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

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

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

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

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

The World Trade Organization (WTO) conducted its fifth and latest trade policy review of Israel in July 2018. In the past three years, the Israeli government has not conducted any investment policy reviews through the Organization for Economic Cooperation and Development (OECD) or the United Nations Conference on Trade and Development (UNCTAD). The OECD concluded an Economic Survey of Israel in 2020, which can be found here: https://www.oecd.org/economy/israel-economic-snapshot/ 

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

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

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

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

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

Israel’s regulatory system is transparent. Ministries and regulatory agencies give notice of proposed regulations to the public on a government web site: http://www.knesset.gov.il . The texts of proposed regulations are also published (in Hebrew) on this web site. The government requests comments from the public about proposed regulations. However, the government occasionally issues new or revised regulations without prior comment periods.

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

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

The Israeli Securities Authority released a recommendation in April 2021 calling for all public companies to publish annual environmental, social, and governance (ESG) reports based on international standards. In May 2021, the Bank of Israel required banks to note in the annual reports the material environmental, social and governance aspects integrated into their targets, and to note concisely the main principles established by the banking corporation for promoting these issues. The Israeli Capital, Insurance, and Savings Authority, which regulates financial services in the insurance and pension funds industries, also required institutional investors to publish ESG reports.

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

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

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

Israel has a written and consistently applied commercial law based on the British Companies Act of 1948, as amended. The judiciary is independent, but businesses complain about the length of time required to obtain judgments. The Supreme Court is an appellate court that also functions as the High Court of Justice. Israel does not employ a jury system.

There are few restrictions on foreign investors, except in defense and other national security industries. Foreign investors are welcome to participate in Israel’s privatization program.

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

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

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

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

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

Israel has established and well-regarded bankruptcy measures in place. Israeli Bankruptcy Law has several layers, some rooted in Common Law, when Palestine was under the British mandate in 1917-1948. Bankruptcy Law in Israel is based on the 1980 Bankruptcy Ordinance, the 1985 Bankruptcy Regulations, and the 2018 Law for Insolvency and Economic Recovery.

The State of Israel encourages both local and foreign investment by offering a wide range of incentives and benefits to investors in industry, tourism, and real estate. The Law for Encouragement of Capital Investment and the Law for the Encouragement of Industrial Research and Design include grants and tax benefits for potential investors. Israel’s Ministry of Economy places a priority on investments in hi-tech companies and R&D activities. The Ministry of Economy’s Small and Medium Business Agency offers special loan programs for Arab women. Israel also offers tax benefits for new immigrants and Israeli citizens returning from residing abroad, including exemption from capital gains taxes on the sale of assets located outside of Israel.

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

For complete information, potential investors should contact:

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

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

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

Israel has one free trade zone, the Red Sea port city of Eilat.

There are no universal performance requirements on investments, but “offset” requirements are often included in sales contracts with the government. There are no limits to private foreign ownership of Israeli firms. Israel’s visa and residency requirements are transparent. The Israeli government does not impose preferential policies on exports by foreign investors.

Israel has a modern legal system based on British common law that provides effective means for enforcing property and contractual rights. Courts are independent. Israeli civil procedures provide that local courts may accept judgments of foreign courts. The Israeli judicial system recognizes and enforces secured interests in property. A reliable system of recording such secured interests exists. The Israeli Land Administration, which manages land in Israel on behalf of the government, registers property transactions. Registering or obtaining land rights is a cumbersome process.

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

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

Israel was removed from the U.S. Trade Representative’s Special 301 Report Watch List in 2014.

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

The 2018 New Designs Law brought Israel into compliance with The Hague System for International Registration of Industrial designs.

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

The United States continues to urge Israel to strengthen and improve its IPR enforcement regime. Israel lacks specialized courts, common in other countries with advanced IPR regimes. General civil or administrative courts in Israel typically adjudicate IPR cases.

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

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

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

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

Financial institutions in Israel allocate credit on market terms. Various credit instruments are available to the private sector and foreign investors can receive credit on the local market. Legal, regulatory, and accounting systems are transparent and conform to international norms, although the prevalence of inflation-adjusted accounting means there are differences from U.S. accounting principles.

In the case of publicly traded firms where ownership is widely dispersed, the practice of “cross-shareholding” and “stable shareholder” arrangements to prevent mergers and acquisitions is common, but not directed at preventing foreign investment. Israeli law prevents foreign investment by individuals or businesses from “enemy states,” currently limited to Iran, Syria, and Lebanon.

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

Israel passed legislation to establish the Israel Citizens’ Fund, a sovereign wealth fund managed by the BOI, in 2014. The law establishing the fund states that it will begin operating a month after the state’s tax revenues from natural gas exceed USD 307 million (1 billion NIS), which the Ministry of Finance expects will occur in late 2022.

Israel established the Government Companies Authority (GCA) as an auxiliary unit of the Ministry of Finance following the passage of the 1975 Government Companies Law. It is the administrative agency for state-owned companies in charge of supervision, privatization, and implementation of structural changes. The Israeli state only provides support for commercial SOEs in exceptional cases. The GCA leads the recruitment process for SOE board members. Board appointments are subject to the approval of a committee, which confirms whether candidates meet the minimum board member criteria set forth by law.

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

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

Israel’s inter-ministerial privatization committee approved plans in January 2020 to sell off the Port of Haifa, Israel’s largest shipping hub. The privatization process is underway now. The incoming owner will be required to invest approximately USD 280 million (1 billion NIS) in the port, including the cost of upgrading infrastructure and financing the layoff of an estimated 200 workers. The government of Israel has ongoing plans to fully privatize Israel Post, which currently has 20 percent of its shares publicly listed.

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

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

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

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities;
• U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises; and;
• Xinjiang Supply Chain Business Advisory 

Department of the Treasury

• OFAC Recent Actions

Department of Labor

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

Israel significantly strengthened greenhouse gas reduction targets during 2021 but does not yet have a national climate strategy, nor has it identified specific expectations for private sector contributions to reaching these targets. There are no binding policies to implement Prime Minister Bennett’s 2021 announcement that Israel will achieve net-zero carbon emissions by 2050. Public procurement policies are subject to environmental regulations and often require environmental impact assessments. The government does not explicitly consider environmental and green growth considerations such as resource efficiency, pollution abatement, or climate resilience in awarding procurement contracts.

Bribery and other forms of corruption are illegal under several Israeli laws and Civil Service regulations. Israel is a signatory to the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions. Israel ranks 36 out of 175 countries in Transparency International’s 2021 Corruption Perceptions Index, dropping one place from its 2020 ranking. Several Israeli NGOs focus on public sector ethics in Israel and Transparency International has a local chapter.

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

Ministry of Justice
Office of the Director General
29 Salah a-Din Street Jerusalem
+972 73-392 5665
mancal@justice.gov.il 

Transparency International Israel Tel Aviv University, Faculty of Management
+972 3 640 9176
Shvil@TI-Israel.org 

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

The security situation remains complex in Israel and the West Bank, and can change quickly depending on the political environment, recent events, and geographic location. Terrorist groups and lone-wolf terrorists continue plotting possible attacks in Israel, the West Bank, and Gaza. Terrorists may attack with little or no warning, targeting tourist locations, transportation hubs, markets, shopping malls, and government facilities. Hamas, a U.S. government-designated foreign terrorist organization, controls security in Gaza, making it particularly dangerous and volatile.

Central Bureau of Statistics data from February 2022 indicate there are 4.1 million people active in the Israeli labor force, with a 3.9 percent unemployment rate. According to OECD data from 2020, 47 percent of Israelis aged between 25 and 34 years have a tertiary education. Many university students specialize in fields with high industrial R&D potential, including engineering, computer science, mathematics, physical sciences, and medicine. According to the Investment Promotion Center, there are more than 145 scientists out of every 10,000 workers in Israel, one of the highest rates in the world. The rapid growth of Israel’s high-tech sector in the late 1990s increased the demand for workers with specialized skills. Tech sector executives report a significant shortage of qualified labor for the sector given its size and continuing growth.

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

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

The size of Israel’s informal economy is estimated to be 20.8 percent which represents approximately $97 billion at GDP PPP levels, according to OECD estimates. Black market lending is common in Israel’s Arab neighborhoods with some “money change” shops servings as fronts for such illegal businesses. According to the Israel Democracy Institute, a national reform program aims to address the trend of large segments of the workforce in Israel working under temporary contracts that offer minimal job security, weak social protections, and dwindling economic security.

Daniel Devries
Economic Officer
U.S. Embassy Jerusalem – Tel Aviv Branch Office
DevriesDJ@state.gov

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

The Japanese government explicitly promotes inward FDI and has established formal programs to attract it. In 2013, the government of Prime Minister Shinzo Abe announced its intention to double Japan’s inward FDI stock to JPY 35 trillion (USD 318 billion) by 2020 and reiterated that commitment in its revised Japan Revitalization Strategy issued in August 2016. At the end of 2020, Japan’s inward FDI stock was JPY 39.7 trillion (USD 386 billion), a 15.6 percent increase over the previous year, achieving the target. The previous administration set a target for inward FDI stocks to double to JPY 80 trillion ($672.3 billion with 1.0 USD = ¥119) by 2030, set out in the Basic Policies released in June 2021 by then-Prime Minister Suga. Achieving this goal would put Japan’s FDI stock as a percentage of GDP at around 20 percent of the OECD average.

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

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

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

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

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

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

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

The OECD released its biennial Japan economic survey results in December 2021 (available at http://www.oecd.org/japan/economic-survey-japan.htm ).

The Japan External Trade Organization is Japan’s investment promotion and facilitation agency. JETRO operates six Invest Japan Business Support Centers (IBSCs) across Japan that provide consultation services on Japanese incorporation types, business registration, human resources, office establishment, and visa/residency issues. Through its website ( https://www.jetro.go.jp/en/invest/setting_up/ ), the organization provides English-language information on Japanese business registration, visas, taxes, recruiting, labor regulations, and trademark/design systems and procedures in Japan. While registration of corporate names and addresses can be completed online, most business registration procedures must be completed in person. In addition, corporate seals and articles of incorporation of newly established companies must be verified by a notary, although there are indications of change underway. Japan established a new Digital Agency in September 2021 to promote the digital provision of government services and digital transformation in the private sector.

According to the 2020 World Bank “Doing Business” Report, it takes eleven days to establish a local limited liability company in Japan. JETRO reports that establishing a branch office of a foreign company requires one month, while setting up a subsidiary company takes two months. Although 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, Labour, and Welfare), the Japan Pension Service, the district Public Employment Security Office, and the district tax bureau. JETRO operates a one-stop business support center in Tokyo so that foreign companies can complete all necessary legal and administrative procedures at one location. In 2017, JETRO launched an online business registration system that allows businesses to register company documents but not immigration documentation.

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

The Japan Bank for International Cooperation (JBIC) provides a variety of support for outward Japanese foreign direct investment. Most such support comes in the form of “overseas investment loans,” which can be provided to Japanese companies (investors), overseas Japanese affiliates (including joint ventures), and foreign governments in support of projects with Japanese content, typically infrastructure projects. JBIC often supports outward FDI projects to develop or secure overseas resources that are of strategic importance to Japan, for example, construction of liquefied natural gas (LNG) export terminals to facilitate sales to Japan and third countries in Asia. (Note: Days after Russia’s invasion of Ukraine, JBIC announced on March 3, 2022, that it would review the agreement it signed in November 2021 providing for a JPY 220 billion ($1.8 billion) in loans regarding LNG development in Russia.) More information on JBIC is available at https://www.jbic.go.jp/en/index.html .

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

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

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

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

Japan places no restrictions on outbound investment, except under certain circumstances (e.g., with countries under international sanctions) that are listed in the appendix of the FEFTA.

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 with adequate time for them to prepare, relying instead on formal and informal connections between regulators and domestic firms to arrive at regulatory decisions. This practice may have the effect of disadvantaging foreign firms that lack the benefit of deep relationships with local regulators. The United States has encouraged the Japanese government to improve public notice and comment procedures to ensure consistency and transparency in rule-making and to give fair consideration to comments received. The National Trade Estimate Report on Foreign Trade Barriers (NTE), issued by the Office of the U.S. Trade Representative (USTR), contains a description of Japan’s regulatory regime as it affects foreign exporters and investors.

The Japanese government encourages environmental, social, and governance disclosure (ESG) to assist investors. The Financial Services Agency is coordinating closely with the international community on harmonizing these standards in the G20 and the Financial Stability Board, among other multilateral groups, and is working to implement these best practices domestically. It is working with the Tokyo Stock Exchange to catalogue ESG bonds issued within the exchange.  The Tokyo Metropolitan Government provides subsidies that aim to partially cover certification and consulting costs incurred by entities issuing green bonds.  Combined with subsidies funded by the Ministry of the Environment, the additional burden incurred by issuing entities can be reduced by as much as 90 percent.

The Japanese Industrial Standards Committee (JISC), administered by the Ministry of Economy, Trade, and Industry, plays a central role in maintaining Japan Industrial Standards (JIS). JISC aims to align JIS with international standards. According to JISC, as of March 31, 2021, 59 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.

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

Major laws affecting foreign direct investment into Japan include the 1949 Foreign Exchange and Foreign Trade Act, the 2005 Companies Act, and the 1948 Financial Instruments and Exchange Act. The Japanese government actively encourages FDI into Japan and has sought over the past decades to ease legal and administrative burdens on foreign investors, including with major reforms to the Companies Act in 2005 and the Financial Instruments and Exchange Act in 2008. The Japanese government amended the Foreign Exchange and Foreign Trade Act in 2019.

The Japan Fair Trade Commission (JFTC) holds sole responsibility for enforcing Japanese competition and anti-trust law, although public prosecutors may file criminal charges related to a JFTC finding. In fiscal year 2020, the JFTC investigated 101 suspected Antimonopoly Act (AMA) violations and completed 91 investigations. During this same time period, the JFTC issued 15 cease and desist orders and issued a total of JPY 4.3 billion (USD 42 million) surcharge payment orders to four companies. In 2019, the Diet amended the AMA and granted the JFTC discretion to incentivize cooperation with investigations and adjust surcharges according to the nature and extent of the violation.

The JFTC also reviews proposed “business combinations” (i.e., mergers, acquisitions, increased shareholdings, etc.) to ensure that transactions do not “substantially … restrain competition in any particular field of trade.” In December 2019, amended merger guidelines and policies entered into force to “deal with business combinations in the digital market.” Data enjoys consideration as a competitive asset under these new guidelines along with the network effects characteristic of digital businesses. The JFTC has expanded authority (but under no legal obligation) to review merger cases, including “Non-Notifiable Cases,” when the transaction value is more than JPY 40 billion (USD 370 million) and the merger is expected to affect domestic consumers. Further, the amended policies suggest that parties consult with the JFTC voluntarily when the transaction value exceeds JPY40 billion and when one or more of the following factors is met:

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

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

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

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

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

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

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

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

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

Japan established a feed-in-tariff (FIT) system in 2012 to incentivize the diversification of its power supply. Under the FIT, approved renewable energy projects – including solar photovoltaic (PV), wind, geothermal, small-scale hydropower, and biomass – sell electricity to the transmission and distribution utilities at a fixed price for 20 years, and the utilities pass these costs on to end users through electricity rates. Solar PV has benefited most from the FIT scheme, with Japan now the world’s third largest solar market by installed capacity. Prices are set annually according to resource type and other conditions. Due to the cost of the FIT system – estimated at JPY 80.2 billion ($671 million) for 2022 – METI has reduced subsidy levels over time, particularly for solar PV projects. It has also taken other measures to control costs, such as introducing a capacity auction system for projects over a certain size.

In line with recent revisions to Japan’s Renewable Energy Act, a new “feed-in-premium” (FIP) scheme will go into effect in April 2022 alongside the existing FIT scheme. Under the FIP, approved projects can receive a premium – based on the variable wholesale power market price – in addition to any revenue earned through market or bilateral transactions. FIP projects over a certain size must also participate in the existing auction system. The revised Renewable Energy Act also established a limit on the time period within which new FIT or FIP projects must commence operations before losing their access to grid interconnection. Further, the revised act requires that new commercial solar projects secure funds necessary for end-of-life decommissioning. These changes to Japan’s renewable energy support scheme, while necessary to address the growing economic costs of the existing FIT scheme, is forcing project developers to change their business models and sharpen their ability to predict revenues. We cannot yet estimate the impact these changes will have on the growth of Japan’s renewable energy market.

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

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

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

The Diet approved a revision to add “advanced data technologies” as one of targeted growth areas for NSSZs in May 2020, which went into effect on September 1, 2020. The revision allowed regions to create “Super City National Strategic Zones,” on the condition that the zone will provide advanced services to its citizens through utilizing artificial intelligence (AI), big data or other data linkage platforms. The Cabinet Office website cited remote schooling/healthcare, cashless payment services, and one-stop administrative services as examples of such projects.

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

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

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

Japan currently has no laws that ban or control land purchases by foreign nationals who live in the country. Foreign individuals and entities located outside of Japan also have the right to purchase property. On June 16, 2021, Japan’s Diet passed the Law to Investigate and Regulate Land Use around Important Facilities and Remote Border Islands, tightening oversight of land use near designated areas such as military defense facilities by allowing the Japanese government to collect personal information of individuals, both foreign nationals and Japanese citizens, to investigate their land usage. The law and its implementing guidelines may enter into effect as early as April 2022.

The Japanese government is unsure of the titleholders to 4.1 million hectares of land in Japan, roughly 20 percent of all land. It estimated that by 2040 the amount of land without titleholders will increase to 7.2 million hectares. There are a number of reasons beyond the administrative difficulties of a title transfer as to why land lacks a clear title holder. They include: population decline, especially in rural areas; the difficulty of locating heirs, particularly if there are multiple heirs or if the deceased had no children; and the cost of reregistering land under a new name due to taxes. Virtually all the large banks, as well as some other private companies, offer loans to purchase property in Japan.

Japan maintains a comprehensive and sophisticated intellectual property (IP) regime recognized as among the strongest in the world. In 2021, Japan ranked fifth out of 53 countries evaluated by the U.S. Chamber of Commerce on the strength of IP environments. The government has operated a dedicated “Intellectual Property High Court” to adjudicate IP-related cases since 2005, providing judges with enhanced access to technical experts and the ability to specialize in intellectual property law. However, certain shortcomings remain, notably in the transparency and predictability of its system for pricing on-patent pharmaceuticals and medical devices. The discriminatory effect of healthcare reimbursement pricing measures implemented by the Japanese government continues to raise serious concerns about the ability of U.S. pharmaceutical and companies to have full and fair opportunity to use and profit from their IP in the Japanese market. More generally, the weak deterrent effect of Japan’s relatively modest penalties for IP infringement remains a cause for concern.

On May 19, 2021, Japan’s National Diet amended the country’s Trademark Act, closing a loophole that had permitted unlimited importation of counterfeit goods delivered by mail to individuals who claimed the items were for personal use. Previously, only imports for business purposes were within the scope of the Trademark Act. Items claimed for personal use were exempted, and there was no restriction on the quantity of items imported for personal use, nor any limit on the number of times an individual could apply the personal use exemption.

On May 26, 2021, Japan’s National Diet amended the country’s Copyright Act, a move that U.S. rights holders have flagged as potentially compromising intellectual property rights.  The amendment went into effect on January 1, 2022.  It stipulates that any license obtained to transmit content through traditional television broadcasting systems can be presumed to include a grant of rights to simulcast the content via other means, including Internet transmission. Lawmakers crafted the presumption of rights extension to overcome “difficulties” expressed by domestic broadcasters associated with obtaining rights from “non-professional” creators and licenses obtained via non-contract scenarios.  U.S. stakeholders have expressed concern about the revision creating potential uncertainty for commercial licensing and the potential for unintended consequences without due consideration of global perspectives. In response, officials of Japan’s Agency for Cultural Affairs (ACA) stressed that business contracts, such as those under which major international content distributors operate, would not be affected, and the ACA does not foresee the amendment materially altering such existing business practices.

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

• RCEP: The Regional Comprehensive Economic Partnership includes a comprehensive IP chapter, much of it repeating norms set out in the Trade-Related Aspects of Intellectual Property Rights Agreement, but also offering unique protections for genetic resources, traditional knowledge, and folklore.
• Japan-UK CEPA: The Japan-UK Comprehensive Economic Partnership Agreement signed on October 23, 2020, and in force beginning January 1, 2021, contains an IP chapter including provisions on copyrights, trademarks, geographical indications, industrial designs, patents, regulatory test data exclusivity, new plant varieties, trade secrets, domain names, and enforcement.
• Japan-EU EPA: The Japan-EU Economic Partnership Agreement, which entered into force February 1, 2019, also includes a substantial IP chapter.
• CPTPP: As part of its 2018 accession to the CPTPP, Japan passed several substantive amendments to its Copyright Law, including measures that extended the term of copyright protection and strengthened technological protection rules.

Japan’s Customs and Tariff Bureau publishes a yearly report on goods seizures, available online in English ( http://www.customs.go.jp/mizugiwa/chiteki/pages/g_001_e.htm ). Japan seized an estimated USD 118.3 million worth of IP-infringing goods in 2020, a decrease of 2.4 percent over 2019. In June 2020, the Customs and Tariff Bureau of the Ministry of Finance announced the “SMART Customs Initiative 2020,” which aims to utilize cutting-edge technologies such as AI to improve the sophistication and efficiency of its operations. For additional information about national laws and points of contact at local IP offices, please see the World Intellectual Property Organization’s country profiles at http://www.wipo.int/directory/en/ .

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

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

In January 2014, the TSE and Nikkei launched the JPX Nikkei 400 Index. The index puts a premium on company performance, particularly return on equity (ROE). Companies included are determined by such factors as three-year average returns on equity, three-year accumulated operating profits and market capitalization, along with others such as the number of external board members. Inclusion in the index has become an unofficial “seal of approval” in corporate Japan, and many companies have taken steps, including undertaking share buybacks, to improve their ROE. The Bank of Japan has purchased JPX-Nikkei 400 exchange traded funds (ETFs) as part of its monetary operations, and Japan’s massive Government Pension Investment Fund (GPIF) has also invested in JPX-Nikkei 400 ETFs, putting an additional premium on membership in the index. The TSE and FSA revised the Corporate Governance Code in 2021 to reflect the realignment of TSE segmentations to be implemented in 2022. The revised guidelines require companies, to be listed in the “Prime Section,” a top-tier TSE section, to have more than one-third external directors.

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

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

Banking services are easily accessible throughout Japan; it is home to many of the world’s largest private commercial banks as well as an extensive network of regional and local banks. Most major international commercial banks are also present in Japan, and other quasi-governmental and non-governmental entities, such as the postal service and cooperative industry associations, also offer banking services. For example, the National Federation of Agricultural Cooperative Associations 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, especially some of the regional banks.

The country’s three largest private commercial banks, often collectively referred to as the “megabanks,” are MUFG Bank (a banking subsidiary of Mitsubishi UFJ Financial Group), Mizuho Bank (Mizuho Financial Group), and SMBC (Sumitomo Mitsui Financial Group). Collectively, they hold assets reaching USD 6.0 trillion at September end of 2021. Japan’s second largest bank by assets – with more than USD 2.0 trillion – is Japan Post Bank, a financial subsidiary of the Japan Post Holdings(which holds 88.99 percent of the bank’s shares as of September 2021). Japan Post Bank offers services via 23,815 Japan Post office branches, at which Japan Post Bank services can be conducted, as well as Japan Post’s network of 31,901 ATMs nationwide, as of the end of March 2021.

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

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

Japanese regulators are encouraging “open banking” interactions between financial institutions and third-party developers of financial technology applications through application programming interfaces (“APIs”) when customers “opt-in” to share their information.  As a result of the government having set a target to have 80 banks adopt API standards by 2020, more than 100 subject banks reportedly have done so.  Many of the largest banks are participating in various proofs of concept using blockchain technology.  While commercial banks have not yet formally adopted blockchain-powered systems for fund settlement, they are actively exploring options, and the largest banks have announced intentions to produce their own virtual currencies at some point.  The Bank of Japan is researching blockchain and its applications for national accounts and established a “Fintech Center” to lead this effort.  The main banking regulator, the Japan Financial Services Agency also encourages innovation with financial technologies, including sponsoring an annual conference on “fintech” in Japan.  In April 2017, amendments to the Act on Settlements of Funds went into effect, permitting the use of virtual currencies as a form of payment in Japan, but virtual currency is still not considered legal tender (e.g., commercial vendors may opt to accept virtual currencies for transactional payments, though virtual currency cannot be used as payment for taxes owed to the government).  The law also requires the registration of virtual currency exchange businesses.  There are currently 30 registered virtual currency exchanges in Japan, as of January 2022.

Japan does not operate a sovereign wealth fund.

Japan has privatized most former state-owned enterprises (SOEs). Under the Postal Privatization Law, privatization of Japan Post group started in October 2007 by turning the public corporation into stock companies. The stock sale of the Japan Post Holdings Co. and its two financial subsidiaries, Japan Post Insurance (JPI) and Japan Post Bank (JPB), began in November 2015 with an IPO that sold 11 percent of available shares in each of the three entities. The postal service subsidiary, Japan Post Co., remains a wholly owned subsidiary of JPH. The Japanese government conducted additional public offerings of stock in September 2017 and October 2021, reducing the government ownership in the holding company to a little over one third. There were offerings in the insurance subsidiary in April 2019 and June 2021. JPH currently owns 88.99 percent of the banking subsidiary and 49.9 percent of the insurance subsidiary. Follow-on sales of shares in the two subsidiary companies will take place over time, but the government’s sale of JPH stocks in October 2021 is considered to be the last. The Postal Privatization Law requires the government to sell a majority share so that the government ownership would be “a little over one third” of all shares in JPH (which was completed in 2021), and JPH to sell all shares of JPB and JPI, as soon as possible.

These offerings mark the final stage of Japan Post privatization begun under former Prime Minister Junichiro Koizumi (2001-2006) 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 on 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 regarding the insurance sector and efforts to address these concerns is available in the annual United States Trade Representative’s National Trade Estimate on Foreign Trade Barriers report for Japan.

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

Deregulation of Japan’s power sector took a step forward in April 2016 with the full liberalization of retail electricity supply, allowing all consumers to choose their electricity provider. This change has led to increased competition from, and rapid growth in the number of, new entrants; as of March 2022, there were almost 750 registered electricity retailers nationwide. While the generation and transmission of electricity remain mostly in the hands of the legacy power utilities, new electricity retailers reached a 21-percent market share of the total volume of electricity sold as of November 2021. Japan implemented the third phase of its power sector reforms in April 2020 by requiring vertically integrated regional monopolies to “legally unbundle” the electricity transmission and distribution portions of their businesses from the power generation and retailing portions. The transmission and distribution businesses retain ownership of, and operational control over, the power grid in their regional service territories. In addition, many of the former vertically integrated regional monopolies created electricity retailers to compete in the fully deregulated retail market.

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

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

Japanese corporate governance has often been criticized for failing to sufficiently prioritize shareholder interests and detect wrongdoing by company executives in a timely way, due in part to a lack of independent corporate directors and to cross-shareholding agreement among firms. Previous governments made corporate governance reform a core element of their economic agendas with the goal of reinvigorating Japan’s business sector through encouraging a stronger focus by management on earnings and shareholder value. PM Kishida has pledged that his administration will facilitate reforms further, with an added emphasis on additional stakeholders, such as labor and the environment.

Progress has been made through efforts by the Financial Services Agency (FSA) and Tokyo Stock Exchange (TSE) to introduce non-binding reforms through changes to Japan’s Companies Act in 2014 and adoption of a Corporate Governance Code (CSR) in 2015. Together with the Stewardship Code for institutional investors launched by the FSA in 2014, these initiatives have encouraged companies to put cash stockpiles to better use by increasing investment, raising dividends, and taking on more risk to boost Japan’s growth. Positive results of these efforts are evidenced by rising shareholder returns, unwinding of cross-shareholdings, and increasing numbers of independent board members.  According to a TSE survey conducted in December 2018, 85.3 percent of companies had a compliance rate of 90 percent out of the 66 principles of the new code. As of August 2021, 97 percent of TSE First Section-listed firms had at least two independent directors, according to an August 2021 TSE report. In December 2019, the Diet approved a revision of the Companies Act, which will enable companies to provide documents for shareholders’ meetings electronically. Listed companies will be obligated to have at least one outside director. The bill went into effect on March 1, 2021.

Following Stewardship Code revision in March 2020, the TSE and FSA revised the Corporate Governance Code in spring of 2021 to reflect the realignment of the TSE segmentations, which will be implemented in 2022. The revised guidelines require companies, to be listed in the “Prime Section,” a top-tier TSE section, to have more than one-third external directors. As of October 2021, 72.8 percent had one-third external directors. The guidelines also urge listed companies to have more diversity in mid-level and managerial posts by hiring and training female and foreign workers. Awareness of corporate social responsibility (CSR) among both producers and consumers in Japan is high, and foreign and local enterprises generally follow accepted CSR principles. Business organizations also actively promote CSR. Japan encourages adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.

Additional Resources 

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities;
• U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises; and;
• Xinjiang Supply Chain Business Advisory 

Department of the Treasury

• OFAC Recent Actions

Department of Labor

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

Changes to Japan’s Climate Law, enacted in May 2021 and taking full effect on April 1, 2022, codify Japan’s decarbonization commitments under the Paris Agreement. The revisions mark the first time that a specific reduction target was written into Japanese law. The new legislation amends the law in three areas: requiring Japan to achieve net-zero greenhouse gas emissions by 2050, bolstering mechanisms to support and expedite decarbonization at the subnational level, and requiring digitalization and transparency of emissions-related information published by the Government of Japan (GOJ). Diet approval of the revised law was unanimous.

The government had previously been less forward leaning on implementing policy and taking legislative action on Japan’s near-term 2030 climate goals. The new climate law aims to address this by expediting decarbonization projects through simplified licensing and approvals from GOJ ministries. The Ministry of Environment also plans to submit additional amendments to the law in April that would provide JPY 20 billion (USD 174 million) in funding for private sector entities and another JPY 20 billion to subnational governments to accelerate decarbonization efforts.

The 2021 revisions to the climate law also expand the standards for prefectural environmental policy and establish mechanisms to overcome local resistance and red tape for green project implementation. The law now calls for prefectural policies to specifically address renewable energy promotion, low-carbon products and operations, public transportation and greening of public spaces, and promotion of Japan’s “recycling-oriented society.” The changes also authorize ministries to establish standards for designating “promotion areas” for project development, following consultation with stakeholders and consideration of the “natural and societal conditions of each region.” In addition, municipalities must establish criteria for renewable energy promotion and work to identify local “promotion areas.” The new climate law streamlines and expedites approvals for decarbonization projects. Implementers, upon confirmation that a project aligns with municipal environmental plans, will benefit from consolidated and simplified licensing and approvals from GOJ ministries.

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

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

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

Japan ratified the Organisation for Economic Co-Operation and Development (OECD) Anti-Bribery Convention, which bans bribing foreign government officials, in 1999. Japan detected only 46 allegations of foreign bribery, half of which the OECD brought to Japan’s attention, through 2019.

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

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

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

The Government of Japan has provided extensive and expanded employment subsidies to companies to encourage them to maintain employment during the COVID-19 pandemic. Despite the pandemic, worker shortages remain in sectors such as information service, restaurants, and construction. The unemployment rate as of January 2022 was 2.8 percent. The fact that Japan’s unemployment rate has risen so slowly during the pandemic is likely due to the social contract between worker and employer in Japan, as well as the continued government subsidies that expanded substantially under the pandemic. Traditionally, Japanese workers have been classified as either regular or non-regular employees. Companies recruit regular employees directly from schools or universities and provide an employment contract with no fixed duration, effectively guaranteeing them lifetime employment. Non-regular employees are hired for a fixed period. Companies have increasingly relied on such non-regular workers to fill short-term labor requirements and to reduce labor costs. The pandemic has particularly hurt non-regular workers whose employment was concentrated in hard-hit service sectors such as tourism, hospitality, restaurants, and entertainment.

Major employers and labor unions engage in collective bargaining in nearly every industry. Union members as of June 2021 made up 16.9 percent of employees (“koyo-sha”), down slightly compared to 2020 and in decline from 25 percent of the workforce in 1990. The government provides benefits for workers laid off for economic reasons through a national employment insurance program. Some National Strategic Special Zones allow for special employment of foreign workers in certain fields, but those and all other foreign workers are still subject to the same national labor laws and standards as Japanese workers. Japan has comprehensive labor dispute resolution mechanisms, including labor tribunals, mediation, and civil lawsuits. A Labor Standards Bureau oversees the enforcement of labor standards through a national network of Labor Bureaus and Labor Standards Inspection Offices.

The number of foreign workers has been rising but slowed down slightly during the past year due to the pandemic. At just over 1.73 million as of October 2021, they still represent a small fraction of Japan’s 68.6-million-worker labor force. The Japanese government has made changes to labor and immigration laws to facilitate the entry of larger numbers of skilled foreign workers in selected sectors. A revision to the Immigration Control and Refugee Recognition Law in December 2018, implemented in April 2019, created the “Specified Skilled” worker program designed specifically for lower-skilled foreign workers. Prior to this change, Japan had never created a visa category for lower-skilled foreign workers, and this law created two. Category 1 grants five-year residency to low-skilled workers who pass skills exams and meet Japanese language criteria and permits them to work in 14 designated industries, such as agriculture or nursing care, identified by the Japanese government to be experiencing severe labor shortage. Category 2 is for skilled workers with more experience, granting them long-term residency and a path to long-term employment, but currently permitted only in a few designated industries, such as construction and shipbuilding.

The Japanese government also operates the Technical Intern Training Program (TITP). Originally intended as an international skills-transfer program for workers from developing countries, TITP is currently used to address immediate labor shortages in over 85 designated occupations, such as jobs in the construction, agriculture, fishery, and elderly nursing care industries. As noted previously, the 2018 Immigration Control Law revision enabled TITP beneficiaries with at least three years of experience to qualify to apply for the Category 1 status of the Specified Skilled worker program without any exams.

To address the labor shortage resulting from population decline and a rapidly aging society, Japan’s government has pursued measures to increase participation and retention of older workers and women in the labor force. A law that entered 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. The law was revised again in March 2020 and entered into force in April 2021, asking companies to “make efforts” to secure employment for workers between 65 and 70.

Since 2013, the government has committed to increasing women’s economic participation. The Women’s Empowerment Law passed in 2015 requires large companies to disclose statistics about the hiring and promotion of women and to adopt action plans to improve the numbers. The COVID-19 pandemic has, however, had a disproportionately negative effect on women in Japan. Women were more likely than men to occupy non-regular positions, work in industries hardest hit by the downturn, and face greater pressure to prioritize family over work. As a result, women have experienced reductions in working hours, departure from the labor force, or furloughs in greater numbers than men, erasing part of the rise in their workforce participation through 2019. The Government of Japan has acknowledged this impact on women’s economic participation and convened a study group in September 2020 to consider solutions. Its final report, issued on April 28, 2021, urged that changes be made to systems and practices which persist in Japanese society, such as gender-based roles. The report also noted the importance of gender segregated data to be taken at the national and local government level, to help create effective measures.

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

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

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

* Source for Host Country Data: *2020 Nominal GDP data from Economic and Social Research Institute, Cabinet Office, Japanese Government. February, 2022. (Note: uses exchange rate of 106.78 Yen to 1 U.S. Dollar and Calendar Year Average Data)

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

Pam Pontius
Economic Section
U.S. Embassy Tokyo
1-10-5 Akasaka, Minato-ku, Tokyo 107-8420
Japan+81 03-3224-5035
pontiuspr@state.gov

Mexico is open to foreign direct investment (FDI) in most economic sectors and has consistently been one of the largest emerging market recipients of FDI.  Mexico’s proximity to the United States and preferential access to the U.S. market, macroeconomic stability, large domestic market, growing consumer base, increasingly skilled workers, and lower labor costs combine to attract foreign investors.  The COVID-19 economic crisis showed how linked North American supply chains are and highlighted new opportunities for partnership and investment.  Still, recent policy and regulatory changes have created doubts about the investment climate, particularly in the energy, agriculture, and the formal employment pensions management sectors.

The United States has been the largest source of FDI in Mexico, with 34 percent of the stock as of 2020 (IMF).  According to Mexico’s Secretariat of Economy, total FDI flows for 2021 were USD 31.6 billion, a 13.2 percent increase compared to 2020 (USD 27.9 billion).  The automotive, aerospace, telecommunications, financial services, and electronics sectors typically receive large amounts of FDI.

Most foreign investment is concentrated in northern states near the U.S. border, where most maquiladoras (export-oriented manufacturing and assembly plants) are located, or to Mexico City and the nearby “El Bajio” (e.g. Guanajuato, Queretaro, etc.) region.  In the past, foreign investors have overlooked Mexico’s southern states, although the administration is focused on attracting investment to the region, including through large infrastructure projects such as the Maya Train, the Dos Bocas refinery, and the trans-isthmus logistics and industrial corridor.  In 2021, the GOM ramped up public spending and widely promoted private investment in these projects.  In December 2021, President Lopez Obrador issued a controversial decree naming these projects “national security” priorities, allowing them to proceed before the completion of environmental and other impact studies.  Though courts enjoined the executive decree, it still generated concerns about the Lopez Obrador administration’s commitment to transparency.

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

The GOM dissolved the former trade and investment promotion agency ProMexico in 2019, and Mexico’s Secretariat of Foreign Affairs (SRE) assumed most of its responsibilities with the establishment of the General Directorate for Global Investment (GDGI) in June 2021.  The GDGI launched three specific projects:  the California Economic Council; an interactive data base to attract FDI called the “Atlas Prospectivo;” and the U.S.-Mexico Task Force for Transport Electrification.  The GDGI works closely with Mexico’s state secretaries of economy to promote trade and attract FDI through partnerships with SRE’s diplomatic missions overseas.

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

Reforms over the past decade in the energy, power generation, telecommunications, and retail fuel sales sectors have liberalized access for foreign investors.  While reforms have not led to the privatization of state-owned enterprises such as Pemex or the Federal Electricity Commission (CFE), they have allowed private firms to participate.  Still, the Lopez Obrador administration has made significant regulatory and policy changes that favor Pemex and CFE over private participants.  The changes have led private companies to file lawsuits in Mexican courts and seek compensation through international arbitration.

Hydrocarbons:  Private companies participate in hydrocarbon exploration and extraction activities through contracts with the government under four categories:  competitive contracts, joint ventures, profit sharing agreements, and license contracts.  All contracts must include a clause stating subsoil hydrocarbons are owned by the State.  The government held nine auctions allowing private companies to bid on exploration and development rights to oil and gas resources in blocks around the country.  Between 2015 and 2018, Mexico auctioned more than 100 land, shallow, and deep-water blocks with significant interest from international oil companies.  The administration has since postponed further auctions but committed to respecting the existing contracts awarded under the previous administration.  Still, foreign players were discouraged when the GOM awarded operatorship of a major shallow water oil discovery made by a U.S. company-led consortium to Pemex.  The private consortium had invested more than USD 200 million in making the discovery and is seeking compensation through international arbitration.

Telecommunications:  Mexican law states telecommunications and broadcasting activities are public services and the government will at all times maintain ownership of the radio spectrum.  In January 2021, President Lopez Obrador proposed incorporating the independent Federal Telecommunication Institute (IFT) into the Secretariat of Communications and Transportation (SCT), to save government funds and avoid duplication.  Non-governmental organizations and private sector companies said such a move would potentially violate the USMCA, which mandates signatories to maintain independent telecommunications regulators.  As of March 2022, the proposal remains pending.  Mexico’s Secretary of Economy Tatiana Clouthier underscored in public statements that President López Obrador is committed to respecting Mexico’s obligations under the USMCA, including maintaining an autonomous telecommunications regulator.

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

The USMCA, which entered into force July 1, 2020, maintained several NAFTA provisions, granting U.S. and Canadian investors national and most-favored-nation treatment in setting up operations or acquiring firms in Mexico.  Exceptions exist for investments restricted under the USMCA.  Currently, the United States, Canada, and Mexico have the right to settle any legacy disputes or claims under NAFTA through international arbitration for a sunset period of three years following the end of NAFTA.  Only the United States and Mexico are party to an international arbitration agreement under the USMCA, though access is restricted as the USMCA distinguishes between investors with covered government contracts and those without.  Most U.S. companies investing in Mexico will have access to fewer remedies under the USMCA than under NAFTA, as they will have to meet certain criteria to qualify for arbitration.  Sub-national Mexican governments must also accord national treatment to investors from USMCA countries.

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

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

There has not been an update to the World Trade Organization’s (WTO) trade policy review of Mexico since June 2017 covering the period to year-end 2016.

The October 2021 “Human Rights for a Just Energy Transition” report analyzes some of the energy policy decisions taken by the Mexican government in the last two years and provides investment-related recommendations: https://www.business-humanrights.org/en/latest-news/m%C3%A9xico-nuevo-informe-derechos-humanos-para-una-transici%C3%B3n-justa-destaca-regresi%C3%B3n-de-acci%C3%B3n-clim%C3%A1tica-y-derechos-humanos/

According to the World Bank, on average registering a foreign-owned company in Mexico requires 11 procedures and 31 days.  Mexico ranked 60 out of 190 countries in the World Bank’s most recent 2020 Doing Business report.  In 2016, then-President Pena Nieto signed a law creating a new category of simplified businesses called Sociedad for Acciones Simplificadas (SAS).  Owners of SASs are supposed to be able to register a new company online in 24 hours.  Still, it can take between 66 and 90 days to start a new business in Mexico, according to the World Bank.  The GOM maintains a business registration website, www.tuempresa.gob.mx, and one for general information on opening a business, https://www.gob.mx/tuempresa?tab=Abre. The Secretariat of Economy offers a one-stop shop website “Invest in Mexico” aimed at facilitating the administrative procedures for foreign investors: www.economia.gob.mx/invest-in-mx/.  Companies operating in Mexico must register with the tax authority (Servicio de Administracion Tributaria or SAT), the Secretariat of the Economy, and the Public Registry.  Additionally, companies engaging in international trade must register with the Registry of Importers, while foreign-owned companies must register with the National Registry of Foreign Investments.

Since October 2019, SAT has launched dozens of tax audits against major international and domestic corporations, resulting in hundreds of millions of dollars in new tax assessments, penalties, and late fees.  Multinational and Mexican firms have reported audits based on diverse aspects of the tax code, including adjustments on tax payments made, waivers received, and deductions reported during the Enrique Peña Nieto administration.  Private sector stakeholders reported a continuation of SAT’s aggressive tax auditing practices in 2021.

Various offices at the Secretariat of Economy and the Secretariat of Foreign Affairs handle promoting Mexican outward investment and assistance to Mexican firms acquiring or establishing joint ventures with foreign firms.  Mexico does not restrict domestic investors from investing abroad.

The National Commission on Regulatory Improvement (CONAMER), within the Secretariat of Economy, is the agency responsible for streamlining federal and sub-national regulation and reducing the regulatory burden on business.  Mexican law requires secretariats and regulatory agencies to conduct impact assessments of proposed regulations and engage in notice and comment rule making, which CONAMER carries out.  Impact assessments are made available for public comment via CONAMER’s website:  https://www.gob.mx/conamer.  The official gazette of state and federal laws currently in force in Mexico is publicly available via:  http://www.ordenjuridico.gob.mx/.  Mexican law provides for a 20-day public consultation period for most proposed regulations.  Any interested stakeholder can comment on draft regulations and the supporting justification, including regulatory impact assessments.  Certain measures are not subject to a mandatory public consultation period.  These include measures concerning taxation, responsibilities of public servants, the public prosecutor’s office executing its constitutional functions, and the Secretariats of National Defense (SEDENA) and the Navy (SEMAR).  In 2021, there was a rise in rule making with waiver of full notice and public comment processes as President Lopez Obrador rushed regulations through “in the national interest.”

Given SAT’s mandate to collect taxes and revenue from international trade, many of its regulations circumvent the notice and public comment process.  In 2021, SAT proposed a new requirement for a “digital waybill complement” or “complemento de carta porte” for nearly all goods shipments within Mexican territory effective January 1, 2022.  Mexican and U.S. private sector representatives called the digital document “onerous” as it requires 180 data points for shipments across all modalities—rail, truck, air, and maritime shipping—many of which are unknown at the onset of a shipment.  Despite the domestic nature of the new requirement, U.S. companies raised concerns about the “carta porte” as a technical barrier to trade given the potential delays it could cause for shipments to and from ports of entry.  The U.S. government has pushed for better SAT coordination with the private sector to address compliance challenges with the new requirement.  This advocacy led to the postponement of “carta porte’s” entry into force to October 1, 2022 and public-private working groups to discuss implementation in the interim.

The National Quality Infrastructure Program (PNIC) is the official document used to plan, inform, and coordinate standardization activities, both public and private.  The PNIC is published annually by the Secretariat of Economy in Mexico’s Official Gazette.  The PNIC describes Mexico’s plans for new voluntary standards (Normas Mexicanas; NMXs) and mandatory technical regulations (Normas Oficiales Mexicanas; NOMs) as well as proposed changes to existing standards and technical regulations.  Interested stakeholders can request the creation, modification, or cancelation of NMXs and NOMs as well as participate in the working groups that develop and modify these standards and technical regulations.  Mexico’s antitrust agency, the Federal Commission for Economic Competition (COFECE), plays a key role in protecting, promoting, and ensuring a competitive free market in Mexico as well as protecting consumers.  COFECE is responsible for eliminating barriers both to competition and free market entry across the economy (except for the telecommunications sector, which is governed by its own competition authority) and for identifying and regulating access to essential production inputs.  In September 2021, COFECE Commissioner President Alejandra Palacios stepped down following several months of public disagreements with President Lopez Obrador’s statist energy policy.  Lopez Obrador has not named substitutions for COFECE’s Commissioners since November 2020, leaving the institution without a quorum for resolutions related to barriers to competition or the issuance of regulatory provisions.

In addition to COFECE, the Energy Regulatory Commission (CRE) and National Hydrocarbon Commission (CNH) are both technical-oriented independent agencies that play important roles in regulating the energy and hydrocarbons sectors.  CRE regulates national electricity generation, coverage, distribution, and commercialization, as well as the transportation, distribution, and storage of oil, gas, and biofuels.  CNH supervises and regulates oil and gas exploration and production and issues oil and gas upstream (exploration/production) concessions.  In addition, the National Center for Energy Control (CENACE) is the independent electricity grid operator.  Energy experts assert that these agencies, particularly CRE, are no longer fully independent as they have favored Pemex and CFE with regulations and permits over private participants.

Mexico has seen a shift in the public procurement process since the onset of the COVID-19 pandemic.  Government entities are increasingly awarding contracts either as direct awards or by invitation-only procurements.  In addition, there have been recent tenders that favor European standards over North American standards.

Generally speaking, the Mexican government has established legal, regulatory, and accounting systems that are transparent and consistent with international norms.  Still, Mexico’s current executive administration has eroded the autonomy and publicly questioned the value of specific antitrust and energy regulators and has proposed dissolving some of them to cut costs.  Furthermore, corruption continues to affect equal enforcement of some regulations.  The administration rolled out an ambitious plan to centralize government procurement in an effort to root out corruption and generate efficiencies.  The administration estimated it could save up to USD 25 billion annually by consolidating government purchases in the Secretariat of Finance.  Still, the expedited rollout and lack of planning for supply chain contingencies led to several sole-source purchases.  The Mexican government’s budget is published online and readily available.  The Bank of Mexico also publishes and maintains data about the country’s finances and debt obligations.

Investors are increasingly concerned the administration is undermining confidence in the “rules of the game,” particularly in the energy sector, by weakening the political autonomy of COFECE, CNH, CENACE, and CRE.  Still, COFECE has successfully challenged regulatory changes in the electricity sector that favor state-owned enterprises over private companies.  The administration has appointed five of seven CRE commissioners over the Senate’s objections, which voted twice to reject the nominees in part due to concerns their appointments would erode the CRE’s autonomy.  The administration’s budget cuts resulted in significant government layoffs, which has reportedly hampered agencies’ ability to carry out their work, a key factor in investment decisions.  The independence of the CRE and CNH was further undermined by a memo from the government to both bodies instructing them to use their regulatory powers to favor state-owned Pemex and CFE.  Investors expressed concern over the current executive administration setting a fee ceiling for AFORES, or private pensions management firms, starting in 2022 using a fast-tracked regulatory process with little industry consultation.

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

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

The judicial branch and Prosecutor General’s office (FGR) are constitutionally independent from each other and the executive.  The Prosecutor General is nominated by the president and approved by a two-thirds majority in the Senate for a nine-year term, effectively de-coupling the Prosecutor General from the political cycle of elections every six years.  With the historic 2019 labor reform, Mexico also created an independent labor court system run by the judicial branch (formerly this was an executive branch function).  The labor courts are being brought online in a phased process by state with the final phase completed on May 1, 2022.

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

Mexico has two constitutionally autonomous regulators to govern matters of competition – the Federal Telecommunications Institute (IFT) and the Federal Commission for Economic Competition (COFECE).  IFT governs broadcasting and telecommunications, while COFECE regulates all other sectors.  For more information on competition issues in Mexico, please visit COFECE’s bilingual website at: www.cofece.mx.  As mentioned above, Lopez Obrador has publicly questioned the value of COFECE and his party unsuccessfully introduced a proposal last year which would have dramatically reduced its resources and merged COFECE and other regulators into a less-independent structure.  COFECE currently has the minimum quorum required of at least four commissioners in order to operate, out of a seven-members full board.  However, COFECE lacks the required quorum of five commissioners in order to issue final resolutions determining competition barriers as well as anti-competitive practices.  President Lopez Obrador has not appointed the remaining commissioners as required by law.

USMCA (and NAFTA) contain clauses stating Mexico may neither directly nor indirectly expropriate property, except for public purpose and on a non-discriminatory basis.  Expropriations are governed by international law and require rapid fair market value compensation, including accrued interest.  Investors have the right to international arbitration. The USMCA contains an annex regarding U.S.-Mexico investment disputes and those related to covered government contracts.

Mexico’s Reorganization and Bankruptcy Law (Ley de Concursos Mercantiles) governs bankruptcy and insolvency.  Congress approved modifications in 2014 to shorten procedural filing times and convey greater juridical certainty to all parties, including creditors.  Declaring bankruptcy is legal in Mexico and it may be granted to a private citizen, a business, or an individual business partner.  Debtors, creditors, or the Attorney General can file a bankruptcy claim.  Mexico ranked 33 out of 190 countries for resolving insolvency in the World Bank’s 2020 Doing Business report (that last it produced).  The average bankruptcy filing takes 1.8 years to be resolved and recovers 63.9 cents per USD, which compares favorably to average recovery in Latin America and the Caribbean of just 31.2 cents per USD.  The “Buró de Crédito” is Mexico’s main credit bureau.  More information on credit reports and ratings can be found at:  http://www.burodecredito.com.mx/.

Land grants or discounts, tax deductions, and technology, innovation, and workforce development funding are commonly used incentives.  Additional federal foreign trade incentives include: (1) IMMEX:  a promotion which allows manufacturing sector companies to temporarily import inputs without paying general import tax and value added tax (VAT); (2) Import tax rebates on goods incorporated into products destined for export; and (3) Sectoral promotion programs allowing for preferential ad-valorem tariffs on imports of selected inputs.  Industries typically receiving sectoral promotion benefits are footwear, mining, chemicals, steel, textiles, apparel, and electronics.  Manufacturing and other companies report it is becoming increasingly difficult to request and receive reimbursements from SAT of the VAT paid on inputs for the export sector, with significant reimbursement delays and arrears reaching tens of millions USD for some companies.

The administration renewed until December 31, 2024 a program launched in January 2019 that established a border economic zone (BEZ) in 43 municipalities in six northern border states within 15.5 miles from the U.S. border.  The BEZ program entails: 1) a fiscal stimulus decree reducing the Value Added Tax (VAT) from 16 percent to 8 percent and the Income Tax (ISR) from 30 percent to 20 percent; 2) a minimum wage increase to MXN 176.72 (USD 8.75) per day; and 3) the gradual harmonization of gasoline, diesel, natural gas, and electricity rates with neighboring U.S. states.  The purpose of the BEZ program was to boost investment, promote productivity, and create more jobs in the region.  Sectors excluded from the preferential ISR rate include financial institutions, the agricultural sector, and export manufacturing companies (maquilas).

On December 30, 2020, President Lopez Obrador launched a similar program for 22 municipalities in Mexico’s southern states of Campeche, Tabasco, and Chiapas, reducing VAT from 16 to 8 percent and ISR from 30 to 20 percent and harmonizing excise taxes on fuel with neighboring states in Central America.  Chetumal in Quintana Roo will also enjoy duty-free status.  The benefits extend from January 1, 2021 to December 31, 2024.

Mexico does not follow a “forced localization” policy—foreign investors are not required by law to use domestic content in goods or technology.  However, investors intending to produce goods in Mexico for export to the United States should take note of the rules of origin prescriptions contained within USMCA if they wish to benefit from USMCA treatment.  Chapter four of the USMCA introduced new rules of origin and labor content rules, which entered into force on July 1, 2020.

In 2020, the Central Bank of Mexico (or Banxico) and the National Banking and Securities Commissions (CNBV – Mexico’s principal bank regulator) drafted regulations mandating the largest financial technology companies operating in Mexico to either host data on a back-up server outside of the United States—if their primary is in the United States—or on physical servers in Mexico.  As of March 2022, the draft regulations remain pending public comment.  The financial services industry is concerned they could violate provisions of the USMCA financial services chapter prohibiting data localization.

Mexico’s government is increasingly choosing its military for the construction and management of economic infrastructure.  In the past two years, the government entrusted the Army (SEDENA) with building the new airport in Mexico City, and sections 6, 7, and part of section 5 of the Maya Train railway project in Yucatan state.  SEDENA created a state-owned company to operate and manage the newly completed Mexico City airport.  SEDENA is also issuing contracts for the construction of over 300 social development bank branches throughout Mexico.  The government announced plans to give to the Navy (SEMAR) the rights for construction, management, and operations of the Trans-Isthmic Train project to connect the ports of Coatzacoalcos in Veracruz state with the Salina Cruz port in Oaxaca state.  The government is in the process of transferring administration of land and sea ports from the Secretariat of Communications and Transportation (SCT) to SEDENA and SEMAR respectively and has appointed retired military personnel to port administrator positions at most ports.

Mexico ranked 105 out of 190 countries for ease of registering property in the World Bank’s 2020 Doing Business report, falling two places from its 2019 report.  Article 27 of the Mexican Constitution guarantees the inviolable right to private property.  Expropriation can only occur for public use and with due compensation.  Mexico has four categories of land tenure:  private ownership, communal tenure (ejido), publicly owned, and ineligible for sale or transfer.

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

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

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

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

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

The process for trademark registration in Mexico normally takes six to eight months.  The registration process begins by filing an application with IMPI, which is published in IMPI’s Gazette for opposition by a third party.  If no opposition is filed, IMPI undertakes a formalities examination, followed by a substantive examination to determine if the application and supporting documentation fulfills the requirements established by law and regulation to grant the trademark registration.  Once the determination is made, IMPI then issues the registration.  A trademark registration in Mexico is valid for 10 years from the date of registration and is renewable for 10-year periods.  Any party with standing can challenge a trademark registration through a cancellation proceeding.  IMPI employs the following administrative procedures:  nullity, expiration or lapsing, opposition, cancellation, trademark, patent, and copyright infringement.  Once IMPI issues a decision, the affected party may challenge it through an internal reconsideration process or go directly to the Specialized IP Court for a nullity trial.  An aggrieved party can then file an appeal with a Federal Appeal Court based on the Specialized IP Court’s decision.  In cases with an identifiable constitutional challenge, the plaintiff may file an appeal before the Supreme Court.

To improve efficiency, in 2020 IMPI partnered with the United States Patent and Trademark Office (USPTO) to launch the Parallel Patent Grant (PPG) initiative.  Under this new work-sharing arrangement, IMPI will expedite the grant of a Mexican patent for businesses and individuals already granted a corresponding U.S. patent.  This arrangement allows for the efficient reutilization of USPTO work by IMPI.  The USPTO also has a Patent Prosecution Highway (PPH) agreement with IMPI.  Under the PPH, an applicant receiving a ruling from either IMPI or the USPTO that at least one claim in an application is patentable may request that the other office expedite examination of the corresponding application.  The PPH leverages fast-track patent examination procedures already available in both offices to allow applicants in both countries to obtain corresponding patents faster and more efficiently.

Mexico undertook significant legislative reform to comply with the USMCA.  The Mexican Federal Law for Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial) went into effect November 5, 2020.  The decree issuing this law was published in the Official Gazette on July 1, 2020, in response to the USMCA and the CPTPP.  This new law replaced the Mexican Industrial Property Law (Ley de la Propiedad Industrial), substantially strengthening IPR across a variety of disciplines.  Mexico amended its Federal Copyright Law and its Federal Criminal Code to comply with the USMCA.  The amendments went into effect July 2, 2020.  These amendments should significantly strengthen copyright law in Mexico.  Still, there are concerns that constitutional challenges filed against notice and takedown provisions as well as TPMs in the amendments may weaken these. provisions.

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

Mexico remained on the Watch List in the 2021 Special 301 report published by the U.S. Trade Representative (USTR).  Obstacles to U.S. trade include the wide availability of pirated and counterfeit goods in both physical and virtual notorious markets.  The 2021 USTR Out-of-Cycle Review of Notorious Markets for Counterfeiting and Piracy listed these Mexican markets:  Tepito in Mexico City, La Pulga Rio in Monterrey, and Mercado San Juan de Dios in Guadalajara.  Mexico is a signatory to numerous international IP treaties, including the Paris Convention for the Protection of Industrial Property, the Berne Convention for the Protection of Literary and Artistic Works, and the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights.

Intellectual Property Rights Attaché for Mexico, Central America and the Caribbean
U.S. Trade Center Liverpool No. 31 Col. Juárez
C.P. 06600 Mexico City
Tel: (52) 55 5080 2189

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

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

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

The Mexican government is generally open to foreign portfolio investments, and foreign investors trade actively in various public and private asset classes.  Foreign entities may freely invest in federal government securities.  The Foreign Investment Law establishes foreign investors may hold 100 percent of the capital stock of any Mexican corporation or partnership, except in those few areas expressly subject to limitations under that law.  Foreign investors may also purchase non-voting shares through mutual funds, trusts, offshore funds, and American Depositary Receipts.

They also have the right to buy directly limited or nonvoting shares as well as free subscription shares, or “B” shares, which carry voting rights.  Foreigners may purchase an interest in “A” shares, which are normally reserved for Mexican citizens, through a neutral fund operated by one of Mexico’s six development banks.  Finally, Mexico offers federal, state, and local governments bonds that are rated by international credit rating agencies.  The market for these securities has expanded rapidly in past years and foreign investors hold a significant stake of total federal issuances.  However, foreigners are limited in their ability to purchase sub-sovereign state and municipal debt.  Liquidity across asset classes is relatively deep.

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

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

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

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

Mexico’s Financial Technology (FinTech) law came into effect in March 2018 and administration released secondary regulations in 2019, creating a broad rubric for the development and regulation of innovative financial technologies.  The law covers both cryptocurrencies and a regulatory “sandbox” for start-ups to test the viability of products, placing Mexico among the FinTech policy vanguard.  The reforms have already attracted significant investment to lending fintech companies and mobile payment companies.  However, industry stakeholders suggest insufficient clarity in the authorities’ implementation of the secondary regulations may be eroding the legal certainty the FinTech Law brought to the sector.  The CNBV has authorized fourteen fintechs under the FinTech Law to operate in the Mexican market and it is reviewing other applications.

The Mexican Petroleum Fund for Stability and Development (FMP) was created as part of 2013 budgetary reforms.  Housed in Banxico, the fund distributes oil revenues to the national budget and a long-term savings account.  The FMP incorporates the Santiago Principles for transparency, placing it among the most transparent Sovereign Wealth Funds in the world.  Both Banxico and Mexico’s Supreme Federal Auditor regularly audit the fund.  Mexico is also a member of the International Working Group of Sovereign Wealth Funds.  The Fund resources totaled MXN 23.4 billion (approximately USD 1.2 billion) in 2021.  The FMP is required to publish quarterly and annual reports, which can be found at www.fmped.org.mx.

There are two main SOEs in Mexico, both in the energy sector.  Pemex operates the hydrocarbons (oil and gas) sector, which includes upstream, mid-stream, and downstream operations.  Pemex historically contributed one-third of the Mexican government’s budget but falling output and global oil prices alongside improved revenue collection from other sources have diminished this amount over the past decade to about 8 percent.  The Federal Electricity Commission (CFE) operates the electricity sector.  While the GOM maintains state ownership, the 2013 constitutional reforms granted Pemex and CFE management and budget autonomy and greater flexibility to engage in private contracting.

As a result of Mexico’s 2013 energy reform, the private sector is now able to compete with Pemex or enter into competitive contracts, joint ventures, profit sharing agreements, and license contracts with Pemex for hydrocarbon exploration and extraction.  Liberalization of the retail fuel sales market, which Mexico completed in 2017, created significant opportunities for foreign businesses.  Given Pemex frequently raises debt in international markets, its financial statements are regularly audited.  The Natural Resource Governance Institute considers Pemex to be the second most transparent state-owned oil company after Norway’s Equinor.  Pemex’s ten-person Board of Directors contains five government ministers and five independent councilors.  The administration has identified increasing Pemex’s oil, natural gas, and refined fuels production as its chief priority for Mexico’s hydrocarbon sector.  Since taking office in 2018, the administration has taken numerous legal and regulatory steps to limit private competition for Pemex.

Changes to the Mexican constitution in 2013 and 2014 opened power generation and commercial supply to the private sector, allowing companies to compete with CFE.  Mexico held three long-term power auctions since the reforms, in which over 40 contracts were awarded for 7,451 megawatts of energy supply and clean energy certificates.  CFE remains the sole provider of transmission and distribution services and owns all distribution assets.  The 2013 energy reform separated CFE from the National Energy Control Center (CENACE), which controls the national wholesale electricity market and ensures non-discriminatory access to the grid for competitors, though recent actions call into question CENACE’s independence.  Legal and regulatory changes adopted by the Mexican government attempt to modify the rules governing the electricity dispatch order to favor CFE.  Dozens of private companies and non-governmental organizations have successfully sought injunctions against the measures, which they argue discriminate against private participants in the electricity sector.

Independent power generators were authorized to operate in 1992 but were required to sell their output to CFE or use it to self-supply.  Those legacy self-supply contracts have come under criticism with an electricity reform law and proposed constitutional amendment giving the government the ability to cancel contracts it deems fraudulent.  Under the 2013 reform, private power generators may now install and manage interconnections with CFE’s existing state-owned distribution infrastructure.  The 2013 reform also required the government to implement a National Program for the Sustainable Use of Energy as a transition strategy to encourage clean technology and fuel development and reduce pollutant emissions.  The executive administration has identified increasing CFE-owned power generation as its top priority for the utility, breaking from the firm’s recent practice of contracting private firms to build, own, and operate generation facilities.  CFE forced several foreign and domestic companies to renegotiate previously executed gas supply contracts, which raised significant concerns among investors about contract sanctity.

One of the main non-market-based advantages CFE and Pemex receive vis-a-vis private businesses in Mexico is related to access to capital.  In addition to receiving direct budget support from the Secretariat of Finance, both entities also receive implicit credit guarantees from the federal government.  As such, both are able to borrow funds on public markets at below the market rate their corporate risk profiles would normally suggest.  In addition to budgetary support, the CRE and SENER have delayed or halted necessary permits for new private sector gas stations, fuel terminals, fuel imports, and power plants, providing an additional non-market advantage to CFE and Pemex.

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

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

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

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

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities;
• U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises; and;
• Xinjiang Supply Chain Business Advisory 

Department of the Treasury

• OFAC Recent Actions

Department of Labor

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

Mexico published the National Strategy of Climate Change in 2013 with no further update since then and published the Special Program for Climate Change (PECC) in November 2021.  Mexico presented its sixth climate change communications report to the UNFCCC in 2018 and submitted its National Determination Contribution (NDC) to the UNFCCC in December 2020.

Mexico published its National Biodiversity Strategy in 2016.  Mexico published the second extensive country study of Natural Capital in 2006.  Mexico presented its Sixth National Report to the UN Convention on Biological Biodiversity in 2019.

Mexico has not released an official net-zero carbon emissions policy or strategy.

The PECC 2021 highlights include private sector climate change actions and fostering the inclusion of the private sector in the National Infrastructure Fund (Fonadin) to invest in sustainable infrastructure.

In October 2019, the Secretariat of Environment and Natural Resources (SEMARNAT) released an agreement to set the bases for a pilot program for a cap-and-trade emissions system for the energy and industry sectors.  SEMARNAT hasn’t reported updates on this pilot program.

The 2022 GOM budget allocated USD 3.84 billion for the Adaptation and Mitigation of the Effects of Climate Change and for the Promotion of the Use of Clean Technologies and Fuels.

Corruption exists in many forms in the GOM and society, including corruption in the public sector (e.g., demand for bribes or kickbacks by government officials) and private sector (e.g., fraud, falsifying claims, etc.), as well as conflict of interest issues, which are not well defined in the Mexican legal framework.

Government and law enforcement officials are sometimes complicit with criminal elements, posing serious challenges for the rule of law.  Some of the most common reports of official corruption involve government officials stealing from public coffers, creating fake companies to divert public funds, or demanding bribes in exchange for not prosecuting criminal activity or awarding public contracts.  The current administration supported anti-corruption reforms (detailed below) and judicial proceedings in several high-profile corruption cases, including former governors.  However, Mexican civil society asserts that the government must take more systematic, effective, and frequent action to address corruption at the institutional level.

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

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

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

Mexico is a member of the Open Government Partnership and enacted a Transparency and Access to Public Information Act in 2015, which revised the existing legal framework to expand national access to information.  Transparency in public administration at the federal level improved noticeably but expanding access to information at the state and local level has been slow.  According to Transparency International’s 2021 Corruption Perception Index, Mexico ranked 124 of 180 nations.  Civil society organizations focused on fighting corruption are high-profile at the federal level but are few in number and less powerful at the state and local levels.

Business representatives, including from U.S. firms, believe public funds are often diverted to private companies and individuals due to corruption and perceive favoritism to be widespread among government procurement officials.  The GAN Business Anti-Corruption Portal states compliance with procurement regulations by state bodies in Mexico is unreliable and that corruption is extensive, despite laws covering conflicts of interest, competitive bidding, and company blacklisting procedures.

The U.S. Embassy has engaged in a broad-based effort to work with Mexican agencies and civil society organizations in developing mechanisms to fight corruption and increase transparency and fair play in government procurement.  Efforts with specific business impact include government procurement best practices training and technical assistance under the U.S. Trade and Development Agency’s Global Procurement Initiative.  Mexico ratified the UN Convention Against Corruption in 2004.  It ratified the OECD Anti-Bribery Convention in 1999.

Contact at government agency:
Secretariat of Public Administration
Miguel Laurent 235, Mexico City
52-55-2000-1060

Contact at “watchdog” organization:
Transparencia Mexicana
Dulce Olivia 73, Mexico City
52-55-5659-4714
Email: info@tm.org.mx

Mass demonstrations are common in the larger metropolitan areas and in the southern Mexican states of Guerrero and Oaxaca. While political violence is rare, drug and organized crime-related violence has increased significantly in recent years. Political violence is also likely to accelerate in the run-up to the June 2022 elections as criminal actors seek to promote election of their preferred candidates. The national homicide rate dropped to 27 homicides per 100,000 residents in 2021 from 29 homicides per 100,000 residents in 2020, although aggregate homicides remain near all-time highs. For complete security information, please see the Safety and Security section in the Consular Country Information page at https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Mexico.html. Conditions vary widely by state. For a state-by-state assessment please see the Consular Travel Advisory at https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/mexico-travel-advisory.html.

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

Mexican labor law requires at least 90 percent of a company’s employees be Mexican nationals. Employers can hire foreign workers in specialized positions as long as foreigners do not exceed 10 percent of all workers in that specialized category. Mexico’s 56 percent rate of informality remains higher than countries with similar GDP per capita levels. High informality, defined as those working in unregistered firms or without social security protection, distorts labor market dynamics, contributes to persistent wage depression, drags overall productivity, and slows economic growth. In the formal economy, there exist large labor shortages due to a system that incentivizes informality. Manufacturing companies, particularly along the U.S.-Mexico border and in the states of Aguascalientes, Guanajuato, Jalisco, and Querétaro, report labor shortages and an inability to retain staff due to wages sometimes being less that what can be earned in the informal economy, although the recent increases in the minimum wage are leading to increases in entry level wages which are attracting more workers. Shortages of skilled workers and engineers continue due to a mismatch between industry needs and what schools teach. Mexico has one of the lowest female labor participation rates in the OECD, 45 percent to a 76 percent male participation rate among people legally allowed to work (15 years or older). Barriers for female workers include the culturally assigned role for them as caretakers of children and the elderly. Most Mexican workers work for a micro business (41 percent) and 59 percent earn between USD 8.6 and USD 17 per day. The unemployment rate in Mexico has maintained a stable path ranging from 3.5 percent to 4.9 percent (its highest peak during the pandemic). This rate, however, masks the high level of underemployment (14.8 percent) in Mexico (those working part time or in the informal sector when they want full time, formal sector jobs). For 2020 the informal economy accounted for 22 percent of total Mexican GDP according to the National Institute of Statistics and Geography. Informal businesses span across all economic activities from agriculture to manufacturing. In Mexico labor informality also spans across all economic activities with formal businesses employing both formal and informal workers to reduce their labor costs.

On May 1, 2019, Lopez Obrador signed into law a sweeping reform of Mexico’s labor law, implementing a constitutional change and focusing on the labor justice system. The reform replaces tripartite dispute resolution entities (Conciliation and Arbitration Boards) with independent judicial bodies and conciliation centers. In terms of labor dispute resolution mechanisms, the Conciliation and Arbitration Boards (CABs) previously adjudicated all individual and collective labor conflicts. Under the reform, collective bargaining agreements will now be adjudicated by federal labor conciliation centers and federal labor courts.

Labor experts predict the labor reform will result in a greater level of labor action stemming from more inter-union and intra-union competition. The Secretariat of Labor, working closely with Mexico’s federal judiciary, as well as state governments and courts, created an ambitious state-by-state implementation agenda for the reforms, which started November 18, 2020, and will end during the second semester of 2022. On November 18, 2020 the first phase of the labor reform implementation began in eight states: Durango, State of Mexico, San Luis Potosi, Zacatecas, Campeche, Chiapas, Tabasco, and Hidalgo. On November 3, 2021 the second phase started in 13 additional states, and the third phase will start during 2022 in 11 states. Further details on labor reform implementation can be found at: www.reformalaboral.stps.gob.mx .

Mexico’s labor relations system has been widely criticized as skewed to represent the interests of employers and the government at the expense of workers. Mexico’s legal framework governing collective bargaining created the possibility of negotiation and registration of initial collective bargaining agreements without the support or knowledge of the covered workers. These agreements are commonly known as protection contracts and constitute a gap in practice with international labor standards regarding freedom of association. The percentage of the economy covered by collective bargaining agreements is between five and 10 percent, of which more than half are believed to be protection contracts. As of March 7, 2022, 3,267 collective bargaining contracts have been legitimized (reviewed and voted on by the workers covered by them), according to the Secretariat of Labor. The reform requires all collective bargaining agreements to be submitted to a free, fair, and secret vote every two years with the objective of getting existing protectionist contracts voted out. The increasingly permissive political and legal environment for independent unions is already changing the way established unions manage disputes with employers, prompting more authentic collective bargaining. As independent unions compete with corporatist unions to represent worker interests, workers are likely to be further emboldened in demanding higher wages.

The USMCA’s labor chapter (Chapter 23) contains specific commitments on union democracy and labor justice which relate directly to Mexico’s 2019 labor reform and its implementation. In addition, the USMCA’s dispute settlement chapter (Chapter 31) includes a facility-specific labor rapid response mechanism to address labor rights issues and creates the ability to impose facility specific remedies to ensure remediation of such situations.

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

* data from the IMF’s Coordinated Direct Investment Survey (CCIS)
( https://data.imf.org/?sk=40313609-F037-48C1-84B1-E1F1CE54D6D5&sId=1482331048410 )

William Ayala
AyalaWM@state.gov
Economic Section
U.S. Embassy in Mexico
Paseo de la Reforma 305
Colonia Cuauhtemoc
06500 Mexico, CDMX

Poland welcomes foreign investment as a source of capital, growth, and jobs, and as a vehicle for technology transfer, research and development (R&D), and integration into global supply chains. The government’s Strategy for Responsible Development identified key goals for attracting investment, including improving the investment climate, a stable macroeconomic and regulatory environment, and high-quality corporate governance, including in state-controlled companies. By the end of 2020, according to IMF and National Bank of Poland data, Poland had attracted around $250 billion (cumulative) in foreign direct investment (FDI), principally from Western Europe and the United States. In 2020, reinvested profits again dominated the net inflow of FDI to Poland. The greatest reinvestment of profits occurred in services and manufacturing, reflecting the change of Poland’s economy to a more service-oriented and less capital-intensive structure.Foreign companies generally enjoy unrestricted access to the Polish market. However, Polish law limits foreign ownership of companies in selected strategic sectors, and limits acquisition of real estate, especially agricultural and forest land. Additionally, the current government has expressed a desire to increase the percentage of domestic ownership in some industries such as media, banking, and retail which have large holdings by foreign companies and has employed sectoral taxes and other measures to advance this aim. In March 2018, Sunday trading ban legislation went into effect, which has gradually phased out Sunday retail commerce in Poland, especially for large retailers. Since February 1, 2022, changes to the ban on Sunday trading are in force. According to these rules, it is possible to open stores that provide postal services on non-trading Sundays if the revenues from this activity exceed 40 percent of the total revenues of a given branch. Sales records must be kept separately for each commercial outlet, even if the entrepreneur has several such outlets. Fines for breaking the Sunday trading ban are from $230 to $23,250 (PLN 1,000 to PLN 100,000). From February 1, 2022, the same penalty applies for not keeping required monthly records. From 2020, the trade ban applies to all but seven Sundays a year. In 2020, a law was adopted requiring producers and importers of certain sugary and sweetened beverages to pay a fee.

The government has been planning to introduce an advertising tax – hailed as a “solidarity fee”- covering a wide array of entities including publishers, tech companies and cinemas. Only small media businesses would be exempt from the new levy. Polish authorities have also publicly favored introducing a comprehensive digital services tax.

While the government continues to acknowledge the value of FDI as a driver of growth, it has tended to focus on lessening Poland’s dependence on foreign capital by championing re-industrialization largely in the knowledge-based industries as well as shifting to more self-reliance in lending to small- and medium-sized firms in the banking sector.

There are a variety of agencies involved in investment promotion:

The Ministry of Economic Development and Technology has two departments involved in investment promotion and facilitation: the Investment Development and the Trade and International Relations Departments. The Deputy Minister supervising the Investment Development Department is also the ombudsman for foreign investors. https://www.gov.pl/web/przedsiebiorczosc-technologia/ 

The Ministry of Foreign Affairs (MFA) promotes Poland’s foreign relations including economic relations, and along with the Polish Chamber of Commerce (KIG), organizes missions of Polish firms abroad and hosts foreign trade missions to Poland. https://www.msz.gov.pl/ ; https://kig.pl/ 

The Polish Investment and Trade Agency (PAIH) is the main institution responsible for promotion and facilitation of foreign investment. The agency is responsible for promoting Polish exports, for inward foreign investment and for Polish investments abroad. The agency operates as part of the Polish Development Fund, which integrates government development agencies. PAIH coordinates all operational instruments, such as commercial diplomatic missions, commercial fairs, and programs dedicated to specific markets and sectors. The Agency has opened offices abroad including in the United States (Washington, D.C, Chicago, Houston, and New York). PAIH’s services are available to all investors. https://www.paih.gov.pl/en 

The American Chamber of Commerce has established the American Investor Desk – an investor-dedicated know-how gateway providing comprehensive information on investing in Poland and investing in the USA: https://amcham.pl/american-investor-desk 

In July 2021, PAIH and AmCham signed a cooperation agreement. Its purpose is to promote and create favorable conditions for the development of exports and investments on the Polish and American markets.

Poland allows both foreign and domestic entities to establish and own business enterprises and engage in most forms of remunerative activity per the Entrepreneurs’ Law which went into effect on April 30, 2018. Forms of business activity are described in the Commercial Companies Code. Poland does place limits on foreign ownership and foreign equity for a limited number of sectors. Polish law limits non-EU citizens to 49 percent ownership of a company’s capital shares in the air transport, radio and television broadcasting, and airport and seaport operations sectors. Licenses and concessions for defense production and management of seaports are granted on the basis of national treatment for investors from OECD countries.

Pursuant to the Broadcasting Law, a television broadcasting company may only receive a license if the voting share of foreign owners does not exceed 49 percent and if the majority of the members of the management and supervisory boards are Polish citizens and hold permanent residence in Poland. In 2017, a team comprised of officials from the Ministry of Culture and National Heritage, the National Broadcasting Council (KRRiT), and the Office of Competition and Consumer Protection (UOKiK) was created in order to review and tighten restrictions on large media and limit foreign ownership of the media. In December 2021, the President vetoed modifications to the media law limiting foreign ownership of the sector. There is concern that governing party politicians have not completely abandoned their plans and may attempt to bypass the president’s veto in such a way as to modify the media law.

Over the past six years, Poland’s ranking on Reporters without Borders’ Press Freedom Index has dropped to 64th from 18th. The governing Law and Justice (PiS) party aims to decrease foreign ownership of media, particularly outlets critical of their governing coalition. Approaches have included proposals to set caps on foreign ownership, the use of a state-controlled companies to purchase media, and the application of economic tools (taxes, fines, advertising revenue) to pressure foreign and independent media. In the insurance sector, at least two management board members, including the chair, must speak Polish. The Law on Freedom of Economic Activity (LFEA) requires companies to obtain government concessions, licenses, or permits to conduct business in certain sectors, such as broadcasting, aviation, energy, weapons/military equipment, mining, and private security services. The LFEA also requires a permit from the Ministry of Economic Development for certain major capital transactions (i.e., to establish a company when a wholly or partially Polish-owned enterprise has contributed in-kind to a company with foreign ownership by incorporating liabilities in equity, contributing assets, receivables, etc.). A detailed description of business activities that require concessions and licenses can be found here: https://www.paih.gov.pl/publications/how_to_do_business_in_Poland 

Polish law restricts foreign investment in certain land and real estate. Land usage types such as technology and industrial parks, business and logistic centers, transport, housing plots, farmland in special economic zones, household gardens and plots up to two hectares are exempt from agricultural land purchase restrictions. Since May 2016, foreign citizens from European Economic Area member states, Iceland, Liechtenstein, and Norway, as well as Switzerland, do not need permission to purchase any type of real estate including agricultural land. Investors from outside of the EEA or Switzerland need to obtain a permit from the Ministry of Internal Affairs and Administration (with the consent of the Defense and Agriculture Ministries), pursuant to the Act on Acquisition of Real Estate by Foreigners, prior to the acquisition of real estate or shares which give control of a company holding or leasing real estate. The permit is valid for two years from the day of issuance, and the ministry can issue a preliminary document valid for one year. Permits may be refused for reasons of social policy or public security. The exceptions to this rule include purchases of an apartment or garage, up to 0.4 hectares of undeveloped urban land, and “other cases provided for by law” (generally: proving a particularly close connection with Poland). Laws to restrict farmland and forest purchases (with subsequent amendments) came into force April 30, 2016, and are addressed in more detail in Section 5, Protection of Property Rights.

Since September 2015, the Act on the Control of Certain Investments has provided for the national security-related screening of acquisitions in high-risk sectors including: energy generation and distribution; petroleum production, processing and distribution; telecommunications; media; mining; and manufacturing and trade of explosives, weapons and ammunition. Poland maintains a list of strategic companies which can be amended at any time, but is updated at least once a year, usually in late December. The national security review mechanism does not appear to constitute a de facto barrier for investment and does not unduly target U.S. investment. According to the Act, prior to the acquisition of shares of strategic companies (including the acquisition of proprietary interests in entities and/or their enterprises) the purchaser (foreign or local) must notify the controlling government body and receive approval. The obligation to inform the controlling government body applies to transactions involving the acquisition of a “material stake” in companies subject to special protection. The Act stipulates that failure to notify carries a fine of up to PLN 100,000,000 ($22,300,000) or a penalty of imprisonment between six months and five years (or both penalties together) for a person acting on behalf of a legal person or organizational unit that acquires a material stake without prior notification.

As part of the COVID-19 Anti-Crisis Shield, on June 24, 2020, legislation entered into force extending significantly the FDI screening mechanism in Poland for 24 months. In the absence of new permanent regulations and due to the Russian invasion in Ukraine, there is a high probability that this legislation will be extended. An acquisition from a country that is not a member of the EU, the EEA, or the OECD requires prior clearance from the President of the Polish Competition Authority if it targets a company generating turnover exceeding EUR 10 million ($10.5 million) that either: 1) is a publicly-listed company, 2) controls assets classified as critical infrastructure, 3) develops or maintains software crucial for vital processes (e.g., utilities systems, financial transactions, food distribution, transport and logistics, health care systems); or 4) conducts business in one of 21 specific industries, including energy, gas and oil production, storage, distribution and transportation; manufacture of chemicals, pharmaceuticals and medical instruments; telecommunications; and food processing. The State Assets Ministry is preparing similar and more permanent measures.

In November 2019, the governing PiS party reestablished a treasury ministry, known as the State Assets Ministry, to consolidate the government’s control over state-owned enterprises. The government dissolved Poland’s energy ministry, transferring that agency’s mandate to the State Assets Ministry. The Deputy Prime Minister and Minister of State Assets announced he would seek to consolidate state-owned companies with similar profiles, including merging Poland’s largest state-owned oil and gas firm PKN Orlen with state-owned Lotos Group and establishing a National Food Holding. At the same time, the government is working on changing the rules of governing state-owned companies to have better control over the firms’ activities.

The government has not undergone any third-party review focused on investment policy by a multilateral or civil society organization in the last five years,

The OECD published its 2020 economic survey of Poland. It can be found here:

https://www.oecd.org/economy/poland-economic-snapshot/ 

Additionally, the OECD Working Group on Bribery has provided recommendations on the implementation of the OECD Anti-Bribery Convention in Poland here:

https://www.oecd.org/poland/poland-should-urgently-implement-reforms-to-boost-fight-against-foreign-bribery-and-preserve-independence-of-prosecutors-and-judges.htm 

In 2021, government activities and regulations focused primarily on addressing challenges related to the COVID-19 pandemic.

The Polish government has continued to implement reforms aimed at improving the investment climate with a special focus on the small- and medium-enterprise (SME) sector and innovations. Poland reformed its R&D tax incentives with new regulations and changes encouraging wider use of the R&D tax breaks. As of January 1, 2019, a new mechanism reducing the tax rate on income derived from intellectual property rights (IP Box) was introduced. Please see Section 5, Protection of Property Rights of this report for more information.

A package of five laws referred to as the “Business Constitution”—intended to facilitate the operation of small domestic enterprises—was gradually introduced in 2018. The main principle of the Business Constitution is the presumption of innocence of business owners in dealings with the government.

Poland made enforcing contracts easier by introducing an automated system to assign cases to judges randomly. Despite these reforms and others, some investors have expressed serious concerns regarding over-regulation, over-burdened courts and prosecutors, and overly burdensome bureaucratic processes. Tax audit methods have changed considerably. For instance, in many cases an appeal against the findings of an audit must now be lodged with the authority that issued the initial finding rather than a higher authority or third party. Poland also enabled businesses to get electricity service faster by implementing a new customer service platform that allows the utility to better track applications for new commercial connections.

The Ministry of Finance and the National Tax Administration have launched an e-Tax Office, available online at https://www.podatki.gov.pl/ . The website, which will be constructed in stages through September 2022, will make it possible to settle all tax matters in a single user-friendly digital location.

Running a business in Poland will be facilitated by e-invoices. From January 2022, entrepreneurs will be able to use it voluntarily. Taxpayers choosing an e-invoice will receive a VAT refund faster – the refund period will be shortened by 20 days (from 60 to 40). The government plans, starting in 2023, to have entrepreneurs use this solution obligatorily.

A special tax unit, the “Investor Desk,” has been established at the Finance Ministry to handle tax matters of strategic investors. This unit, working with other agencies focused on foreign investments in Poland, will support large investors with administrative requirements.

In Poland, business activity may be conducted in the forms of a sole proprietorship, civil law partnership, as well as commercial partnerships and companies regulated in provisions of the Commercial Partnerships and Companies Code. Sole proprietorship and civil law partnerships are registered in the Central Registration and Information on Business (CEIDG), which is housed with the Ministry of Economic Development and Technology here:

https://prod.ceidg.gov.pl/CEIDG.CMS.ENGINE/?D;f124ce8a-3e72-4588-8380-63e8ad33621f 

Commercial companies are classified as partnerships (registered partnership, professional partnership, limited partnership, and limited joint-stock partnership) and companies (limited liability company and joint-stock company). A partnership or company is registered in the National Court Register (KRS) and maintained by the competent district court for the registered office of the established partnership or company. A 2018 law introduced a new type of company—PSA (Prosta Spółka Akcyjna – Simple Joint Stock Company). PSAs are meant to facilitate start-ups with simpler and cheaper registration procedures. The minimum initial capitalization is 1 PLN ($0.23) while other types of registration require 5,000 PLN ($1,126) or 50,000 PLN ($11,260). A PSA has a board of directors, which merges the responsibilities of a management board and a supervisory board. The provision for PSAs entered into force in July 2021.

From October 12, 2022, an amendment to the Commercial Companies Code and certain other acts will enter into force. It introduces the so-called “holding law,” developed by the Commission for Owner Oversight Reform in the Ministry of State Assets. The amendment lays down the principles of how a parent company may instruct its subsidiaries and stipulates the parent company’s liability and the principles of creditor, officer, and minority shareholder protections.

This amendment constitutes an important change for many companies operating in Poland, including foreign parent companies. Holding companies meeting certain requirements will be eligible for an exemption from CIT of 95 percent of dividends received from subsidiaries and full exemption from CIT of capital gains from the sale of shares of subsidiaries for unrelated entities. Only a limited liability company or a joint stock company, being considered a Polish tax resident, may be considered a holding company. The requirement of holding at least 10 percent of shares of a subsidiary and for a period of at least one year applies. Both the holding company and the subsidiary cannot belong to a tax capital group and cannot benefit from tax exemptions (e.g., activity in the special economic zone). The holding company must conduct genuine business activity in Poland. Capital gains from the sale of real estate-rich companies are not exempt. New regulations will apply only to capital companies.

On January 1, 2021, a new law on public procurement entered into force. This law had been adopted by the Polish Parliament on September 11, 2019. The new law aims to reorganize the public procurement system, further harmonize it with EU law, and improve transparency.

Beginning in July 2021, commercial companies were required to submit electronically all applications for registration, deletion, and changes to the National Court Register. All company files are now available electronically and the registration process should speed up significantly.

National Court Register (KRS): https://www.gov.pl/web/gov/uslugi-dla-przedsiebiorcy  A certified e-signature may be obtained from one of the commercial e-signature providers listed on the following website:  https://www.nccert.pl/ 

Agencies with which a business will need to file in order to register in the KRS include:

Central Statistical Office to register for a business identification number (REGON) for civil-law partnership http://bip.stat.gov.pl/en/regon/subjects-and-data-included-in-the-register/ 

ZUS – Social Insurance Agency http://www.zus.pl/pl/pue/rejestracja 

Ministry of Finance http://www.mf.gov.pl/web/bip/wyniki-wyszukiwania/?q=business percent20registration 

Both registers (KRS and REGON) are available in English and foreign companies may use them.

Poland’s Single Point of Contact site for business registration and information is: https://www.biznes.gov.pl/en/ 

The Polish Agency for Investment and Trade (PAIH), under the umbrella of the Polish Development Fund (PFR), plays a key role in promoting Polish investment abroad. More information on PFR can be found in Section 6, Financial Sector and at its website: https://pfr.pl/ .

PAIH has 58 offices worldwide, including four in the United States. PAIH assists entrepreneurs with the administrative and legal procedures related to specific projects. PAIH also works with entrepreneurs in the development of legal solutions and finding suitable locations, reliable partners, and suppliers. The agency implements pro-export projects such as “Polish Tech Bridges” dedicated to the outward expansion of innovative Polish SMEs.

Poland is a founding member of the Asian Infrastructure Investment Bank (AIIB).

Poland co-founded and actively supports the Three Seas Initiative, which seeks to improve north-south connections in road, energy, and telecom infrastructure in 12 countries on NATO’s and the EU’s eastern flank. In May 2019, the national development bank, Bank Gospodarstwa Krajowego (BGK), and the Romanian development bank EximBank founded the Three Seas Fund, a commercial initiative to support the development of transport, energy and digital infrastructure in Central and Eastern Europe. As of March 2022, there were nine core sponsors involved in the Fund. There were no breakthroughs in 2021 for the Three Seas Initiative, however, 2021 did bring long-awaited stabilization as well as the recognition of the initiative among the majority of international partners in the region. The Three Seas Initiative may be able to play a significant role in the inclusion process for Ukraine in European structures.

Under the Government Financial Support for Exports Program, BGK grants foreign buyers financing for the purchase of Polish goods and services. The program provides the following financing instruments: credit for buyers granted through the buyers’ bank; credit for buyers granted directly from BGK; the purchase of receivables on credit from the supplier under an export contract; documentary letters of credit post-financing; the discounting of receivables from documentary letters of credit; confirmation of documentary letters of credit; and export pre-financing. BGK has international offices in London and Frankfurt.

In July 2019, BGK, the European Investment Bank, and four other development banks (French Deposits and Consignments Fund, Italian Deposits and Loans Fund, the Spanish Official Credit Institute, and the German Credit Institute for Reconstruction), began the implementation of the “Joint Initiative on Circular Economy” (JICE), the goal of which is to eliminate waste, prevent its generation, and increase the efficiency of resource management. PFR TFI S.A, an entity also under the umbrella of PFR, supports Polish investors planning to or already operating abroad. PFR TFI manages the Foreign Expansion Fund (FEZ), which provides loans, on market terms, to foreign entities owned by Polish entrepreneurs. See https://www.pfrtfi.pl/  and https://pfr.pl/en/offer/polish-international-development-fund.html 

The Polish Constitution contains a number of provisions related to administrative law and procedures.  It states administrative bodies have a duty to observe and comply with the law of Poland.  The Code of Administrative Procedures (CAP) states rules and principles concerning participation and involvement of citizens in processes affecting them, the giving of reasons for decisions, and forms of appeal and review.

As a member of the EU, Poland complies with EU directives by harmonizing rules or translating them into national legislation.  Rule-making and regulatory authority exist at the central, regional, and municipal levels.  Various ministries are engaged in rule-making that affects foreign business, such as pharmaceutical reimbursement at the Ministry of Health or incentives for R&D at the Ministry of Economic Development and Technology.  Regional and municipal level governments can levy certain taxes and affect foreign investors through permitting and zoning.

Polish accounting standards do not differ significantly from international standards.  Major international accounting firms provide services in Poland.  In cases where there is no national accounting standard, the appropriate International Accounting Standard may be applied.  However, investors have complained of regulatory unpredictability and high levels of administrative red tape.  Foreign and domestic investors must comply with a variety of laws concerning taxation, labor practices, health and safety, and the environment.  Complaints about these laws, especially the tax system, center on frequent changes, lack of clarity, and strict penalties for minor errors.

Poland has improved its regulatory policy system over the last several years.  The government introduced a central online system to provide access for the general public to regulatory impact assessments (RIA) and other documents sent for consultation to selected groups such as trade unions and business.  Proposed laws and regulations are published in draft form for public comment, and ministries must conduct public consultations.  Poland follows OECD recognized good regulatory practices, but investors say the lack of regulations governing the role of stakeholders in the legislative process is a problem.  Participation in public consultations and the window for comments are often limited.

New guidelines for RIA, consultation and ex post evaluation were adopted under the Better Regulation Program in 2015, providing more detailed guidance and stronger emphasis on public consultation.  Like many countries, Poland faces challenges to fully implement its regulatory policy requirements and to ensure that RIA and consultation comments are used to improve decision making.  The OECD suggests Poland extend its online public consultation system and consider using instruments such as green papers more systematically for early-stage consultation to identify options for addressing a policy problem.  OECD considers steps taken to introduce ex post evaluation of regulations encouraging.

Bills can be submitted to Parliament for debate as “citizens’ bills” if authors collect 100,000 signatures in support for the draft legislation.  NGOs and private sector associations most often take advantage of this avenue.  Parliamentary bills can also be submitted by a group of parliamentarians, a mechanism that bypasses public consultation and which both domestic and foreign investors have criticized.  Changes to the government’s rules of procedure introduced in June 2016 reduced the requirements for RIA for preparations of new legislation.

Administrative authorities are subject to oversight by courts and other bodies (e.g., the Supreme Audit Chamber – NIK), the Office of the Human Rights Ombudsperson, special commissions and agencies, inspectorates, the Prosecutor and parliamentary committees.  Polish parliamentary committees utilize a distinct system to examine and instruct ministries and administrative agency heads.  Committees’ oversight of administrative matters consists of: reports on state budget implementation and preparation of new budgets, citizens’ complaints, and reports from NIK.  In addition, courts and prosecutors’ offices sometimes bring cases to Parliament’s attention.

The Ombudsperson’s institution works relatively well in Poland.  Polish citizens have a right to complain and to put forward grievances before administrative bodies.  Proposed legislation can be tracked on the Prime Minister’s webpage, RPL Strona Główna (rcl.gov.pl)  and the Parliament’s webpage:  https://www.sejm.gov.pl/sejm9.nsf/proces.xsp 

The government promotes and encourages companies’ environmental, social, and governance (ESG) disclosure. For example, the Strategic Investments Program launched by Bank Gospodarstwa Krajowego (BGK) offers co-financing, up to 95 percent of the value, for investments by local governments. As part of the assessment of applications, implementation of innovative technologies and compliance with sustainable development goals are taken into account. Tax relief for corporate social responsibility (CSR), intended for all entrepreneurs, will come into force in 2022. Companies will be able to deduct an additional 50 percent from the tax base for costs incurred on activities such as sports, culture, higher education, and science. CSR relief may be deducted up to the amount of income obtained in the tax year. The government also organizes or supports conferences and campaigns such as “Our Climate” and “TOGETAIR 2022,” with the aim of raising awareness of ways to transition to a climate-neutral, green, competitive, and inclusive economy.

Poland has consistently met the Department of State’s minimum requirements for fiscal transparency: 2021 Fiscal Transparency Report – United States Department of State

Poland’s budget and information on debt obligations were widely and easily accessible to the general public, including online. The budget was substantially complete and considered generally reliable. NIK audited the government’s accounts and made its reports publicly available, including online. The budget structure and classifications are complex, and the Polish authorities agree more work is needed to address deficiencies in the process of budgetary planning and procedures. State budgets encompass only part of the public finances sector.

The European Commission regularly assesses the public finance sustainability of Member States based on fiscal gap ratios. In 2022, Poland’s public finances will be exposed to a higher general government deficit, uncertainty in financial markets resulting from the Russian invasion of Ukraine, the macroeconomic environment with elevated inflation, and the monetary policy of the National Bank of Poland (NBP) and major central banks, including the European Central Bank and the U.S. Federal Reserve.

Since its EU accession in May 2004, Poland has been transposing European legislation and reforming its own regulations in compliance with the EU system. Poland sometimes disagrees with EU regulations related to renewable energy and emissions due to its important domestic coal industry. Poland participates in the process of creation of European norms. There is strong encouragement for non-governmental organizations, such as environmental and consumer groups, to actively participate in European standardization. In areas not covered by European normalization, the Polish Committee for Standardization (PKN) introduces norms identical with international norms, i.e., PN-ISO and PN-IEC. PKN actively cooperates with international and European standards organizations and with standards bodies from other countries. PKN has been a founding member of the International Organization for Standardization (ISO) and a member of the International Electro-technical Commission (IEC) since 1923.PKN also cooperates with the American Society for Testing and Materials (ASTM) International and the World Trade Organization’s (WTO) Agreement on Technical Barriers to Trade (TBT). Poland has been a member of the WTO since July 1, 1995 and was a member of GATT from October 18, 1967. All EU member states are WTO members, as is the EU in its own right. While the member states coordinate their positions in Brussels and Geneva, the European Commission alone speaks for the EU and its members in almost all WTO affairs. PKN runs the WTO/TBT National Information Point in order to apply the provisions of the TBT with respect to information exchange concerning national standardization.Useful Links:

http://ec.europa.eu/growth/single-market/european-standards/harmonised-standards/ 

http://eur-lex.europa.eu/oj/direct-access.html?locale=en )

The Polish legal system is code-based and prosecutorial.  The main source of the country’s law is the Constitution of 1997.  The legal system is a mix of Continental civil law (Napoleonic) and remnants of communist legal theory.  Poland accepts the obligatory jurisdiction of the European Court of Justice (ECJ), but with reservations.  In civil and commercial matters, first instance courts sit in single-judge panels, while courts handling appeals sit in three-judge panels. District Courts (Sad Rejonowy) handle the majority of disputes in the first instance.  When the value of a dispute exceeds a certain amount or the subject matter requires more expertise (such as those regarding intellectual property rights), Circuit Courts (Sad Okregowy) serve as first instance courts.  Circuit Courts also handle appeals from District Court verdicts.  Courts of Appeal (Sad Apelacyjny) handle appeals from verdicts of Circuit Courts as well as generally supervise the courts in their region.  The Polish judicial system generally upholds the sanctity of contracts.  Foreign court judgements, under the Polish Civil Procedure Code and European Community regulation, can be recognized.  There are many foreign court judgments, however, which Polish courts do not accept or accept partially.  There can also be delays in the recognition of judgments of foreign courts due to an insufficient number of judges with specialized expertise.  Generally, foreign firms are wary of the slow and over-burdened Polish court system, preferring other means to defend their rights.  Contracts involving foreign parties often include a clause specifying that disputes will be resolved in a third-country court or through offshore arbitration.  (More detail in Section 4, Dispute Settlement.)

Since coming to power in 2015, the PiS-led government has pursued far-reaching reforms to Poland’s judicial system. The reforms have led to legal disputes with the European Commission over threats to judicial independence. The reforms have also drawn criticism from legal experts, NGOs, and international organizations. Poland’s government contends the reforms are needed to purge the old Communist guard and increase efficiency and democratic oversight in the judiciary.

Observers have noted, in particular, the introduction of an extraordinary appeal mechanism in the 2017 Supreme Court Law.  The extraordinary appeal mechanism states that final judgments issued since 1997 can be challenged and overturned in whole or in part during a three-year period starting from the day the legislation entered into force, April 3, 2018.  On February 25, 2021, the lower house of Parliament (Sejm) passed an amendment to the law further extending the deadline for submitting extraordinary complaints by three years (until April 3, 2024).  The President signed the bill into law on March 31, 2021. During 2021, the Extraordinary Appeals Chamber received 744 new complaints of which 280 were recognized and accepted for examination. During 2021, the Chamber reviewed 103 complaints.

On April 8, 2020, the European Court of Justice (ECJ) issued interim measures ordering the government to suspend the work of the Supreme Court Disciplinary Chamber with regard to disciplinary cases against judges. The ECJ is evaluating an infringement proceeding launched by the European Commission in April 2019 and referred to the ECJ in October 2019. The Commission has argued that the country’s disciplinary regime for judges “undermines the judicial independence of…judges and does not ensure the necessary guarantees to protect judges from political control, as required by the Court of Justice of the EU.” The Commission stated the disciplinary regime did not provide for the independence and impartiality of the Disciplinary Chamber, which is composed solely of judges selected by the restructured National Council of the Judiciary, which is appointed by the Sejm. The ECJ has yet to make a final ruling. The European Commission and judicial experts have complained the government has ignored the ECJ’s interim measures.

On April 29, 2020, the European Commission launched another infringement procedure regarding a law that came into effect on February 14, 2020. The law allows judges to be disciplined for impeding the functioning of the legal system or for questioning another judge’s professional state or the effectiveness of his or her appointment. It also requires judges to disclose memberships in associations. The Commission stated the law “undermines the judicial independence of Polish judges and is incompatible with the primacy of EU law.” It also stated the law “prevents Polish courts from directly applying certain provisions of EU law protecting judicial independence and from putting references for preliminary rulings on such questions to the [European] Court of Justice.” On December 3, 2020, the Commission expanded its April 29 complaint to include the continued functioning of the Disciplinary Chamber in apparent disregard of the ECJ’s interim measures in the prior infringement procedure.  On January 27, 2021, the European Commission sent a reasoned opinion to the Polish government for response.

On July 14 and 15, 2021, the ECJ issued two rulings against Polish government changes to Poland’s judicial disciplinary system. These rulings directly conflicted with a July 14, 2021, Polish Constitutional Tribunal ruling that said the ECJ had exceeded its authority. On July 20, 2021, the European Commission threatened financial sanctions and gave the Polish government until August 16, 2021, to confirm compliance with the ECJ rulings. On August 16, the Polish government sent a letter to the Commission in response to the ultimatum, promising new legislation in “the coming months” to fix Poland’s judicial disciplinary regime and liquidate the controversial Disciplinary Chamber of the Supreme Court. On September 7, 2021, the Commission announced it had requested the ECJ impose financial penalties against Poland for not complying with ECJ rulings. The Commission also initiated a new infringement procedure against Poland to ascertain details about the Polish government’s planned legislation. On October 27, 2021, the ECJ imposed a €1 million daily fine against Poland for the government’s failure to suspend the Disciplinary Chamber of the Supreme Court, as ordered by the ECJ in July. As of April 2022, the Polish Parliament has not completed the legislative process to consider legislation that responds to the European Commission’s concerns.

Foreign nationals can expect to obtain impartial proceedings in legal matters. Polish is the official language and must be used in all legal proceedings. It is possible to obtain an interpreter. The basic legal framework for establishing and operating companies in Poland, including companies with foreign investors, is found in the Commercial Companies Code. The Code provides for establishment of joint-stock companies, limited liability companies, or partnerships (e.g., limited joint-stock partnerships and professional partnerships). These corporate forms are available to foreign investors who come from an EU or European Free Trade Association (EFTA) member state or from a country that offers reciprocity to Polish enterprises, including the United States.With few exceptions, foreign investors are guaranteed national treatment. Companies that establish an EU subsidiary after May 1, 2004 and conduct or plan to commence business operations in Poland must observe all EU regulations. However, in some cases they may not be able to benefit from all privileges afforded to EU companies. Foreign investors without permanent residence and the right to work in Poland may be restricted from participating in day-to-day operations of a company. Parties can freely determine the content of contracts within the limits of European contract law. All parties must agree on essential terms, including the price and the subject matter of the contract. Written agreements, although not always mandatory, may enable an investor to avoid future disputes. The Civil Code is the law applicable to contracts.

Useful websites (in English) to help navigate laws, rules, procedures, and reporting requirements for foreign investors:

Polish Investment and Trade Agency: https://www.paih.gov.pl/en 

Polish Financial Supervision Authority (KNF):  https://www.knf.gov.pl/en/ 

Office of Competition and Consumer Protection (UOKIK):  https://uokik.gov.pl/legal_regulations.php 

Biznes.gov.pl is intended for people who plan to start a new business in Poland. The portal is designed to simplify the formalities of setting up and running a business. It provides up-to-date regulations and procedures for running a business in Poland and the EU; it supports electronic application submission to state institutions; and it answers questions regarding running a business. Information is available in Polish and English. https://www.biznes.gov.pl/en/przedsiebiorcy/ 

In 2022, the Polish Government introduced a new measure – an investment agreement – for strategic investors who would like to obtain clarity and certainty regarding the tax consequences of a given investment. The agreement (commonly referred to as “Interpretation 590”) is concluded with the Ministry of Finance and will be binding on the tax administration.

An Interpretation 590 includes the following features:

• Its objective is to provide flexibility, completeness, and comprehensiveness in determining the tax consequences of an investment project.
• It is available to investors planning an investment in Poland worth at least PLN 100 million (approximately $22 million) and, from 2025 onward, PLN 50 million (approximately $11 million).
• The agreement will be valid for the stated period, limited to five tax years (with the possibility to extend).
• Separate applications to various tax authorities (e.g., individual tax rulings, advance pricing arrangements (APA), anti-GAAR clearance, etc.) are not required as all of these matters would be covered with one investment agreement.
• The scope of information provided in the agreement should not be limited by the provisions of the Tax Code governing individual tax rulings. One agreement could cover all potential tax consequences of an investment.
• The agreement will be subject to a fee of PLN 50,000 (approximately $11,200) for the initial application and PLN 100,000 to 500,000 (approximately $22,400 to $112,000) after concluding the agreement, with the exact fee depending on the volume of the investment and scope of the investment agreement).

The above changes reflect an increasing focus of the Polish Government to attract significant investments into Poland.

A special tax unit, the “Investor Desk” has been established, at the Finance Ministry, to handle tax matters of strategic investor. This unit, along with other agencies focused on foreign investments in Poland, will support significant investors passing through administrative requirements.

The tax authorities are often open to discussing strategic investments and providing support in applying formal measures which, with new measures in place, should be even more common and accessible to investors.

Poland has a high level of nominal convergence with the EU on competition policy in accordance with Articles 101 and 102 of the Lisbon Treaty. Poland’s Office of Competition and Consumer Protection (UOKiK) is well within EU norms for structure and functioning, with the exception that the Prime Minister both appoints and dismisses the head of UOKiK. This is supposed to change to be in line with EU norms, however, as of April 2022, the Prime Minister was still exercising his right to remove and nominate UOKiK’s presidents.

The Act on Competition and Consumer Protection  was amended in mid-2019. The most important changes, which concern geo-blocking and access to fiscal and banking secrets, came into force on September 17, 2019. Other minor changes took effect in January 2020. The amendments result from the need to align national law with new EU laws.

Starting in January 2020, UOKiK may intervene in cases when delays in payment are excessive. UOKiK can take action when the sum of outstanding payments due to an entrepreneur for three subsequent months amounts to at least PLN 5 million ($1.1 million). In 2022, the minimum amount decreases to PLN 2 million ($450,000).

The President of UOKiK issues approximately 100 decisions per year regarding practices restricting competition and infringing on collective interests of consumers. Enterprises have the right to appeal against those decisions to the court. In the first instance, the case is examined by the Court of Competition and Consumer Protection, and in the second instance, by the Appellate Court. The decision of the Appellate Court may be challenged by way of a cassation appeal filed to the Supreme Court. In major cases, the General Counsel to the Republic of Poland will act as the legal representative in proceedings concerning an appeal against a decision of the President of UOKiK.

As part of COVID-related measures, the Polish Parliament adopted legislation amending the Act of July 24, 2015, on the Control of Certain Investments, introducing full-fledged foreign direct investment control in Poland and giving new responsibilities to UOKiK. Entities from outside the EEA and/or the OECD have to notify the Polish Competition Authority of the intention to make an investment resulting in acquisition, achievement or obtaining directly or indirectly “significant participation” or the status of a dominant entity within the meaning of the Act of July 24, 2015, on the Control of Certain Investments in an entity subject to protection. The law entered into force on July 24, 2020 and is valid for 24 months. In view of the war taking place across Poland’s eastern border and in the absence of significant amendments to the original Act on the Control of Certain Investments, there is a high likelihood that the temporary amendment adopted in 2020 will be extended, with possible modifications.

In late 2020, the government proposed legislation concerning UOKiK’s investigative powers, cooperation between anti-monopoly authorities, and changes to fine imposition and leniency programs. One of the amendments also stipulates that the President of UOKiK will be elected to a 5-year term and the dismissal of the anti-monopoly authority will only be possible in precisely defined situations, such as a legally valid conviction for a criminal offense caused by intentional conduct and the deprivation of public rights or of Polish citizenship. Adoption of these solutions is linked to the implementation of the EU’s ECN+ directive.

All multinational companies must notify UOKiK of a proposed merger if any party to it has subsidiaries, distribution networks, or permanent sales in Poland.

Examples of competition reviews can be found at:

https://uokik.gov.pl/aktualnosci.php?news_id=17406  (PKN Orlen/Polska Press)

https://www.uokik.gov.pl/news.php?news_id=17198  (Agora/Eurozet)

https://www.uokik.gov.pl/news.php?news_id=17202  (Orlen/Polska Press)

https://www.uokik.gov.pl/news.php?news_id=17198  (BPH Bank spread clauses)

Decisions made by the President of UOKiK can be searched here: https://decyzje.uokik.gov.pl/bp/dec_prez.nsf 

In December 2021, UOKiK launched its first competition probe into a major online platform, beginning an investigation into whether Apple’s latest privacy update unlawfully favors its own personalized advertising service. UOKiK has also initiated two proceedings concerning the application of competition law to employment-related arrangements. This follows a growing global trend of competition authorities combating no-poach or wage-fixing arrangements.

The President of UOKiK has the power to impose significant fines on individuals in management positions at companies that violate the prohibition of anticompetitive agreements and in the case of violations of consumer rights. The maximum fine that can be imposed on a manager is PLN 2 million ($450,000) and, in the case of managers in the financial sector, up to PLN 5 million ($1.12 million).

UOKiK imposed such fines on individuals for the first time in 2021 and as of March 2022, they have been imposed in three cases. Two cases concerned horizontal agreements regarding price fixing and market sharing, and one case concerned vertical restraints on resale prices. More decisions imposing fines on individuals can be expected as there are additional pending cases.

In October 2020, UOKiK issued a €6.48 billion ($6.8 billion) fine on Gazprom for failing to notify the agency about a joint financing agreement.

Article 21 of the Polish Constitution states that “expropriation is admissible only for public purposes and upon equitable compensation.”  The Law on Land Management and Expropriation of Real Estate states that property may be expropriated only in accordance with statutory provisions such as construction of public works, national security considerations, or other specified cases of public interest.  The government must pay full compensation at market value for expropriated property.  Acquiring land for road construction investment, and recently also for the Central Communication Port and the Vistula Spit projects, has been liberalized and simplified to accelerate property acquisition, particularly through a special legislative act. Most acquisitions for road construction are resolved without problems.  There have been a few cases, however, in which the inability to reach agreement on remuneration has resulted in disputes.  Post is not aware of any recent expropriation actions against U.S. investors, companies, or representatives.

Poland’s bankruptcy law has undergone significant change and modernization in recent years. There is now a bankruptcy law and a separate, distinct restructuring law. Bankruptcy in Poland is criminalized if a company’s management does not file a petition to declare bankruptcy when a company becomes illiquid for an extended period of time or if a company ceases to pay its liabilities. https://www.paih.gov.pl/polish_law/bankruptcy_law_and_restructuring_proceedings

In order to reduce the risk of overwhelming the bankruptcy courts with an excess of cases resulting from the COVID-19 pandemic, changes were introduced in the bankruptcy process for consumers, shifting part of the duties to a trustee. A second significant change was the introduction of simplified restructuring proceedings. During restructuring proceedings, a company appoints an interim supervisor and is guaranteed protection against debt collection while seeking approval for specific restructuring plans from creditors. The simplified proceedings enjoy great support among entities at risk of insolvency. These changes were originally intended to remain in force only until June 30, 2021, later extended until November 30, 2021. The popularity of simplified restructurings among distressed entrepreneurs led the Polish Parliament to retain them for an indefinite period of time.

The latest implementation of the amendments to the bankruptcy law brought about other amendments to the proceedings, as follows:

• The announcement on the opening of the proceedings to approve the arrangement will be made by the arrangement supervisor, not by the debtor himself or herself;
• The announcement may be made only after the debtor has submitted the list of receivables and the list of disputed receivables;
• The arrangement supervisor will list the agreements that are essential for the functioning of the debtor’s enterprise so as to prevent its termination;
• The court’s decision on the cancellation of the effects of making the announcement may be appealed; and
• The case files will be kept by the arrangement supervisor.

These amendments entered into force on December 1, 2021.

On December 1, 2021, the National Debtors Register (NDR or Krajowy Rejestr Zadluzonych) began operations. Its purpose is to increase the safety of business transactions through easier verification of contractors, as well as to contribute to the acceleration of bankruptcy and restructuring proceedings. This registry makes proceedings more transparent and easier to follow because all important information regarding the proceedings is available online in one place. In addition to its informational function, the National Debtors Register also serves as a platform for bankruptcy and restructuring proceedings. Applications and letters in proceedings are filed exclusively via the NDR system. Voting on the arrangement and collecting creditors’ votes also takes place via this system, as does the preparation and delivery of court judgments. Certain statutorily defined groups of entities will be exempt from the obligation to file letters in bankruptcy and restructuring proceedings through the NDR.

Poland’s Plan for Responsible Development identified eight industries for development and investment incentives: aviation, defense, automotive parts manufacturing, ship building, information technology, chemicals, furniture manufacturing, and food processing. More information about the plan can be found at this link: https://www.gov.pl/web/fundusze-regiony/plan-na-rzecz-odpowiedzialnego-rozwoju . Poland encourages energy sector development through its energy policy adopted by the government in February 2021. The policy can be found at: https://www.gov.pl/web/klimat/polityka-energetyczna-polski . On March 29, 2022, the government adopted an update to “Poland’s Energy Policy until 2040” (PEP2040) According to the update, Poland will strengthen its energy sovereignty through faster development of renewable energy sources, including hydroelectric plants, photovoltaics, and offshore windmills. By 2040, these energy sources should account for nearly half of the national electricity production, an increase from 34 percent assumed in the previous plan.  On March 30, 2022, the government also confirmed its intention to loosen the rules for building onshore wind farms. The assumptions can be found here: https://www.gov.pl/web/klimat/zalozenia-do-aktualizacji-polityki-energetycznej-polski-do-2040-r

The policy foresees a primary role for fossil fuels until 2040 as well as strong growth in electricity production. The government will continue to pursue developing nuclear energy and offshore wind power generation, as well as distributed generation. Poland’s National Energy and Climate Plan for years 2021-2030 (NECP PL) developed in line with the EU Regulation on the Governance of the Energy and Climate Action, together with PEP2040, pave the road to the new European Green Deal. Poland may spend approximately $420 billion on the transformation of its energy sector in 2021-2040, according to the energy policy. These investments would include about $230 billion in the fuel and energy sectors and about $90 billion in the generation segment, of which 80 percent will be spent on nuclear energy and renewables investments.A new economic program called the “Polish Deal” includes significant changes to the tax system including incentives to attract capital to Poland. The program is undergoing additional amendments after implementation in January 2022. The program consists of support schemes for enterprises, new investment and development projects, and incentives for innovators, as well as reforms of the healthcare system and social welfare, education, environmental, and energy policies.

Incentives for innovators include the IP Box, tax relief for R&D costs, innovative employers, robotization and prototype development. Other incentives include tax relief for expansion, consolidation, IPO, and CSR activities.

More information on the changes that may affect international business can be found at:

https://insightplus.bakermckenzie.com/bm/tax/poland-the-polish-deal 

The government has a strategy for establishing a commercial 5G network in all cities by 2025. Due to repeated postponements of frequency auctions, however, this goal may not be feasible.

In mid-2021, the Ministry of Economic Development and Technology finished public consultations on its Industry Development White Paper, which identified the government’s views on its most significant barriers to industrial activity.  The document was to serve as a foundation for Poland’s Industrial Policy (PIP). Public comments received focused on issues related to the education system not being tailored to the needs of industry, a workforce deficit, difficulties in obtaining funding for R&D, environmental regulations, complex administrative procedures and legislation, labor regulations, and high energy prices.  The PIP was slated to become a strategic document, setting the direction for long-term industrial development and focusing on five areas:  digitization, security, industrial production location, the Green Deal, and modern society.  In early 2022, the Ministry of Economic Development and Technology decided that the PIP did not take into account the dynamic changes that took place in 2021, in particular, the energy market situation, the disruption of the supply chain of raw materials and semi-finished products, or the impact of the “Fit for 55” package on the functioning of industry in Poland. The Ministry has stated it will present appropriate economic policy tools after analyzing the current situation.A company investing in Poland, either foreign or domestic, may receive assistance from the Polish government. Foreign investors have the potential to access certain incentives such as: income tax and real estate tax exemptions; investment grants; grants for research and development, and grants for other activities such as environmental protection, training, logistics, or use of renewable energy sources.

Large priority-sector investments may qualify for the “Program for Supporting Investment of Considerable Importance for the Polish Economy for 2011-2030.” The program, amended in October 2019, is one of the instruments enabling support for new investment projects, particularly relevant for the Polish economy. Its main goal is to increase innovation and the competitiveness of the Polish economy. Under the amended program, it is possible to co-finance large strategic investments as well as medium-sized innovative projects. Projects that adapt modern technologies and provide for research and development activities are awarded. The program is also conducive to establishing cooperation between the economic sector and academic centers. The support is granted in the form of a subsidy, based on an agreement concluded between the Minister of Economic Development and Technology and the investor. The agreement regulates the conditions for the payment of subsidies and the investment implementation schedule. Under the program, investment support may be granted in two categories: eligible costs for creating new jobs and investment costs in tangible and intangible assets. Companies can learn more at: https://www.paih.gov.pl/why_poland/investment_incentives/programme_for_supporting_investments_of_major_importance_to_the_polish_economy_for_2011_-_2030 

https://www.gov.pl/web/rozwoj/program-wspierania-inwestycji-o-istotnym-znaczeniu-dla-gospodarki-polskiej-na-lata-2011-2030 

The Polish Investment Zone (PSI), the system of tax incentives for investors which replaced the previous system of special economic zones (SEZ), was launched September 5, 2018. Under the law on the PSI, companies can apply for a corporate income tax (CIT) exemption for a new investment to be placed anywhere in Poland.

More information on government financial support is available at: https://www.paih.gov.pl/why_poland/investment_incentives 

The Polish government is seeking to increase Poland’s economic competitiveness by shifting toward a knowledge-based economy. Public and private sector investment in R&D has been steadily growing since 2016, supported by EU funds dedicated to R&D and innovation. Businesses may also take advantage of the EU Horizon Europe program which succeeded the research funding program Horizon 2020. The EU institutions set the 2021–2027 budget for Horizon Europe at €95.5 billion (including €5.4 billion from the Next Generation of the EU Recovery Fund). The first Horizon Europe Strategic Plan (2021-2024), which sets out key strategic orientations for the support of research and innovation, was adopted on March 15, 2021.

More information is available at: Ministry of Funds and Regional Development: https://www.gov.pl/web/fundusze-regiony/otwarte-konkursy-nabory-dotacje-i-dofinansowania 

Ministry of Economic Development and Technology:

https://www.gov.pl/web/rozwoj/programy-i-projekty 

Horizon Europe 2021-2027: https://ec.europa.eu/info/horizon-europe_en#proposal 

As of January 1, 2019, the Innovation Box, or IP Box, reduces the tax rate applicable to income derived from intellectual property rights to 5 percent. Taxpayers applying the IP Box are entitled to benefit from the tax preference until a given right expires (20 years in the case of a patented invention). In order to benefit from the program, taxpayers are obliged to separately account for the relevant income. Foreign investors may take advantage of this benefit as long as the relevant IP is registered in Poland. Pursuant to new regulations in force from January 1, 2022, entrepreneurs will be able to use the R&D relief and the IP Box relief simultaneously. Taxpayers have the right to deduct eligible R&D costs when determining income from qualifying intellectual property rights.

Effective starting the 2021 tax year, Poland introduced a set of optional rules, referred to as the “Estonian CIT,” for corporate taxpayers. The new rules permit eligible companies to defer payment of corporate income tax up to the time they distribute their profits.

The update of the National Reform Program (NRP) heralded the introduction of a new incentive measure for enterprises in the form of tax relief related to investments in automation and robotization (robotization relief). This relief is introduced for a period of 5 years and covers expenses from the beginning of the 2022 fiscal year until the end of the 2026 fiscal year. It is available to all entities subject to income tax and investing in robotization, regardless of the sector or size of operations. The new tax relief operates in a similar manner as the existing R&D tax relief, enabling taxpayers to make an additional deduction of eligible costs (expenses detailed in an exhaustive list) from the tax base. Within the framework of robotization relief, it will be possible to deduct 50 percent of eligible costs.

There are numerous grants, preferential loans, and other financial instruments to encourage investment that protects the environment by increasing energy efficiency and to promote renewable energy sources and cogeneration systems. Incentives are available mostly from EU

funds and national funds and can cover up to 85 percent of eligible costs.The Polish government does not issue sovereign guarantees for FDI projects. Co-financing may be possible for partnering on large FDI projects, such as the planned central airport project or a nuclear power plant project.

Foreign-owned firms have the same opportunities as Polish firms to benefit from foreign trade zones (FTZs), free ports, and special economic zones (since January 2019, they make up the Polish Investment Zone). The 2004 Customs Law (with later amendments) regulates the operation of FTZs in Poland. The Minister of Finance establishes duty-free zones. The Minister designates the zone’s managing authorities, usually provincial governors, who issue operating permits to interested companies for a given zone.Most activity in FTZs involves storage, packaging, and repackaging. As of October 2021, there were seven FTZs: Gliwice, near Poland’s southern border; Terespol, near Poland’s border with Belarus; Mszczonow, near Warsaw; Warsaw’s Frederic Chopin International Airport; Szczecin; Swinoujscie; and Gdansk. Duty-free shops are available only for travelers to non-EU countries.There are bonded warehouses in: Bydgoszcz-Szwederowo; Krakow-Balice; Wroclaw-Strachowice; Katowice-Pyrzowice; Gdansk-Trojmiasto; Lodz-Lublinek; Poznan-Lawica; Rzeszow-Jasionka, Warszawa-Modlin, Lublin, Szczecin-Goleniow; Radom-Sadkow, and Olsztyn-Mazury. Commercial companies can operate bonded warehouses. Customs and storage facilities must operate pursuant to custom authorities’ permission. Only legal persons established in the EU can receive authorization to operate a customs warehouse.

The Polish Investment Zone (PSI), a system of tax incentives for investors which replaced the previous system of special economic zones (SEZ), was launched September 5, 2018. Under the law on the PSI, companies can apply for a corporate income tax (CIT) exemption for a new investment to be placed anywhere in Poland. The CIT exemption is calculated based on the value of the investment multiplied by the percentage of public aid allocated for a given region based on its level of development (set percentage). The CIT exemption is for 10-15 years, depending on the location of the investment. Special treatment is available for investment in new business services and R&D. A point system determines eligibility for the incentives. Entities operating in special economic zones are entitled to change the depreciation rates for new assets starting in 2021.

The deadline for utilizing available tax credits from the previous SEZ system is the end of 2026 (extended from 2020). The regulations also contain important changes for entities already operating in SEZs, even if they do not plan new investment projects. This includes the possibility of losing the right to tax incentives in the event of fraud or tax evasion. Investors should consider carefully the potential benefits of the CIT exemption in assessing new investments or expansion of existing investments in Poland.

On January 1, 2022, an amendment to the Act on Special Economic Zones came into force, which was largely related to a change in the regional aid map. Information on the latest changes is available at: https://www.paih.gov.pl/why_poland/Polish_Investment_Zone 

On April 8, 2021, legislation amending provisions of Poland’s customs and tax laws was signed into law. The main customs-related change combines into a single procedure the issuance of decisions on customs and tax duties with the payment of fuel surcharges and emission fees on imported goods.

Here is a link to the platform for electronic fiscal and customs services: https://puesc.gov.pl/ 

Poland has no policy of “forced localization” designed to force foreign investors to use domestic content in goods or technology. Investment incentives apply equally to foreign and domestic firms. Over 40 percent of firms in Special Economic Zones are Polish. There is little data on localization requirements in Poland and there are no requirements for foreign information technology (IT) providers to turn over source code and/or provide access to surveillance (backdoors into hardware and software or turn over keys for encryption). Exceptions exist in sectors where data are important for national security such as critical telecommunications infrastructure and in gambling. Operators of public telecommunications networks and providers of publicly available telecommunications services must store certain telecommunications data in the territory of Poland for a period of 12 months. In the case of online gambling, the devices for processing and archiving of data concerning gambling games are installed and stored in the EU/EEA. Financial sector laws restrict or preclude the ability of certain entities (e.g., banks, payment service providers) to outsource some key activities to providers located or operating outside of the EU. This restriction may affect storage of client data in a cloud environment, for example.

Data protection in Poland is primarily governed by the  General Data Protection Regulation (Regulation (EU) 2016/679)  (GDPR) which has been implemented into Polish law by the Act of 10 May 2018 on the Protection of Personal Data . In addition, the Act of 21 February 2019 Amending Sectoral Laws to Ensure Application of GDPR adjusts the Polish legal system to the requirements under the GDPR. The Act introduced changes to over 160 sectoral acts, including the Labor Code, the Banking Law, and the Act on Electronic Services.

In Poland, there are several statutory minimum or maximum data retention periods set out by law. In other cases, retention periods must be established based on the GDPR storage limitation principle stating that personal data should not be retained for longer than is necessary. Examples of retention periods set out by law include:

• Employee documentation for ten to 50 years;
• Accidents and injury at work documentation for ten years from making of the files;
• Employee CCTV recordings for three months from the date of recording (if the recorded event is subject to further proceedings, then as long as needed); and
• Tax documentation for five years from the end of the calendar year in which tax payment was due.

In the case of personal data processing in relation to journalistic, artistic, or literary activity, retention periods do not apply.

In the telecommunication sector, the Office of Electronic Communication (UKE) ensures telecommunication operators fulfill their obligations. In radio and television, the National Broadcasting Council (KRRiT) acts as the regulator. Polish regulations protect an individual’s personal data that are collected in Poland regardless of where the data are physically stored. The Personal Data Protection Office (UODO) enforces personal data regulations.

On December 8, 2021, the provisions of the Act on Open Data and the Re-use of Public Sector Information entered into force. This Act, passed on August 11, 2021, introduced into the Polish legal system the provisions of Directive (EU) 2019/1024 of the European Parliament and of the Council of June 20, 2019, on open data and the re-use of public sector information. It retains the principle of unconditional and free of charge access to or provision of public sector information for the purpose of its re-use (with certain exceptions). It provides for the implementation of solutions that go beyond the minimum set in the Directive, making the re-use of public sector information more efficient and bringing about an increase in the innovation of products and services of the private sector that uses this data. The new regulations make it possible to increase the volume of public data that can be used, for example, to carry out analysis and research, or for the needs of AI solutions or the Internet of Things. New regulations make it possible, in particular, for public authorities to develop repositories, such as data portals. The re-use of public sector information must be carried out in compliance with the relevant rules, including the regulations on personal data protection, in particular, the provisions of the GDPR.

Polish law limits non-EU citizens to 49 percent ownership of a company’s capital shares in the air transport, radio and television broadcasting sectors, as well as in airport and seaport operations. There are also legal limits on foreign ownership of farm and forest lands as outlined in Section 2 of this report under Limits on Foreign Control and Right to Private Ownership and Establishment. Pursuant to the Broadcasting Law, a TV broadcasting company may only receive a license if the voting share of its foreign owners does not exceed 49 percent and if they hold permanent residence in Poland. In the insurance sector, at least two members of management boards, including the chair, must speak Polish.

Poland recognizes and enforces secured interests in property, movable and real. The concept of a mortgage exists in Poland, and there is a recognized system of recording such secured interests. There are two types of publicly available land registers in Poland: the land and mortgage register (ksiegi wieczyste), the purpose of which is to register titles to land and encumbrances thereon; and the land and buildings register (ewidencja gruntow i budynkow), the function of which is more technical as it contains information concerning physical features of the land, class of land, and its use. Generally, real estate in Poland is registered and legal title can be identified on the basis of entries in the land and mortgage registers which are maintained by relevant district courts. Each register is accessible to the public and excerpts are available on application, subject to a nominal fee. The registers are available online.

Poland has a non-discriminatory legal system accessible to foreign investors that protects and facilitates acquisition and disposition of all property rights, including land, buildings, and mortgages. However, foreigners (both individuals and entities) must obtain a permit to acquire property (See Section 1 Limits on Foreign Control and Right to Private Ownership and Establishment). Many investors, foreign and domestic, complain the judicial system is slow in adjudicating property rights cases. Under the Polish Civil Code, a contract to buy real property must be made in the form of a notary deed. Foreign companies and individuals may lease real property in Poland without having to obtain a permit.

Widespread nationalization of property during and after World War II has complicated the ability to establish clear title to land in Poland, especially in major municipalities.  While the Polish government has an administrative system for reviewing claims for the restitution of communal property, former individual property owners must file and pursue claims in the Polish court system in order to receive restitution.  There is no general statute of limitations regarding the filing or litigation of private property restitution claims, but there are exceptions for specific cases.  For example, in cases involving the communist-era nationalization of Warsaw under the Bierut Decree, there were claims deadlines that have now passed, and under current law, those who did not meet the deadlines would no longer be able to make a claim for either restitution or compensation.  During 2021, Warsaw city authorities continued implementing a 2015 law dubbed the Small Reprivatization Act.  This law aimed to stop the problem of speculators purchasing Warsaw property claims for low values from the original owners or their heirs and then applying for a perpetual usufruct or compensation as the new legal owner.

NGOs and advocacy groups expressed serious concerns that the 2015 law fell short of providing just compensation to former owners who lost property as a result of the nationalization of properties by the communist-era government, and also properties taken during the Holocaust era. Legal experts expressed concern that the law limited the ability of petitioners to reclaim property unjustly taken from their lawful owners. The World Jewish Restitution Organization asserted that the time limits included in the law were insufficient for potential claimants, particularly Holocaust survivors and their heirs, to meet difficult documentary requirements.

Critics state the law might extinguish potential claims by private individuals of properties seized during World War II or the communist era, if no one comes forward to pursue a restitution claim within the time limit.  Any potential claimants who come forward within six months after publication of the affected property by the City of Warsaw will have an additional three months to establish their claim.  The city began publishing lists in 2017 and continued to do so during 2021.  The city’s website contains further information on these cases and the process to pursue a claim:

https://bip.warszawa.pl/Menu_podmiotowe/biura_urzedu/SD/ogloszenia/default.htm 

In 2021, the government significantly altered legal and administrative procedures for private property restitution and compensation. On June 24, Parliament adopted a revision to the Code of Administrative Procedure that significantly restricted the ability of individuals to seek the return of private property seized under Nazi occupation or during the Communist era. The law made it impossible to challenge any administrative decision issued more than 30 years prior and ended any pending administrative challenges to those decisions. The legislation limited the primary process by which claimants can seek restitution or compensation for expropriated property, according to NGOs and lawyers specializing in the issue. Individuals who already successfully challenged administrative decisions were still able to seek return of their property or compensation in the courts. The president signed the legislation into law on August 14, and the law entered into force on September 16. It is sometimes difficult to establish clear title to properties.  There are no comprehensive estimates of land without clear title in Poland.

The 2016 Agricultural Land Law banned the sale of state-owned farmland under the administration of the National Center for Support of Agriculture (NCSA) for five years.  Long-term state-owned farmland leases are available for farmers looking to expand their operations up to 300 hectares.  Foreign investors can (and do) lease agricultural land.  The 2016 Agricultural Land Law also imposed restrictions on sales of privately-owned farmland, giving the NCSA preemptive right of purchase.  In June 2019, the Polish Parliament amended the Agricultural Land Law to loosen land sale requirements.  The amendment increased the size of private agricultural land, from 0.3 to 1.0 hectare that could be sold without the approval of the NCSA.  The new owner is not allowed to sell the land for five years. The Law on Forest Land similarly prevents Polish and foreign investors from purchasing privately-held forests and gives state-owned entities (Lasy Panstwowe) preemptive right to buy privately-held forest land.

The 2011 amendment to the law of Management of Farmland Administered by NCSA and 2016 Agricultural Land Law adversely affected tenants with long-term state-owned land leases.  Several entities, including U.S. companies, faced the prospect of returning some currently leased land to the Polish government over the coming years.  Three of these entities appealed to the Ombudsman, who requested the Constitutional Tribunal (CT) to verify the law’s compliance with the constitution, but the cases were dismissed by the CT in the fall of 2020.  On March 17, 2021, a law amending the 2016 Agricultural Land Law was adopted.  The amendment extended the ban on selling state-owned farmland under the administration of the NCSA for another five years, until May 1, 2026.  The 2021 amendment did not change the land lease situation for larger operators, who remain ineligible to have their land leases extended unless 30 percent of the land under lease had been returned.  Additionally, eligible renters can apply for the prolongation of the lease contracts, but for larger farmers, under 2020 Order of the Director General of NCSA, they can be extended up to eight years.

Polish intellectual property rights (IPR) law is more strict than European Commission directives require.  Poland is a member of the World Intellectual Property Organization (WIPO) and a party to many of its treaties, including the Berne Convention, the Paris Convention, the Patent Cooperation Treaty, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty. Enforcement is improving across all sectors of Poland’s IPR regime.

2021 saw a sudden drop in piracy statistics in Poland, compared to other EU countries. According to Blu Media Study’s “Poles’ Finances in Times of the 2021 Pandemic,” as many as six out of ten Poles use online subscription services. Poles use services that provide access to movies and series (39 percent of participants) most often, and to music (15 percent), games and online journalism (11 percent each) less frequently. Pirated series in Poland in 2021 were dominated by productions from platforms that were inaccessible to Polish consumers.

A popular Polish cyberlocker platform is included on the 2021 Notorious Markets List. Poland does not appear in the U.S. Trade Representative’s Special 301 Report.

In cases of IPR violations, Polish law requires a rights holder to start the prosecution process.  In Poland, authors’ and creators’ organizations and associations track violations and share these with prosecutors.  Rights holders express concern that penalties for digital IPR infringement are not high enough to deter violators.

In August 2021, the Chancellery of the Prime Minister of Poland published assumptions to the draft of the new Act on Industrial Property Law, which would replace the current Act of 30 June 2000 – Industrial Property Law. Below are the main assumptions to the draft of the new act:

• Utility models – the bill provides for the introduction of provisions streamlining and speeding up the application procedure, by replacing the current examination system with a registration system. It means that (similarly as with trademarks and industrial designs) the Polish Patent Office would no longer by default examine the substantive conditions for granting a protection right to a utility model but would focus only on the formal aspects of the application. This amendment aims to speed up the examination of applications for registration and shorten the time from an average 24 months to about 12 months.
• Industrial designs – the definition of an industrial design and the conditions for obtaining protection have been changed, so that the national regulations are fully harmonized with Directive 98/71/EC of the European Parliament and of the Council of 13 October 1998 on the legal protection of designs.
• Trademarks – the bill provides for shortening the period of filing opposition to two months from the date of publication of information about the application, dropping the current mandatory two-month settlement period for the parties during the opposition proceedings (the so-called cooling-off period), and abolition of the joint protection right.
• Geographical indications – the bill provides for a new procedure of registration of these rights. The proposed provisions would apply only to non-agricultural products.
• Trade secrets – to solve the problem of unlawful acquisition of information, the bill provides for the introduction of a so-called deposit, corresponding to the provisions of Directive (EU) 2016/943 of the European Parliament and of the Council of 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure. A deposit, containing technical and technological information constituting a trade secret, may make it easier to prove the priority of the existence of information constituting a trade secret and the subject matter of that information.
• Official fees – the bill provides for systematization of the regulations on the fee collection structure and record keeping, eliminating doubts as to the amount of and eligibility for the payment of fees. The draft act also introduces a new solution, according to which when filing applications for at least three different objects of industrial property within three months, the fee for the application for each of them may be reduced by 30 percent. The proposed solution offers greater support to innovators who are at the stage of building their portfolio of intellectual property rights with a commercialization aim.

The planned date of the adoption of the draft of the new legislation was the first quarter of 2022.

On July 1, 2020, intellectual property courts, in the form of Intellectual Property Divisions (IPDs), were introduced in Poland. This role was entrusted to five Regional Courts – Gdansk, Katowice, Lublin, Poznan and Warsaw. Courts of Appeal in Warsaw and Poznan deal with cases at second instance. In accordance with applicable regulations, cases involving greater technical complexity, namely cases concerning computer programs, inventions, utility models, topographies of integrated circuits, plant varieties and business secrets of a technical nature, are in principle dealt with only in Warsaw.

The creation of the intellectual property courts, with their judges specializing in adjudication in the area of intellectual property law, is a step in the right direction, and the experience gained so far from the proceedings before these courts seems to confirm the validity of this decision.

Tax incentives for IPR known collectively as “IP Box” or “Innovation Box,” included in the November 2018 tax amendment, have been applicable since January 2019. See Section 4 – Investment Incentives.

Polish customs tracks seizures of counterfeit goods. In 2021, compared to 2018, 67 percent more goods infringing intellectual property arrived in Poland.  According to the DLA Piper and Amazon report the value of smuggling reached $45 million (PLN 203 million), which was 3.5 times more than a year earlier. Illegal practices are likely to increase due to the war in Ukraine.

General information on copyright in Poland:

https://www.paih.gov.pl/polish_law/intellectual_property_rights 

Polish Patent Office: http://www.uprp.pl/o-urzedzie/Lead03,14,56,1,index,pl,text/ 

Chancellery of the Prime Minister: https://www.gov.pl/cyfryzacja/co-robimy 

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

The Polish regulatory system is effective in encouraging and facilitating portfolio investment. Both foreign and domestic investors may place funds in demand and time deposits, stocks, bonds, futures, and derivatives. Poland’s equity markets facilitate the free flow of financial resources. Poland’s stock market is the largest and most developed in Central Europe. In September 2018, it was reclassified as developed market status by FTSE Russell’s country classification report. The stock market’s capitalization generally falls in the range of 30-40 percent, however, in 2021 it reached 50 percent of GDP. Although the Warsaw Stock Exchange (WSE) is itself a publicly traded company with shares listed on its own exchange after its partial privatization in 2010, the state retains a significant percentage of shares which allows it to control the company.

In April 2021, the WSE celebrated its 30-year anniversary. Over the three decades, it has become a hub for foreign institutional investors targeting equity investments in the region. It has also become an increasingly significant source of capital.

In addition to the equity market, Poland has a wholesale market dedicated to the trading of treasury bills and bonds (Treasury BondSpot Poland). This treasury market is an integral part of the Primary Dealers System organized by the Finance Ministry and part of the pan-European bond platform. Wholesale treasury bonds and bills denominated in zlotys and some securities denominated in euros are traded on the Treasury BondSpot market. Non-government bonds are traded on Catalyst, a WSE managed platform. The capital market is a source of funding for Polish companies. While securities markets continue to play a subordinate role to banks in the provision of finance, the need for medium-term financial support for the modernization of the electricity and gas sectors is likely to lead to an increase in the importance of the corporate bond market. The Polish government acknowledges the capital market’s role in the economy in its development plan. Foreigners may invest in listed Polish shares, but they are subject to some restrictions in buying large packages of shares. The impact of the pandemic was still being felt in 2021, stimulating volatility in financial markets and improving liquidity.

The Capital Markets Development Strategy, published in 2018, identifies 20 key barriers and offers 60 solutions. Some key challenges include low levels of savings and investment, insufficient efficiency, transparency, and liquidity of many market segments, and lack of taxation incentives for issuers and investors. The primary aim of the strategy is to improve access of Polish enterprises to financing. The strategy focuses on strengthening trust in the market, improving the protection of individual investors, the stabilization of the regulatory and supervisory environment, and the use of competitive new technologies. The strategy is not a law but sets the direction for further regulatory proposals. The Ministry of Finance assumes in its development directions for 2021-2024, the liquidation of approximately 50 percent of barriers to the development of the financial market identified in the strategy.

The development activities pursued in 2021 included the adoption of the WSE Group ESG Strategy 2025 in December 2021. The ESG Strategy sets out the ambitions and objectives in the area of sustainable development for 2022-2025.

In 2021, the Warsaw Stock Exchange (WSE) published its first ESG reporting guidelines for listed companies – a handbook developed in collaboration with industry experts. WSE joined a group of approximately 60 stock exchanges around the world that have written guidance on ESG reporting. Poland’s consumer and business environment is  increasingly concerned  with environmental, social, and governance (ESG) factors, although a lack of standardized reporting mechanisms is leaving investors confused about the true extent of their portfolio’s ESG performance.  The guidelines provide small and mid-sized companies with a roadmap for measuring their impact on the environment while defining a code of good practice for market leaders. From the international perspective, the guidelines will strengthen the position of the Polish capital market and investor interest in companies listed on the WSE. In December 2020, the WSE partnered with the European Bank for Reconstruction and Development (EBRD) to bring clarity to ESG reporting by listed companies in Poland and the region of Central and Southeast Europe.

Poland is one of the most rigorously supervised capital markets in Europe according to the European Commission.

The Employee Capital Plans program (PPK)—which is designed to increase household saving to augment individual incomes in retirement—could provide a boost to Poland’s capital markets and reduce dependence on foreign saving as a source for investment financing. The program has been delayed due to the outbreak of the COVID-19 pandemic.High-risk venture capital funds are an increasingly important segment of the capital market which is developing fast. The funds remain active and Poland is a leader in this respect in Central and Eastern Europe. 2021 was a breakthrough year for Polish start-up firms and most of these firms have shrugged off the impact of the pandemic or even benefitted from it. The development of Polish start-ups also translates into jobs creation. The 15 companies that raised the most venture capital (VC) funding in 2019–2021 employed more than 1,300 people in 2021. The average share of Polish employees in these companies was 58 percent. Poland had its first two start-ups reach “unicorn” status in 2021, medical appointment service DocPlanner and hair appointment app Booksy.

More unicorns are expected to emerge in 2022. VC funding most often goes to companies working in the health innovation domain, according to a report by PFR Ventures and Inovo Venture Partners. In 2021, they accounted for more than 14 percent of all transitions. SaaS (subscription model) remains the most popular business model. VC investment hit a record high in Poland in 2021, increasing 66 percent over the year before to reach almost $900 million.

The government’s package of tax relief for IPOs, investment in stock exchange debutants, and VC fund investing became available in January 2022.

Poland provides full IMF Article VIII convertibility for current transactions. Banks can and do lend to foreign and domestic companies. Companies can and do borrow abroad and issue commercial paper, but the market is less robust than in Western European countries or the United States. The Act on Investment Funds allows for open-end, closed-end, and mixed investment funds, and the development of securitization instruments in Poland. In general, no special restrictions apply to foreign investors purchasing Polish securities.Credit allocation is on market terms. The government maintains some programs offering below-market rate loans to certain domestic groups, such as farmers and homeowners. Foreign investors and domestic investors have equal access to Polish financial markets. Private Polish investment is usually financed from retained earnings and credits, while foreign investors utilize funds obtained outside of Poland as well as retained earnings. Polish firms raise capital in Poland and abroad.Recent changes in the governance structure of the Polish Financial Supervisory Authority (KNF) are aimed at increasing cross governmental coordination and a better-targeted response in case of financial shocks, while achieving greater institutional effectiveness through enhanced resource allocation. KNF’s supplementary powers have increased, allowing it to authorize the swift acquisition of a failing or likely to fail lender by a stronger financial institution.

On July 20, 2021, a draft act was published on the amendment of certain acts in connection with ensuring the development of the financial market and protection of investors in this market. As follows from the justification to the draft act, the act aims to organize and improve the functioning of financial market institutions by eliminating barriers to access to the financial market, improving supervision over the financial market, protecting clients of financial institutions and minority shareholders, and increasing the level of digitization in performance of supervisory duties by KNF. The draft act provides for tightening of many administrative sanctions that may be imposed on entities subject to the supervision of KNF. In practice, this may lead to the imposition of fines in a much higher amount, which in turn will significantly increase the risk related to the conduct of business activity subject to supervision.

On July 21, 2021, the Polish Financial Supervision Authority presented its strategy for the years 2021-2025. The document is the overarching plan that defines the mission, vision, and values of the KNF organization.

The Polish financial sector is well capitalized and has limited direct exposure to Russia, Ukraine, and Belarus.  The economic fallout from the pandemic has not threatened banking sector stability. Fiscal, monetary, and macroprudential support measures implemented at the beginning of the pandemic have helped the sector emerge from the pandemic-induced recession relatively unscathed.

The banking sector plays a dominant role in the financial system, accounting for about 70 percent of financial sector assets. The sector is mostly privately owned, with the state controlling about 40 percent of the banking sector and the biggest insurance company. Poland had 30 locally incorporated commercial banks at the end of 2021, according to KNF. The number of locally-incorporated banks has been declining over the last five years. Poland’s 520 cooperative banks play a secondary role in the financial system but are widespread. The state owns eight banks. Over the last few years, growing capital requirements, lower prospects for profit generation, and uncertainty about legislation addressing foreign currency mortgages has pushed banks towards mergers and acquisitions. KNF welcomes this consolidation process, seeing it as a “natural” way to create an efficient banking sector.The Polish National Bank (NBP) is Poland’s central bank. At the end of 2021, the banking sector was overall well capitalized and solid. Poland’s banking sector meets European Banking Authority regulatory requirements. The share of non-performing loans decreased in 2021 after a sharp rise in 2020. In December 2021, the share of non-performing loans was 5.7 percent of portfolios, an improvement from 6.8 percent a year earlier. Poland’s central bank is willing and able to provide liquidity support to the banking sector, in local and foreign currencies, if needed.

Poland is a member of the EU, but not of the euro currency area or banking union. As a result, it shares a single market and many harmonized economic rules with the EU but retains its own currency and monetary policy.

The banking sector is liquid, remains profitable, and major banks are well capitalized, although disparities exist among banks. Banks remained under pressure in 2020 and the first half of 2021 due to low interest rates, the issue of conversion of Swiss francs mortgage portfolios into Polish zlotys, and a special levy on financial institutions (0.44 percent of the value of assets excluding equity and Polish sovereign bonds). Banks managed to restore their profits in 2021, but the low profitability of the banking sector remains a challenge, especially for smaller banks, although it does not generate risks to the system’s stability.

Legal risks for foreign exchange mortgages issued in primarily Swiss francs during 2006-2008, remain a major source of risk in the banking system. The probability of the most costly scenarios unfolding for banks, however, has diminished. In a process begun by the government and shaped by court decisions handed down by the European Court of Justice and Poland’s Supreme Court, since 2019, Polish citizens have been able to convert Swiss franc denominated loan principal into local currency while continuing to pay interest on the terms of the original loan agreement (Swiss franc LIBOR) with the banks absorbing any foreign exchange loss. About one-third of housing loans are still in foreign currency, particularly Swiss francs, according to the NBP. This is down from 62 percent at the start of 2011, but the fall in the value of the zloty has made such loans costly for borrowers and a risk to commercial banks’ asset quality. The financial regulator has restricted the availability of loans in euros or Swiss francs in order to minimize the banking system’s exposure to exchange risk resulting from fluctuations. Only individuals who earn salaries denominated in these currencies continue to enjoy easy access to loans in foreign currencies.

Since 2015, the Polish government established an active campaign aiming to increase the market share of national financial institutions. Since 2017, Polish investors’ share in the banking sector’s total assets exceeds the foreign share in the sector. The state controls around 40 percent of total assets, including the two largest banks in Poland. These two lenders control about one third of the market. Rating agencies warn that an increasing state share in the banking sector might impact competitiveness and profits in the entire financial sector. There is concern that lending decisions at state-owned banks could come under political pressure. Nevertheless, Poland’s strong fundamentals and the size of its internal market mean that many foreign banks will want to retain their positions.

Poland has well developed payments systems, integrated with those of the EU and overseen by the NBP. Apple Pay and Google Pay have launched operations in Poland.

In 2020, NBP had relationships with 27 commercial and central banks and was not concerned about losing any of them.

Poland does not have a sovereign wealth fund sensu stricto. However, the Polish Development Fund (PFR) is often referred to as Poland’s Wealth Fund. PFR is an umbrella organization pooling resources of several governmental agencies and departments, including EU funds. A strategy for PFR was adopted in September 2016 registered in February 2017. PFR supports the implementation of the Responsible Development Strategy. PFR operates as a group of state-owned banks and insurers, investment bodies, and promotion agencies. The group implements programs enhancing long-term investment and economic potential and supporting equal opportunities as well as environmental protection. The budget of PFR initially reached PLN 14 billion ($3.1 billion), which managers estimate is sufficient to raise capital worth PLN 90-100 billion ($20-22 billion). Various actors within the organization can invest through acquisition of shares, through direct financing, seed funding, and co-financing venture capital. Depending on the instruments, PFR expects different rates of return. While supportive of overseas expansion by Polish companies, the PFR’s mission is domestic.

PFR directs the strategic vision for the corporate group which includes four distinct subsidiaries:

• PFR Ventures – the largest fund of funds (FoF) in the CEE region offering repayable financing to innovative SMEs through selected financial intermediaries such as venture capital funds or business angels;
• PFR Portal PPK – a company dedicated to supervising the Employee Capital Plans (PPK), which is a common and voluntary long-term saving system for employees in Poland, developed and co-financed by employers and the state;
• PFR TFI – a company focused on incepting and managing closed-end investment funds oriented towards alternative assets (e.g., real estate, infrastructure projects, PE or VC) as well as managing a part of the assets raised in the PPK program;
• PFR Nieruchomosci – the real estate arm of the group which aims to improve the potential of the national housing market by implementing investments of significant importance to local communities.

PFR’s core function was initially focused on fostering private sector development by direct (equity) and indirect investment across a wide range of sectors, including technology, infrastructure, and energy. Over the years, the group’s mandate has broadened and now includes the following areas:

• Bridging infrastructure gaps in the Polish economy (including transport, municipal, and digital infrastructure);
• Venture capital market development (direct investment and via existing private sector venture capital funds);
• Facilitating the government’s pension reform by managing a long-term pension savings scheme; and
• Fostering investment in affordable housing and developing the housing rental market.

PFR group has been used by the government to implement several unique policy projects, including emergency support to private sector entities, promotion of the private pension savings scheme and, more recently, the provision of sizable financial support (PLN 100 billion or $22 billion) to the private sector amid the COVID-19 pandemic. PFR ‘s assets currently represent about 3.2 percent of Poland’s GDP.

ESG (environmental, social, and corporate governance) reporting is becoming a standard for more and more organizations. To meet the needs of entrepreneurs, the PFR team has prepared a special list of start-ups and tools supporting ESG reporting, which is aimed at facilitating the adaptation of companies to the new standards.

In March 2022, the European Investment Bank and PFR signed an agreement on strategic cooperation. The cooperation agreement concerns the co-financing of investments mainly in the areas of sustainable economy development, environmental protection, climate change mitigation and adaptation, improvement of energy efficiency and increasing the use of renewable energy sources.

In the period 2022-2025, financing the energy transformation will be one of the three basic pillars of the Polish Development Fund’s activity. The main emphasis will be placed on the development of infrastructure contributing to increasing energy security and reducing the emission intensity of the Polish energy sector, both at the national and local levels.

State-owned enterprises (SOEs) exist mainly in the defense, energy, transport, banking, and insurance sectors. The main Warsaw stock index (WIG) is dominated by state-controlled companies. The government intends to keep majority share ownership and/or state-control of economically and strategically important firms and is expanding the role of the state in the economy, particularly in the banking, energy, foodstuffs, and media sectors. Some U.S. investors have expressed concern that the government favors SOEs by offering loans from the national budget as a capital injection and unfairly favoring SOEs in investment disputes. Since Poland’s EU accession, government activity favoring state-owned firms has received careful scrutiny from Brussels. Since the Law and Justice (PiS) government came to power in 2015, there has been a considerable increase in turnover in managerial positions of state-owned companies (although this has also occurred in previous changes of government, but to a lesser degree) and increased focus on building national champions in strategic industries to be able to compete internationally. There have also been cases of takeovers of foreign private companies by state-controlled companies the viability of which has raised doubts. SOEs are governed by a board of directors and most pay an annual dividend to the government, as well as prepare and disclose annual reports.

A list of companies classified as “important for the economy” is at this link: https://www.gov.pl/web/premier/wykaz-spolek 

Among them are companies of “strategic importance” whose shares cannot be sold, including: Grupa Azoty S.A., Grupa LOTOS S.A., KGHM Polska Miedz S.A., Energa S.A., and the Central Communication Port.

The government sees SOEs as drivers and leaders of its innovation policy agenda. For example, several energy SOEs established a company to develop electro mobility. The performance of SOEs has remained strong overall and broadly similar to that of private companies. International evidence suggests, however, that a dominant role of SOEs can pose fiscal, financial, and macro-stability risks.

As of June, 2021 there were 349 companies in partnership with state authorities. Among them there are companies under bankruptcy proceedings and in liquidation and in which the State Treasury held residual shares. According to the Minister of State Assets, companies controlled by the state create 15 percent of GDP. Here is a link to the list of companies, including under the control of which ministry they fall: http://nadzor.kprm.gov.pl/spolki-z-udzialem-skarbu-panstwa .

The Ministry of State Assets, established after the October 2019 post-election cabinet reshuffle, has control over almost 180 enterprises. Their aggregate value reaches several dozens of billions of Polish zlotys. Among these companies are the largest chemical, energy, and mining groups; firms in the banking and insurance sectors; and transport companies. This list does not include state-controlled public media, which are under the supervision of the Ministry of Culture, or the State Securities Printing Company (PWPW) supervised by the Interior Ministry. Supervision over defense industry companies has been shifted from the Ministry of Defense to the Ministry of State Assets.

The same standards are generally applied to private and public companies with respect to access to markets, credit, and other business operations such as licenses and supplies. Government officials occasionally exercise discretionary authority to assist SOEs. In general, SOEs are expected to pay their own way, finance their operations, and fund further expansion through profits generated from their own operations.

On February 21, 2019, an amendment to the Act on the Principles of Management of State-Owned Property was adopted, which provides for the establishment of a new public special-purpose fund – the Capital Investment Fund. The fund is a source of financing for the purchase and subscription of shares in companies. The fund is managed by the Prime Minister’s office and financed by dividends from state-controlled companies.

Starting October 12, 2022, the Act amending the Commercial Companies Code and certain other acts will enter into force. It introduces the so-called “holding law” developed by the Commission for Owner Oversight Reform with the Ministry of State Assets. It lays down the principles of how a parent company may instruct its subsidiaries and stipulates the parent company’s liability and the principles of creditor, officer, and minority shareholder protections.

This amendment constitutes an important change for many companies operating in Poland including foreign parent companies. The new regulations, which have encountered some controversy, will apply only to capital companies. The legislation distinguishes between the separate activities of holding companies and of groups of companies. Protections have been extended to minority shareholders and creditors of subsidiaries, identifying threats that may result from binding instructions of the parent company for these groups.

The PiS-led government has increased control over Poland’s banking and energy sectors.

Proposed legislation to “deconcentrate” and “repolonize” Poland’s media landscape, including through the possible forced sale of existing investments, has met with domestic and international protest. Critical observers allege that PiS and its allies are running a pressure campaign against foreign and independent media outlets aimed at destabilizing and undermining their businesses. These efforts include blocking mergers through antimonopoly decisions, changes to licensing requirements, and the proposed new advertising tax. Increasing government control over state regulatory bodies, advertising agencies and infrastructure such as printing presses and newsstands, are other possible avenues. Since 2015, state institutions and state-owned and controlled companies have ceased to subscribe to or place advertising in independent media, cutting off an important source of funding for those media companies. At the same time, public media has received generous support from the state budget.

In December 2020, state-controlled energy firm PKN Orlen, headed by PiS appointees, acquired control of Polska Press in a deal that gives the governing party indirect control over 20 of Poland’s 24 regional newspapers. Because this acquisition was achieved without legislative changes, it has not provoked diplomatic repercussions with other EU member states or a head-on collision with Brussels over the rule of law. Having successfully taken over a foreign-owned media company with this model, there are concerns PKN Orlen will continue to be used for capturing independent media not supportive of the government.

In Poland, the same rules apply to SOEs and publicly-listed companies unless statutes provide otherwise. The state exercises its influence through its rights as a shareholder in proportion to the number of voting shares it holds (or through shareholder proxies). In some cases, an SOE is afforded special rights as specified in the company’s articles, and in compliance with Polish and EU laws. In some non-strategic companies, the state exercises special rights as a result of its majority ownership but not as a result of any specific strategic interest. Despite some of these specific rights, the state’s aim is to create long-term value for shareholders of its listed companies by adhering to the OECD’s SOE Guidelines. State representatives who sit on supervisory boards must comply with the Commercial Companies Code and are expected to act in the best interests of the company and its shareholders. The European Commission noted that “Polska Fundacja Narodowa” (an organization established to promote Polish culture worldwide and funded by Polish SOEs) was involved in the organization and financing of a campaign supporting the controversial judiciary changes by the government. The Commission stated this was broadly against OECD recommendations on SOE involvement in financing political activities.

SOE employees can designate two fifths of the SOE’s Supervisory Board’s members. In addition, according to Poland’s privatization law, in wholly state-owned enterprises with more than 500 employees, the employees are allowed to elect one member of the management board. SOEs are subject to a series of additional disclosure requirements above those set forth in the Company Law. The supervising ministry prepares specific guidelines on annual financial reporting to explain and clarify these requirements. SOEs must prepare detailed reports on management board activity, plus a report on the previous financial year’s activity, and a report on the result of the examination of financial reports. In practice, detailed reporting data for non-listed SOEs is not easily accessible. State representatives to supervisory boards must go through examinations to be able to apply for a board position. Many major state-controlled companies are listed on the Warsaw Stock Exchange and are subject to the “Code of Best Practice for WSE Listed Companies.”

On September 30, 2015, the Act on Control of Certain Investments entered into force. The law creates mechanisms to protect against hostile takeovers of companies operating in strategic sectors (gas, power generation, chemical, copper mining, petrochemical and telecoms) of the Polish economy (see Section 2 on Investment Screening), most of which are SOEs or state controlled. In 2020, the government amended the legislation preventing hostile take overs. The amendments will be in force for 24 months. They are a part of the pandemic-related measures introduced by the Polish government. The SOE governance law of 2017 (with subsequent amendments) is being implemented gradually. The framework formally keeps the oversight of SOEs centralized. The Ministry of State Assets exercises ownership functions for the majority of SOEs. A few sector-specific ministries (e.g., Culture and Infrastructure) also exercise ownership for SOEs with public policy objectives. The Prime Minister’s office oversees development agencies such as the Polish Development Fund, the Industry Development Agency, and ElectroMobility Poland S.A.

The Polish government has completed the privatization of most of the SOEs it deems not to be of national strategic importance. With few exceptions, the Polish government has invited foreign investors to participate in major privatization projects. In general, privatization bidding criteria have been clear and the process transparent. The majority of SOEs classified as “economically important” or “strategically important” are in the energy, mining, media, telecommunications, and financial sectors. The government intends to keep majority share ownership of these firms, or to sell tranches of shares in a manner that maintains state control. The government is currently focused on consolidating and improving the efficiency of the remaining SOEs.

In Poland, the principle of sustainable development has been given the rank of a fundamental right resulting from the provisions of the Constitution of the Republic of Poland. Article 5 of the Constitution says: “The Republic of Poland guards the independence and inviolability of its territory, ensures the freedoms and rights of people and citizens as well as the security of citizens, protects the national heritage and protects the environment, guided by the principle of sustainable development.”

Polish law provides for many restrictions imposed on investors in order to ensure that all undertaken investments do not affect the environment with respect to provided indicators. Public authorities have a significant role in granting appropriate permits, and public consultations are carried out beforehand.

The Ordinance of the Minister of Investment and Development (the name has since changed to the Economic Development and Technology Ministry) of May 10, 2018, established working groups responsible for sustainable development and corporate social responsibility. The chief function of the working groups is to create space for dialogue and exchange of experiences between the public administration, social partners, NGOs, and the academic environment in corporate social responsibility (CSR) and responsible business conduct (RBC). Experts cooperate within five working groups: 1) Innovation for CSR and sustainable development; 2) Business and human rights; 3) Development of non-financial reporting; 4) Socially responsible administration; and 5) Socially responsible universities.

Zespół ds. Zrównoważonego Rozwoju i Społecznej Odpowiedzialności Przedsiębiorstw – Ministerstwo Funduszy i Polityki Regionalnej – Portal Gov.pl (www.gov.pl) 

The greater team issues recommendations concerning implementation of the CSR/RBC policy, in particular, the objectives of the Strategy for Responsible Development. More information on recent developments in the CSR area and future events is available under this link: https://www.gov.pl/web/fundusze-regiony/spoleczna-odpowiedzialnosc-przedsiebiorstw-csr2 

On October 8, 2021, the Council of Ministers adopted the National Action Plan for the implementation of the UN Guiding Principles on Business and Human Rights for 2021-2024 (NAP). The implementation of the first edition of the National Action Plan for 2017-2020 was completed and the Final Report was prepared. The report concerns tasks aimed at improving the observance of human rights, the implementation of which was carried out on the basis of schedules developed by individual ministries and other institutions involved in the NAP. Biznes i prawa człowieka – Ministerstwo Funduszy i Polityki Regionalnej – Portal Gov.pl (www.gov.pl) 

The mission is not aware of reports of human or labor rights concerns relating to RBC in Poland.An increasing number of Polish enterprises are implementing the principles of CSR/RBC in their activities. One of these principles is to openly inform the public, employees, and local communities about the company’s activities by publishing non-financial reports. An increasing number of corporate sector entities understand that sharing experience in the field of integration of social and environmental factors in everyday business activities helps build credibility and transparency of the Polish market. Many companies voluntarily compile ESG/CSR activity reports based on international reporting standards. Most reports are published by companies from the fuel, energy, banking, food industries, logistics, and transport sectors. There is also growing interest in voluntary reporting in the healthcare, retail, and construction sectors. Surveys indicate, however, that companies still have a long way to go in ESG reporting.The attitude of Poles to environmental issues is changing, and so are their expectations regarding business. According to a study by ARC Rynek i Opinia for the Warsaw School of Economics, 59 percent of Poles consciously choose domestic products more often and 57 percent avoid products that harm the environment. In Poland, provisions relating to responsible business conduct are contained within the Public Procurement law and are the result of transposition of very similar provisions contained in the EU directives. For example, there is a provision for reserved contracts, where the contracting authority may limit competition for sheltered workshops and other economic operators whose activities include social and professional integration of people belonging to socially marginalized groups.

Independent organizations including NGOs and business and employee associations promote CSR in Poland. The Responsible Business Forum (RBF), founded in 2000, is the oldest and largest NGO in Poland focusing on corporate social responsibility: http://odpowiedzialnybiznes.pl/english/ 

CSR Watch Coalition Poland, part of the OECD Watch international network aims to advance respect for human rights in the context of business activity in Poland in line with the spirit of the UNBHR-GPs and the OECD Guidelines for Multinational Enterprises (MNEs): https://www.oecdwatch.org/organisations/csr-watch-coalition-poland/ 

Poland’s largest CSR and sustainable development review, published by the Responsible Business Forum, confirms the enormous mobilization and commitment in the fight against the pandemic. Many businesses have launched new CSR activities to deliver assistance and support. The 19th edition of the “Responsible Business in Poland. Good Practices” report has seen a more than 40 percent increase in activities reported. The total number of reported practices hit an all-time high of almost 2,000. Experts from the RBF note a lower number of long-standing practices which shows that the pandemic has led to suspension or discontinuation of certain CSR activities. The pandemic has also fueled the development of CSR partnerships, which is reflected in the activities reported. Businesses collaborated, for instance, in the production of sanitizer gel, provision and delivery of medicines and PPE to hospitals, and social welfare centers.

Research shows that sustainability and CSR are increasingly translating into consumer choices in Poland. According to SW Research for Stena Recycling, nearly 70 percent of Poles would like their favorite products to come from sustainable production and are willing to switch to more sustainably produced products. More than half believe that the circular economy can have a direct, positive impact on the environment.

In December 2016, Poland was the first country in the world to issue a green bond. The bond served to highlight the government’s support for projects with clear environmental benefits, as well as finance Poland’s key environmental goals, i.e., Poland’s National Renewable Energy Plan and the National Program for the Augmentation of Forest Cover. Green bonds are becoming increasingly popular in Poland.

In December 2020, the Warsaw Stock Exchange (WSE) partnered with the European Bank for Reconstruction and Development (EBRD) to bring clarity to ESG reporting from listed companies in Poland and the region of Central and Southeast Europe. In 2021, the WSE published its first ESG reporting guidelines for listed companies – a handbook developed in collaboration with industry experts. The WSE joined a group of approximately 60 stock exchanges around the world that have written guidance on ESG reporting. Poland’s consumer and business environment is  increasingly concerned  with ESG factors, although a lack of standardized reporting mechanisms is leaving investors confused about the true extent of their portfolio’s ESG performance.  The guidelines provide small and mid-sized companies with a roadmap for measuring their impact on the environment while defining a code of good practice for market leaders.

Poland launched the Chapter Zero Poland Program, which is part of the international Climate Governance Initiative established by the World Economic Forum. The program brings together members of the supervisory boards and presidents of major companies to raise awareness of the consequences of climate change for business and the impact of business on climate.

Poland maintains a National Contact Point (NCP) for OECD Guidelines for Multinational Enterprises: https://www.gov.pl/web/fundusze-regiony/krajowy-punkt-kontaktowy-oecd  Starting in March 2021, the EU regulation SFDR 2019/2088 on disclosure of information related to sustainable development (environmental, labor, human rights, and anti-corruption) in the financial services sector applies in Poland and other EU countries.The NCP promotes the OECD MNE Guidelines through seminars and workshops. Investors can obtain information about the Guidelines and their implementation through Regional Investor Assistance Centers. Information on the OECD NCP activities is under this link: https://www.gov.pl/web/fundusze-regiony/oecd-national-contact-point 

Poland is not a member of the Extractive Industries Transparency Initiative (EITI) or the Voluntary Principles on Security and Human Rights. The primary extractive industries in Poland are coal and copper mining.  Onshore, there is also hydrocarbon extraction, primarily conventional natural gas, with limited exploration for shale gas.  The Polish government exercises legal authority and receives revenues from the extraction of natural resources and from infrastructure related to extractive industries such as oil and gas pipelines through a concessions-granting system, and in most cases through shareholder rights in state-owned enterprises.  The Polish government has two revenue streams from natural resources: 1) from concession licenses; and 2) from corporate taxes on the concession holders.  License and tax requirements apply equally to both state-owned and private companies.  Natural resources are brought to market through market-based mechanisms by both state-owned enterprises and private companies. Poland was among the original ratifiers of the Montreux Document on Private Military and Security Companies in 2008. One company from Poland is a member of the International Code of Conduct for Private Security Service Providers’ Association (ICoCA).

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities;
• U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises; and;
• Xinjiang Supply Chain Business Advisory 

Department of the Treasury

• OFAC Recent Actions 

Department of Labor

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

The updated nationally determined contributions (NDC) as of December 18, 2020, submitted by Poland envision an at least 55 percent domestic reduction in GHG emissions by 2030 compared to 1990.

On March 29, 2022, the Council of Ministers adopted the assumptions for updating the “Energy Policy of Poland until 2040” (PEP2040) – Strengthening Energy Security and Independence.  The updated energy policy of Poland will take into account energy sovereignty, a particular element of which is to ensure rapid independence of the national economy from imported fossil fuels from the Russian Federation.  The assumptions provide for increasing technological diversification and expansion of capacities based on domestic sources, including further development of renewable energy sources and consistent implementation of nuclear energy and improvement of energy efficiency, but also further diversification of supplies and providing alternatives to oil and natural gas.  Actions taken will be aimed at the development of new low-carbon technologies and their integration into the system.  Priority will be given to actions that strengthen the development of electricity grids and energy storage, while the use of coal-fired units may increase from time to time in the face of uncertainty in the natural gas market.  Poland shall also undertake negotiating efforts to reform the EU climate policy mechanisms to enable a low-carbon and ambitious transformation, contributing to the achievement of the EU’s targets, while taking into account the temporary increased use of conventional generation capacity.  Due to recent unlawful Russian aggression against Ukraine, Poland’s neighbor, the Polish government decided to periodically increase the use of domestic hard coal deposits in case of a threat to the energy security of the state.  Originally the government assumed that coal units would be replaced more quickly and to a greater extent by gas units, but under current circumstances there will be a greater transition directly from coal sources to renewables and nuclear ones.  The requirement to end the use of coal by 2049 will still be binding.

Even though Poland has committed to the Fit for 55 package, it has not yet adopted an individual commitment to become climate-neutral by 2050.  Instead, Poland continues to say that the EU as a whole will be climate-neutral by that date, suggesting that other EU members may have to have negative emissions by 2050 to make up for Poland’s emissions.  The PEP2040 with recent amendments, however, sets up ways of reducing the use of coal and gas while increasing the role of RES (wind, solar, biomass) and nuclear. Other policies which aim to achieve climate goals include PEP2030 – Polityka Ekologiczna Panstwa 2030 (which encompasses 3 specific objectives: Environment and Health, Environment and Economy, and Environment and Climate). There is also Poland’s Hydrogen Strategy to 2030 with an Outlook to 2040 which sets out the main objectives of hydrogen economy development in Poland and the directions of activities needed to achieve them.  The Circular Economy program ( GOZ – gospodarka o obiegu zamknietym) is supervised by the Ministry of Economic Development and Technology. The National Fund for Environmental Protection and Water Management, along with the Ministry of Climate and Environment, established and financed a pilot program entitled “Circular economy in municipalitie” in 2017.  The pilot ran until 2020 with three municipalities participating (Łukowica -Małopolskie Province, Tuczno – Zachodniopomorskie Province and Wieluń – Łódzkie Province).

The private sector is already implementing some solutions to achieving relevant targets and goals due to EU regulations and pressure from the financial/banking sector and foreign investors.

Poland has an unfavorable energy mix due to its heavy dependency on coal (71 percent of energy comes from coal fired plants). The cost of transitioning to a net-zero economy by 2050 will be approximately 350 billion euros ($370 billion) and with be realized through the implementation of several programs which aim to achieve clean air, preserve biodiversity, and promote ecological solutions. Most of the government’s flagship programs should be implemented by 2030 or 2040. Programs to promote clean and accessible energy include Poland’s energy policy until 2040 (PEP2040), which emphasizes energy security; amendments to the Energy Efficiency Act and to the RES Act (still not finalized); the Polish nuclear energy program (PPEJ), and biomethane and hydrogen programs. There are also programs implemented and financed by the National Fund for Environmental Protection and Water Management (a body supervised by the Ministry of Climate and Environment). These include Mój Prąd, Agroenergia, District heating, and Polska Geotermia Plus, which are all planned to run until 2025 and are focused on local governments, institutions, and individual citizens. Programs dedicated to fight air pollution are: Stop SMOG, Clean Air Program, and Thermal modernization relief. There also are programs dedicated to supporting cities and municipalities in adapting to the challenges caused by climate changes: Adaptation to climate change and limiting the effects of environmental threats and City with Climate (blue and green infrastructure and green public transport).

Available tax solutions and loans:

• Thermo-modernization relief up to PLN 53,000 ($12,000) per taxpayer in the home, to be used for items such as insulation or replacement of the heating system. In the case of spouses who are co-owners of a building, the limit increases to PLN 106,000 ($24,000).
• R&D relief which allows the deduction of up to 200 percent of R&D expenses. In practice, most of the activities eligible for the R&D tax credit can be described as ecological, such as an increase in energy efficiency, improvement in the recyclability of materials, and various industrial innovations.
• A tax on non-recycled plastic in force since the beginning of 2021. The fee is added to Poland’s EU membership fee and has not yet been passed on to businesses. In addition, a so-called “plastic directive” prohibiting the sale of disposable cutlery, plates, and ear buds will come into force in Poland in March/April 2022.
• Zero excise tax for natural gas intended to power internal combustion engines, i.e., liquefied natural gas (LNG), compressed natural gas (CNG), biogas, and hydrogen and biohydrogen. The policy has been in force since August 2019.
• Zero excise tax on electric and hybrid vehicles (according to the Act of 11 January 2018 on electromobility and alternative fuels). The provision originally applied to hybrid vehicles only until January 2021 but was extended for two more years for cars with internal combustion engines of no more than two liters.

Ecolabelling:  Many companies in Poland have already earned the right to label their products with the European Ecolabel.  The certificates are awarded by the Polish Centre for Testing and Certification (PCBC). Entrepreneurs who obtain the certificate for specific products have the right to mark them with a distinctive sign with the Ecolabel logo.

Protected areas:  The 2004 Act on Nature Conservation describes the following forms of nature conservation: national parks; nature reserves; landscape parks; protected landscape areas; NATURA 2000 areas; species protection of plants, animals and fungi, and other forms of nature conservation: monuments of nature, documentation sites, ecological arable lands, and landscape/nature complexes.species protection of plants, animals and fungi, and; other forms of nature conservation: monuments of nature, documentation sites, ecological arable lands, and landscape/nature complexes.

Ecosystem management plans: Projects related to this topic are run by the National Fund for Environment Protection and Water Management and supervised by the Ministry of Climate as the Operator of the program, “Environment, Energy and Climate Change.”

Nature-based solutions (NBS): Includes all solutions based on green and blue infrastructure (ex: greening of cities, water management) and are mainly introduced by local governments and as an education topic to raise awareness among citizens.

Poland has laws, regulations, and penalties aimed at combating corruption of public officials and counteracting conflicts of interest.  Anti-corruption laws extend to family members of officials and to members of political parties who are members of Parliament.  There are also anti-corruption laws regulating the finances of political parties.  According to a local NGO, an increasing number of companies are implementing voluntary internal codes of ethics.  In 2021, the Transparency International (TI) index of perceived public corruption ranked Poland as 42nd least corrupt among 180 countries/territories (three places higher than on the 2020 TI index).

The Polish Central Anti-Corruption Bureau (CBA) and national police investigate public corruption.  The Justice Ministry and the police are responsible for enforcing Poland’s anti-corruption criminal laws.  The Finance Ministry administers tax collection and is responsible for denying the tax deductibility of bribes.  Reports of alleged corruption most frequently appear in connection with government contracting and the issuance of a regulation or permit that benefits a particular company.  Allegations of corruption by customs and border guard officials, tax authorities, and local government officials show a decreasing trend.  If such corruption is proven, it is usually punished.  Overall, U.S. firms have found that maintaining policies of full compliance with the U.S. Foreign Corrupt Practices Act (FCPA) is effective in building a reputation for good corporate governance and that doing so is not an impediment to profitable operations in Poland.  Poland ratified the UN Anticorruption Convention in 2006 and the OECD Convention on Combating Bribery in 2000.  Polish law classifies the payment of a bribe to a foreign official as a criminal offense, the same as if it were a bribe to a Polish official. For more information on the implementation of the OECD Anti-Bribery Convention in Poland, please visit:   http://www.oecd.org/daf/anti-bribery/poland-oecdanti-briberyconvention.htm 

Centralne Biuro Antykorupcyjne (Central Anti-Corruption Bureau – CBA)
al. Ujazdowskie 9, 00-583 Warszawa
+48 800 808 808
kontakt@cba.gov.pl

To report corruption, use this link: www.cba.gov.pl ; and:  https://www.cba.gov.pl/pl/zglos-korupcje/445,Zglos-korupcje-osobiscie-lub-pisemnie.html 

The Batory Foundation, as part of a broader operational program (ForumIdei), continues to monitor public corruption, carries out research into this area, and publishes reports on various aspects of the government’s transparency.  Contact information for Batory Foundation is:  batory@batory.org.pl; 22 536 02 00.

Poland is a politically stable country.  Constitutional transfers of power are orderly.  The last presidential elections took place in June 2020 and parliamentary elections took place in October 2019; observers considered both elections free and fair.  The Organization for Security and Cooperation in Europe, which conducted the election observation during the June 2020 presidential elections, found the presidential elections were administered professionally, despite legal uncertainty during the electoral process due to the outbreak of the COVID-19 epidemic.  Prime Minister Morawiecki’s government was re-appointed in November 2019.  Local elections took place in October 2018.  Elections to the European Parliament took place in May 2019.  The next parliamentary elections are scheduled for the fall of 2023.  There have been no confirmed incidents of politically motivated violence toward foreign investment projects in recent years.

The February 24, 2022, Russian invasion of Ukraine is likely to have major consequences for Poland. Poland, a leading NATO member, has become a special hub for transporting military equipment to the Ukrainian armed forces. Poland is dealing with a massive inflow of refugees, which could impact domestic political stability.

Poland has a well-educated, skilled labor force.  Productivity, however, remains below OECD averages but is rising rapidly and unit costs are competitive.  In the last quarter of 2021, according to the Polish Central Statistical Office (GUS), the average gross wage in Poland was PLN 5,995 per month ($1,500) compared to 5,458 ($1,444) in the last quarter of 2020.  Poland’s economy employed roughly 16.780 million people in the fourth quarter of 2021.  Eurostat measured total Polish unemployment at 2.9 percent, with youth unemployment at 11 percent in December 2021.  The unemployment rate was the same among male and female workers. GUS reports unemployment rates differently and tends to be higher than Eurostat figures.  Unemployment varied substantially among regions: the highest rate was 8.6 percent (according to GUS) in the north-eastern part of Poland (Warmia and Mazury), and the lowest was 3.1 percent (GUS) in the western province of Wielkopolska, at the end of the fourth quarter of 2021.  Unemployment was lowest in major urban areas.  Polish workers are usually eager to work for foreign companies, in Poland and abroad.  Since Poland joined the EU, up to two million Poles have sought work in other EU member states.

According to the Ministry of Family and Social Policy, more than 2 million “simplified procedure” work declarations were registered in 2021, of which 1.7 million were for Ukrainian workers (compared to 1.3 million a year earlier).  Under the revised procedure, local authorities may verify if potential employers have actual job positions for potential foreign workers.  The law also authorizes local authorities to refuse declarations from employers with a history of abuse, as well as to ban employers previously convicted of human trafficking from hiring foreign workers.  The 2018 revision also introduced a new type of work permit for foreign workers, the so-called seasonal work permit, which allow for legal work up to nine months in agriculture, horticulture, tourism, and similar industries.  Ministry of Family and Social Policy statistics show that during 2021, more than 400,000 seasonal work permits of this type were issued, of which more than 387,000 went to Ukrainians.  Ministry of Family and Social Policy statistics also show that in 2021, more than 504,000 foreigners received work permits, including more than 325,000 Ukrainians, compared with 295,272 in 2020.  On March 12, 2022, the new law on assistance to Ukrainian citizens in connection with the armed conflict on the territory of the country entered into force. Under the new law, Ukrainian citizens who fled their country as a result of the war can legally stay and work in Poland for up to 18 months.

Polish companies suffer from a shortage of qualified workers.  According to a 2022 report, “Barometer of Professions,” commissioned by the Ministry of Family and Social Policy, several industries suffer shortages, including the construction, manufacturing, healthcare, transportation, education, food processing, and financial industries.

The most sought-after workers in the construction industry include concrete workers, steel fixers, carpenters, and bricklayers.  Manufacturing companies seek electricians, electromechanical engineers, tailors, welders, woodworkers, machinery operators, and locksmiths.  Employment has expanded in service industries such as information technology, manufacturing, and administrative and support service activities.  The business process outsourcing industry in Poland has experienced dynamic growth.  The state-owned sector employs about a quarter of the work force, although employment in coal mining and steel are declining.

Since 2017, the minimum retirement age for men has been 65 and 60 for women.  Labor laws differentiate between layoffs and dismissal for cause (firing).  In the case of layoffs (when workers are dismissed for economic reasons in companies which employ more than 20 employees), employers are required to offer severance pay.  In the case of dismissal for cause, the labor law does not require severance pay.

Most workers hired under labor contracts have the legal right to establish and join independent trade unions and to bargain collectively. Individuals who are self-employed or in an employment relationship based on a civil law contract are also permitted to form a union. The law provides for the rights of workers to form and join independent trade unions, bargain collectively, and conduct legal strikes. The law prohibits antiunion discrimination and provides legal measures under which workers fired for union activity may demand reinstatement. Trade union influence is declining, though unions remain powerful among miners, shipyard workers, government employees, and teachers.  The Polish labor code outlines employee and employer rights in all sectors, both public and private, and has been gradually revised to adapt to EU standards. However, employers tend to use temporary and contract workers for jobs that are not temporary in nature.  Employers have used short-term contracts because they allow firing with two weeks’ notice and without consulting trade unions.  Employers also tend to use civil instead of labor contracts because of ease of hiring and firing, even in situations where work performed meets all the requirements of a regular labor contract.

Polish law requires equal pay for equal work and equal treatment with respect to signing labor contracts, employment conditions, promotion, and access to training.  The law defines equal treatment as nondiscrimination in any way, directly or indirectly on the grounds of gender, age, disability, race, religion, nationality, political opinion, ethnic origin, denomination, sexual orientation, and whether or not the person is employed temporarily or permanently, full time or part time.

The 1991 Law on Conflict Resolution defines the mechanism for labor dispute resolution.  It consists of four stages: first, the employer is obliged to conduct negotiations with employees; the second stage is a mediation process, including an independent mediator; if an agreement is not reached through mediation, the third stage is arbitration, which takes place at the regional court; the fourth stage of conflict resolution is a strike.

The Polish government adheres to the International Labor Organization’s (ILO) core conventions and generally complies with international labor standards.  However, there are several gaps in enforcing these standards, including legal restrictions on the rights of workers to form and join independent unions.  Cumbersome procedures make it difficult for workers to meet all of the technical requirements for a legal strike.  The law prohibits collective bargaining for key civil servants, appointed or elected employees of state and municipal bodies, court judges, and prosecutors.  There were some limitations with respect to identification of victims of forced labor.  Despite prohibitions against discrimination with respect to employment or occupation, such discrimination occurs.  Authorities do not consistently enforce minimum wage, hours of work, and occupational health and safety, either in the formal or informal sectors.

The National Labor Inspectorate (NLI) is responsible for identifying possible labor violations; it may issue fines and notify the prosecutor’s office in cases of severe violations.  According to labor unions, however, the NLI does not have adequate tools to hold violators accountable and the small fines imposed as punishment are an ineffective deterrent to most employers.  The United States has no FTA or preference program (such as GSP) with Poland that includes labor standards.

The grey economy’s share in Poland’s GDP is expected to increase to 18.9 percent in 2022, from 18.3 percent in 2021, according to Poland’s Institute of Forecasts and Economic Analyses (IPAG). IPAG estimates that the total value of the shadow economy in Poland will reach EUR 126.4 billion (PLN 590 billion) in 2022. According to IPAG, Russia’s ongoing war in Ukraine remains a significant factor of uncertainty and may additionally boost the grey economy to 19.4 percent. According to worldeconomics.com, the size of Poland’s informal economy is estimated to be 22.4 percent which represents approximately $354 billion at GDP PPP levels.

In 2021, Poland ranked 18 in the Mastercard Index of Women Entrepreneurs (MIWE) ranking offering women good conditions for running a business, down 12 places from 2020. According to the Mastercard report, 29 percent of companies in Poland are run by women. At the end of 2021, the share of women on the boards of the companies listed on the Warsaw Stock Exchange was only 17 percent, a decrease by one percent compared to 2020.

According to the analysis of data from the National Court Register carried out by the Dun & Bradstreet business intelligence agency, the number of companies owned by women in Poland at the end of 2021 decreased by three percent compared to 2020 and accounted for 32.5 percent of all companies. The number of women in the position of CEO decreased from 23.5 percent to 19.5 percent and as members of management boards from 30 percent to 25 percent. According to the Central Statistical Office (GUS) data, the share of women in the Polish labor market amounts to over 40 percent.

The pandemic undoubtedly contributed to the decline in women’s business activity. According to the report of the Foundation Success Written with Lipstick, one-third of surveyed business owners and co-owners admitted that they had problems with running a business in 2021, over a quarter recorded a drop in revenues, and eight percent had to suspend activities. Every fifth entrepreneur had to change the business profile of her company due to the pandemic.

The COVID-19 pandemic continued to dominate 2021, affecting the business world and forcing employers and employees to adapt to new working conditions. Due to the growing popularity of remote work, the Ministry of Labor has continued works aimed at introducing remote work to the provisions of the Labor Code for good. New regulations will be introduced in the first half of 2022.

Anna Jaros
Economic Specialist
U.S. Embassy Warsaw
+48 22 504 2000
econwrw@state.gov

The GoSA is generally open to foreign investment to drive economic growth, improve international competitiveness, and access foreign markets. The Department of Trade and Industry and Competition’s (DTIC) Trade and Investment South Africa (TISA) division assists foreign investors. It actively courts manufacturing in sectors where it believes South Africa has a competitive advantage. It favors sectors that are labor intensive and with the potential for local supply chain development. DTIC publishes the “Investor’s Handbook” on its website: HYPERLINKError! Hyperlink reference not valid. and TISA provides investment support through One Stop Shops in Pretoria, Johannesburg, Cape Town, Durban, and online at http://www.investsa.gov.za/one-stop-shop/  (see Business Facilitation). The 2018 Competition Amendment Bill introduced a government review mechanism for FDI in certain sectors on national security grounds, including energy, mining, banking, insurance, and defense (see section on Laws and Regulations on Foreign Direct Investment). The private sector has expressed concern about the politicization of mergers and acquisitions.

Currently, there are few limitations on foreign private ownership and South Africa has established several incentive programs to attract foreign investment. Under the Companies Act, which governs the registration and operation of companies in South Africa, foreign investors may establish domestic entities as well as register foreign-owned entities. However, the Act requires that external companies submit their annual returns to the Companies and Intellectual Property Commission Office (CIPC) for review. Although generally there are no rules that would prohibit foreign companies from purchasing South African assets or engaging in takeovers, the Act does contain national security interest criteria for certain industries, including energy, mining, banking, insurance, and defense (see section on Laws and Regulations on Foreign Direct Investment), that could potentially subject transactions covered to additional scrutiny. Reviews will be conducted by a committee comprised of 28 ministers and officials chosen by President Ramaphosa. The law also states that the president must identify and publish in the Gazette, the South African equivalent of the U.S. Federal Register, a list of national security interests including the markets, industries, goods or services, sectors or regions for mergers involving a foreign acquiring firm.

In addition to the Companies Act national security review provisions, there are a small number of industries that are subject to additional requirements through separate acts. On September 28, 2021, President Ramaphosa signed the Private Security Industry Regulation Amendment Act, which limits foreign ownership of private security companies to 49 percent based on national security concerns. The Banks Act of 1990 permits a foreign bank to apply to the Prudential Authority (operating within the administration of the South African Reserve Bank) to establish a representative office or a local branch in South Africa.  The Insurance Act of 2017 prohibits persons from conducting insurance business in South Africa without being appropriately licensed by the Prudential Authority.  The Insurance Act permits a foreign reinsurer to conduct insurance business in South Africa, subject to that foreign reinsurer being granted a license and establishing both a trust (for the purposes of holding the prescribed security) and a representative office in South Africa.  The Electronic Communications Act of 2005 imposes limitations on foreign control of commercial broadcasting services.  The Act Provides that a foreign investor may not, directly or indirectly, (1) exercise control over a commercial broadcasting licensee; or (2) have a financial interest or an interest in voting shares or paid-up capital in a commercial broadcasting licensee exceeding 20 percent. The Act caps the percentage of foreigners serving as directors of a commercial broadcasting licensee at 20 per cent. Lastly, foreign purchasers of South African securities are obliged to notify an authorized dealer (generally commercial banks) of the purchase and have the securities endorsed “non-resident.”

DTIC’s TISA division assists foreign investors, actively courting manufacturers in sectors where it believes South Africa has a competitive advantage. DTIC publishes the “Investor’s Handbook” on its website: www.the DTIC.gov.za and TISA provides investment support through One Stop Shops in Pretoria, Johannesburg, Cape Town, Durban, and online at  http://www.investsa.gov.za/one-stop-shop/  (see Business Facilitation).  Foreign companies may be eligible for incentives in South Africa under several ad hoc initiatives as well as the Special Economic Zones (SEZs) Act of 2014, which promotes regional industrial development by providing incentives for foreign (and local) investors that elect to operate within the country’s SEZs. More information regarding incentive programs may be found at: http://www.thedtic.go/v.za/financial-and-non-financial-support/incentives/  and below in Incentives. The 2018 Competition Amendment Bill introduced a government review mechanism for FDI in certain sectors on national security grounds,

Although South Africa welcomes foreign investment, there are policies that potentially disadvantage foreign companies, including the Broad-Based Black Economic Empowerment Act of 2013 (B-BBEE). B-BBEE represents one avenue that South Africa has taken to re-integrate historically disadvantaged individuals (HDIs) into the economy by requiring companies meet certain thresholds of black ownership and management control to participate in government tenders and contracts. While companies support the Act’s intent, it can be difficult to meet the B-BBEE requirements, which are tallied on B-BBEE scorecards and are periodically re-defined. The higher the score on the scorecard, the greater preferential access a company must bid on government tenders and contracts.

In recognition of the challenge the scorecards place on foreign business, the Department of Trade, Industry and Competition created an alternative Equity Equivalence Investment Program (EEIP) program for multinational or foreign owned companies to allow them to show alternative paths to meeting B-BBEE ownership and management requirements under the law. Many companies still view the terms as onerous and restrictive. Multinationals, primarily in the technology sector such as Microsoft and Amazon Web Services, participate in the EE program. J.P. Morgan was the first international investment bank in South Africa to launch a DTIC-approved equity equivalent investment program in August 2021. The company will deploy R340 million (approximately USD 22 million) of financing into the South African economy and create more than 1000 permanent jobs.

The B-BBEE program has come under sharp criticism in the past several years on the grounds that the Act has not gone far enough to shift ownership and management control in the commercial space to HDIs. In response, the GoSA has increasingly taken measures to strengthen B-BBEE through more restrictive application, increasing investigations into the improper use of B-BBEE scorecards, and is considering additional legislation to support B-BBEE’s policies. For instance, the GoSA is considering a new Equity Employment Bill that will set a numerical threshold, purportedly at the discretion of each Ministry, for employment based on race, gender, and disability, over and above other B-BBEE criteria. The bill is currently with the National Council of Provinces and if it passes, it will move to President Ramaphosa for signature.

South Africa has not undergone any third-party investment policy reviews through organizations such as the Organization for Economic Co-operation and Development (OECD), World Trade Organization (WTO), United Nations Conference on Trade and Development (UNCTAD), or UN Working Group on Business and Human Rights.

In November 2021, civil society organizations launched a constitutional lawsuit against the GoSA, demanding that it cancel plans to build 1,500 Mega Watts (MW) of coal-fired power because this would worsen air and water pollution along with health hazards and global warming. They filed the case in the North Gauteng High Court on the grounds that the new power would pose “significant unjustifiable threats to constitutional rights” and to the climate by pushing up greenhouse gas emissions. South Africa is the 12th worst greenhouse gas (GHG) emitter in the world. The Center for Environmental Rights provided a review at: https://cer.org.za/news/new-coal-power-will-cost-south-africans-much-more-report-shows .

In November 2021, environmental activists gathered at the oil and gas giant Sasol’s annual general meeting demanding commitment to move away from fossil fuels. Activists also want Sasol and its shareholders to accelerate the country’s just transition, which commits to significantly reducing carbon dioxide emissions, and moving towards greener energy alternatives. A domestic shareholder activism organization called JustShare released a report on Sasol and climate change claiming that Sasol is not planning to decarbonize, despite climate science.

DTIC has established One Stop Shops (OSS) to simplify administrative procedures and guidelines for foreign companies wishing to invest in South Africa in Cape Town, Durban, and Johannesburg. In theory, OSS should be staffed by officials from government entities that handle regulation, permits and licensing, infrastructure, finance, and incentives, with a view to reducing lengthy bureaucratic procedures, reducing bottlenecks, and providing post-investment services. However, some users of the OSS complain that some of the inter-governmental offices are not staffed, so finding a representative for certain transactions may be difficult. The virtual OSS web site is: http://www.investsa.gov.za/one-stop-shop/ .

The CIPC issues business registrations and publishes a step-by-step guide for online registration at ( http://www.cipc.co.za/index.php/register-your-business/companies/ ), which can be done through a self-service terminal, or through a collaborating private bank. New businesses must also request through the South African Revenue Service (SARS) an income tax reference number for turnover tax (small companies), corporate tax, employer contributions for PAYE (income tax), and skills development levy (applicable to most companies). The smallest informal companies may not be required to register with CIPC but must register with the tax authorities. Companies must also register with the Department of Labour (DoL) – www.labour.gov.za  – to contribute to the Unemployment Insurance Fund (UIF) and a compensation fund for occupational injuries. DoL registration may take up to 30 days but may be done concurrently with other registrations.

South Africa does not incentivize outward investments. South Africa’s stock foreign direct investments in the United States in 2019 totaled USD 4.1 billion (latest figures available), a 5.1 percent increase from 2018. The largest outward direct investment of a South African company was a gas liquefaction plant in the State of Louisiana by Johannesburg Stock Exchange (JSE) and NASDAQ dual-listed petrochemical company SASOL. There are some restrictions on outward investment, such as a R1 billion (USD 83 million) limit per year on outward flows per company. Larger investments must be approved by the South African Reserve Bank and at least 10 percent of the foreign target entities’ voting rights must be obtained through the investment. https://www.resbank.co.za/RegulationAndSupervision/FinancialSurveillanceAndExchangeControl/FAQs/Pages/Corporates.aspx 

South African laws and regulations are generally published in draft form for stakeholder comment at: https://www.gov.za/document?search_query=&field_gcisdoc_doctype=545&field_gcisdoc_subjects=All&start_date=&end_date= . South Africa’s process is similar to the U.S. notice and comment consultation process and full draft texts are available to the public; however, foreign stakeholders have expressed concern over the adequacy of notice and the GoSA’s willingness to address comments. Legal, regulatory, and accounting systems are generally transparent and consistent with international norms. The GoSA’s regulatory regime and laws enacted by Parliament are subject to judicial review to ensure they follow administrative processes.

DTIC is responsible for business-related regulations. It develops and reviews regulatory systems in the areas of competition, standards, consumer protection, company and intellectual property registration and protections, as well as other subjects in the public interest. It also oversees the work of national and provincial regulatory agencies mandated to assist DTIC in creating and managing competitive and socially responsible business and consumer regulations. DTIC publishes a list of bills and acts that govern its work at: http://www.theDTIC.gov.za/legislation/legislation-and-business-regulation/?hilite=%27IDZ%27 

South Africa has a number of public laws that promote transparency of the business regulatory regime to aid the public in understanding their rights. For instance, South Africa’s Consumer Protection Act (2008) reinforces various consumer rights, including right of product choice, right to fair contract terms, and right of product quality. The law’s impact varies by industry, and businesses have adjusted their operations accordingly. A brochure summarizing the Consumer Protection Act can be found at: http://www.theDTIC.gov.za/wp-content/uploads/CP_Brochure.pdf . Similarly, the National Credit Act of 2005 aims to promote a fair and non-discriminatory marketplace for access to consumer credit and for that purpose to provide the general regulation of consumer credit and improves standards of consumer information. A brochure summarizing the National Credit Act can be found at: http://www.theDTIC.gov.za/wp-content/uploads/NCA_Brochure.pdf

The South African National Treasury is developing new legislation that will “seek to enhance the transformation imperatives of the South African financial services sector.” In August 2021, the former Minister of Finance Tito Mboweni said that a new version of the Conduct of Financial Institutions (COFI) bill contains provisions that, if enacted, will require financial institutions to develop transformation plans and commitments around B-BBEE. The bill seeks to enhance market conduct, market development and financial inclusion. National Treasury also published a draft policy document on financial inclusion for public comment, which focuses on general ‘economic inclusiveness’ for South Africa. A summary statement of the draft policy can be found at: http://www.treasury.gov.za/comm_media/press/2020/20201028%20Media%20Statement%20-%20Updated%20Financial%20Inclusion%20Policy.pdf.

Parliament’s National Assembly passed the Employment Equity Amendment Bill in November 2021 and has sent the draft law to the National Council of Provinces for concurrence. The bill will allow the Employment and Labor minister to set employment equity targets for different business sectors and for different designated groups (that is, black people, women, and persons with disabilities).

In South Africa the financial sector has been a leader in integrating environmental, social, and governance issues into its practices. For example, regulation 28 of the Pension Funds Act, 1956 requires a pension fund and its board to “before investing in, and whilst invested in an asset, consider any factor which may materially affect the sustainable long-term performance of the asset including but not limited to those of an environment, social and governance character.” There are no specific ESG disclosure rules for companies, but several ESG related laws include a carbon tax law and energy efficiency legislation.

The Financial Sector and Deposit Insurance Levies (Administration) and Deposit Insurance Premiums Bill was tabled in parliament in January 2022. The National Treasury had published the bill for comment in December 2021. The bill seeks to “facilitate the funding of financial sector regulators, ombuds and other bodies, to ensure that they are able to effectively regulate the financial sector for the benefit of financial customers.” According to the bill’s memorandum, the deposit insurance premiums will be imposed on licensed banks, mutual banks, co-operative banks and branches of foreign banks that conduct business in South Africa. The model imposes huge expenses on the financial sector and results in an increased burden on already over-taxed citizens.

Under the current disclosure regime in South Africa, there is no explicit duty to provide disclosures on ESG matters. However, JSE-listed companies are subject to general continuing disclosure obligations under the JSE Listing Requirements, which apply to financially material ESG issues. Regulatory enforcement processes are legally reviewed and made publicly available for stakeholder comments.

The country’s fiscal transparency is overall very good. National Treasury publishes the executive budget online and the enacted budget is usually published within three months of enactment. End of year reports are published within twelve months of the end of the fiscal year. Information on debt obligations (including explicit and contingent liabilities) is made publicly available and updated at least annually. Public finances and debt obligations are fairly transparent. The year ending March 2021 report is not yet published.

South Africa is a member of the African Continental Free Trade Area, which commenced trading in January 2021. It is a signatory to the SADC-EAC-COMESA Tripartite FTA and a member of the Southern Africa Customs Union (SACU), which has a common external tariff and tariff-free trade between its five members (South Africa, Botswana, Lesotho, Namibia, and Eswatini, formerly known as Swaziland). South Africa has free trade agreements with the Southern African Development Community (SADC); the Trade, Development and Cooperation Agreement (TDCA) between South Africa and the European Union (EU); the EFTA-SACU Free Trade Agreement between SACU and the European Free Trade Association (EFTA) – Iceland, Liechtenstein, Norway, and Switzerland; and the Economic Partnership Agreement (EPA) between the SADC EPA States (South Africa, Botswana, Namibia, Eswatini, Lesotho, and Mozambique) and the EU and its Member States. SACU and Mozambique (SACUM) and the United Kington (UK) signed an Economic Partnership Agreement (EPA) in September 2019.

South Africa is a member of the WTO. While it notifies some draft technical regulations to the Committee on Technical Barriers to Trade (TBT), these notifications may occur after implementation. In November 2017, South Africa ratified the WTO’s Trade Facilitation Agreement, implementing many of its commitments, including some Category B notifications. The GoSA is not party to the WTO’s Government Procurement Agreement (GPA).

South Africa has a strong legal system composed of civil law inherited from the Dutch, common law inherited from the British, and African customary law. Generally, South Africa follows English law in criminal and civil procedure, company law, constitutional law, and the law of evidence, but follows Roman-Dutch common law in contract law, law of delict (torts), law of persons, and family law. South African company law regulates corporations, including external companies, non-profit, and for-profit companies (including state-owned enterprises). Funded by the Department of Justice and Constitutional Development, South Africa has district and magistrate courts across 350 districts and high courts for each of the provinces. Cases from Limpopo and Mpumalanga are heard in Gauteng. The Supreme Court of Appeals hears appeals, and its decisions may only be overruled by the Constitutional Court. South Africa has multiple specialized courts, including the Competition Appeal Court, Electoral Court, Land Claims Court, the Labor and Labor Appeal Courts, and Tax Courts to handle disputes between taxpayers and SARS. Rulings are subject to the same appeals process as other courts.

The major laws affecting foreign investment in South Africa are:

1. The Companies Act, which governs the registration and operation of companies in South Africa.
2. The Protection of Investment Act, which provides for the protection of investors and their investments.
3. The Labor Relations Act, which provides protection for employees against unfair dismissal and unfair labor practices.
4. The Customs and Excise Act, which provides for general incentives to investors in various sectors.
5. The Competition Act, which is responsible for the investigation, control and evaluation of restrictive practices, abuse of dominant position, and mergers.
6. The Special Economic Zones Act which provides national economic growth and exports by using support measures to attract foreign and domestic investments and technology.

In July 2021, the SARS updated the SARS Customs and Excise Client Accreditation rules. Section 64E deals with SARS client accreditation rules and is of interest to importers and exporters who wish to apply for accredited client status in South Africa. An accredited client, or preferred trader, is similar to the authorized economic operator found in many other countries. The new rules set out two levels of accredited client status: Level 1 – Authorized Economic Operator (Compliance) and Level 2 – Authorized Economic Operator (Security). A person that is registered for customs and excise activities in South Africa may apply for Level 1 or 2 accredited client status. According to the new rules, all customs activities for which an applicant is registered or licensed under the provisions of the Act will be considered when assessing applications for either level of accredited client status. The new rules also set out the application process, the validity of the person applying, the renewal process for accredited client status, criteria for levels of accredited client status, and the benefits of the two levels of accredited client status.

The Ease of Doing Business Bill was introduced in Parliament in February 2021 and is currently under consideration by the Portfolio Committee on Public Service and Administration. If passed, the bill will provide for a mechanism to allow the executive, Parliament. and others to assess the socio-economic impact of regulatory measures, including the detection and reduction of measures that increase the cost of doing business. DTIC has a one-stop-shop website for investment that provides relevant laws, rules, procedures, and reporting requirements for investors (refer to section one for details).

South Africa’s Competition Commission is empowered to investigate, control, and evaluate restrictive business practices, abuse of dominant positions, and review mergers to achieve equity and efficiency. Its public website is www.compcom.co.za . The Competition Commission is an investigative body. The Competition Tribunal, an adjudicative body that may review Competition Committee actions, functions very much like a court. It has jurisdiction throughout South Africa and adjudicates competition matters. Tribunal decisions may be appealed through the South African court system. International and domestic investors have raised concern the Commission has taken an increasingly social activist approach by prioritizing the public interest criteria found in the Competition Amendment Bill of 2018 over other more traditional anti-trust and monopoly criteria to push forward social and economic policies such as B-BBEE. Concerns include that the new Commission approach has led to more ambiguous, expensive, and lengthy review processes and often result in requests to alter previously agreed-upon terms of the merger and acquisition at a late stage.

In January 2021, GovChat, South Africa’s official citizen-government engagement platform, asked the Competition Tribunal to prevent its removal from a U.S.-owned platform, which charges a fee to business and GoSA clients for contacting customers or citizens. The tribunal granted GovChat’s application for interim relief, stating: “The respondents are interdicted and restrained from off-boarding the applicants from their WABA pending the conclusion of a hearing into the applicants’ complaint lodged with the [Competition] Commission, or six months of date hereof, whichever is the earlier.” On March 14, 2022, the Competition Commission referred the investigation to the Tribunal for review, alleging that the U.S. party’s actions against GovChat constituted an “abuse of dominance.” The Commission asked the Tribunal to assess the U.S. party with a maximum penalty constituting 10 percent of its annual turnover, and to enjoin the U.S. party from removing GovChat from the WhatsApp platform.

The Competition Commission prohibited the sale of the South African operations of a U.S. fast food chain and Grand Food Meat Plant, its main supplier, by Grand Parade Investments (GPI) to a U.S. private equity firm in June 2021 on the grounds that the sale would reduce the proportion of black ownership from 68 percent to zero percent. The regulator found this to be “a significant reduction in the shareholding of historically disadvantaged persons.” By August 2021, the parties and the Commission had agreed to a revised set of conditions which include the new owner’s commitment to improving its rating for the enterprise and supplier development element under its B-BBEE scorecard, which relates to empowering black-owned and smaller enterprises. In addition, the U.S. private equity firm agreed to establish an employee share ownership program that will entitle workers to a five percent stake in the company.

Racially discriminatory property laws and land allocations during the colonial and apartheid periods resulted in highly distorted patterns of land ownership and property distribution in South Africa. Given land reform’s slow and mixed success, the National Assembly (Parliament) passed a motion in February 2018 to investigate amending the constitution (specifically Section 25, the “property clause”) to allow for land expropriation without compensation (EWC). Some politicians, think-tanks, and academics argue that Section 25 already allows for EWC in certain cases, while others insist that amendments are required to implement EWC more broadly and explicitly. Parliament tasked an ad hoc Constitutional Review Committee composed of parliamentarians from various political parties to report back on whether to amend the constitution to allow EWC, and if so, how it should be done. In December 2018, the National Assembly adopted the committee’s report recommending a constitutional amendment. Following elections in May 2019 the new Parliament created an ad hoc Committee to Initiate and Introduce Legislation to Amend Section 25 of the Constitution. The Committee drafted constitutional amendment language explicitly allowing for EWC and accepted public comments on the draft language through March 2021. After granting a series of extensions to complete its work, Parliament finally voted on the Committee’s draft bill on December 7, 2021. Constitutional amendments require a two-thirds parliamentary majority (267 votes) to pass, as well as the support of six out of the nine provinces in the National Council of Provinces. Because no single political party holds such a majority, a two-third vote can only be achieved with the support of two or more political parties. Because the ruling ANC could not garner enough supporting votes from the left-leaning Economic Freedom Fighters, who sought more drastic “state custodianship” of all property, nor the right-leaning Democratic Alliance, which rejected EWC as an investment-killing measure, the bill failed. However, on December 8, Justice Minister Ronald Lamola told media that the ruling party would use its simple majority to pass EWC legislation, which requires a lower threshold than a constitutional amendment. The ANC’s EWC bill is still making its way through Parliament but will likely see constitutional challenges from opposing parties.

In October 2020, the GoSA published the draft expropriation bill in its Gazette, which would introduce the EWC concept into its legal system. The application of the draft’s provisions could conflict with South Africa’s commitments to international investors under its remaining investment protection treaties as well as its obligations under customary international law. Submissions closed in February 2021 and the Public Works committee is currently finalizing the language.

Existing expropriation law, including The Expropriation Act of 1975 (Act) and the Expropriation Act Amendment of 1992, entitles the GoSA to expropriate private property for reasons of public necessity or utility. The decision is an administrative one. Compensation should be the fair market value of the property as agreed between the buyer and seller or determined by the court per Section 25 of the Constitution.

In 2018, the GoSA operationalized the 2014 Property Valuation Act that creates the office of Valuer-General charged with the valuation of property that has been identified for land reform or acquisition or disposal. The Act gives the GoSA the option to expropriate property based on a formulation in the Constitution termed “just and equitable compensation.”

The Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA), enacted in 2004, gave the state ownership of South Africa’s mineral and petroleum resources. It replaced private ownership with a system of licenses controlled by the GoSA and issued by the Department of Mineral Resources. Under the MPRDA, investors who held pre-existing rights were granted the opportunity to apply for licenses, provided they met the licensing criteria, including the achievement of certain B-BBEE objectives. Parliament passed an amendment to the MPRDA in 2014 but President Ramaphosa never signed it. In August 2018, Minister for the Department of Mineral Resources Gwede Mantashe called for the recall of the amendments so that oil and gas could be separated out into a new bill. He also announced the B-BBEE provisions in the new Mining Charter would not apply during exploration but would start once commodities were found and mining commenced. In November 2019, the newly merged Department of Mineral Resources and Energy (DMRE) published draft regulations to the MPRDA. In December 2019, the DMRE published the Draft Upstream Petroleum Resources Development Bill for public comment. Parliament continues to review this legislation. Oil and gas exploration and production is currently regulated under MPRDA, but the new Bill will repeal and replace the relevant sections pertaining to upstream petroleum activities in the MPRDA.

On September 27, 2018, the Minister of the DMRE released a new mining charter, stating that the new charter would be operationalized within the next five years to bolster certainty in the sector. The charter establishes requirements for new licenses and investment in the mining sector and includes rules and targets for black ownership and community development in the sector to redress historic economic inequalities from the apartheid era. The new rules recognize existing mining right holders who have a minimum 26 percent B-BBEE ownership as compliant but requires an increase to 30 percent B-BBEE ownership within a five-year transitional period. Recognition of B-BBEE ownership compliance is not transferable to a new owner. New mining right licenses must have 30 percent B-BBEE shareholding, applicable to the duration of the mining right.

In March 2019 the Minerals Council of South Africa applied for a judicial review of the 2018 Mining Charter. The court was asked to review several issues in the Mining Charter including: the legal standing of the Mining Charter in relation to the MPRDA; the levels of black ownership of mines under B-BBEE requirements; the levels of ownership required when B-BBEE partners sell their shares, and if B-BBEE ownership levels must be maintained in perpetuity, especially when levels of ownership preceded the current Mining Charter. In September 2021, the Pretoria high court ruling set aside key aspects of the Mining Charter, notably those related to black ownership targets. The DMRE resolved not to appeal the high court ruling.

The Insolvency Act 24 of 1936 sets out liquidation procedures for the distribution of any remaining asset value among creditors. Financial sector legislation such as the Banks Act or Insurance Act makes further provision for the protection of certain clients (such as depositors and policy holders). South Africa’s bankruptcy regime grants many rights to debtors, including rejection of overly burdensome contracts, avoiding preferential transactions, and the ability to obtain credit during insolvency proceedings.

South Africa also offers various investment incentives targeted at specific sectors or types of business activities, including tax allowances to support in the automotive sector and rebates for film and television production. The GoSA favors sectors that are labor intensive and with the potential for local supply chain development More information regarding incentive programs may be found at: http://www.thedtic.gov.za/financial-and-non-financial-support/incentives/ .

The Public Investment Corporation SOC Limited (PIC) is an asset management firm wholly owned by the GoSA and is governed by the Public Investment Corporation Act, 2004 . PIC’s clients are mostly public sector entities, including the Government Employees Pension Fund (GEPF) and UIF, among others. The PIC runs a diversified investment portfolio including listed equities, real estate, capital market, private equity, and impact investing. The PIC has been known to jointly finance foreign direct investment if the project will create social returns, primarily in the form of new employment opportunities for South Africans.

To encourage and support businesses looking to green their operations, there are incentives built in into the income tax. Section 12L of the Income Tax Act was passed in 2013 allowing for deductions for energy efficiency measures. Businesses can claim deductions of 95 cents per kilowatt hour, or kilowatt hour equivalent, of energy efficiency savings made within a year against a verified 12-month baseline. The baseline measurement and verification of savings must be done by a SANAS accredited Measurement and Verification (M&V) body. The incentive allows for tax deductions for all energy carriers, not just electricity, except for renewable energy sources which have separate provisions. An amendment in 2015 allowed businesses to claim savings from electricity co-generation, combining heat and power, if there is an energy conversion efficiency of more than 35 percent. All energy efficiency schemes that businesses want to claim the deductions against need to be registered with the South African National Energy Development Institute (SANEDI). https://www.sanedi.org.za/12L.html 

Section 12B of the Income Tax Act includes a provision for a capital allowance for movable assets used in the production of renewable energy. The incentive allows for 100 percent asset accelerated depreciation in first financial year that the asset is brought online. This could equate to a 28 percent deduction on the business’ income tax. Currently, company tax in South-Africa is 28 percent (it has since been reduced to 27 percent as from April 1, the beginning of the 2022/2023 fiscal year). With this incentive, a company could deduct the value of a new solar power system as a depreciation expense decreasing the company’s income tax liability by the same value as the value of the installed solar system. The reduction can also be carried over to the next financial year as a deferred tax asset.

https://www.westerncape.gov.za/energy-security-game-changer/news/clean-energy-tax-incentives 

Section 12N of the Income Tax Act provides for improvements to property not owned by taxpayers: if the improvements are associated with the Independent Power Producer Procurement Programme. Section 12U Income Tax Act provides for additional deduction in respect of supporting infrastructure in respect of renewable energy: such as roads and fences

South Africa designated its first Industrial Development Zone (IDZ) in 2001. IDZs offer duty-free import of production-related materials and zero VAT on materials sourced from South Africa, along with the right to sell in South Africa upon payment of normal import duties on finished goods. Expedited services and other logistical arrangements may be provided for small to medium-sized enterprises or for new foreign direct investment. Co-funding for infrastructure development is available from DTIC. There are no exemptions from other laws or regulations, such as environmental and labor laws. The Manufacturing Development Board licenses IDZ enterprises in collaboration with the SARS, which handles IDZ customs matters. IDZ operators may be public, private, or a combination of both. There are currently five IDZs in South Africa: Coega IDZ, Richards Bay IDZ, Dube Trade Port, East London IDZ, and Saldanha Bay IDZ. South Africa also has SEZs focused on industrial development. The SEZs encompass the IDZs but also provide scope for economic activity beyond export-driven industry to include innovation centers and regional development. There are six SEZs in South Africa: Atlantis SEZ, Nkomazi SEZ, Maliti-A-Phofung SEZ, Musina/Makhado SEZ, Tshwane SEZ, and O.R. Tambo SEZ. The broader SEZ incentives strategy allows for 15 percent Corporate Tax as opposed to the current 28 percent, Building Tax Allowance, Employment Tax Incentive, Customs Controlled Area (VAT exemption and duty free), and Accelerated 12i Tax Allowance. For more detailed information on SEZs, please see: http://www.theDTIC.gov.za/sectors-and-services-2/industrial-development/special-economic-zones/?hilite=%27SEZ%27 

The GoSA does not impose forced localization. However, authorities incentivize the use of local content in goods and technology. In 2021, President Ramaphosa and DTIC Minister Ebrahim Patel announced that South Africa will expand existing localization measures to reboot the economy. DTIC released a policy statement on localization in May 2021. The localization plan’s cornerstone is the implementation of a scheme to substitute 20 percent of imports, or approximately R20 billion (USD 1.3 billion) across selected categories with local goods by 2025. For instance, the industrial master plan for textiles set a goal that 60 percent of all clothing sold in South Africa will be locally manufactured by 2030. Preferential procurement is applied uniformly to both domestic and foreign investors. The GoSA’s B-BBEE requirements, however, make it difficult for foreign investors to score well on the “ownership” element of the B-BBEE scorecard due to corporate rules that can prevent the transfer of discounted equity stakes to South African subsidiaries. Although the GoSA created the EEIP for international companies that cannot meet the ownership element of B-BBEE through the direct sale of equity to local investors, some companies claim that the reporting requirements and high level of required financial contributions make the EE program unviable.

A Draft National Data and Cloud Policy, released by the GoSA in April 2021, seeks to put the GoSA at the heart of data control, ownership, and distribution in South Africa.  The draft policy proposed a series of government interventions, including the establishment of a new state-owned enterprise to manage government-owned and controlled networks. It aims to consolidate excess capacity of publicly funded data centers and deliver processing, data facilities and cloud computing capacity. The GoSA plans to develop ICT special economic zones, hubs and transformation centers. The draft policy seeks to impose data localization requirements and defines data localization as the “…requirements for the physical storage of data within a country’s national boundaries, although it is sometimes used more broadly to mean any restrictions on cross border data flows.” The draft policy provides inter alia that: data generated in South Africa shall be the property of South Africa, regardless of where the technology company is domiciled; ownership and control of personal information and data shall be in line with the Protection of Personal Information Act (POPIA); DTIC through the CIPC and the National Intellectual Property Management Office (NIPMO) shall develop a policy framework on data generated from intellectual activities including sharing and use of such data. The POPIA entered fully into force in July 2021 and regulates how personal information may be processed and under which conditions data may be transferred outside of South Africa. Currently, there is no requirement for foreign information technology providers to turn over source code or provide access to surveillance. However, compliance burdens may be significant.  The Department of Communications and Digital Technologies is responsible for developing ICT policies and legislation. The Independent Communications Authority of South Africa is the regulatory body which regulates the telecommunications sector.

The South African legal system protects and facilitates the acquisition and disposition of all property rights (e.g., land, buildings, and mortgages). Deeds must be registered at the Deeds Office. Banks usually register mortgages as security when providing finance for the purchase of property. Foreigners may purchase and own immovable property in South Africa without any restrictions since they are generally subject to the same laws as South African nationals. Foreign companies and trusts are also permitted to own property in South Africa if they are registered in South Africa as an external company. Since South Africa does not have formal land audits, the proportion of land that does not have clear title is unknown. If property legally purchased is unoccupied, property ownership does not revert back to other owners such as squatters. However, squatters are known to occupy properties illegally and may rent the properties to unsuspecting tenants when there are absentee landowners.

South Africa enforces intellectual property rights through civil and criminal procedures. It is a member of the World Intellectual Property Organization (WIPO) and in the process of acceding to the Madrid Protocol. It is also a signatory to the WTO’s Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPS). Generally, South Africa is considered to have a strong domestic legal framework for protecting intellectual property (IP). Enforcement can be spotty due to lack of resources for additional law enforcement and market surveillance support. However, South African authorities work closely with rights holders and with international stakeholders to address IP violations. Bringing cases to criminal court is costly, with most of the burden placed on rights holders to develop the evidence needed for prosecutions; however, civil and criminal remedies are available. South Africa has not been named in the Special 301 or the notorious market report; however, there are yearly submissions requesting South Africa’s inclusion, primarily based on delays in burdens in patent and trademark registration, draft copyright legislation under review in Parliament described below and increasing counterfeit activity in certain business districts. South Africa does not track seizures of counterfeit goods writ-large, though CIPC and law enforcement agencies release periodic reports on significant raids and media coverage in major metro areas reports on major seizures.

Owners of patents and trademarks may license them locally, but when a patent license entails the payment of royalties to a non-resident licensor, DTIC must approve the royalty agreement. Patents are granted for twenty years, usually with no option to renew. Trademarks are valid for an initial period of ten years, renewable for additional ten-year periods. A patent or trademark holder pays an annual fee to preserve ownership rights. All agreements relating to payment for applicable rights are subject to South African Reserve Bank (SARB) approval. A royalty of up to four percent is the standard for consumer goods and up to six percent for intermediate and finished capital goods.

Literary, musical, and artistic works, as well as cinematographic films and sound recordings, are eligible for protection under the Copyright Act of 1978. New designs may be registered under the Designs Act of 1967, which grants copyrights for five years. The Counterfeit Goods Act of 1997 provides additional protection to owners of trademarks, copyrights, and certain marks under the Merchandise Marks Act of 1941. The Intellectual Property Laws Amendment Act of 1997 amended the Merchandise Marks Act of 1941, the Performers’ Protection Act of 1967, the Patents Act of 1978, the Copyright Act of 1978, the Trademarks Act of 1993, and the Designs Act of 1993 to bring South African intellectual property legislation into line with TRIPS. To modernize its intellectual property rights (IPR) regime further, DTIC introduced the Copyright Amendment Bill (CAB) and the Performers’ Protection Amendment Bill (PPAB). The bills remain under Parliamentary review after being returned by President Ramaphosa in June 2020 on constitutional grounds. Stakeholders have raised several concerns, including the CAB bill’s application of “fair use,” and clauses in both bills that allow DTIC Minister to set royalty rates for visual artistic work or equitable renumeration for direct or indirect uses of copyrighted works. Additional changes to South Africa’s IPR regime are under consideration through a draft DTIC policy document, Phase 1 of the Intellectual Property Policy of the Republic of South Africa; however, draft legislation has not yet been released.

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/. 

South Africa recognizes the importance of foreign capital in financing persistent current account and budget deficits, and South Africa’s financial markets are regarded as some of the most sophisticated among emerging markets. A sound legal and regulatory framework governs financial institutions and transactions. The fully independent SARB regulates a wide range of commercial, retail and investment banking services according to international best practices, such as Basel III, and participates in international forums such as the Financial Stability Board and G-20 Finance Ministers and Central Bank Governors. The JSE serves as the front-line regulator for listed firms but is supervised by the Financial Services Board (FSB). The FSB also oversees other non-banking financial services, including other collective investment schemes, retirement funds and a diversified insurance industry. The GoSA has committed to tabling a Twin Peaks regulatory architecture to provide a clear demarcation of supervisory responsibilities and consumer accountability and to consolidate banking and non-banking regulation.

South Africa has access to deep pools of capital from local and foreign investors that provides sufficient scope for entry and exit of large positions. Financial sector assets are more than GDP by approximately 48 percent, and the JSE is the largest on the continent with market capitalization of approximately USD 1.282 billion as of October 2021 and 442 companies listed on the main, alternative, and other smaller boards as of January 2021. Non-bank financial institutions (NBFI) hold about two thirds of financial assets. The liquidity and depth provided by NBFIs make these markets attractive to foreign investors, who hold more than a third of equities and government bonds, including sizeable positions in local-currency bonds. A well-developed derivative market and a currency that is widely traded as a proxy for emerging market risk allows investors considerable scope to hedge positions with interest rate and foreign exchange derivatives.

SARB’s exchange control policies permit authorized currency dealers, to buy and borrow foreign currency freely on behalf of domestic and foreign clients. The size of transactions is not limited, but dealers must report all transactions to SARB. Non-residents may purchase securities without restriction and freely transfer capital in and out of South Africa. Local individual and institutional investors are limited to holding 25 percent of their capital outside of South Africa.

Banks, NBFIs, and other financial intermediaries are skilled at assessing risk and allocating credit based on market conditions. Foreign investors may borrow freely on the local market. In recent years, the South African auditing profession has suffered significant reputational damage with allegations that two large foreign firms aided, and abetted irregular client management practices linked to the previous administration or engaged in delinquent oversight of listed client companies. South Africa’s WEF competitiveness rating for auditing and reporting fell from number one in the world in 2016, to number 60 in 2019.

South African banks are well capitalized and comply with international banking standards. There are 19 registered banks in South Africa and 15 branches of foreign banks. Twenty-nine foreign banks have approved local representative offices. Five banks – Standard, ABSA, First Rand (FNB), Capitec, and Nedbank – dominate the sector, accounting for over 85 percent of the country’s banking assets, which total over USD 390 billion. SARB regulates the sector according to the Bank Act of 1990. There are three alternatives for foreign banks to establish local operations, all of which require SARB approval: separate company, branch, or representative office. The criteria for the registration of a foreign bank are the same as for domestic banks. Foreign banks must include additional information, such as holding company approval, a letter of comfort and understanding from the holding company and a letter of no objection from the foreign bank’s home regulatory authority. More information on the banking industry may be found at www.banking.org.za .

The Financial Sector Conduct Authority (FSCA) is the dedicated market conduct authority in South Africa’s Twin Peaks regulatory model implemented through the Financial Sector Regulation Act. The FSCA’s mandate includes all financial institutions that provide a financial product and/or a financial service as defined in the Financial Sector Regulation Act. The JSE Securities Exchange South Africa, the sixteenth largest exchange in the world measured by market capitalization, enjoys the global reputation of being one of the best regulated. Market capitalization stood at USD 1.282 billion as of October 2021, with 442 firms listed. The Bond Exchange of South Africa (BESA) is licensed under the Financial Markets Control Act. Membership includes banks, insurers, investors, stockbrokers, and independent intermediaries. The exchange consists principally of bonds issued by the GoSA, state-owned enterprises, and private corporations. The JSE acquired BESA in 2009. More information on financial markets may be found at www.jse.co.za . Non-residents can finance 100 percent of their investment through local borrowing. A finance ratio of 1:1 also applies to emigrants, the acquisition of residential properties by non-residents, and financial transactions such as portfolio investments, securities lending and hedging by non-residents.

Although President Ramaphosa and the finance minister announced in February 2020 the aim to create a Sovereign Wealth Fund, no action has been taken.

State-owned enterprises (SOEs) play a significant role in the South African economy in key sectors such as electricity, transport (air, rail, freight, and pipelines), and telecommunications. Limited competition is allowed in some sectors (e.g., telecommunications and air). The GoSA’s interest in these sectors often competes with and discourages foreign investment.

There are over 700 SOEs at the national, provincial, and local levels. Of these, seven key SOEs are overseen by the Department of Public Enterprises (DPE) and employee approximately 105,000 people. These SOEs include Alexkor (diamonds); Denel (military equipment); Eskom (electricity generation, transmission, and distribution); Mango (budget airlines); South African Airways (national carrier); South African Forestry Company (SAFCOL); and Transnet (transportation). For other national-level SOEs, the appropriate cabinet minister acts as shareholder on behalf of the state. The Department of Transport, for example, oversees South African’s National Roads Agency (SANRAL), Passenger Rail Agency of South Africa (PRASA), and Airports Company South Africa (ACSA), which operates nine of South Africa’s airports. The Department of Communications oversees the South African Broadcasting Corporation (SABC). A list of the seven SOEs that are under the DPE portfolio are found on the DPE website at: https://dpe.gov.za/state-owned-companies/ . The national government directory contains a list of 128 SOEs at: https://www.gov.za/about-government/contact-directory/soe-s .

SOEs under DPE’s authority posted a combined loss of R13.9 billion (USD 0.9 billion) in 2019 (latest data available). Many are plagued by mismanagement and corruption, and repeated government bailouts have exposed the public sector’s balance sheet to sizable contingent liabilities. The debt of Eskom alone represents about 10 percent of GDP of which two-thirds is guaranteed by government, and the company’s direct cost to the budget has exceeded nine percent of GDP since 2008/9.

Eskom, provides generation, transmission, and distribution for over 90 percent of South Africa’s electricity of which 80 percent comes from 15 coal-fired power plants. Eskom’s coal plants are an average of 41 years old, and a lack of maintenance has caused unplanned breakdowns and rolling blackouts, known locally as “load shedding,” as old coal plants struggle to keep up with demand. Load shedding reached a record 1136 hours as of November 30, 2021, costing the economy an estimated USD eight billion and is expected to continue for the next several years until the GoSA can increase generating capacity and increase its Energy Availability Factor (EAF). In October 2019 the DMRE finalized its Integrated Resource Plan (IRP) for electricity, which outlines South Africa’s policy roadmap for new power generation until 2030, which includes replacing 10,000 MW of coal-fired generation by 2030 with a mix of technologies, including renewables, gas and coal. The IRP also leaves the possibility open for procurement of nuclear technology at a “scale and pace that flexibly responds to the economy and associated electricity demand” and DMRE issued a Request for Information on new nuclear build in 2020. In accordance with the IRP, the GoSA approved the procurement of almost 14,000 MW of power to address chronic electricity shortages. The GoSA held the long-awaited Bid Window 5 (BW5) of the Renewable Energy Independent Power Producer Procurement Program (REIPPPP) in 2021, the primary method by which renewable energy has been introduced into South Africa. The REIPPPP relies primarily on private capital and since the program launched in 2011 it has already attracted approximately ZAR 210 billion (USD 14 billion) of investment into the country. All three major credit ratings agencies have downgraded Eskom’s debt following Moody’s downgrade of South Africa’s sovereign debt rating in March 2020, which could impact investors’ ability to finance energy projects.

Transnet National Ports Authority (TNPA), the monopoly responsible for South Africa’s ports, charges some of the highest shipping fees in the world. High tariffs on containers subsidize bulk shipments of coal and iron. According to the South African Ports Regulator, raw materials exporters paid as much as one quarter less than exporters of finished products. TNPA is a division of Transnet, a state-owned company that manages the country’s port, rail, and pipeline networks. In May 2020 S&P downgraded Transnet’s local currency rating from BB to BB- based on a generally negative outlook for South Africa’s economy rather than Transnet’s outlook specifically.

South Africa’s state-owned carrier, South African Airways (SAA), entered business rescue in December 2019 and suspended operations indefinitely in September 2020. The pandemic exacerbated SAA’s already dire financial straits and complicated its attempts to find a strategic equity partner to help it resume operations. Industry experts doubt the airline will be able to resume operations. United Airlines and Delta Air Lines provide regular service between Atlanta (Delta) and Newark (United) to Johannesburg and Cape Town.

The telecommunications sector, while advanced for the continent, is hampered by poor implementation of the digital migration. In 2006, South Africa agreed to meet an International Telecommunication Union deadline to achieve analogue-to-digital migration by June 1, 2015. The long-delayed migration is scheduled to be completed by the end of March 2022, and while potential for legal challenges remain, most analysts believe the migration will be completed in 2022. The independent communications regulator initiated a spectrum auction in September 2020, which was enjoined by court action in February 2021 following suits by two of the three biggest South African telecommunications companies. After months of litigation, the regulator agreed to changes some terms of the auction, and the auction took place successfully in March 2022. One legal challenge remains, however, as third-largest mobile carrier Telkom has alleged the auction’s terms disproportionately favored the two largest carriers, Vodacom and MTN. Telkom’s case is due to be heard in April 2022, and its outcome will determine whether the spectrum allocation will proceed.

The GoSA appears not to have fulfilled its oversight role of ensuring the sound governance of SOEs according to OECD best practices. The Zondo Commission of Inquiry into allegations of state capture in the public sector has outlined corruption at the highest echelons of SOEs such as Transnet, Eskom, SAA and Denel and provides some explanation for the extent of the financial mismanagement at these enterprises. The poor performance of SOEs continues to reflect crumbling infrastructure, poor and ever-changing leadership, corruption, wasteful expenditure and mismanagement of funds.

The GoSA has taken few concrete actions to privatize SOEs; on the contrary, even minor reorganizations are roundly criticized as attempts to privatize state assets. Meanwhile, failing SOEs like PRASA are propped up by the fiscus. In 2021, the GoSA sought to sell a controlling 51 percent interest in South African Airways to a bespoke consortium funded in large part by the Public Investment Corporation, which controls investments of state pensions. A year later, however, the airline remains under government control because critical terms of the deal, including the sale price, have not been agreed upon. Transnet, Eskom, and defense contractor Denel have been subjects of various reorganization plans, but ultimately remain accountable to Cabinet shareholders.

President Ramaphosa, during his February 10, 2022, State of the Nation Address (SONA), announced that the cabinet had approved amendments to the Electricity Regulations Act (ERA) that would liberalize South African electricity markets. The amendment provides changes to definitions that will enable the legal framework for a liberalized energy market and allow for a more competitive and open electricity market in the country including the establishment of a Transmission System Operator, a necessary part of state-owned utility Eskom’s unbundling process. The Eskom generation and distribution divisions are set to be restructured by December 2022. The market structure in the bill provides for a shift to a competitive multimarket electricity supply industry, which represents a significant departure from South Africa’s long-standing vertically integrated model monopolized by Eskom. According to a press release from the DMRE, the changes will provide for “an open market that will allow for non-discriminatory, competitive electricity-trading platform.”

There is a general awareness of responsible business conduct in South Africa. The King Committee, established by the Institute of Directors in Southern Africa (IoDSA) in 1993, is responsible for driving ethical business practices. They drafted the King Code and King Reports to form an inclusive approach to corporate governance. King IV is the latest revision of the King Report, having taken effect in April 2017. King IV serves to foster greater transparency in business. It holds an organization’s governing body and stakeholders accountable for their decisions. As of November 2017, it is mandatory for all businesses listed on the JSE to be King IV compliant.

South Africa’s regional human rights commitments and obligations apply in the context of business and human rights. This includes South Africa’s commitments and obligations under the African Charter on Human and Peoples’ Rights, the African Charter on the Rights and Welfare of the Child, the Maputo Protocol on the Rights of Women in Africa, and the African Charter on Democracy, Elections and Governance. In 2015, the South African Human Rights Commission (SAHRC) published a Human Rights and Business Country Guide for South Africa which is underpinned by the UN Guiding Principles on Business and Human Rights (UNGPs) and outlines the roles and responsibilities of the State, corporations and business enterprises in upholding and promoting human rights in the South African context.

The GoSA promotes Responsible Business Conduct (RBC). The B-BBEE policy, the Companies Act, the King IV Report on Corporate Governance 2016, the Employment Equity Act of 1998 (EEA) and the Preferential Procurement Act are generally regarded as the government’s flagship initiatives for RBC in South Africa.

The GoSA factors RBC policies into its procurement decisions. Firms have largely aligned their RBC activities to B-BBEE requirements through the socio-economic development element of the B-BBEE policy. The B-BBEE target is one percent of net profit after tax spent on RBC, and at least 75 percent of the RBC activity must benefit historically disadvantaged South Africans and is directed primarily towards non-profit organizations involved in education, social and community development, and health.

The GoSA effectively and fairly enforces domestic laws pertaining to human rights, labor rights, consumer protection, and environmental protections to protect individuals from adverse business impacts. The Employment Equity Act prohibits employment discrimination and obliges employers to promote equality and eliminate discrimination on grounds of race, gender, sex, pregnancy, marital status, family responsibility, ethnic or social origin, colour, sexual orientation, age, disability, religion, HIV status, conscience, belief, political opinion, culture, language and birth in their employment policies and practices. These constitutional provisions align with generally accepted international standards. Discrimination cases and sexual harassment claims can be brought to the Commission for Conciliation, Mediation and Arbitration (CCMA), an independent dispute reconciliation body set up under the terms of the Labour Relations Act. The Consumer Protection Act aims to promote a fair, accessible and sustainable marketplace for consumer products and services. The National Environmental Management Act aims to to provide for co-operative, environmental governance by establishing principles for decision-making on matters affecting the environment, institutions that will promote co-operative governance and procedures for co-ordinating environmental functions exercised by organs of state.

The SAHRC is a National Human Rights Institution established in terms of the South African Constitution. It is mandated to promote respect for human rights, and the culture thereof; promote the protection, development, and attainment of human rights; and monitor and assess the observance of human rights in South Africa. The SAHRC is accredited with an “A” status under the United Nations’ Paris Principles. There are other independent NGOs, investment funds, unions, and business associations that freely promote and monitor RBC.

The South African mining sector follows the rule of law and encourages adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. South Africa is a founding member of the Kimberley Process Certification Scheme (KPCS) aimed at preventing conflict diamonds from entering the market. It does not participate in the Extractive Industries Transparency Initiative (EITI). South African mining, labor and security legislation seek to embody the Voluntary Principles on Security and Human Rights. Mining laws and regulations allow for the accounting of all revenues from the extractive sector in the form of mining taxes, royalties, fees, dividends, and duties.

South Africa has a private security industry and there is a high usage of private security companies by the government and industry. The country is a signatory of The Montreux Document on Private Military and Security Companies.

Additional Resources

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities;
• U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises; and;
• Xinjiang Supply Chain Business Advisory 

Department of the Treasury

• OFAC Recent Actions

Department of Labor

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

South Africa’s 2019 National Climate Change Adaptation Strategy (NCCAS) and National Climate Change Bill (currently under consideration in Parliament) aim to serve as an overarching legislative framework for adapting to and mitigating the effects of climate change, supported by the implementation of the low‐emissions development and growth strategy for South Africa.

South Africa’s NCCAS supports the country’s ability to meet its obligations in terms of the Paris Agreement on Climate Change. The 2011 National Climate Change Response Policy is a comprehensive plan to address both mitigation and adaptation in the short, medium and long term (up to 2050). GHG emissions are set to stop increasing at the latest by 2020-2025, to stabilize for up to 10 years and then to decline in absolute terms.

The NCCAS specifies strategies for climate change adaptation and mitigation, making use of the short-, medium- and long-term planning horizons. Concerning mitigation, it includes proposals to set emission reduction outcomes for each significant sector and sub-sector of the economy based on an in-depth assessment of the mitigation potential, best available mitigation options and a full assessment of the costs and benefits using a ‘carbon budgets’ approach. It also proposed the deployment of a range of economic instruments, including the appropriate pricing of carbon and economic incentives, as well as the possible use of emissions offset or emission reduction trading mechanisms for those relevant sectors, sub-sectors, companies or entities where a carbon budget approach has been selected.

South Africa’s Energy Efficiency and Energy and Demand Management flagship programs cover development and facilitation of an aggressive energy efficiency program in industry, building on previous Demand Side Management programs, and covering non-electricity energy efficiency as well. A structured program will be established with appropriate initiatives, incentives and regulation, along with a well-resourced information collection and dissemination process. Local governments are encouraged to take an active part in demand-side management.

The GoSA has called its 2020 Low Emission Development Strategy (LEDS) “the beginning of our journey towards ultimately reaching a net zero economy by 2050”. The strategy is a response to the Paris Agreement’s call for countries to set out long-term climate strategies. It draws together existing policies, planning and research across economic sectors. Among these are the IRP, which is how South Africa plans its electricity supply.

The IRP guides the evolution of the South African electricity supply sector, in that it identifies the preferred electricity generation technologies to be built to meet projected electricity demand. It thus provides a mechanism for the GoSA to drive the diversification of the country’s electricity generation mix and promote the use of renewable energy and other low-carbon technologies.

South African measures are currently being implemented by government to address GHG emissions mitigation across the four key sectors of the economy, namely energy (supply and demand), industry, AFOLU and waste.

Decarbonization of energy supply will largely be driven through the Integrated Energy Plan, the Integrated Resource Plan and the Industrial Biofuels Strategy, issued by the Department of Energy, the predecessor of this Department.

South Africa’s Energy planning is guided by the Integrated Energy Plan (IEP). The Energy Act also mandates the Minister of Energy to develop, review and publish the IEP. The IEP approach analyses current energy supply and demand trends within the different sectors of the economy, across all energy carriers. It then uses this information along with assumptions about future demand and technology evolution to project the country’s future energy requirements under a variety of different scenarios, including those with emissions limits and different carbon prices. The IEP provides the overall future direction for the energy mix in South Africa, and thus represents a key instrument for driving the move to a low carbon future. The IEP update with a clear trajectory for the energy sector is critical to guiding overall energy planning for the country.

The Biofuels Industrial Strategy of the Republic of South Africa outlines the GoSA’s approach to the development of a biofuel sector in the country. The primary aim of the Strategy is to address poverty and unemployment, although the role in climate change mitigation in the liquid fuels sector is recognized. In support of the strategy, the Regulations Regarding the Mandatory Blending of Biofuels with Petrol and Diesel were published in the Government Gazette in August 2012. The Regulations describe the eligibility and process for purchasing biofuels for blending and specify the type of records that need to be kept.

In 2022, South Africa’s Department of Science and Innovation launched its Hydrogen Society Roadmap (HSRM) to, among other things, take advantage of and develop opportunities for direct replacement of hydrogen from natural gas by green hydrogen. The HSRM will focus on the creation of and export market for hydrogen and ammonia, providing power to the electricity grid, decarbonizing heavy-duty transport, decarbonization or energy intensive industry, and local manufacture of hydrogen products and fuel cell components.

A diverse range of actions that contribute to GHG emissions mitigation is being seen across the private sector in South Africa, with significant gains having been made in certain sectors on both energy efficiency and emissions mitigation.

The private sector action is being driven by a growth in understanding of the business opportunities, local and global market pressure and existing and forthcoming legislation. Actions range from adopting new products and processes to new service offerings to retrofitting of existing operations to make them more energy efficient and less emissions intensive. With suitable support this growth in action will continue.

President Ramaphosa signed into law on May 26, 2019, a carbon for company-level carbon taxes, signaling his commitment to mitigate climate change in South Africa. The carbon tax applies to entities that operate emission generation facilities at a combined installed capacity equal or above their carbon tax threshold. Each emissions generating facility must obtain a license to operate and report their emissions through the National Greenhouse Gas Emission Reporting Regulations of the Department of Environment, Forestry and Fisheries. The GoSA set the carbon tax at 120 ZAR (7.91 USD) per ton of carbon dioxide (CO2) but implemented a soft start including a phased rollout. The Minister of Finance in his February 2022 national budget  speech announced an increase to the carbon tax rate from USD 8 to USD 9 (R144), effective from 1 January 2022. He also provided more clarity on the tax announcing an increase in the carbon tax rate, a delay in the roll out of the second phase of the carbon tax, and a reference to the Climate Change Bill, under consideration in the parliament, that makes it compulsory for taxpayers to participate in the carbon budget system. To uphold South Africa’s COP26 commitments, the carbon tax rate will increase each year by at least one USD until it reaches USD 20 per ton of CO2. Starting in 2026, the carbon price increases more rapidly every year to reach at least USD 30 by 2030, and USD 120 beyond 2050. The carbon tax is being implemented in three phases, with the second phase originally scheduled to start in January 2023 having been postponed to the beginning of 2026. Taxpayers will continue to enjoy tax-free allowances which reduce their carbon tax liability. These allowances are given as rebates or refunds when the allowances being applied for are verified. The following allowances were permitted: 60 percent allowance for fossil fuel combustion; 10 percent trade exposure allowance; five percent performance allowance: five percent, carbon budget allowance; and a five percent offset allowance. The Act stipulates those multiple allowances can be granted to the same taxpayer. However, the total may not exceed 95 percent. Regulations regarding the trade exposure and performance allowances are determined by National Treasury.

The South African Air Quality Act of 2004 established minimum emissions standards (MES) for a wide range of industries and technologies from combustion installation to the metallurgical industry. The MES have been poorly enforced but there is growing pressure on the GoSA to hold companies accountable due to the negative impact air pollution is having on human health. In March 2022 the Pretoria High Court, in a suit brought by the Center for Environmental Rights, ruled that the Department of Forestry, Fisheries and the Environment (DFFE) has unreasonably delayed regulations to implement and enforce air pollution standards.

South Africa remains one of the most biodiverse countries in the world. The country is home to 10 percent of the world’s plant species and seven percent of its reptile, bird, and mammal species. Furthermore, endemism rates reach 56 percent for amphibians, 65 percent for plants and up to 70 percent for invertebrates. The GoSA has identified the biodiversity economy as a catalyst to address the triple challenge of unemployment, poverty, and inequality. The United Nations Development Programme (UNDP) has partnered with the GoSA through the Biodiversity Finance Initiative (BIOFIN) to pilot financial solutions which will advance the biodiversity economy agenda of the country.

According to the South African National Biodiversity Assessment, published by the South African National Biodiversity Institute (SANBI) in 2018, there are more than 418,000 biodiversity-related jobs in the country. This speaks volumes to the contribution of biodiversity towards addressing issues of unemployment in a post-COVID-19 agenda.

South Africa has been recognized globally for its efforts in providing fiscal incentives to promote the conservation of biodiversity. The GoSA, through the National Treasury, has provided fiscal incentives in the form of biodiversity tax incentives aiming to fulfil national environmental policy to preserve the environment. This is facilitated through the government-led regime of entering into agreements with private and communal landowners to formally conserve and maintain a particular area of land.

These agreements result in declared protected areas and are established through the national biodiversity stewardship initiative. These agreements result in environmental management expenses incurred by taxpayers as well as loss of economic rights and use. The biodiversity tax incentives present a mechanism to address the mitigation of management costs, address potential loss of production income due to land management restrictions, ensure the continued investment of landowners and communities in long term and effective land management. This mechanism ultimately assists in the sustainability of compatible commercial operations essential to the persistence of the area and the economy and livelihood growth required in South Africa.

The BIOFIN program in South Africa is currently working with the DFFE to promote the implementation of biodiversity tax incentives. The feasibility of the biodiversity tax incentives has been thoroughly tested through various projects including the partnership between SANBI and UNDP on the Biodiversity Land Use (BLU) project. The BLU project has successfully made progress in improving tax incentives for biodiversity stewardship. This project was instrumental in advocating for the 2014 amendment to the Income Tax Act that was published, which included a new Section 37D. Section 37D has provided much-needed expense relief as well as long-term financial sustainability to privately and communally owned and managed protected areas. Biodiversity tax incentives have proven to be a lifeline for many during the COVID-19 pandemic by enabling continued conservation and livelihood sustenance

BIOFIN considers biodiversity tax incentives as one of the financial mechanisms that can be used to promote biodiversity conservation and bolster the biodiversity economy. The granting of a tax relief encourages landowners (communal and private) to use their land in a sustainable manner whilst reducing the costs associated with managing a protected area. Biodiversity tax incentives effectively enhance the financial effectiveness of South Africa’s protected areas and their compatible commercial activities. They aid in sustainable biodiversity and ecosystem management. This is essential to the longevity of these areas and the creation of broader biodiversity economy livelihoods, the effective growth of small, medium and micro enterprises (SMMEs), and commercial operations linked to the wildlife economy. They also increase the protected area estate and area under responsible land management. Non-state investment in establishing and managing protected areas requires a suite of sustainable finance tools to mitigate management costs, offset loss of production income, increase land under protection, and ensure effective growth of enterprises engaged in the biodiversity economy.

South Africa recognizes the risk of general environmental decay and global warming and is committed to responding to the climate change challenge.

South Africa has taken strides in the environmental domain that support, either directly or indirectly, which include public procurement targets for renewable energy; provisions in the Energy Act; the new Green Economy Accord; and international commitments to climate change mitigation.

The GoSA’s REIPPPP is a government-led procurement program that aims to increase the share of renewable energy in the national grid by procuring energy from independent power producers (IPPs). It was issued by the Department of Energy in 2011 to replace a feed-in tariff program. A key objective of the program is economic development: using a competitive bidding process, renewable energy projects submitted are assessed on two factors, namely the tariff they offer (weighted 70 per cent) as well as their contribution to defined economic development criteria. The REIPPPP is an important component of South Africa’s overarching Integrated Resource Plan for electricity and makes clear targets for the procurement of renewable energy.

South Africa ranked 10th in the 2021 BNEF’s Climatescope rankings of most attractive markets for energy transition investments. In 2021, the MIT Technology Review’s Green Future Index, which ranks countries and territories on their progress and commitment toward building a low carbon future, ranked South Africa 47th of 76 countries. South Africa is listed at number 11 of 21 African nations ranked by the Global Green Growth Institute’s Global Green Growth Index.

South Africa has a robust anti-corruption framework, but laws are inadequately enforced, and public sector accountability is low. High-level political interference has undermined the country’s National Prosecuting Authority (NPA). “State capture,” a term used to describe systemic corruption of the state’s decision-making processes by private interests, is synonymous with the administration of former president Jacob Zuma. In response to widespread calls for accountability, President Ramaphosa launched four separate judicial commissions of inquiry to investigate corruption, fraud, and maladministration, including in the Public Investment Corporation, South African Revenue Service, and the NPA which have revealed pervasive networks of corruption across all levels of government. The Zondo Commission of Inquiry, launched in 2018, has published and submitted three parts of its report to President Ramaphosa and Parliament as of March 2022. Once the entire report is reased and submitted to Parliament, Ramaphosa stated his government will announce its action plan. The Zondo Commission findings reveal the pervasive depth and breadth of corruption under the reign of former President Jacob Zuma.

The Department of Public Service and Administration coordinates the GoSA’s initiatives against corruption, and South Africa’s Directorate for Priority Crime Investigations focuses on organized crime, economic crimes, and corruption. The Office of the Public Protector, a constitutionally mandated body, investigates government abuse and mismanagement. The Prevention and Combating of Corrupt Activities Act (PCCA) officially criminalizes corruption in public and private sectors and codifies specific offenses (such as extortion and money laundering), making it easier for courts to enforce the legislation. Applying to both domestic and foreign organizations doing business in the country, the PCCA covers receiving or offering bribes, influencing witnesses, and tampering with evidence in ongoing investigations, obstruction of justice, contracts, procuring and withdrawal of tenders, and conflict of interests, among other areas. Inconsistently implemented, the PCCA lacks whistleblower protections. The Promotion of Access to Information Act and the Public Finance Management Act call for increased access to public information and review of government expenditures. President Ramaphosa in his reply to the debate on his State of the Nation Address on 20 February 2018 announced Cabinet members would be subject to lifestyle audits despite several subsequent repetitions of this pledge, no lifestyle audits have been shared with the public or Parliament.

The South Africa government’s latest initiative is the opening of an Office on Counter Corruption and Security Services (CCSS) that seeks to address corruption specifically in ports of entry via fraudulent documents and other means.

South Africa is a signatory to the Anticorruption Convention and the OECD Convention on Combatting Bribery. South Africa is also a party to the SADC Protocol Against Corruption, which seeks to facilitate and regulate cooperation in matters of corruption amongst Member States and foster development and harmonization of policies and domestic legislation related to corruption. The Protocol defines ‘acts of corruption,’ preventative measures, jurisdiction of Member States, as well as extradition. http://www.sadc.int/files/7913/5292/8361/Protocol_Against_Corruption2001.pdf

To report corruption to the GoSA:

Advocate Busisiwe Mkhwebane
Public Protector
Office of the Public Protector, South Africa
175 Lunnon Street, Hillcrest Office Park, Pretoria 0083
Anti-Corruption Hotline: +27 80 011 2040 or +27 12 366 7000
http://www.pprotect.org  or customerservice@pprotect.org 

Or for a non-government agency:

David Lewis
Executive Director
Corruption Watch
87 De Korte Street, Braamfontein/Johannesburg 2001
+27 80 002 3456 or +27 11 242 3900
http://www.corruptionwatch.org.za/content/make-your-complaint 
info@corruptionwatch.org.za 

South Africa has strong institutions and is relatively stable, but it also has a history of politically motivated violence and civil disturbance. Violent protests against the lack of effective government service delivery are common. Killings of, and by, mostly low-level political and organized crime rivals occur regularly. In May 2018, President Ramaphosa set up an inter-ministerial committee in the security cluster to serve as a national task force on political killings. The task force includes the Police Minister‚ State Security Minister‚ Justice Minister‚ National Prosecuting Authority, and the National Police Commissioner. The task force ordered multiple arrests, including of high-profile officials, in what appears to be a crackdown on political killings. Criminal threats and labor-related unrest have impacted U.S. companies in the past. In July 2021 the country experienced wide-spread rioting in Gauteng and KwaZulu-Natal provinces sparked by the imprisonment of former President Jacob Zuma for contempt of court during the deliberations of the “Zondo Commission” established to review claims of state-sponsored corruption during Zuma’s presidency. Looting and violence led to over USD 1.5 billion in damage to these province’s economies and thousands of lost jobs. U.S. companies were amongst those impacted. Foreign investors continue to raise concern about the government’s reaction to the economic impacts, citing these riots and deteriorating security in some sectors such as mining to be deterrents to new investments and the expansion of existing ones.

The unemployment rate in the third quarter of 2021 was 34.9 percent. The results of the Quarterly Labour Force Survey (QLFS) for the third quarter of 2021 show that the number of employed persons decreased by 660,000 in the third quarter of 2021 to 14.3 million. The number of unemployed persons decreased by 183,000 to 7.6 million compared to the second quarter of 2021. The youth unemployment (ages 15-24) rate was 66.5 percent in the third quarter of 2021.

The GoSA has replaced apartheid-era labor legislation with policies that emphasize employment security, fair wages, and decent working conditions. Under the aegis of the National Economic Development and Labor Council (NEDLAC), government, business, and organized labor negotiate all labor laws, apart from laws pertaining to occupational health and safety. Workers may form or join trade unions without previous authorization or excessive requirements. Labor unions that meet a locally negotiated minimum threshold of representation (often, 50 percent plus one union member) are entitled to represent the entire workplace in negotiations with management. As the majority union or representative union, they may also extract agency fees from non-union members present in the workplace. In some workplaces and job sectors, this financial incentive has encouraged inter-union rivalries, including intimidation and violence.

There are 205 trade unions registered with the Department of Labor as of February 2019 (latest published figures), up from 190 the prior year, but down from the 2002 high of 504. According to the 2019 Fourth QLFS report from StatsSA, 4.071 million workers belonged to a union, an increase of 30,000 from the fourth quarter of 2018. Department of Labor statistics indicate union density declined from 45.2 percent in 1997 to 24.7 percent in 2014, the most recent data available. Using StatsSA data, however, union density can be calculated: The February 2020 QLFS reported 4.071 million union members and 13.868 million employees, for a union density of 29.4 percent.

The right to strike is protected on issues such as wages, benefits, organizational rights disputes, and socioeconomic interests of workers. Workers may not strike because of disputes where other legal recourse exists, such as through arbitration. South Africa has robust labor dispute resolution institutions, including the CCMA, the bargaining councils, and specialized labor courts of both first instance and appellate jurisdiction. The GoSA does not waive labor laws for foreign direct investment. The number of working days lost to strike action fell to 55,000 in 2020, compared with 1.2 million in 2019. The sharp decrease is attributable to the GoSA’s imposition of the National State of Disaster at the onset of the COVID-19 pandemic, and the accompanying lockdown that commenced on March 26, which forced many businesses either to close or lay off workers and implement wage cuts or shorten time of work. The fact that many wage negotiations were put on hold also led to a reduction in strike figures.

Collective bargaining is a cornerstone of the current labor relations framework. As of February 2019, the South Africa Department of Labor listed 39 private sector bargaining councils through which parties negotiate wages and conditions of employment. Per the Labor Relations Act, the Minister of Labor must extend agreements reached in bargaining councils to non-parties of the agreement operating in the same sector. Employer federations, particularly those representing small and medium enterprises (SMEs) argue the extension of these agreements – often reached between unions and big business – negatively impacts SMEs. In 2019, the average wage settlement resulted in a 7.1 percent wage increase, on average 2.9 percent above the increase in South Africa’s consumer price index (latest information available).

In his 2022 state of the nation address President Ramaphosa spoke of tax incentives for companies that employ youth in efforts to curb youth unemployment. In addition, President Ramaphosa announced measures to move funds in the national budget to address youth unemployment.

South Africa’s current national minimum wage is USD 1.45/hour (R21.69/hour), with lower rates for domestic workers being USD 1.27/hour (R19.09/hour). The rate is subject to annual increases by the National Minimum Wage Commission as approved by parliament and signed by President Ramaphosa. Employers and employees are each required to pay one percent of wages to the national unemployment fund, which will pay benefits based on reverse sliding scale of the prior salary, up to 58 percent of the prior wage, for up to 34 weeks. The Labor Relations Act (LRA) outlines dismissal guidelines, dispute resolution mechanisms, and retrenchment guideline. The Act enshrines the right of workers to strike and of management to lock out striking workers. It created the CCMA, which mediates and arbitrates labor disputes as well as certifies bargaining council impasses for strikes to be called legally.

The Basic Conditions of Employment Act (BCEA) establishes a 45-hour workweek, standardizes time-and-a-half pay for overtime, and authorizes four months of maternity leave for women. Overtime work must be conducted through an agreement between employees and employers and may not be more than 10 hours a week. The law stipulates rest periods of 12 consecutive hours daily and 36 hours weekly and must include Sunday. The law allows adjustments to rest periods by mutual agreement. A ministerial determination exempted businesses employing fewer than 10 persons from certain provisions of the law concerning overtime and leave. Farmers and other employers may apply for variances. The law applies to all workers, including foreign nationals and migrant workers, but the GoSA did not prioritize labor protections for workers in the informal economy. The law prohibits employment of children under age 15, except for work in the performing arts with appropriate permission from the Department of Labor.

The EEA, amended in 2014, protects workers against unfair discrimination on the grounds of race, age, gender, religion, marital status, pregnancy, family responsibility, ethnic or social origin, color, sexual orientation, disability, conscience, belief, political, opinion, culture, language, HIV status, birth, or any other arbitrary ground. The EEA further requires large- and medium-sized companies to prepare employment equity plans to ensure that historically disadvantaged South Africans, as well as women and disabled persons, are adequately represented in the workforce. More information regarding South African labor legislation may be found at: www.labour.gov.za/legislation 

Shelbie Legg
Trade and Investment Officer
877 Pretorius Street
Arcadia, Pretoria 0083
+27 (0)12-431-4343
LeggSC@state.gov 

Promoting inward FDI has been an important policy goal for the Taiwan authorities because of Taiwan’s self-imposed public debt ceiling that limits public spending, and its low levels of private investment. Despite the global economic recession caused by the COVID-19 pandemic, Taiwan’s domestic private investment registered 19 percent y-o-y growth in 2021 due to continuous reshoring of investment by overseas Taiwan companies since late 2018. Taiwan has pursued various measures to attract FDI from both foreign companies and Taiwan firms operating overseas. A network of science and industrial parks, technology industrial zones, and free trade zones aims to expand trade and investment opportunities by granting tax incentives, tariff exemptions, low-interest loans, and other favorable terms. Incentives tend to be more prevalent for investment in the manufacturing sector. In January 2019, Taiwan launched a reshoring incentive program to attract Taiwan firms operating in the PRC to return to Taiwan.

Thus far, Taiwan has received favorable responses from Information Communication Technology (ICT) manufacturers. The Ministry of Economic Affairs (MOEA) Department of Investment Services (DOIS) Invest in Taiwan Center serves as Taiwan’s investment promotion agency and provides streamlined procedures for foreign investors, including single-window and employee recruitment services. For investments over US $17.6 million (New Taiwan Dollar NTD 500 million), Taiwan authorities will assign a dedicated project manager for the investment process. DOIS services are available to all foreign investors. The Center’s website contains an online investment aid system (https://investtaiwan.nat.gov.tw/smartIndexPage?lang=eng ) to help investors retrieve all the required application forms based on various investment criteria and types.

Taiwan also passed the Foreign Talent Retention Act to attract foreign professionals using relaxed visa and work permit issuance process and tax incentives. As of December 2021, 3,927 foreigners received the Taiwan Employment Gold Card, a government initiative to attract highly skilled foreign talent to Taiwan (https://goldcard.nat.gov.tw/en/ ). The Taiwan Employment Gold Card also includes a residency permit for the applicant and his/her immediate relatives (parents, spouse, children), a work permit for three years, an alien resident certificate, and a re-entry permit. The Employment Gold Card policy helped alleviate recruiting companies’ liability in work permit applications and associated administrative expenditures. The MOEA is also in the process of drafting a proposed amendment to the Statute for Investment by Foreign Nationals, which would replace the existing pre-approval investment review process with an ex-post reporting mechanism and strengthen investment screening in industries of national security concern.

Taiwan maintains a negative list of industries closed to foreign investment in sectors related to national security and environmental protection, including public utilities, power distribution, natural gas, postal service, telecommunications, mass media, and air and sea transportation. These sectors constitute less than one percent of the production value of Taiwan’s manufacturing sector and less than five percent of the services sector. Railway transport, freight transport by small trucks, pesticide manufactures, real estate development, brokerage, leasing, and trading are open to foreign investment. The negative list of investment sectors, last updated in February 2018, is available at http://www.moeaic.gov.tw/download-file.jsp?do=BP&id=ZYi4SMROrBA=.

The Taiwan authorities actively promote a “5+2 Innovative Industries” and six strategic industries development program to accelerate industrial transformation. Target industries under this campaign include smart machinery, biomedicine, IoT, green energy, national defense, advanced agriculture, circular economy, and semiconductors. The Taiwan authorities also offer subsidies for the research and development expenses for partnerships with foreign firms. Taiwan’s central authorities take a cautious approach to approving foreign investment in innovative industries that utilize new and potentially disruptive business models, such as the sharing economy.

Taiwan’s authorities regularly meet with foreign business groups. For example, Taiwan’s National Development Council (NDC) meets with the American Chamber of Commerce in Taiwan (AmCham Taiwan) to discuss AmCham Taiwan’s annual White Paper. Some U.S. investors have expressed concerns about a lack of transparency, consistency, and predictability in the investment review process, particularly regarding private equity investment transactions. U.S. investors claim to experience lengthy review periods for private equity transactions that involve redundant inquiries from the MOEA Investment Commission and its constituent agencies. Some U.S. investors report that public hearings convened by Taiwan regulatory agencies about specific private equity transactions appear to promote opposition to private equity rather than foster transparent dialogue. Private equity transactions and other previously approved investments have, in the past, attracted Legislative Yuan scrutiny, including committee-level resolutions that opposed specific transactions.

Foreign entities are entitled to establish and own business enterprises and engage in all forms of remunerative activity, similar with local firms, unless otherwise specified in relevant regulations. Taiwan sets foreign ownership limits in certain industries, such as a 60 percent limit on foreign ownership of wireless and fixed-line telecommunications firms, including a direct foreign investment limit of 49 percent in that sector. State-controlled Chunghwa Telecom, which controls 92 percent of the fixed-line telecom market, maintains a 49 percent limit on direct foreign investment and a 60 percent limit on overall foreign investment, including indirect ownership. There is a 20 percent limit on foreign direct investment in cable television broadcasting services, but foreign ownership of up to 60 percent is allowed through indirect investment via a Taiwan entity. However, in practice, this kind of investment is subject to heightened regulatory and political scrutiny. In addition, there is a foreign ownership limit of 49.99 percent for satellite television broadcasting services and piped distribution of natural gas and a 49 percent limit for high-speed rail services. These foreign ownership limits also apply to all public switched telecommunications resources (“PSTN”) that use telecommunications resources. The foreign ownership cap on airport ground services firms, air-catering companies, aviation transportation businesses (airlines), and general aviation businesses (commercial helicopters and business jet planes) is less than 50 percent, with a separate limit of 25 percent for any single foreign investor. Foreign investment in Taiwan-flagged merchant shipping services is limited to 50 percent for Taiwan shipping companies operating international routes.

Taiwan has opened more than two-thirds of its aggregate industrial categories to PRC investors, with 97 percent of manufacturing sub-sectors and 51 percent of construction and services sub-sectors open to PRC capital. PRC nationals are prohibited from serving as chief executive officer in a Taiwan company, although a PRC board member may retain management control rights. The Taiwan authorities regard PRC investment in media or advanced technology sectors, such as semiconductors, as a national security concern. The Cross-Strait Agreement on Trade in Services and the Cross-Strait Agreement on Avoidance of Double Taxation and Enhancement of Tax Cooperation were signed in 2013 and 2015, respectively, but have not taken effect. Negotiations on the Agreement on Trade in Goods with the PRC were halted in 2016.

Taiwan’s Investment Commission screens applications for FDI, mergers, and acquisitions. Taiwan authorities claim that 95 percent of investments not subject to the negative list and, with capital less than US $17.6 million (NTD 500 million), obtain approval at the Investment Commission staff level within two to four days. Investments between US $17.6 million (NTD 500 million) and US $53 million (NTD 1.5 billion) in capital take three to five days to screen. The approval authority for these types of transactions rests with the Investment Commission’s executive secretary. For investment in restricted industries, in cases where the investment amount or capital increase exceeds NTD 1.5 billion, or for mergers, acquisitions, and spin-offs, screening takes 10 to 20 days and includes review by relevant supervisory ministries. Final approval rests with the Investment Commission’s executive secretary. Screening for foreign investments involving cross-border mergers and acquisitions or other special situations takes 20-30 days, as these transactions require interagency review and deliberation at the Investment Commission’s monthly meeting.

The investment screening process provides Taiwan’s regulatory agencies opportunities to attach conditions to investments to mitigate concerns about ownership, structure, or other factors. Screening may also include an assessment of the impact of proposed investments on a sector’s competitive landscape and the rights of local shareholders and employees. Screening is also used to detect investments with unclear funding sources, especially PRC-sourced capital. To ensure monitoring of PRC-sourced investment in line with Taiwan law and public sentiment, Taiwan’s National Security Bureau participates in every investment review meeting regardless of the size of the investment. Blocked deals in recent years reflected the authorities’ increased focus on national security concerns beyond the negative-list industries. Taiwan authorities also review proposals to prevent illegal PRC investment via third-areas or through dummy accounts.

Foreign investors must submit an application form containing their funding plan, business operation plan, entity registration, and documents certifying the inward remittance of investment funds. Applicants and their agents must provide a signed declaration certifying that any PRC investors in a proposed transaction do not hold more than a 30 percent ownership stake and do not retain managerial control of the company. When an investment fails review, an investor may re-apply when the reason for the denial no longer exists. Foreign investors may also petition the regulatory agency that denied approval or may appeal to the Administrative Court.

Taiwan has been a member of the World Trade Organization (WTO) since 2002. In September 2018, the WTO conducted the fourth review of Taiwan’s trade policies and practices. Related reports and documents are available at: https://www.wto.org/english/tratop_e/tpr_e/tp477_crc_e.htm

MOEA took steps to improve the business registration process, including finalizing amendments to the Company Act to make business registration more efficient. Since 2014, Taiwan shortened the application review period for company registration to two days. Applications for a taxpayer identification number, labor insurance (for companies with five or more employees), national health insurance, and pension plans can be processed at the same time for approval within five to seven business days. Since January 2017, MOEA’s Central Region Office processes foreign investors’ company registration applications.

In recent years, the Taiwan authorities revised rules to improve the business climate for startups. To develop Taiwan into a startup hub in Asia, Taiwan authorities launched an entrepreneur visa program to permit foreign entrepreneurs to remain in Taiwan if they meet one of the following requirements: raise at least US $70,400 (NTD 2 million) in funding, hold patent rights or a professional skills certificate; operate in an incubator or innovation park in Taiwan; win prominent startup or design competitions, or receive grants from the Taiwan authorities. Since in 2019, startup entrepreneurs – including foreign investors – can use intellectual property (IP) as collateral to obtain bank loans. In July 2021, the Taiwan authorities further introduced additional tax and social security measures to attract foreign professionals to Taiwan.

Further details about Taiwan’s business registration process can be found in Invest Taiwan Center’s business one-stop service request website at https://onestop.nat.gov.tw/oss/web/Show/engWorkFlowEn.do . The Investment Commission website lists the rules, regulations, and required forms for seeking foreign investment approval: https://www.moeaic.gov.tw/businessPub.view?lang=en&op_id_one=1

Approval from the Investment Commission is required for foreign investors before proceeding with business registration. After receiving an approval letter from the Investment Commission, an investor can apply for capital verification and then file an application for a corporate name and proceed with business registration. The new company must register with the Bureau of Labor Insurance and the Bureau of National Health Insurance before recruiting employees.

For the manufacturing, construction, and mining industries, the MOEA defines small and medium-sized enterprises (SMEs) as companies with less than US $2.8 million (NTD 80 million) of paid-in capital and fewer than 200 employees. For all other industries, SMEs are defined as having less than US $3.5 million (NTD 100 million) of paid-in capital and fewer than 100 employees. Taiwan runs a Small and Medium Enterprise Credit Guarantee Fund to help SMEs obtain financing from local banks. Firms established by foreigners in Taiwan may receive a guarantee from the Fund. Taiwan’s National Development Fund has set aside NTD 10 billion (US $350 million) to invest in SMEs.

The PRC used to be the top destination for Taiwan companies’ overseas investment given the low cost of factors of production there, such as wages and land. Since rising trade tensions between the United States and the PRC in 2018, the Taiwan authorities have intensified their efforts to assist Taiwan firms to diversify production by either relocating back to Taiwan or to other markets, including in Southeast Asia. The Tsai administration launched the New Southbound Policy to enhance Taiwan’s economic engagement with 18 countries in Southeast Asia, South Asia, and the Pacific. In 2021, Taiwan companies’ investment in the 18 countries totaled US $5.8 billion. The Taiwan authorities seek investment agreements with these countries to incentivize Taiwan firms’ investment in those markets. Invest Taiwan Center provides consultation and loan guarantee services to Taiwan firms operating overseas. Taiwan’s financial regulators have urged Taiwan banks to expand their presence in Southeast Asian economies either by setting up branches or acquiring subsidiaries.

According to the Act Governing Relations between the People of the Taiwan Area and the Mainland Area, all Taiwan individuals, juridical persons, organizations, or other institutions must obtain approval from the Investment Commission to invest in or have any technology-oriented cooperation with the PRC. The Taiwan authorities maintain a negative list for Taiwan firms’ investment and have special rules governing technology cooperation in the PRC. The Taiwan authorities, Taiwan companies, and foreign investors in Taiwan are increasingly vigilant about the threat of IP theft and illegal talent poaching in key strategic industries, such as the semiconductor industry.

Taiwan generally maintains transparent regulatory and accounting systems that conform to international standards. Publicly listed Taiwan companies fully adopted International Financial Reporting Standards (IFRS) IFRS 16 in 2019. Taiwan’s Financial Supervisory Commission (FSC) has affirmed that Taiwan will begin implementing IFRS 17 in January 2026. Ministries generally originate business-related draft legislation and submit it to the Executive Yuan for review. Following approval by the Executive Yuan, draft legislation is forwarded to the Legislative Yuan for consideration. Legislators can also propose legislation. While the cabinet-level agencies are the primary contact windows for foreign investors before entry, foreign investors also need to abide by local government rules, including those related to transportation services and environmental protection, among others.

Draft laws, rules, and orders are published on The Executive Yuan Gazette Online for public comment. Beginning December 29, 2016, the Taiwan authorities instituted a 60-day public comment period for new rules. All draft regulations and laws are required to be available for public comment and advanced notice unless they meet specific criteria allowing a shorter window. While welcomed by the U.S. business community, the 60-day comment period is not uniformly applied. Draft laws and regulations of interest to foreign investors are regularly shared with foreign chambers of commerce for their comments.

These announcements are also available for public comment on the NDC’s public policy open discussion forum at https://join.gov.tw/index. Foreign chambers of commerce and Taiwan business groups’ comments on proposed laws and regulations, and Taiwan ministries’ replies, are posted publicly on the NDC website. In October 2017, the NDC launched a separate policy discussion forum specifically for startups, which can be found online at https://law.ndc.gov.tw/ProcessFlowNewLaw.aspx, serving as the central platform to harmonize regulatory requirements governing innovative businesses and startups operation.

The Executive Yuan Legal Affairs Committee oversees the enforcement of regulations. Ministries are responsible for enforcement, impact analysis, draft amendments to existing laws, and petitions to laws pursuant to their respective authorities. Impact assessments may be completed by in-house or private researchers. To enhance Taiwan’s regulatory coherence in the wake of regional economic integration initiatives, the NDC in 2017 released a Regulatory Impact Analysis Operational Manual as a practical guideline for central government agencies.

Taiwan authorities place a high priority on promoting socially responsible investment. Both the regulators and investors are gearing up to integrate environmental, social, and corporate governance (ESG) into investment processes. Taiwan authorities mandate that publicly listed companies with more than US $180 million (NTD 5 billion) in capital and firms in sectors with direct impact on consumers, such as food processing, restaurants, chemicals, and financial services, etc., prepare annual social responsibility reports. A total of 586 of Taiwan’s publicly listed companies issued annual social responsibility reports, and nearly half of the reports are prepared voluntarily. In April 2021, Taiwan’s Public Service Pension Fund announced that it will target to fund a total of US $400 million to two foreign asset managers for its “Global Quality ESG Indexed Equity” mandate.

Taiwan regularly discloses government finance data to the public, including all debts incurred by all levels of government. Past information is also retrievable in a well-maintained fiscal database. Taiwan’s national statistics agency also publishes contingent debt information.

Taiwan is not a member of any regional economic agreements but is a full member of international economic organizations such as the WTO, APEC, ADB, and Egmont Group. Although Taiwan is not a member of many international organizations, it voluntarily adheres to or adopts international norms, including with finance, such as IFRS. Taiwan is a signatory to the Trade Facilitation Agreement (TFA) and met some of the customs facilitation requirements specified in the TFA, such as single-window customs services and preview of the origin. In 2018, citing tax parity for domestic retailers and the risk of fraud, Taiwan lowered the de minimis threshold from US $150 (NTD 3,000) to US $70 (NTD 2,000), an approach regarded as contrary to facilitating customs clearance and trade, especially for small- and medium-sized U.S. businesses. NDC is drafting a proposed amendment to the Personal Information Protection Act and related regulations to meet the European Union’s General Data Protection Regulation (GDPR) standards and obtain adequacy status.

Taiwan maintains a codified system of law. In addition to the specialized courts, Taiwan maintains a three-tiered court system composed of the District Courts, the High Courts, and the Supreme Court. The Compulsory Enforcement Act provides a legal basis for enforcing the ownership of property. Taiwan does not have discrete commercial or contract laws. Various laws regulate businesses and specific industries, such as the Company Law, the Commercial Registration Law, the Business Registration Law, and the Commercial Accounting Law. Taiwan’s Civil Code provides the basis for enforcing contracts.

Taiwan’s court system is generally viewed as independent and free from overt interference by other branches of government. Taiwan established its Intellectual Property Court in July 2008 in response to the need for a more centralized and professional litigation system for IPR disputes. There are also specialized labor courts at every level of the court system to deal with labor disputes. Foreign court judgments are final and binding and enforced on a reciprocal basis. Companies can appeal regulatory decisions in the court system.

Regulations governing FDI principally derive from the Statute for Investment by Foreign Nationals and the Statute for Investment by Overseas Chinese. These two laws permit foreign investors to transact either in foreign currency or the NTD. The laws specify that foreign-invested enterprises must receive the same regulatory treatment accorded to local firms. Foreign companies may invest in state-owned firms undergoing privatization and are eligible to participate in publicly financed R&D programs.

Amendments the Legislative Yuan passed in 2015 to the Merger and Acquisition Act clarified investment review criteria for mergers and acquisition transactions. The Investment Commission is drafting amendments to the Statute for Investment by Foreign Nationals to simplify the investment review process. Included is an amendment that would replace a pre-investment approval requirement with a post-investment reporting system for investments under a certain threshold. Ex-ante approval would still be required for investments in restricted industries and those exceeding the threshold. The new proposal would also allow the authorities to impose various penalties for violations of the law. Guidance that previously required special consideration of the impact of a private equity fund’s investment has been folded into the set of general evaluation criteria for foreign investment in important industries. In 2016, the MOEA released a supplementary document to clarify required certification for different types of investment applications. This document, which was last revised in August 2021 and in Chinese only, can be found at https://www.moeaic.gov.tw/download-file.jsp?do=BP&id=k/wXjgwG3BM=

In December 2020, Taiwan authorities amended the Regulations Governing the Approval of PRC Investment in Taiwan to ensure the complex structure of foreign investments by investors from the PRC do not circumvent the investment control through any indirect investment structure. The new PRC investment rules introduced stricter criteria for identifying PRC investment through third-area intermediary, expanded the scope of investment subject to the authorities’ approval, and forbid PRC investment with any political or military affiliation.

All foreign investment-related regulations, application forms, and explanatory information can be found on the Investment Commission’s website, at http://run.moeaic.gov.tw/MOEAIC-WEB-SRC/OfimDownloadE.aspx . The Invest in Taiwan Portal also provides other relevant legal information of interest to foreign investors, such as labor, entry and exit regulations, at https://investtaiwan.nat.gov.tw/showPageeng1031003?lang=eng&search=1031003 

Taiwan’s Fair Trade Act was enacted in 1992. Taiwan’s Fair Trade Commission (TFTC) examines business practices that might impede fair competition. Parties may appeal a TFTC decision directly to the High Administrative Court. After the High Administrative Court issues its opinion, either party may file an appeal to the Supreme Administrative Court, which will only review decisions to determine if the lower court failed to apply the law.

According to Taiwan law, the authorities may expropriate property whenever it is deemed necessary for the public interest, such as for national defense, public works, and urban renewal projects. The U.S. government is not aware of any recent cases of nationalization or expropriation of foreign-invested assets in Taiwan. There are no reports of indirect expropriation or any official actions tantamount to expropriation. Under Taiwan law, no venture with 45 percent or more foreign investment may be nationalized, as long as the 45 percent capital contribution ratio remains unchanged for 20 years after establishing the foreign business. Taiwan law requires fair compensation must be paid within a reasonable period when the authorities expropriate constitutionally protected private property for public use.

Taiwan’s bankruptcy law guarantees creditors the right to share a bankrupt debtor’s assets on a proportional basis. Secured interests in property are recognized and enforced through a registration system. Bankruptcy is not criminalized in Taiwan. Corporate bankruptcy is generally governed by the Company Act and the Bankruptcy Act, while the Consumer Debt Resolution Act governs personal bankruptcy. The quasi-public Joint Credit Information Center is the only credit-reporting agency in Taiwan. In 2020 (latest data available,) there were 200 rulings on bankruptcy petitions.

The Statute for Industrial Innovation provides the legal basis for offering tax credits for companies’ R&D expenditures. MOEA also operates several R&D subsidy programs for target industries including the IoT, smart machinery, biotechnology and biopharmaceuticals, green energy, national defense, the circular economy, 5G equipment, and agriculture. Investors can receive tax incentives for investing in free trade zones, public construction, and biotechnology or biopharmaceuticals. Investment support from the central authorities may be available for priority projects. Industrial zones, export processing zones, science parks, and local governments offer various subsidies, financing, and tax deductions. Investors may receive low-interest loans or subsidies for participating in industrial R&D and industry revitalization programs. R&D tax credits, equivalent to 15 percent of total R&D expenditures, are available only to companies who file corporate income taxes in Taiwan. The Act for the Recruitment and Employment of Foreign Professionals of 2018 offers relaxed visa requirements and high-earner tax deductions to foreign professionals. For a detailed list of investment incentives programs, please refer to the Invest in Taiwan website at https://investtaiwan.nat.gov.tw/showPage?lang=eng&search=1031001 . Taiwan government has various programs to support underrepresented entrepreneurs, including the Phoenix Micro Start-up Loan and interest subsidies for women, offshore island residents and the middle-aged and senior citizens at the early stage of start-up.

In promotion of Taiwan’s green energy industry, Taiwan’s National Development Fund and local banks collectively provided US $3.4 billion in financial guarantees to steer continued green investment into offshore wind projects and other major infrastructure projects in Taiwan. Since 2018, international renewable energy companies have rushed to set up offshore wind farms in Taiwan because of the 20-year power purchase agreement and generous feed-in tariffs (FIT) pricing scheme. Taiwan’s domestic banks have provided special loans of over US $42 billion to green energy companies and nearly US $9.1 billion to offshore wind businesses. Taiwan’s installed solar PV capacity had tripled over the past four years to reach 7.8 GW since Taiwan authorities in 2016 announced the 2025 installed solar capacity target of 20 GW. Investors have been drawn to Taiwan’s streamlined application process for solar PV projects and incentives such as higher FIT rates.

There are seven free trade/free port zones in Taiwan: Anping, Kaohsiung, Keelung, Suao, Taichung, Taipei, and Taoyuan International Airport. The authorities have relaxed restrictions on the movement of merchandise, capital, and personnel into and out of these zones. As part of a broader restructuring and to increase the competitiveness of Taiwan’s ports, the Ministry of Transportation and Communication established the Taiwan International Ports Corporation (TIPC) in 2012 to manage commercial activities of Taiwan’s ports and free trade zones. TIPC facilitates cooperation with foreign shipping operations and related businesses. In addition to preferential tariffs and fees, the foreign labor ceiling for manufacturers in the free ports zones is 40 percent. Kaohsiung Port also serves as a London Metal Exchange (LME) delivery port of primary aluminum, aluminum alloy, copper, lead, nickel, tin, and zinc.

With one prominent counterexample, Taiwan does not mandate any forced localization or performance requirements and does not ask software firms to disclose their source code nor access to encryption. In this counterexample, the National Communications Commission prohibited a local telecom carrier from contracting a PRC cloud services company due to concerns over personal data protection. Positive examples of data mobility include new businesses such as Uber and Food Panda and mobile payment firms like Apple Pay, all of which are freely transmitting data cross-border. The authorities may, subject to strict legal proceedings based on Personal Data Protection Act, examine financial crime data from services providers. In September 2019, the Taiwan FSC amended rules to allow banks to store data on overseas cloud servers, as long as the FSC can obtain information for such operations and maintain the right to execute on-site examinations.

Property interests are enforced in Taiwan, and it maintains a reliable recording system for mortgages and liens. Taiwan law protects the land use rights of indigenous peoples. Taiwan’s Land Act stipulated that forests, fisheries, hunting grounds, salt fields, mineral deposits, water sources, and lands lying within fortified and military areas and those adjacent to national frontiers may not be transferred or leased to foreigners. Based on the Ministry of Interior’s (MOI) Operational Regulations for Foreigners to Acquire Land Rights in Taiwan, foreigners coming from countries that provide Taiwan residents the same land rights will be allowed to acquire or set the same rights in Taiwan. In May 2015, the Cadastral Clearance Act was passed to promote better land registration management. As in other investment categories, Taiwan has specific regulations governing property acquisition by PRC investors.

Taiwan’s laws to protect IPR include: the Patent Act, Trademark Act, Copyright Act, and Trade Secrets Act. Taiwan established the pharmaceutical Patent Linkage system in mid-2019. The Taiwan Intellectual Property Office (TIPO) is responsible for policy formulation, laws drafting, and inter-agency enforcement coordination. The Intellectual Property Rights Protection Corps. Of the Criminal Investigation Brigade (CIB) and National Police Administration (NPA) receive IP infringement reports (through toll free direct line of 0800-016-597; and email: 0800016597@iprp.spsh.gov.tw ), and then provide them to the Ministry of Justice for investigations. IP cases are tried in both District Courts and the specialized IP Court.

In January 2022, the Executive Yuan (EY) approved draft amendments to the Copyright Act and Trademark Act to prepare for Taiwan’s ascension to the Comprehensive and Progressive Agreement for Trans-Pacific (CPTPP). The draft amendment on Copyright Act proposes that illegal digital piracy, distribution, and public transmission be deemed as actionable-without-compliant offenses (same as indictable crimes); and pirated optical discs shall be included in the scope of digital piracy, resulting to higher penalties. The draft amendment on the Trademark Act expands counterfeiting crimes from originally defined as “knowingly” to “intentional” and “negligent.” Criminal liabilities are included in the draft, which as of late March 2022, is in the Legislative Yuan (LY) for review. In April 2021, the EY approved the draft amendment of the Copyright Act. This draft covers a wide range of changes, including: (1) the protection from simultaneous further communication to the public (e.g. a retailer plays a YouTube video inside its store); (2) fair use applies to distance learning, libraries and other archival institutions, museums, and regularly held non-profit events; (3) online advertisement of pirated goods deemed as copyright infringement; and (4) minimum six-month imprisonment. This draft amendment is meant to counter the development of digital technology and the internet. As of late March 2022, the draft is in the LY for review.

In 2021, Taiwan’s National Police Agency investigated 3,672 IP (including trademark, copyright, and trade secrets) infringement cases, with seizures totaling US $35.5 billion (NTD 103.0 billion). Taiwan Customs prosecuted 228 IP-infringement import cases, with 2.23 million items of trademark infringement and three items of copyright infringement. The majority of those cases were related to bags, pharmaceuticals, and clothing. The Prosecutors’ Offices of the District Courts handled down verdicts of 6,258 IP infringement cases in 2021, with 53 percent of them not indicted.

Although some industries lobbied for Taiwan’s inclusion the 2022 301 Report, AIT recommended not including Taiwan on the watch list based on consultations with related agencies as well as Taiwan-based stakeholders. Given Taiwan’s progress in recent years, on both regulations and also the inter-agency efforts on enforcement, AIT concluded that Taiwan’s conclusion would be counterproductive. Another assessment made by AIT for the Notorious Market List concluded that Taiwan-based U.S. stakeholders and law enforcement do not have concerns about brick and mortar markets. As for online markets, local investigation agencies confirmed that the infringing sites allegedly hosted in Taiwan were actually hosted outside of Taiwan.

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/. 

Taiwan authorities welcome foreign portfolio investment in the Taiwan Stock Exchange (TWSE), with foreign investment accounting for approximately 43.5 percent of TWSE capitalization in 2021. Taiwan allows the establishment of offshore banking, securities, and insurance units to attract a broader investor base. The FSC utilizes a negative list approach to regulating local banks’ overseas business not involving the conversion of the NTD.

Taiwan’s capital market is mature and active. At the end of 2021, 959 companies were listed on the TWSE, with a total market value of US $2.2 trillion (including transactions of stocks, Taiwan Depository Receipts, exchange-traded funds, and warrants). Foreign portfolio investors are not subject to a foreign ownership ceiling, except in certain restricted companies, and are not subject to any ceiling on portfolio investment. The turnover ratio in the TWSE rose to 205.3 percent in 2021 as the TWSE Capitalization Weighted Stock Index (TAIEX) soared 23.7 percent in 2021. Payments and transfers resulting from international trade activities are fully liberalized in Taiwan. A wide range of credit instruments, all allocated on market terms, is available to domestic- and foreign-invested firms alike.

Taiwan’s banking sector is healthy, tightly regulated, and competitive, with 39 banks including three online-only banks servicing the market. The sector’s non-performing loan ratio has remained below 1 percent since 2010, with a sector average of 0.17 in December 2021. Capital-adequacy ratios (CAR) are generally high, and several of Taiwan’s leading commercial lenders are government-controlled, enjoying implicit state guarantees. The sector had a CAR of 14.82 percent as of September 2021, far above the Basel III regulatory minimum of 10.5 percent required by 2019. Taiwan banks’ liquidity coverage ratio, which was required by Basel III to reach 100 percent by 2019, averaged 134.2 percent in September 2021. Taiwan’s banking system is primarily deposit-funded and has limited exposure to global financial, wholesale markets. Regulators have encouraged local banks to expand to overseas markets, especially in Southeast Asia, and minimize exposure in the PRC. Taiwan Central Bank statistics show that Taiwan banks’ PRC net exposure on an ultimate risk basis was USD 70.8 billion in the third quarter of 2021, trailing the United States’ USD 110.2 billion. Taiwan’s largest bank in terms of assets is the wholly state-owned Bank of Taiwan, which had USD 198.2 billion of assets as of December 2021. Taiwan’s eight state-controlled banks (excluding the Export and Import Bank) jointly held nearly US $1,015.6 billion, or 48 percent of the banking sector’s total assets.

The Taiwan Central Bank operates as an independent agency and state-owned company under the Executive Yuan, free from political interference. The Central Bank’s mandates are to maintain financial stability, develop Taiwan’s banking business, guard the stability of the NTD’s external and internal value, and promote economic growth within the scope of the three aforementioned goals.

Foreign banks are allowed to operate in Taiwan as branches and foreign-owned subsidiaries, but financial regulators require foreign bank branches to limit their customer base to large corporate clients. Foreigners holding a valid visa entering Taiwan are allowed to open an NTD account with local banks with passports and an ID number issued by the immigration office. Please refer to the Taiwan Bankers’ Association’s webpage: https://www.ba.org.tw/PublicInformation/BusinessDetail/10?returnurl=%2F  for detailed information regarding various types of bank services for foreigners in Taiwan.

Taiwan does not have a sovereign wealth fund, although the American business community continues to advocate for one. Taiwania Capital Management Company, a partially government-funded investment company, was established in October 2017 to promote investment in innovative and other target industries. As of August 2021, Taiwania raised US $490 million for four funds investing in IoT, biotech, digital health, and early startups in automation, 5G and networking, and advanced manufacturing.

Taiwan has 17 SOEs with stakes by the central authorities exceeding 50 percent, including official agencies such as the Taiwan Central Bank. Please refer to the list of all central government, majority-owned SOEs available online at https://ws.ndc.gov.tw/Download.ashx?u=LzAwMS9hZG1pbmlzdHJhdG9yLzEwL3JlbGZpbGUvMC8xMjk1LzM3NGExNjVjLWM5MzAtNDYxZS1iYjViLTA3ODkzYjNlNWVhMi5kb2M%3d&n=M2ZjMzZmMDItZjVjOC00ZjU2LThiMTctZmM3Y2EzMTE1MDRhLmRvYw%3d%3d&icon=.doc Some of these SOEs are large in scale and exert significant influence in their industries, especially monopolies such as Taiwan Power (Taipower) and Taiwan Water. CPC Corporation (formerly China Petroleum Corporation) controls over 70 percent of Taiwan’s retail gasoline market. The most recent privatization took place in 2014, when the Aerospace Industrial Development Corporation (AIDC) was successfully privatized through a public listing on the TWSE. Taiwan authorities retain control over some SOEs that were privatized, including managing appointments to boards of directors. These enterprises include Chunghwa Telecom, China Steel, China Airlines, Taiwan Fertilizer, Taiwan Salt, CSBC Corporation (shipbuilding), Yang Ming Marine Transport Corp., and eight public banks. In 2020 (latest data available), the 17 SOEs together had a net income of NTD 258 billion (US $9.2 billion), down 21 percent from the NTD 325 billion (US $11.6 billion) in 2019. The SOEs’ average return on equities continued to decline from a recent peak of 11.13 percent in 2015 to 6.67 percent in 2020. These 17 SOEs employed a total of 120,606 workers.

Taiwan has not adopted the OECD Guidelines on Corporate Governance for SOEs. In Taiwan, SOEs are defined as public enterprises in which the government owns more than 50 percent of shares. Public enterprises with less than a 50 percent government stake are not subject to Legislative Yuan supervision. Still, authorities may retain managerial control through senior management appointments, which may change with each administration. Each SOE operates under the supervising ministry’s authority, and government-appointed directors should hold more than one-fifth of an SOE’s board seats. The Executive Yuan, the Ministry of Finance, and MOEA have criteria for selecting individuals for senior management positions. Each SOE has a board of directors, and some SOEs have independent directors and union representatives sitting on the board.

Taiwan’s central and local government entities, and SOEs are all covered by the WTO’s Agreement on Government Procurement (GPA.) Except for state monopolies, SOEs compete directly with private companies. SOEs’ purchases of goods or services are regulated by the Government Procurement Act and are open to private and foreign companies via public tender. Private companies have the same access to financing as SOEs. Taiwan banks are generally willing to extend loans to enterprises meeting credit requirements. SOEs are subject to the same tax obligations as private enterprises and are regulated by the Fair Trade Act as private enterprises. The Legislative Yuan reviews SOEs’ budgets each year.

There are no privatization programs in progress. Taiwan’s most recent privatization of AIDC in 2014 included the imposition of a foreign ownership ceiling of 10 percent due to the sensitive nature of the defense sector. In August 2017, Taiwan authorities identified CPC Corporation, Taipower Company, and Taiwan Sugar as their next privatization targets. Following the passage of the Electricity Industry Act amendments in January 2017, MOEA has stated that Taipower’s privatization will not occur in the near future, but plans to restructure it as a new holding company after separating Taipower’s distribution business from power generation.

The Taiwan public has high expectations for and is sensitive to responsible business conduct (RBC), in part due to concerns about such issues as food safety and environmental pollution. Taiwan authorities actively promote RBC. MOEA and the FSC issued guidelines on ethical standards and internal control mechanisms to urge businesses to take responsibility for the impact of their activities on the environment, consumers, employees, and communities. Although not a member of the United Nations, Taiwan pledged on its own initiative to uphold international human rights conventions. In December 2020, Taiwan’s Cabinet released the National Action Plan on Business and Human Rights (NAP) in an aim to provide better protections for human rights in the workplace. Taiwan’s labor law provides a minimum age for employment of 15 but has an exception for work by children younger than 15 if they have completed junior high school and the competent authorities have determined the work will not harm the child’s mental and physical health. The law prohibits children younger than 18 from doing heavy or hazardous work. Working hours for children are limited to eight hours per day, and children may not work overtime or on night shifts. There is no reported RBC related to forced labor or child labor issues.

The TWSE conducts an annual review of the corporate governance performance of all publicly listed companies. To promote more profit-sharing with employees, Taiwan’s Securities and Futures Act mandates that all publicly listed companies establish a compensation committee. In November 2018, the Act was amended to require all publicly listed companies to disclose average employee compensation and wage adjustment information. Taiwan Depository & Clearing Corporation, a government-run securities depository of Taiwan, in 2020 launched Taiwan ESG Dashboard to encourage sustainable investing and enhance companies’ performance on ESG issues. In 2021, 30 Taiwan companies were included in the Dow Jones Sustainability World Index. Taiwan ranks fourth among 12 Asian markets in the Corporate Governance Watch 2020 report, behind only Australia, Hong Kong, and Singapore. There are also independent NGOs and business associations promoting or monitoring RBC in Taiwan.

In August 2020, the FSC announced that it will implement the “Corporate Governance 3.0–Sustainable Development Roadmap” for the TWSE listed companies. All TWSE-listed companies are required to appoint a chief corporate governance officer. They must complete the carbon footprint verification and disclosure by 2027, and all the certification by 2029. Starting in January 2022, 42 listed petrochemical companies and 44 financial institutions were required to obtain third-party assurance for sustainability reporting. The FSC also mandates greenhouse gas emissions disclosure in annual reports beginning in 2023 for all steel and cement companies, as well as listed companies with paid-in capital of over US $360 million (NTD 10 billion).

Taiwan does not participate in the Extractive Industries Transparency Initiative. Taiwan authorities encourage Taiwan firms to adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas, and many Taiwan-listed companies have voluntarily enclosed conflict minerals free statement in their annual social responsibility reports. Taiwan has a private security industry. Taiwan is not a signatory of The Montreux Document on Private Military and Security Companies, nor a participant in the International Code of Conduct for Private Security Service Providers’ Association (ICoCA.)

Taiwan’s Greenhouse Gas Reduction and Management Act in 2015 includes long-term reduction goals in its official legislation to combat climate change and maps out general guidelines in the 2017 National Climate Change Action Guidelines for greenhouse gas mitigation and climate change adaptation. Taiwan has a national strategy to protect biodiversity and maintain sustainable ecosystems. Taiwan established a national ecological network in 2018 and compiled ecological survey data over the past five years to identify key biodiversity areas and promote ecofriendly land production. The Cabinet is amending the ‘Greenhouse Gas Reduction and Management Act’ into the ‘Climate Change Response Act (CCRA)” and will strengthen climate management by appointing cabinet-level authorities to enhance Taiwan’s overall capacities for climate change mitigation through emission controls and incentive mechanisms to facilitate carbon reduction and adopting a carbon pricing mechanism with levies on Taiwan’s carbon-intensive emitters and imported commodities.

Taiwan authorities are in discussion with industry and business to promote voluntary greenhouse gas emissions reduction, decarbonized energy systems, higher energy efficiency in industry, green transportation and negative emissions technologies to achieve relevant targets/goals. The Taiwan Alliance for Net-Zero Emissions, a group comprised of local traditional manufacturing, technology, finance, and service industries, supports Taiwan authorities’ efforts to attain net-zero carbon emissions at office sites by 2030 and production sites by 2050. Another consortium, the Taiwan Climate Alliance, formed by eight ICT companies in Taiwan, plans to use 100 percent renewable energy in their manufacturing processes by 2050.

Taiwan’s Environmental Protection Administration (TEPA) adopted a carbon emission offset program in 2015. TEPA initiated a Green Mark product labeling as a voluntary scheme of environmental performance certification in Taiwan beginning from 1992. In 2011, TEPA mandated the post-market verification for green products. Subsidies are also available for renewable energy-use generators. TEPA also subsidizes new motorcycles to phase out motorcycles made before June 2007.

Taiwan’s Government Procurement Act authorizes central and local authorities and other public institutions to give preference in tenders to products with a government-approved eco-label, as well as those that increase social benefits or reduce social costs. Taiwan central authorities set annual green procurement targets and require that the public sector procurement prioritizes environmentally friendly products. Since the program started in 2012, Taiwan’s green procurement rate increased from 30 percent to 95 percent.

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities;
• U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises; and;
• Xinjiang Supply Chain Business Advisory 

Department of the Treasury

• OFAC Recent Actions 

Department of Labor

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

Agency Against Corruption and Northern Investigation Office, Ministry of Justice
No.166, Bo’ai Rd., Zhongzheng District, Taipei
Anti-corruption Hotline opens 24 hrs: +886-0800-286-586
https://www.aac.moj.gov.tw/7170/278724/ 

TI Chinese Taipei, TICT
https://www.transparency.org/en/countries/taiwan
http://www.tict.org.tw/ 

Wang Shen-jieh
Specialist
TI Chinese Taipei
5F, No.111 Mu-Cha Road, Section 1, Taipei, Taiwan 11645
Tel: +886-2-2236-2204
Email: tict@tict.org.tw; transparencytaiwan@gmail.com

Taiwan implemented laws, regulations, and penalties to combat corruption, including in public procurement. The Act on Property Declaration by Public Servants mandates annual property declaration for senior public services officials and their immediate family members. In 2021, the Control Yuan discovered 29 violations and imposed a total of US $485,000 in fines. The Corruption Punishment Statute and Criminal Code contain specific penalties for corrupt activities, including maximum jail sentences of life in prison and a maximum fine of up to NTD 100 million (US $3.5 million). Laws provide for increased penalties for public officials who fail to explain the origins of suspicious assets or property. The Government Procurement Act and the Act on Recusal of Public Servants Due to Conflict of Interest both forbid incumbent and former procurement personnel and their relatives from engaging in related procurement activities. Although not a UN member, Taiwan voluntarily adheres to the UN Convention against Corruption and published its first country report in March 2018.

Guidance titled Ethical Corporate Management Best Practice Principles for all publicly listed companies was revised in November 2014. It asks publicly listed companies to establish an internal code of conduct and corruption-prevention measures for activities undertaken with government employees, politicians, and other private sector stakeholders. The Ministry of Justice is drafting a Whistle Blowers Protection Act to effectively combat illegal behaviors in both government agencies and the private sector. The Anti-money Laundering Act implemented June 2017 requires the mandatory reporting of financial transactions by individuals listed in the Standards for Determining the Scope of Politically Exposed Persons Entrusted with Prominent Public Function, Their Family Members and Close Associates, and by the first-degree lineal relatives by blood or by marriage; siblings, spouse and his/her siblings, and the domestic partner equivalent to a spouse of these politically exposed individuals. The U.S. government is not aware of cases where bribes have been solicited for foreign investment approval.

Taiwan is a young and vibrant multi-party democracy. The transitions of power in both local and presidential elections have been peaceful and orderly. There are no recent examples of politically motivated damage to foreign investment.

The Tsai Ing-wen administration has made improving labor welfare one of its core priorities. Minimum monthly wage has been consistently raised since 2017 and reached US $890 (NTD 25,250) in 2022. Affected by the global pandemic, Taiwan’s unemployment rate in 2021 edged up to 3.64 percent. Taiwan Ministry of Labor (MOL) data show that 53 percent of Taiwan’s population aged above 15 years is at least college-educated. Taiwan’s female worker participation rate is 51.4 percent, similar to neighboring countries’ figures. According to the MOL, informal employment hit a record high at 799,000 labors in 2020, accounting for 7.0 percent of total employment.

The size of Taiwan’s labor force is decreasing as the society ages. Taiwan transitioned from an “aging society” to an “aged society” in 2018. In 2020, 15.8 percent of its population were 65 years old or above, up from 10.6 percent in 2009. Taiwan’s total fertility rate in 2020 was 0.99, marking the first time it went under one and remaining one of the lowest in the world. As of December 2021, there were 669,992 foreign laborers in Taiwan, of which 443,104 were working in the industrial sector. The Labor Standard Act and the Act of Gender Equality in Employment are universally applied to both domestic and foreign workers, with the exception that domestic foreign helpers are not covered by the Labor Standard Act.

MOL data indicated that, while labor shortage rates remained stable at around three percent in the manufacturing industry, the rates have been increasing over past few years in services industries such as food and accommodation, information and communication, art and entertainment, recreation, and real estate activities. Industry groups have long claimed that the lack of blue-collar workers is one of the major issues facing manufacturers operating in Taiwan and have urged the authorities to increase the ceiling on foreign workers. To attract Taiwan businesses to relocate back to Taiwan, Taiwan authorities lifted the foreign workers ceiling for specific industries, but across the board, the ceiling remained at 40 percent of total employees. Taiwan businesses consistently urge the authorities to ease work visa requirements to recruit foreign professionals, especially the skilled white-collar labor in the ICT sector. However, wage growth in Taiwan, compared with neighboring economies, poses a challenge for talent recruitment and retention. Taiwan issued 40,993 working permits to foreign professionals in 2021, with 20 percent to individuals from Japan, followed by 15.9 percent from Malaysia, and 8.3 percent from the United States. 26.7 percent of foreign professionals work in the manufacturing industry.

Private companies are not required to hire nationals. Employers may institute unpaid leave with employees’ consent but must notify the labor authorities and continue to make health insurance, labor insurance, and pension contributions. Due to the global pandemic, 58,731 employees suffered from unpaid leave in 2021. Taiwan provides unemployment relief based on the Employment Insurance Law, vocational training allowances for jobless persons, and employment subsidies to encourage hiring. Labor laws are not waived to attract or retain investment.

Labor relations in Taiwan are generally harmonious. Although Taiwan is not a member of the International Labor Organization (ILO), it adheres to ILO conventions on the protection of workers’ rights. Taiwan law protects the right to join independent unions, conduct legal strikes, and bargain collectively. Labor unions have become more active in Taiwan over the past decade, and the Collective Agreement Act outlines the negotiation mechanism for collective bargaining to protect labor’s interests in the negotiations. The majority of labor unions exist in the manufacturing sector. The authorities provide financial incentives to enterprise unions to encourage negotiation of “collective agreements” with employers that detail their employees’ immediate labor rights and entitlements. No strike has initiated/conducted in 2020-21 due to the stringent economic impact by the global pandemic. Taiwan’s labor authorities have announced the increasing frequency and coverage of labor inspections. Since 2019, government incentives for business growth and industrial development have incorporated the labor inspection record as a core evaluating item for the applying entities. Violating employers will not be eligible for tax reduction or grants. The Labor Incident Act of 2020 mandates the establishment of special labor courts, which helps accelerates dispute resolution and reduces financial cost for labor filing employment lawsuits. In December 2020, Taiwan implemented the Middle-aged and Elderly Employment Promotion Act to promote employment opportunities for employees aged above 45 years.

Arati Shroff
Deputy Chief, Economic Section, American Institute in Taiwan
100 Jinhu Road, Taipei, Taiwan
+886-2-2162-2000
ShroffA@state.gov

The Philippines seeks foreign investment to support economic recovery, generate employment, promote economic development, and contribute to inclusive and sustained growth in targeted areas. In 2021, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act standardized the incentives regime across 14 investment promotion agencies (IPAs). With the reform, the Board of Investments (BOI) and Philippine Economic Zone Authority (PEZA) continue to be the country’s lead IPAs. The BOI approves incentives for projects with an investment capital of USD 20 million and below; the interagency Fiscal Incentives Review Board (FIRB) approves incentives for projects beyond the USD 20 million investment capital threshold. Noteworthy advantages of the Philippine investment landscape include free trade zones, including economic zones, and a large, educated, English-speaking, and relatively low-cost Filipino workforce. Philippine law treats foreign investors the same as their domestic counterparts, except in sectors reserved for Filipinos by the Philippine Constitution and the Foreign Investment Act (see details under Limits on Foreign Control section). Additional information regarding investment policies and incentives are available on the BOI (http://boi.gov.ph) and PEZA (http://www.peza.gov.ph) websites.

Restrictions on foreign ownership in some sectors, inadequate public investment in infrastructure, and lack of transparency in procurement tenders hinder foreign investment. The Philippines’ regulatory regime remains ambiguous in many sectors of the economy, and corruption is a significant problem. Large, family-owned conglomerates dominate the economic landscape, crowding out other smaller businesses.

Foreigners are prohibited from fully owning land under the 1987 Constitution, although the 1993 Investors’ Lease Act allows foreign investors to lease a contiguous parcel of up to 1,000 hectares (2,471 acres) for a maximum of 75 years. Dual citizens are permitted to own land.

The 2022 Foreign Investment Act (FIA) still requires the publishing every two years of the Foreign Investment Negative List (FINL), which outlines sectors in which foreign investment is restricted. The latest FINL was released in October 2018; an updated version of the FINL is currently under draft. The FINL bans foreign ownership/participation in the following investment activities: mass media (except recording and internet businesses); small-scale mining; private security agencies; utilization of marine resources; cockpits; manufacturing of firecrackers and pyrotechnic devices; manufacturing and distribution of nuclear, biological, chemical and radiological weapons; and manufacturing and distribution of anti-personnel mines. With the exception of the practices of law, radiologic and x-ray technology, and marine deck and marine engine officers, foreign professionals are allowed to practice in the Philippines if their country permits reciprocity for Philippine citizens. These professions include medicine, pharmacy, nursing, dentistry, accountancy, architecture, engineering, criminology, teaching, chemistry, environmental planning, geology, forestry, interior design, landscape architecture, and customs brokerage. In practice, however, language exams, onerous registration processes, and other barriers make it difficult for foreigners to practice in these fields.

The Philippines limits foreign ownership to 40 percent in the manufacturing of explosives, firearms, and military hardware; private radio communication networks; natural resource exploration, development, and utilization (with exceptions); educational institutions (with some exceptions); operation and management of public utilities; operation of commercial deep sea fishing vessels; Philippine government procurement contracts (40 percent for supply of goods and commodities); contracts for the construction and repair of locally funded public works (with some exceptions); ownership of private land; and rice and corn production and processing (with some exceptions). Other areas that carry varying foreign ownership ceilings include the following: private employee recruitment firms (25 percent) and advertising agencies (30 percent). The amended FIA includes 100 percent foreign ownership for enterprises with a minimum paid-in capital of USD 100,000 involved in advanced technology (as determined by the Department of Science and Technology), endorsed as start-ups or start-up enablers (pursuant to the Innovative Startup Act), and where a majority of direct hires (but not less than 15 workers) are local talent. The FINL, however, is limited in scope since it cannot change prior laws related to foreign investments, such as Constitutional provisions which bar investment in mass media, utilities, and natural resource extraction.

In the telecommunications sector, the Philippines’ existing regulations limit competition and create barriers to entry. Telecommunications services in the Philippines are classified as either “basic” or “enhanced” value added. Internet service providers as value-added service providers cannot build their own fiber network for commercial purpose and are required to connect to franchised telecommunication facilities for their service. Only companies with a legislative franchise and public telecommunication entities are allowed to build transmission and switching facilities, offer a local exchange service (landline), and operate inter-exchange service (backbone) and an international gateway facility.

Amendments to the Retail Trade Liberalization Act lowered the minimum investment requirement for foreign retailers from USD 2.5 million to USD 500,000 and per-store investment requirement from USD 830,000 to USD 200,000. It also removed the USD 250,000 minimum investment for retailers of luxury goods. In effect, retail trade enterprises with capital of less than USD 500,000 are still reserved for Filipinos. The Philippines allows up to full foreign ownership of insurance adjustment, lending, financing, or investment companies; however, foreign investors are prohibited from owning stock in such enterprises, unless the investor’s home country affords the same reciprocal rights to Filipino investors.

Foreign banks are allowed to establish branches or own up to 100 percent of the voting stock of locally incorporated subsidiaries if they can meet certain requirements. However, a foreign bank cannot open more than six branches in the Philippines. A minimum of 60 percent of the total assets of the Philippine banking system should, at all times, remain controlled by majority Philippine-owned banks. Ownership caps apply to foreign non-bank investors, whose aggregate share should not exceed 40 percent of the total voting stock in a domestic commercial bank and 60 percent of the voting stock in a thrift/rural bank.

The World Trade Organization (WTO) and the Organization for Economic Co-operation and Development (OECD) conducted a Trade Policy Review of the Philippines in March 2018 and an Investment Policy Review of the Philippines in 2016, respectively. The reviews are available online at the WTO website (https://www.wto.org/english/tratop_e/tpr_e/tp468_e.htm) and OECD website (http://www.oecd.org/daf/oecd-investment-policy-reviews-philippines-2016-9789264254510-en.htm).

Business registration in the Philippines is cumbersome due to multiple agencies involved in the process. It takes an average of 33 days to start a business in Quezon City in Metro Manila, according to the 2020 World Bank’s Ease of Doing Business report. The Duterte Administration’s landmark law, Republic Act No. 11032 or the Ease of Doing Business and Efficient Government Service Delivery Act of 2018 (better known as the “Ease of Doing Business Act”), sought to address the issues through the amendment of the Anti-Red Tape Act of 2007 (https://www.officialgazette.gov.ph/2018/05/28/republic-act-no-11032/). The Ease of Doing Business Act legislates standardized deadlines for government transactions, a single business application form, a one-stop-shop to issue or renew permits and licenses, automation of business permits processing, a zero-contact policy, and a central business databank. Implementing rules and regulations for the Act were signed in 2019 (http://arta.gov.ph/pages/IRR.html). The law also created an Anti-Red Tape Authority (ARTA) under the Office of the President to oversee national policy on anti-red tape issues and implement reforms to improve competitiveness rankings. ARTA also monitors compliance of agencies and issues notices to erring and non-compliant government employees and officials.

ARTA is governed by a council that includes the Secretaries of Trade and Industry, Finance, Interior and Local Governments, and Information and Communications Technology. The Department of Trade and Industry serves as interim Secretariat for ARTA. Since passage of the 2018 Ease of Doing Business Act, the Philippines jumped 29 notches in the World Bank’s 2020 Doing Business Report ranking to 95th, with the ARTA pushing for the full adoption of an online application system as an efficient alternative to on-site application procedures, issue online permits, and use e-signatures in the processing of government transactions. In the past year, ARTA has launched integrated business registration portals, a database of government services and service standards, and the country’s first Regulatory Impact Assessment (RIA) manual, in line with the Ease of Doing Business Act’s mandate for government agencies to undergo an RIA process before proposing new regulations.

The Revised Corporation Code, a business-friendly amendment that encourages entrepreneurship, improves the ease of business and promotes good corporate governance. This new law amends part of the four-decade-old Corporation Code and allows for existing and future companies to hold a perpetual status of incorporation, compared to the previous 50-year term limit which required renewal. More importantly, the amendments allow for the formation of one-person corporations, providing more flexibility to conduct business; the old code required all incorporation to have at least five stockholders and provided less protection from liabilities.

There are no restrictions on outward portfolio investments for Philippine residents, defined to include non-Filipino citizens who have been residing in the country for at least one year; foreign-controlled entities organized under Philippine laws; and branches, subsidiaries, or affiliates of foreign enterprises organized under foreign laws operating in the country. However, outward investments funded by foreign exchange purchases above USD 60 million, or its equivalent per investor per year, require prior notification to the Central Bank.

Proposed Philippine laws must undergo public comment and review. Government agencies are required to craft implementing rules and regulations (IRRs) through public consultation meetings within the government and with private sector representatives after laws are passed. New regulations must be published in newspapers or in the government’s online official gazette before taking effect (https://www.gov.ph/). The 2016 Executive Order on Freedom of Information (FOI) mandates full public disclosure and transparency of government operations, with certain exceptions. The public may request copies of official records through the FOI website (https://www.foi.gov.ph/). Government offices in the Executive Branch are expected to develop their respective agencies’ implementation guidelines. The order is criticized for its long list of exceptions, which render the policy less effective.

Stakeholders report regulatory enforcement in the Philippines is generally weak, inconsistent, and unpredictable. Many U.S. investors describe business registration, customs, immigration, and visa procedures as burdensome and frustrating. Regulatory agencies are generally not statutorily independent but are attached to cabinet departments or the Office of the President and, therefore, are subject to political pressure. Issues in the judicial system also affect regulatory enforcement.

The Philippines is a member of the World Trade Organization (WTO) and provides notice of draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). (http://tbtims.wto.org/en/Notifications/Search?ProductsCoveredHSCodes=&ProductsCoveredICSCodes=&DoSearch=True&ExpandSearchMoreFields=False&NotifyingMember=Philippines&DocumentSymbol=&DistributionDateFrom=&DistributionDateTo=&SearchTerm=&ProductsCovered=&DescriptionOfContent=&CommentPeriod=&FinalDateForCommentsFrom=&FinalDateForCommentsTo=&ProposedDateOfAdoptionFrom=&ProposedDateOfAdoptionTo=&ProposedDateOfEntryIntoForceFrom=&ProposedDateOfEntryIntoForceTo=).

The Philippines continues to fulfill required regulatory reforms under the ASEAN Economic Community (AEC). The Philippines officially joined live operations of the ASEAN Single Window (ASW) on December 30, 2019. The country’s National Single Window (NSW) now issues an electronic Certificate of Origin via the TRADENET.gov.ph platform, and the NSW is connected to the ASW, allowing for customs efficiencies and better transparency.

The Philippines passed the Customs Modernization and Tariff Act in 2016, which enables the country to largely comply with the WTO Agreement on Trade Facilitation.

The Philippines has a mixed legal system of civil, common, Islamic, and customary laws, along with commercial and contractual laws.

The Philippine judicial system is a separate and largely independent branch of the government, made up of the Supreme Court and lower courts. The Supreme Court is the highest court and sole constitutional body. More information is available on the court’s website (http://sc.judiciary.gov.ph/). The lower courts consist of: (a) trial courts with limited jurisdictions (i.e., Municipal Trial Courts, Metropolitan Trial Courts, etc.); (b) Regional Trial Courts (RTCs); (c) Shari’ah District Courts (Muslim courts); and (d) Courts of Appeal (appellate courts). Special courts include the Sandiganbayan (anti-graft court for public officials) and the Court of Tax Appeals. A total of 147 RTCs have been designated as Special Commercial Courts (SCC) to hear intellectual property (IP) cases, with four SCCs authorized to issue writs of search and seizure on IP violations, enforceable nationwide. In addition, nearly any case can be appealed to appellate courts, including the Supreme Court, increasing caseloads and further clogging the judicial system.

Foreign investors describe the inefficiency and uncertainty of the judicial system as a significant disincentive to investment. Many investors decline to file dispute cases in court because of slow and complex litigation processes and corruption among some personnel. The courts are not considered impartial or fair. Stakeholders also report an inexperienced judiciary when confronted with complex issues such as technology, science, and intellectual property cases. The Philippines ranked 152nd out of 190 economies, and 18th among 25 economies from East Asia and the Pacific, in the World Bank’s 2020 Ease of Doing Business report in terms of enforcing contracts.

The interagency Fiscal Incentives Review Board (FIRB) is the ultimate governing body that oversees the administration and grant of tax incentives by investments promotions agencies (IPAs). Chaired by the Philippine Secretary of Finance, the FIRB also determines the target performance metrics used as conditions to avail of tax incentives and reviews, approves, and cancels incentives for investments above USD 20 million as endorsed by IPAs. The BOI regulates and promotes investment into the Philippines that caters to the domestic market. The Strategic Investment Priorities Plan (SIPP), administered by the BOI, identifies preferred economic activities approved by the President. Government agencies are encouraged to adopt policies and implement programs consistent with the SIPP.

The Foreign Investment Act (FIA) requires the publishing of the Foreign Investment Negative List (FINL) that outlines sectors in which foreign investment is restricted. The FINL consists of two parts: Part A details sectors in which foreign equity participation is restricted by the Philippine Constitution or laws; and Part B lists areas in which foreign ownership is limited for reasons of national security, defense, public health, morals, and/or the protection of small and medium enterprises (SMEs).

The 1995 Special Economic Zone Act allows the Philippine Economic Zone Authority (PEZA) to regulate and promote investments in export-oriented manufacturing and service facilities inside special economic zones, including the granting of fiscal and non-fiscal incentives for investments worth USD 20 million and below.

Further information about investing in the Philippines is available at the BOI website (http://boi.gov.ph/) and PEZA website (http://www.peza.gov.ph).

The 2015 Philippine competition law established the Philippine Competition Commission (PCC), an independent body mandated to resolve complaints on issues such as price fixing and bid rigging, to stop mergers that would restrict competition. More information is available on PCC website (http://phcc.gov.ph/#content). The Department of Justice (https://www.doj.gov.ph/) prosecutes criminal offenses involving violations of competition laws.

Philippine law allows expropriation of private property for public use or in the interest of national welfare or defense in return for fair market value compensation. In the event of expropriation, foreign investors have the right to receive compensation in the currency in which the investment was originally made and to remit it at the equivalent exchange rate. However, the process of agreeing on a mutually acceptable price can be protracted in Philippine courts. No recent cases of expropriation involve U.S. companies in the Philippines.

The 2016 Right-of-Way Act facilitates acquisition of right-of-way sites for national government infrastructure projects and outlines procedures in providing “just compensation” to owners of expropriated real properties to expedite implementation of government infrastructure programs.

The 2010 Philippine bankruptcy and insolvency law provides a predictable framework for rehabilitation and liquidation of distressed companies, although an examination of some reported cases suggests uneven implementation. Rehabilitation may be initiated by debtors or creditors under court-supervised, pre-negotiated, or out-of-court proceedings. The law sets conditions for voluntary (debtor-initiated) and involuntary (creditor-initiated) liquidation. It also recognizes cross-border insolvency proceedings in accordance with the United Nations Conference on Trade and Development (UNCTAD) Model Law on Cross-Border Insolvency, allowing courts to recognize proceedings in a foreign jurisdiction involving a foreign entity with assets in the Philippines. Regional trial courts designated by the Supreme Court have jurisdiction over insolvency and bankruptcy cases.

The Philippines’ Investment Priorities Plan (IPP) enumerates investment activities entitled to incentives facilitated by BOI, such as an income tax holiday. Non-fiscal incentives include the following: employment of foreign nationals, simplified customs procedures, duty exemption on imported capital equipment and spare parts, importation of consigned equipment, and operation of a bonded manufacturing warehouse.

The transitional 2020 IPP provides incentives for the following activities: COVID-19 mitigation, manufacturing (e.g., agro-processing, modular housing components, machinery, and equipment); agriculture, fishery, and forestry (e.g., hatcheries, postharvest facilities, nurseries); integrated circuit design, creative industries, and knowledge-based services (e.g., IT-Business Process Management services for the domestic market); repair, maintenance, and overhaul of aircraft; charging/refueling stations for alternative energy vehicles; industrial waste treatment; telecommunications (e.g., connectivity facilities and mobile broadband services); engineering, procurement, and construction; healthcare and disaster risk reduction management services (e.g., hospitals, drug rehabilitation centers, and quarantine and evacuation centers); mass housing; infrastructure and logistics (e.g., airports, seaports, and PPP projects); inclusive business models (activities of medium and large enterprises in agribusiness and tourism that include micro and small enterprises in their value chains); energy (development of energy sources, power generation plants, and ancillary services); innovation drivers (e.g., fabrication laboratories); and environment (e.g., climate change-related projects). Further details of the 2020 IPP are available on the BOI website (http://boi.gov.ph/). The BOI was tasked to update the investment priorities and formulate a Strategic Investment Priorities Plan to replace the IPP in light of the enactment of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act on March 26, 2021 under the Comprehensive Tax Reform Program.

Domestic-oriented foreign-owned enterprises whose foreign ownership exceeds 40 percent may qualify for BOI incentives, such as specific tax credits and tax exemptions, if the enterprise’s proposed activity is listed in the SIPP or meets the criteria of industry tiers and/or location.

The first package of the Tax Reform for Acceleration and Inclusion (TRAIN) law, which took effect January 1, 2018, removed the 15 percent special tax rate on gross income of employees of multinational enterprises’ regional headquarters (RHQ) and regional operating headquarters (ROHQ) located in the Philippines. RHQ and ROHQ employees are now subject to regular income tax rates, usually at higher and less competitive rates than before the implementation of the TRAIN law.

Export-oriented businesses enjoy preferential tax treatment when located in export processing zones, free trade zones, and certain industrial estates, collectively known as economic zones, or ecozones. Businesses located in ecozones are considered outside customs territory and are allowed to import capital equipment and raw material free of customs duties, taxes, and other import restrictions. Goods imported into ecozones may be stored, repacked, mixed, or otherwise manipulated without being subject to import duties and are exempt from the Bureau of Customs’ Selective Pre-shipment Advance Classification Scheme. While some ecozones are designated as both export processing zones and free trade zones, individual businesses within them are only permitted to receive incentives under a single category.

The BOI imposes a higher export performance requirement on foreign-owned enterprises (70 percent of production) than on Philippine-owned companies (50 percent of production) when providing incentives under SIPP.

Companies registered with BOI and PEZA may employ foreign nationals in supervisory, technical, or advisory positions for five years from date of registration (possibly extendable upon request). Top positions and elective officers of majority foreign-owned BOI-registered enterprises (such as president, general manager, and treasurer, or their equivalents) are exempt from employment term limitation. Foreigners intending to work locally must secure an Alien Employment Permit from the Department of Labor and Employment (DOLE), renewable every year with the duration of employment (which in no case shall exceed five years). The BOI and PEZA facilitate special investor’s resident visas with multiple entry privileges and extend visa facilitation assistance to foreign nationals, their spouses, and dependents.

The 2006 Biofuels Act establishes local content requirements for diesel and gasoline. Regarding diesel, only locally produced biodiesel is permitted. For gasoline, all local ethanol must be bought off the market before imports are allowed to meet the blend requirement, and the local ethanol production may only be sourced from locally produced sugar/molasses feedstock.

The Philippines does not impose restrictions on cross-border data transfers. Sensitive personal information is protected under the 2012 Data Privacy Act, which provides penalties for unauthorized processing and improper disposal of data even if processed outside the Philippines.

The Philippines recognizes and protects property rights, but the enforcement of laws is weak and fragmented. The Land Registration Authority and the Register of Deeds (http://www.lra.gov.ph/ ), which facilitate the registration and transfer of property titles, are responsible for land administration, with more information available on their websites. Property registration processes are tedious and costly. Multiple agencies are involved in property administration, which results in overlapping procedures for land valuation and titling processes. Record management is weak due to a lack of funds and trained personnel. Corruption is also prevalent among land administration personnel and the court system is slow to resolve land disputes. The Philippines ranked 120th out of 190 economies in terms of ease of property registration in the World Bank’s 2020 Ease of Doing Business report.

The Philippines is not listed on the United States Trade Representative’s (USTR) Special 301 Watch List. The country has a generally robust intellectual property rights (IPR) regime in place, although enforcement is irregular and inconsistent. The total estimated value of counterfeit goods reported seized in 2021 was close to USD 500 million, significantly higher than the USD 193 million recorded in 2020 and the previous record high of USD 472 million in 2018, a sign of enforcement activities returning to pre-pandemic levels. The sale of imported counterfeit goods in local markets has visibly decreased since the start of the COVID-19 pandemic, though the amount of counterfeit goods sold online has dramatically increased due to the shift of most businesses to online activities.

The Intellectual Property (IP) Code provides a legal framework for IPR protection, particularly in key areas of patents, trademarks, and copyrights. The Intellectual Property Office of the Philippines (IPOPHL) is the implementing agency of the IP Code, with more information available on its website (https://www.ipophil.gov.ph/). The Philippines generally has strong patent and trademark laws. IPOPHL’s IP Enforcement Office (IEO) reviews IPR-related complaints and visits establishments reportedly engaged in IPR-related violations. However, weak border protection, corruption, limited enforcement capacity by the government, and lack of clear procedures continue to weaken enforcement. In addition, IP owners still must assume most enforcement and storage costs when counterfeit goods are seized.

Enforcement actions are often not followed by successful prosecutions. The slow and capricious judicial system keeps most IP owners from pursuing cases in court. IP infringement is not considered a major crime in the Philippines and takes a lower priority in court proceedings, especially as the courts become more crowded with criminal cases deemed more serious, which receive higher priority. Many IP owners opt for out-of-court settlements (such as ADR) rather than filing a lawsuit that may take years to resolve in the unpredictable Philippine courts.

The IPOPHL has jurisdiction to resolve certain disputes concerning alleged infringement and licensing through its Arbitration and Mediation Center.

The Philippines has been a member of the World Intellectual Property Organization (WIPO) since 1980. For additional information about treaty obligations and points of contact at the local IP offices, see WIPO’s country profiles at http://www.wipo.int/directory/en/.

The Philippines welcomes the entry of foreign portfolio investments, including in local and foreign-issued equities listed on the Philippine Stock Exchange (PSE). Investments in certain publicly listed companies are subject to foreign ownership restrictions specified in the Constitution and other laws, but the recent amendments to the Public Service Act opened several economic sectors like transportation and telecommunications that were previously closed to 100 percent foreign ownership.

Non-residents are allowed to issue bonds/notes or similar instruments in the domestic market with prior approval from the Central Bank; in certain cases, they may also obtain financing in Philippine pesos from authorized agent banks without prior Central Bank approval.

Although growing, the PSE (with 281 listed firms as of March 2022) lags many of its neighbors in size, product offerings, and trading activity. Efforts are underway to deepen the equity market, including introduction of new instruments (e.g., real investment trusts) and amend listing rules for small and medium enterprises (SME). In 2021, companies raised a record $4.5 billion in capital in PSE, including eight initial public offerings. The growth in market participation of local retail investors also supported robust PSE trading activity over the past year amid a retreat by foreign investors.  The securities market is growing, and while it remains dominated by government bills and bonds, corporate issuances continue to expand due to the favorable interest rate environment, regulatory reforms, and digital transition. Hostile takeovers are uncommon because most companies’ shares are not publicly listed and controlling interest tends to remain with a small group of parties. Cross-ownership and interlocking directorates among listed companies also decrease the likelihood of hostile takeovers.

The Bangko Sentral ng Pilipinas (BSP/Central Bank) does not restrict payments and transfers for current international transactions in accordance with the country’s acceptance of International Monetary Fund Article VIII obligations of September 1995. Purchase of foreign currencies for trade and non-trade obligations and/or remittances requires submission of a foreign exchange purchase application form if the foreign exchange is sourced from banks and/or their subsidiary/affiliate foreign exchange corporations falls within specified thresholds (USD 500,000 for individuals and USD 1 million for corporates/other entities). Purchases above the thresholds are also subject to the submission of minimum documentary requirements but do not require prior Central Bank approval. Meanwhile, a person may freely bring in or carry out foreign currencies up to USD 10,000; more than this threshold requires submission of a foreign currency declaration form.

Credit is generally granted on market terms and foreign investors are able to obtain credit from the liquid domestic market. Some laws require financial institutions to set aside loans for preferred sectors such as agriculture, agrarian reform, and MSMEs. Notwithstanding, bank loans to these sectors remain constrained; for example, MSMEs loans only had a 4.7 percent share of the total banking system loans as of end-June and had been declining since 2015, despite comprising 99 percent of domestic firms. The government has implemented measures to promote lending to preferred sectors at competitive rates, including the establishment of a centralized credit information system, enactment of the 2018 Personal Property Security Law allowing the use of non-traditional collaterals (e.g., movable assets like machinery and equipment and inventories), and the temporary use of MSME loans as commercial banks’ alternative compliance with the reserve requirements against deposit liabilities and substitutes. The government also established the Philippine Guarantee Corporation in 2018 to expand development financing by extending credit guarantees to priority sectors, including MSMEs.

The BSP is a highly respected institution that oversees a stable banking system. It has pursued regulatory reforms promoting good governance and aligning risk management regulations with international standards. The Philippines’ banking system sustained its solid footing amid the pandemic, with capital adequacy ratios well above the Bank for International Settlements’ eight percent minimum threshold and the BSP’s 10 percent regulatory requirement. Loan quality remained manageable, with a non-performing loan ratio of 4.0 percent as of end-2021. High liquidity coverage ratio (197.6 percent) and net stable funding ratio (143.6 percent) suggest that banks can meet funding requirements during short and medium term liquidity shocks.

Commercial banks constitute more than 93 percent of the total assets of the Philippine banking industry. As of September 2021, the five largest commercial banks represented 60 percent of the total resources of the commercial banking sector. The banking system was liberalized in 2014, allowing the full control of domestic lenders by non-residents and lifting the limits to the number of foreign banks that can operate in the country, subject to central bank prudential regulations. Twenty-six of the 45 universal and commercial banks operating in the country are foreign branches and subsidiaries, including three U.S. banks (Citibank, Bank of America, and JP Morgan Chase). Citibank sold its consumer banking unit to a local bank in 2021, with the transition expected to be completed in 2022. Despite the adequate number of operational banks, 15 percent of cities and municipalities in the Philippines were still without banking presence as of end-June 2021 and 4.4 percent were without any financial access point. The BSP nonetheless has made significant progress in expanding financial inclusion, with 53 percent of adults having bank accounts (from 34 percent in 2019) as of end-June 2021 – closer to its 70 percent target by 2023. Recent payment system reforms through the BSP’s National Retail Payment System have also increased individuals and enterprises’ access to e-wallet accounts, allowing them to do financial transactions without formal bank accounts, increasing the efficiency of financial transactions in the country.

Foreign residents and non-residents may open foreign and local currency bank accounts. Although non-residents may open local currency deposit accounts, they are limited to the funding sources specified under Central Bank regulations. Should non-residents decide to convert to foreign currency their local deposits, sales of foreign currencies are limited up to the local currency balance. Non-residents’ foreign currency accounts cannot be funded from foreign exchange purchases from banks and banks’ subsidiary/affiliate foreign exchange corporations.

The Philippines does not presently have sovereign wealth funds.

State-owned enterprises, known in the Philippines as government-owned and controlled corporations (GOCC), are predominantly in the finance, power, transport, infrastructure, communications, land and water resources, social services, housing, and support services sectors. The Governance Commission for GOCC (GCG) further reduced the number of GOCCs to 118 in 2020 (excluding water districts), from 133 the prior year; a list is available on their website (https://gcg.gov.ph). The government corporate sector has combined assets of USD 150 billion and liability of USD 103 billion (or net assets/equity worth about USD 46 billion) as of end-2020. Using adjusted comprehensive income (i.e., without subsidies, unrealized gains, etc.), the GOCC sector’s income declined by 55 percent to USD 1.1 billion in 2020, the lowest since 2015. GOCCs are required to remit at least 50 percent of their annual net earnings (e.g., cash, stock, or property dividends) to the national government. Competition-related concerns, arising from conflicting mandates for selected GOCCs, exist in the transportation sector. For example, both the Philippine Ports Authority and the Civil Aviation Authority of the Philippines have both commercial and regulatory mandates.

Private and state-owned enterprises generally compete equally. The Government Service Insurance System (GSIS) is the only agency, with limited exceptions, allowed to provide coverage for the government’s insurance risks and interests, including those in build-operate-transfer (BOT) projects and privatized government corporations. Since the national government acts as the main guarantor of loans, stakeholders report GOCCs often have an advantage in obtaining financing from government financial institutions and private banks. Most GOCCs are not statutorily independent, thus could potentially be subject to political interference.

The Philippines is not an OECD member country. The 2011 GOCC Governance Act addresses problems experienced by GOCCs, including poor financial performance, weak governance structures, and unauthorized allowances. The law allows unrestricted access to GOCC account books and requires strict compliance with accounting and financial disclosure standards; establishes the power to privatize, abolish, or restructure GOCCs without legislative action; and sets performance standards and limits on compensation and allowances. The GCG formulates and implements GOCC policies. GOCC board members are limited to one-year terms and subject to reappointment based on a performance rating set by GCG, with final approval by the Philippine President.

The Philippine Government’s privatization program is managed by the Privatization and Management Office (PMO) under the Department of Finance. The privatization of government assets undergoes a public bidding process. Apart from restrictions stipulated in FINL, no regulations discriminate against foreign buyers, and the bidding process appears to be transparent. The PMO is currently reviewing the privatization of government-owned mining assets as part of the Philippine government’s revenue-generating measures adopted during the pandemic. Additional information is available on the PMO website (http://www.pmo.gov.ph/ ).

Responsible Business Conduct (RBC) is regularly practiced in the Philippines, although no domestic laws require it. The Philippine Tax Code provides RBC-related incentives to corporations, such as tax exemptions and deductions. Various non-government organizations and business associations also promote RBC. The Philippine Business for Social Progress (PBSP) is the largest corporate-led social development foundation involved in advocating corporate citizenship practice in the Philippines. U.S. companies report strong and favorable responses to RBC programs among employees and within local communities.

The Philippines is not an OECD member country. The Philippine government strongly supports RBC practices among the business community but has not yet endorsed the OECD Guidelines for Multinational Enterprises to stakeholders.

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities;
• U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises; and;
• Xinjiang Supply Chain Business Advisory 

Department of the Treasury

• OFAC Recent Actions

Department of Labor

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

The Philippines is highly vulnerable to the effects of climate change and is already observing its effects, including increased storms and increased storm intensity of up to 50 percent, as well as climate-sensitive diseases such as dengue fever. Philippine government agencies are researching effects on food security, including crop performance and fish population sustainability. Agriculture sector representatives note climate change has also changed typhoon paths. The Asian Development Bank estimated the Philippines would lose 6 percent of its GDP annually by 2100 if it disregards climate change risks.

While the Philippines emits less than 0.4 percent of the world’s greenhouse gas (GHG) emissions, through its Nationally Determined Contribution (NDC) under the Paris Agreement it committed to reduce or avoid 75 percent of GHG emissions by 2020 to 2030 (compared to a business-as-usual model), with reductions coming from the agriculture, waste, industry, transport, and energy sectors. The NDC commitment is predicated on significant international support (including through grants, concessional finance, and private sector investment) and calls for the Philippine government to ensure access to climate finance, support technology development and transfer, provide capacity building, and implement circular economy and sustainable consumption and production practices.

The Philippines is poised to rely on private investment to fund its planned commercially viable “green” infrastructure investment opportunities, which will support the country’s transition to a low carbon economy. The Philippines Investment Coordination Committee (ICC) and the Committee on Infrastructure of the National Economic Development Authority (NEDA) identified big-ticket green infrastructure projects to be added to the national project pipeline, including opportunities in ICT, water, transportation, the digital economy, and the health care sector. The Philippine Securities and Exchange Commission adopted measures to develop a sustainable financial market, including ASEAN Green Bond Standards, ASEAN Social Bond Standards, and ASEAN Sustainability Bond Standards. In 2020, Philippine sustainable bond issuance totaled USD 3.4 billion, 90 percent of which was issued by Philippine banks or Philippine renewable energy, infrastructure, and real estate companies.

The Philippine Climate Change Commission (CCC) formulated the National Climate Change Action Plan (NCCAP) which outlines the country’s agenda for climate adaptation and mitigation for 2011 to 2028. The NCCAP includes a framework to assign economic value to natural resources. The Philippine Development Plan (2017-2022) also calls for strengthened law enforcement to enhance compliance with existing environmental laws and innovative waste and pollution management strategies (to include mitigating effects from COVID-19 response and medical waste). The NCCAP also encourages public investment in climate change action, while the People’s Survival Fund (managed by the CCC) offers local government units dedicated funding to finance local climate adaptation programs and projects.

Foreign investment restrictions remain in the renewable energy sector. While foreign companies can fully own and operate biomass and geothermal projects in the country, the National Renewable Energy Board interprets the Constitutional provision “all natural resources with energy potential should undergo service contracting” as restricting wind and solar projects to the common 40 percent foreign equity ceiling (similar to public utilities). These restrictions hamper badly needed foreign investment in the wind and solar energy sectors.

Corruption is a pervasive and long-standing problem in both the public and private sectors. The country’s ranking in Transparency International’s 2021 Corruption Perceptions Index declined to the 117th spot (out of 180), its worst score in nine years. The 2021 ranking was also dragged down by the government’s poor response to COVID-19, with Transparency International characterizing it as abusive enforcement of laws and accusing the government of major human rights and media freedom violations. Various organizations, including the World Economic Forum, have cited corruption among the top problematic factors for doing business in the Philippines. The Bureau of Customs is still considered to be one of the most corrupt agencies in the country.

The Philippine Development Plan 2017-2022 outlines strategies to reduce corruption by streamlining government transactions, modernizing regulatory processes, and establishing mechanisms for citizens to report complaints. A front-line desk in the Office of the President, the Presidential Complaint Center, or PCC (https://op-proper.gov.ph/contact-us/ ), receives and acts on corruption complaints from the general public. The PCC can be reached through its complaint hotline, text services (SMS), and social media sites.

The Philippine Revised Penal Code, the Anti-Graft and Corrupt Practices Act, and the Code of Ethical Conduct for Public Officials all aim to combat corruption and related anti-competitive business practices. The Office of the Ombudsman investigates and prosecutes cases of alleged graft and corruption involving public officials. Cases against high-ranking officials are brought before a special anti-corruption court, the Sandiganbayan, while cases against low-ranking officials are filed before regional trial courts.

The Office of the President can directly investigate and hear administrative cases involving presidential appointees in the executive branch and government-owned and controlled corporations. Soliciting, accepting, and/or offering/giving a bribe are criminal offenses punishable by imprisonment, a fine, and/or disqualification from public office or business dealings with the government. Government anti-corruption agencies routinely investigate public officials, but convictions by courts are limited, often appealed, and can be overturned. Recent positive steps include the creation of an investors’ desk at the office of the ombuds Office, and corporate governance reforms of the Securities and Exchange Commission.

The Philippines ratified the United Nations Convention against Corruption in 2003. It is not a signatory to the OECD Convention on Combating Bribery.

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

Office of the Ombudsman
Ombudsman Building, Agham Road, North Triangle
Diliman, Quezon City
Hotline: (+632) 8926.2662
Telephone: (+632) 8479.7300
Email/Website: pab@ombudsman.gov.ph / http://www.ombudsman.gov.ph/  

Presidential Complaint Center
Gama Bldg., Minerva St. corner Jose Laurel St.
San Miguel, Manila
Telephone: (+632) 8736.8645, 8736.8603, 8736.8606
Email: pcc@malacanang.gov.ph / https://op-proper.gov.ph/presidential-action-center/  

Contact Center ng Bayan
Text: (+63) 908 881.6565
Email/Website: email@contactcenterngbayan.gov.ph / https://contactcenterngbayan.gov.ph/  

Terrorist groups and criminal gangs operate around the country. The Department of State publishes a consular information sheet and advises all Americans living in or visiting the Philippines to review the information periodically. A travel advisory is in place for those U.S. citizens considering travel to the Philippines.

Terrorist groups, including the Islamic State East Asia (IS-EA) and its affiliate Abu Sayyaf Group (ASG), the Maute Group, Ansar al-Khalifa Philippines (AKP), the communist insurgent group the New People’s Army, and elements of the Bangsamoro Islamic Freedom Fighters (BIFF), periodically attack civilian targets, kidnap civilians – including foreigners – for ransom, and engage in armed attacks against government security forces. These groups have mostly carried out their activities in the western and central regions of Mindanao, including the Sulu Archipelago and Sulu Sea. Groups affiliated with IS-EA continued efforts to recover from battlefield losses, recruiting and training new members, and staging suicide bombings and attacks with improvised explosive devices (IEDs) and small arms that targeted security forces and civilians.

The Philippines’ most significant human rights problems are killings allegedly undertaken by vigilantes, security forces, and insurgents; cases of apparent governmental disregard for human rights and due process; official corruption; shrinking civic spaces; and a weak and overburdened criminal justice system notable for slow court procedures, weak prosecutions, and poor cooperation between police and investigators. In 2021, the Philippines continued to see red-tagging (the act of labelling, branding, naming, and accusing individuals or organizations of being left-leaning, subversives, communists, or terrorists that is used as a strategy by state agents against those perceived to be “threats” or “enemies of the State”), arrests, and killings of human rights defenders and members of the media.

President Duterte’s administration continued its nationwide campaign against illegal drugs, led primarily by the Philippine National Police (PNP) and the Philippine Drug Enforcement Agency (PDEA), which continues to receive worldwide attention for its harsh tactics. In 2021, the government retained its renewed focus on antiterrorism with a particular emphasis on communist insurgents. In addition to Philippine military and police actions against the insurgents, the Philippine government also pressured political groups and activists – accusing them of links to the NPA, often without evidence. The Anti-Terrorism Act of 2020, signed into law on July 3, intends to prevent, prohibit, and penalize terrorism in the country, although critics question whether law enforcement and prosecutors might be able to use the law to punish political opponents and endanger human rights. Following the passage of the Antiterrorism Act of 2020, various human rights groups and private individuals filed petitions questioning the constitutionality of the act. On December 9, the Supreme Court announced its ruling that only two specific provisions of the bill were unconstitutional: first, making dissent or protest a crime if such act had an intent to cause harm; and second, allowing the Anti-terrorism Council to designate someone a terrorist based solely off UN Security Council designation. The petitioners and other human rights groups said, however, that the ruling against the two provisions still does not provide protection to the Filipino people.

The upcoming May 2022 elections could impact the political and security environment in the country, given the Philippines’ history of election-related violence. The Philippine police and military keep a close watch on certain areas they classify as “election hotspots.”

Managers of U.S. companies in the Philippines report that local labor costs are relatively low and workers are highly motivated, with generally strong English language skills. As of December 2021, the Philippine labor force reached 49.5 million workers, with an employment rate of 93.4 percent and an unemployment rate of 6.6 percent. These figures include employment in the informal sector and do not capture the substantial rates of underemployment in the country. Youths between the ages of 15 and 24 made up more than 28.9 percent of the unemployed. More than half of all employment was in the services sector, with 56.6 percent. Agriculture and industry sectors constitute 25.6 percent and 17.8 percent, respectively.

Compensation packages in the Philippines tend to be comparable with those in neighboring countries. Regional Wage and Productivity Boards meet periodically in each of the country’s 16 administrative regions to determine minimum wages. The non-agricultural daily minimum wage in Metro Manila is approximately USD 10, although some private sector workers receive less. Most regions set their minimum wage significantly lower than Metro Manila. Violation of minimum wage standards is common, especially non-payment of social security contributions, bonuses, and overtime. Philippine law also provides for a comprehensive set of occupational safety and health standards. The Department of Labor and Employment (DOLE) has responsibility for safety inspection, but a shortage of inspectors has made enforcement difficult.

The Philippine Constitution enshrines the right of workers to form and join trade unions. The trend among firms using temporary contract labor to lower employment costs continues despite government efforts to regulate the practice. The DOLE Secretary has the authority to end strikes and mandate a settlement between parties in cases involving national interest. DOLE amended its rules concerning disputes in 2013, specifying industries vital to national interest: hospitals, the electric power industry, water supply services (excluding small bottle suppliers), air traffic control, and other industries as recommended by the National Tripartite Industrial Peace Council (NTIPC). Economic zones often offer on-site labor centers to assist investors with recruitment. Although labor laws apply equally to economic zones, unions have noted some difficulty organizing inside the zones.

The Philippines is signatory to all International Labor Organization (ILO) core conventions but has faced challenges with enforcement. Unions allege that companies or local officials use illegal tactics to prevent workers from organizing. The quasi-judicial National Labor Relations Commission reviews allegations of intimidation and discrimination in connection with union activities. Meanwhile, the NTIPC monitors the application of international labor standards.

Reports of forced labor in the Philippines continue, particularly in connection with human trafficking in the commercial sex, domestic service, agriculture, and fishing industries, as well as online sexual exploitation of children.

John Avrett, Economic Officer
U.S. Embassy Manila
1201 Roxas Boulevard, Manila, Philippines
Telephone: (+632) 5301.2000
Email: ManilaEcon@state.gov