountants, and customs brokers must be Panamanian citizens. Most recently, the Panamanian government instituted a regulation requiring that ride share platforms use drivers that possess commercial licenses, which are available only to Panamanian nationals.  The Panamanian government also requires foreigners in some sectors to obtain explicit permission to work.

With the exceptions of retail trade, the media, and several professions, foreign and domestic entities have the right to establish, own, and dispose of business interests in virtually all forms of remunerative activity.  Foreigners need not be legally resident or physically present in Panama to establish corporations or to obtain local operating licenses for a foreign corporation. Business visas (and even citizenship) are readily obtainable for significant investors.

Other Investment Policy Reviews

N/A

Business Facilitation

Procedures regarding how to register foreign and domestic businesses, as well as how to obtain a notice of operation, can be found at the Ministry of Commerce and Industry’s website (https://www.panamaemprende.gob.pa/  ) where one may register a foreign company, create a branch of a registered business, or register as an individual trader from any part of the world.  Corporate applicants must submit notarized documents to the Mercantile Division of the Public Registry, the Ministry of Trade and Industry and the Social Security Institute.  Panamanian government statistics state that applications for foreign businesses take between one to six days to process.

The process for online business registration is clear and available to foreign companies.  Panama is ranked 48 out of 190 countries for starting a business and 99 out of 190 for protecting minority investors, according to the 2019 World Bank’s Doing Business Report (http://www.doingbusiness.org/en/data/exploreeconomies/panama#DB_rp  ).

Outward Investment

No data is presently available on outward investment.

The U.S.-Panama Bilateral Investment Treaty (BIT) entered into force in 1991 and was amended in 2001.  The BIT ensures that, with some exceptions, U.S. investors receive fair, equitable, and nondiscriminatory treatment, and that both parties abide by international law standards, such as for expropriation and compensation and free transfers.  Following the October 31, 2012, implementation of the TPA, the investor protection provisions in the TPA have supplanted those in the BIT. However, until October 30, 2022, investors may choose to invoke dispute settlement under the BIT for disputes that arose prior to entry into force of the TPA, or for disputes relating to investment agreements that were completed before the TPA entered into force.  Panama has closely scrutinized, and in some cases disputed, which firms may qualify for preferred treatment under the BIT and TPA. Panama has a bilateral taxation treaty with the United States.

Panama also has 21 bilateral investment protection agreements with:  Argentina, Canada, Chile, Cuba, the Czech Republic, the Dominican Republic, Finland, France, Germany, Italy, Korea, Mexico, the Netherlands, Qatar, Spain, Sweden, Switzerland, Ukraine, the United Kingdom, and Uruguay.  Panama has signed three BITs that are pending entry into force: Belgium, Luxembourg, and United Arab Emirates.

Panama established diplomatic relations with the People’s Republic of China in June of 2017.  As of this writing, the parties are currently negotiating a free trade agreement and will be negotiating their fifth round in April 2019 in Beijing.

Transparency of the Regulatory System

Panama has five regulators, three that supervise the activities of financial entities (banking, securities, and insurance), and two that supervise the activities of non-financial entities (“designated non-financial businesses and professions (DNFBPs)” and cooperatives).  Each of the regulators regularly publish detailed sector reports, fines and sanctions on their websites. Panama’s banking regulator began publishing fines and sanctions in late 2016. The securities and insurance regulators have published fines and sanctions since 2010. Law 23 of 2015 created the regulator for DNFBPs, which began publishing fines and sanctions in 2018.

In 2012, Panama modified the securities law to regulate brokers, fund managers, and matters related to the securities industry.  The Securities Superintendent is generally considered a competent and effective regulator. Panama is a full signatory to the International Organization of Securities Commissions (IOSCO).

Panama is a member of UNCTAD’s international network of transparent investment procedures (http://panama.eregulations.org/  ).  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 bases justifying the procedures.

International Regulatory Considerations

In 2006, at the time of the negotiations of the TPA, the parties also signed an agreement regarding “Sanitary and Phytosanitary Measures and Technical Standards Affecting Trade in Agricultural Products.”  That agreement entered into force on December 20, 2006.

The Panamanian Food Safety Authority (AUPSA) was established by Decree Law 11 in 2006 to issue science-based sanitary and phytosanitary (SPS) import policies for agricultural and food products entering Panama.  AUPSA does not have regulatory authority for domestic products. In the last four years, AUPSA, as well as other parts of the government, have implemented or proposed measures that restrict market access. These measures have also increased AUPSA’s ability to limit the import of certain agricultural goods, for example as fresh or chilled onions.  In that particular case, AUPSA modified its import requirement adding that imported onions can only be commercialized before the 120 days of harvest of the onion bulb, and each shipment must be accompanied by a laboratory analysis certification of free of Ditylenchus dipsaci.  In another case, AUPSA certified that a bio-tech agricultural product met international standards and did not pose a threat to human consumption, but the Ministry of Health (MINSA) refused to recognize U.S. and international standards, which resulted in a loss of investment of over USD 100 million.    

On April 10, 2018 the President of Panama vetoed the Draft Bill 577 of October 16, 2017, which would have modified Decree Law 11 of 2006 that created the Panamanian Food Safety Authority (AUPSA).  On October 3, 2018 this draft bill 577 was approved again by the National Assembly’s, after the bill was partially vetoed by Panama’s President due to concerns over whether they would unduly restrict trade and market access. The bill is currently pending.

Legal System and Judicial Independence

In 2016, Panama transitioned from the civil to accusatory justice system with the goal of simplifying and expediting criminal cases.  Fundamental procedural rights in civil cases are broadly similar to those available in U.S. civil courts, although some notice and discovery rights, particularly in administrative matters, may be less extensive than in the United States.  Judicial pleadings are not always a matter of public record, nor are the processes always transparent.

Some U.S. firms have reported inconsistent, unfair, and/or biased treatment from Panamanian courts.  The judicial system’s capacity to resolve contractual and property disputes is often weak and open to corruption.  The World Economic Forum’s 2017-2018 Global Competitiveness Report rated Panama’s judicial independence at 120 of 137 countries.  The Panamanian judicial system suffers from poorly trained personnel, case backlogs, and a lack of independence. Furthermore, under Panamanian law, only the National Assembly may initiate corruption investigations against Supreme Court judges, and only the Supreme Court may initiate investigations against members of the National Assembly, which in turn has led to charges of a de facto “non-aggression pact” between the branches.

Laws and Regulations on Foreign Direct Investment

Panama has different laws governing incentives depending on the activity, including the Multinational Headquarters Law, the Tourism Law, the Investment stability Law, miscellaneous laws associated with certain sectors, including the film industry, call centers, certain industrial activities, and agriculture exports.  In addition, laws may differ depending on the economic zone, including the Colon Free Zone, the Panama Pacifico Special Economic Area, and the City of Knowledge. Proinvex (http://proinvex.mici.gob.pa/  ) provides more details on tax and other benefits.

Government policy and law treat Panamanian and foreign investors equally with respect to access to credit.  Panamanian interest rates closely follow international rates (e.g., the U.S. federal funds rate, the London Interbank Offered Rate – LIBOR, etc…), plus a country-risk premium.

The Ministries of Tourism, Public Works, and Industry and Commerce court foreign investment, but once a company invests in Panama, have been less able to provide assistance to foreign investors to help them navigate their new environment, especially in tourism, branding, imports, and infrastructure development.  Although individual ministers have been responsive to U.S. companies, the root issues are more difficult to address. U.S. companies frequently complain about non-payment issues from several ministries, which have stalled payments without any official statement as to the merits of the contract terms.

Some private companies, including multinational corporations, have issued bonds in the local securities market.  Companies rarely issue stock on the local market and, when they do, often issue shares without voting rights. Investor demand is generally limited because of the small pool of qualified investors.  While wealthy Panamanians may hold overlapping interests in various businesses, there is not an established practice of having cross-shareholding or stable shareholder arrangements, designed to restrict foreign investment through mergers and acquisitions.

Competition and Anti-Trust Laws

Panama’s Consumer Protection and Anti-Trust Agency, established by Law 45, October 31, 2007, and modified by Law 29 of June 2008, reviews transactions for competition related concerns and serves as a consumer protection agency.

Expropriation and Compensation

Panamanian law recognizes the concept of eminent domain.  In at least one circumstance, a U.S. company has expressed concern about not being reimbursed at fair market value following the government’s revocation of a concession.

Dispute Settlement

ICSID Convention and New York Convention

Panama is a Party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards).  

Investor-State Dispute Settlement

Resolving commercial and investment disputes in Panama can be a lengthy and complex process.  Despite protections built into the U.S.-Panamanian trade agreements, investors have repeatedly struggled to resolve investment issues in courts.  There are frequent claims of bias and favoritism in the court system and complaints about the lack of adequate titling, inconsistent regulations, and a lack of trained officials outside of the capital.  The World Economic Forum – Global Competitiveness Index 2017-2018 report ranks the independence of Panama’s judicial system 120 out of 137 countries (http://reports.weforum.org/global-competitiveness-index-2017-2018/countryeconomy-profiles/#economy=PAN  ).  There have been allegations that politically connected businesses have benefited from court decisions, and that judges have “slow-rolled” dockets for years without taking action.  Many Panamanian legal firms suggest writing binding arbitration clauses into all commercial contracts.

International Commercial Arbitration and Foreign Courts

The Panamanian government accepts binding international arbitration of disputes with foreign investors.  Panama is a party to the 1958 New York Convention as well as to the 1975 Panama Convention. Panama became a member of the International Center for the Settlement of Investment Disputes (ICSID) in 1996.  Panama adopted the UNCITRAL model arbitration law as amended in 2006. Law 131 of 2013 regulates national and international commercial arbitrations in Panama.

Bankruptcy Regulations

Commercial law is comprehensive and well established.  The World Bank 2019 Doing Business currently ranks Panama 113/190 for resolving insolvency because of slow court systems and complexity of the process.  Panama adopted a new bankruptcy law in 2015, but Panama’s Doing Business ranking has not yet shown material improvement for this metric.

Investment Incentives

Panama provides Industrial Promotion Certificates (IPCs) to incentivize industrial development in high value-added sectors.  Targeted sectors include research and development, management and quality assurance systems, environmental management, utilities and human resources.  Approved IPC’s provide up to 35 percent in tax reimbursements, and preferential import tariffs of 3 percent.

Law 1 (2017) modifies Law 28 (1995) by exempting exports from income tax and provides a zero percent import duty for machinery for those companies that export 100 percent of their products.  Producers to sell a portion of their products into the domestic market will pay a three percent import tariff for machinery and supplies.

Foreign Trade Zones/Free Ports/Trade Facilitation

Panama is home to the Colon Free Trade Zone, the Panama Pacifico Special Economic Zone, and 16 other “free zones” (11 actives zones and 5 in development).  The Colon Free Trade Zone has more than 2,500 businesses, while the Panama Pacifico Special Economic Zone has more than 340 businesses, and the remaining free zones host 126 companies.  These zones provide special tax and other incentives for manufacturers, back office operations and call centers. Additionally, the Colon Free Zone offers companies preferential tax and duty rates that are levied in exchange for basic user fees and a five percent dividend tax (or two percent of net profits if there are no dividends).  Banks and individuals in Panama pay no tax on interest or other income earned outside Panama. No taxes are withheld on savings or fixed time deposits in Panama. Individual depositors do not pay taxes on time deposits. Free zones offer tax-free status, special immigration privileges, and license and customs exemptions to manufacturers who locate within them.  Investment incentives offered by the Panamanian government apply equally to Panamanian and foreign investors.

Performance and Data Localization Requirements

There are no legal performance requirements such as minimum export percentages, significant local requirements of local equity interest, or mandatory technology transfers.  There are no established general requirements that foreign investors invest in local companies, purchase goods or services from local vendors, or invest in R&D or other facilities.  Companies are required to have 90 percent Panamanian employees. There are exceptions to this policy; but the government must approve these on a case-by-case basis. Fields dominated by strong unions, such as construction, have opposed issuing work permits to foreign laborers and some investors have struggled to staff large projects fully.  Foreign workers are common in Panama. Visas are available and the procedures to obtain work permits are generally not considered onerous.

As part of its effort to become a hub for finance, logistics, and communications, Panama has endeavored to become a data storage center.  According to the Panamanian Authority for Government Innovation (AIG, http://www.innovacion.gob.pa/noticia/2834  ), the majority of these firms offer services to banking and telephone companies in Central America and the Caribbean.  Panama boasts exceptional international connectivity, with seven undersea fiber optic cables.

Panama’s data protection law (Law 81, March 26, 2019) establishes the principles, rights, obligations, and procedures that regulate the protection of personal data.  The National Authority for Transparency and Access to Information will oversee enforcement of the law that will go into effect in March 2021. The National Authority for Government Innovation is working closely with large private sector companies to draft specific data protection regulations.  The concept of the personal privacy of communications and documents is provided for in the Panamanian Constitution as a fundamental right (Political Constitution, article 29). The Constitution also provides for a right to keep personal data confidential (article 44). The Criminal Code imposes an obligation on businesses to maintain the confidentiality of information stored in databases or elsewhere, and establishes several crimes for the misuse of such information (Criminal Code, articles 164, 283, 284, 285, 286).  Panama’s electronic commerce legislation also states that providers of electronic document storage must guarantee the protection, reliability, and proper use of information and data stored on behalf of their customers (Law 51, July 22, 2008, article 55).

Real Property

The majority of land in Panama, and almost all land outside of Panama City, is not titled; a system of rights of possession exists, but there are multiple instances where such rights have been successfully challenged.  The World Bank’s Doing Business 2019 report (http://www.doingbusiness.org/data/exploreeconomies/panama  ) notes that Panama has risen to 81 out of 190 countries on the Registering Property indicator, though it still ranks 147th in Enforcing Contracts.  Panama enacted Law 80 (2009) to address the lack of titled land in certain parts of the country; however, it does not cure deficiencies in government administration or the judicial system.  In 2010, the National Assembly approved the creation of the National Authority of Land Management (ANATI) to administer land titling; however, investors have complained about ANATI’s capabilities and lengthy adjudication timelines.

The judicial system’s capacity to resolve contractual and property disputes is generally considered weak and open to corruption, as illustrated by the most recent World Economic Forum’s Global Competitiveness Report 2017-2018 (https://www.weforum.org/reports/the-global-competitiveness-report-2017-2018  ), which rates Panama’s judicial independence as 120 out of 137 countries.  Americans should exercise greater due diligence in purchasing Panamanian real estate than they would in purchasing real estate in the United States.  Engaging a reputable attorney and licensed real estate broker is strongly recommended.

Intellectual Property Rights

Panama has an adequate and effective domestic legal framework to protect and enforce intellectual property rights (IPR).  The U.S.-Panama TPA improved standards for the protection and enforcement of a broad range of IPR, including for patents; trademarks; undisclosed tests and data required to obtain marketing approval for pharmaceutical and agricultural chemical products; and digital copyright products such as software, music, books, and videos.  In order to implement the requirements of the TPA, Panama passed Law 62 of 2012 (industrial property) and Law 64 of 2012 (copyrights). Law 64 also extended copyright protection to the life of the author plus 70 years, mandates the use of legal software in government agencies, and protects against the theft of encrypted satellite signals and the manufacturing or sale of tools to steal signals.  

Panama is a member of the Paris Convention for the Protection of Industrial Property.  Panama’s Industrial Property Law (Law 35 of 1996) provides a term of 20 years of patent protection from the date of filing, or 15 years for pharmaceutical patents.  Panama has expressed interest in participating in the Patent Protection Highway with the U.S. Patent and Trademark Office (USPTO). Law 35, amended by Law 61 of 2012, also provides trademark protection, simplifies the registration of trademarks, and allows for renewals for 10-year periods.  The law grants ex-officio authority to government agencies to conduct investigations and seize suspected counterfeited materials. Decree 123 of 1996 and Decree 79 of 1997 specify the procedures that National Customs Authority (ANA) and Colon Free Zone officials must follow to investigate and confiscate merchandise.  In 1997, ANA created a special office for IPR enforcement; in 1998, the Colon Free Zone followed suit.

The Government of Panama is making efforts to strengthen the enforcement of IPR.  A Committee for Intellectual Property (CIPI), comprising representatives from five government agencies (the Colon Free Zone, the Offices of Industrial Property and Copyright under the Ministry of Commerce and Industry (MICI), ANA, and the Attorney General), under the leadership of the MICI, is responsible for the development of intellectual property policy.  Since 1997, two district courts and one superior tribunal have exclusively adjudicated antitrust, patent, trademark, and copyright cases. Since January 2003, a specific prosecutor with national authority over IPR cases has consolidated and simplified the prosecution of such cases. Law 1 of 2004 added crimes against IP as a predicate offense for money laundering, and Law 14 establishes a 5 to 12-year prison term, plus possible fines.  

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

Resources for Rights Holders

Embassy point of contact:

Colombia Primola
Economic Specialist
PrimolaCE@state.gov

Local lawyers list

Capital Markets and Portfolio Investment

Government policy and law with respect to access to credit treat Panamanian and foreign investors equally.  Panamanian interest rates closely follow international rates (e.g., the U.S. federal funds rate, the London Interbank Offered Rate – LIBOR, etc…), plus a country-risk premium.

Some private companies, including multinational corporations, have issued bonds in the local securities market.  Companies rarely issue stock on the local market and, when they do, often issue shares without voting rights. Investor demand is generally limited because of the small pool of qualified investors.  While wealthy Panamanians may hold overlapping interests in various businesses, there is not an established practice of having cross-shareholding or stable shareholder arrangements, designed to restrict foreign investment through mergers and acquisitions.

Money and Banking System

Panama’s 2008 Banking Law regulates the country’s financial sector.  The law concentrates regulatory authority in the hands of a well-financed Banking Superintendent (https://www.superbancos.gob.pa/  ).

Panama’s banking sector is developed and highly regulated.  However, some U.S. citizens and entities have had difficulty opening bank accounts.  Investors cite lengthy processes, a lack of open communication, and a high documentary threshold for establishing the legitimacy of their activities both inside and outside of Panama.  Banking officials counter these complaints by citing the need to comply with international financial transparency standards. Several of Panama’s largest banks have gone so far as to refuse to establish banking relationships with whole sectors of the economy, such as e-commerce, in order to avoid all possible associated risks.  Private U.S. citizens have also faced difficulty-opening bank accounts in Panama, due to regulatory issues. This results in a large number of legitimate businesses excluded from banking services in Panama.

Traditional bank lending from the well-developed banking sector is relatively efficient and is the most common source of financing for both domestic and foreign investors, offering the private sector a variety of credit instruments.  The free flow of capital is actively supported by the government and is viewed as essential to Panama’s 85 banks (2 official banks, 47 domestic, 24 international plus 12 representational offices).

There are no restrictions on, nor practical measures to prevent hostile foreign investor takeovers, nor are there regulatory provisions authorizing limitations on foreign participation or control or other practices to restrict foreign participation.  There are no government or private sector rules to prevent foreign participation in industry standards setting consortia.

Financing for consumers is relatively open for mortgages, credit cards, and personal loans, even to those earning modest incomes.

Panama’s strategic geographic location, dollarized economy, status as a regional financial, trade, and logistics center, and favorable corporate and tax laws make it an attractive target for money launderers.  Money laundered in Panama is believed to come in large part from the proceeds of drug trafficking. Tax evasion, bank fraud, and corruption are also believed to be major sources of illicit funds. Criminals have been accused of laundering money via bulk cash smuggling and trade at airports, seaports, through shell companies, and the active free trade zones.

In 2015, Panama strengthened its legal framework, amended its criminal code, harmonized legislation with international standards, and passed an anti-money laundering/combating the financing of terrorism (AML/CFT) reform law.  Panama passed Law 18 (2015) that severely restricts the use of bearer shares; companies still using these types of shares must appoint a custodian and maintain strict controls over their use. Panama passed Law 70 (2019) that criminalizes tax evasion and defines tax evasion as a money laundering predicate offense.

In January 2017, Panama’s National Commission on AML/CFT published its first national risk assessment, which identifies FTZs, real estate, construction, lawyers, as “high risk” sectors.  In May 2017, Panama released a supplemental National Strategy Report, which outlines 34 strategic priorities across five functional pillars to be pursued by 17 governmental institutions to improve its AML/CFT regime through 2019.  The Financial Action Task Force (FATF) referred Panama to a one-year enhanced review period in January 2018 due to a lack of effectiveness in Panama’s AML/CFT regime. FATF is currently evaluating Panama’s progress in addressing the identified deficiencies, and will announce whether Panama will be placed on the FATF grey list at the June 2019 plenary. A grey listing could trigger capital flight and further de-risking (i.e., the loss of correspondent banking relationships).

Panama completed the transition to a U.S.-style accusatory penal system in September 2016 but prosecutors lack experience and effectiveness under the new system.  Panama does not accurately track criminal prosecutions and convictions related to money laundering. Law enforcement needs more tools and protection to conduct long-term, complex financial investigations, including undercover operations. The criminal justice system remains at risk for corruption.

Foreign Exchange and Remittances

Foreign Exchange

Panama’s official currency is the U.S. Dollar.

Remittance Policies

Panama has customer due diligence, bulk cash, and suspicious transaction reporting requirements for money service providers (MSB) including 19 remittance companies.  In 2017, the Bank Superintendent assumed oversight of AML/CFT compliance for MSBs. The Ministry of Commerce and Industry (MICI) grants operating licenses for remittance companies under Law 48 (2003).

Sovereign Wealth Funds

Panama started a sovereign wealth fund in 2012 with an initial capitalization of USD 1,234 million.  From 2015 onwards, the law mandates contributions to the National Treasury from the Panama Canal Authority in excess of 3.5 percent of GDP must be deposited into the Fund.  In October 2018, the accumulation rule of the savings was modified, determining that when the contributions of the Canal exceeded 2.5 percent of the GDP, half of the surplus would be destined to national savings.  The Sovereign Wealth Fund closed in 2018 with USD 1.2 billion 2.7percentage less than 2017.

State-owned enterprises (SOEs) are required to send a report to the Ministry of Economy and Finance, the Comptroller’s Office and the Budget Committee of the National Assembly within the first ten days of each month showing their budget implementation.  The reports detail income, expenses, investments, public debt, cash flow, administrative management, management indicators, programmatic achievements and workload. SOEs are also required to submit quarterly financial statements. SOEs are audited by the Comptroller’s Office.

The National Electricity Transmission Company (ETESA) is an examples of an SOE in the energy sector, and Tocumen Airport and the National Highway Company (ENA) are SOEs enterprises in the transportation sector.  Financial allocations and earnings from SOEs entities are all publicly available at the Official Digital Gazette (http://www.gacetaoficial.gob.pa/  ).

Privatization Program

Panama’s privatization framework law does not distinguish between foreign and domestic investor participation in prospective privatizations.  The law calls for pre-screening of potential investors or bidders in certain cases to establish technical viability, but nationality and Panamanian participation are not criteria.  The Government of Panama undertook a series of privatizations the mid-1990s including most of the electricity generation, distribution, ports and telecommunications sectors. There are presently no privatization plans for any major state-owned enterprise.

Panama maintains strict domestic laws relating to labor and employment rights and environmental protection.  While enforcement of these laws is not always stringent, major construction projects are required to complete environmental assessments, guarantee worker protections, and comply with government standards for environmental stewardship.

In May 2012, Panama adopted ISO 26000 to guide businesses in the development of CSR platforms.  In addition, business groups including the Association of Panamanian Business Executives (APEDE) and the American Chamber of Commerce (AMCHAM) are active in encouraging and rewarding good CSR practices.  Since 2009, the AMCHAM has given an annual award to recognize member companies for their positive impact on the local community and environment.

Corruption is Panama’s biggest challenge, and Moody’s identified it as one of the risk factors that could affect Panama’s sovereign rating in the medium-term.  Panama ranked 93rd out of 180 countries in the 2018 Transparency International Corruption Perceptions Index. U.S. investors allege corruption is rampant in the private sector and all levels of the Panamanian government; purchase managers and import/export businesses have been known to overbill or take percentages off purchase orders while judges, mayors, members of the National Assembly, and local representatives have reportedly accepted payments for facilitating land titling and court rulings.  The Foreign Corrupt Practice Act (FCPA) precludes U.S. companies from engaging in bribery and other activities, and U.S. companies look carefully at levels of corruption before investing or bidding on government contracts.

The process to apply for permits and titles can be opaque, and civil servants have been known to ask for payments at each step of the approval process.  The land titling process in particular has been very troublesome for multiple U.S. companies, which have waited in some cases decades for cases to be resolved.

Panama’s government lacks strong systemic checks and balances that would serve to incentivize accountability.  Under Panamanian law, only the National Assembly may initiate corruption investigations against Supreme Court judges, and only the Supreme Court may initiate investigations against members of the National Assembly, which in turn has led to charges of a de facto “non-aggression pact” between the branches.

In late 2016, Odebrecht, a Brazilian firm, admitted to paying USD 59 million in bribes to win Panamanian contracts of at least USD 175 million between 2010 and 2014.  Odebrecht’s admission was confined to bribes paid during the previous administration. The scandal’s reach has yet to be fully determined and Odebrecht’s activities building the second metro line and the Tocumen airport expansion have continued.

Anti-corruption mechanisms exist, such as asset forfeiture, whistleblower and witness protection, and conflict-of-interest rules.  However, the general perception is that anti-corruption laws are not applied rigorously, that government enforcement bodies and the courts are not effective in pursuing and prosecuting those accused of corruption, and the lack of a strong professionalized career civil service in Panama’s public sector has hindered systemic change.  The fight against corruption is also hampered by the government’s refusal to dismantle Panama’s dictatorship-era libel and contempt laws, which can be used to punish whistleblowers, while those accused of acts of corruption are seldom prosecuted and almost never jailed.

U.S. investors in Panama complain about a lack of transparency in government procurement.  The parameters of government tenders often change during the bidding process, creating confusion and the perception the government tailor-makes tenders for specific companies.  For example, the Panama NG Power project has been stalled due to legal challenges alleging the government created the terms of the tender specifically for the Chinese-led consortium.  Odebrecht, furthermore, admitted to paying USD 59 million in bribes to win government contracts, but is still doing business in Panama and actively applying for government projects.

Panama ratified the United Nations’ Anti-Corruption Convention in 2005 and the Organization of American States’ Inter-American Convention Against Corruption in 1998.  However, there is a perception that Panama should more effectively implement the conventions

Resources to Report Corruption

Angelica Maytin
Directora Nacional de Transparencia y Acceso a la Informacion (ANTAI)
Autoridad Nacional de Transparencia y Acceso a la Informacion
Ave. del Prado, Edificio 713, Balboa, Ancon, Panama, República de Panama
(507) 527-9270 / 71/72/73/74
www.antai.gob.pa  

Panama is a peaceful and stable democracy.  On rare occasions, large-scale protests can turn violent and disrupt commercial activity in affected areas.  Mining and energy projects have been sensitive, especially those that involve development in the designated indigenous areas called comarcas.

In May 2014, Panama held national elections that international observers agreed were free and fair.  The transition to the new government was smooth and uneventful. Panama’s Constitution provides for the right of peaceful assembly, and the government respects this right.  No authorization is needed for outdoor assembly, although prior notification for administrative purposes is required. Unions, student groups, employee associations, elected officials, and unaffiliated groups frequently attempt to impede traffic and commerce in order to force the government or business to agree to demands.  Elections are held every five years and the next nationwide elections, as of this writing, are scheduled for May 2019.

Panama’s official unemployment rate is 6 percent.  Economists in Panama estimate that the unemployment rate for skilled workers is negative, indicating a shortage of workers for skilled jobs including accounting, IT, customer service, and specialized construction skills.  Employers frequently cite the lack of skilled labor and English language speakers as a limiting factor on growth.

Panama’s non-agriculture labor force is approximately 1.8 million persons.  Forty-three percent of workers are employed in the informal sector, with a lower rate of informal employment in Panama’s capital region (38 percent) compared to the indigenous areas (83 percent).

While the government has periodically revised its labor code, including a modest revision in 1995, it remains highly restrictive.  Several sectors, including the Panama Canal Authority, the Colon Free Zone, and export processing zones/call centers are covered by their own labor regimes.  Employers outside of these areas, such as the tourism sector, have called for greater flexibility, easier termination of workers, and the elimination of many constraints on productivity-based pay.  The Panamanian government has issued waivers to the regulations on an ad hoc basis in order to address employers’ needs, but there is no consistent standard for obtaining such a waiver.

Panama spends approximately 14 percent of the central government’s budget, or 4 percent of GDP, on education.  The 2017-2018 World Economic Forum Global Competitiveness Report ranked Panama 82 out of 140 countries for its skillset of university graduates.  This poor showing underscored the 2010 OECD Program for International Student Achievement (PISA) analysis, which ranked Panama second worst among participating Latin American countries.   

The law provides for the right of private sector workers to form and join unions of their choice, subject to the union’s registration with the government.

The law provides for the right of private sector workers to strike except in areas deemed vital to public welfare and security, including police and health workers.  All private sector and public sector workers have the right to bargain collectively, and the law prohibits employer anti-union discrimination, and protects workers engaged in union activities from loss of employment or discriminatory transfers.  Strikes must be supported by a majority of employees and related to improvement of working conditions, a collective bargaining agreement, or in support of another strike of workers on the same project (solidarity strike).

The law prohibits all forms of forced labor of adults or children.  The law establishes penalties of 15 to 20 years’ imprisonment for forced labor involving movement (either cross-border or within the country) and six to 10 years’ imprisonment for forced labor not involving movement.

The law prohibits the employment of children under age 14, although children who have not completed primary school may not begin work until age 15.  Exceptions to the minimum age requirements can be made for children 12 and older to perform light farm work if it does not interfere with school hours.  The law does not set a limit on the total number of hours that these children may work in agriculture or define what kinds of light work children may perform.  The law prohibits 14 to 18-year-old children from engaging in potentially hazardous work and identifies such hazardous work to include work with electrical energy; explosives or flammables, toxic and radioactive substances; work underground and on railroads, airplanes, and boats; and work in nightclubs, bars, and casinos.

The United States and Panama signed a comprehensive Overseas Private Investment Corporation (OPIC) agreement in April 2000.  OPIC offers both financing and insurance coverage against expropriation, war, revolution, insurrection, and inconvertibility for eligible U.S. investors in Panama.  OPIC can insure up to USD 350 million per project for U.S. investors, contractors, exporters, and financial institutions. Financing is available for overseas investments that are wholly owned by U.S. companies or that are joint ventures in which the U.S. firm is a participant.  Panama has been a member of the Multilateral Investment Guarantee Agency (MIGA) since 1996.

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

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Commercial Section
panamaweb@state.gov
Building 783, Basilio Lakas Street, Clayton
http://www.export.gov/panama  

Policies Toward Foreign Direct Investment

Attracting foreign direct investment remains a critical component of the SAG’s broader Vision 2030 program to diversify an economy overly dependent on oil and to create employment opportunities for a growing youth population.  As such, the SAG seeks foreign investment that explicitly promotes economic development, transfers foreign expertise and technology to Saudi Arabia, creates jobs for Saudi nationals, and increases Saudi’s non-oil exports. The government encourages investment in nearly all economic sectors, with priority given to transportation, health/biotechnology, information and communications technology (ICT), media/entertainment, industry (mining and manufacturing), and energy.

Saudi Arabia’s economic reform programs are opening up new areas for potential investment.  For example, in a country where most public entertainment was once forbidden, the SAG now regularly sponsors and promotes entertainment programming, including live concerts, dance exhibitions, sports competitions, and other public performances.  Significantly, the audiences for many of those events are now gender-mixed, representing a larger consumer base. In addition to the reopening of cinemas in April 2018, the SAG hosted its first Formula E race in December 2018 in Riyadh, as well as the Saudi International Golf Tournament in Jeddah in early 2019 (a leg of the PGA European Tour).

The SAG is proceeding with “economic cities” and new “giga-projects” that are at various stages of development and welcomes foreign investment in them.  These projects are large-scale and self-contained developments in different regions focusing on particular industries, e.g., technology, energy, tourism, and entertainment.  Principal among these projects are:

• Qiddiya, a new, large-scale entertainment, sports, and cultural complex near Riyadh;
• King Abdullah Financial District, a USD 10 billion commercial center development in Riyadh;
• Red Sea Project, a massive tourism development on the western Saudi coast, which aims to create 70,000 jobs and attract one million tourists per year.
• Amaala, a wellness, healthy living, and meditation resort on the Kingdom’s northwest coast, projected to include more than 2,500 luxury hotel rooms and 700 villas.  
• NEOM, a new USD 500 billion project to build a futuristic “independent economic zone” in northwest Saudi Arabia;

The Saudi Arabian General Investment Authority (SAGIA) governs and regulates foreign investment in the Kingdom, issues licenses to prospective investors, and works to foster and promote investment opportunities across the economy.  Established originally as a regulatory agency, SAGIA has increasingly shifted its focus to investment promotion and assistance, offering potential investors detailed guides and a catalogue of current investment opportunities on its website (www.sagia.gov.sa  ).

Despite Saudi Arabia’s overall welcoming approach to foreign investment, some structural impediments remain.  Foreign investment is currently prohibited in 11 sectors, including:

1. Oil exploration, drilling, and production;
2. Catering to military sectors;
3. Security and detective services;
4. Real estate investment in the holy cities, Makkah and Medina;
5. Tourist orientation and guidance services for religious tourism related to Hajj and Umrah;
6. Recruitment offices;
7. Printing and publishing (subject to a variety of exceptions);
8. Certain internationally classified commission agents;
9. Services provided by midwives, nurses, physical therapy services, and quasi-doctoral services;
10. Fisheries; and
11. Poison centers, blood banks, and quarantine services.

(The complete “negative list” can be found at www.sagia.gov.sa  .)  

In addition to the negative list, older laws that remain in effect prohibit or otherwise restrict foreign investment in some economic subsectors not on the list, including some areas of healthcare.  In 2018, Saudi Arabia began to allow foreign ownership in businesses providing services relating to road transportation, real estate brokerage, labor recruitment, and audiovisual display. At the same time, SAGIA has demonstrated some flexibility in approving exceptions to the “negative list” exclusions.  

Foreign investors must also contend with increasingly strict localization requirements in bidding for certain government contracts, labor policy requirements to hire more Saudi nationals (usually at higher wages than expatriate workers), an increasingly restrictive visa policy for foreign workers, and gender segregation in business and social settings (though gender segregation is becoming more relaxed as the SAG introduces socio-economic reforms).  

Additionally, in a bid to bolster non-oil income, the government implemented new taxes and fees in 2017 and early 2018, including significant visa fee increases, higher fines for traffic violations, new fees for certain billboard advertisements, and related measures.  The government implemented a value-added tax (VAT) in January 2018 at a rate of five percent, in addition to excise taxes implemented in June 2017 on cigarettes (at a rate of 100 percent), carbonated drinks (at a rate of 50 percent), and energy drinks (at a rate of 100 percent).  In January 2018, the government also implemented new fees for expatriate employers ranging between USD 80 and USD 107 per employee per month, as well as increasing levies on expatriates with dependents amounting to a USD 54 monthly fee for each dependent. These expatriate fees are scheduled to increase every year through 2020.  On January 1, 2018, the SAG also reduced previous subsidies on electricity and gasoline, which resulted in a doubling of residential electricity rates and an increase in price of gasoline by more than 80 percent.

Limits on Foreign Control and Right to Private Ownership and Establishment

Saudi Arabia fully recognizes rights to private ownership and the establishment of private business.  As outlined above, the SAG excludes foreign investors from some economic sectors and places some limits on foreign control.  With respect to energy, Saudi Arabia’s largest economic sector, foreign firms are barred from investing in the upstream hydrocarbon sector, but the SAG permits foreign investment in the downstream energy sector, including refining and petrochemicals.  There is significant foreign investment in these sectors. ExxonMobil, Shell, China’s Sinopec, and Japan’s Sumitomo Chemical are partners with Saudi Aramco (the SAG’s state-owned oil firm) in domestic refineries. ExxonMobil, Chevron, Shell, and other international investors have joint ventures with Aramco and/or the Saudi Basic Industries Corporation (SABIC) in large-scale petrochemical plants that utilize natural-gas feedstock from Aramco’s operations.  In Saudi Arabia’s Eastern Province, the Dow Chemical Company and Aramco are partners in a USD 20 billion joint venture to construct, own, and operate the world’s largest integrated petrochemical production complex.

With respect to other non-oil natural resources, the national mining company, Ma’aden, has a USD 12 billion joint venture with Alcoa for bauxite mining and aluminum production and a USD 7 billion joint venture with the leading American fertilizer firm Mosaic and SABIC to produce phosphate-based fertilizers.  

Joint ventures almost always take the form of limited-liability partnerships, to which there are some disadvantages.  Foreign partners in service and contracting ventures organized as limited-liability partnerships must pay, in cash or in kind, 100 percent of their contribution to authorized capital.  SAGIA’s authorization is only the first step in setting up such a partnership.

Professionals, including architects, consultants, and consulting engineers, are required to register with, and be certified by, the Ministry of Commerce and Investment (MCI), in accordance with the requirements defined in the Ministry’s Resolution 264 from 1982.  These regulations, in theory, permit the registration of Saudi-foreign joint-venture consulting firms. As part of its WTO accession commitments, Saudi Arabia generally allows consulting firms to establish a local office without a Saudi partner. The requirement that law firms and engineering consulting firms must have a Saudi partner was rescinded in 2017.  Foreign engineering consulting companies must have been incorporated for at least 10 years and have operations in at least four different countries to qualify. However, offices practicing accounting and auditing, architecture, or civil planning, or providing healthcare, dental, or veterinary services must still have a Saudi partner, and the foreign partner’s equity cannot exceed 75 percent of the total investment.  

In recent years, Saudi Arabia has opened additional service markets to foreign investment, including financial and banking services; aircraft maintenance and repair and computer reservation systems; wholesale, retail, and franchise distribution services (traditionally subject to minimum 25 percent local ownership and minimum 20 million Saudi riyal (USD 5.3 million) foreign investment); both basic and value-added telecom services; and investment in the computer and related services sectors.  In 2016, for example, Saudi Arabia formally approved full foreign ownership of retail and wholesale businesses in the Kingdom, thereby removing the former 25 percent local ownership requirement. While some companies have already received licenses under the new rules, the restrictions attached to obtaining full ownership – including a requirement to invest over USD 50 million during the first five years and ensure that 30 percent of all products sold are manufactured locally – have proven difficult to meet and precluded many investors from taking full advantage of the reform.

Other Investment Policy Reviews

Saudi Arabia completed its second WTO trade policy review in late 2015, which included investment policy (https://www.wto.org/english/tratop_e/tpr_e/tp433_e.htm  ).  

Business Facilitation

In addition to applying for a license from SAGIA as described above, foreign and local investors must register a new business via the MCI, which has begun offering online registration services for limited liability companies at:  http://www.mci.gov.sa/en  .  Though users may submit articles of association and apply for a business name within minutes on MCI’s website, final approval from the ministry often takes a week or longer.  Applicants must also complete a number of other steps in order to start a business, including obtaining a municipality (baladia) license for their office premises and registering separately with the Ministry of Labor and Social Development, Chamber of Commerce, Passport Office, Tax Department, and the General Organization for Social Insurance.  From start to finish, registering a business in Saudi Arabia takes a foreign investor on average three to five months from the time an initial SAGIA application is complete, placing the country at 141 of 190 countries in terms of ease of starting a business, according to the World Bank (2019 rankings).  With respect to foreign direct investment, the investment approval by SAGIA is a necessary, but not sufficient, step in establishing an investment in the Kingdom. There are a number of other government ministries, agencies, and departments regulating business operations and ventures.

Saudi officials have stated their intention to attract foreign small- and medium-sized enterprises (SMEs) to the Kingdom.  The SAG established the Small and Medium Enterprises General Authority in 2015 to facilitate the growth of the SME sector. In 2016, the SAG released a new Companies Law designed in part to promote the development of the SME sector.  The law allows one person, rather than the previous minimum of two, to form a corporation, though in very limited cases. It also substantially reduced the minimum capital and number of shareholders required to form a joint stock company (from five previously to two).

Outward Investment

Saudi Arabia does not restrict domestic investors from investing abroad.  Private Saudi citizens, Saudi companies, and SAG entities hold extensive overseas investments.  The SAG is attempting to transform its Public Investment Fund (PIF), traditionally a holding company for government shares in state-controlled enterprises, into a major international investor and sovereign wealth fund.  In 2016, the PIF made its first high-profile international investment by taking a USD 3.5 billion stake in Uber. The PIF has also announced a USD 400 million investment in Magic Leap, a Florida-based company that is developing “mixed reality” technology, and a USD 1 billion investment in Lucid Motors, a California-based electric car company.  Saudi Aramco and SABIC are also major investors in the United States. In 2017, Aramco acquired full ownership of Motiva, the largest refinery in the United States, in Port Arthur, Texas. SABIC has announced a multi-billion dollar joint venture with ExxonMobil in a petrochemical facility in Texas.

Saudi Arabia has signed bilateral trade and investment agreements with over 20 countries.  The United States and Saudi Arabia signed a Trade and Investment Framework Agreement (TIFA) in 2003, building upon a bilateral agreement on secured private investment with the United States that has been in place since February 1975.  The United States and Saudi Arabia last held TIFA consultations in May 2018 in Washington, D.C.

Saudi Arabia is a founding member of the Gulf Cooperation Council (GCC), which also includes Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates.  While still under development, the GCC Customs Union formally ensures the free movement of labor and capital within the bloc. (Note: On June 5, 2017, Saudi Arabia, the United Arab Emirates, Bahrain, and Egypt announced they were severing diplomatic relations with Qatar.  The land border between the Kingdom and Qatar remains closed and there are no direct flights between the two countries.)

The GCC currently maintains free trade agreements (FTA) with Lebanon, Singapore, the European Free Trade Association (Norway, Switzerland, Iceland, and Liechtenstein), and the Greater Arab Free Trade Area of 18 Arab countries.  The GCC is in the process of negotiating additional FTAs with China, the European Union, New Zealand, and several other trade partners.

Saudi Arabia does not have a bilateral taxation treaty with the United States, though the country maintained double taxation agreements with more than 43 countries as of March 2019.

The corporate tax treatment in Saudi Arabia of foreign and domestic companies is imbalanced and favors Saudi companies and joint ventures with Saudi participation.  The SAG imposes a flat 20 percent corporate tax rate on foreign investors. Saudi investors do not pay corporate income tax but are subject to a 2.5 percent tax, or “zakat,” on net current assets.

Transparency of the Regulatory System

Saudi Arabia received the lowest score possible (zero out of five) in the World Bank’s 2018 Global Indicators of Regulatory Governance Report, which places the Kingdom in the bottom 13 countries among 186 countries surveyed (http://rulemaking.worldbank.org/  ).  Few aspects of the SAG’s regulatory system are entirely transparent, although Saudi investment policy is less opaque than other areas.  Bureaucratic procedures are cumbersome but can generally be overcome with persistence. Foreign portfolio investment in the Saudi stock exchange is well-regulated by the Capital Markets Authority (CMA), with clear standards for interested foreign investors to qualify to trade on the local market.  The CMA is progressively liberalizing requirements for “qualified foreign investors” to trade in Saudi securities. Insurance companies and banks whose shares are listed on the Saudi stock exchange are required to publish financial statements according to International Financial Reporting Standards (IFRS) accounting standards.  All other companies are required to follow accounting standards issued by the Saudi Organization for Certified Public Accountants.

Stakeholder consultation on regulatory issues is inconsistent.  Some Saudi organizations are scrupulous about consulting businesses affected by the regulatory process, while others tend to issue regulations with no consultation at all.  Proposed laws and regulations are not always published in draft form for public comment. An increasing number of government agencies, however, solicit public comments through their websites.  The processes and procedures for stakeholder consultation are not generally transparent or codified in law or regulations. There are no private-sector or government efforts to restrict foreign participation in the industry standards-setting consortia or organizations that are available.  There are no informal regulatory processes managed by NGOs or private-sector associations.

International Regulatory Considerations

Saudi Arabia uses technical regulations developed both by the Saudi Arabian Standards Organization (SASO) and by the Gulf Standards Organization (GSO).  Although the GCC member states continue to work toward common requirements and standards, each individual member state, and Saudi Arabia through SASO, continues to maintain significant autonomy in developing, implementing, and enforcing technical regulations and conformity assessment procedures in its territory.  More recently, Saudi Arabia has moved toward adoption of a single standard for technical regulations. This standard is often based on International Organization for Standardization (ISO) or International Electrotechnical Commission (IEC) standards, to the exclusion of other international standards, such as those developed by U.S.-domiciled standards development organizations (SDOs).

Saudi Arabia’s exclusion of these other international standards, which are often used by U.S. manufacturers, can create significant market access barriers for industrial and consumer products exported from the United States.  The United States government has engaged Saudi authorities on the principles for international standards per the WTO Technical Barriers to Trade Committee Decision and encouraged Saudi Arabia to adopt standards developed according to such principles in their technical regulations, allowing all products that meet those standards to enter the Saudi market.  Several U.S.-based standards organizations, including SDOs and individual companies, have also engaged SASO, with mixed success, in an effort to preserve market access for U.S. products, ranging from electrical equipment to footwear.

A member of the WTO, Saudi Arabia notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

The Saudi legal system is derived from Islamic law, known as sharia.  Saudi commercial law, meanwhile, is still developing.  In 2016, Saudi Arabia took a significant step in improving its dispute settlement regime with the establishment of the Saudi Center for Commercial Arbitration (see “Dispute Settlement” below).  Through its Commercial Law Development Program, the U.S. Department of Commerce provides capacity-building programs for Saudi stakeholders in the areas of contract enforcement, public procurement, and insolvency.

The Saudi Ministry of Justice oversees the sharia-based judicial system, but most ministries have committees to rule on matters under their jurisdictions.  Judicial and regulatory decisions can be appealed. Many disputes that would be handled in a court of law in the United States are handled through intra-ministerial administrative bodies and processes in Saudi Arabia.  Generally, the Saudi Board of Grievances has jurisdiction over commercial disputes between the government and private contractors. The Board also reviews all foreign arbitral awards and foreign court decisions to ensure that they comply with sharia.  This review process can be lengthy, and outcomes are unpredictable.

The Kingdom’s record of enforcing judgments issued by courts of other GCC states under the GCC Common Economic Agreement, and of other Arab League states under the Arab League Treaty, is somewhat better than enforcement of judgments from other foreign courts.  Monetary judgments are based on the terms of the contract – i.e., if the contract is calculated in U.S. dollars, a judgment may be obtained in U.S. dollars. If unspecified, the judgment is denominated in Saudi riyals. Non-material damages and interest are not included in monetary judgments, based on the sharia prohibitions against interest and against indirect, consequential, and speculative damages.  

As with any investment abroad, it is important that U.S. investors take steps to protect themselves by thoroughly researching the business record of a proposed Saudi partner, retaining legal counsel, complying scrupulously with all legal steps in the investment process, and securing a well-drafted agreement.  Even after a decision is reached in a dispute, enforcement of a judgment can still take years. The U.S. government recommends consulting with local counsel in advance of investing to review legal options and appropriate contractual provisions for dispute resolution.

ICSID Convention and New York Convention

The Kingdom of Saudi Arabia ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1994.  Saudi Arabia is also a member state of the International Center for the Settlement of Investment Disputes Convention (ICSID), though under the terms of its accession it cannot be compelled to refer investment disputes to this system absent specific consent, provided on a case-by-case basis.  Saudi Arabia has yet to consent to the referral of any investment dispute to the ICSID for resolution.

Investor-State Dispute Settlement

The use of any international or domestic dispute settlement mechanism within Saudi Arabia continues to be time-consuming and uncertain, as all outcomes are subject to a final review in the Saudi judicial system and carry the risk that principles of sharia law may potentially supersede a judgment or legal precedent.  The U.S. government recommends consulting with local counsel in advance of investing to review legal options and contractual provisions for dispute resolution.

International Commercial Arbitration and Foreign Courts

Traditionally, dispute settlement and enforcement of foreign arbitral awards in Saudi Arabia have proven time-consuming and uncertain, carrying the risk that sharia principles can potentially supersede any foreign judgments or legal precedents.  Even after a decision is reached in a dispute, effective enforcement of the judgment can take a long period of time.  In several cases, disputes have caused serious problems for foreign investors. For instance, Saudi partners and creditors have blocked foreigners’ access to or right to use exit visas, forcing them to remain in Saudi Arabia against their will.  In cases of alleged fraud or debt, foreign partners may also be jailed to prevent their departure from the country while awaiting police investigation or court adjudication of the case. Courts can in theory impose precautionary restraint on personal property pending the adjudication of a commercial dispute, though this remedy has been applied sparingly.

In recent years, the SAG has demonstrated a commitment to improving the quality of commercial legal proceedings and access to alternative dispute resolution mechanisms.  Local attorneys indicate that the quality of final judgments in the court system has improved, but that cases still take too long to litigate. In 2012, the SAG updated certain provisions in Saudi Arabia’s domestic arbitration law, paving the way for the establishment of the Saudi Center for Commercial Arbitration (SCCA) in 2016.  Developed in accordance with international arbitration rules and standards, including those set by the American Arbitration Association’s International Centre for Dispute Resolution and the International Chamber of Commerce’s International Court of Arbitration, the SCCA offers comprehensive arbitration services to firms both domestic and international.  The SCCA reports that both domestic and foreign law firms have begun to include referrals to the SCCA in the arbitration clauses of their contracts. However, it is currently too early to assess the quality and effectiveness of SCCA proceedings, as the SCCA is still in the early stages of operation. Awards rendered by the SCCA can be enforced in local courts, though judges remain empowered to reject enforcement of provisions they deem noncompliant with sharia law.  

In December 2017, the United Nations Commission on International Trade Law (UNCITRAL) recognized Saudi Arabia as a jurisdiction that has adopted an arbitration law based on the 2006 UNCITRAL Model Arbitration Law.  While Saudi Arabia adopted this law in 2012, UNCITRAL did not consider it as a model law jurisdiction due to the SAG’s reference to sharia’s supremacy over UNCITRAL-adopted provisions.  After discussions between UNCITRAL representatives and Saudi judges, during which the Saudi judges clarified that sharia would not affect the enforcement of foreign arbitral awards, UNCITRAL added Saudi Arabia to the list of model law jurisdictions.  The potential impact of the decision is that foreign investors and companies in Saudi Arabia have slightly more certainty that their arbitration agreements and awards will be enforced, as in other UNCITRAL countries.  Whether (and how) Saudi courts will apply this latest interpretation of the relationship between foreign arbitral awards and sharia law remains to be seen.  

Laws and Regulations on Foreign Direct Investment

In January 2019, the Saudi government established the Foreign Trade General Authority (FTGA), which aims to strengthen Saudi Arabia’s non-oil exports and investment, increase the private sector’s contribution to foreign trade, and resolve obstacles encountered by Saudi exporters and investors.  The new authority will also monitor the Kingdom’s obligations under international trade agreements and treaties, negotiate and enter into new international commercial and investment agreements, and represent the Kingdom before the World Trade Organization. The Governor of the Foreign Trade General Authority will report to the Minister of Commerce and Investment. 

Until the FTGA becomes operational (possibly later in 2019), MCI and SAGIA remain the primary Saudi government entities responsible for formulating policies regarding investment activities, proposing plans and regulations to enhance the investment climate in the country, and evaluating and licensing investment proposals.  

Despite the list of activities excluded from foreign investment (see “Policies Toward Foreign Direct Investment”), foreign minority ownership in joint ventures with Saudi partners may be allowed in some of these sectors.  Foreign investors are no longer required to take local partners in many sectors and may own real estate for company activities. They are allowed to transfer money from their enterprises out of the country and can sponsor foreign employees, provided that “Saudization” quotas are met (see “Labor Section” below).  Minimum capital requirements to establish business entities range from zero to 30 million Saudi riyals (USD 8 million), depending on the sector and the type of investment.

SAGIA offers detailed information on the investment process, provides licenses and support services to foreign investors, and coordinates with government ministries to facilitate investment.  According to SAGIA, it must grant or refuse a license within five days of receiving an application and supporting documentation from a prospective investor. SAGIA has established and posted on-line its licensing guidelines, but many companies looking to invest in Saudi Arabia continue to work with local representation to navigate the bureaucratic licensing process.  

SAGIA licenses foreign investments by sector, each with its own regulations and requirements:  (i) services, which comprise a wide range of activities including, IT, healthcare, and tourism; (ii) industrial, (iii) real estate, (iv) public transportation, (v) entrepreneurial, (vi) contracting, (vii) audiovisual media, (viii) science and technical office, (ix) education (colleges and universities), and (x) domestic services employment recruitment.  SAGIA also offers several special-purpose licenses for bidding on and performance of government contracts. Foreign firms must describe their planned commercial activities in some detail and will receive a license in one of these sectors at SAGIA’s discretion. Depending on the type of license issued, foreign firms may also require the approval of relevant competent authorities, such as the Ministry of Health or the Saudi Commission for Tourism and National Heritage.    

An important SAGIA objective is to ensure that investors do not just acquire and hold licenses without investing, and SAGIA sometimes cancels licenses of foreign investors that it deems do not contribute sufficiently to the local economy.  SAGIA’s periodic license reviews, with the possibility of cancellation, add uncertainty for investors and can provide a disincentive to longer-term investment commitments.

SAGIA has agreements with various SAG agencies and ministries to facilitate and streamline foreign investment.  These agreements permit SAGIA to facilitate the granting of visas, establish SAGIA branch offices at Saudi embassies in different countries, prolong tariff exemptions on imported raw materials to three years and on production and manufacturing equipment to two years, and establish commercial courts.  To make it easier for businesspeople to visit the Kingdom, SAGIA can sponsor visa requests without involving a local company. Saudi Arabia has implemented a decree providing that sponsorship is no longer required for certain business visas. While SAGIA has set up the infrastructure to support foreign investment, many companies report that despite some improvements, the process remains cumbersome and time-consuming.  

Competition and Anti-Trust Laws

SAGIA and the Ministry of Commerce and Investment review transactions for competition-related concerns.  Concerns have arisen that allegations of price fixing for certain products, including infant nutrition products, may have been used on occasion as a pretext to control prices.  The Ministry of Commerce and Investment has looked to the GCC’s reference pricing approach on subsidized products to assist the SAG in determining market-price suggested norms.

Saudi competition law prohibits certain vertically-integrated business combinations.  Consequently, companies doing business in Saudi Arabia may find it difficult to register exclusivity clauses in distribution agreements, but are not necessarily precluded from enforcing such clauses in Saudi courts.

Expropriation and Compensation

The Embassy is not aware of any cases in Saudi Arabia of expropriation from foreign investors without adequate compensation.  Some small- to medium-sized foreign investors, however, have complained that their investment licenses have been cancelled without justification, causing them to forfeit their investments.  

Bankruptcy Regulations

Potential investors should note that the “Resolving Insolvency” indicator most negatively affects Saudi Arabia’s World Bank “Doing Business” ranking.  

However, in February 2018, the SAG announced the approval of new bankruptcy legislation, which became effective in August 2018.  According to the SAG, the new bankruptcy law seeks to “further facilitate a healthy business environment that encourages participation by foreign and domestic investors, as well as local small and medium enterprises.”  The new law clarifies procedural processes and recognizes distinct creditor classes (e.g., secured creditors). The new law also includes procedures for continued operation of the distressed company via financial restructuring.  Alternatively, the parties may pursue an orderly liquidation of company assets, which would be managed by a court-appointed licensed bankruptcy trustee. Saudi courts have begun to accept and hear cases under this new legislation.

Investment Incentives

SAGIA advertises a number of financial advantages for foreigners looking to invest in the Kingdom, including the lack of personal income taxes and a corporate tax rate of 20 percent on foreign companies’ profits.  SAGIA also lists various SAG-sponsored, regional, and international financial programs to which foreign investors have access, such as the Arab Fund for Economic and Social Development, the Arab Trade Financing Program, and the Islamic Development Bank.  

The Saudi Industrial Development Fund (SIDF), a government financial institution established in 1974, supports private-sector industrial investments by providing medium- and long-term loans for new factories and for projects to expand, upgrade, and modernize existing manufacturing facilities.  The SIDF offers loans of 50 percent to 75 percent of a project’s value, depending on the project’s location. Foreign investors that set up manufacturing facilities in developed areas (Riyadh, Jeddah, Dammam, Jubail, Mecca, Yanbu, and Ras Al-Khair), for example, can receive a 15-year loan for up to 50 percent of a project’s value; investors in the Kingdom’s least developed areas can receive a 20-year loan for up to 75 percent of the project’s value.  The SIDF also offers consultancy services for local industrial projects in the administrative, financial, technical and marketing fields. (The SIDF’s website is at https://www.sidf.gov.sa/en/Pages/default.aspx  .)  

The SAG offers several incentive programs to promote employment of Saudi nationals.  The Saudi Human Resources Development Fund (HRDF) (https://www.hrdf.org.sa/), for example, will pay 30 percent of a Saudi national’s wages for the first year of work, with a wage subsidy of 20 percent and 10 percent for the second and third year of employment, respectively (subject to certain limits and caps).   

American and other foreign firms are able to participate in SAG-financed and/or -subsidized research-and-development programs.  Many of these programs are run though the King Abdulaziz City for Science and Technology (KACST), which funds many of the Kingdom’s R&D programs.   

Foreign Trade Zones/Free Ports/Trade Facilitation

Saudi Arabia does not operate free trade zones or free ports.  However, as part of its Vision 2030 program, the SAG has announced it will create special zones with special regulations to encourage investment and diversify government revenues.  The SAG is discussing the establishment of special regulatory zones in certain areas, including at the NEOM giga-project, and the King Abdullah Financial District project in Riyadh.  

Saudi Arabia has established a network of “economic cities” as part of the country’s efforts to diversify away from oil.  Overseen by SAGIA, these four economic cities aim to provide a variety of advantages to companies that choose to locate their operations within the city limits, including in matters of logistics and ease of doing business.  The four economic cities are: King Abdullah Economic City near Jeddah, Prince AbdulAziz Bin Mousaed Economic City in north-central Saudi Arabia, Knowledge Economic City in Medina, and Jazan Economic City near the southwest border with Yemen.  The cities are in various states of development, and their future development potential is unclear, given competing Vision 2030 economic development projects.

The Saudi Industrial Property Authority (MODON) oversees the development of 35 industrial cities, including some still under development.  MODON offers incentives for commercial investment in these cities, including competitive rents for industrial land, government-sponsored financing, export guarantees, and certain customs exemptions.  (MODON’s website is at https://www.modon.gov.sa/en/Pages/default.aspx  .)

The Royal Commission for Jubail and Yanbu (RCJY) was formed in 1975 and established the industrial cities of Jubail, located in eastern Saudi Arabia on the Gulf coast, and Yanbu, located in north western Saudi Arabia on the Red Sea coast.  A significant portion of Saudi Arabia’s refining, petrochemical, and other heavy industries are located in the Jubail and Yanbu industrial cities. The RCJY’s mission is to plan, promote, develop, and manage petrochemicals and energy intensive industrial cities.  In connection with this mission, RCJY promotes investment opportunities in the two cities and can offer a variety of incentives, including tax holidays, customs exemptions, low cost loans, and favorable land and utility rates. More recently, the RCJY has assumed responsibility for managing the Ras Al Khair City for Mining Industries (2009) and the Jazan City for Primary and Downstream Industries (2015).  (The RCJY’s website is at https://www.rcjy.gov.sa).

Performance and Data Localization Requirements

The government does not impose systematic conditions on foreign investment.  For example, there are no requirements to locate in a specific geographic area (except for some restrictions on the distribution of retail outlets and the location of industrial activities).  Investors are not required to export a certain percentage of output. There is no requirement that the share of foreign equity be reduced over time. Investors are not required to disclose proprietary information to the SAG as part of the regulatory approval process, except where issues of health and safety are concerned.    

Although investors have not been required heretofore to purchase from local sources, the situation is changing.  In line with its bid to diversify the economy and provide more private sector jobs for Saudi nationals, the SAG has embarked upon a broad effort to source goods and services domestically and is seeking commitments from investors to do so.  In 2017, the Council of Economic and Development Affairs (CEDA) established the Local Content and Private Sector Development Unit (NAMAA in Arabic) to promote local content and improve the balance of payments. NAMAA is responsible for monitoring and implementing regulations, suggesting new policies, and coordinating with the private sector on all local content matters.  

Government-controlled enterprises are also increasingly introducing local content requirements for foreign firms.  Aramco’s “In-Kingdom Total Value Added” program, for example, strongly encourages the purchase of goods and services from a local supplier base and aims to double Aramco’s percentage of locally-manufactured energy-related goods and services to 70 percent by 2021.  

In the defense sector, Saudi Arabia’s military is in the process of reforming its procurement processes and policies to incorporate new ambitious goals of Saudi employment and localized production.  The SAG has shifted over the last two years away from offsets in favor of “localization” of purchases of goods and services and “Saudization” of the labor force. Previously, the government required offsets in investments equivalent to up to 40 percent of a program’s value for defense contracts, depending on the value of the contract.  The SAG is currently mandating increasingly strict localization requirements for government contracts in the defense sector. The SAG’s Vision 2030 program calls for 50 percent of defense materials to be produced and procured locally by 2030, and simultaneously seeks comparable increases in the number of Saudis employed in this sector.

The government encourages recruitment of Saudi employees through a series of incentives (see section 11 on “Labor Policies” for details of the “Saudization” program) and limits placed on the number of visas for foreign workers available to companies.  The Saudi electronic visitor visa system defaults to five-year visas for all U.S. citizen applicants. “Business visas” are routinely issued to U.S. visitors who do not have an invitation letter from a Saudi company; the visa applicant must provide evidence that he or she is engaged in legitimate commercial activity.  “Commercial visas” are issued by invitation from Saudi companies to applicants who have a specific reason to visit a Saudi company.

In the fall of 2016, the SAG implemented a series of significant visitor fee increases for expatriates whose countries do not have reciprocity agreements with Saudi Arabia, doubling the cost of a single-entry business visit visa to USD 533.  (U.S. citizens are exempt from such increases on the basis of reciprocity.) The SAG also imposed higher exit and reentry visa fees for all foreign workers residing in the Kingdom, including U.S. citizens. Furthermore, in January 2018, the SAG implemented new fees for expatriate employers ranging between USD 80 and USD 107 per employee per month and increased levies on expatriates with dependents to a USD 54 monthly fee for each dependent (see section 11 on “Labor Policies”).  In January 2019, fees on expatriate employees increased to between USD 133 to USD 160 per month, and levies on expatriate dependents increased to USD 80 per month. These fees are scheduled to increase again in 2020, but no additional increases are planned at this time.

Data Treatment

There are no requirements for foreign IT providers to turn over source code or provide access to encryption.  Other than a requirement to retain records locally for ten years for tax purposes, there is no requirement regarding data storage or access to surveillance.   

The Saudi legal system protects and facilitates acquisition and disposition of all property, consistent with Islamic practice of upholding private property rights.  Non-Saudi corporate entities are allowed to purchase real estate in Saudi Arabia in accordance with the foreign-investment code. Other foreign-owned corporate and personal property is protected by law.  Saudi Arabia has a system of recording security interests, and plans to modernize its land registry system. Saudi Arabia ranked 24th out of 190 countries for ease of registering property in the 2019 World Bank Doing Business Report.

In 2017, the Saudi Ministry of Housing implemented an annual vacant land tax of 2.5 percent of the assessed value on vacant lands in urban centers in an attempt to spur development.  Additionally, in January 2018, in an effort to increase Saudis’ access to finance and stimulate the mortgage and housing markets, Saudi Arabia’s central bank lifted the maximum loan-to-value rate for mortgages for first-time homebuyers to 90 percent from 85 percent, and increased interest payment subsidies for first-time buyers.  This further liberalized stringent down-payment requirements that prevailed up to 2016, when the central bank raised the maximum loan-to-value rate from 70 percent to 85 percent.

Intellectual Property Rights

In the last two decades, Saudi Arabia undertook a comprehensive revision of its laws governing intellectual property rights (IPR) to bring them in line with the WTO agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs); the changes were promulgated in coordination with the World Intellectual Property Organization (WIPO).  The SAG updated its Trademark Law (2002), Copyright Law (2003), and Patent Law (2004) with the dual goals of TRIPs compliance and effective deterrence against IPR violations.

Saudi Arabia was included on USTR’s Special 301 “Priority Watch List” in April 2019 following an increase in the number of stakeholder complaints about the protection of IPR in the Kingdom, particularly with respect to pharmaceuticals, rampant digital and signal piracy, software, and counterfeit goods.

Recent steps by the Saudi Food and Drug Authority (SFDA) to license locally-manufactured, cheaper generic versions of patent-pending drugs within their five year regulatory data protection period have created significant concern among U.S. industry stakeholders, who allege commercial loss resulting from this abrogation of their patent and data protection rights.  Additionally, in 2017, the SFDA granted a license to a local generic pharmaceutical manufacturer for an innovative treatment developed by a U.S. pharmaceutical company that had filed for patent protection with the GCC patent office. According to the U.S. pharmaceutical and biologics industry, the SFDA’s failure to recognize the patent and protect the data constitutes a serious breach of intellectual property rights.  

During 2018, an illicit broadcast and streaming service called “beoutQ” became widely available in Saudi Arabia.  beoutQ is suspected of satellite and online piracy, as well as supporting piracy devices and related services, such as apps that allow access to unlicensed movies and television productions, including sports events. 

U.S. software firms report that the Saudi government continues to use unlicensed and “under-licensed” (in which an insufficient number of licenses is procured for the total number of users) software on government computer systems in violation of their copyrights.  Other concerns include the lack of seizure and destruction of counterfeit goods in enforcement actions by MCI, and limits on the ability of MCI to enter facilities suspected of involvement in the sale or manufacture of counterfeit goods, including facilities located in residential areas.

The Saudi government is in the process of reorganizing its IPR agencies and centralizing responsibility for all IPR matters in the new Saudi Authority for Intellectual Property (SAIP).  SAIP’s Board of Directors held its first meeting in March 2018 under the chairmanship of the Minister of Commerce and Investment. SAIP also signed a Memorandum of Understanding in September 2018 with the U.S. Patent and Trademark Office.  SAIP’s objective is to ensure the unification and integration of IPR in Saudi Arabia. SAIP is expected to prepare a new national IPR strategy and oversee its implementation.

Resources for Rights Holders

Embassy point of contact:

Brian Barone
Economic Officer
+966 11 488-3800 Ext. 4140
Email: BaroneBA@state.gov

Regional IPR Attache:

Pete C. Mehravari
U.S. Intellectual Property Attache for Middle East and North Africa
Patent Attorney
U.S. Embassy Kuwait | U.S. Department of Commerce
Office: +965 2259-1455
Email: Peter.mehravari@trade.gov

Capital Markets and Portfolio Investment

Saudi Arabia’s financial policies generally facilitate the free flow of private capital, while currency can be transferred in and out of the Kingdom without restriction.  Saudi Arabia maintains an effective regulatory system governing portfolio investment in the Kingdom. The Capital Markets Law, passed in 2003, allows for brokerages, asset managers, and other nonbank financial intermediaries to operate in the Kingdom.  The law created a market regulator, the Capital Market Authority (CMA), which was established in 2004, and opened the Saudi stock exchange (Tadawul) to public investment.  

Prior to 2015, the CMA only permitted foreign investors to invest in the Saudi stock market through indirect “swap arrangements,” through which foreigners had accumulated ownership of one per cent of the market.  In June 2015, the CMA opened the Tadawul to “qualified foreign investors,” but with a stringent set of regulations that only large financial institutions could meet.  Since 2015, the CMA has progressively relaxed the rules applicable to qualified foreign investors, easing barriers to entry and expanding the foreign investor base.  The CMA adopted regulations in 2017 permitting corporate debt securities to be listed and traded on the exchange; in March 2018, the CMA authorized government debt instruments to be listed and traded on the Tadawul.  The Tadawul was incorporated into the FTSE Russell Emerging Markets Index as of March 2019, resulting in an initial foreign capital injection of approximately USD 700 million.  This was the first of five staged capital infusions over the next 12 months totaling USD 6.8 billion. Separately, the USD 11 billion infusion into the Tadawul from integration into the MSCI Emerging Markets Index will take place in two tranches beginning in May 2019.

Money and Banking System

The banking system in the Kingdom is generally well-capitalized and healthy.  The public has easy access to deposit-taking institutions. The legal, regulatory, and accounting systems used in the banking sector are generally transparent and consistent with international norms.  The Saudi Arabian Monetary Authority (SAMA), the central bank, which oversees and regulates the banking system, generally gets high marks for its prudential oversight of commercial banks in Saudi Arabia.  SAMA is a member and shareholder of the Bank for International Settlements in Basel, Switzerland.

The SAG has authorized increased foreign participation in its banking sector over the last several years.  SAMA has granted licenses to a number of foreign banks to operate in the Kingdom, including Deutsche Bank, J.P. Morgan Chase N.A., and Industrial and Commercial Bank of China (ICBC).  A number of additional, CMA-licensed foreign banks participate in the Saudi market as investors or wealth management advisors. Citigroup, for example, returned to the Saudi market in early 2018 under a CMA license.  

Credit is normally widely available to both Saudi and foreign entities from commercial banks and is allocated on market terms.  The Saudi banking sector has one of the world’s lowest non-performing loan (NPL) ratios, in the range of 1.5 per cent for 2017. In addition, credit is available from several government institutions, such as the SIDF, which allocate credit based on government-set criteria rather than market conditions.  Companies must have a legal presence in Saudi Arabia in order to qualify for credit. The private sector has access to term loans, and there have been a number of corporate issuances of sharia compliant bonds, known as sukuk.  

Foreign Exchange and Remittances

Foreign Exchange

There is no limitation in Saudi Arabia on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, or imported inputs, other than certain withholding taxes (withholding taxes range from five percent for technical services and dividend distributions to 15 percent for transfers to related parties, and 20 percent or more for management fees).  Bulk cash shipments greater than USD 10,000 must be declared at entry or exit points. Since 1986, when the last currency devaluation occurred, the official exchange rate has been fixed by SAMA at 3.75 Saudi riyals per U.S. dollar. Transactions typically take place using rates very close to the official rate.

Remittance Policies

Saudi Arabia is one of the largest remitting countries in the world, with roughly 75 percent of the Saudi labor force comprised of foreign workers.  Remittances totaled approximately USD 39 billion in 2018. There are currently no restrictions on converting and transferring funds associated with an investment (including remittances of investment capital, dividends, earnings, loan repayments, principal on debt, lease payments, and/or management fees) into a freely usable currency at a legal market-clearing rate.  There are no waiting periods in effect for remitting investment returns through normal legal channels.

The Ministry of Labor and Social Development is progressively implementing a “Wage Protection System” designed to verify that expatriate workers, the predominant source of remittances, are being properly paid according to their contracts.  Under this system, employers are required to transfer salary payments from a local Saudi bank account to an employee’s local bank account, from which expatriates can freely remit their earnings to their home countries.

In 2017, SAMA enhanced and updated its previous Circular on Guidelines for the Prevention of Money Laundering and Terrorist Financing.  The enhanced guidelines have increased alignment with the Financial Action Task Force (FATF) 40 Recommendations, the nine Special Recommendations on Terrorist Financing, and relevant UN Security Council Resolutions.  Saudi Arabia is a member of the Middle East and North Africa Financial Action Task Force (MENA-FATF). In 2015 Saudi Arabia obtained observer status to the FATF and is seeking full membership in the organization.

Sovereign Wealth Funds

The Public Investment Fund (PIF, www.pif.gov.sa  ) is the Kingdom’s officially designated sovereign wealth fund.  While PIF lacks many of the attributes of a traditional sovereign wealth fund, it has evolved into the SAG’s primary investment vehicle.  

Established in 1971 to channel oil wealth into economic development, the PIF has historically been a holding company for government shares in partially privatized state-owned enterprises (SOEs), including SABIC, the National Commercial Bank, Saudi Telecom Company, and others.  Crown Prince Mohammed bin Salman is the chairman of the PIF and announced his intention in April 2016 to build the Fund into a USD 2 trillion global investment fund, relying in part on proceeds from a potential initial public offering of up to five percent of Saudi Aramco shares.  

Since that announcement, the PIF has made a number of high-profile international investments, including a USD 3.5 billion investment in Uber, a commitment to invest USD 45 billion into Japanese SoftBank’s VisionFund, a commitment to invest USD 20 billion into U.S. Blackstone’s Infrastructure Fund, a USD 1 billion investment in U.S. electric car company Lucid Motors, and a partnership with cinema company AMC to operate movie theaters in the Kingdom.  Under the Vision 2030 reform program, the PIF is financing a number of strategic domestic development projects, including: “NEOM,” a new USD 500 billion project to build an “independent economic zone” in northwest Saudi Arabia; “Qiddiya,” a new, large-scale entertainment, sports, and cultural complex near Riyadh; “the Red Sea Project”, a massive tourism development on the western Saudi coast; and “Amaala,” a wellness, healthy living, and meditation resort also located on the Red Sea.  

As of early 2019, the PIF had an investment portfolio valued at approximately USD 250-260 billion, mainly in shares of state-controlled domestic companies.  In an effort to rebalance its investment portfolio, the PIF has divided its assets into six investment pools comprising local and global investments in various sectors and asset classes:  Saudi holdings; Saudi sector development; Saudi real estate and infrastructure development; Saudi giga-projects; international strategic investments; and an international diversified pool of investments.  The PIF has ambitions to achieve USD 600 billion in assets under management by 2020.

In practice, SAMA’s foreign reserve holdings also operate as a quasi-sovereign wealth fund, accounting for the majority of the SAG’s foreign assets.  SAMA invests the Kingdom’s surplus oil revenues primarily in low-risk liquid assets, such as sovereign debt instruments and fixed-income securities. SAMA’s foreign reserves stood at approximately USD 497 billion at the end of 2018.  Total reserves increased by approximately USD 165 million in 2018, after falling USD 39.4 billion and USD 80.6 billion in 2017 and 2016, respectfully. SAMA’s foreign reserve holdings peaked at USD 746 billion in mid-2014.

Though not a formal member, Saudi Arabia serves as a permanent observer to the International Working Group on Sovereign Wealth Funds.

SOEs play a leading role in the Saudi economy, particularly in water, power, oil, natural gas, petrochemicals, and transportation.  Saudi Aramco, the world’s largest producer and exporter of crude oil and a large-scale oil refiner and producer of natural gas, is 100 percent SAG-owned, and its revenues typically contribute the majority of the SAG’s budget.  Five of the eleven representatives on Aramco’s board of directors are from the SAG, including the chairman and vice chairman. The SAG announced a plan for an initial public offering (IPO) of up to five percent of Aramco shares in 2018, but the IPO has been delayed.  The SAG claims the company is valued at USD 2 trillion, which would make a five percent IPO the largest in history. Saudi Aramco has announced it will acquire SABIC, Saudi Arabia’s leading petrochemical company, which is 70 percent owned by the SAG. Five of the nine representatives on SABIC’s board of directors are from the SAG, including the chairman and vice chairman.  The SAG is similarly well-represented in the leadership of other SOEs. The SAG either wholly owns or holds controlling shares in many other major Saudi companies, such as the Saudi Electricity Company, Saudi Arabian Airlines (Saudia), the Saline Water Conversion Company, Ma’aden (mining), and the National Commercial Bank and other leading financial institutions.

Privatization Program

Saudi Arabia has undertaken a limited privatization process for state-owned companies and assets dating back to 2002.  The process, which is open to domestic and foreign investors, has resulted in partial privatizations of state-owned enterprises in the banking, mining, telecommunications, petrochemicals, water desalination, insurance, and other sectors.

As part of Vision 2030 reforms, the SAG has announced its intention to privatize additional sectors of the economy.  Privatization is a key element underpinning the Vision 2030 goal of increasing the private sector’s contribution to GDP from 40 percent to 65 percent by 2030.  In April 2018, the SAG launched a Vision 2030 Privatization Program that aims to: strengthen the role of the private sector by unlocking state-owned assets for investment, attract foreign direct investment, create jobs, reduce government overhead, improve the quality of public services, and strengthen the balance of payments.  (The full Privatization Program report is available online at http://vision2030.gov.sa/en/ncp  .)  The program report references a range of approaches to privatization, including:  full and partial assets sales, initial public offerings, management buy-outs, public-private partnerships (build-operate-transfer models), concessions, and outsourcing.  The SAG aims to create 10,000-12,000 jobs and generate USD 9-USD 11 billion in non-oil revenue by 2020 through the Privatization Program. While the Privatization report outlines the general guidelines for the Program, it does not include an exhaustive list of assets to be privatized.  The report does, however, reference education, healthcare, transportation, renewable energy, power generation, waste management, sports clubs, grain silos, and water desalination facilities as prime areas for privatization or public-private partnerships.

In 2017, Saudi Arabia established the National Center for Privatization and Public Private Partnerships, which will oversee and manage the Privatization Program.  (The Center’s website is at http://www.ncp.gov.sa/en/pages/home.aspx  .)  The NCCP’s mandate is to introduce privatization through the development of programs, regulations, and mechanisms for facilitating private sector participation in entities now controlled by the government.

There is a growing awareness of corporate social responsibility (CSR) in Saudi Arabia.  The King Khalid Foundation issues annual “responsible competitiveness” awards to companies doing business in Saudi Arabia for outstanding CSR activities.

Foreign firms have identified corruption as a barrier to investment in Saudi Arabia.  Saudi Arabia has a relatively comprehensive legal framework that addresses corruption, but many firms perceive enforcement as selective.  The Combating Bribery Law and the Civil Service Law, the two primary Saudi laws that address corruption, provide for criminal penalties in cases of official corruption.  Government employees who are found guilty of accepting bribes face 10 years in prison or fines of up to one million riyals (USD 267,000). Ministers and other senior government officials appointed by royal decree are forbidden from engaging in business activities with their ministry or organization.  Saudi corruption laws cover most methods of bribery and abuse of authority for personal interest, but not bribery between private parties. Public officials are not subject to financial disclosure laws. Some officials have engaged in corrupt practices with impunity, and perceptions of corruption persist in some sectors.  

On November 4, 2017, King Salman issued a royal decree forming a new Supreme Anti-Corruption Committee.  The SAG subsequently detained approximately 200 government officials, businesspersons, and royal family members as part of the anti-corruption campaign.  The royal decree exempted committee members – which included the Crown Prince, attorney general, chairman of the National Anticorruption Commission (“Nazaha”), chief of the General Audit Bureau, chairman of the Saudi Monitoring and Investigation Commission, and head of the State Security Presidency – from “all laws, regulations, instructions, orders, and decisions” that would impede anticorruption efforts.  Some of the detainees reportedly negotiated financial settlements in exchange for their release. In January 2018, the attorney general announced that the SAG had collected more than USD 100 billion in various types of assets, including real estate, commercial entities, securities, cash, and other assets as part of its anti-corruption campaign. In January 2019, the Saudi government announced the end of the anti-corruption campaign.  

The Supreme Anti-Corruption Committee, National Anticorruption Commission/Nazaha, the Public Prosecutor’s Office, and the Control and Investigation Board are units of the government with authority to investigate reports of criminal activity, corruption, and “disciplinary cases” involving government employees.  These bodies are responsible for investigating potential cases and referring them to the administrative courts.

Nazaha, established in 2011, is responsible for promoting transparency and combating all forms of financial and administrative corruption.  Nazaha’s ministerial-level director reports directly to the King. Nazaha refers cases of possible public corruption to the Public Prosecutor’s Office.  Some evidence suggests the organization has not shied away from prosecuting influential players whose indiscretions may previously have been ignored. In 2016, for example, it referred the Minister of Civil Service for investigation over allegations of abuse of power and nepotism.  In November 2016, Nazaha announced it found irregularities in the appointment of the minister’s son to the Ministry of Municipal and Rural Affairs. The Commission regularly publishes news of its investigations on its website (http://www.nazaha.gov.sa/en/Pages/Default.aspx  ).

The Control and Investigation Board is responsible for investigating financial and administrative malfeasance, and the Public Prosecutor’s Office has the lead on all criminal investigations.  The General Auditing Bureau is also charged with combating corruption, as is the Human Rights Commission, which responds to and researches complaints of corruption.

SAMA, the central bank, oversees a strict regime to combat money laundering.  Saudi Arabia’s Anti-Money Laundering Law provides for sentences up to 10 years in prison and fines up to USD 1.3 million.  The Basic Law of Governance contains provisions on proper management of state assets and authorizes audits and investigation of administrative and financial malfeasance.  

The Government Tenders and Procurement Law regulates public procurements, often a source of corruption.  The law provides for public announcement of tenders and guidelines for the award of public contracts. Saudi Arabia is an observer of the WTO Agreement on Government Procurement (GPA).  Although Saudi Arabia committed to initiate negotiations for accession to the WTO GPA when it became a WTO Member in 2005, it has not yet begun those negotiations.

Saudi Arabia ratified the UN Convention against Corruption in April 2013 and signed the G20 Anti-Corruption Action Plan in November 2010.

Globally, Saudi Arabia ranks 58th out of 180 countries in Transparency International’s Corruption Perceptions Index 2018.  

Resources to Report Corruption

The National Anti-Corruption Commission’s address is:  

National Anti-Corruption Commission
P.O. Box (Wasl) 7667, Al Olaya – Ghadir District
Riyadh 2525-13311
The Kingdom of Saudi Arabia
Fax: 0112645555
E-mail: info@nazaha.gov.sa

Nazaha accepts complaints about corruption through its website http://www.nazaha.gov.sa  or mobile application.

Saudi Arabia is a monarchy ruled by King Salman bin Abdulaziz Al Saud.  The King’s son, Crown Prince Mohammed bin Salman, has assumed a central role in government decision-making.  The Department of State regularly reviews and updates a travel advisory to apprise U.S. citizens of the security situation in Saudi Arabia and frequently reminds U.S. citizens of recommended security precautions.  As of March 2019, the Travel Advisory for Saudi Arabia urges U.S. citizens to exercise increased caution when traveling to Saudi Arabia due to terrorism and the threat of missile and drone attacks on civilian targets.  The Travel Warning notes that terrorist groups continue plotting possible attacks in Saudi Arabia and that terrorists may attack with little or no warning, targeting tourist locations, transportation hubs, markets/shopping malls, and local government facilities.  In the past, terrorists have targeted both Saudi and Western government interests, mosques and other religious sites (both Sunni and Shia), and places frequented by U.S. citizens and other Westerners. Additionally, Houthi rebel groups operating in Yemen have fired missiles and rockets into Saudi Arabia, targeting populated areas and civilian infrastructure, and have publicly stated their intent to continue to do so.  Missile attacks have targeted major cities such as Riyadh and Jeddah, Riyadh’s international airport, Saudi Aramco facilities, and vessels in Red Sea shipping lanes. The Houthi rebel groups are also in possession of unmanned aerial systems (drones), which they have used to target civilian infrastructure and military facilities in Saudi Arabia. U.S. citizens living and working on or near such installations, particularly in areas near the border with Yemen, are at heightened risk of missile and drone attack.

Please visit https://travel.state.gov/ for further information, including the latest Travel Advisory.

The Ministry of Labor and Social Development sets labor policy and, along with the Ministry of Interior, regulates recruitment and employment of expatriate labor, which makes up a majority of the private-sector workforce.  About 75 percent of total jobs in the country are held by expatriates, who number roughly 12.6 million out of a total population of approximately 33.4 million. The largest groups of foreign workers come from India, Pakistan, Bangladesh, Egypt, the Philippines, and Yemen.  Saudis occupy about 96 percent of government jobs, but only about 25 percent of the total jobs in the Kingdom. Over one-third of Saudi nationals are employed in the public sector.

Saudi Arabia’s General Authority for Statistics estimates unemployment at 6.0 percent for the total population and 12.8 percent for Saudi nationals (Q3 2018 figures), but these figures mask a high youth unemployment rate, a Saudi female unemployment rate of 30.9 percent, and low Saudi labor participation rates (42.0 percent overall;19.7 percent for women).  With approximately 60 percent of the Saudi population under the age of 30, job creation for new Saudi labor market entrants will prove a serious challenge for a number of years.

The SAG encourages Saudi employment through “Saudization” policies that place quotas on employment of Saudi nationals in certain sectors, coupled with limits placed on the number of visas for foreign workers available to companies.  In 2011, the Ministry of Labor and Social Development laid out a sophisticated plan known as Nitaqat, under which companies are divided into categories, each with a different set of quotas for Saudi employment based on company size.  Reforms enacted in 2017 refine the program to incentivize further the employment of women, individuals with disabilities, and managerial and high-wage positions.  Each company is determined to be in one of four strata based on its actual percentage of Saudi employees, with platinum and green strata for companies meeting or exceeding the quota for their sector and size, and yellow and red strata for those failing to meet it.  Expatriate employees in red and yellow companies can move freely to green or platinum companies, without the approval of their current employers, and green and platinum companies have greater privileges with regard to securing and renewing work permits for expatriates.

Over the past few years, the SAG has taken additional measures to strengthen the Nitaqat program and expand the scope of Saudization to require the hiring of Saudi nationals.  The Ministry of Labor and Social Development has mandated that certain job categories in specific economic sectors only employ Saudi nationals, beginning with mobile phone stores in 2016.  The ministry has since broadened the policy to include car rental agencies, retail sales jobs in shopping malls, and other sectors. The ministry has likewise mandated that only Saudi women can occupy retail jobs in certain businesses that cater to female customers, such as lingerie and cosmetics shops.  In 2017, the Ministry of Labor and Social Development began to phase in rules forbidding employment of foreigners in retail sales positions in 12 sectors, including: watches, eyewear, medical equipment and devices, electrical and electronic appliances, auto parts, building materials, carpets, cars and motorcycles, home and office furniture, children’s clothing and men’s accessories, home kitchenware, and confectioneries.  Because many retail shops in sectors subject to Saudization are owned and operated by expatriates, these policies have resulted in numerous store closures across the country. Many elements of Saudization and Nitaqat have garnered criticism from the private sector, but the SAG claims these policies have substantially increased the percentage of Saudi nationals working in the private sector over the last several years, despite near-record unemployment levels.    

In 2017, the Ministry of Labor and Social Development and the Ministry of Interior launched the latest phase of an ongoing campaign to deport illegal and improperly documented workers.  Furthermore, in January 2018, the SAG implemented new fees for expatriate employers (ranging between USD 80 and USD 107 per employee per month), as well as increased levies on expatriates with dependents (a USD 54 monthly fee for each dependent).  In January 2019, fees on expatriate employees increased to between USD 133 to USD 160 per month, and levies on expatriate dependents increased to USD 80 per month. These fees are scheduled to increase again in 2020, but no additional increases are planned at this time.  The combination of Saudization and Nitaqat policies, new expatriate fees, increased visa and entry/exit permit fees, the new VAT, and other measures that have raised the cost of living, has prompted approximately 1.5 million expatriates to depart the Kingdom over the past two years.  These measures have also significantly increased labor costs for employers, both Saudi and foreign alike.

Saudi Arabia’s labor laws forbid union activity, strikes, and collective bargaining.  However, the government allows companies that employ more than 100 Saudis to form “labor committees” to discuss work conditions and grievances with management.  In 2015, the SAG published 38 amendments to the existing labor law with the aim of expanding Saudi employees’ rights and benefits. Domestic workers are not covered under the provisions of the latest labor law; separate regulations covering domestic workers were issued in 2013, stipulating employers provide at least nine hours of rest per day, one day off a week, and one month of paid vacation every two years.

Saudi Arabia has taken significant steps to address labor abuses, but weak enforcement continues to result in credible reports of employer violations of foreign employee labor rights.  In some instances, foreign workers and particularly domestic staff encounter employer practices (including passport withholding and non-payment of wages) that constitute trafficking in persons.  The Department’s annual Trafficking in Persons Report details concerns about labor law enforcement within Saudi Arabia’s sponsorship system is available at: https://www.state.gov/trafficking-in-persons-report/

Overtime is normally compensated at time-and-a-half rates.  The minimum age for employment is 14. The SAG does not adhere to the International Labor Organization’s convention protecting workers’ rights.  Non-Saudis have the right to appeal to specialized committees in the Ministry of Labor and Social Development regarding wage non-payment and other issues.  Penalties issued by the ministry include banning infringing employers from recruiting foreign and/or domestic workers for a minimum of five years.

The U.S. Overseas Private Investment Corporation (OPIC) ceased operating in Saudi Arabia in 1995 due to the SAG’s failure to take steps to adopt and implement laws that extend internationally recognized workers’ rights to its labor force.  Saudi Arabia has been a member of the Multilateral Investment Guarantee Agency since April 1988.

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

* Source for Host Country Data: Saudi General Authority for Statistics

Table 3: Sources and Destination of FDI

According to the 2018 UNCTAD World Investment Report, Saudi Arabia’s total FDI inward stock was $232.2 billion and total FDI outward stock was $79.6 billion (in both cases, as of 2017).   

Detailed data for inward direct investment (below) is as of 2010, which is the latest available breakdown of inward FDI by country.

*Source: IMF Coordinated Direct Investment Survey (2010 – latest available complete data)

Table 4: Sources of Portfolio Investment

Source: IMF’s Coordinated Portfolio Investment Survey (CPIS); data as of December 2017.

Economic Section and Foreign Commercial Service Offices
Embassy of the United States of America
P.O. Box 94309
Riyadh 11693, Saudi Arabia
Phone: +966 11 488-3800

Policies Towards Foreign Direct Investment

The government of South Africa is generally open to foreign investment as a means to drive economic growth, improve international competitiveness, and access foreign markets.  Merger and acquisition activity is more sensitive and requires advance work to answer potential stakeholder concerns. The 2018 Competition Amendment Bill, which was signed into law on February 13, 2019, introduced a mechanism for South Africa to review foreign direct investments and mergers and acquisitions by a foreign acquiring firm on the basis of protecting national security interests (see section on Laws and Regulations on Foreign Direct Investment below).  Virtually all business sectors are open to foreign investment. Certain sectors require government approval for foreign participation, including energy, mining, banking, insurance, and defense.

The Department of Trade and Industry’s (the dti) Trade and Investment South Africa (TISA) division provides assistance to foreign investors.  In the past year, they opened provincial One-Stop Shops that provide investment support for foreign direct investment (FDI), with offices in Johannesburg, Cape Town, and Durban, and a national One Stop Shop located at the dti in Pretoria and online at http://www.gov.za/Invest percent20SA percent3AOnestopshop  .  An additional one-stop shop has opened at Dube Trade Port, which is a special economic zone aerotropolis linked to the King Shaka International Airport in Durban.  The dti actively courts manufacturing industries in which research indicates the foreign country has a comparative advantage. It also favors manufacturing that it hopes will be labor intensive and where suppliers can be developed from local industries.  The dti has traditionally focused on manufacturing industries over services industries, despite a strong service-oriented economy in South Africa. TISA offers information on sectors and industries, consultation on the regulatory environment, facilitation for investment missions, links to joint venture partners, information on incentive packages, assistance with work permits, and logistical support for relocation.  The dti publishes the “Investor’s Handbook” on its website: www.dti.gov.za  

While the government of South Africa supports investment in principle and takes active steps to attract FDI, investors and market analysts are concerned that its commitment to assist foreign investors is insufficient in practice.  Some felt that the national-level government lacked a sense of urgency to support investment deals. Several investors reported trouble accessing senior decision makers. South Africa scrutinizes merger- and acquisition-related foreign direct investment for its impact on jobs, local industry, and retaining South African ownership of key sectors.  Private sector representatives and other interested parties were concerned about the politicization of South Africa’s posture towards this type of investment. Despite South Africa’s general openness to investment, actions by some South African Government ministries, populist statements by some politicians, and rhetoric in certain political circles show a lack of appreciation for the importance of FDI to South Africa’s growth and prosperity and a lack of concern about the negative impact domestic policies may have on the investment climate.  Ministries often do not consult adequately with stakeholders before implementing laws and regulations or fail to incorporate stakeholder concerns if consultations occur. On the positive side, the President, assisted by his appointment of four investment envoys, and his new cabinet are working to restore a positive investment climate and appear to be making progress as they engage in senior level overseas roadshows to attract investment.

Limits on Foreign Control and Right to Private Ownership and Establishment

Currently there is no limitation on foreign private ownership. South Africa’s transformation efforts – the re-integration of historically disadvantaged South Africans into the economy – has led to policies that could disadvantage foreign and some locally owned companies.  In 2017, the Broad-Based Black Socio-Economic Empowerment Charter proposed for the South African mining and minerals industry required an increase to 30 percent ownership by black South Africans, but was mired in the courts as industry challenged it. The Charter was retracted for revision and a new version was proposed in 2018. The Broad-Based Black Economic Empowerment Act of 2013 (B-BBEE), and associated codes of good practice, requires levels of company ownership and participation by Black South Africans to get bidding preferences on government tenders and contracts. The dti created an alternative equity equivalence (EE) program for multinational or foreign owned companies to allow them to score on the ownership requirements under the law, but many view the terms as onerous and restrictive.  Currently eight multinationals, most in the technology sector, participate in this program, most in the technology sector.

Other Investment Policy Reviews

The World Trade Organization carried out in 2015 a Trade Policy Review for the Southern African Customs Union, in which South Africa accounts for over 90 percent of overall GDP.  Neither the OECD nor the UN Conference on Trade and Development (UNCTAD) has conducted investment policy reviews for South Africa.

Business Facilitation

According to the World Bank’s Doing Business report, South Africa’s rank in ease of doing business in 2019 was unchanged from 2018 at 82nd of 190.  It ranks 134th for starting a business, taking an average of forty days to complete the process. South Africa ranks 143rd of 190 countries on trading across borders.

In 2017, the dti launched a national InvestSA One Stop Shop (OSS) to simplify administrative procedures and guidelines for foreign companies wishing to invest in South Africa.  The dti, in conjunction with provincial governments, opened physical OSS locations in Cape Town, Durban, and Johannesburg. These physical locations bring together key government entities dealing with issues including policy and regulation, permits and licensing, infrastructure, finance, and incentives, with a view to reducing lengthy bureaucratic procedures, reducing bottlenecks, and providing post-investment services.  The virtual OSS web site is: http://www.gov.za/Invest percent20SA percent3AOnestopshop  .

The Companies and Intellectual Property Commission (CIPC), a body of the dti, is responsible for business registrations and publishes a step-by-step process for registering a company.  This process can be done on its website (http://www.cipc.co.za/index.php/register-your-business/companies/  ), through a self-service terminal, or through a collaborating private bank.  New business registrants also need to register through the South African Revenue Service (SARS) to get an income tax reference number for turnover tax (small companies), corporate tax, employer contributions for PAYE (income tax), and skills development levy (applicable to most companies).  The smallest informal companies may not be required to register with CIPC, but must register with the tax authorities. Companies also need to register with the Department of Labour (DoL) – www.labour.gov.za   – to contribute to the Unemployment Insurance Fund (UIF) and a compensation fund for occupational injuries.  The DoL registration takes the longest (up to 30 days), but can be done concurrently with other registrations.

Outward Investment

South Africa does not incentivize outward investments.  South Africa’s stock foreign direct investments in the United States in 2017 totaled USD 4.1 billion (latest figures available), an almost 40 percent increase from 2016.  The largest outward direct investment of a South African company is a gas liquefaction plant in the State of Louisiana by Johannesburg Stock Exchange (JSE) and NASDAQ dual-listed petrochemical company SASOL.  There are some restrictions on outward investment, such as a R1 billion (USD 83 million) limit per year on outward flows per company. Larger investments must be approved by the South African Reserve Bank and at least 10 percent of the foreign target entities voting rights must be obtained through the investment. https://www.resbank.co.za/RegulationAndSupervision/
FinancialSurveillanceAndExchangeControl/FAQs/Pages/Corporates.aspx  

Of South Africa’s 49 signed bilateral investment treaties (BITs), 35 never entered into force or were terminated.  According to UNCTAD, fourteen agreements are still in force including with Russia, China, Cuba, and Iran. The 2015 “Protection of Investment Act” replaces lapsed BITs and stipulates that “Existing investments that were made under such treaties will continue to be protected for the period and terms stipulated in the treaties.  Any investments made after the termination of a treaty, but before promulgation of this Act, will be governed by the general South African law.” It also provides that “the government may consent to international arbitration in respect of investments covered by the Act, subject to the exhaustion of domestic remedies.” Such “arbitration will be conducted between the Republic and the home state of the applicable investor.”  South Africa is not engaged in new BIT negotiations.

South Africa is a member of the Southern Africa Customs Union (SACU) which has a common external tariff and tariff-free trade between its five members (South Africa, Botswana, Lesotho, Namibia, and Eswatini, formerly known as Swaziland).  South Africa is generally restricted from negotiating trade agreements by itself because SACU is the competent authority. Nevertheless, South Africa has free trade agreements with the Southern African Development Community (SADC) including its 12 members; the Trade, Development and Cooperation Agreement (TDCA) between South Africa and the European Union (EU); EFTA-SACU Free Trade Agreement between SACU and the European Free Trade Association (EFTA) – Iceland, Liechtenstein, Norway, and Switzerland; and the Economic Partnership Agreement (EPA) between the SADC EPA States (South Africa, Botswana, Namibia, Eswatini, Lesotho, and Mozambique) and the EU and its Member States.  These agreements mainly cover trade in goods and provide preferential market access, though article 52 of the 1999 EU-TDCA covers investment promotion and protection.  South Africa, through SACU, is currently negotiating a “rollover” EPA with the United Kingdom (UK) similar to its EPA with the EU in an effort to curb any trade disruptions when the UK exits the EU.  Progress in reaching an agreement is mired in negotiations over rules of origin, cumulation, and sanitary and phytosanitary matters. 

South Africa is a signatory to the SADC-EAC-COMESA Tripartite FTA which includes 26 countries with a combined GDP of USD 860 billion and a combined population of approximately 590 million people.  This agreement primarily covers trade in goods. South Africa ratified the African Continental Free Trade Agreement in 2018. It joins 21 other African countries, reaching the threshold needed to bring the agreement into force, once these countries submit their ratification instruments to the African Union.  Implementation of the agreement still requires signatories to present offers on tariff lines and services, and agree to rules of origin among other outstanding issues.

The United States and South Africa signed a Trade and Investment Framework Agreement (TIFA) in 1999.  The last TIFA discussions were held in 2015. The United States and SACU negotiated a Trade, Investment and Development Cooperation Agreement (TIDCA) in 2008.

The first U.S.-South Africa bilateral tax treaty eliminated double taxation and entered into force in 1998.  In 2014, a new bilateral tax treaty was signed to implement the U.S. Foreign Asset Tax Compliance Act (FATCA).

As part of a broad set of tax increases, in 2018 the government raised, for the first time since 1993, the value added tax (VAT) by one percentage point to 15 percent.  Other fiscal measures intended to raise government revenues, such as no upward adjustments to personal income tax brackets to account for inflation, higher alcohol and tobacco excise duties, and an extra 29 cents per liter for gasoline and 30 cents per liter for diesel in fuel levies – are meant to generate an additional R15-billion (USD 1.1 billion) for the national coffers.  The tax increases come alongside government expenditure cuts primarily in government payroll compensation. Taken together, these interventions aim to stabilize public finances by 2023. According to Finance Minister Tito Mboweni, “It will not be easy. There are no quick fixes. But our nation is ready for renewal. We are ready to plant the seeds of our future.”

The South African Revenue Service (SARS) began collecting the health promotion levy – previously known as the sugar-sweetened beverages tax – in April 2018, almost one year after it was initially due to come into effect.  In February 2019, the Minister of Finance announced a five percent increase to this tax from 2.1 rand cents to 2.21 rand cents (USUSD 0.0015 to USD 0.0016) per gram of sugar content that exceeds 4 grams per 100 ml.  The tax, which applies to both domestic and international products, is meant to encourage the reduction in the consumption of sugar-sweetened beverages to deal with obesity and the epidemic of non-communicable diseases such as diabetes, which is cited as the second leading cause of death, after tuberculosis, among South Africans.  The Treasury argued that taxes on foods high in sugar can be an important element in a strategy to address diet-related diseases.

The South African Revenue Service will impose a carbon emissions tax from June 2019, based on an initial levy of R120 per ton of carbon dioxide equivalent (CO2e) of greenhouse gas emissions above certain tax-free allowances.

Transparency of the Regulatory System

South African laws and regulations are generally published in draft form for stakeholders to comment, and legal, regulatory, and accounting systems are generally transparent and consistent with international norms.

The dti is responsible for business-related regulations. It develops and reviews regulatory systems in the areas of competition, standards, consumer protection, company and intellectual property registration and protections, as well as other subjects in the public interest.  It also oversees the work of national and provincial regulatory agencies mandated to assist the dti in creating and managing competitive and socially responsible business and consumer regulations. The dti publishes a list of Bills and Acts that govern the dti’s work at http://www.dti.gov.za/business_regulation/legislation.jsp  .

The 2015 Medicines and Related Substances Amendment Act authorized the creation of the South African Healthcare Products Regulatory Authority (SAHPRA), meant in part to address the backlog of more than 7000 drugs waiting for approval to be used in South Africa.  Established in 2018, and unlike its predecessor, the Medicines Control Council (MCC), SAHPRA is a stand-alone public entity governed by a board that is appointed by and accountable to the South African Ministry of Health. SAHPRA is responsible for the monitoring, evaluation, regulation, investigation, inspection, registration, and control of medicines, scheduled substances, clinical trials and medical devices, in vitro diagnostic devices (IVDs), complementary medicines, and blood and blood-based products.  SAHPRA intends to do this through 207 full-time in-house technical evaluators, though this structure has not been fully staffed. Unlike with the MCC, SAHPRA’s funding is provided by the retention of registration fees. Despite its launch in 2018, the full staffing and implementation of SAPHRA is anticipated to take up to five years, and clearing the backlog of drug registration dossiers will also take significant time.

South Africa’s Consumer Protection Act (2008) went into effect in 2011. The legislation reinforces various consumer rights, including right of product choice, right to fair contract terms, and right of product quality. Impact of the legislation varies by industry, and businesses have adjusted their operations accordingly. A brochure summarizing the Consumer Protection Act can be found at:  http://www.dti.gov.za/business_regulation/acts/CP_Brochure.pdf . Similarly, the National Credit Act of 2005 aims to promote a fair and non-discriminatory marketplace for access to consumer credit and for that purpose to provide the general regulation of consumer credit and improves standards of consumer information. A brochure summarizing the National Credit Act can be found at: http://www.dti.gov.za/business_regulation/acts/NCA_Brochure.pdf 

International Regulatory Considerations

South Africa is a member of the Southern African Customs Union (SACU), the oldest existing customs union in the world.  SACU functions mainly on the basis of the 2002 SACU Agreement which aims to: (a) facilitate the cross-border trade in goods among SACU members; (b) create effective, transparent and democratic institutions; (c) promote fair competition in the common customs area; (d) increase investment opportunities in the common customs area; (e) enhance the economic development, diversification, industrialization and competitiveness of member States; (f) promote the integration of its members into the global economy through enhanced trade and investment; (g) facilitate the equitable sharing of revenue arising from customs and duties levied by members; and (h) facilitate the development of common policies and strategies.

The 2002 SACU Agreement requires member States to develop common policies and strategies with respect to industrial development; cooperate in the development of agricultural policies; cooperate in the enforcement of competition laws and regulations; develop policies and instruments to address unfair trade practices between members; and calls for harmonization of product standards and technical regulations.

SACU member States are working to develop the regional industrial development policy to harmonize competition policy and unfair trade practices.  Progress is limited in general to customs related areas, mainly tariff and trade remedies. SACU has not harmonized non-tariff measures. Also, the 2002 SACU Agreement is limited to the liberalization of trade in goods and does not cover trade in services.  In 2008, the SACU Council of Ministers agreed that new generation issues such as services, investment, and Intellectual Property Rights should be incorporated into the SACU Agenda. Work is ongoing. South Africa is generally restricted from negotiating trade agreements by itself, since SACU is the competent authority.

In general, South Africa models its standards according to European standards or UK standards where those differ.

South Africa is a member of the WTO and attempts to notify all draft technical regulations to the Committee on Technical Barriers to Trade (TBT), though often after the regulations have been implemented.

In November 2017, South Africa ratified the WTO’s Trade Facilitation Agreement. According to the government, it has implemented over 90 percent of the commitments as of February 2018. The outstanding measures were notified under Category B, to be implemented by the indicative date of 2022 without capacity building support and include Article 3 and Article 10 commitments on Advance Rulings and Single Window.

The South African Government is not party to the WTO’s Government Procurement Agreement (GPO).

Legal System and Judicial Independence

South Africa has a mixed legal system composed of civil law inherited from the Dutch, common law inherited from the British, and African customary law, of which there are many variations.  As a general rule, South Africa follows English law in criminal and civil procedure, company law, constitutional law, and the law of evidence, but follows Roman-Dutch common law in contract law, law of delict (torts), law of persons, and family law.  South African company law regulates corporations, including external companies, non-profit, and for-profit companies (including state-owned enterprises). Funded by the national Department of Justice and Constitutional Development, South Africa has district and magistrates courts across 350 districts and high courts for each of the provinces (except Limpopo and Mpumalanga, which are heard in Gauteng).  Often described as “the court of last resort,” the Supreme Court of Appeals hears appeals, and its jurisprudence may only be overruled by the apex court, the Constitutional Court. Moreover, South Africa has multiple specialized courts, including the Competition Appeal Court, Electoral Court, Land Claims Court, the Labour and Labour Appeal Courts, and Tax Courts to handle disputes between taxpayers and the South African Revenue Service.  These courts exist parallel to the court hierarchy, and their decisions are subject to the same process of appeal and review as the normal courts. Analysts routinely praise the competence and reliability of judicial processes, and the courts’ independence has been repeatedly proven with high-profile rulings against controversial legislation, as well as against former presidents and corrupt individuals in the executive and legislative branches.

Laws and Regulations on Foreign Direct Investment

The February 2019 ratification of the Competition Amendment Bill introduced, among other revisions, section 18A that mandates the President create a committee – comprised of 28 Ministers and officials chosen by the President – to evaluate and intervene in a merger or acquisition by a foreign acquiring firm on the basis of protecting national security interests.  According to the bill, any decisions taken by this committee are required to be published in the Gazette and must be presented, in appropriate detail, to the National Assembly. The new section states that the President must identify and publish in the Gazette – the South African equivalent of the U.S. Federal Register – a list of national security interests including the markets, industries, goods or services, sectors or regions in which a merger involving a foreign acquiring firm must be notified to the South African government.  The law also outlines what factors the President should take into consideration when determining what constitutes a threat to national security interest, including the merger’s impact on the use or transfer of sensitive technology or know-how; the security of critical infrastructure, including systems, facilities, and networks; the supply of critical goods or services to citizens and/or to the government; and the potential to enable foreign surveillance or espionage or hinder intelligence or law enforcement operations. It also suggests the President consider transactions that enable or facilitate terrorism, terrorist organizations, or organized crime; and to consider a merger’s impact on the economic and social stability of South Africa.  The law further recommends the committee take into consideration whether the foreign acquiring firm is a firm controlled by a foreign government.

Competition and Anti-Trust Laws

The Competition Commission is empowered to investigate, control and evaluate restrictive business practices, abuse of dominant positions, and mergers in order to achieve equity and efficiency.  Their public website is www.compcom.co.za  

The Competition Tribunal has jurisdiction throughout South Africa and adjudicates competition matters in accordance with the Competition Act.  While the Commission is the investigation and enforcement agency, the Tribunal is the adjudicative body, very much like a court.

In addition to the points made in the previous section, the amendments, presented by the Ministry for Economic Development that revise the Competition Act of 1998 and entered effect in February 2019 extend the mandate of the competition authorities and the executive to tackle high levels of economic concentration, address the limited transformation in the economy, and curb the abuse of market power by dominant firms.  The changes introduced through the Competition Amendment Act are meant to curb anti-competitive practices and break down monopolies that hinder “transformation” – the increased participation of black and HDSA in the South African economy. The amendments aim to deter the abuse of market dominance by large firms that use practices such as margin squeeze, exclusionary practices, price discrimination, and predatory pricing.  By increasing the penalties for these prohibited business practices – for repeat offences the penalties could amount to between 10 percent to 25 percent of a firm’s annual turnover – and allowing the parent or holding company to be held liable for the actions of its subsidiaries that contravene competition law, the Competition Commission hopes to break down these anticompetitive practices and open up new opportunities for SMEs.

Expropriation and Compensation

Racially discriminatory property laws and land allocations during the colonial and apartheid periods resulted in highly distorted patterns of land ownership and property distribution in South Africa.  Given the slow and mixed success of land reform to date, the National Assembly (Parliament) passed a motion in February 2018 to investigate a proposal to amend the constitution (specifically Section 25, the “property clause”) to allow for land expropriation without compensation (EWC). The constitutional Bill of Rights, where Section 25 resides, has never been amended.  Some politicians, think-tanks, and academics argue that Section 25, as written, allows for EWC in certain cases, while others insist that in order to implement EWC more broadly, amending the constitution is required. Academics foresee a few test cases for EWC over the next year, primarily targeted at abandoned buildings in urban areas, informal settlements in peri-urban areas, and involving labor tenants in rural areas.

Parliament tasked an ad hoc Constitutional Review Committee – made up of parliamentarians from various political parties – to report back on whether to amend the constitution to allow EWC, and if so, how it should be done.  In December 2018, the National Assembly adopted the committee’s report recommending a constitutional amendment, but Parliament ran out of time to draft the amendment before its final session before the May 8, 2019 elections.  The next Parliament will need to compose a new ad hoc committee to draft the constitutional amendment bill.

South African law requires that Parliament engage in a rigorous public participation process.  Parliament must publish a proposed bill to amend the Constitution in the Government Gazette at least 30 days prior to its introduction to allow for public comment.  Any change to the constitution would need a two-thirds parliamentary majority (267 votes) to pass, as well as the support of six out of the nine provinces in the National Council of Provinces.  Currently, no single political party has such a majority.

In September 2018, President Ramaphosa appointed an advisory panel on land reform, which supports the Inter-Ministerial Committee on Land Reform chaired by Deputy President David Mabuza.  Comprised of ten members from academia, social entrepreneurship, and activist organizations, the panel will submit a formal report in 2019 on issues related to land restitution, redistribution, tenure security, and agricultural support.  Analysts have praised the panel for representing the executive branch’s interest and dedication to engaging with diverse sectors to handle the sensitive, multi-faceted issues related to land reform.

Existing expropriation law, including The Expropriation Act of 1975 (Act) and the Expropriation Act Amendment of 1992, entitles the government to expropriate private property for reasons of public necessity or utility.  The decision is an administrative one. Compensation should be the fair market value of the property as agreed between the buyer and seller, or determined by the court, as per Section 25 of the Constitution. In several restitution cases in which the government initiated proceedings to expropriate white-owned farms after courts ruled the land had been seized from blacks during apartheid, the owners rejected the court-approved purchase prices.  In most of these cases, the government and owners reached agreement on compensation prior to any final expropriation actions. The government has twice exercised its expropriation power, taking possession of farms in Northern Cape and Limpopo provinces in 2007 after negotiations with owners collapsed. The government paid the owners the fair market value for the land in both cases. A new draft expropriation law, intended to replace the Expropriation Act of 1975, was passed and is awaiting Presidential signature.  Some analysts have raised concerns about aspects of the new legislation, including new clauses that would allow the government to expropriate property without first obtaining a court order.

In 2018, the government operationalized the 2014 Property Valuation Act that creates the office of Valuer-General charged with the valuation of property that has been identified for land reform or acquisition or disposal by a department.  Among other things, the Act gives the government the option to expropriate property based on a formulation in the Constitution termed “just and equitable compensation.” This considers the market value of the property and applies discounts based on the current use of the property, the history of the acquisition, and the extent of direct state investment and subsidy in the acquisition and capital improvements to the property.  Critics fear that this could lead to the government expropriating property at a price lower than fair market value. The Act also allows the government to expropriate property under a broad range of policy goals, including economic transformation and correcting historical grievances.

The Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA), enacted in 2004, gave the state ownership of all of South Africa’s mineral and petroleum resources.  It replaced private ownership with a system of licenses controlled by the government of South Africa, and issued by the Department of Mineral Resources.  Under the MPRDA, investors who held pre-existing rights were granted the opportunity to apply for licenses, provided they met the licensing criteria, including the achievement of certain B-BBEE objectives.  Amendments to the MPRDA passed by Parliament in 2014, but were not signed by the President.  In August 2018, the Minister for the Department of Mineral Resources, Gwede Mantashe, called for the recall of the amendments so that oil and gas could be separated out into a new bill.  The Minister also announced the B-BBEE provisions in the new Mining Charter would not apply during exploration, but would start once commodities were found and mining commenced.  The Amendments are now with the Department of Mineral Resources to draft a new bill to be submitted to Parliament.

Dispute Settlement

ICSID Convention and New York Convention

South Africa is a member of the New York Convention of 1958 on the recognition and enforcement of foreign arbitration awards, but is not a member of the World Bank’s International Center for the Settlement of Investment Disputes.

Investor-State Dispute Settlement

The 2015 Promotion of Investment Act removes the option for investor state dispute settlement through international courts typically afforded through bilateral investment treaties (BITs).  Instead, investors disputing an action taken by the South African government must request the Department of Trade and Industry to facilitate the resolution by appointing a mediator. A foreign investor may also approach any competent court, independent tribunal, or statutory body within South Africa for the resolution of the dispute.

Dispute resolution can be a time-intensive process in South Africa.  If the matter is urgent, and the presiding judge agrees, an interim decision can be taken within days while the appeal process can take months or years.  If the matter is a dispute of law and is not urgent, it may proceed by application or motion to be solved within months. Where there is a dispute of fact, the matter is referred to trial, which can take several years.  The Alternative Dispute Resolution involves negotiation, mediation or arbitration, and may resolve the matter within a couple of months.

International Commercial Arbitration and Foreign Courts

Arbitration in South Africa follows the Arbitration Act of 1965, which does not distinguish between domestic and international arbitration and is not based on UNCITRAL model law.  South African courts retain discretion to hear a dispute over a contract entered into under U.S. law and under U.S. jurisdiction; however, the South African court will interpret the contract with the law of the country or jurisdiction provided for in the contract.

South Africa recognizes the International Chamber of Commerce, which supervises the resolution of transnational commercial disputes.  South Africa applies its commercial and bankruptcy laws with consistency and has an independent, objective court system for enforcing property and contractual rights.

Alternative Dispute Resolution is increasingly popular in South Africa for many reasons, including the confidentiality which can be imposed on the evidence, case documents, and the judgment.  South Africa’s new Companies Act also provides a mechanism for Alternative Dispute Resolution.

Bankruptcy Regulations

South Africa has a strong bankruptcy law, which grants many rights to debtors, including rejection of overly burdensome contracts, avoiding preferential transactions, and the ability to obtain credit during insolvency proceedings.  South Africa ranks 66 out of 190 countries for resolving insolvency according to the 2019 World Bank Doing Business report, an increase from its 2018 rank of 55 despite receiving the same overall score, indicating that the increase is only due to other countries falling below South Africa in 2019.

Investment Incentives

South Africa offers various investment incentives targeted at specific sectors or types of business activities. The dti has a number of incentive programs ranging from tax allowances to support in the automotive sector and helping innovation and technology companies to film and television production.

12I Tax Allowance: is designed to support new industrial projects that utilize only new and unused manufacturing assets and expansions or upgrades of existing industrial projects. The incentive offers support for both capital investment and training. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=45&subthemeid=26  

Agro-Processing Support Scheme (APSS): aims to stimulate investment by South African agro-processing/beneficiation (agri-business) enterprises. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=69&subthemeid=25  

Aquaculture Development and Enhancement Programme (ADEP): is available to South African registered entities engaged in primary, secondary, and ancillary aquaculture activities in both marine and freshwater classified under SIC 132 (fish hatcheries and fish farms) and SIC 301 and 3012 (production, processing and preserving of aquaculture fish). https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=56&subthemeid=26  

Automotive Investment Scheme (AIS): designed to grow and develop the automotive sector through investment in new and/ or replacement models and components that will increase plant production volumes, sustain employment and/ or strengthen the automotive value chain. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=37&subthemeid=26  

Medium and Heavy Commercial Vehicles Automotive Investment Scheme (MHCV-AIS): is designed to grow and develop the automotive sector through investment in new and/or replacement models and components that will increase plant production volumes, sustain employment and/or strengthen the automotive value chain. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=60&subthemeid=26  

People-carrier Automotive Investment Scheme (P-AIS): provides a non-taxable cash grant of between 20 percent and 35 percent of the value of qualifying investment in productive assets approved by the dti. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=55&subthemeid=26  

Business Process Services (BPS): aims to attract investment and create employment opportunities in South Africa through offshoring activities. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=6&subthemeid=25  

Capital Projects Feasibility Programme (CPFP): is a cost-sharing grant that contributes to the cost of feasibility studies likely to lead to projects that will increase local exports and stimulate the market for South African capital goods and services. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=4&subthemeid=26  

Cluster Development Programme (CDP): aims to promote industrialization, sustainable economic growth and job creation needs of South Africa through cluster development and industrial parks. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=66&subthemeid=28  

Critical Infrastructure Programme (CIP): aims to leverage investment by supporting infrastructure that is deemed to be critical, thus lowering the cost of doing business.  https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=3&subthemeid=26  

Clothing and Textile Competitiveness Improvement Programme (CTCIP): aims to build capacity among manufacturers and in other areas of the apparel value chain in South Africa, to enable them to effectively supply their customers and compete on a global scale. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=35&subthemeid=25  

Export Marketing and Investment Assistance (EMIA): develops export markets for South African products and services and recruits new foreign direct investment into the country. The purpose of the scheme is to partially compensate exporters for costs incurred with respect to activities aimed at developing an export market for South African product and services and to recruit new foreign direct investment into South Africa. https://www.thedti.gov.za/trade_investment/emia.jsp  

Foreign Film and Television Production and Post-Production Incentive: to attract foreign-based film productions to shoot on location in South Africa and conduct post-production activities. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=63&subthemeid=26  

Innovation and Technology Funding instruments: click on the link to see a graphic of the various funding instruments the government has made available. https://www.thedti.gov.za/financial_assistance/Innovation_value_Chain.jsp  

Manufacturing Competitiveness Enhancement Programme (MCEP): aims to encourage manufacturers to upgrade their production facilities in a manner that sustains employment and maximizes value-addition in the short to medium term.  Participants can also apply for incentives for energy efficiency and green economy incentives. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=53&subthemeid=25  

Production Incentive (PI): forms part of the Clothing and Textile Competitiveness Program, and forms part of the customized sector program for the clothing, textiles, footwear, leather and leather goods industries. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=36&subthemeid=25  

Sector-Specific Assistance Scheme (SSAS): is a reimbursable cost-sharing incentive scheme which grants financial support to organizations that support the development of industry sectors and those that contribute to the growth of South African exports. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=8&subthemeid=26  

Shared Economic Infrastructure Facility (SEIF) – contact the Department of Small Business Development on +27 861 843 384 (select option 2) or E-Mail: sbdinfo@dsbd.gov.za for more information. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=61&subthemeid=1  

Support Programme for Industrial Innovation (SPII): is designed to promote technology development in South Africa’s industry, through the provision of financial assistance for the development of innovative products and/or processes. SPII is focused on the development phase, which begins when basic research concludes and ends at the point when a pre-production prototype has been produced. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=48&subthemeid=8  

Strategic Partnership Programme (SPP) – The SPP aims to develop and enhance the capacity of small and medium-sized enterprises to provide manufacturing and service support to large private sector enterprises. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=67&subthemeid=1  

Workplace Challenge Programme (WPC): managed by Productivity South Africa, WPC aims to encourage and support negotiated workplace change towards enhancing productivity and world-class competitiveness, best operating practices, continuous improvement, lean manufacturing, while resulting in job creation. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=68&subthemeid=25  

Foreign Trade Zones/Free Ports/Trade Facilitation

South Africa designated its first Industrial Development Zone (IDZ) in 2001. IDZs offer duty-free import of production-related materials and zero VAT on materials sourced from South Africa, along with the right to sell in South Africa upon payment of normal import duties on finished goods.  Expedited services and other logistical arrangements may be provided for small to medium-sized enterprises or for new foreign direct investment. Co-funding for infrastructure development is available from the dti. There are no exemptions from other laws or regulations, such as environmental and labor laws.  The Manufacturing Development Board licenses IDZ enterprises in collaboration with the South African Revenue Service (SARS), which handles IDZ customs matters. IDZ operators may be public, private, or a combination of both. There are currently five IDZs in South Africa: Coega IDZ, Richards Bay IDZ, Dube Trade Port, East London IDZ, and Saldanha Bay IDZ.  For more detailed information on IDZs in South Africa please see: http://www.thedti.gov.za/industrial_development/sez.jsp  

In February 2014, the dti introduced a new Special Economic Zones (SEZs) Bill focused on industrial development. The SEZs encompass the IDZs but also provide scope for economic activity beyond export-driven industry to include innovation centers and regional development.  There are five SEZ in South Africa: Atlantis SEZ, Nkomazi SEZ, Maliti-A-Phofung SEZ, Musina/Makhado SEZ, and OR Tambo SEZ. The broader SEZ incentives strategy allows for 15 percent Corporate Tax as opposed to the current 28 percent, Building Tax Allowance, Employment Tax Incentive, Customs Controlled Area (VAT exemption and duty free), and Accelerated 12i Tax Allowance.

Performance and Data Localization Requirements

Employment and Investor Requirements

Foreign investors who establish a business or who invest in existing businesses in South Africa must show within twelve months of establishing the business that at least 60 percent of the total permanent staff are South African citizens or permanent residents.

The Broad-Based Black Economic Empowerment (B-BBEE) program measures employment equity, management control, and ownership by historically disadvantaged South Africans for companies which do business with the government or bid on government tenders.  Companies may consider the B-BBEE scores of their sub-contractors and suppliers, as their scores can sometimes contribute to or detract from the contracting company’s B-BBEE score.

A business visa is required for foreign investors who will establish a business or who will invest in an existing business in South Africa.  They are required to invest a prescribed financial capital contribution equivalent to R2.5million (USD 178 thousand) and have at least R5 million (USD 356 thousand) in cash and capital available.  These capital requirements may be reduced or waived if the investment qualifies under one of the following types of industries/businesses: information and communication technology; clothing and textile manufacturing; chemicals and bio-technology; agro-processing; metals and minerals refinement; automotive manufacturing; tourism; and crafts.

The documentation required for obtaining a business visa is onerous and includes, among other requirements, a letter of recommendation from the Department of Trade and Industry regarding the feasibility of the business and its contribution to the national interest, and various certificates issued by a chartered or professional South African accountant.

U.S. citizens have complained that the processes to apply for and renew visas and work permits are lengthy, confusing, and difficult.  Requirements frequently change mid-process, and there is little to no feedback about why an application might be considered incomplete or denied.  Many U.S. citizens use facilitation services to help navigate these processes.

Goods, Technology, and Data Treatment

The government does not require the use of domestic content in goods or technology.  The transfer of personal information about a subject to a third party who is in a foreign country is prohibited unless certain conditions are met.  These conditions are outlined in the Protection of Personal Information (PoPI) Act, which the government enacted in 2013 to regulate how personal information may be processed.  The conditions relate to: accountability, processing limitations, purpose specification, information quality, openness, security safeguards, and data subject participation. PoPI also created an Information Regulator (IR) to draft regulations and enforce them; the five member body that comprises the IR was established in 2018.  The IR released regulations on personal information processing in December 2018, but government was not clear if the one year grace period to begin implementation started from the date the regulations were published or from the date the IR is fully operational.

Investment Performance Requirements

There are no performance requirements on investments.

Real Property

The South African legal system protects and facilitates the acquisition and disposition of all property rights (e.g., land, buildings, and mortgages).  Deeds must be registered at the Deeds Office. Banks usually register mortgages as security when providing finance for the purchase of property.

South Africa ranks 106th of 190 countries in registering property according to the 2019 World Bank Doing Business report.

Intellectual Property Rights

South Africa has a strong legal structure and enforcement of intellectual property rights through civil and criminal procedures.  Criminal procedures are generally lengthy, so the customary route is through civil enforcement.  There are concerns about counterfeit consumer goods, illegal commercial photocopying, and software piracy.

Owners of patents and trademarks may license them locally, but when a patent license entails the payment of royalties to a non-resident licensor, the Department of Trade and Industry (the dti) must approve the royalty agreement.  Patents are granted for twenty years – usually with no option to renew. Trademarks are valid for an initial period of ten years, renewable for ten-year periods. The holder of a patent or trademark must pay an annual fee to preserve ownership rights.  All agreements relating to payment for the right to use know-how, patents, trademarks, copyrights, or other similar property are subject to approval by exchange control authorities in the SARB. A royalty of up to four percent is the standard approval for consumer goods, and up to six percent for intermediate and finished capital goods.

Literary, musical, and artistic works, as well as cinematographic films and sound recordings are eligible for copyright under the Copyright Act of 1978.  New designs may be registered under the Designs Act of 1967, which grants copyrights for five years. The Counterfeit Goods Act of 1997 provides additional protection to owners of trademarks, copyrights, and certain marks under the Merchandise Marks Act of 1941.  The Intellectual Property Laws Amendment Act of 1997 amended the Merchandise Marks Act of 1941, the Performers’ Protection Act of 1967, the Patents Act of 1978, the Copyright Act of 1978, the Trademarks Act of 1993, and the Designs Act of 1993 to bring South African intellectual property legislation fully into line with the WTO’s Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPS).  Further Amendments to the Patents Act of 1978 also brought South Africa into line with TRIPS, to which South Africa became a party in 1999, and implemented the Patent Cooperation Treaty. The private sector and law enforcement cooperate extensively to stop the flow of counterfeit goods into the marketplace, and the private sector believes that South Africa has made significant progress in this regard since 2001.   Statistics on seizures are not available.

In an effort to modernize outdated copyright law to incorporate “digital age” advances, the dti introduced the latest draft of the Copyright Amendment Bill in May 2017.  The South African Parliament and the National Council of Provinces approved the Copyright Amendment Bill in March 2019 and sent the bill to the president for signature. As of mid-May 2019, the bill had not been signed.  Among the issues of concern to some private sector stakeholders is the introduction of the U.S. model of “fair use” for copyright exemptions without prescribing industry-specific circumstances where fair use will apply, creating uncertainty about copyrights enforcement.  Other concerns that stakeholders have include a clause which allows the Minister of Trade and Industry to set royalty rates for visual artistic works and impose compulsory contractual terms. The bill also limits the assignment of copyright to 25 years before it reverts back to the author.

The Performers’ Protection Amendment Bill seeks to address issues relating to the payment of royalties to performers; safeguarding the rights of contracting parties; and promotes performers’ moral and economic rights for performances in fixations (recordings).  Similar to the Copyright Amendment Bill, this bill gives the Minister of Trade and Industry authority to determine equitable remuneration for a performer and copyright owner for the direct or indirect use of a work. It also suggests that any agreement between the copyright owner and performer will only last for a period of 25 years and does not determine what happens after 25 years.  The bill also does not stipulate how it will address works with multiple performers, particularly how to resolve potential problems of hold-outs when contracts are renegotiated that could hinder the further exploitation of a work.

The dti released the final Intellectual Property Policy of the Republic of South Africa Phase 1  in June, 2018, that informs the government’s approach to intellectual property and existing laws.  Phase I focuses on the health space, particularly pharmaceuticals. The South African Government, led by the dti, held multiple rounds of public consultations since its introduction and the 2016 release of the IP Consultative Framework.

Among other things, the IP policy framework calls for South Africa to carry out substantive search and examination (SSE) on patent applications and to introduce a pre- and post-grant opposition system.  The dti repeatedly stressed its goal of creating the domestic capacity to understand and review patents, without having to rely on other countries’ examinations. U.S. companies working in South Africa have been generally supportive of the government’s goal; they are concerned, however, that the relatively low number of examiners currently on staff (20) to handle the proposed SSE process and the introduction of a pre-grant opposition system in South Africa could lead to significant delays of products to market.  The South African Government is working with international partners (including USPTO and the European Union) to provide accelerated training of their patent reviewers while also recruiting new staff.

The new IP policy framework also raises concerns around the threat of separate patentability criteria for medicines and a more liberalized compulsory licensing regime.  Stakeholders are calling for more concrete assurances that the use of compulsory licensing provisions will be as a last resort and applied in a manner consistent with WTO rules.  Industry sources report they are not aware of a single case of South Africa issuing a compulsory license.

South Africa is currently in the process of implementing the Madrid Protocol.  CIPC has completed drafting legislative amendments after consultations with stakeholders and the World Intellectual Property Organization (WIPO) on the implementation process in South Africa.  WIPO has conducted a number of missions to South Africa on this matter, the latest of which was in February 2018. South Africa has also engaged with national IP offices with similar trade mark legislation, such as New Zealand.

Resources for Rights Holders

Economic Officer covering IP issues:

Juan Manuel Cammarano
Trade and Investment Officer
+27(0)12 431-4343
CammaranoJM@State.gov

For additional information about South Africa’s treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/  .  A list of attorneys for various South African districts can be found on the U.S. Mission Citizen Services page: https://za.usembassy.gov/u-s-citizen-services/local-resources/attorneys/

Capital Markets and Portfolio Investment

South Africa recognizes the importance of foreign capital in financing persistent current account and budget deficits and openly courts foreign portfolio investment.  Authorities regularly meet with investors and encourage open discussion between investors and a wide range of private and public-sector stakeholders. The government enhanced efforts to attract and retain foreign investors.  President Cyril Ramaphosa hosted an investment conference in October 2018 and attended the World Economic Forum in Davos in January 2019 to promote South Africa as an investment destination. South Africa suffered a two-quarter technical recession in 2018 with economic growth registering only 0.8 percent for the entire year.

South Africa’s financial market is regarded as one of the most sophisticated among emerging markets.  A sound legal and regulatory framework governs financial institutions and transactions.

The fully independent South African Reserve Bank (SARB) regulates a wide range of commercial, retail and investment banking services according to international best practices, such as Basel III, and participates in international forums such as the Financial Stability Board and G-20 Finance Ministers and Central Bank Governors.  There are calls to “nationalize” the privately-held SARB, which would not change its constitutional mandate to maintain price stability. The Johannesburg Stock Exchange (JSE) serves as the front-line regulator for listed firms, but is supervised in these regulatory duties by the Financial Services Board (FSB). The FSB also oversees other non-banking financial services, including other collective investment schemes, retirement funds and a diversified insurance industry.  The South African government has committed to tabling a Twin Peaks regulatory architecture to provide a clear demarcation of supervisory responsibilities and consumer accountability and to consolidate banking and non-banking regulation in 2017.

South Africa has access to deep pools of capital from local and foreign investors which provide sufficient scope for entry and exit of large positions.  Financial sector assets amount to almost three times GDP, and the JSE is the largest on the continent with capitalization of approximately USD 900 billion and approximately 400 companies listed on the main, alternative and other smaller boards.  Non-bank financial institutions (NBFI) hold about two thirds of financial assets.  The liquidity and depth provided by NBFIs make these markets attractive to foreign investors, who hold more than a third of equities and government bonds, including sizeable positions in local-currency bonds. A well-developed derivative market and a currency that is widely traded as a proxy for emerging market risk allows investors considerable scope to hedge positions with interest rate and foreign exchange derivatives.

The SARB’s exchange control policies permit authorized currency dealers, normally one of the large commercial banks, to buy and borrow foreign currency freely on behalf of domestic and foreign clients.  The size of transactions is not limited, but dealers must report all transactions to SARB, regardless of size.  Non-residents may purchase securities without restriction and freely transfer capital in and out of South Africa.  Local individual and institutional investors are limited to holding 25 percent of their capital outside of South Africa. Given the recent exchange rate fluctuations, this requirement has entailed portfolio rebalancing and repatriation to meet the prescribed prudential limits.

Banks, NBFIs, and other financial intermediaries are skilled at assessing risk and allocating credit based on market conditions.  Foreign investors may borrow freely on the local market.  A large range of debt, equity and other credit instruments are available to foreign investors, and a host of well-known foreign and domestic service providers offer accounting, legal and consulting advice.  In recent years, the South African auditing profession has suffered significant reputational damage with the leadership of two large foreign firms being implicated in allegations of aiding and abetting irregular client management practices that were linked to the previous administration, or of delinquent oversight of listed client companies.  South Africa’s WEF competitiveness rating for auditing and reporting fell from number one in the world in 2016, to number 55 in 2018.

Money and Banking System

South African banks are well capitalized and comply with international banking standards. There are 19 registered banks in South Africa and 15 branches of foreign banks. Twenty-nine foreign banks have approved local representative offices. Five banks – Standard, ABSA, First Rand (FNB), Capitec, and Nedbank – dominate the sector, accounting for over 85 percent of the country’s banking assets, which total over USD 390 billion.  The SARB regulates the sector according to the Bank Act of 1990. There are three alternatives for foreign banks to establish local operations, all of which require SARB approval: separate company, branch, or representative office. The criteria for the registration of a foreign bank are the same as for domestic banks. Foreign banks must include additional information, such as holding company approval, a letter of “comfort and understanding” from the holding company, and a letter of no objection from the foreign bank’s home regulatory authority. More information on the banking industry may be obtained from the South African Banking Association at the following website: www.banking.org.za  .

The Financial Services Board (FSB) governs South Africa’s non-bank financial services industry (see website: www.fsb.co.za/  ).  The FSB regulates insurance companies, pension funds, unit trusts (i.e., mutual funds), participation bond schemes, portfolio management, and the financial markets.  The JSE Securities Exchange SA (JSE) is the nineteenth largest exchange in the world measured by market capitalization and enjoys the global reputation of being one of the best regulated.  Market capitalization stood at USD 900 billion as of November 2018, with 388 firms listed. The Bond Exchange of South Africa (BESA) is licensed under the Financial Markets Control Act. Membership includes banks, insurers, investors, stockbrokers, and independent intermediaries.  The exchange consists principally of bonds issued by government, state-owned enterprises, and private corporations. The JSE acquired BESA in 2009. More information on financial markets may be obtained from the JSE (website: www.jse.co.za  ).  Non-residents are allowed to finance 100 percent of their investment through local borrowing.  A finance ratio of 1:1 also applies to emigrants, the acquisition of residential properties by non-residents, and financial transactions such as portfolio investments, securities lending and hedging by non-residents.

Foreign Exchange and Remittances

Foreign Exchange

The South African Reserve Bank (SARB) Exchange Control Department administers foreign exchange policy.  An authorized foreign exchange dealer, normally one of the large commercial banks, must handle international commercial transactions and report every purchase of foreign exchange, irrespective of the amount.  Generally, there are only limited delays in the conversion and transfer of funds. Due to South Africa’s relatively closed exchange system, no private player, however large, can hedge large quantities of Rand for more than five years.

While non-residents may freely transfer capital in and out of South Africa, transactions must be reported to authorities.  Non-residents may purchase local securities without restriction. To facilitate repatriation of capital and profits, foreign investors should ensure an authorized dealer endorses their share certificates as “non-resident.”  Foreign investors should also be sure to maintain an accurate record of investment.

Remittance Policies

Subsidiaries and branches of foreign companies in South Africa are considered South African entities and are treated legally as South African companies.  As such, they are subject to exchange control by the SARB. South African companies may, as a general rule, freely remit the following to non-residents: repayment of capital investments; dividends and branch profits (provided such transfers are made out of trading profits and are financed without resorting to excessive local borrowing); interest payments (provided the rate is reasonable); and payment of royalties or similar fees for the use of know-how, patents, designs, trademarks or similar property (subject to prior approval of SARB authorities).

While South African companies may invest in other countries, SARB approval/notification is required for investments over R500 million (USD 43.5 million).  South African individuals may freely invest in foreign firms listed on South African stock exchanges. Individual South African taxpayers in good standing may make investments up to a total of R4 million (USD 340,000) in other countries.  As of 2010, South African banks are permitted to commit up to 25 percent of their capital in direct and indirect foreign liabilities. In addition, mutual and other investment funds can invest up to 25 percent of their retail assets in other countries.  Pension plans and insurance funds may invest 25 percent of their retail assets in other countries.

Before accepting or repaying a foreign loan, South African residents must obtain SARB approval.  The SARB must also approve the payment of royalties and license fees to non-residents when no local manufacturing is involved.  When local manufacturing is involved, the dti must approve the payment of royalties related to patents on manufacturing processes and products.  Upon proof of invoice, South African companies may pay fees for foreign management and other services provided such fees are not calculated as a percentage of sales, profits, purchases, or income.

Sovereign Wealth Funds

South Africa does not have a Sovereign Wealth Fund.

State-owned enterprises (SOEs) play a significant role in the South African economy.  In key sectors such as electricity, transport (air, rail, freight and pipelines), and telecommunications, SOEs play a lead role, often defined by law, although limited competition is allowed in some sectors (e.g., telecommunications and air).  The government’s interest in these sectors often competes with and discourages foreign investment.  South Africa’s overall fixed investment was 19 percent of GDP.  The SOEs share of the investment was 21 percent while private enterprise contributed 63 percent (government spending made up the remainder of 16 percent).  The IMF estimates that the debt of the SOEs would add 13.5 percent to the overall national debt.

The Department of Public Enterprises (DPE) has oversight responsibility in full or in part for seven of the approximately 700 SOEs that exist at the national, provincial and local levels:  Alexkor (diamonds); Denel (military equipment); Eskom (electricity generation, transmission and distribution); South African Express and Mango (budget airlines); South African Airways (national carrier); South African Forestry Company (SAFCOL – (forestry); and Transnet (transportation).   These seven SOEs employ approximately 105,000 people.  For other national-level SOEs, the appropriate cabinet minister acts as shareholder on behalf of the state. The Department of Transport, for example, has oversight of the state-owned South African National Roads Agency (SANRAL), Passenger Rail Agency of South Africa (PRASA), and Airports Company South Africa (ACSA), which operates nine of South Africa’s airports. The Department of Communications has oversight of the South African Broadcasting Corporation (SABC). The National Treasury assumed control of South African Airways (SAA) in 2014 through 2018, but SAA has since returned to the DPE. .

Combined, South Africa’s SOEs that fall under DPE’s authority posted a loss of R15.5 billion (USD 1.3 billion) in the 2017/2018 financial year.  In recent years many have been plagued by mismanagement and corruption, and repeated government bailouts have exposed the public sector’s balance sheet to sizable contingent liabilities.  The election of President Cyril Ramaphosa and appointment of Minister of Public Enterprises Pravin Gordhan signaled a renewed emphasis on improving SOE governance and performance.

The state-owned electricity giant Eskom generates approximately 95 percent of the electricity used in South Africa.  Coal-fired power stations generate approximately 93 percent of Eskom’s electricity.  Eskom’s core business activities are generation, transmission, trading and distribution.  South Africa’s electricity system operates under strain because of low availability factors for base load generation capacity due to maintenance problems.  The electricity grid’s capacity reserve margins frequently fall under two percent, well below international norms.  Beginning in November 2013, Eskom periodically declared “electricity emergencies,” and asked major industrial users to reduce consumption by ten percent for specified periods (usually one to two days).   To meet rising electricity demand, Eskom is building new power stations (including two of the world’s largest coal-fired power stations, but both are years overdue and over budget).  Eskom and independent industry analysts anticipate South Africa’s electricity grid will remain constrained for at least the next several years.  The South African government has implemented a renewable energy independent power producer procurement program (REIPPP) that in the past three years has added 1500Mw of a planned 3900Mw of renewable energy production to the grid and recently signed 27 Independent Power Producer agreements to provide an additional 2,300 MW to the grid.  In February 2018, S&P announced that it “lowered its long-term foreign and local currency issuer credit ratings on South Africa-owned utility ESKOM Holdings SOC Ltd. to ‘CCC+’ from ‘B-‘.

Transnet National Ports Authority (TNPA), the monopoly responsible for South Africa’s ports, charges some of the highest shipping fees in the world.  In March 2014, Transnet announced an average overall tariff increase of 8.5 percent at its ports to finance a USD 240 million modernization effort.  High tariffs on containers subsidize bulk shipments of coal and iron ore, thereby favoring the export of raw materials over finished ones.  According to the South African Ports Regulator, raw materials exporters paid as much as one quarter less than exporters of finished products.  TNPA is a division of Transnet, a state-owned company that manages the country’s port, rail and pipeline networks.  In April 2012, Transnet launched its Market Driven Strategy (MDS), a R336 billion (USD 28 billion) investment program to modernize its port and rail infrastructure.  Transnet’s March 2014 selection of four OEMs to manufacture 1064 locomotives is part of the MDS.  This CAPEX is being 2/3 funded by operating profits with the remainder from the international capital markets.  In 2016, Transnet reported it had invested R124 billion (USD 10.3 billion) in the previous four years in rail, ports, and pipeline infrastructure.  In recent years ratings agencies have downgraded Transnet’s rating to below the investment-grade threshold.  In November 2017 S&P downgraded Transnet’s local currency rating from BBB- to BB+.

Direct aviation links between the United States and South Africa are limited to flights between Atlanta, New York (JFK), and Washington (Dulles) to Johannesburg.  The growth of low-cost carriers in South Africa has reduced domestic airfares, but private carriers are likely to struggle against national carriers without further air liberalization in the region and in Africa.  The launch of the Single African Air Transport Market, which is composed of 23 African Union member states including South Africa, in January 2018 demonstrates the potential for further cooperation on the continent.  In South Africa, the state-owned carrier, South African Airways (SAA), relies on the government for financial assistance to stay afloat and received back-to-back bailouts of R5 billion (USD 357 million) in 2018 alone to repay creditors.  New management at SAA, including a new board and CEO offer some hope that SAA will implement its turnaround plan, but the airline has a long journey to recover from mismanagement and six consecutive years of losses. The new management has requested a R21.7 billion (USD 1.55 billion) bailout from government over three years to turn the company around. During fiscal year 2017/2018, SAA lost R5.7 billion (USD 407 million) bringing the company’s cumulative losses since 2011 to a total of R23 billion (USD 1.65 billion).

The telecommunications sector in South Africa, while advanced for the continent, is hampered by regulatory uncertainty and poor implementation of the digital migration, both of which contribute to the high cost of data.  In 2006, South Africa agreed to meet an International Telecommunication Union deadline to achieve analogue-to-digital migration by June 1, 2015.  As of April 2019, South Africa has initiated but not completed the migration.  Until this process is finalized, South Africa will not be able to allocate the spectrum freed up by the conversion.  Many of the issues stemmed from the confusion and infighting caused by the 2014 split of the Department of Communications into two departments—the Department of Communications (DOC) and the Department of Telecommunications and Postal Services (DTPS). In November 2018, the Ramaphosa administration announced their re-incorporation into a single Department of Communications to take effect after the May 2019 elections.

In October 2016, DTPS released a policy paper addressing the planned course of action to realize the potential of the ICT sector.  The paper advocates for open access requirements that could overhaul how telecommunications firms gain access to and use infrastructure.  It also proposes assigning all high-demand spectrum to a Wireless Open Access Network.  Some stakeholders, including state-owned telecommunications firm Telkom, agree with the general approach.  Others, including the major private sector mobile carriers, feel the interventions would curb investment while doing little to facilitate digital access and inclusion.  In November 2017, DTPS published a draft Electronic Communications Amendment Bill that would implement the ICT White Paper, but the Minister of Communications withdrew the bill in February 2019.  Private industry and civil society had criticized the reach of the bill. The Minister stated that the DoC would consult with relevant stakeholders to re-draft the bill before submitting it to Parliament.

Privatization Program

Although in 2015 and 2016 senior government leaders discussed allowing private-sector investment into some of the more than 700 SOEs and a recently released report of a presidential review commission on SOE that called for rationalization of SOEs, the government has not taken any concrete action to enable this.  The CEO of SAA has stated that a fund-raising plan to sell a stake in SAA to an equity partner will be shelved until the airline can shore up its balance sheet. He announced the restructuring of the national carrier into three segments: international, regional, and domestic, but he has not articulated how that would occur in practice.

Other candidates for unbundling of SOEs / privatization are ESKOM and defense contractor Denel.

Responsible Business Conduct (RBC), is well-developed in South Africa, and is driven in part by the recognition that the private sector has an important role to play.  The socio-economic development element of B-BBEE has formalized and increased RBC in South Africa, as firms have largely aligned their RBC activities to the element’s performance requirements.  The 2013 amendment’s compliance target is one percent of net profit after tax spent on RBC, and at least 75 percent of the RBC activity must benefit historically disadvantaged South Africans referred to the B-BBEE act as black people, which includes South Africans of black, colored, Chinese and Indian descent.  Most RBC is directed towards non-profit organizations involved in education, social and community development, and health.

The South African mining sector follows the rule of law and encourages adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.  For example South Africa is a founding member of the Kimberley Process Certification Scheme (KPCS), the process established in 2000 to prevent conflict diamonds from entering the mainstream rough diamond market. The Kimberley Process is designed to ensure that diamond purchases do not finance violence by rebel movements and their allies seeking to undermine legitimate governments.

South Africa does not participate in the Extractive Industries Transparency Initiative (EITI). South African mining, labor and security legislation seek to speak to the values as embodied by Voluntary Principles on Security and Human Rights.

South African mining laws and regulations allow for the accounting of all revenues from the extractive sector in the form of mining taxes, royalties, fees, dividends and duties.  The reporting and accounting of all revenues from the extractive sector is done through Parliament by such institutions as the Auditor General and the National Treasury budgetary processes and the results are publicly available. There is a sizeable illicit mining sector in South Africa, mostly in decommissioned gold mines.

South Africa has a robust anti-corruption framework, but laws are inadequately enforced and accountability in public sectors tends to be low. The law provides for criminal penalties for conviction of official corruption, and the government continued efforts to curb corruption, but officials sometimes engaged in corrupt practices with impunity.

High-level political interference has undermined the ability of the country’s National Prosecuting Authority (NPA) – constitutionally responsible for all prosecutions – to pursue criminal proceedings and enforce accountability.  After an unprecedented consultative process, President Ramaphosa appointed Shamila Batohi as the National Director of Public Prosecutions (NDPP) in December 2018, and he created an Investigative Directorate within her office in March 2019 to focus on the significant number of cases emanating from ongoing corruption investigations.  The Constitutional Court ruled in August 2018 that Zuma’s appointment of Shaun Abrahams as the former NDPP was invalid and ordered President Ramaphosa to replace Abrahams within 90 days. Widely praised by civil society, the court also ordered former NDPP Mxolisi Nxasana to repay a “golden handshake” (an illegal departure bonus) of 10.2 million rand (USD 788,000) he received wh