Policies Towards Foreign Direct Investment

The Macri government actively seeks foreign direct investment. To improve the investment climate, the Macri administration has enacted reforms to simplify bureaucratic procedures in an effort to provide more transparency, reduce costs, diminish economic distortions by adopting good regulatory practices, and increase capital market efficiencies. Since 2016, Argentina has expanded economic and commercial cooperation with key partners including Chile, Brazil, Japan, South Korea, Spain, Canada, and the United States, and deepened its engagement in international fora such as the G-20, WTO, and OECD.

Over the past year, Argentina issued new regulations in the gas and energy, communications, technology, and aviation industries to improve competition and provide incentives aimed to attract investment in those sectors. Argentina seeks tenders for investment in wireless infrastructure, oil and gas, lithium mines, renewable energy, and other areas. However, many of the public-private partnership projects for public infrastructure planned for 2018 had to be delayed or canceled due to Argentina’s broader macroeconomic difficulties and ongoing corruption investigations into public works projects.

Foreign and domestic investors generally compete under the same conditions in Argentina. The amount of foreign investment is restricted in specific sectors such as aviation and media. Foreign ownership of rural productive lands, bodies of water, and areas along borders is also restricted.

Argentina has a national Investment and Trade Promotion Agency that provides information and consultation services to investors and traders on economic and financial conditions, investment opportunities, Argentine laws and regulations, and services to help Argentine companies establish a presence abroad. The agency also provides matchmaking services and organizes roadshows and trade delegations. The agency’s web portal provides detailed information on available services (http://www.produccion.gob.ar/agencia). Many of the 24 provinces also have their own provincial investment and trade promotion offices.

The Macri administration welcomes dialogue with investors. Argentine officials regularly host roundtable discussions with visiting business delegations and meet with local and foreign business chambers. During official visits over the past year to the United States, China, India, Vietnam, and Europe, among others, Argentine delegations often met with host country business leaders.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic commercial entities in Argentina are regulated by the Commercial Partnerships Law (Law 19,550), the Argentina Civil and Commercial Code, and rules issued by the regulatory agencies. Foreign private entities can establish and own business enterprises and engage in all forms of remunerative activity in nearly all sectors.

Full foreign equity ownership of Argentine businesses is not restricted, for the most part, with exception in the air transportation and media industries. The share of foreign capital in companies that provide commercial passenger transportation within the Argentine territory is limited to 49 percent per the Aeronautic Code Law 17,285. The company must be incorporated according to Argentine law and domiciled in Buenos Aires. In the media sector, Law 25,750 establishes a limit on foreign ownership in television, radio, newspapers, journals, magazines, and publishing companies to 30 percent.

Law 26,737 (Regime for Protection of National Domain over Ownership, Possession or Tenure of Rural Land) establishes that a foreigner cannot own land that allows for the extension of existing bodies of water or that are located near a Border Security Zone. In February 2012, the government issued Decree 274/2012 further restricting foreign ownership to a maximum of 30 percent of national land and 15 percent of productive land. Foreign individuals or foreign company ownership is limited to 1,000 hectares (2,470 acres) in the most productive farming areas. In June 2016, the Macri administration issued Decree 820 easing the requirements for foreign land ownership by changing the percentage that defines foreign ownership of a person or company, raising it from 25 percent to 51 percent of the social capital of a legal entity. Waivers are not available.

Argentina does not maintain an investment screening mechanism for inbound foreign investment. U.S. investors are not at a disadvantage to other foreign investors or singled out for discriminatory treatment.

Other Investment Policy Reviews

Argentina was last subject to an investment policy review by the OECD in 1997 and a trade policy review by the WTO in 2013. The United Nations Conference on Trade and Development (UNCTAD) has not done an investment policy review of Argentina.

Business Facilitation

Since entering into office in December 2015, the Macri administration has enacted reforms to normalize financial and commercial transactions and facilitate business creation and cross-border trade. These reforms include eliminating capital controls, reducing some export taxes and import restrictions, reducing business administrative processes, decreasing tax burdens, increasing businesses’ access to financing, and streamlining customs controls.

In October 2016, the Ministry of Production issued Decree 1079/2016, easing bureaucratic hurdles for foreign trade and creating a Single Window for Foreign Trade (“VUCE” for its Spanish acronym). The VUCE centralizes the administration of all required paperwork for the import, export, and transit of goods (e.g., certificates, permits, licenses, and other authorizations and documents). Argentina subjects imports to automatic or non-automatic licenses that are managed through the Comprehensive Import Monitoring System (SIMI, or Sistema Integral de Monitoreo de Importaciones), established in December 2015 by the National Tax Agency (AFIP by its Spanish acronym) through Resolutions 5/2015 and 3823/2015. The SIMI system requires importers to submit detailed information electronically about goods to be imported into Argentina. Once the information is submitted, the relevant Argentine government agencies can review the application through the VUCE and make any observations or request additional information. The number of products subjected to non-automatic licenses has been modified several times, resulting in a net decrease since the beginning of the SIMI system.

The Argentine Congress approved an Entrepreneurs’ Law in March 2017, which allows for the creation of a simplified joint-stock company (SAS, or Sociedad por Acciones Simplifacada) online within 24 hours of registration. Detailed information on how to register a SAS is available at: https://www.argentina.gob.ar/crear-una-sociedad-por-acciones-simplificada-sas . As of April 2019, the online business registration process is only available for companies located in Buenos Aires. The government is working on expanding the SAS to other provinces. Further information can be found at http://www.produccion.gob.ar/todo-sobre-la-ley-de-emprendedores/.

Foreign investors seeking to set up business operations in Argentina follow the same procedures as domestic entities without prior approval and under the same conditions as local investors. To open a local branch of a foreign company in Argentina, the parent company must be legally registered in Argentina. Argentine law requires at least two equity holders, with the minority equity holder maintaining at least a five percent interest. In addition to the procedures required of a domestic company, a foreign company establishing itself in Argentina must legalize the parent company’s documents, register the incoming foreign capital with the Argentine Central Bank, and obtain a trading license.

A company must register its name with the Office of Corporations (IGJ, or Inspeccion General de Justicia). The IGJ website describes the registration process and some portions can be completed online (http://www.jus.gob.ar/igj/tramites/guia-de-tramites/inscripcion-en-el-registro-publico-de-comercio.aspx ). Once the IGJ registers the company, the company must request that the College of Public Notaries submit the company’s accounting books to be certified with the IGJ. The company’s legal representative must obtain a tax identification number from AFIP, register for social security, and obtain blank receipts from another agency. Companies can register with AFIP online at www.afip.gob.ar or by submitting the sworn affidavit form No. 885 to AFIP.

Details on how to register a company can be found at the Ministry of Production and Labor’s website: https://www.argentina.gob.ar/produccion/crear-una-empresa . Instructions on how to obtain a tax identification code can be found at: https://www.argentina.gob.ar/obtener-el-cuit .

The enterprise must also provide workers’ compensation insurance for its employees through the Workers’ Compensation Agency (ART, or Aseguradora de Riesgos del Trabajo). The company must register and certify its accounting of wages and salaries with the Directorate of Labor, within the Ministry of Production and Labor.

In April 2016, the Small Business Administration of the United States and the Ministry of Production of Argentina signed a Memorandum of Understanding (MOU) to set up small and medium sized business development centers (SBDCs) in Argentina. The goal of the MOU is to provide small businesses with tools to improve their productivity and increase their growth. Under the MOU, in June 2017, Argentina set up the first SBDC pilot in the province of Neuquen.

The Ministry of Production and Labor offers a wide range of attendance-based courses and online training for businesses. The full training menu can be viewed at: https://www.argentina.gob.ar/produccion/capacitacion 

Outward Investment

Argentina does not have a governmental agency to promote Argentine investors to invest abroad nor does it have any restrictions for a domestic investor investing overseas.

Argentina has a Bilateral Investment Treaty (BIT) with the United States, which entered into force on October 20, 1994. The text of the Argentina-United States BIT is available at: http://2001-2009.state.gov/documents/organization/43475.pdf .

As of April 2019, Argentina has 50 BITs in force. Argentina has signed treaties that are not yet in force with six other countries: Greece (October 1999), New Zealand (August 1999), the Dominican Republic (March 2001), Qatar (November 2016), United Arab Emirates (April 2018), and Japan (December 2018).

During 2018 and the first quarter of 2019, Argentina continued discussions to strengthen bilateral commercial, economic, and investment cooperation with a number of countries, including China, Denmark, India, Mexico, Japan, the Netherlands, Spain, South Korea, Russia, Vietnam, and the United States. Argentina and the United States established a bilateral Commercial Dialogue and a Trade and Investment Framework Agreement (TIFA) in 2016. Bilateral talks are ongoing through both mechanisms. Argentina does not have a Free Trade Agreement with the United States.

Argentina is a founding member of the Southern Common Market (MERCOSUR), which includes Brazil, Paraguay, Uruguay, and Venezuela (currently suspended). Through MERCOSUR, Argentina has Free Trade Agreements with Egypt, Israel, Bolivia, Chile, and Peru. MERCOSUR has Trade Framework Agreements with Morocco and Mexico, and Preferential Trade Agreements (PTA) with the Southern African Customs Union (SACU), India, Colombia, Chile, Mexico, and Ecuador. MERCOSUR is currently pursuing a Free Trade Agreement with the European Union and the European Free Trade Association (EFTA) and has initiated free trade discussions with Canada, South Korea, and Japan. The bloc is also in talks to expand on its agreements with SACU and India.

Argentina has Economic Complementarity Agreements with Bolivia, Colombia, Ecuador, Mexico, Peru, and Chile that were established before MERCOSUR and thus, grandfathered into Mercosur. Argentina is engaged in ongoing negotiations to expand the PTA agreement with Mexico. Argentina also has an economic association agreement with Colombia signed in June 2017. In January 2019, the expanded Economic Complementation Agreement (ECA) between Chile and Argentina entered into effect. The new ECA was signed in November 2017, approved by the Argentine Congress in December 2018, and ratified by the Chilean Congress in January 2019. The new deal includes trade facilitation regulation and development programs directed to supporting SMEs, and adds chapters on e-commerce, trade in services, and government procurement.

Argentina does not have a bilateral taxation treaty with the United States. In December 2016, Argentina signed a Tax Information Exchange Agreement with the United States, which increases the transparency of commercial transactions between the two countries to aid with combating tax and customs fraud. The Agreement entered into force on November 13, 2017. The United States and Argentina have initiated discussions to sign a Foreign Account Tax Compliance Act (FATCA) inter-governmental agreement.

In 2014, Argentina committed to implementing the OECD single global standard on automatic exchange of financial information. According to media sources, Argentina had been set to make its first financial information exchange in September 2018, but it was postponed to 2019.

In June 2018, AFIP and the OECD signed an MOU to establish the first Latin American Financial and Fiscal Crime Investigation Academy.

Argentina has signed 18 double taxation treaties, including with Germany, Canada, Russia, and the United Kingdom. In November 2016, Argentina and Switzerland signed a bilateral double taxation treaty. In November 2016, Argentina signed an agreement with the United Arab Emirates, which has not yet entered into force. In July 2017, Argentina updated a prior agreement with Brazil, which also has not yet been implemented. Argentina also has customs agreements with numerous countries. A full listing is available at: http://www.afip.gov.ar/institucional/acuerdos.asp .

In general, national taxation rules do not discriminate against foreigners or foreign firms (e.g., asset taxes are applied to equity possessed by both domestic and foreign entities).

Transparency of the Regulatory System

The Macri administration has taken measures to improve government transparency. President Macri created the Ministry of Modernization, tasked with conducting quantitative and qualitative studies of government procedures and finding solutions to streamline bureaucratic processes and improve transparency. In September 2018, the Ministry of Modernization was downgraded into a Secretariat due to a budget-oriented streamlining of the Cabinet.

In September 2016, Argentina enacted a Right to Access Public Information Law (27,275) that mandates all three governmental branches (legislative, judicial, and executive), political parties, universities, and unions that receive public funding are to provide non-classified information at the request of any citizen. The law also created the Agency for the Right to Access Public Information to oversee compliance.

Continuing its efforts to improve transparency, in November 2017, the Treasury Ministry launched a new website to communicate how the government spends public funds in a user-friendly format. Subsections of this website are targeted toward policymakers, such as a new page to monitor budget performance (http://www.aaip.gob.ar/hacienda/sechacienda/metasfiscales ), as well as improving citizens’ understanding of the budget, e.g. the new citizen’s budget “Presupuesto Ciudadano” website (https://www.minhacienda.gob.ar/onp/presupuesto_ciudadano/). This program is part of the broader Macri administration initiative led by the Secretariat of Modernization to build a transparent, active, and innovative state that includes data and information from every area of the public administration. The initiative aligns with the Global Initiative for Fiscal Transparency (GIFT) and UN Resolution 67/218 on promoting transparency, participation, and accountability in fiscal policy.

During 2017, the government introduced new procurement standards including electronic procurement, formalization of procedures for costing-out projects, and transparent processes to renegotiate debts to suppliers. The government also introduced OECD recommendations on corporate governance for state-owned enterprises to promote transparency and accountability during the procurement process. (The link to the regulation is at http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do?id=306769 .)

Argentine government efforts to improve transparency were recognized internationally. In its December 2017 Article IV consultation, the International Monetary Fund (IMF) Executive Board noted that “Argentina’s government made important progress in restoring integrity and transparency in public sector operations,” and agreed with the staff appraisal that commended the government for the progress made in the systemic transformation of the Argentine economy, including efforts to rebuild institutions and restore integrity, transparency, and efficiency in government.

On January 10, 2018, the government issued Decree 27 with the aim of curbing bureaucracy and simplifying administrative proceedings to promote the dynamic and effective functioning of public administration. Broadly, the decree seeks to eliminate regulatory barriers and reduce bureaucratic burdens, expedite and simplify processes in the public domain, and deploy existing technological tools to better focus on transparency.

In April 2018, Argentina passed the Business Criminal Responsibility Law (27,041) through Decree 277. The decree establishes an Anti-Corruption Office in charge of outlining and monitoring the transparency policies with which companies must comply to be eligible for public procurement.

Under the bilateral Commercial Dialogue, Argentina and the United States discuss good regulatory practices, conducting regulatory impact analyses, and improving the incorporation of public consultations in the regulatory process. Similarly, under the bilateral Digital Economy Working Group, Argentina and the United States share best practices on promoting competition, spectrum management policy, and broadband investment and wireless infrastructure development.

Legislation can be drafted and proposed by any citizen and is subject to Congressional and Executive approval before being passed into law. Argentine government authorities and a number of quasi-independent regulatory entities can issue regulations and norms within their mandates. There are no informal regulatory processes managed by non-governmental organizations or private sector associations. Rulemaking has traditionally been a top-down process in Argentina, unlike in the United States where industry organizations often lead in the development of standards and technical regulations.

Ministries, regulatory agencies, and Congress are not obligated to provide a list of anticipated regulatory changes or proposals, share draft regulations with the public, or establish a timeline for public comment. They are also not required to conduct impact assessments of the proposed legislation and regulations.

Since 2016, the Office of the President and various ministries has sought to increase public consultation in the rulemaking process; however, public consultation is non-binding and has been done in an ad-hoc fashion. In 2017, the Federal Government of Argentina issued a series of legal instruments that seek to promote the use of tools to improve the quality of the regulatory framework. Amongst them, Decree 891/2017 for Good Practices in Simplification establishes a series of tools to improve the rulemaking process. The decree introduces tools on ex-ante and ex-post evaluation of regulation, stakeholder engagement, and administrative simplification, amongst others. Nevertheless, no formal oversight mechanism has been established to supervise the use of these tools across the line of ministries and government agencies, which make implementation difficult and limit severely the potential to adopt a whole-of-government approach to regulatory policy, according to a 2019 OECD publication on Regulatory Policy in Argentina.

Some ministries and agencies have developed their own processes for public consultation, such as publishing the draft on their websites, directly distributing the draft to interested stakeholders for feedback, or holding public hearings. In 2016 the Ministry of Justice and Human Rights launched the digital platform Justicia2020 (https://www.justicia2020.gob.ar/ ), to foster public involvement in the Judiciary reform process projected by 2020. Once the draft of a bill is introduced into the Argentine Congress, the full text of the bill and its status can be viewed online at the Chamber of Deputies website (http://www.diputados.gov.ar/), and that of the Senate (http://www.senado.gov.ar/ ).

All final texts of laws, regulations, resolutions, dispositions, and administrative decisions must be published in the Official Gazette (https://www.boletinoficial.gob.ar ), as well as in the newspapers and the websites of the Ministries and agencies. These texts can also be accessed through the official website Infoleg (http://www.infoleg.gob.ar/ ), overseen by the Ministry of Justice. Interested stakeholders can pursue judicial review of regulatory decisions.

Argentina requires public companies to adhere to International Financial Reporting Standards (IFRS). Argentina is a member of UNCTAD’s international network of transparent investment procedures.

International Regulatory Considerations

Argentina is a founding member of MERCOSUR and has been a member of the Latin American Integration Association (ALADI for Asociacion Latinoamericana de Integracion) since 1980.

Argentina has been a member of the WTO since 1995 and it ratified the Trade Facilitation Agreement in January 2018. Argentina notifies technical regulations, but not proposed drafts, to the WTO Committee on Technical Barriers to Trade. Argentina has sought to deepen its engagement with the OECD and submitted itself to an OECD regulatory policy review in March 2018, which was released in Mach 2019. Argentina participates in all 23 OECD committees and seeks an accession invitation before the end of 2019.

Additionally, the Argentine Institute for Standards and Certifications (IRAM) is a member of international and regional standards bodies including the International Standardization Organization (ISO), the International Electrotechnical Commission (IEC), the Panamerican Commission on Technical Standards (COPAM), the MERCOSUR Association of Standardization (AMN), the International Certification Network (i-Qnet), the System of Conformity Assessment for Electrotechnical Equipment and Components (IECEE), and the Global Good Agricultural Practice network (GLOBALG.A.P.).

Legal System and Judicial Independence

According to the Argentine constitution, the judiciary is a separate and equal branch of government. In practice, there have been instances of political interference in the judicial process. Companies have complained that courts lack transparency and reliability, and that Argentine governments have used the judicial system to pressure the private sector. A 2017 working group review of Argentina’s application to join the OECD noted the politicization of the General Prosecutor’s Office created a lack of prosecutorial independence. The OECD working group said the executive branch, prior to the Macri government, had pressured judges through threatened or actual disciplinary proceedings. Media revelations of judicial impropriety and corruption feed public perception and undermine confidence in the judiciary.  

The Macri administration has publicly expressed its intent to improve transparency and rule of law in the judicial system, and the Justice Minister announced in March 2016 the “Justice 2020” initiative to reform the judiciary.

Argentina follows a Civil Law system. In 2014, the Argentine government passed a new Civil and Commercial Code that has been in effect since August 2015. The Civil and Commercial Code provides regulations for civil and commercial liability, including ownership of real and intangible property claims. The current judicial process is lengthy and suffers from significant backlogs. In the Argentine legal system, appeals may be brought from many rulings of the lower court, including evidentiary decisions, not just final orders, which significantly slows all aspects of the system. The Justice Ministry reported in December 2018 that the expanded use of oral processes had reduced the duration of 68 percent of all civil matters to less than two years.  

Many foreign investors prefer to rely on private or international arbitration when those options are available. Claims regarding labor practices are processed through a labor court, regulated by Law 18,345 and its subsequent amendments and implementing regulations by Decree 106/98. Contracts often include clauses designating specific judicial or arbitral recourse for dispute settlement.

Laws and Regulations on Foreign Direct Investment

According to the Foreign Direct Investment Law 21,382 and Decree 1853/93, foreign investors may invest in Argentina without prior governmental approval, under the same conditions as investors domiciled within the country. Foreign investors are free to enter into mergers, acquisitions, greenfield investments, or joint ventures. Foreign firms may also participate in publicly-financed research and development programs on a national treatment basis. Incoming foreign currency must be identified by the participating bank to the Central Bank of Argentina (www.bcra.gov.ar). There is no official regulation or other interference in the court that could affect foreign investors.

All foreign and domestic commercial entities in Argentina are regulated by the Commercial Partnerships Law (Law No. 19,550) and the rules issued by the commercial regulatory agencies. Decree 27/2018 amended Law 19,550 to simplify bureaucratic procedures. Full text of the decree can be found at (http://servicios.infoleg.gob.ar/infolegInternet/anexos/305000-309999/305736/norma.htm ). All other laws and norms concerning commercial entities are established in the Argentina Civil and Commercial Code, which can be found at: http://servicios.infoleg.gob.ar/infolegInternet/anexos/235000-239999/235975/norma.htm 

Further information about Argentina’s investment policies can be found at the following websites:

• Ministry of Production and Labor (http://www.produccion.gob.ar/ )
• Treasury Ministry (https://www.argentina.gob.ar/hacienda )
• The Central Bank of the Argentine Republic (http://www.bcra.gov.ar/ )
• The National Securities Exchange Commission (http://www.cnv.gob.ar/ )
• The National Investment and Trade Promotion Agency (http://www.inversionycomercio.org.ar/ )
• Investors can download Argentina’s investor guide through this link: (https://drive.google.com/file/d/0B-086VB27JBjN0x0NmM4Y09GODA/view )

Competition and Anti-Trust Laws

The National Commission for the Defense of Competition and the Secretariat of Commerce, both within the Ministry of Production and Labor, have enforcement authority of the Competition Law (Law 25,156). The law aims to promote a culture of competition in all sectors of the national economy. In May 2018, the Argentine Congress approved a new Defense of the Competition Law (Law 27,442). The new law incorporates anti-competitive conduct regulations and a leniency program to facilitate cartel investigation. The full text of the law can be viewed at: http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do?id=310241 .

Expropriation and Compensation

Section 17 of the Argentine Constitution affirms the right of private property and states that any expropriation must be authorized by law and compensation must be provided. The United States-Argentina BIT states that investments shall not be expropriated or nationalized except for public purposes upon prompt payment of the fair market value in compensation.

Argentina has a history of expropriations under previous administrations, the most recent of which occurred in March 2015 when the Argentine Congress approved the nationalization of the train and railway system. A number of companies that were privatized during the 1990s under the Menem administration were renationalized under the Kirchner administrations. Additionally, in October 2008, Argentina nationalized its private pension funds, which amounted to approximately one-third of total GDP, and transferred the funds to the government social security agency.

In May 2012, the Fernandez de Kirchner administration nationalized the oil and gas company Repsol-YPF. Although most of the litigation was settled in 2016, a small percentage of stocks owned by an American hedge fund remain in litigation in U.S. courts.

Dispute Settlement

ICSID Convention and New York Convention

Argentina is signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards, which the country ratified in 1989. Argentina is also a party to the International Center for Settlement of Investment Disputes (ICSID) Convention since 1994.

There is neither specific domestic legislation providing for enforcement under the 1958 New York Convention nor legislation for the enforcement of awards under the ICSID Convention. Companies that seek recourse through Argentine courts may not simultaneously pursue recourse through international arbitration. In practice, the Macri administration has shown a willingness to negotiate settlements to valid arbitration awards.

In March 2012, the United States suspended Argentina’s designation as a Generalized System of Preferences (GSP) beneficiary developing country because it had not acted in good faith in enforcing arbitration awards in favor of United States citizens or a corporation, partnership, or association that is 50 percent or more beneficially owned by United States citizens. Effective January 1, 2018, the United States ended Argentina’s suspension from the GSP program.  Following Congressional reauthorization of the program, as of April 22, 2018, Argentina’s access was restored for GSP duty-free treatment for over 3,000 Argentine products.

Investor-State Dispute Settlement

The Argentine government officially accepts the principle of international arbitration. The United States-Argentina BIT includes a chapter on Investor-State Dispute Settlement for U.S. investors.

In the past ten years, Argentina has been brought before the ICSID in 54 cases involving U.S. or other foreign investors. Argentina currently has four pending arbitration cases filed against it by U.S. investors. For more information on the cases brought by U.S. claimants against Argentina, go to: https://icsid.worldbank.org/en/Pages/cases/AdvancedSearch.aspx# .

Local courts cannot enforce arbitral awards issued against the government based on the public policy clause. There is no history of extrajudicial action against foreign investors.

Argentina is a member of the United Nations Commission on International Trade Law (UNCITRAL) and the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

Argentina is also a party to several bilateral and multilateral treaties and conventions for the enforcement and recognition of foreign judgments, which provide requirements for the enforcement of foreign judgments in Argentina, including:

Treaty of International Procedural Law, approved in the South-American Congress of Private International Law held in Montevideo in 1898, ratified by Argentina by law No. 3,192.

Treaty of International Procedural Law, approved in the South-American Congress of Private International Law held in Montevideo in 1939-1940, ratified by Dec. Ley 7771/56 (1956).

Panamá Convention of 1975, CIDIP I: Inter-American Convention on International Commercial Arbitration, adopted within the Private International Law Conferences – Organization of American States, ratified by law No. 24,322 (1995).

Montevideo Convention of 1979, CIDIP II: Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards, adopted within the Private International Law Conferences – Organization of American States, ratified by law No. 22,921 (1983).

International Commercial Arbitration and Foreign Courts

Alternative dispute resolution (ADR) mechanisms can be stipulated in contracts. Argentina also has ADR mechanisms available such as the Center for Mediation and Arbitrage (CEMARC) of the Argentine Chamber of Trade. More information can be found at: http://www.intracen.org/Centro-de-Mediacion-y-Arbitraje-Comercial-de-la-Camara-Argentina-de-Comercio—CEMARC–/#sthash.RagZdv0l.dpuf .

Argentina does not have a specific law governing arbitration, but it has adopted a mediation law (Law 24.573/1995), which makes mediation mandatory prior to litigation. Some arbitration provisions are scattered throughout the Civil Code, the National Code of Civil and Commercial Procedure, the Commercial Code, and three other laws. The following methods of concluding an arbitration agreement are non-binding under Argentine law: electronic communication, fax, oral agreement, and conduct on the part of one party. Generally, all commercial matters are subject to arbitration. There are no legal restrictions on the identity and professional qualifications of arbitrators. Parties must be represented in arbitration proceedings in Argentina by attorneys who are licensed to practice locally. The grounds for annulment of arbitration awards are limited to substantial procedural violations, an ultra petita award (award outside the scope of the arbitration agreement), an award rendered after the agreed-upon time limit, and a public order violation that is not yet settled by jurisprudence when related to the merits of the award. On average, it takes around 21 weeks to enforce an arbitration award rendered in Argentina, from filing an application to a writ of execution attaching assets (assuming there is no appeal). It takes roughly 18 weeks to enforce a foreign award. The requirements for the enforcement of foreign judgments are set out in section 517 of the National Procedural Code.

No information is available as to whether the domestic courts frequently rule in cases in favor of state-owned enterprises (SOE) when SOEs are party to a dispute.

Bankruptcy Regulations

Argentina’s bankruptcy law was codified in 1995 in Law 24,522. The full text can be found at: http://www.infoleg.gov.ar/infolegInternet/anexos/25000-29999/25379/texact.htm . Under the law, debtors are generally able to begin insolvency proceedings when they are no longer able to pay their debts as they mature. Debtors may file for both liquidation and reorganization. Creditors may file for insolvency of the debtor for liquidation only. The insolvency framework does not require approval by the creditors for the selection or appointment of the insolvency representative or for the sale of substantial assets of the debtor. The insolvency framework does not provide rights to the creditor to request information from the insolvency representative but the creditor has the right to object to decisions by the debtor to accept or reject creditors’ claims. Bankruptcy is not criminalized; however, convictions for fraudulent bankruptcy can carry two to six years of prison time.

Financial institutions regulated by the Central Bank of Argentina (BCRA) publish monthly outstanding credit balances of their debtors; the BCRA and the National Center of Debtors (Central de Deudores) compile and publish this information. The database is available for use of financial institutions that comply with legal requirements concerning protection of personal data. The credit monitoring system only includes negative information, and the information remains on file through the person’s life. At least one local NGO that makes microcredit loans is working to make the payment history of these loans publicly accessible for the purpose of demonstrating credit history, including positive information, for those without access to bank accounts and who are outside of the Central Bank’s system. Equifax, which operates under the local name “Veraz” (or “truthfully”), also provides credit information to financial institutions and other clients, such as telecommunications service providers and other retailers that operate monthly billing or credit/layaway programs.

The World Bank’s 2018 Doing Business Report ranked Argentina 101 among 189 countries for the effectiveness of its insolvency law. This is a jump of 15 places from its ranking of 116 in 2017. The report notes that it takes an average of 2.4 years and 16.5 percent of the estate to resolve bankruptcy in Argentina.

Investment Incentives

Government incentives do not make any distinction between foreign and domestic investors.

The Argentine government offers a number of investment promotion programs at the federal, provincial, and municipal levels to attract investment to specific economic sectors such as capital assets and infrastructure, innovation and technological development, and energy, with no discrimination between national or foreign-owned enterprises. They also offer incentives to encourage the productive development of specific geographical areas. The Investment and International Trade Promotion Agency provides cost-free assessment and information to investors to facilitate operations in the country. Argentina’s investment promotion programs and regimes can be found at: http://www.investandtrade.org.ar/?lang=en  http://www.inversionycomercio.org.ar/en/where_tax_benefits.php?wia=1&lang=en<http://www.inversionycomercio.org.ar/docs/pdf/Doing_Business_in_Argentina-2018.pdf, and http://www.produccion.gob.ar.

The National Fund for the Development of Micro, Small, and Medium Enterprises provides low cost credit to small and medium-sized enterprises for investment projects, labor, capital, and energy efficiency improvement with no distinction between national or foreign-owned enterprises. More information can be found at https://www.argentina.gob.ar/produccion/financiamiento 

The Ministry of Production and Labor supports numerous employment training programs that are frequently free to the participants and do not differentiate based on nationality.

Some of the investment promotion programs require investments within a specific region or locality, industry, or economic activity. Some programs offer refunds on Value-Added Tax (VAT) or other tax incentives for local production of capital goods.

Foreign Trade Zones/Free Ports/Trade Facilitation

Argentina has two types of tax-exempt trading areas: Free Trade Zones (FTZ), which are located throughout the country, and the more comprehensive Special Customs Area (SCA), which covers all of Tierra del Fuego Province and is scheduled to expire at the end of 2023.

Argentine law defines an FTZ as a territory outside the “general customs area” (GCA, i.e., the rest of Argentina) where neither the inflows nor outflows of exported final merchandise are subject to tariffs, non-tariff barriers, or other taxes on goods. Goods produced within a FTZ generally cannot be shipped to the GCA unless they are capital goods not produced in the rest of the country. The labor, sanitary, ecological, safety, criminal, and financial regulations within FTZs are the same as those that prevail in the GCA. Foreign firms receive national treatment in FTZs.

Merchandise shipped from the GCA to a FTZ may receive export incentive benefits, if applicable, only after the goods are exported from the FTZ to a third country destination. Merchandise shipped from the GCA to a FTZ and later exported to another country is not exempt from export taxes. Any value added in an FTZ or re-export from an FTZ is exempt from export taxes. For more information on FTZ in Argentina see: http://www.afip.gob.ar/zonasFrancas/ .

Products manufactured in an SCA may enter the GCA free from taxes or tariffs. In addition, the government may enact special regulations that exempt products shipped through an SCA (but not manufactured therein) from all forms of taxation except excise taxes. The SCA program provides benefits for established companies that meet specific production and employment objectives.

Performance and Data Localization Requirements

Employment and Investor Requirements

The Argentine national government does not have local employment mandates nor does it apply such schemes to senior management or boards of directors. However, certain provincial governments do require employers to hire a certain percentage of their workforce from provincial residents. There are no excessively onerous visa, residence, work permit, or similar requirements inhibiting mobility of foreign investors and their employees. Under Argentine Law, conditions to invest are equal for national and foreign investors. As of March 2018, citizens of MERCOSUR countries can obtain legal residence within five months and at little cost, which grants permission to work. Argentina suspended its method for expediting this process in early 2018.

Goods, Technology, and Data Treatment

Argentina has local content requirements for specific sectors. Requirements are applicable to domestic and foreign investors equally. Argentine law establishes a national preference for local industry for most government procurement if the domestic supplier’s tender is no more than five to seven percent higher than the foreign tender. The amount by which the domestic bid may exceed a foreign bid depends on the size of the domestic company making the bid. On May 10, 2018, Argentina issued Law 27,437, giving additional priority to Argentine small and medium-sized enterprises and, separately, requiring that foreign companies that win a tender must subcontract domestic companies to cover 20 percent of the value of the work. The preference applies to procurement by all government agencies, public utilities, and concessionaires.  There is similar legislation at the sub-national (provincial) level.

On September 5, 2018, the government issued Decree 800/2018, which provides the regulatory framework for Law 27,437. On November 16, 2016, the government passed a public-private partnership (PPP) law (27,328) that regulates public-private contracts. The law lowered regulatory barriers to foreign investment in public infrastructure projects with the aim of attracting more foreign direct investment. Several projects under the PPP initiative have been canceled or put on hold due to an ongoing investigation on corruption in public works projects during the last administration. The PPP law contains a “Buy Argentina” clause that mandates at least 33 percent local content for every public project.

Argentina is not a signatory to the WTO Agreement on Government Procurement (GPA), but it became an observer to the GPA in February 1997.

On July 5, 2016, the Ministry of Production and Labor and the Ministry of Energy and Mining issued Joint Resolutions 123 and 313, which allow companies to obtain tax benefits on purchases of solar or wind energy equipment for use in investment projects that incorporate at least 60 percent local content in their electromechanical installations.  In cases where local supply is insufficient to reach the 60 percent threshold, the threshold can be reduced to 30 percent. The resolutions also provide tax exemptions for imports of capital and intermediate goods that are not locally produced for use in the investment projects.

On August 1, 2016, Argentina passed law 27,263, implemented by Resolution 599-E/2016, which provides tax credits to automotive manufacturers for the purchase of locally-produced automotive parts and accessories incorporated into specific types of vehicles. The tax credits range from 4 percent to 15 percent of the value of the purchased parts.  The list of vehicle types included in the regime can be found here: http://servicios.infoleg.gob.ar/infolegInternet/anexos/260000-264999/263955/norma.htm . On April 20, 2018, Argentina issued Resolution 28/2018, simplifying the procedure for obtaining the tax credits. The resolution also establishes that if the national content drops below the minimum required by the resolution because of relative price changes due to exchange rate fluctuations, automotive manufacturers will not be considered non-compliant with the regime. However, the resolution sets forth that tax benefits will be suspended for the quarter when the drop was registered.

The Media Law, enacted in 2009 and amended in 2015, requires companies to produce advertising and publicity materials locally or to include 60 percent local content. The Media Law also establishes a 70 percent local production content requirement for companies with radio licenses. Additionally, the Media Law requires that 50 percent of the news and 30 percent of the music that is broadcast on the radio be of Argentine origin. In the case of private television operators, at least 60 percent of broadcast content must be of Argentine origin. Of that 60 percent, 30 percent must be local news and 10 to 30 percent must be local independent content.

Argentina establishes percentages of local content in the production process for manufacturers of mobile and cellular radio communication equipment operating in Tierra del Fuego province.  Resolution 66, issued July 12, 2018, replaces Resolution 1219/2015 and maintains the local content requirement for products such as technical manuals, packaging, and labeling. Resolution 66 eliminated the local content requirement imposed by Resolution 1219 for batteries, screws, and chargers. The percentage of local content required ranges from 10 percent to 100 percent depending on the process or item. In cases where local supply is insufficient to meet local content requirements, companies may apply for an exemption that is subject to review every six months. A detailed description of local content percentage requirements can be found here .

There are no requirements for foreign IT providers to turn over source code and/or provide access to encryption, nor does the government prevent companies from freely transmitting customer or other business-related data outside the country’s territory.

Argentina does not have forced localization of content in technology or requirements of data storage in country.

Investment Performance Requirements

There is no discrimination between domestic and foreign investors in investment incentives. There are no performance requirements. A complete guide of incentives for investors in Argentina can be found at: http://www.inversionycomercio.org.ar/invest_argentina.php .

Real Property

Secured interests in property, including mortgages, are recognized in Argentina. Such interests can be easily and effectively registered. They also can be readily bought and sold. Argentina manages a national registry of real estate ownership (Registro de la Propiedad Inmueble) at http://www.dnrpi.jus.gov.ar/ . No data is available on the percent of all land that does not have clear title. There are no specific regulations regarding land lease and acquisition of residential and commercial real estate by foreign investors. Law 26,737 (Regime for Protection of National Domain over Ownership, Possession or Tenure of Rural Land) establishes the restrictions of foreign ownership on rural and productive lands, including water bodies. Foreign ownership is also restricted on land located near borders.

Legal claims may be brought to evict persons unlawfully occupying real property, even if the property is unoccupied by the lawful owner. However, these legal proceedings can be quite lengthy, and until the legal proceedings are complete, evicting squatters is problematic. The title and actual conditions of real property interests under consideration should be carefully reviewed before acquisition.

Argentine Law 26.160 prevents the eviction and confiscation of land traditionally occupied by indigenous communities in Argentina, or encumbered with an indigenous land claim. Indigenous land claims can be found in the land registry. Enforcement is carried out by the National Institute of Indigenous Affairs, under the Ministry of Social Development.

Intellectual Property Rights

The government of Argentina adheres to some treaties and international agreements on intellectual property (IP) and belongs to the World Intellectual Property Organization and the World Trade Organization. The Argentine Congress ratified the Uruguay Round agreements, including the provisions on intellectual property, in Law 24425 on January 5, 1995.

The U.S. Trade Representative’s 2019 Special 301 Report identified Argentina on the Priority Watch List. Trading partners on the Priority Watch List present the most significant concerns regarding inadequate or ineffective IP protection or enforcement or actions that otherwise limit market access for persons relying on IP protection. For a complete version of the 2019 Report, see: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/april/ustr-releases-2018-special-301-report .

Argentina continues to present longstanding and well-known challenges to IP-intensive industries, including from the United States. A key deficiency in Argentina’s legal framework for patents is the unduly broad limitations on patent eligible subject matter. Pursuant to a highly problematic 2012 Joint Resolution establishing guidelines for the examination of patents, Argentina rejects patent applications for categories of pharmaceutical inventions that are eligible for patentability in other jurisdictions, including in the United States. Additionally, to be patentable, Argentina requires that processes for the manufacture of active compounds disclosed in a specification be reproducible and applicable on an industrial scale. Stakeholders assert that Resolution 283/2015, introduced in September 2015, also limits the ability to patent biotechnological innovations based on living matter and natural substances. Such measures have interfered with the ability of companies investing in Argentina to protect their IP and may be inconsistent with international norms. Another ongoing challenge to the innovative agricultural, chemical, and pharmaceutical sectors is inadequate protection against the unfair commercial use, as well as unauthorized disclosure, of undisclosed test or other data generated to obtain marketing approval for products in those sectors. Argentina struggles with a substantial backlog of patent applications resulting in long delays for innovators seeking patent protection in the market, a problem compounded by a reduction in the number of patent examiners in 2018 primarily due to a government-wide hiring freeze.

Enforcement of IP rights in Argentina continues to be a challenge and stakeholders report widespread unfair competition from sellers of counterfeit and pirated goods and services. La Salada in Buenos Aires remains the largest counterfeit market in Latin America. Argentine police generally do not take ex officio actions, prosecutions can stall and languish in excessive formalities, and, when a criminal case does reach final judgment, infringers rarely receive deterrent sentences. Hard goods counterfeiting and optical disc piracy is widespread, and online piracy continues to grow as criminal enforcement against online piracy is nearly nonexistent. As a result, IP enforcement online in Argentina consists mainly of right holders trying to convince cooperative Argentine ISPs to agree to take down specific infringing works, as well as attempting to seek injunctions in civil cases. Right holders also cite widespread use of unlicensed software by Argentine private enterprises and the government.

Over the last year, Argentina made limited progress in IP protection and enforcement. Beset with economic challenges, Argentina’s government agencies were strapped by a reduction of funding and a government-wide hiring freeze, and many of Argentina’s IP-related initiatives that had gained momentum last year did not gain further traction due to a lack of resources. Despite these circumstances, the National Institute of Industrial Property (INPI) revamped its procedures and began accepting electronic filing of patent, trademark, and industrial designs applications as of October 1, 2018. Argentina also improved registration procedures for trademarks and industrial designs.  On trademarks, the law now provides for a fast track option that reduces the time to register a trademark to four months. The United States continues to monitor this change as INPI works on the implementing regulation. For industrial designs, INPI now accepts multiple applications in a single filing and applicants may substitute digital photographs for formal drawings. To further improve patent protection in Argentina, including for small and medium-sized enterprises, the United States urges Argentina to ratify the Patent Cooperation Treaty (PCT).

Argentina’s efforts to combat counterfeiting continue, but without systemic measures, illegal activity persists.  Argentine authorities arrested the alleged operators of the market La Salada as well as numerous associates in 2017, but vendors continue to sell counterfeit and pirated goods at the market and throughout Buenos Aires. The United States has encouraged Argentina to create a national IP enforcement strategy to build on these successes and move to a sustainable, long-lasting initiative. The United States also has encouraged legislative proposals to this effect, along the lines of prior bills introduced in Congress to provide for landlord liability and stronger enforcement on the sale of infringing goods at outdoor marketplaces such as La Salada, and to amend the trademark law to increase criminal penalties for counterfeiting carried out by criminal networks. In November 2017, Argentina entered into an agreement with the Chamber of Medium-Sized Enterprises and the Argentine Anti-Piracy Association to create a National Anti-Piracy Initiative focusing initially on trademark counterfeiting. The United States encourages Argentina to expand this initiative to online piracy. In March, revisions to the criminal code, including certain criminal sanctions for circumventing technological protection measures (TPMs), were submitted to Congress. While Argentina has moved forward with the creation of a federal specialized IP prosecutor’s office, the office is not yet in operation. In November 2018, following a constructive bilateral meeting earlier in the year, Argentina and the United States held a DVC under the bilateral Innovation and Creativity Forum for Economic Development, part of the U.S.-Argentina Trade and Investment Framework Agreement (TIFA), to continue discussions and collaboration on IP topics of mutual interest. The United States intends to monitor all the outstanding issues for progress, and urges Argentina to continue its efforts to create a more attractive environment for investment and innovation.

For statistics on illegal sales in Argentina, go to the following link: http://redcame.org.ar/seccion/relevamiento-venta-ilegal 

Capital Markets and Portfolio Investment

The Macri administration has enacted a series of macroeconomic reforms (unifying the exchange rate, settling with holdout creditors, annulling most of the trade restrictions, lifting capital controls, to mention a few) to improve the investment climate. In May 2018, the Congress approved a new capital markets law aimed at boosting economic growth through the development and deepening of the local capital market. The law removed over-reaching regulatory intervention provisions introduced by the previous government and eased restrictions on mutual funds and foreign portfolio investment in domestic markets. Argentina also signed several bilateral agreements and MOUs with other countries aimed to increase foreign direct investment. There are no restrictions on payments and transfers abroad (in accordance with IMF Article VIII).

The Argentine Securities and Exchange Commission (CNV or Comision Nacional de Valores) is the federal agency that regulates securities markets offerings. Securities and accounting standards are transparent and consistent with international norms. Foreign investors have access to a variety of options on the local market to obtain credit. Nevertheless, the domestic credit market is small – credit is 16 percent of GDP, according to the World Bank. The Buenos Aires Stock Exchange is the organization responsible for the operation of Argentina’s primary stock exchange, located in Buenos Aires city. The most important index of the Buenos Aires Stock Exchange is the MERVAL (Mercado de Valores).

U.S. banks, securities firms, and investment funds are well-represented in Argentina and are dynamic players in local capital markets. In 2003, the government began requiring foreign banks to disclose to the public the nature and extent to which their foreign parent banks guarantee their branches or subsidiaries in Argentina.

Money and Banking System

Argentina has a relatively sound banking sector based on diversified revenues, well-contained operating costs, and a high liquidity level. The main challenge for banks is to rebuild long-term assets and liabilities. Due to adverse international and domestic conditions with the economy entering into a recession with high inflation and interest rates, credit to the private sector in local currency (for both corporations and individuals) decreased 18 percent in real terms in 2018. In spite of falling credit, banks remain well equipped to weather weak economic conditions. The largest bank is the Banco de la Nacion Argentina. Non-performing private sector loans constitute less than four percent of banks’ portfolios. The ten largest private banks have total assets of approximately ARS 2,643 billion (USD 64 billion). Total financial system assets are approximately ARS 5,506 billion (USD 134 billion). The Central Bank of Argentina acts as the country’s financial agent and is the main regulatory body for the banking system.

Foreign banks and branches are allowed to establish operations in Argentina. They are subject to the same regulation as local banks. Argentina’s Central Bank has many correspondent banking relationships, none of which are known to have been lost in the past three years.

The Central Bank has enacted a resolution recognizing cryptocurrencies and requiring that they comply with local banking and tax laws. No implementing regulations have been adopted. Blockchain developers report that several companies in the financial services sector are exploring or considering using blockchain-based programs externally and are using some such programs internally. One Argentine NGO, through funding from the Inter-American Development Bank (IDB), is developing blockchain-based banking applications to assist low income populations.

Foreign Exchange and Remittances

Foreign Exchange

President Macri has issued a number of regulations that lifted all capital controls and reduced trade restrictions. In November 2017, the government repealed the obligation to convert hard currency earnings on exports of both goods and services to pesos in the local foreign exchange market.

Per Resolution 36,162 of October 2011, locally registered insurance companies are mandated to maintain all investments and cash equivalents in the country. The BCRA limits banks’ dollar-denominated asset holdings to 10 percent of their net worth.

In June 2018, the International Monetary Fund (IMF) and Argentina announced a Standby Arrangement agreement (SBA). Three months after agreeing to a USD 50 billion SBA, Argentina and the IMF announced in September 2018 a set of revisions, including an increase of the line of credit by USD 7.1 billion and front loading the disbursement of funds. The revised program sought to erase any doubts about the government’s ability to cover its financing needs for 2018 and 2019 and in turn, Argentina committed to meeting strict new budget and monetary policy targets. On the monetary side, the BCRA replaced inflation targeting with a policy to ensure zero growth of the monetary base through December 2019. The BCRA also allows the exchange rate to float freely between a floor and ceiling of 34 and 44 pesos per dollar (at the time of introducing the framework).

Originally, the BCRA hoped that the floor and ceiling bounds would avoid a real appreciation of the peso; the adjustment started with a 3 percent monthly increase for the last quarter of 2018, and would drop to a monthly 1.75 percent increase for the second quarter of 2019. However, in mid-April 2019, the BCRA announced that the floor and ceiling will remain constant until the end of 2019, at 39.8 and 51.5 pesos per dollar, respectively. Under this framework, the BCRA may only sell up to USD 150 million reserves per day when trading above the ceiling.

Remittance Policies

According to Resolutions 3,819/2015 and 1/2017, companies and investors have no official restrictions on money conversion, remittances, or repatriation of their earnings.

Sovereign Wealth Funds

The Argentine Government does not maintain a Sovereign Wealth Fund.

The Argentine government has state-owned enterprises (SOEs) or significant stakes in mixed-capital companies in the following sectors: civil commercial aviation, water and sanitation, oil and gas, electricity generation, transport, paper production, satellite, banking, railway, shipyard, and aircraft ground handling services.

By Argentine law, a company is considered a public enterprise if the state owns 100 percent of the company’s shares. The state has majority control over a company if the state owns 51 percent of the company’s shares. The state has minority participation in a company if the state owns less than 51 percent of the company’s shares. Laws regulating state-owned enterprises and enterprises with state participation can be found at http://www.saij.gob.ar/13653-nacional-regimen-empresas-estado-lns0001871-1955-03-23/123456789-0abc-defg-g17-81000scanyel .

Through the government’s social security agency (ANSES), the Argentine government owns stakes ranging from one to 31 percent in 46 publically-listed companies. U.S. investors also own shares in some of these companies. As part of the ANSES takeover of Argentina’s private pension system in 2008, the government agreed to commit itself to being a passive investor in the companies and limit the exercise of its voting rights to 5 percent, regardless of the equity stake the social security agency owned. A list of such enterprises can be found at: http://fgs.anses.gob.ar/participacion .

State-owned enterprises purchase and supply goods and services from the private sector and foreign firms. Private enterprises may compete with SOEs under the same terms and conditions with respect to market share, products/services, and incentives. Private enterprises also have access to financing terms and conditions similar to SOEs. SOEs are subject to the same tax burden and tax rebate policies as their private sector competitors. SOEs are not currently subject to firm budget constraints under the law, and have been subsidized by the central government in the past; however, the Macri administration is reducing subsidies in the energy, water, and transportation sectors. Argentina does not have regulations that differentiate treatment of SOEs and private enterprises. Argentina has observer status under the WTO Agreement on Government Procurement and, as such, SOEs are subject to the conditions of Argentina’s observance.

Argentina does not have a specified ownership policy, guideline or governance code for how the government exercises ownership of SOEs. The country generally adheres to the OECD Guidelines on Corporate Governance of SOEs. The practices for SOEs are mainly in compliance with the policies and practices for transparency and accountability in the OECD Guidelines.

Argentina does not have a centralized ownership entity that exercises ownership rights for each of the SOEs. The general rule in Argentina is that requirements that apply to all listed companies also apply to publicly-listed SOEs.

In 2018, the OECD released a report evaluating the corporate governance framework for the Argentine SOE sector relative to the OECD Guidelines on Corporate Governance of SOEs, which can be viewed here: http://www.oecd.org/countries/argentina/oecd-review-corporate-governance-soe-argentina.htm .

Privatization Program

The current administration has not developed a privatization program.

There is an increasing awareness of corporate social responsibility (CSR) and responsible business conduct (RBC) among both producers and consumers in Argentina. RBC and CSR practices are welcomed by beneficiary communities throughout Argentina. There are many institutes that promote RBC and CSR in Argentina, the most prominent being the Argentine Institute for Business Social Responsibility (http://www.iarse.org /), which has been working in the country for more than 17 years and includes among its members many of the most important companies in Argentina.

Argentina is a member of the United Nation’s Global Compact. Established in April 2004, the Global Compact Network Argentina is a business-led network with a multi-stakeholder governing body elected for two-year terms by active participants. The network is supported by the United Nations Development Program (UNDP) Argentina in close collaboration with other UN Agencies. The Global Compact Network Argentina is the most important RBC/CSR initiative in the country with a presence in more than 20 provinces. More information on the initiative can be found at: http://pactoglobal.org.ar .

Foreign and local enterprises tend to follow generally accepted CSR/RBC principles. Argentina subscribed to the Declaration on the OECD Guidelines for Multinational Enterprises in April 1997.

Many provinces, such as Mendoza and Neuquen, have or are in the process of enacting a provincial CSR/RBC law. There have been many previously unsuccessful attempts to pass a CSR/RBC law. Distrust over the State’s role in private companies had been the main concern for legislators opposed to these bills.

In February 2019, the Argentine government joined the Extractive Industries Transparency Initiative (EITI).

Argentina’s legal system incorporates several measures to address public sector corruption. The government institutions tasked with combatting corruption include the Anti-Corruption Office (ACO), the National Auditor General, and the General Comptroller’s Office. Public officials are subject to financial disclosure laws, and the Ministry of Justice’s ACO is responsible for analyzing and investigating federal executive branch officials based on their financial disclosure forms. The ACO is also responsible for investigating corruption within the federal executive branch or in matters involving federal funds, except for funds transferred to the provinces. While the ACO does not have authority to independently prosecute cases, it can refer cases to other agencies or serve as the plaintiff and request a judge to initiate a case.

Argentina enacted a new Corporate Criminal Liability Law in November 2017 following the advice of the OECD to comply with its Anti-Bribery Convention. The full text of Law 27,401 can be found at: http://servicios.infoleg.gob.ar/infolegInternet/anexos/295000-299999/296846/norma.htm . The new law entered into force in early 2018. It extends anti-bribery criminal sanctions to corporations, whereas previously they only applied to individuals; expands the definition of prohibited conduct, including illegal enrichment of public officials; and allows Argentina to hold Argentines responsible for foreign bribery. Sanctions include fines and blacklisting from public contracts. Argentina also enacted an express prohibition on the tax deductibility of bribes.

Corruption has been an issue in Argentina. In its March 2017 report, the OECD expressed concern about Argentina’s enforcement of foreign bribery laws, inefficiencies in the judicial system, politicization and perceived lack of independence at the Attorney General’s Office, and lack of training and awareness for judges and prosecutors. According to the World Bank’s worldwide governance indicators, corruption remains an area of concern in Argentina. In the latest Transparency International Corruption Perceptions Index (CPI) that ranks countries and territories by their perceived levels of corruption, Argentina ranked 85 out of 180 countries in 2018, an improvement of 10 places versus 2016. Allegations of corruption in provincial as well as federal courts remained frequent. Few Argentine companies have implemented anti-foreign bribery measures beyond limited codes of ethics.

Since assuming office, President Macri made combating corruption and improving government transparency a priority objective for his administration. In September 2016, Congress passed a law on public access to information. The law explicitly applies to all three branches of the federal government, the public justice offices, and entities such as businesses, political parties, universities, and trade associations that receive public funding. It requires these institutions to respond to citizen requests for public information within 15 days, with an additional 15-day extension available for “exceptional” circumstances. Sanctions apply for noncompliance. The law also mandates the creation of the Agency for Access to Public Information, an autonomous office within the executive branch. President Macri also proposed a series of criminal justice and administrative reforms. Chief among these are measures to speed the recovery of assets acquired through corruption, plea-bargaining-type incentives to encourage judicial cooperation, and greater financial disclosure for public servants. In early 2016, the Argentine government reaffirmed its commitment to the Open Government Partnership (OGP), became a founding member of the Global Anti-Corruption Coalition, and reengaged the OECD Working Group on Bribery.

Argentina is a party to the Organization of American States’ Inter-American Convention against Corruption. It ratified in 2001 the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Anti-Bribery Convention). Argentina also signed and ratified the UN Convention against Corruption (UNCAC) and participates in UNCAC’s Conference of State Parties. Argentina also participates in the Mechanism for Follow-up on the Implementation of the Inter-American Convention against Corruption (MESICIC).

Since Argentina became a party to the OECD Anti-Bribery Convention, allegations of Argentine individuals or companies bribing foreign officials have surfaced. A March 2017 report by the OECD Working Group on Bribery indicated there were 13 known foreign bribery allegations involving Argentine companies and individuals as of that date.  According to the report, Argentine authorities investigated and closed some of the allegations and declined to investigate others.  The authorities determined some allegations did not involve foreign bribery but rather other offenses.  Several such allegations remained under investigation. 

Resources to Report Corruption

Laura Alonso
Director
Government of Argentina Anti-Corruption Office
Oficina Anticorrupción, Tucumán 394, C1049AAH, Ciudad Autónoma de Buenos Aires.
Phone: +54 11 5167 6400
Email: anticorrupcion@jus.gov.ar and http://denuncias.anticorrupcion.gob.ar/ 

Poder Ciudadano (Local Transparency International Affiliate)
Phone: +54 11 4331 4925 ext 225
Fax: +54 11 4331 4925
Email: comunicaciones@poderciudadano.org
Website: http://www.poderciudadano.org 

Demonstrations are common in metropolitan Buenos Aires and in other major cities and rural areas. Political violence is not widely considered a hindrance to the investment climate in Argentina.

Protesters regularly block streets, highways, and major intersections, causing traffic jams and delaying travel. Public demonstrations, strikes, and street blocking barricades increased in 2018 in response to economic and political issues. While demonstrations are usually non-violent, individuals sometimes seek confrontation with the police and vandalize private property. Groups occasionally protest in front of the U.S. Embassy or U.S.-affiliated businesses. In February 2016, the Ministry of Security approved a National Anti-Street Pickets Protocol that provides guidelines to prevent the blockage of major streets and public facilities during demonstrations. However, this protocol did not often apply to venues within the City of Buenos Aires (CABA), which fall under the city’s jurisdiction.  The CABA government often did not enforce security protocols against illegal demonstrations.

In December 2017, while Congress had called an extraordinary session to address the retirement system reforms, several demonstrations against the bill turned violent, causing structural damage to public and private property, injuries to 162 people (including 88 policemen), and arrests of 60 people. The demonstrations ultimately dissipated, and the government passed the bill.

Argentine workers are among the most highly-educated and skilled in Latin America. Foreign investors often cite Argentina’s skilled workforce as a key factor in their decision to invest in Argentina. Argentina has relatively high social security, health, and other labor taxes, however, and high labor costs are among foreign investors’ most often cited operational challenges. The unemployment rate was 9.1 percent in the fourth quarter of 2018, according to official statistics. The government estimated unemployment for workers below 29 years old as roughly double the national rate. Analysts estimate one-third of Argentina’s salaried workforce was employed informally. Though difficult to measure, analysts believe including self-employed informal workers in the estimate would drive the overall rate of informality to 40 percent of the labor force.

Labor laws are comparatively protective of workers in Argentina, and investors cite labor-related litigation as an important factor increasing labor costs in Argentina. There are no special laws or exemptions from regular labor laws in the Foreign Trade Zones. Organized labor plays an important role in labor-management relations and in Argentine politics. Under Argentine law, the Secretariat of Labor recognizes one union per sector per geographic unit (e.g., nationwide, a single province, or a major city) with the right to negotiate a collective bargaining agreement for that sector and geographic area. Roughly 40 percent of Argentina’s formal workforce is unionized. The Secretariat of Labor ratifies collective bargaining agreements. Collective bargaining agreements cover workers in a given sector and geographic area whether they are union members or not, so roughly 70 percent of the workforce was covered by an agreement. While negotiations between unions and industry are generally independent, the Secretariat of Labor often serves as a mediator. Argentine law also offers recourse to mediation and arbitration of labor disputes.

Tensions between management and unions occur. Many managers of foreign companies say they have good relations with their unions. Others say the challenges posed by strong unions can hinder further investment by their international headquarters. Depending on how sectors are defined, some activities such as oil and gas production or aviation involve multiple unions, which can lead to inter-union power disputes that can impede the companies’ operations.

During 2017, the government helped employers and workers agree on adjustments to collective bargaining agreements covering private sector oil and gas sector workers in Neuquen Province for unconventional hydrocarbon exploration and production. The changes were aimed at reducing certain labor costs and incentivizing greater productivity. Employers and unions reached similar agreements in the construction and automotive sectors. The government intends to adapt such agreements to other sectors, while it seeks to advance broader labor reforms through new legislation.

The government presented to the Congress in November 2017 a labor reform bill, including four broad thrusts: (1) a labor amnesty that would aim to reduce informality by encouraging employers to declare their off-the-books workers to the authorities without penalties or fines; (2) a National Institute of Worker Education to develop policies and programs aimed at workers’ skills development, as well as a system of workplace-based educational programs specifically for secondary, technical, and university students; (3) a technical commission to limit costs for union healthcare programs by evaluating drugs and medical treatments to determine which ones the union plans must cover; and (4) modifications to the labor contract law to reduce employers’ costs, incentivize hiring, and improve competitiveness. Union resistance to the fourth area led the government to divide the bill into three separate proposals covering the first three reform areas, respectively, and to resubmit the new bills to the congress in May 2018. The three labor reform bills remained pending before congress as of March 2019.

Labor-related demonstrations in Argentina occurred periodically in 2018. Reasons for strikes include job losses, high taxes, loss of purchasing power, and wage negotiations. Labor demonstrations may involve tens of thousands of protestors. Recent demonstrations have essentially closed sections of the city for a few hours or days at a time. Demonstrations by airline employees caused significant flight delays or cancellations in recent months as well.

The Secretariat of Labor has hotlines and an online website to report labor abuses, including child labor, forced labor, and labor trafficking. The Superintendent of Labor Risk (Superintendencia de Riesgos del Trabajo) has oversight of health and safety standards. Unions also play a key role in monitoring labor conditions, reporting abuses and filing complaints with the authorities. Argentina has a Service of Mandatory Labor Conciliation (SECLO), which falls within the Secretariat of Labor, Employment and Social Security. Provincial governments and the city government of Buenos Aires are also responsible for labor law enforcement.

The minimum age for employment is 16. Children between the ages of 16 and 18 may work in a limited number of job categories and for limited hours if they have completed compulsory schooling, which normally ends at age 18. The law requires employers to provide adequate care for workers’ children during work hours to discourage child labor. The Department of Labor’s 2016 Worst Form of Child Labor for Argentina can be accessed here: https://www.dol.gov/agencies/ilab/resources/reports/child-labor/argentina 

The Department of State’s 2018 Human Rights Report for Argentina can be accessed here. 

Argentine Law prohibits discrimination on the grounds of sex, race, nationality, religion, political opinion, union affiliation, or age. The law also prohibits employers, either during recruitment or time of employment, from asking about a worker’s political, religious, labor, and cultural views or sexual orientation. These national anti-discrimination laws also apply to labor relations and other social relations.

Argentina has been a member of the International Labor Organization since 1919.

The Argentine government signed a comprehensive agreement with the Overseas Private Investment Corporation (OPIC) in 1989. The agreement allows OPIC to insure U.S. investments against risks resulting from expropriation, inconvertibility, war or other conflicts affecting public order. In November 2018, OPIC and the Government of Argentina signed six letters of interest to advance several projects in support of Argentina’s economic growth. The agreements will support sectors ranging from infrastructure to energy to logistics and total USD 813 million dollars in U.S. support that will catalyze additional private investment.

OPIC is open for business in all Latin American and Caribbean countries except Venezuela and Cuba. Argentina is also a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

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

* https://www.indec.gob.ar/uploads/informesdeprensa/pib_03_19.pdf ;  www.bcra.gov.ar 

Table 3: Sources and Destination of FDI

No information from the IMF’s Coordinated Portfolio Investment Survey (CPIS) for Outward Direct Investment is available for Argentina.

Table 4: Sources of Portfolio Investment

Data not available.

Economic Section
U.S. Embassy Buenos Aires
Avenida Colombia 4300
(C1425GMN)
Buenos Aires, Argentina
+54-11-5777-4747
ECONBA@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 Toward Foreign Direct Investment

Direct inward investment into Japan by foreign investors has been open and free since the Foreign Exchange and Foreign Trade Act (the Forex Act) was amended in 1998.  In general, the only requirement for foreign investors making investments in Japan is to submit an ex post facto report to the relevant ministries.

The Japanese Government explicitly promotes inward FDI and has established formal programs to attract it.  In 2013, the government of Prime Minister Shinzo Abe announced its intention to double Japan’s inward FDI stock to JPY 35 trillion (USD 318 billion) by 2020 and reiterated that commitment in its revised Japan Revitalization Strategy issued in August 2016.  At the end of June 2018, Japan’s inward FDI stock was JPY 29.9 trillion (USD 270 billion), a small increase over the previous year. The Abe Administration’s interest in attracting FDI is one component of the government’s strategy to reform and revitalize the Japanese economy, which continues to face the long-term challenges of low growth, an aging population, and a shrinking workforce.

In April 2014, the government established an “FDI Promotion Council” comprised of government ministers and private sector advisors.  The Council remains active and continues to release recommendations on improving Japan’s FDI environment. The Ministry of Economy, Trade and Industry (METI) and the Japan External Trade Organization (JETRO) are the lead agencies responsible for assisting foreign firms wishing to invest in Japan.  METI and JETRO have together created a “one-stop shop” for foreign investors, providing a single Tokyo location—with language assistance—where those seeking to establish a company in Japan can process the necessary paperwork (details are available at http://www.jetro.go.jp/en/invest/ibsc/  ).  Prefectural and city governments also have active programs to attract foreign investors, but they lack many of the financial tools U.S. states and municipalities use to attract investment.

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

The Japanese Government established an “Investment Advisor Assignment System” in April 2016 in which a State Minister acts as an advisor to select foreign companies with “important” investments in Japan.  The system aims to facilitate consultation between the Japanese Government and foreign firms. Of the nine companies selected to participate in this initiative to date, seven are from the United States.

Limits on Foreign Control and Right to Private Ownership and Establishment

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

The Foreign Exchange and Foreign Trade Act governs investment in sectors deemed to have national security or economic stability implications.  If a foreign investor wants to acquire over 10 percent of the shares of a listed company in certain designated sectors, it must provide prior notification and obtain approval from the Ministry of Finance and the ministry that regulates the specific industry.  Designated sectors include agriculture, aerospace, forestry, petroleum, electric/gas/water utilities, telecommunications, and leather manufacturing.

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

Other Investment Policy Reviews

The World Trade Organization (WTO) conducted its most recent review of Japan’s trade policies in March 2017 (available at https://www.wto.org/english/tratop_e/tpr_e/tp451_e.htm  ).

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

Business Facilitation

The Japan External Trade Organization (JETRO) is Japan’s investment promotion and facilitation agency.  JETRO operates six Invest Japan Business Support Centers (IBSCs) across Japan that provide consultation services on Japanese incorporation types, business registration, human resources, office establishment, and visa/residency issues.  Through its website (https://www.jetro.go.jp/en/invest/setting_up  /), the organization provides English-language information on Japanese business registration, visas, taxes, recruiting, labor regulations, and trademark/design systems and procedures in Japan.  While registration of corporate names and addresses can be completed through the internet, most business registration procedures must be completed in person. In addition, corporate seals and articles of incorporation of newly established companies must be verified by a notary.

According to the 2018 World Bank “Doing Business” Report, it takes 12 days to establish a local limited liability company in Japan.  JETRO reports that establishing a branch office of a foreign company requires one month, while setting up a subsidiary company takes two months.  While requirements vary according to the type of incorporation, a typical business must register with the Legal Affairs Bureau (Ministry of Justice), the Labor Standards Inspection Office (Ministry of Health, Labor, and Welfare), the Japan Pension Service, the district Public Employment Security Office, and the district tax bureau.  In April 2015, JETRO opened a one-stop business support center in Tokyo so that foreign companies can complete all necessary legal and administrative procedures in one location; however, this arrangement is not common throughout Japan. JETRO has announced its intent to develop a full online business registration system, but it was not operational as of March 2019.

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

Outward Investment

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

There are no restrictions on outbound investment; however, not all countries have a treaty with Japan regarding foreign direct investment (e.g., Iran).

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

As of March 2019, Japan had concluded 33 bilateral investment treaties (BITs):  Argentina, Armenia, Bangladesh, Cambodia, China, Colombia, Egypt, Hong Kong SAR, Iran, Iraq, Israel, Jordan, Kazakhstan, Kenya, South Korea, Kuwait, Laos,  Mongolia, Mozambique, Myanmar, Oman, Pakistan, Papua New Guinea, Peru, Russia, Saudi Arabia, Sri Lanka, Turkey, Ukraine, UAE, Uruguay, Uzbekistan, and Vietnam.  In addition, Japan has a trilateral investment agreement with China and South Korea. Japan also has 17 EPAs that include investment chapters (Association of Southeast Asian Nations, Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), European Union (EU), Singapore, Mexico, Malaysia, Philippines, Chile, Thailand, Brunei, Indonesia, Switzerland, Vietnam, India, Peru, Australia, and Mongolia)

On  December 30, 2018, Japan and ten other countries: Australia, Brunei, Canada, Chile, Malaysia, Mexico, Peru, New Zealand, Singapore, and Vietnam signed the CPTPP.  Australia, Canada, Japan, Mexico, New Zealand, Singapore, and Vietnam have already ratified the agreement. This agreement includes an investment chapter. The United States is not a signatory of this agreement.   The text of the agreement is available online (https://www.cas.go.jp/jp/tpp/naiyou/tpp_text_en.html#TPP11  

On February 1, 2019, the Japan – EU economic partnership agreement went into force.  This agreement includes a chapter on investment liberalization. The text of the agreement is available online (http://trade.ec.europa.eu/doclib/press/index.cfm?id=1684  ).

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

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

Japan has concluded 61 double taxation treaties that cover 71 countries and jurisdictions.  More information is available from the Ministry of Finance: http://www.mof.go.jp/english/tax_policy/tax_conventions/international_182.htm  

Transparency of the Regulatory System

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

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

International Regulatory Considerations

The Japanese Industrial Standards Committee (JISC), administered by the Ministry of Economy, Trade, and Industry (METI), plays a central role in maintaining the Japan Industrial Standard (JIS), the country’s main body of standards.  JISC aims to align JIS with international standards: in 2016, the organization estimated that 58 percent of Japan’s standards were harmonized with their international counterparts. Nonetheless, Japan maintains a large number of Japan-specific standards that can complicate efforts to introduce new products to the country.  Japan is a member of the WTO and notifies the WTO Committee on Technical Barriers to Trade (TBT) of proposed regulations.

Legal System and Judicial Independence

Japan is primarily a civil law country based on codified law.  The Constitution and the five major legal codes (Civil, Civil Procedure, Commercial, Criminal, and Criminal Procedure) form the legal base of the system.  Japan has a fully independent judiciary and a consistently applied body of commercial law. However, if you are arrested in Japan, even for a minor offense, you may be held in detention without bail for several months or more during the investigation and legal proceedings.  An Intellectual Property High Court was established in 2005 to expedite trial proceedings in intellectual property (IP) cases.  Foreign judgments are recognized and enforced by Japanese courts under certain conditions.

Laws and Regulations on Foreign Direct Investment

Major laws affecting foreign direct investment (FDI) into Japan include the Foreign Exchange and Foreign Trade Act, the Companies Act, and the Financial Instruments and Exchange Act.  The Japanese government actively encourages FDI into Japan and has sought over the past decades to ease legal and administrative burdens on foreign investors, including with major reforms to the Companies Act in 2005 and the Financial Instruments and Exchange Act in 2008.  The Japanese government has not promulgated any significant new laws or regulations related to FDI in the past year.

Competition and Anti-Trust Laws

The Japan Fair Trade Commission (JFTC) holds sole responsibility for enforcing Japanese competition and anti-trust law, although public prosecutors may file criminal charges related to a JFTC accusation.  The JFTC also reviews proposed “business combinations” (i.e. mergers, acquisitions, increased shareholdings, etc.) to ensure that transactions do not “substantially […] restrain competition in any particular field of trade.”   On March 12, 2019, a bill to revise the Anti-Monopoly Law for the first time in six years was submitted to the Diet, after obtaining Cabinet approval. The revisions include: (i) more flexible implementation of the leniency program; (ii) extension of maximum calculation period for penalty charges, from three to ten years; and (iii) increasing the cap for penal charges for obstruction of investigations, etc. If approved by the Diet, the law will take effect no later than 18 months after its promulgation. JFTC also plans to change its Commission rulesto introduce the Attorney-Client privilege, only in the limited scope of “unreasonable restraint of trade,” such as cartels. This revision would not require Diet approval.  The Government of Japan expects both changes to take effect by the end of 2020.

Expropriation and Compensation

In the post-war period since 1945, the Japanese government has not expropriated any enterprises, and the expropriation or nationalization of foreign investments in Japan is highly unlikely.

Dispute Settlement

ICSID Convention and New York Convention

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

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

Investor-State Dispute Settlement

There have been no major bilateral investment disputes in the past ten years.

International Commercial Arbitration and Foreign Courts

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

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

Bankruptcy Regulations

The World Bank 2018 “Doing Business” Report ranked Japan first worldwide for resolving insolvency.  An insolvent company in Japan can face liquidation under the Bankruptcy Act or take one of four roads to reorganization: the Civil Rehabilitation Law; the Corporate Reorganization Law; corporate reorganization under the Commercial Code; or an out-of-court creditor agreement.  The Civil Rehabilitation Law focuses on corporate restructuring in contrast to liquidation, provides stronger protection of debtor assets prior to the start of restructuring procedures, eases requirements for initiating restructuring procedures, simplifies and rationalizes procedures for the examination and determination of liabilities, and improves procedures for approval of rehabilitation plans.

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

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

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

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

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

Investment Incentives

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

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

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

Performance and Data Localization Requirements

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

Japan has no general restrictions on data storage.  Previously, separate and inconsistent privacy guidelines among Japanese ministries created a burdensome regulatory environment with regard to the storage and general treatment of personally identifiable information.  However, amendments to Japan’s Personal Information Protection Act, which came into full effect on May 30, 2017, transferred all enforcement powers from the individual ministries to an independent third party authority.  This Personal Information Protection Commission (PPC) issued guidelines for businesses on the protection of personal data and oversees implementation of the Personal Information Protection Act amendments, including new rules for the protection and electronic transmission of personal data.

Real Property

Secured interests in real property are recognized and enforced.  Mortgages are a standard lien on real property and must be recorded to be enforceable.  Japan has a reliable recording system. Property can be rented or leased but no sub-lease is legal without the owner’s consent.  In the World Bank’s 2018 “Doing Business” Report, Japan ranks 52 out of 190 economies in the category of Ease of Registering Property.  This is a result of the bureaucratic steps and fees associated with purchasing improved real property in Japan, even when it is already registered and has a clear title.  The required documentation for property purchases can be burdensome. Additionally, it is common practice in Japan for property appraisal values to be lower than the actual sale value, increasing the deposit required of the purchaser as the bank will provide financing only up to the appraisal value.

The Japanese Government is unsure of the titleholders to 4.1 million hectares of land in Japan, roughly 20 percent of all land and an area equivalent in size to the island of Kyushu, a government-sponsored study group noted in 2017.  According to a think tank expert on land use, 25 percent of all the land in Japan is registered to people who are no longer alive or otherwise unreachable. In 2015, the Ministry of Land, Infrastructure, Transportation and Tourism (MLIT) found that, of 400 randomly selected tracts of land, 46 percent was registered more than 30 years ago and 20 percent was registered more than 50 years ago.  A similar survey by the Ministry of Agriculture, Forestry and Fisheries (MAFF) found that 20 percent of farmland had a deceased owner and had not been re-registered. The government appointed a group of experts to study the matter, and the Unknown Land Owners Problem Study Group announced the results in a midterm report on June 26, 2017 and in a final report on December 13, 2017 (http://www.kok.or.jp/project/fumei.html  ).  It estimated that by 2040 the amount of land without titleholders will increase to 7.2 million hectares.  The primary reasons that land in Japan lacks a titleholder are: Japan’s population is declining; Japanese are increasingly moving from rural areas to urban areas; heirs are difficult to locate and there may be multiple heirs, especially if the deceased did not have children; and heirs do not re-register the land under their own names due to the cost of the initial and continuing taxes and the time and difficulty to change the title.  On June 6, 2018, the Japanese Diet enacted a special law to promote the use of unclaimed land in the public interest, as more and more properties are expected to become available amid the decreasing population.  The act goes into effect on June 1, 2019, and will enable the heads of local governments to authorize use of the unattended land for up to 10 years for public purposes such as community halls, parks, and health clinics. If the landowner appears and reclaims the land, the property will be returned after the term of the land-use contract ends.  If no one reclaims the land, the land-use period can be extended.

Virtually all the large banks, as well as some other private companies, offer loans to purchase property in Japan.

Intellectual Property Rights

Japan maintains a robust legal framework for intellectual property (IP) and provides reasonably strong enforcement to rights holders.  The U.S. Chamber of Commerce International IP Index ranked Japan’s intellectual property framework eighth worldwide in its 2019 report7.  While IP piracy remains a problem, its prevalence in Japan is similar to other developed markets.

Japan established a dedicated IP High Court in 2005 to speed decisions in intellectual property cases.  In 2017, cases before the court required an average of 7.3 months from commencement to disposition.  The number of cross-border IP-related litigations is increasing due to the globalization of business activities.  IP High Court judges have access to neutral technical advisors to aid in interpreting complex cases, but a constrained discovery system can limit the evidence that can be used at trial.  Typical awarded damages are considerably lower than those seen in the United States.

On December 8, 2017, Japan and the European Union (EU) finalized negotiations on an Economic Partnership Agreement, which includes provisions related to IP including geographic indications.  The agreement entered into force on February 1, 2019.

The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) which entered into force on December 30, 2018 harmonizes intellectual property rights among the 11 member nations (including Japan).  However, the CPTPP suspended a number of provisions considered U.S. priorities in the original Trans-Pacific Partnership Agreement (TPP) chapter on IP in areas such as patents and pharmaceuticals, copyright, Internet service provider (ISP) liability, and IP rights enforcement.

Japan’s Customs and Tariff Bureau publishes a yearly report on good seizures, available online in English (http://www.customs.go.jp/mizugiwa/chiteki/pages/g_001_e.htm  ).  Japan seized USD 13.5 billion yen (USD 121.5 million) of goods in 2018, mostly due to intellectual property infringement.  China is by far the largest source of seized goods in Japan, accounting for 94 percent of all seizure cases and 89 percent of all seized goods by value.

U.S. stakeholders have recently expressed concern that Japan’s pharmaceutical reimbursement system does not adequately reward innovation and provide incentives for companies to invest in the research and development of advanced medical devices and innovative pharmaceuticals. Specifically, there are concerns that recent policy changes to the Price Maintenance Premium put Japanese companies at an advantage over U.S. companies.

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

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

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

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

Japan does not restrict financial flows, and accepts obligations under International Monetary Fund (IMF) Article VIII.

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

Money and Banking System

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

The country’s three largest private commercial banks, often collectively referred to as the “megabanks,” are Mitsubishi UFJ Financial, Mizuho Financial, and Sumitomo Mitsui Financial.  Collectively, they hold assets approaching USD 7 trillion. Japan’s second largest bank by assets – with USD 2 trillion – is Japan Post Bank, a financial subsidiary of the Japan Post Group that is still majority state-owned.  Japan Post Bank offers services via 24,000 Japan Post office branches, at which Japan Post Bank services can be conducted, as well as Japan Post’s network of 29,100 ATMs nationwide.

A large number of foreign banks operate in Japan offering both banking and other financial services.  Like their domestic counterparts, foreign banks are regulated by the Japan Financial Services Agency. According to the IMF, there have been no observations of reduced or lost correspondent banking relationships in Japan.  There are 443 correspondent banking relationships available to the country’s central bank (main banks: 125; trust banks: 13; foreign banks: 50; credit unions: 251; other: 4).

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

Japan accounts for approximately half of the world’s trades of Bitcoin, the most prevalent blockchain currency (digital decentralized cryptographic currency).  Japanese regulators are encouraging “open banking” interactions between financial institutions and third-party developers of financial technology applications through application programming interfaces (“APIs”) when customers “opt-in” to share their information.  The government has set a target to have 80 banks adopt API standards by 2020.  Many of the largest banks are participating in various proofs of concept using blockchain technology.  While commercial banks have not yet formally adopted blockchain-powered systems for fund settlement, they are actively exploring options, and the largest banks have announced intentions to produce their own virtual currencies at some point.  The Bank of Japan is researching blockchain and its applications for national accounts, and established a “Fintech Center” to lead this effort.  The main banking regulator, the Japan Financial Services Agency (FSA) also encourages innovation with financial technologies, including sponsoring an annual conference on “fintech” in Japan.  In April 2017, amendments to the Act on Settlements of Funds went into effect, permitting the use of virtual currencies as a form of payment in Japan, but virtual currency is still not considered legal tender (e.g., commercial vendors may opt to accept virtual currencies for transactional payments, though virtual currency cannot be used as payment for taxes owed to the government).  The law also requires the registration of virtual currency exchange businesses.  There are currently 19 registered virtual currency exchanges; 1 other exchange operates while its registration is pending with FSA.

Foreign Exchange and Remittances

Foreign Exchange Policies

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

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

Remittance Policies

Investment remittances are freely permitted.

Sovereign Wealth Funds

Japan does not operate a sovereign wealth fund.

Japan has privatized most former state-owned enterprises (SOEs).  Under the Postal Privatization Law, privatization of Japan Post group started in October 2007 by turning the public corporation into stock companies.  The stock sale of the Japan Post Holdings Co. and its two financial subsidiaries, Japan Post Insurance (JPI) and Japan Post Bank (JPB), began in November 2015 with an initial public offering that sold 11 percent of available shares in each of the three entities.  The postal service subsidiary, Japan Post Co., will remain a wholly owned subsidiary of Japan Post Holdings (JPH). The Japanese government conducted an additional public offering of stock in September 2017, reducing the government ownership in the holding company to approximately 57 percent.  There were no additional offerings of the stock in the bank or insurance subsidiaries: JPH currently owns 88.99 percent of the banking subsidiary and 89.00 percent of the insurance subsidiary. Follow-on sales of shares in the three companies will take place over time, as the Postal Privatization Law requires the government to sell a majority share (up to two-thirds of all shares) in JPH, and JPH to sell all shares of JPB and JPI, as soon as possible.  The Ministry of Finance announced in April 2019 that the government will sell additional shares of JPH. Media reported that as a result of the third sale of the government JPH share holdings possibly to be implemented as early as this fall, its holdings would account for slightly above one-third of outstanding shares, the lower limit specified in the Postal Privatization Law.

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

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

Privatization Program

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

The liberalization of Japan’s power sector, now more than 25 years in the making, took a step forward in April 2016 with the full liberalization of the retail sector. This has led to an influx of new electricity retailers, though the generation and transmission of electricity remain in the hands of the legacy utility companies, which have been privatized.  The liberalization is expected to come to a head with the legal “unbundling” of the monopolies by 2020.

American energy companies have reported increased opportunities in this sector, but the former utility monopolies still have immense power over the regulatory regime, market, and infrastructure.  For example, there is a wholesale market on which new retailers can buy electricity to sell to their customers, but the legacy utilities, which control most of the generation, sell very little power into that market.  This leaves new retailers in a supply crunch. Also, new entrants in power generation are given limited access to the power grid because the system is already at capacity with baseload generation from the legacy firms.

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

Japanese corporate governance has been criticized for failing to sufficiently prioritize shareholder interests, due in part due to a lack of independent corporate directors and to cross-shareholding agreement among firms.  The Abe government has made corporate governance reform a core element of its economic agenda with the goal to reinvigorate Japan’s business sector by encouraging a stronger focus by management on earnings and shareholder value.

Progress has been made through efforts by the Financial Services Agency (FSA) and Tokyo Stock Exchange (TSE) to introduce non-binding reforms through changes to Japan’s Companies Act in 2014 and to adopt of a Corporate Governance Code (CSR) by in 2015.  Together with the Stewardship Code for institutional investors launched by the FSA in 2014, these initiatives encourage companies to put cash stockpiles to better use by increasing investment, raising dividends, and taking on more risk to boost Japan’s growth.  Positive results of these efforts are evidenced by rising shareholder returns, unwinding of cross-shareholdings, and increasing numbers of independent board members.  Moreover, more than 90 percent of listed firms now have two or more independent directors.

Awareness of corporate social responsibility among both producers and consumers in Japan is high, and foreign and local enterprises generally follow accepted CSR principles.  Business organizations also actively promote CSR. Japan encourages adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.

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

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

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

Japan has ratified the OECD Anti-Bribery Convention, which bans bribing foreign government officials.  However, there are continuing concerns over the effectiveness of Japan’s anti-bribery enforcement efforts, particularly the very small number of cases prosecuted by Japanese authorities compared to other OECD members.

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

Resources to Report Corruption

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

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

Japan currently faces one of the tightest labor markets in decades, in part due to demographic decline, with a shortage of workers in sectors such as information services, hospitality, construction, transportation, maintenance, and security.  Unemployment is near a 25 year low, at 2.3 percent in March 2019. Traditionally, Japanese workers have been classified as either regular or non-regular employees. Companies recruit regular employees directly from schools or universities and provide an employment contract with no fixed duration, effectively guaranteeing them lifetime employment.  Non-regular employees are hired for a fixed period. Companies have increasingly relied on non-regular workers to fill short-term labor requirements and to reduce labor costs.

Japan has a robust structure for collective bargaining in which roughly 17 percent of workers are represented by unions active in nearly every industry, including textiles.  The government provides benefits for workers laid off for economic reasons through a national employment insurance program. Some National Strategic Special Zones allow for special employment of foreign workers in certain fields, but those and all other foreign workers are  subject to the same national labor laws and standards as Japanese workers. Japan has comprehensive labor dispute resolution mechanisms, including labor tribunals, mediation, and civil lawsuits. A Labor Standards Bureau oversees the enforcement of labor standards through a national network of Labor Bureaus and Labor Standards Inspection Offices.

The number of foreign workers is rising, but at just over 1.46 million as of October 2018, they still represent a fraction of Japan’s nearly 68 million-worker labor force.  The Japanese government has made additional changes to labor and immigration laws to facilitate the entry of larger numbers of skilled foreign workers in selected sectors. For example, the Immigration Control and Refugee Recognition Law was revised in 2014 to improve the “Points System” for highly skilled foreign professionals, easing the requirements for residency.  Special economic zones may permit foreign workers in certain categories, such as domestic employees and agricultural workers.

The Japanese government has also taken steps to expand the Technical Intern Training Program (TITP).  Originally intended as a skills-transfer program for workers from developing countries, TITP is currently used to address immediate labor shortages in specific sectors, such as construction and agriculture.  In 2014, the Japanese government expanded TITP in the construction sector through FY2020, the year of the Tokyo summer Olympics, extending the period of stay for construction workers under TITP from three years to five, and permitting re-entry of former interns and trainees for another two to three years.  In November 2017, the legislation that passed the Diet in November 2016 went into effect, which extended the period of stay under TITP to five years for more categories of workers, and strengthened supervision of the program and companies to deter human rights abuses. At the same time, nursing care service was added to the list of work categories permitted for TITP, and the government expanded oversight to address abuses of the program.

To address Japan’s acute labor shortage in specific industries, the Japanese government revised the Immigration Control and Refugee Recognition Law again in December 2018, to create new visa categories for lower-skilled foreign workers.  This marks a major turning point in Japan’s policy on foreign workers, which encouraged the entry of highly-skilled professionals, but had no visa category specifically for low-skilled foreign workers.  Ministerial Ordinances, Cabinet Orders, and Operating Guidelines were released in March 2019, laying out details of the program. Fourteen industries have been identified to be suffering from acute labor shortage, in which lower-skilled foreigners will be permitted to work under the “Specific Skills” status of residence.   The new system began on April 1, 2019. The Japanese government estimates that approximately 47,550 foreign workers will be accepted within the first year, and 345,000 will be accepted within five years.

Also, to address the labor shortage resulting from population decline and a rapidly aging society, Japan’s government has pursued measures to increase participation and retention of older workers and women in the labor force.  A law that went into force in April 2013 requires companies to introduce employment systems allowing employees reaching retirement age (generally set at 60) to continue working until age 65. Since 2013, the government has committed to increasing women’s economic participation as well.  The Women’s Empowerment Law passed in 2015 requires large companies to disclose statistics about the hiring and promotion of women, and to adopt action plans to improve their numbers. In the six years under the second Abe Administration since he became Prime Minister in 2012, approximately 3 million women have joined the labor force.

On June 29, 2018, the Diet passed the Workstyle Reform package bills.  The legislation revised eight labor laws, including the Labor Standards Law and Labor Contract Law.  The package introduces a legal cap on overtime work at less than 100 hour per month and 720 hours per year with penalties for violators, such as imprisonment of up to six months or fines of up to 300,000 yen.  A key provision, however, is the so-called “White Collar Exemption,” originally submitted to the Diet in 2015, which would implement a merit-based wage system for certain highly-skilled professionals and exempt firms from paying such workers overtime or premium overtime pay for late night, weekend, or holiday work.  In addition, an “equal-pay-for-equal-work” provision seeks to reduce compensation gaps between regular and non-regular employees.  Most measures took effect in April 1, 2019, although equal-pay provisions would be implemented from 2020.  The package offers some flexibility on implementation for small and medium-sized enterprises (SMEs).

Although independent labor unions play a role in the annual determination of wage scales throughout the economy, that role has been declining along with union membership.  Union members today make up only 17 percent of the labor force, down from 25 percent in 1990.

Japan has ratified 48 International Labor Organization (ILO) Conventions (including six of the eight core Conventions).  As part of its agreement in principle on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) with 10 other trading partners, Japan agreed to adopt the fundamental labor rights stated in the ILO Declaration including freedom of association and the recognition of the right to collective bargaining, the elimination of forced labor and employment discrimination, and the abolition of child labor.  CPTPP entered force in Japan on December 30, 2018.

Overseas Private Investment Corporation (OPIC) insurance and finance programs are not available in Japan. However, OPIC and its Japanese counterpart, Japan Bank for International Cooperation, are supporting opportunities for U.S. investors to partner with Japanese investors in third countries.

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

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

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

*2017 Nominal GDP data (Calendar Year Data) from “Annual Report on National Accounts for 2017”, Economic and Social Research Institute, Cabinet Office, Japanese Government, released on December 25, 2018  . (Note: uses 2017 yearly average exchange rate of 112.2 Yen to 1 U.S. Dollar)

** 2017 FDI data from “JETRO Invest Japan Report 2018 (Summary) and FDI stock, Japan’s Outward and Inward Foreign Direct Investment,” Japan External Trade Organization (JETRO).

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

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Michael Cavanaugh
Economic Section
U.S. Embassy Tokyo
1-10-5 Akasaka, Minato-ku, Tokyo 107-8420
Japan
+81 03-3224-5000

Policies Towards Foreign Direct Investment

The UK encourages foreign direct investment.  With a few exceptions, the government does not discriminate between nationals and foreign individuals in the formation and operation of private companies.  The Department for International Trade actively promotes direct foreign investment, and prepares market information for a variety of industries. U.S. companies establishing British subsidiaries generally encounter no special nationality requirements on directors or shareholders. Once established in the UK, foreign-owned companies are treated no differently from UK firms.   The British Government is a strong defender of the rights of any British-registered company, irrespective of its nationality of ownership.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign ownership is limited in only a few national security-sensitive companies, such as Rolls Royce (aerospace) and BAE Systems (aircraft and defense).  No individual foreign shareholder may own more than 15 percent of these companies. Theoretically, the government can block the acquisition of manufacturing assets from abroad by invoking the Industry Act 1975, but it has never done so in practice.  Investments in energy and power generation require environmental approvals. Certain service activities (like radio and land-based television broadcasting) are subject to licensing. The Enterprise Act of 2002 extends powers to the UK government to intervene in mergers and acquisitions which might give rise to national security implications and into which they would not otherwise be able to intervene.

The UK requires that at least one director of any company registered in the UK must be ordinarily resident in the UK.  The UK, as a member of the Organization for Economic Cooperation and Development (OECD), subscribes to the OECD Codes of Liberalization, committed to minimizing limits on foreign investment.

While the UK does not have a formalized investment review body to assess the suitability of foreign investments in national security sensitive areas, an ad hoc investment review process does exist and is led by the relevant government ministry with regulatory responsibility for the sector in question (e.g., the Department for Business, Energy, and Industrial Strategy who would have responsibility for review of investments in the energy sector).  To date, U.S. companies have not been the target of these ad hoc reviews. The UK is currently considering revisions to its national security review process related to foreign direct investment. (https://www.gov.uk/government/consultations/national-security-and-infrastructure-investment-review ).

The Government has proposed to amend the turnover threshold and share of supply tests within the Enterprise Act 2002. This is to allow the Government to examine and potentially intervene in mergers that currently fall outside the thresholds in two areas: (i) the dual use and military use sector, (ii) parts of the advanced technology sector. For these areas only, the Government proposes to lower the turnover threshold from £70 million (USD 92 million) to £1 million (USD 1.3 million) and remove the current requirement for the merger to increase the share of supply to or over 25 percent.

Other Investment Policy Reviews

The Economist’s “Intelligence Unit”, World Bank Group’s “Doing Business 2018”, and the OECD’s “Economic Forecast Summary (May 2019) have current investment policy reports for the United Kingdom:

• http://country.eiu.com/united-kingdom 
• http://www.doingbusiness.org/data/exploreeconomies/united-kingdom/ 
• http://www.oecd.org/economy/united-kingdom-economic-forecast-summary.htm 

Business Facilitation

The UK government seeks to facilitate investment by offering overseas companies access to widely integrated markets.  Proactive policies encourage international investment through administrative efficiency in order to promote innovation and achieve sustainable growth.  The online business registration process is clearly defined, though some types of company cannot register as an overseas firm in the UK, including partnerships and unincorporated bodies. Registration as an overseas company is only required when it has some degree of physical presence in the UK.  After registering a business with the UK government body, named Companies House, overseas firms must register to pay corporation tax within three months. The process of setting up a business in the UK requires as few as thirteen days, compared to the European average of 32 days, which puts the country in first place in Europe and sixth place in the world for ease of establishing a business.  As of April 2016, companies have to declare their Persons of Significant Control (PSC’s).  This change in policy recognizes that individuals other than named directors can have significant influence on a company’s activity and that this information should be transparent.  More information is available at this link: https://www.gov.uk/government/publications/guidance-to-the-people-with-significant-control-requirements-for-companies-and-limited-liability-partnerships .  Companies House maintains a free, publicly searchable directory, available at this link: https://www.gov.uk/get-information-about-a-company .  

The UK offers a welcoming environment to foreign investors, with foreign equity ownership restrictions in only a limited number of sectors covered by the Investing Across Sectors indicators.  As in all other EU member countries, foreign equity ownership in the air transportation sector is limited to 49 percent for investors from outside of the European Economic Area (EEA). Furthermore, the Industry Act (1975) enables the UK government to prohibit transfer to foreign owners of 30 percent or more of important UK manufacturing businesses, if such a transfer would be contrary to the interests of the country.  While these provisions have never been used in practice, they are still included in the Investing Across Sectors indicators, as these strictly measure ownership restrictions defined in the laws.

• https://invest.great.gov.uk/int/ 
• https://www.gov.uk/government/organisations/department-for-international-trade 
• https://www.gov.uk/set-up-business 
• https://www.gov.uk/topic/company-registration-filing/starting-company 
• http://www.doingbusiness.org/data/exploreeconomies/united-kingdom/starting-a-business 

Special Section on the British Overseas Territories and Crown Dependencies

The British Overseas Territories (BOTs) comprise Anguilla, British Antarctic Territory, Bermuda, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands, Gibraltar, Montserrat, Pitcairn Islands, St. Helena, Ascension and Tristan da Cunha, Turks and Caicos Islands, South Georgia and South Sandwich Islands, and Sovereign Base Areas on Cyprus.  The BOTs retain a substantial measure of responsibility for their own affairs. Local self-government is usually provided by an Executive Council and elected legislature. Governors or Commissioners are appointed by the Crown on the advice of the British Foreign Secretary, and retain responsibility for external affairs, defense, and internal security. However, the UK imposed direct rule on the Turks and Caicos Islands in August 2009 after an inquiry found evidence of corruption and incompetence.  Its Premier was removed and its constitution was suspended. The UK restored Home Rule following elections in November 2012.

Many of the territories are now broadly self-sufficient.  However, the UK’s Department for International Development (DFID) maintains development assistance programs in St. Helena, Montserrat, and Pitcairn.  This includes budgetary aid to meet the islands’ essential needs and development assistance to help encourage economic growth and social development in order to promote economic self-sustainability.  In addition, all other BOTs receive small levels of assistance through “cross-territory” programs for issues such as environmental protection, disaster prevention, HIV/AIDS and child protection. The UK also lends to the BOTs as needed, up to a pre-set limit, but assumes no liability for them if they encounter financial difficulty.

Seven of the BOTs have financial centers:  Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Montserrat, and the Turks and Caicos Islands.  These Territories have committed to the OECD’s Common Reporting Standard (CRS) for the automatic exchange of taxpayer financial account information.  They are already exchanging information with the UK, and began exchanging information with other jurisdictions under the CRS from September 2017. 

The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes has rated Anguilla as “partially compliant” with the internationally agreed tax standard.  Although Anguilla sought to upgrade its rating in 2017, it still remains at “partially compliant” as of April 2019. The Global Forum has rated the other six territories as “largely compliant.”  Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar and the Turks and Caicos Islands have also committed in reciprocal bilateral arrangements with the UK to hold beneficial ownership information in central registers or similarly effective systems, and to provide UK law enforcement authorities with near real-time access to this information.  These arrangements came into effect in June 2017. 

Anguilla:  Anguilla is a neutral tax jurisdiction.  There are no income, capital gains, estate, profit or other forms of direct taxation on either individuals or corporations, for residents or non-residents of the jurisdiction.  The territory has no exchange rate controls. Non-Anguillan nationals may purchase property, but the transfer of land to an alien includes a 12.5 percent tax.

British Virgin Islands:  The government of the British Virgin Islands welcomes foreign direct investment and offers a series of incentive packages aimed at reducing the cost of doing business on the islands.  This includes relief from corporation tax payments over specific periods but companies must pay an initial registration fee and an annual license fee to the BVI Financial Services Commission.  Crown land grants are not available to non-British Virgin Islanders, but private land can be leased or purchased following the approval of an Alien Land Holding License. Stamp duty is imposed on transfer of real estate and the transfer of shares in a BVI company owning real estate in the BVI at a rate of 4 percent for belongers and 12 percent for non-belongers.  There is no corporate income tax, capital gains tax, branch tax, or withholding tax for companies incorporated under the BVI Business Companies Act. Payroll tax is imposed on every employer and self-employed person who conducts business in BVI. The tax is paid at a graduated rate depending upon the size of the employer. The current rates are 10 percent for small employers (those which have a payroll of less than USD 150,000, a turnover of less than USD 300,000 and fewer than 7 employees) and 14 percent for larger employers. Eight percent of the total remuneration is deducted from the employee, the remainder of the liability is met by the employer. The first USD 10,000 of remuneration is free from payroll tax.

Cayman Islands:  There are no direct taxes in the Cayman Islands.  In most districts, the government charges stamp duty of 7.5 percent on the value of real estate at sale; however, certain districts, including Seven Mile Beach, are subject to a rate of nine percent.  There is a one percent fee payable on mortgages of less than KYD 300,000, and one and a half percent on mortgages of KYD 300,000 or higher. There are no controls on the foreign ownership of property and land.  Investors can receive import duty waivers on equipment, building materials, machinery, manufacturing materials, and other tools.

Falkland Islands:  Companies located in the Falkland Islands are charged corporation tax at 21 percent on the first GBP one million and 26 percent for all amounts in excess of GBP one million.  The individual income tax rate is 21 percent for earnings below USD 15,694 (GBP 12,000) and 26 percent above this level.

Gibraltar:  The government of Gibraltar encourages foreign investment.  Gibraltar has a buoyant economy with a stable currency and few restrictions on moving capital or repatriating dividends.  The corporate income tax rate is 20 percent for utility, energy, and fuel supply companies, and 10 percent for all other companies.  There are no capital or sales taxes. Gibraltar is currently a part of the EU and receives EU funding for projects that improve the territory’s economic development.

Montserrat:  The government of Montserrat welcomes new private foreign investment.  Foreign investors are permitted to acquire real estate, subject to the acquisition of an Alien Land Holding license which carries a fee of five percent of the purchase price.  The government also imposes stamp and transfer fees of 2.6 percent of the property value on all real estate transactions. Foreign investment in Montserrat is subject to the same taxation rules as local investment, and is eligible for tax holidays and other incentives.  Montserrat has preferential trade agreements with the United States, Canada, and Australia. The government allows 100 percent foreign ownership of businesses but the administration of public utilities remains wholly in the public sector.

St. Helena:  The island of St. Helena is open to foreign investment and welcomes expressions of interest from companies wanting to invest.  Its government is able to offer tax based incentives which will be considered on the merits of each project – particularly tourism projects.  All applications are processed by Enterprise St. Helena, the business development agency.

Pitcairn Islands:  The Pitcairn Islands have approximately 50 residents, with a workforce of approximately 29 employed in 10 full-time equivalent roles.  The territory does not have an airstrip or safe harbor. Residents exist on fishing, subsistence farming, and handcrafts.

The Turks and Caicos Islands:  The islands operate an “open arms” investment policy.  Through the policy, the government commits to a streamlined business licensing system, a responsive immigration policy to give investment security, access to government-owned land under long-term leases, and a variety of duty concessions to qualified investors.  The islands have a “no tax” status, but property purchasers must pay a stamp duty on purchases over USD 25,000. Depending on the island, the stamp duty rate may be up to 6.5 percent for purchases up to USD 250,000, eight percent for purchases USD 250,001 to USD 500,000, and 10 percent for purchases over USD500,000.

The Crown Dependencies:

The Crown Dependencies are the Bailiwick of Jersey, the Bailiwick of Guernsey and the Isle of Man.  The Crown Dependencies are not part of the UK but are self-governing dependencies of the Crown. They have their own directly elected legislative assemblies, administrative, fiscal and legal systems and their own courts of law. The Crown Dependencies are not represented in the UK Parliament.

Jersey’s standard rate of corporate tax is zero percent.  The exceptions to this standard rate are financial service companies, which are taxed at 10 percent, utility companies, which are taxed at 20 percent, and income specifically derived from Jersey property rentals or Jersey property development, taxed at 20 percent. VAT is not applicable in Jersey as it is not part of the EU VAT tax area.

Guernsey has a zero percent rate of corporate tax.  Some exceptions include some specific banking activities, taxed at 10 percent, utility companies, which are taxed at 20 percent, Guernsey residents’ assessable income is taxed at 20 percent, and income derived from land and buildings is taxed at 20 percent

The Isle of Man’s corporate standard tax is zero percent.  The exceptions to this standard rate are income received from banking business, which is taxed at 10 percent and income received from land and property in the Isle of Man which is taxed at 20 percent. In addition, a 10 percent tax rate also applies to companies who carry on a retail business in the Isle of Man and have taxable income in excess of £500,000 from that business.  VAT is applicable in the Isle of Man as it is part of the EU customs territory.

This tax data is current as of April 2019.  

Outward Investment

The UK is one of the largest outward investors in the world, often protected through Bilateral Investment Treaties (BITs), which have been concluded with many countries.  The UK’s international investment position abroad (outward investment) increased from GBP 1,696.5 billion in 2017 to GBP 1,713.3 billion in 2018. By the end of 2018 the UK’s stock of outward FDI was GBP 1,713 billion, a 52 rise percent since 2002.  The main destination for UK outward FDI is the United States, which accounted for approximately 23 percent of UK outward FDI stocks at the end of 2017. Other key destinations include the Netherlands, Luxembourg, France, and Ireland which, together with the United States, account for a little under half of the UK’s outward FDI stock.

Europe and the Americas remain the dominant areas for British FDI positions abroad, accounting for 16 of the top 20 destinations for total UK outward FDI.  The UK’s international investment position within the Americas was GBP 401.9 billion in 2017. This is the third largest recorded value in the time series since 2006 for the Americas.  The United States, at GBP 329.3 billion, continued to be the largest destination for UK international investment positions abroad within the Americas in 2017.

The United States and UK have enjoyed a Commerce and Navigation Treaty since 1815 which guarantees national treatment of U.S. investors.  A Bilateral Tax Treaty specifically protects U.S. and UK investors from double taxation. The UK has its own bilateral tax treaties with more than 100 countries and a network of about a dozen double taxation agreements. The UK has concluded 105 Bilateral Investment Treaties (BITs), which are known in the UK as Investment Promotion and Protection Agreements.  These include: Albania, Angola, Antigua and Barbuda, Argentina, Armenia, Azerbaijan, Bahrain, Bangladesh, Barbados, Belarus, Belize, Benin, Bolivia, Bosnia and Herzegovina, Brazil, Bulgaria, Burundi, Cameroon, Chile, China, Colombia, Congo, Costa Rica, Côte d’Ivoire, Croatia, Cuba, Czech Republic, Dominica, Ecuador, Egypt, El Salvador, Estonia, Ethiopia, Gambia, Georgia, Ghana, Grenada, Guyana, Haiti, Honduras, Hong Kong, China SAR, Hungary, Indonesia, Jamaica, Jordan, Kazakhstan, Kenya, Korea Republic of, Kuwait, Kyrgyzstan, Laos People’s Democratic Republic, Latvia, Lebanon, Lesotho, Libya, Lithuania, Malaysia, Malta, Mauritius, Mexico, Moldova, Mongolia, Morocco, Mozambique, Nepal, Nicaragua, Nigeria, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Qatar, Romania, Russian Federation, Saint Lucia, Senegal, Serbia, Sierra Leone, Singapore, Slovakia, Slovenia, Sri Lanka, Swaziland, Tanzania, United Republic of, Thailand, Tonga, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Vanuatu, Venezuela, Bolivarian Republic of, Vietnam, Yemen, Zambia, and Zimbabwe.

For a complete current list, including actual treaty texts, see:  http://investmentpolicyhub.unctad.org/IIA/CountryBits/221#iiaInnerMenu 

Transparency of the Regulatory System

U.S. exporters and investors generally find little difference between the United States and UK in the conduct of business.  The regulatory system provides clear and transparent guidelines for commercial engagement. Common law prevails in the UK as the basis for commercial transactions, and the International Commercial Terms (INCOTERMS) of the International Chambers of Commerce are accepted definitions of trading terms.  For accounting standards and audit provisions, firms in the UK currently use the International Financial Reporting Standards (IFRS) set by the International Accounting Standards Board (IASB) and approved by the European Commission. The UK’s Accounting Standards Board provides guidance to firms on accounting standards and works with the IASB on international standards.

Statutory authority over prices and competition in various industries is given to independent regulators, for example Ofcom, Ofwat, Ofgem, the Office of Fair Trading (OFT), the Rail Regulator, and the Prudential Regulatory Authority (PRA).  The PRA was created out of the dissolution of the Financial Services Authority (FSA) in 2013. The PRA reports to the Financial Policy Committee (FPC) in the Bank of England. The PRA is responsible for supervising the safety and soundness of individual financial firms, while the FPC takes a systemic view of the financial system and provides macro-prudential regulation and policy actions.  The Consumer and Markets Authority (CMA) acts as a single integrated regulator focused on conduct in financial markets. The Financial Conduct Authority (FCA) is a regulatory enforcement mechanism designed to address financial and market misconduct through legally reviewable processes. These regulators work to protect the interests of consumers while ensuring that the markets they regulate are functioning efficiently.  Most laws and regulations are published in draft for public comment prior to implementation. The FCA maintains a free, publicly searchable register of their filings on regulated corporations and individuals here: https://register.fca.org.uk/ .

The UK government publishes regulatory actions, including draft text and executive summaries, on the Department for Business, Energy & Industrial Strategy webpage listed below.  The current policy requires the repeal of two regulations for any new one in order to make the business environment more competitive.

The primary difference between the regulatory environment in the UK and the United States is that so long as the UK is a member of the European Union, it is mandated to comply with and enforce EU regulations and directives.  The U.S. government has expressed concerns about the degree of transparency and accountability in the EU regulatory process. The extent to which the UK will deviate from the EU regulatory regime after the UK withdraws from the EU is unknown at this time.

• https://www.gov.uk/government/policies/business-regulation 
• https://www.gov.uk/government/organisations/regulatory-delivery 

International Regulatory Considerations

The UK’s withdrawal from the EU may result in an extended period of regulatory uncertainty across the economy as the UK determines the extent to which it will maintain and enforce the current EU regulatory regime or deviate towards new regulations in any particular sector .  The UK is an independent member of the WTO, and actively seeks to comply with all its WTO obligations.

Legal System and Judicial Independence

The UK is a common law country.  UK business contracts are legally enforceable in the UK, but not in the United States or other foreign jurisdictions.  International disputes are resolved through litigation in the UK Courts or by arbitration, mediation, or some other alternative dispute resolution (ADR) method.  The UK has a long history of applying the rule of law to business disputes. The current judicial process remains procedurally competent, fair, and reliable, which helps position London as an international center for dispute resolution with over 10,000 cases filed per annum.

Laws and Regulations on Foreign Direct Investment

There is no specific statute governing or restricting foreign investment in the UK.  The procedure for establishing a company in the UK is identical for British and foreign investors.  No approval mechanisms exist for foreign investment, apart from the ad hoc national security process outlined in Section 1.  Foreigners may freely establish or purchase enterprises in the UK, with a few limited exceptions, and acquire land or buildings.  The UK is currently reviewing its procedures and considering new rules for restricting foreign investment in those sectors of the economy with higher risk for adversely impacting national security.   

The practice of multinational enterprises structuring operations to minimize taxes, referred to as ‘tax avoidance’ in the UK, has been a controversial political issue and subject to investigations by the UK Parliament and EU authorities.  Both foreign and UK firms remain subject to the same tax laws. Foreign investors may have access to certain EU and UK regional grants and incentives designed to attract industry to areas of high unemployment.

In 2015, the UK flattened its structure of corporate tax rates.  The UK currently taxes corporations at a flat rate of 19 percent, with marginal tax relief granted for companies with profits falling between USD 391,000 (GBP 300,000) and 1.96 million (GBP 1.5 million).  Tax deductions are allowed for expenditure and depreciation of assets used for trade purposes. These include machinery, plant, industrial buildings, and assets used for research and development. A special rate of 20 percent is given to unit trusts and open-ended investment companies.  There are different Corporation Tax rates for companies that make profits from oil extraction or oil rights in the UK or UK continental shelf. These are known as ‘ring fence’ companies. Small ‘ring fence’ companies are taxed at a rate of 19 percent for profits up to USD 391,000 (GBP 300,000), and 30 percent for profits over USD 391,000 (GBP 300,000).

UK citizens also make mandatory payments of about 12 percent of income into the National Insurance system, which funds social security and retirement benefits.  The UK requires non-domiciled residents of the UK to either pay tax on their worldwide income or the tax on the relevant part of their remitted foreign income being brought into the UK.  If they have been resident in the UK for seven tax years of the previous nine, and they choose to pay tax only on their remitted earnings, they may be subject to an additional charge of USD 39,141 (GBP 30,000).  If they have been resident in the UK for 12 of the last 14 tax years, they may be subject to an additional charge of USD 78,282 (GBP 60,000).

The Scottish Parliament has the legal power to increase or decrease the basic income tax rate in Scotland, currently 20 percent, by a maximum of three percentage points.  The Scottish Government has been opposed to increasing tax rates, mainly because any financial advantage gained by an increase in taxes would be offset by the need to establish a new administrative body to manage the new revenue.

For guidance on laws and procedures relevant to foreign investment in the UK, follow the link below:

https://www.gov.uk/government/collections/investment-in-the-uk-guidance-for-overseas-businesses 

All USD conversions based on spot exchange rate as of April 08, 2019.

Competition and Anti-Trust Laws

UK competition law contains both British and European elements.  The Competition Act 1998 and the Enterprise Act 2002 are the most important statutes for cases with a purely national dimension.  However, if the impact of a business’ conduct crosses borders, EU law applies. Section 60 of the Competition Act 1998 provides that UK rules are to be applied in line with European jurisprudence.

The Companies Act of 1985, administered by the Department for Business, Entrepreneurship, Innovation and Skills (BEIS), governs ownership and operation of private companies.  The Companies Act of 2006 replaced the 1985 Act, simplifying existing rules.

BEIS uses a transparent code of practice that is fully in accord with EU merger control regulations, in evaluating bids and mergers for possible referral to the Competition Commission.  The Competition Act of 1998 strengthened competition law and enhanced the enforcement powers of the Office of Fair Trading (OFT). Prohibitions under the act relate to competition-restricting agreements and abusive behavior by entities in dominant market positions.  The Enterprise Act of 2002 established the OFT as an independent statutory body with a Board, and gives it a greater role in ensuring that markets work well. Also, in accordance with EU law, if deemed in the public interest, transactions in the media or that raise national security concerns may be reviewed by the Secretary of State of BEIS.

In 2014, the Competition Commission and the OFT merged into a single Non Departmental Government Body: the Competition and Markets Authority.  This new body is responsible for investigating mergers that could restrict competition, conducting market studies and investigations where there may be competition problems, investigating breaches of EU and UK prohibitions, initiating criminal proceedings against individuals who commit cartel offenses, and enforcing consumer protection legislation.  This body is unlikely to alter UK competition policy.

UK competition law has three main tasks: 1) prohibiting agreements or practices that restrict free trading and competition between business entities (this includes in particular the repression of cartels); 2) banning abusive behavior by a firm dominating a market, or anti-competitive practices that tend to lead to such a dominant position (practices controlled in this way may include predatory pricing, tying, price gouging, refusal to deal and many others); and 3) supervising the mergers and acquisitions of large corporations, including some joint ventures.  Transactions that are considered to threaten the competitive process can be prohibited altogether, or approved subject to “remedies” such as an obligation to divest part of the merged business or to offer licenses or access to facilities to enable other businesses to continue competing.

The Competition and Markets Authority (CMA) is the primary regulatory body for competition law enforcement.  It was created through the merger of the Office of Fair Trading (OFT) with the Competition Commission through the Enterprise and Regulatory Reform Act 2013.  Competition law is closely connected with law on deregulation of access to markets, state aids and subsidies, the privatization of state owned assets, and the establishment of independent sector regulators.

Although the OFT and the Competition Commission have general review authority, specific “watchdog” agencies such as Ofgem (the electricity and gas markets regulation authority), Ofcom (the communications regulation authority), and Ofwat (the water services regulation authority) are also charged with seeing how the operation of those specific markets work.

Expropriation and Compensation

The OECD, of which the UK is a member, states that when a government expropriates property, compensation should be timely, adequate and effective.  In the UK, the right to fair compensation and due process is uncontested and is reflected in all international investment agreements. Expropriation of corporate assets or the nationalization of industry requires a special act of Parliament.  A number of key UK banks became subject to full or part-nationalization from early 2008 as a response to the global financial crisis and banking collapse. The first bank to become nationalized was Northern Rock in February 2008, and by March 2009 the UK Treasury had taken a 65 percent stake in Lloyds Banking Group and a 68 percent stake in the Royal Bank of Scotland (RBS).  In the event of nationalization, the British government follows customary international law by providing prompt, adequate, and effective compensation.

Dispute Settlement

As a member of the World Bank-based International Center for Settlement of Investment Disputes (ICSID), the UK accepts binding international arbitration between foreign investors and the State.  As a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the UK provides local enforcement on arbitration judgments decided in other signatory countries.

London is a thriving center for the resolution of international disputes through arbitration under a variety of procedural rules such as those of the London Court of International Arbitration, the International Chamber of Commerce, the Stockholm Chamber of Commerce, the American Arbitration Association International Centre for Dispute Resolution, and others.  Many of these arbitrations involve parties with no connection to the jurisdiction, but who are drawn to the jurisdiction because they perceive it to be a fair, neutral venue with an arbitration law and courts that support efficient resolution of disputes. They also choose London-based arbitration because of the general prevalence of the English language and law in international commerce.  A wide range of contractual and non-contractual claims can be referred to arbitration in this jurisdiction including disputes involving intellectual property rights, competition, and statutory claims. There are no restrictions on foreign nationals acting as arbitration counsel or arbitrators in this jurisdiction. There are few restrictions on foreign lawyers practicing in the jurisdiction as evidenced by the fact that over 200 foreign law firms have offices in London.

ICSID Convention and New York Convention

The UK is a member of the International Center for Settlement of Investment Disputes (ICSID) and a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.  The latter convention has territorial application to Gibraltar (September 24, 1975), Hong Kong (January 21, 1977), Isle of Man (February 22, 1979), Bermuda (November 14, 1979), Belize and Cayman Islands (November 26, 1980), Guernsey (April 19, 1985), Bailiwick of Jersey (May 28, 2002), and British Virgin Islands (February 24, 2014).

The United Kingdom has consciously elected not to follow the UNCITRAL Model Law on International Commercial Arbitration.  Enforcement of an arbitral award in the UK is dependent upon where the award was granted. The process for enforcement in any particular case is dependent upon the seat of arbitration and the arbitration rules that apply.  Arbitral awards in the UK can be enforced under a number of different regimes, namely: The Arbitration Act 1996, The New York Convention, The Geneva Convention 1927, The Administration of Justice Act 1920 and the Foreign Judgments (Reciprocal Enforcement) Act 1933, and Common Law.

The Arbitration Act 1996 governs all arbitrations seated in England, Wales and Northern Ireland, both domestic and international. The full text of the Arbitration Act can be found here: http://www.legislation.gov.uk/ukpga/1996/23/data.pdf .

The Arbitration Act is heavily influenced by the UNCITRAL Model Law, but it has some important differences.  For example, the Arbitration Act covers both domestic and international arbitration; the document containing the parties’ arbitration agreement need not be signed; an English court is only able to stay its own proceedings and cannot refer a matter to arbitration; the default provisions in the Arbitration Act require the appointment of a sole arbitrator as opposed to three arbitrators; a party retains the power to treat its party-nominated arbitrator as the sole arbitrator in the event that the other party fails to make an appointment (where the parties’ agreement provides that each party is required to appoint an arbitrator); there is no time limit on a party’s opposition to the appointment of an arbitrator; parties must expressly opt out of most of the provisions of the Arbitration Act which confer default procedural powers on the arbitrators; and there are no strict rules governing the exchange of pleadings.  Section 66 of the Arbitration Act applies to all domestic and foreign arbitral awards. Sections 100 to 103 of the Arbitration Act provide for enforcement of arbitral awards under the New York Convention 1958. Section 99 of the Arbitration Act provides for the enforcement of arbitral awards made in certain countries under the Geneva Convention 1927.

Under Section 66 of the Arbitration Act, the court’s permission is required for an international arbitral award to be enforced in the UK.  Once the court has given permission, judgment may be entered in terms of the arbitral award and enforced in the same manner as a court judgment or order.  Permission will not be granted by the court if the party against whom enforcement is sought can show that (a) the tribunal lacked substantive jurisdiction and (b) the right to raise such an objection has not been lost.

The length of arbitral proceedings can vary greatly.  If the parties have a relatively straightforward dispute, cooperate, and adopt a fast track procedure, arbitration can be concluded within months or even weeks.  In a substantial international arbitration involving complex facts, many witnesses and experts and post-hearing briefs, the arbitration could take many years. A reasonably substantial international arbitration will likely take between one and two years.

There are two alternative procedures that can be followed in order to enforce an award.  The first is to seek leave of the court for permission to enforce. The second is to begin an action on the award, seeking the same relief from the court as set out in the tribunal’s award.  Enforcement of an award made in the jurisdiction may be opposed by challenging the award. However, the court also may refuse to enforce an award that is unclear, does not specify an amount, or offends public policy.  Enforcement of a foreign award may be opposed on any of the limited grounds set out in the New York Convention. A stay may be granted for a limited time pending a challenge to the order for enforcement. The court will consider the likelihood of success and whether enforcement of the award will be made more or less difficult as a result of the stay.  Conditions that might be imposed on granting the stay include such matters as paying a sum into court. Where multiple awards are to be rendered, the court may give permission for the tribunal to continue hearing other matters, especially where there may be a long delay between awards. UK courts have a good record of enforcing arbitral awards, which they will enforce in the same way that they would enforce an order or judgment of a court.  At the time of writing, there are no examples of the English courts enforcing awards which were set aside by the courts at the place of arbitration.

Most awards are complied with voluntarily.  If the party against whom the award was made fails to comply, the party seeking enforcement can apply to the court.  The length of time it takes to enforce an award which complies with the requirements of the New York Convention will depend on whether there are complex objections to enforcement which require the court to investigate the facts of the case.  If a case raises complex issues of public importance the case could be appealed to the Court of Appeal and then to the Supreme Court. This process could take around two years. If no complex objections are raised, the party seeking enforcement can apply to the court using a summary procedure that is fast and efficient.  There are time limits relating to the enforcement of the award. Failure to comply with an award is treated as a breach of the arbitration agreement. An action on the award must be brought within six years of the failure to comply with the award or 12 years if the arbitration agreement was made under seal. If the award does not specify a time for compliance, a court will imply a term of reasonableness.

Bankruptcy Regulations

The UK has strong bankruptcy protections going back to the Bankruptcy Act of 1542, and in modern days both individual bankruptcy and corporate insolvency are regulated in the UK primarily by the Insolvency Act 1986 and the Insolvency Rules 1986, regulated through determinations in UK courts.  The World Bank’s Doing Business report Ranks the UK 14/189 for ease of resolving insolvency.

Regarding individual bankruptcy law, the court will oblige a bankrupt individual to sell assets to pay dividends to creditors.  A bankrupt person must inform future creditors about the bankrupt status and may not act as the director of a company during the period of bankruptcy.  Bankruptcy is not criminalized in the UK, and the Enterprise Act of 2002 dictates that for England and Wales, bankruptcy will not normally last longer than 12 months.  At the end of the bankrupt period, the individual is normally no longer held liable for bankruptcy debts unless the individual is determined to be culpable for his or her own insolvency, in which case the bankruptcy period can last up to fifteen years.

For corporations declaring insolvency, UK insolvency law seeks to equitably distribute losses between creditors, employees, the community, and other stakeholders in an effort to rescue the company.  Liability is limited to the amount of the investment. If a company cannot be rescued, it is liquidated and assets are sold to pay debts to creditors, including foreign investors.

Investment Incentives

The UK offers a range of incentives for companies of any nationality locating in depressed regions of the country, as long as the investment generates employment.  DIT works with its partner organizations in the devolved administrations – Scottish Development International, the Welsh Government and Invest Northern Ireland – and with London and Partners and Local Enterprise Partnerships (LEPs) throughout England, to promote each region’s particular strengths and expertise to overseas investors.

Local authorities in England and Wales also have power under the Local Government and Housing Act of 1989 to promote the economic development of their areas through a variety of assistance schemes, including the provision of grants, loan capital, property, or other financial benefit.  Separate legislation, granting similar powers to local authorities, applies to Scotland and Northern Ireland. Where available, both domestic and overseas investors may also be eligible for loans from the European Investment Bank.

Foreign Trade Zones/Free Ports/Trade Facilitation

The cargo ports and freight transportation ports at Liverpool, Prestwick, Sheerness, Southampton, and Tilbury used for cargo storage and consolidation are designated as Free Trade Zones.  No activities that add value to commodities are permitted within the Free Trade Zones, which are reserved for bonded storage, cargo consolidation, and reconfiguration of non-EU goods. The Free Trade Zones offer little benefit to U.S. exporters or investors, or any other non-EU exporters or investors.  Questions remain as to the UK’s use of Free Trade Zones in a post-Brexit environment.

Performance and Data Localization Requirements

As of May 2018, companies operating in the UK comply with the EU General Data Protection Regulation (GDPR).  The UK presently intends to transpose the requirements of the GDPR into UK domestic law after the UK withdraws from the EU.  The potential impact of the UK leaving the EU on the free flow of data between the EU and the UK, and the UK and United States is unknown.     

The UK does not follow “forced localization” and does not require foreign IT firms to turn over source code.  The Investigatory Powers Act became law in November 2016 addressing encryption and government surveillance. It permitted the broadening of capabilities for data retention and the investigatory powers of the state related to data.

The UK Government does not mandate local employment, though at least one director of any company registered in the UK must be ordinarily resident in the UK.

Immigration policy is in the midst of sweeping reforms in the UK. Freedom of movement between the UK and EU member states is likely to soon come to an end and the government is looking at a post-Brexit system that will favour high-skilled migrants. New immigration rules (HC1888) that came into effect on April 6, 2012 have wide-ranging implications for foreign employees, primarily affecting businesses looking to sponsor migrants under Tier 2 as well as migrants looking to apply for settlement in the UK.  In particular, the UK Government has introduced a 12-month cooling off period for Tier 2 (General) applications similar to the one that is currently in place for Tier 2 (Intra-company transfer). The effect of this is that, while those who enter the UK under Tier 2 (General) to work for one company will be able to apply in-country under Tier 2 (General) to work for another company, if they leave the UK, they will not be able to apply to re-enter the UK under a fresh Tier 2 (General) permission until twelve months after their previous Tier 2 (General) permission has expired.

These provisions represent a significant tightening of the Tier 2 requirements.  One of the consequences is that, where an individual is sent to the UK on assignment under Tier 2 (Intracompany transfer), and the sponsoring company subsequently wishes to hire them permanently in the UK, they will not be able to apply either to remain in the UK under Tier 2 (General) or leave the UK and submit a Tier 2 (General) application overseas.

This change will mean that employers will have to carefully consider the long-term plans for all assignees that they send to the UK and whether Tier 2 (Intracompany transfer) is the most appropriate category. This is because, if the assignee is subsequently required in the UK on a long-term basis, it will not be possible for them to make a new application under Tier 2 (General) until at least twelve months after their Tier 2 (Intra-company transfer) permission has expired.

Real Property

The UK has robust real property laws stemming from legislation including the Law of Property Act 1925, the Settled Land Act 1925, the Land Charges Act 1972, the Trusts of Land and Appointment of Trustees Act 1996, and the Land Registration Act 2002.

Interests in property are well enforced, and mortgages and liens have been recorded reliably since the Land Registry Act of 1862.  The Land Registry is the government database where all land ownership and transaction data are held for England and Wales, and it is reliably accessible online, here: https://www.gov.uk/search-property-information-land-registry .  Scotland has its own Registers of Scotland, while Northern Ireland operates land registration through the Land and Property Services.

Long-term physical presence on non-residential property without their permission is not typically considered a crime in the UK.  Police take action if squatters commit other crimes when entering or staying in a property. A long-term squatter on otherwise unoccupied land can become the registered owner of property that they have occupied without the owner’s permission through an adverse possession process.

Intellectual Property Rights

The UK legal system provides a high level of protection for intellectual property rights (IPR). Enforcement mechanisms are comparable to those available in the United States.  The UK is a member of the World Intellectual Property Organization (WIPO). The UK is also a member of the major 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, and the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).  The UK has signed and, through implementing various EU Directives, enshrined into UK law the WIPO Copyright Treaty (WCT) and WIPO Performance and Phonograms Treaty (WPPT), known as the internet treaties.

The Intellectual Property Office (IPO) is the official UK government body responsible for IPR including patents, designs, trademarks and copyright.  The IPO website contains comprehensive information on UK law and practice in these areas.

https://www.gov.uk/government/organisations/intellectual-property-office 

The British government tracks and reports seizures of counterfeit goods and regards the production and subsequent sale as a criminal act.  The Intellectual Property Crime Report for 2017/18 highlights the incidence of IPC and the harm caused to the UK economy, showing that almost 4 percent of all UK imports in 2013 were counterfeit, worth £9.3 billion (USD 12 billion). They estimate this equates to around 60,000 jobs being lost and almost £4 billion (USD 5.2 billion) in lost tax revenue.

The Special 301 Report is an annual, congressionally-mandated review of the global state of IPR protection and enforcement.  It is conducted by the Office of the U.S. Trade Representative to identify countries with commercial environments possibly harmful to intellectual property.  The UK is not on the list, nor is it included on the Notorious Markets List

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

Capital Markets and Portfolio Investment

The City of London houses one of the largest and most comprehensive financial centers globally.  London offers all forms of financial services: commercial banking, investment banking, re-insurance, venture capital, private equity, stock and currency brokers, fund managers, commodity dealers, accounting and legal services, as well as electronic clearing and settlement systems and bank payments systems.  London is highly regarded by investors because of its solid regulatory, legal, and tax environments, a supportive market infrastructure, and a dynamic, highly skilled workforce.

The UK government is generally hospitable toward foreign portfolio investment.  Government policies are intended to facilitate the free flow of capital and to support the flow of resources in product and services markets.  Foreign investors are able to obtain credit in local markets at normal market terms, and a wide range of credit instruments are available. The principles underlying legal, regulatory, and accounting systems are transparent, and they are consistent with international standards.  In all cases, regulations have been published and are applied on a non-discriminatory basis by the PRA.

The London Stock Exchange is one of the most active equity markets in the world.  London’s markets have the advantage of bridging the gap between the day’s trading in the Asian markets and the opening of the U.S. market.  This bridge effect is also evident as many Russian and Central European companies have used London stock exchanges to tap global capital markets.  The Alternative Investment Market (AIM), established in 1995 as a sub-market of the London Stock Exchange, is specifically designed for smaller, rapidly expanding companies.  The AIM has a more flexible regulatory system than the main market and has no minimum market capitalization requirements. Since its launch, the AIM has raised more than USD 85 billion (GBP 60 billion) for more than 3,000 companies.

Money and Banking System

The UK banking sector is the largest in Europe.  According to TheCityUK, more than 150 financial services firms from the EU are based in the UK.  As of November 2017, EU banks in the UK held USD 1.9 trillion in assets, which represents a decline of USD 425 billion (or 17 percent) in the span of a year.  The sharp drop was a consequence of the Brexit vote, as European Banks trimmed their exposure to UK assets. The financial and related professional services industry contributed approximately 6.5 percent of UK Economic Output in 2017, employed around 1.1 million people, and contributed some GBP 75 billion in tax revenue in 2017/18, or 10.9 percent of total UK tax receipts.  The impact of Brexit on the financial services industry is uncertain at this time. Some firms have already moved jobs outside the UK, but most believe the UK will maintain its position as a top financial hub.

The Bank of England serves as the central bank of the UK by maintaining monetary and fiscal stability.  According to Bank of England guidelines, foreign banking institutions are legally permitted to establish operations in the UK as subsidiaries or branches.  Responsibilities for the prudential supervision of a non-European Economic Area (EEA) branch are split between the parent’s Home State Supervisors (HSS) and the PRA.  However, the PRA expects the whole firm to meet the PRA’s Threshold Conditions. The PRA has set out its approach to supervising branches and its appetite for allowing international banks to operate as branches in the United Kingdom in this Policy Statement and this Supervisory Statement.  In particular, the PRA expects new non-EEA branches to focus on wholesale banking and to do so at a level that is not critical to the UK economy. The FCA is the conduct regulator for all banks operating in the United Kingdom. For non-EEA branches the FCA’s Threshold Conditions and conduct of business rules apply, including areas such as anti-money laundering.  Eligible deposits placed in non-EEA branches may be covered by the UK deposit guarantee program and therefore non-EEA branches may be subject to regulations concerning UK depositor protection.

Although there are no legal restrictions that prohibit non-UK residents from opening a business bank account, in fact banks refuse to open accounts without proof of residency.  Setting up a business bank account as a non-resident is in principle straightforward. However, in practice most banks will not accept applications from overseas due to fraud concerns and the additional administration costs.  To open a personal bank account, an individual must at minimum present an internationally recognized proof of identification and prove residency in the UK. This is a problem for incoming FDI and American expats. Unless the business or the individual can prove UK residency, they will have limited banking options.

The UK has the most substantial financial services sector in the EU by reason of history, time-zone, language, legal system, critical mass of skill sets, expertise in professional services and London’s cultural appeal.  The UK’s withdrawal from the EU will impact the financial services sector and poses some risk to this financial stability. A period of prolonged uncertainty could increase sterling volatility, the risk-premiums on assets, cost and availability of financing, as well as relationships with EU-based financial institutions.  

Foreign Exchange and Remittances

Foreign Exchange

The British pound sterling is a free-floating currency with no restrictions on its transfer or conversion.  Exchange controls restricting the transfer of funds associated with an investment into or out of the UK are not exercised.

Remittance Policies

Not applicable.

Sovereign Wealth Funds

The United Kingdom does not maintain a national wealth fund.  Although there have at time been calls to turn The Crown Estate – created in 1760 by Parliament as a means of funding the British monarchy – into a wealth fund, there are no current plans in motion.  Moreover, with assets of just under USD 12 billion, The Crown Estate would be small in relation to other national funds.

There are 20 partially or fully state-owned enterprises (SOEs) in the UK, with a combined turnover of about USD 15 billion (GBP 11.5 billion) in 2011.  These enterprises range from large, well-known companies to small trading funds. Some of these, where appropriate, are scheduled to be privatized over the next few years.  The government has already successfully sold its remaining shares in Lloyds, the bank nationalized during the global financial crisis. Since privatizing the oil and gas industry, the UK has not established any new energy-related SOEs or resource funds.

Privatization Program

The privatization of state-owned utilities in the UK is now essentially complete.  With regard to future investment opportunities, the few remaining SOEs or government shares in other utilities are likely to be sold off to the private sector when market conditions improve.

Businesses in the UK are accountable for a due diligence approach to responsible business conduct (RBC), or corporate social responsibility (CSR), in areas such as human resources, environmental issues, sustainable development, and health and safety practices – through a wide variety of existing guidelines at national, EU and global levels.  There is a strong awareness of CSR principles among UK businesses, promoted by UK business associations such as the Confederation of British Industry and the UK government.

The British government fairly and uniformly enforces laws related to human rights, labor rights, consumer protection, environmental protection, and other statutes intended to protect individuals from adverse business impacts.  The UK government adheres to the OECD Guidelines for Multinational Enterprises; as such, it has established a National Contact Point (NCP) to promote the Guidelines and to facilitate the resolution of disputes that may arise within that context: https://www.gov.uk/government/groups/uk-national-contact-point-for-the-organisation-for-economic-co-operation-and-development-guidelines 

The UK is committed to the promotion and implementation of these Guidelines and encourages UK multinational enterprises to adopt high corporate standards involving all aspects of the Guidelines.    The UK NCP is housed in BEIS and is partially funded by DFID. A Steering Board monitors the work of the UK NCP and provides strategic guidance. It is composed of representatives of relevant government departments and four external members nominated by the Trades Union Congress, the Confederation of British Industry, the All Party Parliamentary Group on the Great Lakes Region of Africa, and the NGO community.

The results of a UK government consultation on CSR can be found here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/300265/bis-14-651-good-for-business-and-society-government-response-to-call-for-views-on-corporate-responsibility.pdf .

Information on UK and EU regulations and policies relating to the procurement of supplies, services and works for the public sector, and the relevance of promoting RBC, are found here: https://www.gov.uk/guidance/public-sector-procurement-policy 

Although isolated instances of bribery and corruption have occurred in the UK, U.S. investors have not identified corruption of public officials as a factor in doing business in the UK.

The Bribery Act 2010 came into force on July 1, 2011.  It amends and reforms the UK criminal law and provides a modern legal framework to combat bribery in the UK and internationally.  The scope of the law is extra-territorial. Under the Bribery Act, a relevant person or company can be prosecuted for bribery if the crime is committed abroad.  The Act applies to UK citizens, residents and companies established under UK law. In addition, non-UK companies can be held liable for a failure to prevent bribery if they do business in the UK.

Section 9 of the Act requires the UK Government to publish guidance on procedures that commercial organizations can put in place to prevent bribery on their behalf.  It creates the following offenses: active bribery, described as promising or giving a financial or other advantage, passive bribery, described as agreeing to receive or accepting a financial or other advantage; bribery of foreign public officials; and the failure of commercial organizations to prevent bribery by an associated person (corporate offense).  This corporate criminal offense places a burden of proof on companies to show they have adequate procedures  in place to prevent bribery (http://www.transparency.org.uk/our-work/business-integrity/bribery-act/adequate-procedures-guidance/ ).  To avoid corporate liability for bribery, companies must make sure that they have strong, up-to-date and effective anti-bribery policies and systems.  The first prosecution under the Act (a domestic case) went forward in 2011. A UK administrative clerk faced charges under Section 2 of the Act for requesting and receiving a bribe intending to improperly perform his functions as a result.

The Bribery Act creates a corporate criminal offense making illegal the failure to prevent bribery by an associated person.  The briber must be “associated” with the commercial organization, a term which will apply to, amongst others, the organization’s agents, employees, and subsidiaries. A foreign corporation which “carries on a business, or part of a business” in the UK may therefore be guilty of the UK offense even if, for example, the relevant acts were performed by the corporation’s agent outside the UK. The Act does not extend to political parties and it is unclear whether it extends to family members of public officials.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

The UK formally ratified the OECD Convention on Combating Bribery in December 1998.  The UK also signed the UN Convention Against Corruption in December 2003 and ratified it in 2006.  The UK has launched a number of initiatives to reduce corruption overseas. However, the OECD Working Group on Bribery (WGB) has expressed concerns with the UK’s implementation of the Anti-Bribery Convention.  In 2007, the UK Law Commission began a consultation process to draft a Bribery Bill that met OECD standards. The new Bill was published in draft in March 2009 and adopted by Parliament with cross-party support as the 2010 Bribery Act.

Resources to Report Corruption

UK law provides criminal penalties for corruption by officials, and the government routinely implements these laws effectively.  The Serious Fraud Office (SFO) is an independent government department, operating under the superintendence of the Attorney General with jurisdiction in England, Wales, and Northern Ireland.  It investigates and prosecutes those who commit serious or complex fraud, bribery, and corruption, and pursues them and others for the proceeds of their crime.

The SFO is the UK’s lead agency to which all allegations of bribery of foreign public officials by British nationals or companies incorporated in the United Kingdom should be reported – even in relation to conduct that occurred overseas.  Some of these allegations, where they involve serious or complex fraud and corruption, may fall to the SFO to investigate. Some may be more appropriate for other agencies to investigate, such as the Overseas Anti-Corruption Unit of the City of London Police (OACU) or the International Corruption Unit of the National Crime Agency.  When the SFO receives a report of possible corruption, its intelligence team makes an assessment and decides if the matter is best dealt with by the SFO or passed to a law enforcement partner organization. Allegations can be reported in confidence using the SFO’s secure online reporting form: https://www.sfo.gov.uk/contact-us/reporting-serious-fraud-bribery-corruption/ .

Details can also be sent to the SFO in writing:

SFO Confidential
Serious Fraud Office
2-4 Cockspur Street
London, SW1Y 5BS
United Kingdom

The UK is politically stable but shares with the rest of the world an increased threat of terrorist incidents.  2017 saw an uptick in the number of terrorist incidents in the UK, with deaths from attacks in Westminster, Manchester, London Bridge, and Finsbury Park totaling 36.  The latest official figure, from December 2017, states that nine Islamist plots had been foiled since March 2017, and 22 since 2013, when the Islamic State group emerged in Syria.  The current threat level for international terrorism in the UK is “Severe.”

Environmental advocacy groups in the UK have been involved with numerous protests against a variety of business activities, including:  airport expansion, bypass roads, offshore structures, wind farms, civilian nuclear power plants, and petrochemical facilities. These protests tend not to be violent but can be disruptive, with the aim of obtaining maximum media exposure.

Brexit remains a key source of political instability.  The June 2016 EU referendum campaign was characterized by significant polarization and widely varying perspectives across the country.  Differing views about what should be the terms of the future UK-EU relationship continue to polarize political opinion across the UK.  The people of Scotland voted to remain in the EU and Scottish political leaders have indicated that the UK leaving the EU may provide justification to pursue another Referendum on Scotland leaving the UK.  In addition, Brexit may be a factor contributing to the inability to reconstitute devolved government in Northern Ireland.

The process of Brexit itself has been politically fraught.  The UK was originally due to leave the EU on March 29, 2019, but Prime Minister (PM) Theresa May twice had to request a delay as she remained unable to form a majority in the House of Commons to ratify the Withdrawal Agreement setting out the terms of the UK’s departure from the bloc.  The UK and the EU27 endorsed the draft Withdrawal Agreement at a special meeting of the European Council on November 25, 2018.  The draft deal makes provisions for an extendable 21-month status quo transition period through at least December 31, 2020 – during which the UK would effectively remain a member of the EU without voting rights, while continuing talks on its long-term future economic and security arrangements with the bloc. 

The transition period is, however, conditional upon the successful ratification of the Withdrawal Agreement.  At time of writing, the House of Commons has three times rejected the draft Withdrawal Agreement, largely over concerns with a controversial “backstop” plan to avoid the return to a hard border between Northern Ireland and the Republic of Ireland by keeping the former in a closer economic relationship with the EU – potentially setting up additional regulatory barriers between Northern Ireland and the rest of the UK.  The House of Commons has also voted to reject an exit from the EU without a Withdrawal Agreement in place, a so-called “no deal” Brexit scenario.  Facing the prospect of a no-deal exit on April 12, PM May agreed with her EU27 counterparts to a further extension of the Article 50 negotiating process until October 31, 2019.

Both main political parties (Conservative “Tories” and Labour) have recently tacked in a less business-friendly direction.  The Conservative Party, traditionally the UK’s pro-business party, is focused on implementing Brexit, a process many international businesses oppose because they expect it to make trade in goods, services, and capital with the UK’s largest trading partners more problematic and costly, at least in the short term.  The Conservative Party also intends to limit and reduce international immigration, an issue that was a main driver of the UK’s vote to leave the EU.  The Conservative Party capitalized on this anti-immigrant sentiment as a part of their overall campaign strategy to win the 2017 General Election.  The opposition Labour Party, led by Jeremy Corbyn MP and Chancellor John McDonnell MP, have also promoted polices opposed by business groups including laws that would give employees and shareholders the right to a binding vote on executive remuneration, make trade union rights stronger and more expansive, increase corporate taxes, and renationalize utility companies.  If the Labour Party were to prevail, such a shift to the economic left at a time when the Conservatives have made large, relatively unfunded public spending commitments, could potentially lead to higher levels of taxation and borrowing, crowding out private investment.

The UK’s labor force is the second largest in the European Union, at just over 41 million people. For the period between November 2018 and January 2019, the employment rate was 76.1 percent, with 31.4 million workers employed – the highest employment rate since 1971. Unemployment also hit a 43-year low with 1.32 million unemployed workers, or just 4 percent (down from 4.4 percent a year earlier).  For the same period, the unemployment rate for 18 to 24 year olds was 10.4 percent, lower than for a year earlier (10.5 percent).

The most serious issue facing British employers is a skills gap derived from a high-skill, high-tech economy outpacing the educational system’s ability to deliver work-ready graduates.  The government has placed a strong emphasis on improving the British educational system in terms of greater emphasis on science, research and development, and entrepreneurial skills. The UK’s skills base stands just below the OECD average.

As of 2017, approximately 23.2 percent of UK employees belonged to a union.  Public-sector workers have a much higher share of union members, at 51.8 percent, while the private sector is just under 14 percent.  Manufacturing, transport, and distribution trades are highly unionized. Unionization of the workforce in the UK is prohibited only in the armed forces, public-sector security services, and police forces.  Union membership has been relatively stable in the past few years, although the trend has been slightly downward over the past decade.

Once-common militant unionism is less frequent, but occasional bouts of industrial action, or threatened industrial action, can still be expected.  Recent strike action was motivated in part by the Coalition Government’s deficit reduction impacts on highly unionized sectors. In the 2017, there were 276,000 working days lost from 79 official labor disputes.  Privatization of traditional government entities has exacerbated frictions. The Trades Union Congress (TUC), the British nation-wide labor federation, encourages union-management cooperation as do most of the unions likely to be encountered by a U.S. investor.

In 2017 some cabin crew members of British Airways went on strike; 2018 saw significant strikes at the university level.  In February of 2018, university lecturers launched a widespread strike with staff and students taking collective action across 64 different universities.  Estimates show over a million students were affected and 575,000 teaching hours were lost.

On April 1, 2019, the UK raised the minimum wage to USD 10.71 (GBP 8.21) an hour for workers ages 25 and over.  The increased wage impacts about 2 million workers across Britain. The government plans to raise the National Living Wage to USD 11.75 an hour (GBP 9) by 2020.

The UK decision to leave the EU has introduced uncertainty into the labor market, with questions surrounding the rights of workers from other EU countries currently in the UK, the future rights of employers to hire workers from EU countries, and the extent to which the UK will maintain EU rules on workers’ rights.  

The 2006 Employment Equality (Age) Regulations make it unlawful to discriminate against workers, employees, job seekers, and trainees because of age, whether young or old.  The regulations cover recruitment, terms and conditions, promotions, transfers, dismissals, and training. They do not cover the provision of goods and services. The regulations also removed the upper age limits on unfair dismissal and redundancy.  It sets a national default retirement age of 65, making compulsory retirement below that age unlawful unless objectively justified. Employees have the right to request to work beyond retirement age and the employer has a duty to consider such requests.

OPIC does not operate in the UK.  However, the U.S. Export-Import Bank (Ex-Im Bank) financing is available to support major investment projects in the UK.  A Memorandum of Understanding (MOU) signed by Ex-Im Bank and its UK equivalent, the Export Credits Guarantee Department (ECGD), enables bilateral U.S.-UK consortia intending to invest in third countries to seek investment funding support from the country of the larger partner.  This removes the need for each of the two parties to seek financing from their respective credit guarantee organizations.

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

Table 3: Sources and Destination of FDI

Notes:

The UK Department for International Trade Core Statistics Book denominates these figures in GBP. Due to a volatile GBP/USD exchange rate in 2018, Post has decided to leave the numbers in their denominated currency as to maintain the highest accuracy.

The current fourth ranking for Inward Direct Investment is the UK offshore island of Jersey, a self-governing dependency of the United Kingdom. However, we have chosen to focus here on country-to-country FDI only.

Table 4: Sources of Portfolio Investment

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