Policies Towards Foreign Direct Investment

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

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

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

Other Investment Policy Reviews

Not applicable.

Business Facilitation

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

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

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

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

Outward Investment

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

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

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

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

Transparency of the Regulatory System

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

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

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

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

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

International Regulatory Considerations

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

Legal System and Judicial Independence

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

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

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

Laws and Regulations on Foreign Direct Investment

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

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

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

Competition and Antitrust Laws

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

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

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

Expropriation and Compensation

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

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

International Commercial Arbitration and Foreign Courts

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

Bankruptcy Regulations

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

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

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

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

Investment Incentives

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

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

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

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

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

Foreign Trade Zones/Free Ports/Trade Facilitation

Not applicable

Performance and Data Localization Requirements

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

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

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

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

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

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

Real Property

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

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

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

Intellectual Property Rights

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

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

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

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

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

Capital Markets and Portfolio Investment

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

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

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

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

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

Money and Banking System

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

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

Foreign Exchange and Remittances

Foreign Exchange

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

Remittance Policies

Not applicable

Sovereign Wealth Funds

Austria has no sovereign wealth funds.

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

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

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

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

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

Privatization Program

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

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

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

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

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

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

Additional Resources

Department of State

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

Department of Labor

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

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

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

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

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

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

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

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

Resources to Report Corruption

Contacts at government agencies responsible for combating corruption:

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

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

Contact at “watchdog” organization:

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

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

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

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

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

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

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

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

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

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

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

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

Policies Towards Foreign Direct Investment

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

Screening of FDI

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

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

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

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

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

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

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

Other Investment Policy Reviews

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

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

• OECD Report: http://www.oecd.org/economy/brazil-economic-snapshot/
• IMF Report: https://www.imf.org/en/Publications/CR/Issues/2020/12/01/Brazil-2020-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-49927
• WTO Report: https://www.wto.org/english/tratop_e/tpr_e/tp458_e.htm

Business Facilitation

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

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

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

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

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

References:

• https://investmentpolicy.unctad.org/country-navigator provides investment measures, laws and treaties enacted by selected countries.
• http://www.doingbusiness.org/data/ provides indicators from economies on the ease of starting a limited liability company.
• GER.co provides links to business registration sites worldwide.

Outward Investment

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

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

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

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

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

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

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

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

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

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

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

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

Transparency of the Regulatory System

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

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

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

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

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

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

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

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

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

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

International Regulatory Considerations

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

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

Legal System and Judicial Independence

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

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

Laws and Regulations on Foreign Direct Investment

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

Competition and Antitrust Laws

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

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

Expropriation and Compensation

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

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

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

International Commercial Arbitration and Foreign Courts

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

Bankruptcy Regulations

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

Investment Incentives

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

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

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

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

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

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

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

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

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

Performance and Data Localization Requirements

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

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

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

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

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

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

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

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

Real Property

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

Intellectual Property Rights

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

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

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

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

Capital Markets and Portfolio Investment

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

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

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

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

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

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

Money and Banking System

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

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

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

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

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

Foreign Exchange and Remittances

Foreign Exchange

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

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

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

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

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

Remittance Policies

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

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

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

Sovereign Wealth Funds

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

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

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

Privatization Program

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

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

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

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

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

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

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

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

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

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

Additional Resources

Department of State

• Country Reports on Human Rights Practices (https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);
• Trafficking in Persons Report (https://www.state.gov/trafficking-in-persons-report/);
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities (https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;
• North Korea Sanctions & Enforcement Actions Advisory (https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf).

Department of Labor

• Findings on the Worst forms of Child Labor Report (https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings);
• List of Goods Produced by Child Labor or Forced Labor (https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods);
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World (https://www.dol.gov/general/apps/ilab) and;
• Comply Chain (https://www.dol.gov/ilab/complychain/).

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

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

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

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

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

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

Resources to Report Corruption

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

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

stpc.dpc@cgu.gov.br

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* Source for Host Country Data: https://www.bcb.gov.br and https://www.ipea.gov.br/portal/

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

Policies Towards Foreign Direct Investment

The Philippines seeks foreign investment to generate employment, promote economic development, and contribute to inclusive and sustained growth.  The Board of Investments (BOI) and Philippine Economic Zone Authority (PEZA) are the country’s lead investment promotion agencies (IPAs).  They provide incentives and special investment packages to investors. 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, 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, including San Miguel, Ayala, Aboitiz Equity Ventures, and SM Investments, dominate the economic landscape, crowding out other smaller businesses.

Limits on Foreign Control and Right to Private Ownership and Establishment

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 1991 Foreign Investment Act (FIA) 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 and will be updated once the Strategic Investment Priorities Plan (SIPP) is drafted.  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; and manufacturing and distribution of nuclear, biological, chemical and radiological weapons, and anti-personnel mines.  With the exception of the practices of law, radiologic and x-ray technology, and marine deck and marine engine officers, other laws and regulations on professions allow foreigners to practice in the Philippines if their country permits reciprocity for Philippine citizens, these 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 prevent this from taking place.

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 lands; 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).

Retail trade enterprises with capital of less than USD 2.5 million, or less than USD 250,000, for retailers of luxury goods, are 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.

Other Investment Policy Reviews

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 Facilitation

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 Administrations’ landmark law, Republic Act No. 11032 or the Ease of Doing Business and Efficient Government Service Delivery Act of 2018 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/).  It legislates standardized deadlines for government transactions, a single business application form, a one-stop-shop, automation of business permits processing, a zero-contact policy, and a central business databank.  Implementing rules and regulations for the Act was signed in 2019 (http://arta.gov.ph/pages/IRR.html).  It created an Anti-Red Tape Authority (ARTA) under the Office of the President that oversees national policy on anti-red tape issues and implements reforms to improve competitiveness rankings.  It also monitors compliance of agencies and issue 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 this landmark legislation, the Philippines jumped 29 notches in the World Bank’s 2020 Doing Business Report ranking 95th from its previous 124th rank 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.

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.

Outward Investment

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.

The Philippines has neither a bilateral investment nor a free trade agreement with the United States, but it utilizes the Generalized System of Preferences (GSP – https://ustr.gov/issue-areas/trade-development/preference-programs/generalized-system-preference-gsp), which is yet to be renewed.  The only bilateral free trade agreement the Philippines has is with Japan.  The Philippines has signed bilateral investment agreements with 37 countries or entities:  Argentina, Australia, Austria, Bangladesh, Belgium-Luxembourg Economic Union, Cambodia, Canada, Chile, China, Czech Republic, Denmark, Finland, France, Germany, India, Indonesia, Iran, Italy, Kuwait, Mongolia, Myanmar, Netherlands, Pakistan, Portugal, Republic of Korea, Romania, Russian Federation, Saudi Arabia, Spain, Sweden, Switzerland, Syria, Taiwan, Thailand, Turkey, United Kingdom, and Vietnam.

The Philippines is party to ASEAN regional trade agreements, including an investment chapter with trading partners Australia and New Zealand, Republic of Korea, India, Japan, and China.  It also has an investment agreement with Iceland, Liechtenstein, Norway, and Switzerland under the Philippines-European Free Trade Association (EFTA) Free Trade Agreement.  On November 15, the Philippines along with 14 other Asia-Pacific countries, signed the Regional Comprehensive Economic Partnership (RCEP) trade agreement.  The agreement will be implemented after a ratification process, which could take up to two years.

The Philippines has a tax treaty with United States to avoid double taxation and provide procedures for resolving interpretative disputes and tax enforcement in both countries.  The treaty encourages bilateral trade and investment by allowing the exchange of capital, goods, and services under clearly defined tax rules and, in some cases, preferential tax rates or tax exemptions.

U.S. recipients of royalty income qualify for preferential tax rates (currently 10 percent) under the most favored nation clause of the United States-Philippines tax treaty.  A preferential tax treaty rate of 15 percent applies to dividends and interest income from bona fide loans; and 10 percent on interest income from government bonds.  The Philippine Supreme Court ruled in 2013 that securing a tax treaty relief ruling from the Bureau of Internal Revenue (BIR) is not a legal requirement to qualify for preferential treatment and tax treaty rates; however, based on experience, tax experts generally still advise filing a tax treaty relief application to avoid potential challenges or controversies.  Despite efforts to streamline processes, taxpayers find documentation requirements for tax treaty relief applications burdensome.  The volume of tax treaty relief applications has resulted in processing delays, with most applications reportedly pending for over a year.  Inconsistent taxation rulings are also a concern.

Given the recent updates on tax rulings, the BIR rules and regulations for tax accounting are yet to be fully harmonized with the Philippine Financial Reporting Standards.  The BIR requires taxpayers to maintain records in case of further audits of financial statements and income tax returns.  Additional information regarding BIR regulations is available on the BIR website (https://www.bir.gov.ph/).

The Philippines and United States signed a reciprocal Inter-Governmental Agreement (IGA) in July 2015 for automatic exchange of information between tax authorities to implement the U.S. Foreign Account Tax Compliant Act (FATCA).  The bilateral agreement has yet to enter into force pending completion of domestic legal remedies to overcome stringent bank secrecy restrictions to the disclosure/sharing of information.

Transparency of the Regulatory System

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 official gazette, available online, 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 come up with their respective agencies’ implementation guidelines.  The order is criticized for its long list of exceptions, rendering 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.

International Regulatory Considerations

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.  However, the various implementing rules and regulations to execute specific provisions have not been completed by the Department of Finance and the Bureau of Customs as of April 2020.

Legal System and Judicial Independence

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) Court of Appeals (appellate courts).  Special courts include the “Sandiganbayan” (anti-graft court for public officials) and the Court of Tax Appeals.  Several 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.

Laws and Regulations on Foreign Direct Investment

The Fiscal Incentives Review Board (FIRB) is the ultimate governing body that oversees the administration and grant of tax incentives by investments promotions agencies (IPAs).  It also determines the target performance metrics used as conditions to avail of tax incentives and reviews, approve, 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), identified by the National Economic and Development Authority (NEDA) and 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 PEZAs to regulate and promote investments in export-oriented manufacturing and service facilities inside special economic zones, including grants of fiscal and non-fiscal incentives.

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

Competition and Antitrust Laws

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.

Expropriation and Compensation

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.

Dispute Settlement

ICSID Convention and New York Convention

The Philippines is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the New York Convention.

Investor-State Dispute Settlement

The Philippines is signatory to various bilateral investment treaties that recognize international arbitration of investment disputes.  Since 2002, the Philippines has been respondent to five investment dispute cases filed before the ICSID.  Details of cases involving the Philippines are available on the ICSID website (https://icsid.worldbank.org/en/).

International Commercial Arbitration and Foreign Courts

Investment disputes can take years to resolve due to systemic problems in Philippine courts.  Lack of resources, understaffing, and corruption make the already complex court processes protracted and expensive.  Several laws on alternative dispute resolution (ADR) mechanisms (i.e., arbitration, mediation, negotiation, and conciliation) were approved to decongest clogged court dockets.  Public-Private Partnership (PPP) infrastructure contracts are required to include ADR provisions to make resolving disputes less expensive and time-consuming.

A separate action must be filed for foreign judgments to be recognized or enforced under Philippine law.  Philippine law does not recognize or enforce foreign judgments that run counter to existing laws, particularly those relating to public order, public policy, and good customary practices.  Foreign arbitral awards are enforceable upon application in writing to the regional trial court with jurisdiction.  The petition may be filed any time after receipt of the award.

Bankruptcy Regulations

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 ranked 65th out of 190 economies, and ninth among 25 economies from East Asia and the Pacific, in the World Bank’s 2020 Ease of Doing Business report in terms of resolving insolvency and bankruptcy cases.

Investment Incentives

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 2017 IPP provides incentives to the following activities: manufacturing (e.g., agro-processing, modular housing components, machinery, and equipment); agriculture, fishery, and forestry; integrated circuit design, creative industries, and knowledge-based services (e.g., IT-Business Process Management services for the domestic market, repair/maintenance of aircraft, telecommunications, etc.); healthcare (e.g., hospitals and drug rehabilitation centers); mass housing; infrastructure and logistics (e.g., airports, seaports, and PPP projects); 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 2017 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 planned amendments in the tax incentive scheme of the Philippines under the Comprehensive Tax Reform Program (CREATE).

In the current set-up, BOI-registered enterprises that locate in less-developed areas are entitled to pioneer incentives and can deduct 100 percent of the cost of necessary infrastructure work and labor expenses from taxable income.  Pioneer status can be granted to enterprises producing new products or using new methods, goods deemed highly essential to the country’s agricultural self-sufficiency program, or goods utilizing non-conventional fuel sources.  Furthermore, an enterprise with more than 40 percent foreign equity that exports at least 70 percent of its production may be entitled to incentives even if the activity is not listed in the IPP.  Export-oriented firms with at least 50 percent of revenues derived from exports may register for additional incentives under the 1994 Export Development Act.

Multinational entities that establish regional warehouses for the supply of spare parts, manufactured components, or raw materials for foreign markets also enjoy incentives on imports that are re-exported, including exemption from customs duties, internal revenue taxes, and local taxes.  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 subjected to regular income tax rates, usually at higher and less competitive rates.

Foreign Trade Zones/Free Ports/Trade Facilitation

Export-related 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.

Philippine Economic Zone Authority (PEZA)

PEZA operates 379 ecozones, primarily in manufacturing, IT, tourism, medical tourism, logistics/warehousing, and agro-industrial sectors.  PEZA manages four government-owned export-processing zones (Mactan, Baguio, Cavite, and Pampanga) and administers incentives to enterprises in other privately owned and operated ecozones.  Any person, partnership, corporation, or business organization, regardless of nationality, control and/or ownership, may register as an export, IT, tourism, medical tourism, or agro-industrial enterprise with PEZA, provided the enterprise physically locates its activity inside any of the ecozones.  PEZA administrators have earned a reputation for maintaining a clear and predictable investment environment within the zones of their authority (http://www.peza.gov.ph/index.php/economic-zones/list-of-economic-zones/operating-economic-zones).

Bases Conversion Development Authority (BCDA) and Subic Bay Metropolitan Authority (SBMA)

The ecozones located inside former U.S. military bases were established under the 1992 Bases Conversion and Development Act.  The BCDA (http://www.bcda.gov.ph/) operates Clark Freeport Zone (Angeles City, Pampanga), John Hay Special Economic Zone (Baguio), Poro Point Freeport Zone (La Union), and Bataan Technology Park (Morong, Bataan).  The SBMA operates the Subic Bay Freeport Zone (Subic Bay, Zambales).  Clark and Subic have their own international airports, power plants, telecommunications networks, housing complexes, and tourist facilities.  These ecozones offer comparable incentives to PEZA.  Enterprises already receiving incentives under the BCDA law are disqualified to receive incentives and benefits offered by other laws.

Other Zones

The Phividec Industrial Estate (Misamis Oriental Province, Mindanao) is governed by Phividec Industrial Authority (PIA) (http://www.piamo.gov.ph/), a government-owned and controlled corporation.  Other ecozones are Zamboanga City Economic Zone and Freeport (Zamboanga City, Mindanao) (http://www.zfa.gov.ph/), Cagayan Special Economic Zone (CEZA) and Freeport (Santa Ana, Cagayan Province) (http://ceza.gov.ph/), and Freeport Area of Bataan (FAB) (Mariveles, Bataan).  CEZA grants gaming licenses in addition to offering export incentives.  The Regional Economic Zone Authority (Cotabato City, Mindanao) (https://reza.bangsamoro.gov.ph/) has been operated by the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM).  The FAB is operated by the Authority of the Freeport Area of Bataan (AFAB) (https://afab.gov.ph/).  The incentives available to investors in these zones are similar to PEZA but administered independently.

Performance and Data Localization Requirements

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.

Real Property

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.

Intellectual Property Rights

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 2020 was USD180 million, lower than 2019’s USD 460 million.  The closure of commercial establishments and a strict three-month lockdown due to the COVID-19 pandemic,impacted enforcement activities.  The sale of imported counterfeit goods in local markets has visibly decreased, 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 out 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.

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/.

Resources for Rights Holders

Contacts at Mission:

Douglas Fowler, Economic Officer
Karen Ang, Economic Specialist
Economic Section, U.S. Embassy Manila
Telephone: (+632) 5301.2000
Email: ManilaEcon@state.gov

A list of local lawyers can be found on the U.S. Embassy’s website:  https://ph.usembassy.gov/u-s-citizen-services/attorneys/.

Capital Markets and Portfolio Investment

The Philippines welcomes the entry of foreign portfolio investments, including 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.  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 271 listed firms as of end-2020) lags behind 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 plans to amend listing rules for small and medium enterprises (SME).  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 and recent regulatory reforms.  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 to 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 (currently 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 carryout 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.  However, 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, lending to MSMEs only amount to 5.9 percent of the total banking system loans 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 and 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).  The government also established the Philippine Guarantee Corporation in 2018 to expand development financing by extending credit guarantees to priority sectors, including MSMEs.

Money and Banking System

The Bangko Sentral ng Pilipinas (BSP/Central Bank) is a highly respected institution that oversees a stable banking system.  The Central Bank has pursued regulatory reforms promoting good governance and aligning risk management regulations with international standards.  Capital adequacy ratios are well above the eight percent international standard and the Central Bank’s 10 percent regulatory requirement.  The non-performing loan ratio was at 3.7 percent as of end-2020, and there is ample liquidity in the system, with the liquid assets-to-deposits ratio estimated at about 53 percent.  Commercial banks constitute more than 93 percent of the total assets of the Philippine banking industry.  As of September 2020, 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 46 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 has the largest presence among the foreign bank branches and currently ranks 12th overall in terms of assets.  Despite the adequate number of operational banks, 31 percent of cities and municipalities in the Philippines were still without banking presence as of end-2019 and 4.6 percent were without any financial access point. The level of bank account penetration – the percentage of adults with a formal transaction account – stands at 34.5 percent, nearly halfway to the central bank goal of 70 percent by 2023.

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.

Foreign Exchange and Remittances

Foreign Exchange

The Bangko Sentral ng Pilipinas (Central Bank) has actively pursued reforms since the 1990s to liberalize and simplify foreign exchange regulations.  As a general rule, the Central Bank allows residents and non-residents to purchase foreign exchange from banks, banks’ subsidiary/affiliate foreign exchange corporations, and other non-bank entities operating as foreign exchange dealers and/or money changers and remittance agents to fund legitimate foreign exchange obligations, subject to provision of information and/or supporting documents on underlying obligations.  No mandatory foreign exchange surrender requirement is imposed on exporters, overseas workers’ incomes, or other foreign currency earners; these foreign exchange receipts may be sold for pesos or retained in foreign exchange in local and/or offshore accounts.  The Central Bank follows a market-determined exchange rate policy, with scope for intervention to smooth excessive foreign exchange volatility.

Remittance Policies

Foreign exchange policies do not require approval of inward foreign direct and portfolio investments unless the investor will purchase foreign currency from banks to convert its local currency proceeds or earnings for repatriation or remittance.  Registration of foreign investments with the Central Bank or custodian banks is generally optional.  Duly registered foreign investments are entitled to full and immediate repatriation of capital and remittance of dividends, profits, and earnings.  The Central Bank particularly requires foreign exchange for divestment purposes to be directly remitted to the account of non-resident investor on the date of purchase, with limited exemptions.  To repatriate capital from investments that did not fully materialize, non-resident investors can exchange excess local currencies provided at least 50 percent of inwardly remitted foreign exchange have been invested onshore, except for certain conditions.

As a general policy, government-guaranteed private sector foreign loans/borrowings (including those in the form of notes, bonds, and similar instruments) require prior Central Bank approval.  Although there are exceptions, private sector loan agreements should also be registered with the Central Bank if serviced through the purchase of foreign exchange from the banking system.

The Philippines strengthened its Anti-Money Laundering Act (AMLA) on January 29, 2021. The amended law expands covered entities and empowers the Anti-Terrorism Council to designate covered persons.

Sovereign Wealth Funds

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.  There were 133 operational and functioning GOCCs as of end-2020; a list is available on the Governance Commission for GOCC [GCG] website (https://gcg.gov.ph).  The government corporate sector has a combined asset of USD 300 billion and liability of  USD 210 billion (or net assets/equity worth about USD 9 billion) as of end-2019.  Its total income increased by 3.3 percent to  USD 33 billion during the year, while total expense rose by 0.6 percent to USD 24 billion; these result in a profit of USD 9 billion.  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.

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.

OECD Guidelines on Corporate Governance of SOEs

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 term and subject to reappointment based on a performance rating set by GCG, with final approval by the Philippine President.

Privatization Program

The Philippine Government’s privatization program is managed by the Privatization Management Office (PMO) under the Department of Finance (DOF).  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.  Additional information is available on the PMO website (http://www.pmo.gov.ph/index.htm).

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.

OECD Guidelines for Multinational Enterprises

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.

Additional Resources

Department of State

• Country Reports on Human Rights Practices (https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);
• Trafficking in Persons Report (https://www.state.gov/trafficking-in-persons-report/);
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities (https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;
• North Korea Sanctions & Enforcement Actions Advisory (https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf)

Department of Labor

• Findings on the Worst forms of Child Labor Report (https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings ) and;
• List of Goods Produced by Child Labor or Forced Labor (https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods).
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World (https://www.dol.gov/general/apps/ilab) and;
• Comply Chain (https://www.dol.gov/ilab/complychain/).

Corruption is a pervasive and long-standing problem in both the public and private sectors.  The country’s ranking in Transparency International’s Corruption Perceptions Index declined to the 115th spot (out of 180), its worst score in eight years.  Philippine efforts to control corruption appears stagnant since 2012.  The ranking was also dragged by the government’s poor response to COVID-19, having been characterized as abusive enforcement of and major violations of human rights and media freedom, according to Transparency International.  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, with more information available on its website.  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 Ombudsman’s Office, and corporate governance reforms of the Securities and Exchange Commission.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

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

Resources to Report Corruption

Contact at government agency or agencies 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 contemplating travel to the Philippines.

Terrorist groups, including the ISIS-Philippines affiliated Abu Sayyaf Group (ASG), the Maute Group, Ansar al-Khalifa Philippines (AKP) 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 ISIS-Philippines 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.

In 2017, ISIS-affiliated groups in Mindanao occupied and held siege to Marawi City for five months, prompting President Duterte to declare martial law over the entire Mindanao region – approximately one-third of the country’s territory.  After granting multiple extensions of over two and a half years, Congress, with support from the government, allowed martial law to lapse on December 31, 2019.  In expressing its support for the decision, the military cited improvement in the security climate in Mindanao, but also noted that Proclamation 55, a national state of emergency declaration, remained in effect and would be used as necessary.

The Philippines’ most significant human rights problems were 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 2020, the Philippines has seen a number of 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 2020, the government also renewed focus on  anti-terrorism with a particular emphasis against communist insurgents.  In addition to Philippine military and police actions against the insurgents, the Philippine government also pressured a number of 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.

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 October 2020, the Philippine labor force reached 44 million workers, with an employment rate of 91.3 percent and an unemployment rate of 8.7 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 over 19 percent of the unemployed.  More than half of all employment was in the services sector, with 57.2 percent.  Agriculture and industry sectors constitute 24.5 percent and 18.3 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 Philippines 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.

The U.S. International Development Finance Corp. (DFC) provides debt financing, partial credit guarantees, political risk insurance, grants, equity investment, and private equity capital to support U.S. investors and their investments.  It does so under a bilateral agreement with the Philippines.  DFC can provide debt financing, in the form of direct loans and loan guarantees, of up to USD 1 billion per project for business investments, preferably with U.S. private sector participation, covering sectors as diverse as tourism, transportation, manufacturing, franchising, power, infrastructure, and others.  DFC political risk insurance for currency inconvertibility, expropriation, and political violence for U.S. and other investments including equity, loans and loan guarantees, technical assistance, leases, and consigned inventory or equipment is also available for business investments in the Philippines.  Grants are available for projects that are already reasonably developed but need additional, limited funding and specific work – for example technical, environment and social, or legal – in order to be bankable and eligible for DFC financing or insurance.  In all cases, DFC support is available only where sufficient or appropriate investment support is unavailable from local or other private sector financial institutions.  In addition, DFC supports fifteen private equity funds that are eligible to invest in projects within the Philippines.

* Host Country Statistical Sources:
Philippine Statistical Authority (http://psa.gov.ph/nap-press-release/data-charts)
Bangko Sentral ng Pilipinas (http://www.bsp.gov.ph/statistics/efs_ext2.asp#FCDU)

The Philippine Central Bank does not publish or post inward and outward FDI stock broken down by country.  Total stock figures are reported under the “International Investment Position” data that the Central Bank publishes and submits to the International Monetary Fund’s Dissemination Standards Bulletin Board (DSBB).  As of the third quarter of 2020, inward direct investment (i.e. liabilities) is USD 95 billion, while outward direct investment (i.e., assets) is USD 61 billion.

The Philippine Central Bank disaggregates data into equity and debt securities but does not publish or post the stock of portfolio investments assets broken down by country.  Total foreign portfolio investment stock figures are reported under the “International Investment Position” data that Central Bank publishes and submits to the International Monetary Fund’s Dissemination Standards Bulletin Board (DSBB).  As of third quarter 2020, outward portfolio investment (i.e., assets) was USD 30.9 billion, of which USD 3.9 billion was in equity investments and USD 27 billion was in debt securities.

Douglas Fowler, Economic Officer
Karen Ang, Economic Specialist
U.S. Embassy Manila
1201 Roxas Boulevard, Manila, Philippines
Telephone: (+632) 5301.2000
Email: ManilaEcon@state.gov