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Argentina

Executive Summary

Argentina presents significant investment and trade opportunities, particularly in infrastructure, health, agriculture, information technology, energy, and mining. In 2018, President Mauricio Macri continued to reform the market-distorting economic policies of his immediate predecessors. Since entering office in December 2015, the Macri administration has taken steps to reduce bureaucratic hurdles in business creation, enacted some tax reforms, courted foreign direct investment, and attempted to implement labor reforms through sector-specific agreements with unions. However, Argentina’s economic recession coupled with the political stagnation of an election year have reduced the Macri administration’s ability to enact pro-business reforms and have choked international investment to Argentina.

In 2018, Argentina´s economy suffered from stagnant economic growth, high unemployment, and soaring inflation: economic activity fell 2.6 percent and annual inflation rate reached 47.6 percent by the end of year. This deteriorating macroeconomic situation prevented the Macri administration from implementing structural reforms that could address some of the drivers of the stagflation: high tax rates, high labor costs, access to financing, cumbersome bureaucracy, and outdated infrastructure. In September 2018, Argentina established a new export tax on most goods through December 31, 2020, and in January 2019, began applying a similar tax of 12 percent on most exports of services. To account for fluctuations in the exchange rate, the export tax on these goods and services may not exceed four pesos per dollar exported. Except for the case of the energy sector, the government has been unsuccessful in its attempts to curb the power of labor unions and enact the reforms required to attract international investors.

The Macri administration has been successful in re-establishing the country as a world player. Argentina assumed the G-20 Presidency on December 1, 2017, and hosted over 45 G-20 meetings in 2018, culminating with the Leaders’ Summit in Buenos Aires. The country also held the Financial Action Task Force (FATF) presidency for 2017-2018 and served as host of the WTO Ministerial in 2017.

In 2018, Argentina moved up eight places in the Competitiveness Ranking of the World Economic Forum (WEF), which measures how productively a country uses its available resources, to 81 out of 140 countries, and 10 out of the 21 countries in the Latin American and Caribbean region. Argentina is courting an EU-MERCOSUR trade agreement and is increasing engagement with the Organization for Economic Cooperation and Development (OECD) with the goal of an invitation for accession this year. Argentina ratified the WTO Trade Facilitation Agreement on January 22, 2018. Argentina and the United States continue to expand bilateral commercial and economic cooperation, specifically through the Trade and Investment Framework Agreement (TIFA), the Commercial Dialogue, the Framework to Strengthen Infrastructure Investment and Energy Cooperation, and the Digital Economy Working Group, in order to improve and facilitate public-private ties and communication on trade and investment issues, including market access and intellectual property rights. More than 300 U.S. companies operate in Argentina, and the United States continues to be the top investor in Argentina with more than USD $14.9 billion (stock) of foreign direct investment as of 2017.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 85 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 119 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 80 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $14,907 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $13,030 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

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

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

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

Other Investment Policy Reviews

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

Business Facilitation

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

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

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

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

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

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

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

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

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

Outward Investment

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

4. Industrial Policies

Investment Incentives

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

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

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

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

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

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

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

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

Performance and Data Localization Requirements

Employment and Investor Requirements

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

Goods, Technology, and Data Treatment

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

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

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

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

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

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

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

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

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

Investment Performance Requirements

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

Australia

Executive Summary

Australia is generally welcoming to foreign investment as such investment is widely considered to be an essential contributor to Australia’s economic growth and productivity.  The United States is the dominant source of foreign direct investment (FDI) in Australia. According to the U.S. Bureau of Economic Analysis, the stock of U.S. FDI totaled USD168 billion in January 2018.

Australia runs an annual current-account deficit and, therefore, is dependent on foreign investment, both FDI and portfolio investment.  Mining and resources attracts, by far, the largest share of FDI from the United States. Real estate investment is the second largest recipient of FDI from the United States, although remains much smaller than mining investment in absolute terms.  The Australia-United States Free Trade Agreement establishes higher thresholds for screening U.S. investment for most classes of direct investment.

While welcoming toward FDI, Australia does apply a “national interest” test to qualifying types of investment through its Foreign Investment Review Board review process.  Various changes to the foreign investment rules have been made in recent years, primarily aimed at strengthening national security. The Security of Critical Infrastructure Act 2018 was introduced in July 2018, providing information-collection powers to the Critical Infrastructure Centre and requiring the establishment of a register of critical infrastructure assets.  This will facilitate the Centre playing a greater role in advising the Treasurer on particular cases of foreign investment where national security concerns are present. The related Telecommunications Sector Security Reforms came into force in September 2018 to manage national security concerns surrounding investment in the telecommunications sector.

In response to a perceived lack of fairness, the Australian government has tightened anti-tax avoidance legislation targeting multi-national corporations with operations in multiple tax jurisdictions.  While some laws have been complementary to international efforts to address tax avoidance schemes and the use of low-tax countries or tax havens, Australia has also gone further than the international community in some areas.  This trend will likely continue in 2019 as both of the main political parties are considering options to further strengthen anti-avoidance measures focused on multi-national corporations.

Australia has a strong legal system grounded in procedural fairness, judicial precedent, and the independence of the judiciary.  Property rights are well established and enforceable. The establishment of government regulations typically requires consultation with impacted stakeholders and requires approval by a central regulatory oversight body before progressing to the legislative phase.  Anti-bribery and anti-corruption laws exist and Australia performs well in measures of transparency. Finally, Australia’s business environment is generally conducive to foreign companies operating in the country, and it ranks 18th overall in the World Bank’s Ease of Doing Business Index.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 13 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2018 18 of 190 https://www.doingbusiness.org/rankings
Global Innovation Index 2018 20 of 126 https://www.globalinnovationindex.org/content/page/data-analysis
U.S. FDI in partner country ($M USD, stock positions) 2017 USD 169 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 USD 51,360 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

Other than the screening process described in Section 4, there are few limits or restrictions on foreign investment in Australia.  Foreign purchases of agricultural land greater than AUD15 million (USD11 million) is subject to screening. This threshold applies to the cumulative value of agricultural land owned by the foreign investor, including the proposed purchase. However, the agricultural land screening threshold does not affect investments made under the Australia-United States Free Trade Agreement (AUSFTA).  The current threshold remains AUD 1.154 billion (USD808 million) for U.S. non-government investors. Investments made by U.S. non-government investors are subject to inclusion on the foreign ownership register of agricultural land and to Australian Tax Office (ATO) information gathering activities on new foreign investment.

Other Investment Policy Reviews

Australia has not conducted an investment policy review in the last three years through either the OECD or UNCTAD system.  The last WTO review of Australia’s trade policies and practices took place in April 2015, and can be found at https://www.wto.org/english/tratop_e/tpr_e/tp412_e.htm  .  Australia is not scheduled for a WTO trade policy review in 2019.

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

Business Facilitation

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

In registering a business, individuals and entities are required to register as a company with ASIC, which then gives the company an Australian Company Number, registers the company, and issues a Certificate of Registration.  According to the World Bank “Starting a Business” indicator, registering a business in Australia takes 2.5 days, and Australia ranks 7th globally on this indicator.

Outward Investment

Australia generally looks positively towards outward investment as a ways to grow its economy.  There are no restrictions on domestic investors. Austrade, the Export Finance and Insurance Corporation (Efic), and various other government agencies offer assistance to Australian businesses looking to invest abroad, and some sector-specific export and investment programs exist.

4. Industrial Policies

Investment Incentives

The Commonwealth government and state and territory governments provide a range of measures to assist investors with setting up and running a business and undertaking investment.  Types of assistance available vary by location, industry, and the nature of the business activity. Austrade provides coordinated government assistance to attracting FDI and is intended to serve as the national point-of-contact for investment inquiries.  State and territory governments similarly offer a suite of financial and non-financial incentives. Australian and State and Territory Governments provide selected grants to businesses for establishing or expanding a business, or for specific activities such as research.  The Commonwealth Government also provides incentives for companies engaging in research and development (R&D), and delivers a tax offset for expenditure on eligible R&D activities undertaken during the year. R&D activities conducted overseas are also eligible under certain circumstances, and the program is jointly administered by AusIndustry (Government agency) and the Australian Taxation Office (ATO). The Australian Government typically does not offer guarantees on, or jointly finance projects with, foreign investors.

Foreign Trade Zones/Free Ports/Trade Facilitation

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

Performance and Data Localization Requirements

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

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

Australia has a strong framework for the protection of intellectual property (IP), including software source code.  Foreign providers are not required to provide source code to the Government in exchange for operating in Australia. A current government enquiry is investigating the competition impacts of digital platforms, including the market implications of the algorithms used by these platforms and options for mandating the disclosure of these algorithms to regulators.  

The Government introduced legislation to Parliament in 2018 that would require encrypted messaging services to provide decrypted communications to the Government for selected national security purposes (the Telecommunications and Other Legislation Amendment (Assistance and Access) Act 2018).  Parts of this legislation were passed by parliament in December 2018, and the remaining aspects of it are subject to review by a parliamentary committee at the time of writing. Companies relying on secure encryption technologies have expressed concern about the impacts of this legislation on the security of the products, and the lack of sufficient judicial oversight in reviewing government requests for access to encrypted data.

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

Austria

Executive Summary

Austria has a well-developed market economy that welcomes foreign direct investment, particularly in technology and R&D.  The country benefits from a skilled labor force, and a high standard of living, with its capital Vienna consistently placing at the top of global quality-of-life rankings.  

With more than 50 percent of its GDP attributed to exports, Austria’s economy is closely tied to other EU economies, especially Germany’s, its largest trading partner, followed by the U.S.  The economy features a large service sector and an advanced industrial sector specialized in high-quality component parts, especially for vehicles. The agricultural sector is small but highly developed.

Austria’s economy grew from 2017-18.  GDP increased by 2.7 percent in 2018, leading to a decrease in the unemployment rate to 4.8 percent. However, positive momentum has slowed since then, with GDP growth forecast to reach only 1.7 percent in 2019 and 1.6 percent in 2020.

The country’s location between Western European industrialized nations and growth markets in Central, Eastern, and Southeastern Europe (CESEE) has led to a high degree of economic, social, and political integration with fellow European Union (EU) member states and the CESEE.

Some 300 U.S. companies have investments in Austria, and many have expanded their original investment over time.  U.S. Foreign Direct Investment into Austria totaled approximately EUR 14.5 billion (USD 16.5 billion) in 2018, according to the Austrian National Bank, and U.S. companies support over 20,000 jobs in Austria.  Altogether, Austria offers a stable and attractive climate for foreign investors.

The most positive aspects of Austria’s investment climate include:

  • Relatively high political stability;
  • Harmonious labor-management relations and low incidence of labor unrest;
  • Highly skilled labor across sectors;
  • High levels of productivity and international competitiveness;
  • Excellent quality of life through high levels of personal security and high-quality health, telecommunications, and energy infrastructure.

Negative aspects of Austria’s investment climate include:

  • A high overall tax burden;
  • A large public sector and a complex regulatory system with extensive bureaucracy;
  • Low-to-moderate innovation dynamics.

Key sectors that have historically attracted significant investment in Austria:

  • Automotive;
  • Pharmaceuticals;
  • Financial.

Key issue to watch:

  • Austria’s government has announced a comprehensive tax-reform plan for the coming years. This plan includes lowering the corporate tax rate from 25 percent to around 20 percent in 2022, reducing personal income tax in 2021, and increasing the permissible amount of hours worked per week from 50 to 60.  The government is hoping to increase Austria’s attractiveness as a business location by reducing bureaucracy, reducing labor market protections and lowering non-wage labor costs.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 14 of 175 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 26 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 21 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $7,800 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2018 $45,440 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

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 no specific legal, practical or market access restrictions on foreign investment.  American investors have not complained of discriminatory laws against foreign investors. Corporate taxes are relatively low (25 percent flat tax), and the government plans to reduce them further in a tax reform to be implemented by 2022. U.S. citizens and investors have 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 factor in Austria’s lengthy environmental impact assessments in their investment decision-making.  The requirement that over 50 percent of energy providers must be publicly-owned creates a potential additional burden for 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.

Austria’s national investment promotion company, the Austrian Business Agency (ABA), is the first point of contact for foreign companies aiming to establish their own business 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.

Austrian agencies do not press investors to keep investments in the country, but the Federal Economic Chamber (WKO), and the American Chamber of Commerce in Austria (Amcham) carry out annual polls among their members to measure their satisfaction with the business climate, thus providing early warning to the government of problems investors have identified.

Limits on Foreign Control and Right to Private Ownership and Establishment

There is no principal limitation on establishing and owning a business in Austria. A local managing director must be appointed to any newly-started 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 many trades sectors is only granted when certain preconditions are met, such as certificates of competence, and recognition of foreign education.  There are no limitations on ownership of private businesses. Austria maintains an investment screening process for takeovers of 25 percent or more in the sectors of national security and public services such as energy and water supply, telecommunications, and education services, where the Austrian government retains the right of approval. The screening process has been rarely used since its introduction in 2012, but could pose a de facto barrier, particularly in the energy sector. In April 2019, the EU Regulation on establishing a framework for the screening of foreign direct investments into the Union entered into force.  It creates a cooperation mechanism through which EU countries and the EU Commission will exchange information and raise concerns related to specific investments which could potentially threaten the security of EU countries.

Other Investment Policy Reviews

Not applicable.

Business Facilitation

While the World Bank ranks Austria as the 26th best country in 2019 with regard to “ease of doing business” (www.doingbusiness.org), starting a business takes time and requires many procedural steps (Austria ranked 118 in this category in 2019).

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 Federal 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 companies with sole proprietorship, it is possible under certain conditions to use an online registration process via government websites in German 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/ .

According to the World Bank, the average time to set up a company in Austria is 21 days, well above the EU average of 12.5 days.

Outward Investment

The Austrian government encourages outward investment.  There is no special focus on specific countries, but the United States is seen as an attractive target country given the U.S. position as the second biggest market for Austrian exports.  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 in Washington, DC, New York, Chicago, Atlanta, Los Angeles, and San Francisco.  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 in form of contributions to “market access costs,” and also provides “soft subsidies,” such as counselling, legal advice, and marketing support.

4. Industrial Policies

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, 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.

Austria offers financial and tax incentives within EU regional co-funding schemes to firms undertaking projects in economically underdeveloped and rural areas. Eligibility for co-financing subsidies has already shown a decline within the EU “Common Strategic Framework” for the period 2014 to 2020, compared to previous funding periods.

Austria’s Wirtschaftsservice (AWS) is the government’s institution that provides financial incentives for businesses.  Additional information on targeted investment incentives is available at https://www.aws.at/en/ . More detailed information on investment incentives in English language is available on the ABA website (see chapter 2) at http://investinaustria.at/en/ 

Various government agencies in Austria offer attractive 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 €25 million over 5 to 10 years for investments in Austria, with a focus on small and medium-sized companies.

Performance and Data Localization Requirements

If investors want to employ foreign workers from outside the EU in Austria, they need to apply for a work permit with the Austrian Labor Service (AMS).  The AMS only grants that permission if there is no comparable person in the pool of registered unemployed persons in Austria. 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.  The Austrian government in 2017 passed a law that introduces 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 draft law aimed at making Austria more attractive to qualified specialists is expected to go into effect in 2019.  This law addresses problematic visa application requirements regarding minimum salary and housing that have been making it hard for applicants to qualify.

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) was adopted by Austria in May 2018 and 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 February 2019, the DPA initiated proceedings against Austria’s postal service 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.

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.

Belgium

Executive Summary

The Belgian economy is expected to grow 1.3 percent in 2019, primarily driven by domestic demand and net exports. Private consumption growth was slower than in surrounding countries, mainly caused by higher inflation. Low energy prices and interest rates, and a favorable euro/dollar exchange rate continue to stimulate economic growth and fuel exports, especially given Belgium’s unique position as a logistical hub and gateway to Europe.  Since June 2015, the Belgian government has undertaken a series of measures to reduce the tax burden on labor and to increase Belgium’s economic competitiveness and attractiveness to foreign investment. The July 2017 decision to lower the corporate tax rate from 35 to 25 percent is expected to make a further improve the investment climate.

Belgium boasts an open market well connected to the major economies of the world. As a logistical gateway to Europe, host to the EU institutions and a central location closely tied to the major European economies (Germany in particular), Belgium is an attractive market and location for U.S. investors. Foreign and domestic investors are expected to take advantage of improved credit opportunities and increased consumer and business confidence. Finally, Belgium is a highly-developed, long-time economic partner of the United States that benefits from an extremely well-educated workforce, world-renowned research centers, and the infrastructure to support a broad range of economic activities. Brexit, however, creates uncertainties and it is hard to predict what the impact will be on the Belgian economy.

To fully realize Belgium’s employment potential, it will be critical to address the fragmentation of the labor market. Jobs growth accelerated in 2017 and 2018, driven by the cyclical recovery and the positive impact of past reforms. Older workers account for much of the employment increase, whereas progress has been more limited in integrating vulnerable groups—especially immigrants born outside the EU, the young, and the low-skilled. Moreover, large regional disparities in unemployment rates persist, and there is a significant skills mismatch in several key sectors.

Belgium has a dynamic economy and continues to attract significant levels of investment in chemicals, petrochemicals, plastic and composites; environmental technologies; food processing and packaging; health technologies; information and communication; and textiles, apparel and sporting goods, among other sectors.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 17 of 180 https://www.transparency.org/country/BEL
World Bank’s Doing Business Report 2018 45 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 25 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $54,954 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 USD 41.790 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Belgium has traditionally maintained an open economy that is highly dependent on international trade.  Since WWII, foreign investment has played a vital role in the Belgian economy, providing technology and employment.  It is a key economic policy of the government to make Belgium a more attractive destination to foreign investment. Though the federal government regulates important elements of foreign direct investment such as salaries and labor conditions, it is primarily the responsibility of the regions to attract FDI.  Flanders Investment and Trade (FIT), Wallonia Foreign Trade and Investment Agency (AWEX), and Brussels Invest and Export are the three investment promotion agencies who seek to attract FDI to Flanders, Wallonia and the Brussels Capital Region, respectively.

The regional investment promotion agencies have focused their industrial strategy on key sectors including aerospace and defense; agribusiness, automotive and ground transportation; architecture and engineering; chemicals, petrochemicals, plastics and composites; environmental technologies; food processing and packaging; health technologies; information and communication; and services.

Foreign corporations account for about one-third of the top 3,000 corporations in Belgium.  According to Graydon, a Belgian company specializing in commercial and marketing information, there are currently more than one million companies registered in Belgium. The federal government and the regions do not have specific policies that prioritize investment retention or maintain an ongoing dialogue with investors.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are currently no limits on foreign ownership or control in Belgium.  There are no distinctions between Belgian and foreign companies when establishing or owning a business or setting up a remunerative activity.

Other Investment Policy Reviews

Over the past 3 years, the country has not been the subject of third-party investment policy reviews (IPRs) through a multilateral organization such as the OECD, WTO, or UNCTAD.

Business Facilitation

In order to set up a business in Belgium, one must:

  1. Deposit at least 20 percent of the initial capital with a Belgian credit institution and obtain a standard certification confirming that the amount is held in a blocked capital account;
  2. Deposit a financial plan with a notary, sign the deed of incorporation and the by-laws in the presence of a notary, who authenticates the documents and registers the deed of incorporation.  The authentication act must be drawn up in either French, Dutch or German (Belgium’s three official languages);
  3. Register with one of the Registers of legal entities, VAT and social security at a centralized company docket and obtain a company number.

In most cases, the business registration process can be completed within one week.

https://www.business.belgium.be/en/managing_your_business/setting_up_your_business  

http://procedures.business.belgium.be/en/procedures-iframe/?_ga=2.174982369.210217559.1555582522-1537979373.1536327711  

Based on the number of employees, the projected annual turnover and the shareholder class, a company will qualify as a small or medium-sized enterprise (SME) according to the meaning of the Promotion of Independent Enterprise Act of February 10, 1998.  For a small or medium-sized enterprise, registration will only be possible once a certificate of competence has been obtained. The person in charge of the daily management of the company must prove his or her knowledge of business management, with diplomas and/or practical experience. In the Global Enterprise Register, Belgium currently scores 7 out of 10 for ease of setting up a limited liability company.

Business facilitation agencies provide for equitable treatment of women and underrepresented minorities in the economy.

The three Belgian regions each have their own investment promotion agency, whose services are available to all foreign investors.

Outward Investment

The Belgian governments do not promote outward investment as such.  There are also no restrictions to certain countries or sectors, other than those where Belgium applies UN resolutions.

4. Industrial Policies

Investment Incentives

Since the law of August 1980 on regional devolution in Belgium, investment incentives and subsidies have been the responsibility of Belgian’s three regions: Brussels, Flanders, and Wallonia.  Nonetheless, most tax measures remain under the control of the federal government as do the parameters (social security, wage agreements) that govern general salary and benefit levels. In general, all regional and national incentives are available to foreign and domestic investors alike.

Belgian investment incentive programs at all levels of government are limited by EU regulations and are normally kept in line with those of the other EU member states.  The European Commission has tended to discourage certain investment incentives in the belief that they distort the single market, impair structural change, and threaten EU convergence, as well as social and economic cohesion.   In January 2016, the European Commission ordered Belgium to reclaim up to USD 900 million in tax breaks from 36 companies (12 of whom are U.S. companies) going as far back as 2004. The Belgian Government had given these breaks to companies through a series of one-off fiscal rulings. Belgium legally challenged the EC decision and won, but the EC can still appeal the ruling (see above).

In their investment policies, the regions emphasize innovation promotion, research and development, energy savings, environmental cleanliness, exports, and most of all, employment.  The three regional agencies have staff specializing on specific regions of the world, including the United States, and have representation offices in different countries. In addition, the Finance Ministry established a foreign investment tax unit in 2000 to provide assistance and to make the tax administration more “user friendly” to foreign investors.

In 2005, the Belgian Federal Finance Ministry proposed a new investment incentive program in the form of a notional interest rate deduction.  This was adopted by Parliament, and since January 1, 2006, the new tax law permits a corporation established in Belgium, foreign or domestic, to deduct from its taxable profits a percentage of its adjusted net assets linked to the rate of the Belgian long-term state bond.  The law permits all companies operating in Belgium to deduct the “notional” interest rate that would have been paid on their locally invested capital had it been borrowed at a rate of interest equal to the current rate the Belgian government pays on its 10-year bonds. This amount is deducted from profits, thus lowering nominal Belgian corporate taxes.  The applicable interest rate is adjusted annually, but will never be allowed to vary more than one percent (100 basis points) in one year nor exceed 6.5 percent.

Foreign Trade Zones/Free Ports/Trade Facilitation

There are no foreign trade zones or free ports as such in Belgium.  However, the country utilizes the concept of customs warehouses. A customs warehouse is a warehouse approved by the customs authorities where imported goods may be stored without payment of customs duties and VAT.  Only non-EU goods can be placed under a customs warehouse regime. In principle, non-EU goods of any kind may be admitted, regardless of their nature, quantity, and country of origin or destination. Individuals and companies wishing to operate a customs warehouse must be established in the EU and obtain authorization from the customs authorities.  Authorization may be obtained by filing a written request and by demonstrating an economic need for the warehouse.

Performance and Data Localization Requirements

Performance requirements in Belgium usually relate to the number of jobs created. There are no national requirement rules for senior management or board of directors. There are no known cases where export targets or local purchase requirements were imposed, with the exception of military offset programs, which were reintroduced under Prime Minister Verhofstadt in 2006.  While the government reserves the right to reclaim incentives if the investor fails to meet his employment commitments, enforcement is rare. However, in 2012, with the announced closure of an automotive plant in Flanders, the Flanders regional government successfully reclaimed training subsidies that had been provided to the company.

There is currently no requirement for foreign IT providers to share source code and/or provide access to surveillance agencies.  There is for the moment no forced localization, but the European Parliament is currently considering legislative steps in that direction.

Brazil

Executive Summary

Brazil is the second largest economy in the Western Hemisphere behind the United States, and the eighth largest economy in the world, according to the World Bank.  The United Nations Conference on Trade and Development (UNCTAD) named Brazil the fourth largest destination for global Foreign Direct Investment (FDI) flows in 2017.  In recent years, Brazil received more than half of South America’s total incoming FDI, and the United States is a major foreign investor in Brazil. The Brazilian Central Bank (BCB) reported the United States had the largest single-country stock of FDI by final ownership, representing 22 percent of all FDI in Brazil (USD 118.7 billion) in 2017, the latest year with available data.  The Government of Brazil (GoB) prioritized attracting private investment in infrastructure during 2017 and 2018.

The current economic recovery, which started in the first quarter of 2017, ended the deepest and longest recession in Brazil’s modern history.  The country’s Gross Domestic Product (GDP) expanded by 1.1 percent in 2018, below most initial market analysts’ projections of 3 percent growth in 2018.  Analysts forecast a 2 percent growth rate for 2019. The unemployment rate reached 11.6 percent at the end of 2018. Brazil was the world’s fourth largest destination for FDI in 2017, with inflows of USD 62.7 billion, according to UNCTAD.  The nominal budget deficit stood at 7.1 percent of GDP (USD132.5 billion) in 2018 and is projected to end 2019 at around 6.5 percent of GDP (USD 148.5 billion). Brazil’s debt-to-GDP ratio reached 76.7 percent in 2018 with projections to reach 83 percent by the end of 2019.  The BCB has maintained its target for the benchmark Selic interest rate at 6.5 percent since March 2018 (from a high of 13.75 percent at the end of 2016).

President Bolsonaro took office on January 1, 2019, following the interim presidency by President Michel Temer, who had assumed office after the impeachment of former President Dilma Rousseff in August 2016.  Temer’s administration pursued corrective macroeconomic policies to stabilize the economy, such as a landmark federal spending cap in December 2016 and a package of labor market reforms in 2017. President Bolsonaro’s economic team pledged to continue pushing reforms needed to help control costs of Brazil’s pension system, and has made that issue its top economic priority.  Further reforms are also planned to simplify Brazil’s complex tax system. In addition to current economic difficulties, since 2014, Brazil’s anti-corruption oversight bodies have been investigating allegations of widespread corruption that have moved beyond state-owned energy firm Petrobras and a number of private construction companies to include companies in other economic sectors.  

Brazil’s official investment promotion strategy prioritizes the automobile manufacturing, renewable energy, life sciences, oil and gas, and infrastructure sectors.  Foreign investors in Brazil receive the same legal treatment as local investors in most economic sectors; however, there are restrictions in the health, mass media, telecommunications, aerospace, rural property, maritime, and air transport sectors.  The Brazilian Congress is considering legislation to liberalize restrictions on foreign ownership of rural property and air carriers.

Analysts contend that high transportation and labor costs, low domestic productivity, and ongoing political uncertainties hamper investment in Brazil.  Foreign investors also cite concerns over poor existing infrastructure, still relatively rigid labor laws, and complex tax, local content, and regulatory requirements; all part of the extra costs of doing business in Brazil.  

 

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 105 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 109 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 64 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical-cost basis) 2017 $68,272 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $8,600 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Brazil was the world’s fourth largest destination for Foreign Direct Investment (FDI) in 2017, with inflows of USD 62.7 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, insurance, and air transport sectors.  

The Brazilian Trade and Investment Promotion Agency (APEX) 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 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 is: http://www.apexbrasil.com.br/en  .

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 the healthcare (Law 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), insurance (Law 11371/2006), and air transport sectors (Law 13319/2016).  

Screening of FDI

Foreigners investing in Brazil must electronically register their investment with the 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. Santander is the only major wholly foreign-owned retail bank remaining in Brazil.  Brazil’s anti-trust authorities (CADE) approved Itau bank’s purchase of Citibank’s Brazilian retail banking operation in August 2017. In June 2016, CADE approved Bradesco bank’s purchase of HSBC’s Brazilian retail banking operation.  

Currently, foreign ownership of airlines is limited to 20 percent.  Congressman Carlos Cadoca (PCdoB-PE) presented a bill to Brazilian Congress in August of 2015 to allow for 100 percent foreign ownership of Brazilian airlines (PL 2724/2015).  The bill was approved by the lower house, and since March 2019, it is pending a Senate vote. In 2011, the United States and Brazil signed an Air Transport Agreement as a step towards an Open Skies relationship that would eliminate numerical limits on passenger and cargo flights between the two countries.  Brazil’s lower house approved the agreement in December 2017, and the Senate ratified it in March 2018. The Open Skies agreement has now entered into force.

In July 2015, under National Council on Private Insurance (CNSP) Resolution 325, the Brazilian government announced a significant relaxation of some restrictions on foreign insurers’ participation in the Brazilian market, and in December 2017, the government eliminated restrictions on risk transfer operations involving companies under the same financial group.  The new rules revoked the requirement to purchase a minimum percentage of reinsurance and eliminated a limitation or threshold for intra-group cession of reinsurance to companies headquartered abroad that are part of the same economic group. Rules on preferential offers to local reinsurers, which are set to decrease in increments from 40 percent in 2016 to 15 percent in 2020, 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 maintaining a minimum solvency classification issued by a risk classification agency equal to Standard & Poor’s or Fitch ratings of at least BBB-.

In September 2011, Law 12485/2011 removed a 49 percent limit on foreign ownership of cable TV companies, and allowed telecom companies to 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 have to 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. Draft Law 4059/2012, which would lift the limits on foreign ownership of agricultural land,

has been awaiting a vote in the Brazilian Congress since 2015.

Brazil is not a signatory to the World Trade Organization (WTO) Agreement on Government Procurement (GPA), but became an observer in October 2017.  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 when 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 to participate in Brazil’s public sector procurement to help these firms win government tenders.  Foreign companies are often successful in obtaining subcontracting opportunities with large Brazilian firms that win government contracts. Under trade bloc Mercosul’s Government Procurement Protocol, member nations Brazil, Argentina, Paraguay, and Uruguay are entitled to non-discriminatory treatment of government-procured goods, services, and public works originating from each other’s suppliers and providers.  However, only Argentina has ratified the protocol, and per the Brazilian Ministry of Economy website, this protocol has been in revision since 2010, so it has not yet entered into force.

Other Investment Policy Reviews

The Organization for Economic Co-operation and Development’s (OECD) 2018 Brazil Economic Survey of Brazil highlights Brazil as a leading global economy.  However, it notes that high commodity prices and labor force growth will no longer be able to sustain Brazil’s economic growth without deep structural reforms.  While praising the Temer government for its reform plans, the OECD urged Brazil to pass all needed reforms to realize their full benefit. The OECD cautions about low investment rates in Brazil, and cites a World Economic Forum survey that ranks Brazil 116 out of 138 countries on infrastructure as an area in which Brazil must improve to maintain competitiveness.  

The OECD’s March 15, 2019 Enlarged Investment Committee Report BRAZIL: Position Under the OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations noted several areas in which Brazil needs to improve.  These observations include, but are not limited to: restrictions to FDI requiring investors to incorporate or acquire residency in order to invest; lack of generalized screening or approval mechanisms for new investments in Brazil; sectoral restrictions on foreign ownership in media, private security and surveillance, air transport, mining, telecommunication services; and, restrictions for non-residents to own Brazilian flag vessels.  The report did highlight several areas of improvement and the GoB’s pledge to ameliorate several ongoing irritants as well.

The IMF’s 2018 Country Report No. 18/253 on Brazil highlights that a mild recovery supported by accommodative monetary and fiscal policies is currently underway.  But the economy is underperforming relative to its potential, public debt is high and increasing, and, more importantly, medium-term growth prospects remain uninspiring, absent further reforms.  The IMF advises that against the backdrop of tightening global financial conditions, placing Brazil on a path of strong, balanced, and durable growth requires a committed pursuit of fiscal consolidation, ambitious structural reforms, and a strengthening of the financial sector architecture.  The WTO’s 2017 Trade Policy Review of Brazil notes the country’s open stance towards foreign investment, but also points to the many sector-specific limitations (see above). All three reports highlight the uncertainty regarding reform plans as the most significant political risk to the economy.  These reports are located at the following links:

http://www.oecd.org/brazil/economic-survey-brazil.htm  ,

https://www.oecd.org/daf/inv/investment-policy/Code-capital-movements-EN.pdf ,

https://www.imf.org/~/media/Files/Publications/CR/2017/cr17216.ashx  , and https://www.wto.org/english/tratop_e/tpr_e/tp458_e.htm  .

Business Facilitation

A company must register with the National Revenue Service (Receita) 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  .  

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.

4. Industrial Policies

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 southern 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, which will be phased-in to replace the prior subsidized loans starting on January 1, 2018.  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 (a rate that incorporates inflation). The GoB plans to reduce BNDES’s role further as it continues to promote the development of long-term private capital markets.

In January 2015, the GoB eliminated the industrial products tax (IPI) exemptions on vehicles, while keeping all other tax incentives provided by the October 2012 Inovar-Auto program.  Through Inovar-Auto, auto manufacturers were able to apply for tax credits based on their ability to meet certain criteria promoting research and development and local content. Following successful WTO challenges against the trade-restrictive impacts of some of its tax benefits, the government allowed Inovar-Auto program to expire on December 31, 2017.  Although the government has announced a new package of investment incentives for the auto sector, Rota 2030, it remains at the proposal stage, with no scheduled date for a vote or implementation.

On February 27, 2015, Decree 8415 reduced tax incentives for exports, known as the Special Regime for the Reinstatement of Taxes for Exporters, or Reintegra Program.  Decree 8415 reduced the previous three percent subsidy on the value of the exports to one percent for 2015, to 0.1 percent for 2016, and two percent for 2017 and 2018.

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 (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. The major fiscal benefits of the National Broadband Plan (PNBL) and supporting implementation plan (REPNBL-Redes) have either expired or been revoked.  In 2017, Brazil held a public consultation on a National Connectivity Plan to replace the PNBL, but has not yet published a final version.

Under Law 12598/2013, Brazil offers tax incentives ranging from 13 percent to 18 percent to officially classified “Strategic Defense Firms” (must have Brazilian control of voting shares) as well as to “Defense Firms” (can be foreign-owned) that produce identified strategic defense goods.  The tax incentives for strategic firms can apply to their entire supply chain, including foreign suppliers. The law is currently undergoing a revision, expected to be complete in 2018.

Industrial Promotion

The InovAtiva Brasil and Startup Brasil programs support start-ups in the country.  The GoB also uses free trade zones to incentivize industrial production. A complete description of the scope and scale of Brazil’s investment promotion programs and regimes can be found at: http://www.apexbrasil.com.br/en/home  .  

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 came into force in August 2014 and 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.

  1. Tax incentives for locally sourced information and communication technology (ICT) goods and equipment (Basic Production Process (PPB), Law 8248/91, and Portaria 87/2013);
  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.

Presidential Decree 8135/2013 (Decree 8135) regulated the use of IT services provided to the Federal government by privately and state-owned companies, including the provision that Federal IT communications be hosted by Federal IT agencies. In 2015, the Ministry of Planning developed regulations to implement Decree 8135, which included the requirement to disclose source code if requested.  On December 26, 2018, President Michel Temer approved and signed the Decree 9.637/2018, which revoked Decree 8.135/2013 and eliminated the source code disclosure requirements.

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), this was made official in March 2018.  While it does provide for 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, vehicle registration fees, and most fees for public transportation, such as local bus and rail services.  As part of its fiscal adjustment strategy, Brazil sharply increased regulated prices in January 2015.

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.

Decree 7174 from 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.  While the Marco Civil does not require data to be stored in Brazil, any company investing in Brazil should closely track its provisions – as well provisions of other legislation and regulations, including a data privacy bill passed in August 2018 and cloud computing regulations.

Canada

Executive Summary

Canada and the United States (U.S.) have one of the largest and most comprehensive investment relationships in the world. U.S. investors are attracted to Canada’s strong economic fundamentals, its proximity to the U.S. market, its highly skilled work force, and abundant resources. As of 2017, the U.S. had a stock of USD391 billion of foreign direct investment (FDI) in Canada.  U.S. FDI stock in Canada represents 49 percent of Canada’s total investment. Canada’s FDI stock in the U.S. totaled USD523 billion.

U.S. FDI in Canada is subject to the provisions of the Investment Canada Act (ICA), the World Trade Organization (WTO), and the 1994 North American Free Trade Agreement (NAFTA). Chapter 11 of NAFTA contains provisions such as “national treatment” designed to protect cross-border investors and facilitate the settlement of investment disputes.  NAFTA does not exempt U.S. investors from review under the ICA, which has guided foreign investment policy in Canada since its implementation in 1985. The ICA provides for review of large acquisitions by non-Canadian investors and includes the requirement that these investments be of “net benefit” to Canada. The ICA also has provisions for the review of investments on national security grounds.  The Canadian government has blocked investments on only a few occasions.

Canada, the United States, and Mexico completed negotiations for a modernized and rebalanced NAFTA agreement on September 30, 2018.  The new United States-Mexico-Canada Agreement (USMCA) was signed by all three countries November 30, 2018 and will come into force after the completion of the domestic ratification processes by each individual member of the agreement.  The agreement updates NAFTA’s provisions with respect to investment protection rules and investor-state dispute settlement procedures to better reflect U.S. priorities related to foreign investment. All Parties to the agreement have agreed to treat investors and investments of the other Parties in accordance with the highest international standards, and consistent with U.S. law and practice, while safeguarding each Party’s sovereignty and promoting domestic investment.

Although foreign investment is a key component of Canada’s economic development, restrictions remain in key sectors. Under the Telecommunications Act, Canada maintains a 46.7 percent limit on foreign ownership of voting shares for a Canadian telecom services provider. However, a 2012 amendment exempts foreign telecom carriers with less than 10 percent market share from ownership restrictions in an attempt to increase competition in the sector. In May 2018, Canada eased its foreign ownership restrictions in the aviation sector, which increased foreign ownership limits of Canadian commercial airlines to 49 percent from 25 percent. Investment in cultural industries also carries restrictions, including a provision under the ICA that foreign investment in book publishing and distribution must be compatible with Canada’s national cultural policies and be of “net benefit” to Canada. Canada is open to investment in the financial sector, but barriers remain in retail banking.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 9 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2019 22 of 190 doingbusiness.org/rankings
Global Innovation Index 2018 18 of 128 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in Partner Country ($M USD, stock positions) 2017 $391,208 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $47,270 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Canada and the United States (U.S.) have one of the largest and most comprehensive investment relationships in the world. U.S. investors are attracted to Canada’s strong economic fundamentals, its proximity to the U.S. market, its highly skilled work force, and abundant resources. As of 2017, the U.S. had a stock of USD391 billion of foreign direct investment (FDI) in Canada.  U.S. FDI stock in Canada represents 49 percent of Canada’s total investment. Canada’s FDI stock in the U.S. totaled USD523 billion.

U.S. FDI in Canada is subject to the provisions of the Investment Canada Act (ICA), the World Trade Organization (WTO), and the 1994 North American Free Trade Agreement (NAFTA). Chapter 11 of NAFTA contains provisions such as “national treatment” designed to protect cross-border investors and facilitate the settlement of investment disputes.  NAFTA does not exempt U.S. investors from review under the ICA, which has guided foreign investment policy in Canada since its implementation in 1985. The ICA provides for review of large acquisitions by non-Canadian investors and includes the requirement that these investments be of “net benefit” to Canada. The ICA also has provisions for the review of investments on national security grounds.  The Canadian government has blocked investments on only a few occasions.

Canada, the United States, and Mexico completed negotiations for a modernized and rebalanced NAFTA agreement on September 30, 2018.  The new United States-Mexico-Canada Agreement (USMCA) was signed by all three countries November 30, 2018 and will come into force after the completion of the domestic ratification processes by each individual member of the agreement.  The agreement updates NAFTA’s provisions with respect to investment protection rules and investor-state dispute settlement procedures to better reflect U.S. priorities related to foreign investment. All Parties to the agreement have agreed to treat investors and investments of the other Parties in accordance with the highest international standards, and consistent with U.S. law and practice, while safeguarding each Party’s sovereignty and promoting domestic investment.

Although foreign investment is a key component of Canada’s economic development, restrictions remain in key sectors. Under the Telecommunications Act, Canada maintains a 46.7 percent limit on foreign ownership of voting shares for a Canadian telecom services provider. However, a 2012 amendment exempts foreign telecom carriers with less than 10 percent market share from ownership restrictions in an attempt to increase competition in the sector. In May 2018, Canada eased its foreign ownership restrictions in the aviation sector, which increased foreign ownership limits of Canadian commercial airlines to 49 percent from 25 percent. Investment in cultural industries also carries restrictions, including a provision under the ICA that foreign investment in book publishing and distribution must be compatible with Canada’s national cultural policies and be of “net benefit” to Canada. Canada is open to investment in the financial sector, but barriers remain in retail banking.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 9 of 180 http://www.transparency.org/research/cpi/overview  
World Bank’s Doing Business Report “Ease of Doing Business” 2019 22 of 190 doingbusiness.org/rankings  
Global Innovation Index 2018 18 of 128 https://www.globalinnovationindex.org/analysis-indicator  
U.S. FDI in Partner Country ($M USD, stock positions) 2017 $391,208 http://www.bea.gov/international/factsheet/  
World Bank GNI per capita 2017 $47,270 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD  

 

4. Industrial Policies

Investment Incentives

Federal and provincial governments in Canada offer a wide array of investment incentives that municipalities are generally prohibited from offering. The incentives are designed to advance broader policy goals, such as boosting research and development or promoting regional economies. The funds are available to any qualified Canadian or foreign investor who agrees to use the monies for the stated purpose. For example, Export Development Canada can support inbound investment under certain specific conditions (e.g., investment must be export-focused; export contracts must be in hand or companies have a track record; there is a world or regional product mandate for the product to be produced).  The government also announced the USD 940 million Strategic Innovation Fund in 2017, which provides repayable or non-repayable contributions to firms of all sizes across Canada’s industrial and technology

sectors in an effort to grow and expand those industries.  One of the explicit goals of the program is to attract new investments to Canada.

The Liberal government invested USD 730 million over five years, beginning in 2018, to support five business-led supercluster projects that have the potential to accelerate economic and investment growth in Canada.  The superclusters are now operational, and feature projects in digital technologies, food production, advanced manufacturing, artificial intelligence in supply chain management, and ocean industries. 450 businesses, 60 post-secondary institutions, and 180 other partners are involved in the supercluster projects.  Several U.S. firms are participants, including Microsoft, Boeing, Lockheed Martin, and GE.

Several provinces offer an array of incentive programs and services aimed at attracting foreign investment that lower corporate taxes and incentivize research and development. The Province of Quebec officially re-launched its “Plan Nord” (Northern Plan) in April 2015, a 20-year sustainable development investment initiative that is intended to harness the economic, mineral, energy, and tourism potential of Quebec’s northern territory. Quebec’s government created the “Société du Plan Nord” (Northern Plan Company) to attract investors and work with local communities to implement the plan. Thus far, Plan Nord has helped finance mining projects in northern Quebec and began building the necessary infrastructure to link remote mines with ports. The provincial government is actively seeking other foreign investors who desire to take advantage of these opportunities.

Provincial incentives tend to be more investor-specific and are conditioned on applying the funds to an investment in the granting province. For example, Ontario’s Jobs and Prosperity Fund provides USD2.5 billion from 2013 to 2023 to enhance productivity, bolster innovation, and grow Ontario’s exports. To qualify, companies must have substantive operations (generally three years) and at least C10 million in eligible project costs. Alberta offers companies a 10 percent refundable provincial tax credit worth up to C400,000 annually for scientific research and experimental development encouraging research and development in Alberta as well as Alberta Innovation Vouchers worth C15,000 to C50,000 to help small early-stage technology and knowledge-driven businesses in Alberta get their ideas and products to market faster. Newfoundland and Labrador provide vouchers worth 75 percent of eligible project costs up to C15,000 for R&D, performance testing, field trials, and other projects.

Provincial incentives may also be restricted to firms established in the province or that agree to establish a facility in the province. Government officials at both the federal and provincial levels expect investors who receive investment incentives to use them for the agreed purpose, but no enforcement mechanism exists.

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

Performance and Data Localization Requirements

Data localization is an evolving area in Canada. Privacy rules in two Canadian provinces, British Columbia and Nova Scotia, mandate that personal information in the custody of a public body must be stored and accessed only in Canada unless one of a few limited exceptions applies. These laws prevent public bodies such as primary and secondary schools, universities, hospitals, government-owned utilities, and public agencies from using non-Canadian hosting services.

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

China

Executive Summary

China is one of the top global foreign direct investment destinations due to its large consumer base and integrated supply chains.  China remains, however, a relatively restrictive investment environment for foreign investors due to restrictions in key economic sectors.  Obstacles to investment include ownership caps and requirements to form joint venture partnerships with local Chinese firms, as well as the requirement often imposed on U.S. firms to transfer technology as a prerequisite to gaining market access.  While China made modest openings in some sectors in 2018, such as financial services, insurance, new energy vehicles, and shipbuilding, China’s investment environment continues to be far more restrictive than those of its main trading partners, including the United States.

China relies on the Special Administrative Measures for Foreign Investment Access (known as the “nationwide negative list”) to categorize market access restrictions for foreign investors in defined economic sectors.  While China in 2018 reduced some restrictions, foreign participation in many industries important to U.S. investors remain restricted, including financial services, culture, media, telecommunications, vehicles, and transportation equipment.

Even in sectors “open” to foreign investment, foreign investors often face difficulty establishing an investment due to stringent and non-transparent approval processes to gain licenses and other needed approvals.  These restrictions shield inefficient and monopolistic Chinese enterprises in many industries – especially state-owned enterprises (SOEs) and other enterprises deemed “national champions” – from competition against private and foreign companies.  In addition, lack of transparency in the investment process and lack of rule of law in China’s regulatory and legal systems leave foreign investors vulnerable to discriminatory practices such as selective enforcement of regulations and interference by the Chinese Communist Party (CCP) in judicial proceedings.  Moreover, industrial policies such as Made in China 2025 (MIC 2025), insufficient protection and enforcement of intellectual property rights (IPR), requirements to transfer technology, and a systemic lack of rule of law are further impediments to successful foreign investments in China.

During the CCP 19th Party Congress held in October 2017, CCP leadership underscored Party Chairman Xi Jinping’s primacy by adding “Xi Jinping Thought on Socialism with Chinese Characteristics for the New Era” to the Party Charter.  In addition to significant personnel changes, the Party announced large-scale government and Party restructuring plans in early 2018 that further strengthened Xi’s leadership and expanded the role of the Party in all facets of Chinese life: cultural, social, military, and economic.  An increasingly assertive CCP has caused concern among the foreign business community about the ability of future foreign investors to make decisions based on commercial and profit considerations, rather than political dictates from the Party.

Although market access reform has been slow, the Chinese government has pledged greater market access and national treatment for foreign investors and has pointed to key announcements and new developments, which include:

  • On June 28, 2018 the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) jointly announced the release of Special Administrative Measures for Foreign Investment Access (i.e., “nationwide negative list”), which replaced the Foreign Investment Catalogue.  The negative list was reformatted to remove “encouraged” economic sectors and divided restrictions and prohibitions by industry.  Some of the liberalizations were previously announced, like financial services and insurance (November 2017) and automobile manufacturing and shipbuilding (April 2018).  A new version of the negative list is expected to be released in 2019.
  • On June 30, 2018 NDRC and MOFCOM jointly released the Special Administrative Measures for Foreign Investment Access in the Pilot Free Trade Zones (i.e., the Free Trade Zone, or FTZ, negative list).  The FTZ negative list matched the nationwide negative list with a few exceptions, including: foreign equity caps of 66 percent in the development of new varieties corn and wheat (the nationwide cap is 49 percent), removal of joint venture requirements on oil and gas exploration, and removal of the prohibition on radioactive mineral smelting and processing, including nuclear fuel production.
  • On December 25, 2018 the NDRC and MOFCOM jointly released The Market Access Negative List.  This negative list, unlike the nationwide negative list that applies only to foreign investors, defines prohibitions and restrictions to investment for all investors, both foreign and domestic.  This negative list attempted to unify guidance on allowable investments previously found in piecemeal laws and regulations that were often industry-specific. This list also highlighted what economic sectors are only open to state-owned investors.
  • On March 17, 2019 the National People’s Congress passed a Foreign Investment Law (FIL) that effectively replaced existing law governing foreign investment (i.e., the China-Foreign Joint Venture Law, the Contract Joint Venture Law, and the Wholly Foreign-Owned Enterprises Law).  As drafted, the FIL would address longstanding concerns of U.S. investors, including forced technology transfer and national treatment; however, due to lack of details and implementation guidelines, it is not clear how foreign investor rights would be protected.

While Chinese pronouncements of greater market access and fair treatment of foreign investment is welcome, details are needed on how these policies will address longstanding problems foreign investors have faced in the Chinese market, including  being subject to inconsistent regulations, licensing and registration problems, insufficient IPR protections, and various forms of Chinese protectionism that have created an unpredictable and discriminatory business climate.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
Transparency International’s Corruption Perceptions Index 2018 87 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2018 46 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 17 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $107,556   http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2018 $8,690 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

Ownership Restrictions

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

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

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

Examples of foreign investments requiring Chinese control include:

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

Examples of foreign investment equity caps include:

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

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

Other Investment Policy Reviews

Organization for Economic Cooperation and Development (OECD)

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

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

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

World Trade Organization (WTO)

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

Business Facilitation

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

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

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

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

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

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

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

Outward Investment

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

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

4. Industrial Policies

Investment Incentives

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

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

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

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

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

Performance and Data Localization Requirements

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

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

Czech Republic

Executive Summary

The Czech Republic is a medium-sized, open, export-driven economy with 80 percent of its GDP based on exports, mostly from the automotive and engineering industries.  According to the Czech Statistical Office, most of the country’s exports go to the European Union (EU), with 32.4 percent going to Germany alone. The United States is the Czech Republic’s largest non-EU export partner.  The Czech banking sector remains healthy. The country has strong, stable growth, with 2.9 percent GDP growth in 2018.

The Czech National Bank ended its foreign exchange intervention in the Czech crown (CZK) in April 2017, which had kept the crown at 27 to the euro (EUR).  Since then, the CZK has appreciated to CZK25.8 per EUR and CZK22.9 per USD as of March 2019. The crown is fully convertible, and all international transfers of investment-related profits and royalties can be carried out freely.  While the Czech Republic meets the Maastricht criteria for adoption of the EUR and agreed to join the Eurozone under the country’s EU accession agreement, the Czech government has said it will not seek to join the common currency in the next few years and the possibility remains widely unpopular among Czech voters.

The Czech Republic fully complies with EU and the Organization for Economic Co-operation and Development (OECD) standards for labor laws and equal treatment of foreign and domestic investors.  Labor laws are comparable with those of most developed nations. While wages continue to trail those in neighboring Western European countries (Czech wages are roughly one-third of comparable German wages), they have risen about 7 to 8 percent annually over the past two years, according to the Czech Statistical Office, although pressure on wages in competitive industries like IT has been much higher.  The country is now facing a labor shortage as most companies struggle to find workers with the unemployment rate solidly below 3 percent – the lowest rate in the EU. The 1992 U.S.-Czech Bilateral Investment Treaty, signed with the former Czechoslovakia, provides for international arbitration of investor–state disputes.

Great strides have been taken since the fall of communism to open the market to competition and privatization, but the Czech Republic still lacks sufficient enforcement of anti-trust violations.  The Czech Republic is committed to improving transparency and reducing corruption. The Czech government enforces intellectual property rights (IPR) protections.

There are few restrictions on foreign investment except in certain sectors that require access to sensitive information.   The government is currently in the process of drafting legislation to create a mechanism to screen foreign investments for national security concerns.  The Czech Republic has taken strides to diversify its traditional investments in engineering into new fields of research and development and innovative technologies.  EU structural funding has enabled the country to open a number of world-class scientific and high-tech research centers. EU member states are the largest investors in the Czech Republic.


Table 1:  Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 38 of 180 https://www.transparency.org/cpi2018
World Bank’s Doing Business Report “Ease of Doing Business” 2018 35 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 27 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in Partner Country (M USD, stock positions) 2017 $5,406 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $18,160 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Czech government actively seeks to attract foreign investment via policies that make the country an attractive destination for companies to locate, operate, and expand.  Act No. 72/2000 allows the Czech government to give investment incentives to investors who make new investments or expand their existing investments in the country. CzechInvest, the government investment promotion agency that operates under the Ministry of Industry and Trade, negotiates on behalf of the Czech government with foreign investors.  In addition, CzechInvest provides: assistance during implementation of investment projects, consulting services for foreign investors entering the Czech market, support for suppliers, and assistance for the development of innovative start-up firms. There are no laws or practices that discriminate against foreign investors.

The Czech Republic is a recipient of substantial foreign direct investment (FDI).  Total foreign investment in the Czech Republic (equity capital + reinvested earnings + other capital) equaled USD 156 billion at the end of 2017, compared to USD 121.9 billion in 2016.  The increased activity of foreign investors reflects the solid state of the Czech economy and recovery in Europe. Of these, CzechInvest negotiated 106 new investment projects by foreign investors in the Czech Republic in 2017, worth USD 2.9 billion.

As a medium-sized, open, export-driven economy, the Czech market is strongly dependent on foreign demand, especially from the EU.  In 2018, 84.1 percent of Czech exports went to fellow EU member states, with 65.5 percent of this volume shipped to the EU and 32.4 percent to Germany, the Czech Republic’s largest trading partner according to the Czech Statistical Office.  The global economic crisis pulled the Czech Republic into its longest historical recession and highlighted its sensitivity to economic developments in the EU. Since emerging from recession in 2013, the economy has enjoyed some of the highest GDP growth rates of the European Union.  GDP growth reached 4.4 percent in 2017 and 2.9 percent in 2018. Growth estimates are smaller for 2019 at 2.6 percent, given uncertainty surrounding Brexit and the possibility of increasing international trade tariffs. Some experts predict a hard Brexit could cost the Czech economy 1.1 percent of GDP and 40,000 jobs.

The Czech Republic has no plans to adopt the EUR and instead has taken a delayed approach to adopting the Eurozone’s common currency.  Economic difficulties in the Eurozone during the global downturn weakened public support for the country’s adoption of the EUR, as did the Greek crisis, and the current government opposes setting a target date for accession.

Some unfinished elements in the economic transition, such as the slow pace of legislative and judicial reforms, have posed obstacles to investment, competitiveness, and company restructuring.  The Czech government has harmonized its laws with EU legislation and the acquis communautaire.  This effort involved positive reforms of the judicial system, civil administration, financial markets regulation, intellectual property rights protection, and in many other areas important to investors.

While there have been many success stories involving American and other foreign investors, a handful have experienced problems, mainly in heavily regulated sectors of the economy, such as media.  The slow pace of the courts is often compounded by judges’ lack of familiarity with commercial or intellectual property law.

Both foreign and domestic businesses voice concerns about corruption.  Other long-term economic challenges include dealing with an aging population and diversifying the economy away from an over-reliance on manufacturing and shared services toward a more high-tech, services-based, knowledge economy.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign individuals or entities can operate a business under the same conditions as Czechs.  Some areas, such as banking, financial services, insurance, or defense equipment have certain limitations or registration requirements, and foreign entities need to register their permanent branches in the Czech Commercial Register.  Some professionals, such as architects, physicians, lawyers, auditors, and tax advisors, must register for membership in the appropriate professional chamber. In general, licensing and membership requirements apply equally to foreign and domestic professionals.

As of 2012, U.S. and other non-EU nationals can purchase real property, including agricultural land, in the Czech Republic without restrictions.  Czech legal entities, including 100 percent foreign-owned subsidiaries, may own real estate without any limitations. The right of foreign and domestic private entities to establish and own business enterprises is guaranteed by law.  Enterprises are permitted to engage in any legal activity with the previously noted limitations in sensitive sectors. Laws on auditing, accounting, and bankruptcy are in force, including the use of international accounting standards (IAS).

The government does not differentiate between foreign investors from different countries.

In response to the European Commission’s September 2017 investment screening proposal, the Czech Republic is currently in the process of drafting legislation to create a mechanism to screen foreign investments for national security concerns.  The legislation would require government review before foreign investments in sensitive sectors like defense and critical infrastructure. Investments in certain other sectors could also require review within five years of a transaction if new advancements in technology mean foreign ownership could pose a national security risk.

The U.S.-Czech Bilateral Investment Treaty contains specific guarantees of national treatment and Most Favored Nation treatment for U.S. investors in all areas of the economy other than insurance and real estate (see the section on the Bilateral Investment Treaty below).  U.S. investors are not disadvantaged or singled out by the Czech government.

Other Investment Policy Reviews

In the past three years, the government has not undergone any third-party investment policy reviews through a multilateral organization.

Business Facilitation

Individuals have a number of bureaucratic requirements to set up a business or operate as a freelancer or contractor.  The Ministry of Industry and Trade provides an electronic guide on obtaining a business license, presenting step-by-step assistance, including links to related legislation and statistical data, and specifying authorities with whom to work (such as business registration, tax administration, social security, and municipal authorities), available at: https://www.mpo.cz/en/business/licensed-trades/guide-to-licensed-trades/  .  The Ministry of Industry and Trade has also established regional information points to provide consultancy services related to doing business in the Czech Republic and EU.  A list of contact points is available at: http://www.businessinfo.cz/en/psc.html  .

The time required to start a business was 25 days in 2018, which is slightly above the world average of 20.1 days.  The Czech Republic’s Business Register is publicly accessible and provides details on business entities. An application for an entry into the Business Register can be submitted in a hard copy, via a direct entry by a public notary, or electronically, subject to meeting online registration criteria requirements.  The Business Register is publically available at: https://or.justice.cz/ias/ui/rejstrik  .  The Czech Republic’s Trade Register is an online information system that collects and provides information on entities facilitating small trade and craft-oriented business activities, as specifically determined by related legislation.  It is available online at: http://www.rzp.cz/eng/index.html  .

Outward Investment

The volume of outward investment is lower than incoming FDI.  According to the latest data from the Czech National Bank, outward Czech outward investments amounted only to USD 32.4 billion in 2017, compared to inward investments of USD 156 billion.  However, outward investment activity has increased 78 percent since 2014. According to the Export Guarantee and Insurance Corporation (EGAP), Czech companies increasingly invest abroad to get closer to their customers, save on transport costs, and shorten delivery times.  The Czech government does not incentivize outward investment. As part of EU sanctions, there is a total ban on EU investment in North Korea as of 2017.

4. Industrial Policies

The Czech Republic offers incentives to foreign and domestic firms that invest in the manufacturing sector, technology and research and development centers (R&D), and business support centers.  Incentives are funded from the Czech Republic’s national budget as well as from European Union Structural Funds.  The government provides investment incentives in the form of corporate income tax relief for 10 years, cash grants for job creation up to USD 13,000 per job, cash grants for training up to 50 percent of training costs, and cash grants for the purchase of fixed assets up to 10 percent of eligible costs. In 2019, an amendment to the legislation on investment incentives (Act No. 72/2000 Coll.) will likely go into effect.  The amendment will shift incentives from support for all types of investment towards support for investments that require higher-level, technical and R&D support.

The government does not have a common practice of issuing guarantees or jointly financing foreign direct investment projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Both Czech and EU laws permit foreign investors involved in joint ventures to take advantage of commercial or industrial customs-free zones into which goods may be imported and later exported without depositing customs duty.  Free trade zone treatment means duties need to be paid only in the event that the goods brought into the free trade zone are introduced into the local economy. Since the Czech Republic became part of the single customs territory of the European Community and now offers various exemptions on customs tariffs, the original tariff-driven use of these free trade zones has declined.  While there were some instances of abuse of customs-free zones for tax evasion purposes, new Customs Act No. 242/2016 Coll. now precludes this practice by repealing a clause on exemption from value added taxation in customs-free zones.

Performance and Data Localization Requirements

The Czech Republic abides by EU law governing data localization and performance.  That being said, within the EU, the Czech Republic is highly critical of data localization policies.  On December 2, 2016, it published a joint statement alongside 13 other countries stressing the importance of the free flow of data within Europe.

The host government does not mandate local employment.  There are no government-imposed conditions on permission to invest.  The host government does not follow “forced localization.”

The visa process for non-EU foreign investors and their employees is time consuming and slow, but the requirements are the same for domestic, EU, and non-EU companies.  Worker mobility is currently a difficult issue for all companies operating in the Czech Republic due to the extremely low unemployment rate.

Denmark

Executive Summary

Denmark is regarded by many independent observers as one the world’s most attractive business environments and is characterized by political, economic, and regulatory stability. It is a member of the European Union (EU) and Danish legislation and regulations conform to EU standards on virtually all issues. It maintains a fixed exchange rate policy, with the Danish Krone linked closely to the Euro. Denmark is a social welfare state with a thoroughly modern market economy reliant on free trade in goods and services. It is a net exporter of food, fossil fuels, chemicals and wind power, but depends on raw material imports for its manufacturing sector. Within the EU, Denmark is among the strongest supporters of liberal trade policy. Transparency International regularly ranks Denmark as having among the world’s lowest levels of perceived public sector corruption.

The Danish economy is enjoying a solid upswing. GDP growth averaged 2.0 percent annually over the last three years (2016 – 2018) and 2.3 percent 2015 – 2017.  GDP grew 1.4 percent in 2018 but 2.6 percent Q4 2017 – Q4 2018. The Danish Government estimates that growth will continue at 1.7 percent in 2019 and 1.6 percent in 2020. . Employment is at a historical high with a labor force of 2,776,036, and unemployment at 3.7 percent at the start of 2019.  Danish companies are performing well, and their willingness to invest in order to meet market demand is high. With the current low unemployment, the risk of labor bottleneck issues is increasing in certain sectors, mainly construction, where demand for skilled labor outstrips supply. Danish consumers enjoy increased purchasing power due to increased employment, low interest rates, and positive real wage trends. Observers believe the economy is at full capacity and that economic growth will continue in coming years, although as the competition for economic resources intensifies, it will likely become increasingly difficult to maintain growth rates at this level.

Denmark is an open economy, highly reliant on international trade, with exports accounting for about 55 percent of GDP.  Developments in its major trading partners – Germany, Sweden, the United States and the UK – have substantial impact on Danish national accounts. Gross unemployment, a national definition, was 3.7 percent at the start of 2019, and is forecast to remain subdued in coming years. The OECD Harmonized Unemployment Rate was 5.0 percent in February 2019.

Denmark is a major international development assistance donor, having contributed DKK 16.3 billion (USD 2.6 billion) in 2018, with 68 percent of Danish assistance being bilateral and 32 percent multilateral. Denmark is one of six countries meeting the UN requirement of ODA contribution of 0.7 percent of GNI. Danish assistance in 2017 amounted to 0.74 percent of GNI.

The entrepreneurial climate, including female-led entrepreneurship, is strong; Denmark is a relatively large contributor to the World Bank’s Women Entrepreneurship Finance Facility with a USD 10.6 million contribution.

Underlying macroeconomic conditions in Denmark are sound, with an attractive investment climate. Denmark is strategically situated to link continental Europe with the Nordic and Baltic countries. Transport and communications infrastructures are efficient. Denmark is among world leaders in high-tech industries such as information technology, life sciences, clean energy technologies, and shipping.

Note:  Separate reports on the investment climates for Greenland and for the Faroe Islands can be found at the end of this report.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 1 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 3 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 8 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $13,873 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $55,220 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

A small country with an open economy, Denmark is highly dependent on foreign trade, with exports comprising the largest component (55 percent) of GDP. Danish trade and investment policies are liberal. In general, investment policies are forward-looking, aimed at fostering and developing businesses, especially in high-growth sectors. The Economist Intelligence Unit (EIU) ranks Denmark second globally and first regionally on its business environment ranking. The EIU characterizes Denmark’s business environment as among the most attractive in the world, reflecting a sound macroeconomic framework, excellent infrastructure, low bureaucracy and a friendly policy towards private enterprise and competition. Principal concerns include a high personal tax burden, low productivity growth and uncertainties relating to Brexit, as the UK is a close trading partner that shares many of Denmark’s policy goals within the EU. Overall, however, operating conditions for companies should remain broadly favorable. Denmark scores top marks in various categories, including the political and institutional environment, macroeconomic stability, foreign investment policy, private enterprise policy, financing, and infrastructure.

As of January 2019, the EIU rated Denmark an “AA” country on its Country Risk Service, with a stable outlook. Sovereign risk rated “AA,” and political risk “AAA.” Denmark ranked tenth out of 140 on the World Economic Forum’s 2018 Global Competitiveness Report, third on the World Bank’s 2019 Doing Business ranking, and fifth on the EIU 2018 Democracy Index. “The Big Three” credit rating agencies Standard & Poor’s, Moody’s, and Fitch Group all score Denmark AAA.

“Invest in Denmark,” an agency of the Ministry of Foreign Affairs and part of the Danish Trade Council, provides detailed information to potential investors. The website for the agency is www.investindk.com  .

Corporate tax records of all companies, associations and foundations, which pay taxes in Denmark, were made public beginning in December 2012 and are updated annually. The corporate tax rate is 22 percent.

Limits on Foreign Control and Right to Private Ownership and Establishment

As an EU member state, Denmark is bound by EU rules on free movement of goods, capital, persons and certain services. Denmark welcomes foreign investment and does not distinguish between EU and other investors. There are no additional permits required by foreign investors, nor any reported bias against foreign companies from municipal or national authorities.

Denmark’s central and regional governments actively encourage foreign investment on a national-treatment basis, with relatively few limits on foreign control. A foreign or domestic private entity may freely establish, own, and dispose of a business enterprise in Denmark. The capital requirement for establishing a corporation (A/S) or Limited Partnership (P/S) is DKK 400,000 (approx. USD  63,317) and for establishing a private limited liability company (ApS) DKK 40,000 (approx. USD 6,331.

As of 15 April, it is no longer possible to set up an “Entrepreneurial Company” (IVS). The company type was intended to allow entrepreneurs a cheap and simple way to incorporate with limited liability, with a starting capital of only DKK1 (USD 0.16). Due to repeated instances of fraud and unintended use of the IVS, it has been abolished. Simultaneously, the capital requirements to set up a Private Limited Company were lowered, bringing Denmark more in line with other Scandinavian countries, and to ensure it will continue to be cheap and simple to establish limited liability companies in Denmark. Currently there are approx. 45,000 IVS in existence. These companies have a deadline of 2 years to re-register as Private Limited Companies (ApS), with a minimum capital of DKK 40,000. If they fail to re-register, they will be forcibly dissolved.  No restrictions apply regarding the residency of directors and managers.

Since October 2004, any private entity may establish a European public limited company (SE company) in Denmark. The legal framework of an SE company is subject to Danish corporate law, but it is possible to change the nationality of the company without liquidation and re-founding. An SE company must be registered at the Danish Business Authority if the official address of the company is in Denmark. The minimum capital requirement is EUR 120,000 (approx. USD 135,000).

Danish professional certification and/or local Danish experience are required to provide professional services in Denmark. In some instances, Denmark may accept an equivalent professional certification from other EU or Nordic countries on a reciprocal basis. EU-wide residency requirements apply to the provision of legal and accountancy services.

Ownership restrictions are applied in the following sectors:

  • Hydrocarbon exploration: Requires 20 percent Danish government participation on a “non-carried interest” basis.
  • Defense materials: The law governing foreign ownership of Danish defense companies (L538 of May 26, 2010) stipulates that the Minister of Justice has to approve foreign ownership of more than 40 percent of the equity or more than 20 percent of the voting rights, or if foreign interests gain a controlling share in a defense company doing business in Denmark. This approval is generally granted unless there are security or other foreign policy considerations weighing against approval.
  • Maritime: There are foreign (non-EU resident) ownership requirements on Danish-flagged vessels other than those owned by an enterprise incorporated in Denmark. Ships owned by Danish citizens, Danish partnerships or Danish limited liability companies are eligible for registration in the Danish International Ships Register (DIS). Ships owned by EU or European Economic Area (EEA) entities with a genuine link to Denmark are also eligible for registration, and foreign companies with a significant Danish interest can register a ship in the DIS.
  • Aviation: For an airline to be established in Denmark it must have majority ownership and be effectively controlled by an EU state or a national of an EU state, unless otherwise provided for through an international agreement to which the EU is a signatory.
  • Securities Trading: Non-resident financial institutions may engage in securities trading on the Copenhagen Stock Exchange only through subsidiaries incorporated in Denmark.
  • Real Estate: Purchases of designated vacation properties, or ‘summer houses’, are restricted to citizens of Denmark. Such properties cannot be inhabited year-round, and are located in municipally designated ‘summer house area’ zones, typically near coastlines. EU citizens and companies from EU member states can purchase any type of real estate, except vacation properties, without prior authorization from the authorities. Companies and individuals from non-EU countries that have been present/resident in Denmark for at least five years in total and are currently resident in Denmark can also purchase real estate, except vacation properties, without prior authorization. Non-EU companies or individuals that do not meet these requirements can only purchase real estate with the permission of the Danish Ministry of Justice. Permission is freely given to people with a Danish residency permit, except with regard to purchases of vacation properties.

Other Investment Policy Reviews

The most recent UNCTAD review of Denmark occurred in March 2013, available here: http://unctad.org/en/PublicationsLibrary/webdiaeia2013d2_en.pdf . There is no specific mention of Denmark in the latest WTO Trade Policy Review of the European Union, revised in October 2017.

An EU Commission Staff Working Paper on the investment environment in Denmark is available here: https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/european-semester/european-semester-your-country/denmark_en   while a 2015 private sector investment and taxation review by Deloitte can be found here: http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-denmarkguide-2015.pdf .

Denmark ranked first out of 175 in Transparency International’s 2018 Corruption Perceptions Index. It received a ranking of 3 out of 190 for “Ease of Doing Business” in the World Bank’s 2019 Doing Business Report, placing it first in Europe. In the World Economic Forum’s Global Competitiveness report for 2018, Denmark was ranked 10 out of 140 countries.

The World Intellectual Property Organization’s (WIPO) Global Innovation Index ranked Denmark 8 out of 126 in 2018

Business Facilitation

The Danish Business Authority (DBA) is responsible for business registrations in Denmark. As a part of the Danish Business Authority, “Business in Denmark” provides information on relevant Danish rules and online registrations to foreign companies in English. The Danish business registration website is www.virk.dk  . It is the main digital tool for licensing and registering companies in Denmark and offers a business registration processes that is clear and complete.

Registration of sole proprietorships and partnerships is free of charge, while there is a fee for registration of other business types: DKK 670 (USD 106) if the registration is done digitally and DKK 2150 (USD 340) if the registration form is sent by e-mail or post.

The process for establishing a new business is distinct from that of registration. The Ministry of Foreign Affairs “Invest in Denmark” program provides a step-by-step guide to establishing a business, along with other relevant resources which can be found here: www.investindk.com/Downloads  .The services are free of charge and available to all investors, regardless of country of origin.

Processing time for establishing a new business varies depending on the chosen business entity. Establishing a Danish Limited Liability Company (Anpartsselskab – ApS), for example, generally takes four to six weeks for a standard application. Establishing a sole proprietorship (Enkeltmandsvirksomhed) is simpler, with processing generally taking about one week.

Those providing temporary services in Denmark must provide their company details to the Registry of Foreign Service Providers (RUT). The website (www.virk.dk  ) provides English guidance on how to register a service with RUT. A digital employee’s signature, referred to as a NemID, is required for those wishing to register a foreign company in Denmark. A CPR number (a 10-digit personal identification number) and valid ID are needed to obtain a NemID, though not Danish citizenship.

In the Danish Financial Statements Act no. 1580 of 10 January 2015 section 7(2), small enterprises are defined as enterprises with fewer than 50 employees and whose annual turnover does not exceed DKK 89 million (approx. USD 13.6 million) or annual balance sheet total does not exceed DKK 44 million (approx. USD 6.7 million). Medium-sized enterprises are defined as enterprises with fewer than 250 employees and either have an annual turnover that does not exceed DKK 313 million (approx. USD 47.5 million) or annual balance sheet total does not exceed DKK 156 million (approx. USD 23.7 million).

Outward Investment

Danish companies are not restricted from investing abroad, and Danish outward investment has exceeded inward investments for more than a decade.

4. Industrial Policies

Investment Incentives

Performance incentives are available both to foreign and domestic investors. For instance, foreign and domestic investors in designated regional development areas may take advantage of certain grants and access to preferential financing. Investments in Greenland may be eligible for incentives as well. Foreign subsidiaries located in Denmark can participate in government-financed or subsidized research programs on a national-treatment basis.

Foreign Trade Zones/Free Ports/Trade Facilitation

The only free port in Denmark is the Copenhagen Free Port, operated by the Port of Copenhagen. The Port of Copenhagen and the Port of Malmo (Sweden) merged their commercial operations in 2001, including the free port activities, in a joint company named CMP. CMP is one of the largest port and terminal operators in the Nordic Region and one of the largest Northern European cruise-ship ports; it occupies a key position in the Baltic Sea Region for the distribution of cars and transit of oil. The facilities in the free port are mostly used for tax-free warehousing of imported goods, for exports, and for in-transit trade. Tax and duties are not payable until cargo leaves the Free Port. The processing of cargo and the preparation and finishing of imported automobiles for sale can freely be set up in the Free Port. Manufacturing operations can be established with permission of the customs authorities, which is granted if special reasons exist for having the facility in the Free Port area. The Copenhagen Free Port welcomes foreign companies establishing warehouse and storage facilities.

Performance and Data Localization Requirements

Performance requirements are applied only in connection with investment in hydrocarbon exploration, where concession terms normally require a fixed work program, including seismic surveys and in some cases exploratory drilling, consistent with applicable EU directives. Performance requirements are mostly designed to protect the environment, mainly through encouraging reduced use of energy and water. Several environmental and energy requirements are systematically imposed on households as well as businesses in Denmark, both foreign and domestic. For instance, Denmark was the first of the EU countries, in January 1993, to introduce a carbon dioxide (CO2) tax on business and industry. This includes certain reimbursement schemes and subsidy measures to reduce the costs for businesses, thereby safeguarding competitiveness.

Performance requirements are governed by Danish legislation and EU regulations. Potential violations of the rules governing this area are punishable by fines or imprisonment.

Performance requirements are applied uniformly to domestic and foreign investors.

The Danish government does not follow “forced localization” policies, nor does it require foreign IT providers to turn over source code and/or provide access to surveillance. The Danish Data Protection Agency, a government agency, the Ministry of Justice and the Ministry for Culture are the entities involved with data storage.

France and Monaco

Executive Summary

Please see the end of this report for a summary of the investment climate of Monaco.

France welcomes foreign investment and has a stable business climate that attracts investors from around the world. The French government devotes significant resources to attracting foreign investment through policy incentives, marketing, overseas trade promotion offices, and investor support mechanisms. France has an educated population, first-rate universities, and a talented workforce. It has a modern business culture, sophisticated financial markets, strong intellectual property protections, and innovative business leaders. The country is known for its world-class infrastructure, including high-speed passenger rail, maritime ports, extensive roadway networks, public transportation, and efficient intermodal connections. High-speed (3G/4G) telephony is nearly ubiquitous.

In 2018, France was the ninth largest global market for foreign direct investment (FDI) inflows with a year-on-year increase of 2 percent. In total, there are more than 28,000 foreign-owned companies doing business in France. It is the home to 29 of the world’s 500 largest companies. The World Economic Forum ranked France 17th in terms of global competitiveness in 2018. The United States is the seventh largest foreign investor in France. Around 4,600 U.S. companies in France, of all sizes, employ over 460,000 French citizens.

Following the election of French President Emmanuel Macron in May 2017, the French government implemented significant labor market and tax reforms. By relaxing the rules on companies to hire and fire employees and by offering investment incentives, Macron has buoyed business confidence in France. According to the 2018 American Chamber of Commerce in France – Bain Barometer Survey on the attitudes of U.S. investors in France, 86 percent of American investors surveyed found Macron’s reforms to be substantial and good for improving France’s investment prospects and image in the United States. From mid-November 2018, Macron faced weekly “Yellow Vest” protests over the high cost of living, taxes and social exclusion. Among U.S. investors in France, 62 percent said the current social climate was a “nuisance” for U.S. companies operating in France. Nevertheless, 42 percent of U.S. firms still plan to hire new employees in France over the next two to three years. Investors in technology, in particular, found the climate for development of digital technologies and other innovations to be attractive in France.

France’s GDP growth was 1.5 percent in 2018, down sharply from 2.7 percent in 2017. The budget deficit decreased to 2.6 percent of GDP in 2018. However, the OECD forecasts the budget deficit to reach 3.3 percent of GDP in 2019, due to the cost of the government’s €10.3 billion (USD 11.72 billion) emergency package to address the economic and social needs of middle-class and retired workers in response to the “Yellow Vest” protest movement. France’s public debt ratio, at 98.7 percent of GDP, remains one of the highest in the Euro-Zone.

Key issues to watch in 2019 include: 1) whether President Macron is able to maintain the pace of economic reform, and 2) opportunities and challenges resulting from Brexit.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 21 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 32 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 16 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 USD 85,572 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 USD 37,970 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

France welcomes foreign investment. In the current economic climate, the French government sees foreign investment as a means to create additional jobs and stimulate growth. Investment regulations are simple, and a range of financial incentives are available to foreign investors, who report they find France’s skilled and productive labor force, good infrastructure, technology, and central location in Europe attractive. France’s membership in the European Union (EU) and the Eurozone facilitates the efficient movement of people, services, capital, and goods. However, notwithstanding French efforts at economic and tax reform, market liberalization, and attracting foreign investment, perceived disincentives to investing in France include the relatively high tax environment. Labor market fluidity is improving due to labor market reforms introduced by the Macron Administration, but it is still rigid compared to some OECD economies.

Limits on Foreign Control and Right to Private Ownership and Establishment

France is among the least restrictive countries for foreign investment. With a few exceptions in certain specified sectors, there are no statutory limits on foreign ownership of companies. Foreign entities have the right to establish and own business enterprises, and engage in all forms of remunerative activity.

France does maintain a national security review mechanism. French law stipulates that control by acquisition of a domiciled company or subsidiary operating in certain sectors deemed crucial to France’s national interests relating to public order, public security and national defense are subject to prior notification, screening, and approval by the Economy and Finance Minister. Other sectors requiring approval include energy infrastructure; transportation networks; public water supplies; electronic communication networks; public health protection; and installations vital to national security. In 2018, four additional categories – semiconductors, data storage, artificial intelligence and robotics – were added to the list requiring a national security review. For all listed sectors, France can block foreign takeovers of French companies according to the provisions of the Montebourg Decree.

In 2018, the government held equity positions in approximately 81 firms. Most of the positions were relatively small, but did include provisions, which prevent foreign takeover of these firms. Exceptions, where the government had large holdings included, among others, Aeroports de Paris (50.6 percent), Engie, and Renault. In January 2018, the government sold 4.0 percent of its holding in Engie, lowering its stake to 23.64 percent of the energy company. The government also sold 5.0 percent of its stake in Renault, resulting in its ownership of 15.01 percent of the automaker.

Other Investment Policy Reviews

Given the level of development and stability of the investment climate, France has not recently been the subject of international organizations’ investment policy reviews. The OECD Economic Forecast for France (November 2018) can be found here: http://www.oecd.org/economy/france-economic-forecast-summary.htm  .

Business Facilitation

Business France is a government agency established with the purpose to promote new foreign investment, expansion, technology partnerships, and financial investment. Business France provides services to help investors understand regulatory, tax, and employment policies as well as state and local investment incentives, and government support programs. Business France also helps companies find project finance and potential equity acquisitions. Business France recently unveiled a website in English to help prospective businesses considering the French market (https://www.businessfrance.fr/en/invest-in-France  ).

In addition, France’s public investment bank, Bpifrance, assists foreign businesses to find local investors when setting up a subsidiary in France. It also supports foreign startups in France through the government’s French Tech Ticket program, which provides them with funding, a resident’s permit, and incubation facilities. Both business facilitation mechanisms provide for equitable treatment of women and minorities.

President Macron has made innovation one of his priorities with a EUR 10 billion fund that is being financed through privatizations of State-owned enterprises. France’s priority sectors for investment include: aeronautics, agro-foods, digital, nuclear, rail, auto, chemicals and materials, forestry, eco-industries, shipbuilding, health, luxury, and extractive industries. In the near-term, the French government intends to focus on driverless vehicles, batteries, the high-speed train of the future, nano-electronics, renewable energy, and health industries.

Business France and Bpifrance are particularly interested in attracting foreign investment in the tech sector. The French government has developed a brand “French Tech” to promote France as a location for start-ups and high-growth digital companies. In addition to offices in 17 French cities, French Tech offices have been established in cities including New York, San Francisco, Los Angeles, Shanghai, Hong Kong, Vietnam, Moscow, Berlin, and 14 others.

The website Guichet Enterprises (https://www.guichet-entreprises.fr/fr/  ) is designed to be a one-stop website for registering a business. The site is available in both French and English although some fact sheets on regulated industries are only available in French on the website.

Outward Investment

French firms invest more in the United States than in any other country and support approximately 678,000 American jobs. Total French investment in the United States reached USD 275.5 billion in 2018. France was our eighth-largest trading partner with approximately USD 128 billion in bilateral trade in 2018. The business promotion agency Business France also assists French firms with outward investment. There is no restriction on outward investment.

4. Industrial Policies

Investment Incentives

France offers financial incentives, generally equally available to both French and foreign investors. The government provides incentives for capital investment in small companies. For instance, a French company or a subsidiary of a foreign firm that would invest in a minority shareholding (less than 20 percent) of a small, innovative SME would benefit from a five year, linear amortization of their investment. To qualify, SMEs must allocate at least 15 percent of their spending on research.

Incentivizing research and development (R&D) and innovation is a high priority for the French government. Business France, the country’s export and investment promotion agency, reported that R&D operations accounted for 10 percent of foreign investments projects in 2018 and created or maintained 2,793 jobs, up 23 percent from last year. The United States is the leading foreign investor in R&D in France, accounting for 26 percent of 2018 investment decisions. International companies may join France’s 71 innovation clusters, increasing access to both production inputs and technical benefits of geographical proximity. Other components of this policy include: the Innovative New Company (Jeune Enterprise Innovante) and the French Young Entrepreneurs Initiative.

Foreign Trade Zones/Free Ports/Trade Facilitation

France is subject to all EU free trade zone regulations. These allow member countries to designate portions of their customs’ territory as duty-free, where value-added activity is limited. France has several duty-free zones, which benefit from exemptions on customs for storage of goods coming from outside of the European Union. The French Customs Service administers them, and provides details on its website (http://www.douane.gouv.fr). French legal texts are published online at http://legifrance.gouv.fr.

In September 2018, President Macron announced the extension of 44 Urban Free Zones (ZFU) in low-income neighborhoods and municipalities with at least 10,000 residents. The program provides incentives for employers, who have created 600 new jobs since 2016. Incentives include exemption from payment of payroll taxes and certain social contributions for five years, financed by EUR 15 million a year in State funds.  

Performance and Data Localization Requirements

While there are no mandatory performance requirements established by law, the French government will generally require commitments regarding employment or R&D from both foreign and domestic investors seeking government financial incentives. Incentives like PAT regional planning grants (Prime d’Amenagement du Territoire pour l’Industrie et les Services) and related R&D subsidies are based on the number of jobs created, and authorities have occasionally sought commitments as part of the approval process for acquisitions by foreign investors. PAT has been revised to benefit SMEs, with the objective of promoting the development of businesses in priority regional zones, including EUR 30 million in direct government subsidies. In 2018, a reform of the national security review system expanded the list of sensitive sectors subject to prior authorization by the Ministry of Economy and Finance. Decree 2018-1057 of November 29, 2018, expanded the scope of activities under review to include:  artificial intelligence, data storage, and the space sector, when the direct objective of this investment pertains to national defense, national security, public order and public authority. A new set of measures amending the review mechanism were included in the proposed PACTE law (Plan d’Action pour la Croissance et la Transformation des Entreprises), which was still under review at the end of 2018. Parliamentary leaders from most parties said the PACTE would be approved during the first quarter of 2019. The law would toughen sanctions on both sides of an acquisition for non-compliance with investment review mechanism.

The French government imposes the same conditions on domestic and foreign investors in cultural industries:  all purveyors of movies and television programs (i.e., television broadcasters, telecoms operators, internet service providers and video services) must invest a percentage of their revenues to finance French film and television productions. They must also abide by broadcasting cultural content quotas (minimum 40 percent French, 20 percent EU).

Germany

Executive Summary

As Europe’s largest economy, Germany is a major destination for foreign direct investment (FDI) and has accumulated a vast stock of FDI over time.  Germany is consistently ranked by business consultancies and the UN Conference on Trade and Development (UNCTAD) as one of the most attractive investment destinations based on its reliable infrastructure, highly skilled workforce, positive social climate, stable legal environment, and world-class research and development.

The United States is the leading source of non-European foreign investment in Germany.  Foreign investment in Germany was broadly stable during the period 2013-2016 (the most recent data available) and mainly originated from other European countries, the United States, and Japan.  FDI from emerging economies (particularly China) grew substantially over 2013-2016, albeit from a low level.

German legal, regulatory, and accounting systems can be complex and burdensome, but are generally transparent and consistent with developed-market norms.  Businesses enjoy considerable freedom within a well-regulated environment. Foreign and domestic investors are treated equally when it comes to investment incentives or the establishment and protection of real and intellectual property.  Foreign investors can fully rely on the legal system, which is efficient and sophisticated. At the same time, this system requires investors to closely track their legal obligations. New investors should ensure they have the necessary legal expertise, either in-house or outside counsel, to meet all requirements.

Germany has effective capital markets and relies heavily on its modern banking system.  Majority state-owned enterprises are generally limited to public utilities such as municipal water, energy, and national rail transportation.  The primary objectives of government policy are to create jobs and foster economic growth. Labor unions are powerful and play a generally constructive role in collective bargaining agreements, as well as on companies’ work councils.

German authorities continue efforts to fight money laundering and corruption.  The government supports responsible business conduct and German SMEs are increasingly aware of the need for due diligence.

The German government amended domestic investment screening provisions, effective June 2017, clarifying the scope for review and giving the government more time to conduct reviews, in reaction to an increasing number of acquisitions of German companies by foreign investors, particularly from China.  The amended provisions provide a clearer definition of sectors in which foreign investment can pose a “threat to public order and security,” including operators of critical infrastructure, developers of software to run critical infrastructure, telecommunications operators or companies involved in telecom surveillance, cloud computing network operators and service providers, and telematics companies.  All non-EU entities are now required to notify Federal Ministry for Economic Affairs and Energy in writing of any acquisition of or significant investment in a German company active in these sectors. The new rules also extend the time to assess a cross-sector foreign investment from two to four months, and for investments in sensitive sectors, from one to three months, and introduce the possibility of retroactively initiating assessments for a period of five years after the conclusion of an acquisition.  Indirect acquisitions such as those through a Germany- or EU-based affiliate company are now also explicitly subject to the new rules. In 2018, the government further lowered the threshold for the screening of investments, allowing authorities to screen acquisitions by foreign entities of at least 10 percent of voting rights of German companies that operate critical infrastructure (down from 25 percent), as well as companies providing services related to critical infrastructure.  The amendment also added media companies to the list of sensitive businesses to which the lower threshold applies. German authorities strongly supported the European Union’s new framework to coordinate national security screening of foreign investments, which entered into force in April 2019.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 11 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 24 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 9 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 136 billion USD https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2017 43,490 USD http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

Other Investment Policy Reviews

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

Business Facilitation

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

Applications for registration at the commercial register, which is publically available under www.handelsregister.de  , are electronically filed in publicly certified form through a notary.  The commercial register provides information about all relevant relationships between merchants and commercial companies, including names of partners and managing directors, capital stock, liability limitations, and insolvency proceedings.  Registration costs vary depending on the size of the company.

Germany Trade and Invest (GTAI), the country’s economic development agency, can assist in the registration processes (https://www.gtai.de/GTAI/Navigation/EN/Invest/Investment-guide/Establishing-a-company/business-registration.html  ) and advise investors, including micro-, small-, and medium-sized enterprises (MSMEs), on how to obtain incentives.

In the EU, MSMEs are defined as follows:

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

Outward Investment

The Federal Government provides guarantees for investments by German-based companies in developing and emerging economies and countries in transition in order to insure them against political risks.  In order to receive guarantees, the investment must have adequate legal protection in the host country. The Federal Government does not insure against commercial risks.

4. Industrial Policies

Investment Incentives

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

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

Performance and Data Localization Requirements

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

U.S. companies can generally obtain the visas and work permits required to do business in Germany.  U.S. Citizens may apply for work and residential permits from within Germany. Germany Trade & Invest offers detailed information online at www.gtai.com/coming-to-germany  .

There are no localization requirements for data storage in Germany.  However, in recent years German and European cloud providers have sought to market the domestic location of their servers as a competitive advantage.

Hong Kong

Executive Summary

Hong Kong became a Special Administrative Region (SAR) of the People’s Republic of China (PRC) on July 1, 1997, with its status defined in the Sino-British Joint Declaration and the Basic Law, Hong Kong’s mini-constitution. Under the concept of “one country, two systems,” the PRC government promised that Hong Kong will retain its political, economic, and judicial systems for 50 years after reversion. Hong Kong pursues a free market philosophy with minimal government intervention. The Hong Kong Government (HKG) welcomes foreign investment, neither offering special incentives nor imposing disincentives for foreign investors.

Hong Kong’s well-established rule of law is applied consistently and without discrimination. There is no distinction in law or practice between investments by foreign-controlled companies and those controlled by local interests. Foreign firms and individuals are able to incorporate their operations in Hong Kong, register branches of foreign operations, and set up representative offices without encountering discrimination or undue regulation. There is no restriction on the ownership of such operations. Company directors are not required to be citizens of, or resident in, Hong Kong. Reporting requirements are straightforward and are not onerous.

Hong Kong remains an excellent destination for U.S. investment and trade. Despite a population of less than eight million, Hong Kong is America’s tenth-largest export market, seventh-largest for total agricultural products, and fifth-largest for high-value consumer food and beverage products. Hong Kong’s economy, with world-class institutions and regulatory systems, is based on competitive financial and professional services, trading, logistics, and tourism. The service sector accounts for more than 90 percent of its nearly USD 365 billion gross domestic product (GDP) in 2018. Hong Kong hosts a large number of regional headquarters and regional offices. More than 1,400 U.S. companies are based in Hong Kong, with more than half regional in scope. Finance and related services companies, such as banks, law firms, and accountancies, dominate the pack. Seventy of the world’s 100 largest banks have operations here.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 14 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 4 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 14 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 USD 81,234 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 USD 46,310 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Hong Kong is the world’s third-largest recipient of foreign direct investment (FDI) according to the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2018. The HKG’s InvestHK encourages inward investment, offering free advice and services to support companies from the planning stage through to the launch and expansion of their business. U.S. and other foreign firms can participate in government financed and subsidized research and development programs on a national treatment basis. Hong Kong does not discriminate against foreign investors by prohibiting, limiting, or conditioning foreign investment in a sector of the economy.

Capital gains are not taxed, nor are there withholding taxes on dividends and royalties. Profits can be freely converted and remitted. Foreign-owned and Hong Kong-owned company profits are taxed at the same rate – 16.5 percent. The tax rate on the first USD 255,000 profit for all companies is currently 8.25 percent. No preferential or discriminatory export and import policies affect foreign investors. Domestic industries receive no direct subsidies. Foreign investments face no disincentives, such as quotas, bonds, deposits, nor other similar regulations.

According to HKG statistics, 3,955 overseas companies had regional operations registered in Hong Kong in 2018. The United States has the largest number with 724. About 35 percent of start-ups in Hong Kong come from overseas.

Hong Kong’s Business Facilitation Advisory Committee is a platform for the HKG to consult the private sector on regulatory proposals and implementation of new or proposed regulations.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investors can invest in any business and own up to 100 percent of equity. Like domestic private entities, foreign investors have the right to engage in all forms of remunerative activity.

The HKG owns all land in Hong Kong, which the HKG administers by granting long-term leases without transferring title. Expatriates claim that a 15 percent Buyer’s Stamp Duty on all non-permanent-resident and corporate buyers discriminates against them.

The main exceptions to the HKG’s open foreign investment policy are:

Broadcasting – Voting control of free-to-air television stations by non-residents is limited to 49 percent. There are also residency requirements for the directors of broadcasting companies.

Legal Services – Foreign lawyers at foreign law firms may only practice the law of their jurisdiction. Foreign law firms may become “local” firms after satisfying certain residency and other requirements. Localized firms may thereafter hire local attorneys, but must do so on a 1:1 basis with foreign lawyers. Foreign law firms can also form associations with local law firms.

Other Investment Policy Reviews

Hong Kong last conducted the Trade Policy Review in 2018 through the World Trade Organization (WTO). https://www.wto.org/english/tratop_e/tpr_e/g380_e.pdf 

Business Facilitation

The Economic Analysis and Business Facilitation Unit under the Financial Secretary’s Office is responsible for business facilitation initiatives aimed at improving the business regulatory environment of Hong Kong.

The e-Registry (https://www.eregistry.gov.hk/icris-ext/apps/por01a/index ) is a convenient and integrated online platform provided by the Companies Registry and the Inland Revenue Department for applying for company incorporation and business registration. Applicants, for incorporation of local companies or for registration of non-Hong Kong companies, must first register for a free user account, presenting an original identification document or a certified true copy of the identification document. The Companies Registry normally issues the Business Registration Certificate and the Certificate of Incorporation on the same day for applications for company incorporation. For applications for registration of a non-Hong Kong company, it issues the Business Registration Certificate and the Certificate of Registration two weeks after submission.

Outward Investment

As a free market economy, Hong Kong does not promote or incentivize outward investment, nor restricts domestic investors from investing abroad. Mainland China and British Virgin Islands were the top two destinations for Hong Kong’s outward investments in 2017.

4. Industrial Policies

Investment Incentives

Hong Kong imposes no export performance or local content requirements as a condition for establishing, maintaining, or expanding a foreign investment. There are no requirements that Hong Kong residents own shares, that foreign equity is reduced over time, or that technology is transferred on certain terms. The HKG does not have a practice of issuing guarantees or jointly financing foreign direct investment projects.

The HKG allows a deduction on interest paid to overseas-associated corporations and provides an 8.25 percent concessionary tax rate derived by a qualifying corporate treasury center.

The HKG offers an effective tax rate of around three to four percent to attract aircraft leasing companies to develop business in Hong Kong.

The HKG has set up multiple programs to assist enterprises in securing trade finance and business capital, expanding markets, and enhancing overall competitiveness. These support measures are available to any enterprise in Hong Kong, irrespective of origin.

Hong Kong-registered companies with a significant proportion of their research, design, development, production, management, or general business activities located in Hong Kong are eligible to apply to the Innovation and Technology Fund (ITF), which provides financial support for research and development (R&D) activities in Hong Kong.  Hong Kong Science & Technology Parks (Science Park) and Cyberport are HKG-owned enterprises providing subsidized rent and financial support through incubation programs to early-stage startups.

The HKG offers additional tax deductions for domestic expenditure on R&D incurred by firms. Firms enjoy a 300 percent tax deduction for the first HKD 2 million (USD 255,000) qualifying R&D expenditure and a 200 percent deduction for the remainder. Since 2017, the Financial Secretary has announced over HKD 120 billion (USD 15.3 billion) in funding to support innovation and technology development in Hong Kong.  These funds are largely directed at supporting and adding programs through the ITF, Science Park, and Cyberport.

HKD 20 billion (USD 2.6 billion) has been earmarked for the Research Endowment Fund, which provides research grants to academics and universities.  Another HKD 10 billion (USD 1.3 billion) has been set aside to provide financial incentives to foreign universities to partner with Hong Kong universities and establish joint research projects housed in two research clusters in Science Park, one specializing in artificial intelligence and robotics and the other specializing in biotechnology.  Another HKD 20 billion (USD 2.6 billion) has been appropriated to begin construction on a second, larger Science Park, located on the border with Shenzhen, which is intended to provide a much larger number of subsidized-rent facilities for R&D which are also expected to have special rules allowing Mainland residents to work onsite without satisfying normal immigration procedures.

In September 2018, the HKG launched the Technology Talent Admission Scheme (TechTAS) and the Postdoctoral Hub Program (PHP) to attract non-local talent and nurture local talent. The TechTAS provides a fast-track arrangement for eligible technology companies/institutes to admit overseas and Mainland technology talent to undertake R&D for them in the areas of biotechnology, artificial intelligence, cybersecurity, robotics, data analytics, financial technologies, and material science are eligible for application. The PHP provides funding support to recipients of the ITF as well as incubatees and tenants of Science Park and Cyberport to recruit up to two postdoctoral talents for R&D. Applicants must possess a doctoral degree in a science, technology, engineering and mathematics-related discipline from either a local university or a well-recognized non-local institution.

The HKG plans to set up a USD 256.4 million Re-industrialization Funding Scheme in 2019 to subsidize manufacturers, on a matching basis, setting up smart production lines in Hong Kong.

In May 2018, the Hong Kong Monetary Authority (HKMA) launched the Pilot Bond Grant Scheme with enhanced tax concessions for qualifying debt instruments in order to enhance Hong Kong’s competitiveness in the international bond market.

Foreign Trade Zones/Free Ports/Trade Facilitation

Hong Kong, a free port without foreign trade zones, has modern and efficient infrastructure making it a regional trade, finance, and services center. Rapid growth has placed severe demands on that infrastructure, necessitating plans for major new investments in transportation and shipping facilities, including a planned expansion of container terminal facilities, additional roadway and railway networks, major residential/commercial developments, community facilities, and environmental protection projects. Construction on a third runway at Hong Kong International Airport is scheduled for completion by 2023.

Hong Kong and Mainland China have a Free Trade Agreement Transshipment Facilitation Scheme that enables Mainland-bound consignments passing through Hong Kong to enjoy tariff reductions in the Mainland. The arrangement covers goods traded between Mainland China and its trading partners, including ASEAN members, Australia, Bangladesh, Chile, Costa Rica, Iceland, India, New Zealand, Pakistan, Peru, South Korea, Sri Lanka, Switzerland and Taiwan. As of the end of 2018, the HKG had received 14,935 applications with goods valued at USD 1.2 billion and estimated tariff reduction exceeding USD 81 million.

The HKG launched in December 2018 phase one of the Trade Single Window (TSW) to provide a one-stop electronic platform for submitting ten types of trade documents, promoting cross-border customs cooperation, and expediting trade declaration and customs clearance. Phases two and three are expected to be implemented in 2022 and 2023, respectively.

The latest version of CEPA has established principles of trade facilitation, including simplifying customs procedures, enhancing transparency, and strengthening cooperation.

Performance and Data Localization Requirements

The HKG does not mandate local employment or performance requirements. It does not follow a forced localization policy making foreign investors use domestic content in goods or technology.

Foreign nationals normally need a visa to live or work in Hong Kong. Short-term visitors are permitted to conduct business negotiations and sign contracts while on a visitor’s visa or entry permit. Companies employing people from overseas must demonstrate that a prospective employee has special skills, knowledge, or experience not readily available in Hong Kong.

Hong Kong allows free and uncensored flow of information.  The freedom and privacy of communication is enshrined in Basic Law Article 30. The HKG is required to follow due process and warrant requirements to engage in electronic surveillance or demand most communications records from telecoms providers. The HKG has no requirements for foreign IT providers to turn over source code and does not interfere with data center operations.

Hong Kong does not currently restrict transfer of personal data outside the SAR, but the dormant Section 33 the Personal Data (Privacy) Ordinance would prohibit such transfers unless the personal data owner consents or other specified conditions are met.  The Privacy Commissioner is authorized to bring Section 33 into effect at any time, but it has been dormant since 1995.

Indonesia

Executive Summary

While Indonesia’s population of 268 million, GDP over USD 1 trillion, growing middle class, and stable economy are attractive to U.S. investors, different entities have noted that investing in Indonesia remains challenging. Since October 2014, the Indonesian government under President Joko Widodo, widely referred to as ‘Jokowi,’ has prioritized boosting infrastructure investment to support Indonesia’s economic growth goals, and has committed to reducing bureaucratic barriers to investment, including the launch of a “one-stop-shop” for permits and licenses via the online single submission (OSS) system at the Investment Coordination Board. However, factors such as a decentralized decision-making process, legal uncertainty, economic nationalism, and powerful domestic vested interests in both the private and public sectors, create a complex investment climate. Other factors relevant to investors include: government requirements, both formal and informal, to partner with Indonesian companies, and to purchase goods and services locally; restrictions on some imports and exports; and, pressure to make substantial, long-term investment commitments. While the Indonesian Corruption Eradication Commission continues to investigate and prosecute high-profile corruption cases, investors still cite corruption as an obstacle to pursuing opportunities in Indonesia.

Other barriers to foreign investment that have been reported include difficulties in government coordination, the slow rate of land acquisition for infrastructure projects, relatively weak enforcement of contracts, bureaucratic issues challenging the efficiency of the process, and ambiguous legislation in regards to tax enforcement. Businesses have also complained about changes to rules at the government discretion with little or no notice and opportunity for comment, and lack of communication with companies in the development of laws and regulations. Investors have noted that new regulations are at times difficult to understand and often not properly communicated to those impacted. In addition, companies have complaint of the complexity of  coordination among ministries that continues to delay some processes important to companies, such as securing business licenses and import permits.

Indonesia restricts foreign investment in some sectors through a Negative Investment List. The latest version, issued in 2016, details the sectors in which foreign investment is restricted and outlines the foreign equity limits in a number of other sectors. The 2016 Negative Investment List allows greater foreign investments in some sectors, including e-commerce, film, tourism, and logistics. In health care, the 2016 list loosens restrictions on foreign investment in categories such as hospital management services and manufacturing of raw materials for medicines, but tightens restrictions in others such as mental rehabilitation, dental and specialty clinics, nursing services, and the manufacture and distribution of medical devices. Companies have reported that energy and mining still face significant foreign investment barriers.

Indonesia began to abrogate its more than 60 existing Bilateral Investment Treaties (BITs) in February 2014, allowing some of the agreements to expire. The United States does not have a BIT with Indonesia.

Despite the challenges that the industry has reported, Indonesia continues to attract foreign investment. Singapore, China, Japan, South Korea, and the United States were among the top sources of foreign investment in the country in 2017 (latest available full-year data). Private consumption is the backbone of the largest economy in ASEAN, making Indonesia a promising destination for a wide range of companies, ranging from consumer products and financial services, to digital start-ups and franchisors. Indonesia has ambitious plans to improve its infrastructure with a focus on expanding access to energy, strengthening its maritime transport corridors, which includes building roads, ports, railways and airports, as well as improving agricultural production, telecommunications, and broadband networks throughout the country. Indonesia continues to attract U.S. franchises and consumer product manufacturers. UN agencies and the World Bank have recommended that Indonesia do more to grow financial and investor support for women-owned businesses, noting obstacles that women-owned business sometimes face in early-stage financing.

Table 1

Measure Year Index or Rank Website Address
TI Corruption Perceptions index 2018 89 of 175 https://www.transparency.org/cpi2018
World Bank’s Doing Business Report “Ease of Doing Business” 2019 73 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2018 85 of 126 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $15,170 M http://www.bea.gov/
international/factsheet/
World Bank GNI per capita 2017 $3,540 https://data.worldbank.org/
indicator/NY.GNP.PCAP.CD?locations=ID

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

With GDP growth of 5.17 percent in 2018, Indonesia’s young population, strong domestic demand, stable political situation, and well-regarded macroeconomic policy make it an attractive destination for foreign direct investment (FDI). Indonesian government officials welcome increased FDI, aiming to create jobs and spur economic growth, and court foreign investors, notably focusing on infrastructure development and export-oriented manufacturing. However, foreign investors have complained about vague and conflicting regulations,  bureaucratic issues, ambiguous legislation in regards to  tax enforcement, poor existing infrastructure, rigid labor laws, sanctity of contract issues, and corruption.

The Investment Coordination Board, or BKPM, serves as an investment promotion agency, a regulatory body, and the agency in charge of approving planned investments in Indonesia. As such, it is the first point of contact for foreign investors, particularly in manufacturing, industrial, and non-financial services sectors. In July 2018, Indonesia launched the OSS system to streamline 488 licensing and permitting processes through the issuance of Government Regulation No.24/2018 on Electronic Integrated Business Licensing Services. As a new process, OSS implementation is a work in progress and would benefit from greater socialization, especially at the subnational level. Special expedited licensing services are available for investors meeting certain criteria, such as making investments in excess of approximately IDR100 billion (USD7.4 million) or employing 1,000 local workers.

Limits on Foreign Control and Right to Private Ownership and Establishment

Restrictions on FDI are, for the most part, outlined in Presidential Decree No.44/2016, commonly referred to as the Negative Investment List or the DNI. The Negative Investment List aims to consolidate FDI restrictions from numerous decrees and regulations, in order to create greater certainty for foreign and domestic investors. The 2016 revision to the list eased restrictions in a number of previously closed or restricted fields. Previously closed sectors, including the film industry (including filming, editing, captioning, production, showing, and distribution of films), on-line marketplaces with a value in excess of IDR100 billion (USD7.4 million), restaurants, cold chain storage, informal education, hospital management services, and manufacturing of raw materials for medicine, are now open for 100 percent foreign ownership. The 2016 list also raises the foreign investment cap in the following sectors, though not fully to 100 percent: online marketplaces under IDR100 billion (USD7.4 million), tourism sectors, distribution and warehouse facilities, logistics, and manufacturing and distribution of medical devices. In certain sectors, restrictions are liberalized for foreign investors from other ASEAN countries. Though the energy sector saw little change in the 2016 revision, foreign investment in construction of geothermal power plants up to 10 MW is permitted with an ownership cap of 67 percent, while the operation and maintenance of such plants is capped at 49 percent foreign ownership. For investment in certain sectors, such as mining and higher education, the 2016 Negative Investment List is useful only as a starting point, as additional licenses and permits are required by individual ministries. A number of sensitive business areas, involving, for example, alcoholic beverages, ocean salvage, certain fisheries, and the production of some hazardous substances, remain closed to foreign investment or are otherwise restricted.

Foreign investment in small-scale and home industries (i.e. forestry, fisheries, small plantations, certain retail sectors) is reserved for micro, small and medium enterprises (MSMEs) or requires a partnership between a foreign investor and local entity. Even where the 2016 DNI revisions lifted limits on foreign ownership, certain sectors remain subject to other restrictions imposed by separate laws and regulations. In November 2018, the government announced its plans to liberalize further DNI sectors through the XVI economic policy package, before shelving the idea a few weeks later.

In November 2016, Bank Indonesia issued Regulation No.18/2016 on the implementation of payment transaction processing.  The regulation governs all companies providing the following services: principal, issuer, acquirer, clearing, final settlement operator, and operator of funds transfer.  The BI regulation capped foreign ownership of payments companies at 20 percent, though it contained a grandfathering provision.  BI’s July 2017 Regulation No.19/2017 on the National Payment Gateway (NPG) subsequently imposed a 20 percent foreign equity cap on all companies engaging in domestic debit switching transactions.  Firms wishing to continue executing domestic debit transactions are obligated to form partnership agreements with a NPG switching company.

Foreigners may purchase equity in state-owned firms through initial public offerings and the secondary market. Capital investments in publicly listed companies through the stock exchange are not subject to Indonesia’s Negative Investment List.

Other Investment Policy Reviews

The latest World Trade Organization (WTO) Investment Policy Review of Indonesia was conducted in April 2013 and can be found on the WTO website: http://www.wto.org/english/tratop_e/tpr_e/tp378_e.htm .

The most recent OECD Investment Policy Review of Indonesia, conducted in 2010, can be found on the OECD website: http://www.oecd.org/daf/inv/investmentfordevelopment/indonesia-investmentpolicyreview-oecd.htm .

UNCTADs report on ASEAN Investment can be found here: http://www.unctad.org/en/PublicationsLibrary/unctad_asean_air2017d1.pdf .

Business Facilitation

Business Registration

In order to conduct business in Indonesia, foreign investors must be incorporated as a foreign-owned limited liability company (PMA) through the Ministry of Law and Human Rights. Once incorporated, a PMA must register through the OSS system. Upon registration, a company will receive a business identity number (NIB) along with proof of participation in the Workers Social Security Program (BPJS) and endorsement of any Foreign Worker Recruitment Plans (RPTKA).  An NIB remains valid as long as the business operates in compliance with Indonesian laws and regulations. Existing businesses will eventually be required to register through the OSS system. In general, the OSS system simplified processes for obtaining NIB from three days to one day.

Once an investor has obtained a NIB, he/she may apply for a business license. At this stage, investors must: document their legal claim to the proposed project land/location; provide an environmental impact statement (AMDAL); show proof of submission of an investment realization report; and provide a recommendation from relevant ministries as necessary.  Investors also need to apply for commercial and/or operational licenses prior to commencing commercial operations. Previously the business license process averaged 260 days.  Following establishment of the 2018 OSS system, which includes 488 licenses for various ministries/agencies, the process of starting business has been reduced to 20 days according to the World Bank’s 2019 Ease of Doing Business report, which placed Indonesia 73rd out of the 190 countries surveyed in the report. Special expedited licensing services are also available for investors meeting certain criteria, such as making investments in excess of approximately IDR 100 billion (USD 7.2 million) or employing 1,000 local workers. After obtaining a NIB, investors in some designated industrial estates can immediately start project construction.

Foreign investors are generally prohibited from investing in MSMEs in Indonesia, although the 2016 Negative Investment List opened some opportunities for partnerships in farming and catalog and online retail. In accordance with the Indonesian SMEs Law No. 20/2008, MSMEs are defined as enterprises with net assets less than IDR10 billion (USD0.8 million) or with total annual sales under IDR50 billion (USD 3.7 million). However, the Indonesian Central Bureau of Statistics defines MSMEs as enterprises with fewer than 99 employees. The government provides assistance to MSMEs, including: expanded access to business credit for MSMEs in farming, fishery, manufacturing, creative business, trading and services sectors; a tax exemption for MSMEs with annual sales under IDR 200 million (USD 14.8 million); and assistance with international promotion.

The Ministry of Law and Human Rights’ implementation of an electronic business registration filing and notification system has dramatically reduced the number of days needed to register a company. Foreign firms are not required to disclose proprietary information to the government.

Screening of FDI

BKPM is responsible for issuing “investment licenses” (the term used to encompass both NIB and business licenses) to foreign entities and has taken steps to simplify the application process. The OSS serves as an online portal which allows foreign investors to apply for and track the status of licenses and other services online. The OSS coordinates many of the permits issued by more than a dozen ministries and agencies required for investment approval. In addition, BKPM now issues soft-copy investment and business licenses. While the OSS’s goal is to help streamline investment approvals, investments in the mining, oil and gas, plantation, and most other sectors still require multiple licenses from related ministries and authorities. Likewise, certain tax and land permits, among others, typically must be obtained from local government authorities. Though Indonesian companies are only require to obtain one approval at the local level, businesses report that foreign companies often must additional approvals in order to establish a business.

The Ministry of Home Affairs, the Ministry of Administrative and Bureaucratic Reform, and BKPM issued a circular in 2010 to clarify which government offices are responsible for investment that crosses provincial and regional boundaries. Investment in a regency (a sub-provincial level of government) is managed by the regency government; investment that lies in two or more regencies is managed by the provincial government; and investment that lies in two or more provinces is managed by the central government, or central BKPM. BKPM has plans to roll out its one-stop-shop structure to the provincial and regency level to streamline local permitting processes at more than 500 sites around the country.

Outward Investment

Indonesia’s outward investment is limited, as domestic investors tend to focus on the domestic market. BKPM has responsibility for promoting and facilitating outward investment, to include providing information about investment opportunities in and policies of other countries. BKPM also uses their investment and trade promotion centers abroad to match Indonesian companies with potential investment opportunities. The government neither restricts nor provides incentives for outward investment.

4. Industrial Policies

Investment Incentives

Indonesia provides incentive facilities through fiscal incentives, non-fiscal incentives, and other benefits. Fiscal incentives are in the form of tax holidays, tax allowances, and exemptions of import duties for capital goods and raw materials for investment. As part of the Economic Policy Package XVI, Indonesia issued a modified tax holiday scheme in November 2018 through Ministry of Finance (MOF) Regulation 150/2018, which revokes MOF Regulation 35/2018.  This regulation is intended to attract more direct investment in pioneer industries and simplify the application process through the OSS. The period of the tax holiday is extended up to 20 years; the minimum investment threshold is IDR 100 trillion (USD 7.14 billion), which is a significant reduction from the previous regulation at IDR 500 trillion (USD 35.7 billion). In addition to the tax holiday, depending on the investment amount, this regulation also provides either 25 or 50 percent income tax reduction for the two years after the end of the tax holiday. The following table explains the parameters of the new scheme:

Provision New Capital Investment IDR 100 billion to less than IDR 500 billion New Capital Investment IDR more  than IDR 500 billion
Reduction in Corporate Income Tax Rate

 

50 percent 100 percent
Concession Period

 

5 years 10 years
Transition Period 25 percent Corporate Income Tax Reduction for the next 2 years 50 percent Corporate Income Tax Reduction for the next 2 years

Based on BKPM Regulation 1/2019, the coverage of pioneer sectors was expanded to the digital economy, agricultural, plantation, and forestry, bringing the total to eighteen industries:

  1. Upstream basic metals;
  2. Oil and gas refineries;
  3. Petrochemicals derived from petroleum, natural gas, and coal;
  4. Inorganic basic chemicals;
  5. Organic basic chemicals;
  6. Pharmaceutical raw materials;
  7. Semi-conductors and other primary computer components;
  8. Primary medical device components;
  9. Primary industrial machinery components;
  10. Primary engine components for transport equipment;
  11. Robotic components for manufacturing machines;
  12. Primary ship components for the shipbuilding industry;
  13. Primary aircraft components;
  14. Primary train components;
  15. Power generation including waste-to-energy power plants;
  16. Economic infrastructure;
  17. Digital economy including data processing; and
  18. Agriculture, plantation, and forestry-based processing

Government Regulation No. 9/2016 expanded regional tax incentives for certain business categories in May 2016. Apparel, leather goods, and footwear industries in all regions are now eligible for the tax incentives. In this regulation, existing tax facilities are maintained, including:

  • Deduction of 30 percent from taxable income over a six-year period
  • Accelerated depreciation and amortization
  • Ten percent of withholding tax on dividend paid by foreign taxpayer or a lower rate according to the avoidance of double taxation agreement
  • Compensation losses extended from 5 to 10 years with certain conditions for companies that are:
    1. Located in industrial or bonded zone;
    2. Developing infrastructure;
    3. Using at least 70 percent domestic raw material;
    4. Absorbing 500 to 1000 laborers;
    5. Doing research and development (R&D) worth at least 5 percent of the total investment over 5 years;
    6. Reinvesting capital; or,
    7. Exporting at least 30 percent of their product.

The government also provides the facility of Government-Borne Import Duty (Bea Masuk Ditanggung Pemerintah /BMDTP) with zero percent import duty to improve industrial competitiveness and public goods procurement in high value added, labor intensive, and high growth sectors. MOF Regulation 209/2018 provides zero import duty for imported raw materials in 36 sectors including plastics, cosmetics, polyester, resins, other chemical materials, machinery for agriculture, electricity, toys, vehicle components, telecommunication, fertilizer, and pharmaceuticals until December 2019.

Research and Development

At present, Indonesia does not have formal regulations granting national treatment to U.S. and other foreign firms participating in government-financed or subsidized research and development programs. The Ministry for Research and Technology and Higher Education handles applications on a case-by-case basis.

Natural Resources

Indonesia’s vast natural resource wealth has attracted significant foreign investment over the last century and continues to offer significant prospects. However, some report that a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks near the bottom, 70th of 83 jurisdictions in the Fraser Institute’s 2018 Mining Policy Perception Index. In 2012, Indonesia banned the export of raw minerals, dramatically increased the divestment requirements for foreign mining companies, and required major mining companies to renegotiate their contracts of work with the government. The ban on the export of raw minerals went into effect in January 2014. In July 2014, the government issued regulations that allowed, until January 2017, the export of copper and several other mineral concentrates with export duties and other conditions imposed. When the full ban came back into effect in January 2017, the government issued new regulations that again allowed exports of copper concentrate and other specified minerals, but imposed  more onerous requirements. Of note for foreign investors, provisions of the regulations require that to be able to export non-smelted mineral ores, companies with contracts of work must convert to mining business licenses—and thus be subject to prevailing regulations—and must commit to build smelters within the next five years. Also, foreign-owned mining companies must gradually divest over ten years 51 percent of shares to Indonesian interests, with the price of divested shares determined based on fair market value and not taking into account existing reserves. The 2009 mining law devolved the authority to issue mining licenses to local governments, who have responded by issuing more than 10,000 licenses, many of which have been reported to overlap or be unclearly mapped. In the oil and gas sector, Indonesia’s Constitutional Court disbanded the upstream regulator in 2012, injecting confusion and more uncertainty into the natural resources sector. Until a new oil and gas law is enacted, upstream activities are supervised by the Special Working Unit on Upstream Oil and Gas (SKK Migas).

Infrastructure

Since taking office in October 2014, President Jokowi has made infrastructure development a top priority. The government originally announced plans to add 35,000 megawatts of electricity capacity by 2019, but in 2017 revised this target downward to 19,000 megawatts. The Jokowi administration also announced plans to create a maritime nexus, to include the development or expansion of 24 ports and other transportation infrastructure.  The Indonesian government is also implementing a PPP scheme to develop broadband internet access throughout the country as part of its “Palapa Ring” initiative. The initiative, which will install over 12,000 kilometers of fiber optic cable, is divided into three segments.  The western and central segments have been completed, and the eastern segment is expected to be complete by the end of 2019. Following completion of the Palapa Ring, Indonesia plans to deploy high-throughput satellites to connect remote and frontier areas for internet access. Many businesses report that the current institutional arrangement for infrastructure development still suffers from functional overlap, lack of capacity for public-private partnership (PPP) projects in regional governments, lack of solid value-for-money methodologies, crowding out of the private sector by state-owned enterprises (SOEs), legal uncertainty, lack of a solid land-acquisition framework, long-term operational risks for the private sector, unwillingness from stakeholders to be the first ones to test a new policy approach, and, especially, lack of a PPP apex agency. Currently infrastructure development is largely taking place through SOEs, with PPPs having only a marginal share of infrastructure projects.

Foreign Trade Zones/Free Trade/ Trade Facilitation

Indonesia offers numerous incentives to foreign and domestic companies that operate in special trade zones throughout Indonesia. The largest zone is the free trade zone (FTZ) island of Batam, located just south of Singapore. Neighboring Bintan Island and Karimun Island also enjoy FTZ status. Investors in FTZs are exempt from import duty, income tax, VAT, and sales tax on imported capital goods, equipment, and raw materials until the portion of production destined for the domestic market is “exported” to Indonesia, in which case fees are owed only on that portion.  Foreign companies are allowed up to 100 percent ownership of companies in FTZs. Companies operating in FTZs may lend machinery and equipment to subcontractors located outside of the zone for a maximum two-year period.

Indonesia also has numerous Special Economic Zones (SEZs), regulated under Law No. 39/2009, Government Regulation No. 2/2011 on SEZ management, and Government Regulation No. 96/2015. These benefits include a reduction of corporate income taxes for a period of years (depending on the size of the investment), income tax allowances, and expedited or simplified administrative processes for import/export, expatriate employment, immigration, and licensing. As of April 2019, Indonesia has identified twelve SEZs in manufacturing and tourism centers that are operational or under construction, with 20 additional areas proposed as new SEZs. Ten SEZs are operational (though development is sometimes limited) at: 1) Sei Mangkei, North Sumatera; 2) Tanjung Lesung, Banten, 3) Palu, Central Sulawesi; 4) Mandalika, West Nusa Tenggara, 5) Arun Lhokseumawe, Aceh, 6) Galang Batang, Bintan, Riau Islands 7) Tanjung Kelayang, Pulau Bangka, Bangka Belitung Islands; 8) Bitung, North Sulawesi; 9) Morotai, North Maluku; 10) Maloy Batuta Trans Kalimantan, East Kalimantan. Two more SEZs are expected to operate in 2019: Tanjung Api-Api, South Sumatera; and Sorong, Papua. In 2016, the government began the process of transitioning Batam from an FTZ to SEZ in order to provide further investment incentives in Batam. The Indonesian government announced in December 2018 that it plans to transition management of the Batam FTZ to the local government, creating a single regulatory authority on the island. The conversion to an SEZ is expected to be finished in 2019 and will not affect the status of the neighboring FTZs on Bintan and Karimun islands.

Indonesian law also provides for several other types of zones that enjoy special tax and administrative treatment.  Among these are Industrial Zones/Industrial Estates (Kawasan Industri), bonded stockpiling areas (Tempat Penimbunan Berikat), and Integrated Economic Development Zones (Kawasan Pengembangan Ekonomi Terpadu).  Indonesia is home to 97 industrial estates that host thousands of industrial and manufacturing companies.  Ministry of Finance Regulation No. 105/2016 provides several different tax and customs facilities available to companies operating out of an industrial estate, including corporate income tax reductions, tax allowances, VAT exemptions, and import duty exemptions depending on the type of industrial estate.  Bonded stockpile areas include bonded warehouses, bonded zones, bonded exhibition spaces, duty free shops, bonded auctions places, bonded recycling areas, and bonded logistics centers. Companies operating in these areas enjoy concessions in the form of exemption from certain import taxes, luxury goods taxes, and value added taxes, based on a variety of criteria for each type of location. Most recently, bonded logistics centers (BLCs) were introduced to allow for larger stockpiles, longer temporary storage (up to three years), and a greater number of activities in a single area. The Ministry of Finance issued Regulation 28/2018, providing additional guidance on the types of BLCs and shortening approval for BLC applications. By September 2018, Indonesia had designated 59 BLCs in 81 locations, with plans to designate more in eastern Indonesia.  KAPET zones, first announced in a 1996 presidential decree, are eligible for partial tax holidays, certain income tax exemptions and deductions, flexible treatment of amortization of capital and losses, and fiscal loss compensation. In 2018, Ministry of Finance and the Directorate General for Customs and Excise (DGCE) issued regulations (MOF Regulation No. 131/2018 and DGCE Regulation No. 19/2018) to streamline the licensing process for bonded zones.  Together the two regulations are intended to reduce processing times and the number of licenses required to open a bonded zone.

Shipments from FTZs and SEZs to other places in the Indonesia customs area are treated similarly to exports and are subject to taxes and duties.  Under MOF Regulation 120/2013, bonded zones have a domestic sales quota of 50 percent of the preceding realization amount on export, sales to other bonded zones, sales to free trade zones, and sales to other economic areas (unless otherwise authorized by the Indonesian government).  Sales to other special economic areas are only allowed for further processing to become capital goods, and to companies which have a license from the economic area organizer for the goods relevant to their business.

In 2017, the government issued Presidential Regulation 91 on the Acceleration of Business Operations, aiming to reduce and simplify the Indonesian business licensing regime, including in SEZs. Under this regulation, Indonesia has established national, ministerial, provincial and regional task forces to examine inefficiencies in the process of starting a business, including business licensing practices, the availability of one-stop business registration in SEZs and FTZs, and data sharing between different jurisdictions. The Coordinating Ministry for Economic Affairs, which leads implementation of the regulation, reports that all Indonesian provinces, FTZs, and SEZs, and more than 90 percent of regencies (kabupaten) had established one-stop business licensing services by February 2018.  Under the new rules, businesses that apply for a license under a one-stop system must begin setting up within 90 days unless given an extension. The regulation also provides that the central government may take control of business licensing if a local government unduly delays business license issuance. Business and bonded zone licensing is increasingly integrated into Indonesia’s OSS.

Performance and Data Localization Requirements

Performance Requirements

Indonesia expects foreign investors to contribute to the training and development of Indonesian nationals, allowing the transfer of skills and technology required for their effective participation in the management of foreign companies. Generally, a company can hire foreigners only for positions that the government has deemed open to non-Indonesians. Employers must have training programs aimed at replacing foreign workers with Indonesians. If a direct investment enterprise wants to employ foreigners, the enterprise should submit an Expatriate Placement Plan (RPTKA) to the Ministry of Manpower.

Indonesia recently made significant changes to its foreign worker regulations. Under Presidential Regulation No. 20/2018, issued in March 2018, the Ministry of Manpower now has two days to approve a complete RPTKA application, and an RPTKA is not required for commissioners or executives. An RPTKA’s validity is now based on the duration of a worker’s contract (previously it was valid for a maximum of five years). The new regulation no longer requires expatriate workers to go through the intermediate step of obtaining a Foreign Worker Permit (IMTA). Instead, expatriates can use an endorsed RPTKA to apply with the immigration office in their place of domicile for a Limited Stay Visa or Semi-Permanent Residence Visa (VITAS/VBS). Expatriates receive a Limited Stay Permit (KITAS) and a blue book, valid for up to two years and renewable for up to two extensions without leaving the country. Regulation No. 20/2018 also abolished the requirement for all expatriates to receive a technical recommendation from a relevant ministry. However, ministries may still establish technical competencies or qualifications for certain jobs, or prohibit the use of foreign worker for specific positions, by informing and obtaining approval from the Ministry of Manpower. Foreign workers who plan to work longer than six months in Indonesia must apply for employee social security and/or insurance.

Regulation No. 20/2018 provides for short-term working permits (maximum 6 months) for activities such as conducting audits, quality control, inspections, and installation of machinery and electrical equipment. Ministry of Manpower issued Regulation No.10/2018 to implement Regulation 20/2018, revoking its Regulation No. 16/2015 and No. 35/2015. Regulation 10/2018 provides additional details about the types of businesses that can employ foreign workers, sets requirements to obtain health insurance for expatriate employees, requires companies to appoint local “companion” employees for the transfer of technology and skill development, and requires employers to “facilitate” Indonesian language training for foreign workers. Any expatriate who holds a work and residence permit must contribute USD 1,200 per year to a fund for local manpower training at regional manpower offices. The Ministry of Manpower is preparing additional rules listing the specific types of jobs that will be open for foreign workers. Foreign workers will not be eligible for positions not listed in the decree. Some U.S. firms report difficulty in renewing KITASs for their foreign executives. In February 2017, the Ministry of Energy and Natural resources abolished regulations specific to the oil and gas industry, bringing that sector in line with rules set by the Ministry of Manpower.

With the passage of a defense law in 2012 and subsequent implementing regulations in 2014, Indonesia established a policy that imposes offset requirements for procurements from foreign defense suppliers. Current laws authorize Indonesian end users to procure defense articles from foreign suppliers if those articles cannot be produced within Indonesia, subject to Indonesian local content and offset policy requirements. On that basis, U.S. defense equipment suppliers are competing for contracts with local partners. The 2014 implementing regulations still require substantial clarification regarding how offsets and local content are determined. According to the legislation and subsequent implementing regulations, an initial 35 percent of any foreign defense procurement or contract must include local content, and this 35 percent local content threshold will increase by 10 percent every five years following the 2014 release of the implementing regulations until a local content requirement of 85 percent is achieved. The law also requires a variety of offsets such as counter-trade agreements, transfer of technology agreements, or a variety of other mechanisms, all of which are negotiated on a per-transaction basis. The implementing regulations also refer to a “multiplier factor” that can be applied to increase a given offset valuation depending on “the impact on the development of the national economy.” Decisions regarding multiplier values, authorized local content, and other key aspects of the new law are in the hands of the Defense Industry Policy Committee (KKIP), an entity comprising Indonesian interagency representatives and defense industry leadership. KKIP leadership indicates that they still determine multiplier values on a case-by-case basis, but have said that once they conclude an industry-wide gap analysis study, they will publish a standardized multiplier value schedule. According to government officials, rules for offsets and local content apply to major new acquisitions only, and do not apply to routine or recurring procurements such as those required for maintenance and sustainment.

WTO/Trade-Related Investment Measures

Indonesia notified the WTO of its compliance with Trade-Related Investment Measures (TRIMS) on August 26, 1998. The 2007 Investment Law states that Indonesia shall provide the same treatment to both domestic and foreign investors originating from any country. Nevertheless, the government pursues policies to promote local manufacturing that could be inconsistent with TRIMS requirements, such as linking import approvals to investment pledges, or requiring local content targets in some sectors.

Data Localization Requirements

In 2012, Indonesia issued Government Regulation No. 82/2012 requiring certain “public service providers” to establish data storage and disaster recovery centers on Indonesian soil. The regulation went into effect in October 2017 and several ministries have issued data localization regulations, including regulations related to data privacy, peer-to-peer lending, and insurance. As of April 2019, the Indonesian government has prepared a draft amendment to Government Regulation No. 82/2012 that would classify data into three categories: strategic, high-level, and low-level. The draft amendment offers vague definitions of these categories, defining strategic data as data potentially disruptive to the national governance, security, stability of the financial system, and/or other criteria established by law. The proposed amendment would require that “strategic” data be managed, stored, and processed only in Indonesia. The draft regulation would allow high- and low-level data to be managed, stored, and processed overseas so long as it does not reduce the effective implementation of Indonesian legal jurisdiction, subject to technical requirements established by the Ministry of Communications and Information Technology (KOMINFO).  The draft regulation would give financial sector regulators independent authority to identify and set conditions on the treatment of high-level financial data. It remains unclear how the proposed regulation would affect existing data localization requirements and what additional requirements may be imposed if the revised regulation is issued.

Ireland

Executive Summary

The Irish government actively promotes foreign direct investment (FDI) and has had considerable success in attracting U.S. investment, in particular.  Currently, there are approximately 700 U.S. subsidiaries in Ireland operating primarily in the following sectors: chemicals, bio-pharmaceuticals and medical devices, computer hardware and software, electronics, and financial services.

One of Ireland’s most attractive features as an FDI destination is its low corporate tax rate, which has remained at 12.5 percent since 2003.  Other factors cited by foreign firms include the quality and flexibility of the English-speaking workforce; availability of a multilingual labor force; cooperative labor relations; political stability; and pro-business government policies and regulators.  Additional positive features include a transparent judicial system; transportation links; proximity to the United States and Europe; and Ireland’s geographic location, which leaves it well placed in time zones to support investment in Asia and the Americas.  Ireland also benefits from its membership in the European Union (EU) and resulting access to a Single Market of 500 million consumers, plus the drawing power of existing companies operating successfully in Ireland (a so-called “clustering” effect). The planned withdrawal by the United Kingdom (UK) from the EU, or Brexit, will leave Ireland as the only remaining English-speaking country in the EU and may make Ireland even more attractive as a destination for FDI.

The Irish government treats all firms incorporated in Ireland on an equal basis.  Ireland’s judicial system is transparent and upholds the sanctity of contracts, as well as laws affecting foreign investment.  Conversely, the following factors hurt Ireland’s ability to attract investment: high labor and operating costs (such as for energy); skilled-labor shortages; Eurozone-risk; sometimes-deficient infrastructure (such as in transportation, housing, energy and broadband Internet); uncertainty in EU policies on some regulatory matters; and absolute price levels among the highest in Europe.

There is no formal screening process for foreign investment in Ireland.  Investors looking to receive government grants or assistance through one of the four state agencies responsible for promoting foreign investment in Ireland are often required, however, to meet certain employment and investment criteria.

Ireland uses the euro as its national currency and enjoys full current and capital account liberalization.

The government recognizes and enforces secured interests in property, both chattel and real estate.  Ireland is a member of the World Intellectual Property Organization (WIPO) and a party to the International Convention for the Protection of Intellectual Property.

Several state-owned enterprises (SOEs) operate in Ireland in the energy, broadcasting, and transportation sectors.  All of Ireland’s SOEs are open to competition for market share.

The United States and Ireland do not have a Bilateral Investment Treaty, but since 1950 have shared a Friendship, Commerce, and Navigation Treaty, which provides for national treatment of U.S. investors.  The two countries also have shared a Tax Treaty since 1998, supplemented in December 2012 with an agreement to improve international tax compliance and to implement the U.S. Foreign Account Tax Compliance Act (FATCA).

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 18 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 23 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 10 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $446,383 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $55,290 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Irish government actively promotes FDI, a strategy that has fueled economic growth since the mid-1990s.  The principal goal of Ireland’s investment promotion has been employment creation, especially in technology-intensive and high-skill industries.  More recently, the government has focused on Ireland’s international competitiveness by encouraging foreign-owned companies to enhance research and development (R&D) activities and to deliver higher-value goods and services.

The Irish government’s actions have achieved considerable success in attracting U.S. investment in particular.  The stock of American FDI in Ireland stood at USD 446 billion in 2017, more than the U.S. total for China, India, Russia, Brazil, and South Africa (the so-called BRICS countries) combined.  There are approximately 700 U.S. subsidiaries currently in Ireland employing roughly 155,000 people and supporting work for another 100,000. This figure represents a significant proportion of the 2.28 million people employed in Ireland.  U.S. firms operate primarily in the following sectors: chemicals, bio-pharmaceuticals and medical devices, computer hardware and software, electronics, and financial services.

U.S. investment has been particularly important to the growth and modernization of Irish industry over the past 25 years, providing new technology, export capabilities, management and manufacturing best practices, and employment opportunities.  The activities of U.S. firms in Ireland span from the manufacturing of high-tech electronics, computer products, medical devices, and pharmaceuticals to retailing, banking, finance, and other services. More recently, Ireland has also become an important R&D center for U.S. firms in Europe, and a magnet for U.S. internet/digital media investment.  Industry leaders like Google, Amazon, eBay, PayPal, Facebook, Twitter, LinkedIn, and Electronic Arts use Ireland as the hub or important part of their respective European, and sometimes Middle Eastern, African, and/or Indian operations.

U.S. companies are attracted to Ireland as an exporting sales and support platform to the EU market of 500 million consumers and other global markets, mainly the Middle East and Africa.  Ireland is a successful FDI destination for many reasons, including a corporate tax rate of 12.5 percent for all domestic and foreign firms; a well-educated, English-speaking workforce; the availability of a multilingual labor force; cooperative labor relations; political stability; and pro-business government policies and regulators.  Ireland also benefits from a transparent judicial system; good transportation links; proximity to the United States and Europe, and the drawing power of existing companies operating successfully in Ireland (a so-called “clustering” effect).

Conversely, factors that negatively affect Ireland’s ability to attract investment include high labor and operating costs (such as for energy) costs; sporadic skilled-labor shortages; residual fallout from Ireland’s economic and financial restructuring; and sometimes-deficient infrastructure (such as in transportation, energy and broadband quality).  Ireland also suffers from housing and high-quality office space shortages; uncertainty in EU policies on some regulatory matters; and absolute price levels that are among the highest in Europe. Some Irish government agencies have in the past expressed concern that energy costs and the reliability of energy supply also could undermine Ireland’s attractiveness as a FDI destination.  The American Chamber of Commerce in Ireland has noted the need for greater attention to a “skills gap” in the supply of Irish graduates to the high technology sector. It also has asserted that high personal income tax rates can make attracting talent from abroad difficult.

In 2013, Ireland became the first country in the Eurozone to exit the EU, European Central Bank, and International Monetary Fund (EU/ECB/IMF, or so-called Troika) bailout program.  Compliance with the terms of the Troika program came at a substantial economic cost with gross domestic product (GDP) stagnation, austerity measures, and high unemployment (15 percent).  The economy has since recovered and has been the fastest growing Eurozone economy for the past five years, with a growth rate of 6 percent in 2018. Meanwhile, government initiatives to attract investment have continued to stimulate job creation and employment.  As a result, unemployment levels have fallen dramatically and the Central Bank of Ireland forecasts that Ireland’s unemployment rate will fall to 4.9 percent in 2019. Against this good economic background, there is a resurgent interest in Ireland as an investment destination.  Since exiting the bailout program, the Irish government has successfully returned to international sovereign debt markets, and successful bonds sales exemplify renewed international confidence in Ireland’s recovery.

Brexit and its Implications for Ireland

The UK’s exit from the EU will leave Ireland as the only remaining English-speaking country in the bloc.  Ireland is the only EU country to share a land border with the UK. It is still unclear what the full economic consequences of Brexit will be for Ireland as it loses a close EU ally on policy matters.  Econometric models from the Irish Department of Finance and from the Central Bank of Ireland suggest Brexit will cut economic growth modestly in the near term. Ireland is heavily dependent on the UK as an export market, especially for food products, and sectors such as food and agri-business may be hardest hit.  Ireland also sources many imports from the UK, which could raise costs if supply chains are disrupted. A number of UK-based firms (including US firms) have moved headquarters or opened subsidiary offices in Ireland to facilitate ease of business with other EU countries.

Industrial Promotion

Six government departments and organizations have responsibility to promote investment into Ireland by foreign companies:

  • The Industrial Development Authority of Ireland (IDA Ireland) has overall responsibility for promoting and facilitating FDI in all areas of the country, except in the Shannon Free Zone (see below).  IDA Ireland is also responsible for attracting foreign financial and insurance firms to Dublin’s International Financial Services Center (IFSC). IDA Ireland maintains seven U.S. offices (in New York, NY; Boston, MA; Chicago, IL; Mountain View, CA; Irvine, CA; Atlanta, GA; and Austin, TX), as well as offices throughout Europe and Asia.
  • Enterprise Ireland (EI) promotes joint ventures and strategic alliances between indigenous and foreign companies.  The agency also assists foreign firms that wish to establish food and drink manufacturing operations in Ireland. EI has five offices in the United States (New York, NY; Austin, TX; Boston, MA; Chicago, IL; and Mountain View, CA), as well as offices in Europe, South America, the Middle East, and Asia.
  • Shannon Group (formerly the Shannon Free Airport Development Company) promotes FDI in the Shannon Free Zone (see description below) and owns properties in the Shannon region as potential green-field investment sites.  Since 2006 and the Industrial Development Amendments Act, EI assumed responsibility for investment by Irish firms in the Shannon region. IDA Ireland remains responsible for FDI in the Shannon region outside the Shannon Free Zone.
  • Udaras na Gaeltachta (Udaras) has responsibility for economic development in those areas of Ireland where the predominant language is Irish, and works with IDA Ireland to promote overseas investment in these regions.
  • Department of Foreign Affairs and Trade (DFAT) has responsibility for economic messaging and supporting the country’s trade promotion agenda as well as diaspora engagement to attract investment.
  • Department of Business, Enterprise and Innovation (DBEI) supports the creation of good jobs by promoting the development of a competitive business environment in which enterprises will operate with high standards and grow in sustainable markets.

Limits on Foreign Control and Right to Private Ownership and Establishment

Irish law allows foreign corporations (registered under the Companies Act 2014 or previous legislation and known locally as a public limited company, or plc for short) to conduct business in Ireland.  Any company incorporated abroad that establishes a branch in Ireland must file certain papers with the Registrar of Companies. A foreign corporation with a branch in Ireland will have the same standing in Irish law for purposes of contracts, etc., as a domestic company incorporated in Ireland.  Private businesses are not competitively disadvantaged to public enterprises with respect to access to markets, credit, and other business operations.

No barriers exist to participation by foreign entities in the purchase of state-owned Irish companies.  Residents of Ireland may, however, be given priority in share allocations over all other investors. In 1998, the Irish government sold the state-owned telecommunications company Eircom, and Irish residents received priority in share allocations.  In 2005, the Government privatized the national airline Aer Lingus through a stock market flotation, but it chose to retain about a one-quarter stake. U.S. investors purchased shares during its privatization. In 2015, the International Airlines Group (IAG) purchased the Government’s remaining stake in the airline.

Citizens of countries other than Ireland and EU member states can acquire land for private residential or industrial purposes.  Under Section 45 of the Land Act, 1965, all non-EU nationals must obtain the written consent of the Land Commission before acquiring an interest in land zoned for agricultural use.  There are many equine stud farms and racing facilities owned by foreign nationals. No restrictions exist on the acquisition of urban land.

Ireland does not have formal investment screening legislation, but as an EU member it may need to implement any future common EU investment screening regulations/directives.

Other Investment Policy Reviews

The Economist Intelligence Unit and World Bank’s Doing Business 2019 provide current information on Ireland’s investment policies.

Business Facilitation

All firms must register with the Companies Registration Office (www.cro.ie).  As well as registering companies, the CRO also can register a business/trading name, a non-Ireland based foreign company (external company), or a limited partnership.  A firm or company registered under the Companies Act 2014 becomes a body corporate as and from the date mentioned in its certificate of incorporation. The website permits online data submission.  Firms must submit a signed paper copy of this online application to the CRO, unless the applicant company has already registered with www.revenue.ie (the website of Ireland’s tax collecting authority, the Office of the Revenue Commissioners).

Outward Investment

Enterprise Ireland assists Irish firms in developing partnerships with foreign firms mainly to develop and grow indigenous firms.

4. Industrial Policies

Investment Incentives

Three Irish organizations – IDA Ireland, Enterprise Ireland, and Udaras – currently have regulatory authority for administering grant aid to investors for capital equipment, land, buildings, training, and R&D.  Foreign and domestic business enterprises that seek grant aid from these organizations must submit investment proposals. Typically, these proposals include information on fixed assets (capital), labor, and technology/R&D components, and establish targets using criteria such as sales, profitability, exports, and employment.  These organizations treat this information in confidence, and each investment proposal is subject to an economic appraisal before they offer support.

The state investment agencies and foreign investors establish employment creation targets, which usually serve as the basis for performance requirements.  The agencies only pay grant aid after the foreign investors have attained externally audited performance targets. Grant agreements generally have a repayment term of five years after the date on which the last grant is paid.  Parent companies typically must also guarantee repayment of the government grant if the company closes before an agreed period of time elapses, normally ten years after the grant was paid. There are no requirements that foreign investors procure locally or allow nationals to own shares.

The current EU Regional Aid Guidelines (RAGs) that apply to Ireland operate until 2020.  The RAGs govern the maximum grant aid the Irish government can provide to firms/businesses, which depends on their location.  The differences in the aid ceilings reflect the less developed status of business/infrastructure in regions outside the greater Dublin area.

While investors are free, subject to planning permission, to choose the location of their investment, IDA Ireland has actively encouraged investment in regions outside Dublin since the 1990s.  Investment regionalization became Irish government policy in 2001, officially seeking to spread investment more evenly around the country. The IDA’s current strategy targets locating over 50 percent of all new FDI investments outside the two main urban centers of Dublin and Cork.  To encourage the location of firms outside Dublin, IDA Ireland has developed “magnets of attraction,” providing cluster areas of activity around the country. IDA Ireland also has supported construction of business parks in counties Galway and Louth for the biotechnology sector.

There are no restrictions, de jure or de facto, on participation by foreign firms in government-financed and/or -subsidized R&D programs on a national basis.  In fact, the government strongly encourages and incentivizes (via a partial tax break) foreign companies to conduct R&D as part of a national strategy to build a more knowledge-intensive, innovation-based economy.  Science Foundation Ireland (SFI), the state science agency, has been responsible for administering Ireland’s R&D funding since 2000. Under its current strategy, SFI is investing over USD 200 million annually in R&D activities.  It is targeting leading researchers in Ireland and overseas to promote the development of biotechnology, information and communications technology, and energy, as well as complementary worker skills.

The U.S.-Ireland Research and Development Partnership, launched in July 2006, is a unique initiative involving funding agencies across three jurisdictions:  the United States, Ireland, and Northern Ireland (NI). Under the program, a ‘single-proposal, single-review’ mechanism is facilitated by the National Science Foundation (NSF) and National Institutes of Health (NIH) in the United States, which accept submissions from tri-jurisdictional (U.S., Ireland, and NI) teams for existing funding programs.  All proposals submitted under the auspices of the Partnership must have significant research involvement from researchers in all three jurisdictions. In 2015, the program was expanded to include agricultural research topics.

A key aspect of government support is a flexible 25 percent tax credit on the cost of eligible research, development, and innovation (RDI) activity and of any building with a 35 percent RDI activity level over four years.  A number of U.S. firms have already used these tax credits to build and operate R&D facilities. In addition, the Government in 2016 introduced the Knowledge Development Box (KDB), which offers a lower tax rate for certain R&D activities carried out in Ireland.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Government established Shannon duty-free Processing Zone (SDFPZ) under legislation in 1957.  At that time, companies operating in the area were entitled to a number of taxation and duty-free benefits not available elsewhere in Ireland.

All firms operating in the area, now called the Shannon Free Zone, have the same investment opportunities and tax incentives as indigenous Irish companies.  There are more than 150 companies operating within the 254-hectare business park. These include the following U.S. companies: Benex (Becton Dickinson), Connor-Winfield, Digital River, Enterasys Networks, Extrude Hone, GE Capital Aviation Services, GE Money, Sensing, Genworth Financial, Intel, Illinois Tool Works, Kwik-Lok, Lawrence Laboratories (Bristol Myers Squibb), Le Bas International, Magellan Aviation Services, Maidenform, Melcut Cutting Tools (SGS Carbide Tools), Mentor Graphics, Molex, Phoenix American Financial Services, RSA Security, Shannon Engine Support (CFM International), SPS International/Hi-Life Tools (Precision Castparts Corp), Sykes Enterprises, Symantec, Travelsavers Corp, Viking Pump, Western Well Tool, Xerox, and Zimmer.  The Shannon Group currently operates the SDFPZ, as well as Shannon Airport.

Performance and Data Localization Requirements

Visa, residence, and work permit procedures for foreign investors are non-discriminatory and, for U.S. citizens (as investors or employees), generally liberal.  No restrictions exist on the numbers and duration of employment of foreign managers brought in to supervise foreign investment projects, though they must renew work permits annually.  There are no discriminatory export policies or import policies affecting foreign investors.

Data Storage

The Government does not follow forced localization nor does it require foreign IT providers to turn over source code and/or provide access to surveillance (e.g., backdoors into hardware and software, or encryption keys).  There are no rules on maintaining minimum amounts of data storage in Ireland.

Italy

Executive Summary

Italy’s economy, the eighth largest in the world, is fully diversified, and dominated by small and medium-sized firms (SMEs), which comprise 99.9 percent of Italian businesses.  Italy is an original member of the 19-nation Eurozone. Germany, France, the United States, the United Kingdom, Spain, and Switzerland are Italy’s most important trading partners, with China continuing to gain ground.  Tourism is an important source of external revenue, as are exports of pharmaceutical products, furniture, industrial machinery and machine tools, electrical appliances, automobiles and auto parts, food, and wine, as well as textiles/fashion.  Italy continues to attract less foreign direct investment than many industrialized nations. Italy does not share a bilateral investment treaty with the United States.

Italy’s relatively affluent domestic market, access to the European Common Market, proximity to emerging economies in North Africa and the Middle East, and assorted centers of excellence in scientific and information technology research, remain attractive to many investors.  The government remains open to foreign investment in shares of Italian companies and continues to make information available online to prospective investors. The Italian government’s efforts to implement new investment promotion policies to position Italy as a desirable investment destination have been undermined in part by Italy’s slow economic growth and lack of consistent progress on structural reforms that could reduce lengthy and often inconsistent legal and regulatory procedures, unpredictable tax structure, and layered bureaucracy.  

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 53 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2018 51 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2018 31 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country (M USD, stock positions) 2017 $30,708 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $31,020 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Italy welcomes foreign direct investment (FDI).  As a European Union (EU) member state, Italy is bound by the Union’s treaties and laws.  Under the EU treaties with the United States, Italy is generally obliged to provide national treatment to U.S. investors established in Italy or in another EU member state.  

EU and Italian antitrust laws provide Italian authorities with the right to review mergers and acquisitions for market dominance.  In addition, the Italian government may block mergers and acquisitions involving foreign firms under the “Golden Power” law if the transactions appear to raise national security concerns.  This law was enacted in 2012 and further implemented with decrees in 2015, 2017, and 2019.  The Golden Power law allows the Government of Italy (GOI) to block foreign acquisition of companies operating in strategic sectors (identified as defense/national security, energy, transportation, telecommunications, critical infrastructure, sensitive technology, and nuclear and space technology).  On March 26, 2019 the GOI issued a decree expanding the Golden Power authority to cover the purchase of goods and services related to the planning, realization, maintenance, and management of broadband communications networks using 5G technology.  Per Italian law, Parliament must confirm the decree within 60 days. The GOI’s Golden Power authority always applies in cases involving the sectors above in which the potential purchaser is a non-EU company; it is extended to EU companies if the target of the acquisition is involved in defense/national security activities.  In this respect, the GOI has a say regarding the ownership of private companies as well as ones in which the government has a stake. This law replaced the “Golden Share” which the GOI previously held in former state-owned firms that were partially privatized in the 1990s and 2000s. The law also allows the State to maintain oversight over entire strategic sectors as opposed to individual companies, and by replacing the Golden Share legislation, has enabled Italy to address accusations the Golden Shares violated European treaties.   An interagency group led by the Prime Minister’s office reviews acquisition applications and prepares the dossiers/ recommendations for the Council of Ministers’ decision.   

According to the latest figures available from the Italian Trade Agency (ITA), foreign investors own significant shares of 12,768 Italian companies.  These companies employed 1,211,872 workers with overall sales of EUR 573.6 billion. ITA operates under the umbrella of the Italian Ministry of Economic Development.

The Italian Trade Agency (ITA) operates Invest in Italy: http://www.investinitaly.com/en/.   The Foreign Investments Attraction Department is a dedicated unit of ITA for facilitating the establishment and the development of foreign companies in Italy.  As of April 2019, ITA maintained a presence in 65 countries to assist foreign investors.  

Invitalia is the national agency for inward investment and economic development, owned by the Italian Ministry of Economy and Finance.  The agency focuses on strategic sectors for development and employment.  It places an emphasis on southern Italy, where investment and development lag in comparison to the rest of the country.  Invitalia finances projects both large and small, targeting entrepreneurs with concrete development plans, especially in innovative and high-added-value sectors.  For more information, see https://www.invitalia.it/eng  .  The Ministry of Economic Development also has a program to attract innovative investments: https://www.mise.gov.it  

Italy’s main business association (Confindustria) also provides assistance to companies in Italy: https://www.confindustria.it/en  

Limits on Foreign Control and Right to Private Ownership and Establishment

Under EU treaties and OECD obligations, Italy is generally obliged to provide national treatment to U.S. investors established in Italy or in another EU member state.  

EU and Italian antitrust laws provide Italian national local authorities with the right to review mergers and acquisitions over a certain financial threshold.  The Italian government may block mergers and acquisitions involving foreign firms if national security concerns are raised or on the principle of reciprocity if the government of the foreign firm applies discriminatory measures against Italian firms.  Foreign investors in the defense or aircraft manufacturing sectors are more likely to encounter resistance from the many ministries involved in reviewing foreign acquisitions.  

Italy maintains a formal national security screening process for inbound foreign investment in the sectors of defense/national security, transportation, energy, telecommunications, critical infrastructure, sensitive technology, and nuclear and space technology under its “Golden Power” legislation, and where there may be market concentration (antitrust) issues.  Italy’s Golden Power legislation was expanded on March 26, 2019 to include the purchase of goods and services related to the planning, realization, maintenance, and management of broadband communications networks using 5G technology. (Per Italian law Parliament must confirm the law within 60 days for it to remain in force.) To our knowledge, U.S. investors have not been disadvantaged relative to other foreign investors under the mechanisms described above.

Other Investment Policy Reviews

An OECD Economic Survey was published for Italy in April 2019.  https://www.oecd.org/economy/surveys/Italy-2019-OECD-economic-survey-overview.pdf 

Business Facilitation

Italy has a business registration website, available in Italian and English, administered through the Union of Italian Chambers of Commerce: http://www.registroimprese.it.    The online business registration process is clear and complete.  Foreign companies may use the online process. Before registering a company online, applicants must obtain a certified e-mail address and digital signature, a process that may take up to five days.  A notary is required to certify the documentation. The precise steps required for the registration process depend on the type of business being registered. The minimum capital requirement also varies by type of business.  Generally, companies must obtain a value-added tax account number (partita IVA) from the Italian Revenue Agency, register with the social security agency Istituto Nazionale della Previdenza Sociale (INPS), verify adequate capital and insurance coverage with the Italian workers’ compensation agency Istituto Nazionale per L’Assicurazione contro gli Infortuni sul Lavoro (INAIL), and notify the regional office of the Ministry of Labor.  According to the World Bank Doing Business Index 2018, Italy is ranked 67 out of 190 countries in terms of the ease of starting a business: it takes six procedures and six days to start a business in Italy.  Additional licenses may be required, depending on the type of business to be conducted.

Invitalia and the Italian Trade Agency’s Foreign Direct Investment Unit assist those wanting to set up a new business in Italy.  Many Italian localities also have one-stop shops to serve as a single point of contact for potential investors and provide advice in obtaining necessary licenses and authorizations.  These services are available to all investors.

Outward Investment

Italy neither promotes, restricts, or incentivizes outward investment nor restricts domestic investors from investing abroad.

4. Industrial Policies

Investment Incentives

The GOI offers modest incentives to encourage private sector investment in targeted sectors (e.g., innovative companies) and economically depressed regions, particularly in southern Italy. The incentives are available to eligible foreign investors as well.  Incentives include grants, low-interest loans, deductions and tax credits. Some incentive programs have a cost cap, which may prevent otherwise eligible companies from receiving the incentive benefits once the cap is reached. The GOI applies cost caps on a non-discriminatory basis, typically based on the order that applications were filed.  The government does not have a practice of issuing guarantees or jointly financing foreign direct investment projects.

Italy provides an incentive for investments by SMEs in new machinery and capital equipment (“New Sabatini Law”), available to eligible companies regardless of nationality.  This investment incentive provides financing, subject to an annual cost cap. Sector-specific investment incentives are also available in targeted sectors.

In January 2018, the GOI also provided “super amortization” and “hyper amortization” (essentially, generous tax deductions) on investments in special areas of the economy.  Of these only “hyper amortization” was renewed in the 2019 budget law. The GOI is considering reintroducing the “super amortization” by decree law in the second half of 2019 in order to stimulate investment.  The GOI has not yet renewed the broader “Industry 4.0” initiative launched by the previous government in 2017 to improve the Italian industrial sector’s competitiveness through a combination of policy measures and research and infrastructure funding.

The Italian tax system does not generally discriminate between foreign and domestic investors, though a digital services tax approved in principle by the Parliament in December 2018, but not yet implemented, would primarily impact U.S. companies.  The corporate income tax (IRES) rate is 24 percent. In addition, companies may be subject to a regional tax on productive activities (IRAP) at a 3.9 percent rate. The World Bank estimates Italy’s total tax rate as a percent of commercial profits at 53.1 percent in 2018, higher than the OECD high-income average of 39.8 percent.  

Several U.S. multinationals have sought U.S. Embassy assistance in dealing with Italy’s tax enforcement, with some expressing concerns that the Italian Revenue Agency unfairly targeted large companies.  According to the companies, Italian tax investigations may focus on corporate accounting practices deemed legitimate in other EU Member States, creating inconsistencies and uncertainty.

Foreign Trade Zones/Free Ports/Trade Facilitation

The main free trade zone in Italy is located in Trieste, in the northeast.  The goods may undergo transformation free of any customs restraints. An absolute exemption is granted from any duties on products coming from a third country and re-exported to a non-EU country.  Legislation to create other FTZs in Genoa and Naples exists, but has yet to be implemented. A free trade zone operated in Venice for a period but is currently being restructured.

Italy’s “Decree for the South” law (Law 91 of 2017) foresees eight Special Economic Zones (ZES – Zone Economica Speciale) managed by port authorities in Italy’s less-developed south and islands (the regions of Abruzzo, Basilicata, Calabria, Campania, Molise, Puglia, Sardinia and Sicily).  Investors will be able to access up to EUR 50 million in tax breaks, hiring incentives, reduced bureaucracy, and reimbursement of the IRAP regional business tax, covered by national allotments of EUR 250 million for 2019 and 2020.  The GOI announced plans to increase the allotment by another EUR 300 million, but the increase has not passed into law yet. The Region of Campania approved the strategic plan for implementing the law on March 28, 2018, but the plan still awaits final approval from the Chamber of Deputies to become operational. The Naples ZES will encompass over 54 million square meters of land in the ports of Naples, Salerno and Castellamare di Stabia, as well as industrial areas and transport hubs in 37 cities and towns in Campania.  Incentives are not automatic, as investments will be approved by local government bodies in a procedure governed by the Port Authority of the Central Tyrrhenian Sea.  The Campania Region forecasts that the ZES will create and/or save between 15 and 30 thousand jobs. A proposed ZES encompassing the port cities of Bari and Brindisi on the Adriatic is expected to finish the approval procedure in 2019, followed by a ZES planned around the transshipment port of Gioia Tauro in Calabria and the other five zones: eastern Sicily (Augusta, Catania, and Siracusa), western Sicily (Palermo), Sardinia (Cagliari), ZES Ionica (Taranto in Puglia and the region of Basilicata), and a ZES to be shared between the ports in Abruzzo and Molise.

A special free trade zone was established in late 2015 in the areas within the Emilia-Romagna region that were hit by a May 2012 earthquake and by a January 2014 flood.  The measure aimed to assist the recovery of these areas through tax exemptions amounting to EUR 39.6 million for the years 2015 and 2016 for small enterprises headquartered in these areas.

Currently, goods of foreign origin may be brought into Italy without payment of taxes or duties, as long as the material is to be used in the production or assembly of a product that will be exported.  The free-trade zone law also allows a company of any nationality to employ workers of the same nationality under that country’s labor laws and social security systems.

Performance and Data Localization Requirements

Italy does not mandate local employment.  Non-EU nationals who would like to establish a business in Italy must have a valid residency permit or be nationals of a country with reciprocal arrangements, such as a bilateral investment agreement, as described at: https://www.esteri.it/mae/en/servizi/stranieri/  .

Work permits and visas are readily available and do not inhibit the mobility of foreign investors.  As a member of the Schengen Area, Italy typically allows short-term visits (up to 90 days) without a visa.  The Italian Ministry of Foreign Affairs has specific information about visa requirements: http://vistoperitalia.esteri.it/home/en  .

As a member of the EU, Italy does not follow forced localization policies in which foreign investors must use domestic content in goods or technology.  Italy does not have enforcement procedures for investment performance requirements. Italy does not require local data storage. Companies transmitting customer or other business-related data within or outside of the EU must comply with relevant EU privacy regulations.

Japan

Executive Summary

Japan is the world’s third largest economy, the United States’ fourth largest trading partner, and was the second largest contributor to U.S. foreign direct investment (FDI) in 2017.  The Japanese government actively welcomes and solicits foreign investment, and has set ambitious goals for increasing inbound FDI. Despite Japan’s wealth, high level of development, and general acceptance of foreign investment, inbound FDI stocks as a share of gross domestic product (GDP) are the lowest in the Organization for Economic Co-operation and Development (OECD).

Japan’s legal and regulatory climate is highly supportive of investors in many respects.  Courts are independent, sophisticated, and ostensibly provide equal treatment to foreign investors.  The country’s regulatory system is improving transparency and developing new regulations in line with international norms.  Capital markets are deep and broadly available to foreign investors. Japan maintains strong protections for intellectual property rights with generally robust enforcement.  The country remains a large, wealthy, and sophisticated market with world-class corporations, research facilities, and technologies. Nearly all foreign exchange transactions, including transfers of profits, dividends, royalties, repatriation of capital, and repayment of principal, are freely permitted.  As such, the sectors that have historically attracted the largest foreign direct investment in Japan are electrical machinery, finance, and insurance.

On the other hand, foreign investors in the Japanese market continue to face numerous challenges.  A traditional aversion towards mergers and acquisitions within corporate Japan has inhibited foreign investment, and weak corporate governance has led to low returns on equity and cash hoarding among Japanese firms, although business practices may be improving in both areas, particularly in corporate governance.  Investors and business owners must also grapple with inflexible labor laws and a highly regimented labor recruitment system that can significantly increase the cost and difficulty of managing human resources. The Japanese government has recognized many of these challenges and is pursuing initiatives to improve investment conditions.

Levels of corruption in Japan are low, but deep relationships between firms and suppliers may limit competition in certain sectors and inhibit the entry of foreign firms into local markets.

Future changes in Japan’s investment climate are largely contingent on the success of structural reforms to the Japanese economy.  Recent changes have strengthened corporate governance and increased female labor force participation. Nevertheless, further reforms are necessary to improve economic performance.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 18 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2018 39 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2018 13 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country (M USD, stock positions) 2017 $129,064 https://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $38,550 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

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

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

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

Other Investment Policy Reviews

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

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

Business Facilitation

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

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

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

Outward Investment

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

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

4. Industrial Policies

Investment Incentives

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

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

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

Performance and Data Localization Requirements

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

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

Korea, Republic of

Executive Summary

The Republic of Korea (ROK) is an attractive investment destination for foreign investors due to its political stability, public safety, world-class logistics and information and communications technology (ICT) infrastructure, highly-educated and skilled workforce, and dynamic private sector.  Following market liberalization measures in the 1990s, foreign portfolio investment has grown steadily, exceeding 30 percent of the Korea Composite Stock Price Index’s (KOSPI) total market capitalization in 2018. The services sector offers new and promising opportunities for the next wave of foreign direct investment (FDI).  However, studies conducted by the Korean International Trade Association and others have shown that the ROK underperforms in attracting FDI relative to the size and sophistication of its economy due to its burdensome regulatory environment.

Korea’s FDI shortfall is due in part to its complicated, opaque, and country-unique regulatory framework.  The ROK’s manufacturing model is being overtaken by low-cost producers, most notably China, which threatens the country’s ability to maintain competitiveness  This is especially critical with the advent of disruptive technologies such as fifth generation (5G) mobile communications that enable smart manufacturing, autonomous vehicles, and the Internet of Things – innovative technologies whose further development will be hampered by restrictive regulations that do not comport with global standards.  The ROK government (ROKG) has taken some steps to address this over the last decade. It established the Office of the Foreign Investment Ombudsman to address concerns of foreign investors. It recently created a “regulatory sandbox” program to spur creation of new products in the financial services, energy, and tech sectors. Process improvements such as conducting Regulatory Impact Analyses (RIA) and soliciting substantive feedback from a broad range of stakeholders, including foreign investors, in the development of new regulations are cited by industry observers as additional steps to improve the investment climate. 

The revised Korea-U.S. Free Trade Agreement (KORUS) entered into force January 1, 2019, and continues to allow U.S. investors broad access to the ROK market.  Currently, all forms of investment are protected under KORUS, including equity, debt, concessions, and intellectual property rights.  With a few exceptions, U.S. investors are treated the same as ROK investors (or third-country investors) in the establishment, acquisition, and operation of investments in the ROK.  Investors may elect to bring claims against the government for an alleged investment breach under a transparent international arbitration mechanism. The U.S. government continues to work closely with the ROKG to ensure full implementation of KORUS investment provisions, especially in regard to the right to mount an adequate defense in competition proceedings.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 45 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2018 5 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 12 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $41,602 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $28,380 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The ROK government’s approach toward FDI is positive, and senior policymakers realize the value of foreign investment.  In a March 28, 2019, meeting with the foreign business community, President Moon Jae-in equated their success “with the Korean economy’s progress.”  Foreign investors in the ROK still face numerous hurdles, however, including insufficient regulatory transparency, inconsistent interpretation of regulations, ongoing regulatory revisions that the market cannot anticipate, underdeveloped corporate governance structures, high labor costs, an inflexible labor system, burdensome Korea-unique consumer protection measures, and market domination by large conglomerates, known as chaebol.

The 1998 Foreign Investment Promotion Act (FIPA) is the basic law pertaining to foreign investment in the ROK.  FIPA and related regulations categorize business activities as open, conditionally or partly restricted, or closed to foreign investment.  FIPA features include:

  • Simplified procedures, including those for FDI notification and registration;
  • Expanded tax incentives for high-technology investments;
  • Reduced rental fees and lengthened lease durations for government land (including local government land);
  • Increased central government support for local FDI incentives;
  • Establishment of “Invest KOREA,” a one-stop investment promotion center within the Korea Trade-Investment Promotion Agency (KOTRA) to assist foreign investors; and
  • Establishment of a Foreign Investment Ombudsman to assist foreign investors.

The ROK National Assembly website provides a list of laws pertaining to foreigners, including FIPA, in English (http://korea.assembly.go.kr/res/low_03_list.jsp?boardid=1000000037  ).

The Korea Trade Investment Promotion Agency (KOTRA) actively facilitates foreign investment through its Invest Korea office (on the web at http://m.investkorea.org/m/index.do ).  For investments exceeding 100 million won (about USD 88,000), KOTRA assists in establishing a domestically-incorporated foreign-invested company. KOTRA and the Ministry of Trade, Industry, and Energy (MOTIE) organize a yearly Foreign Investment Week to attract investment to South Korea.  KOTRA also recruits FDI by participating in overseas events such as the March 2019 “South by Southwest Festival” in Austin, Texas, to attract U.S. startups and investors. The ROK’s key official responsible for FDI promotion and retention is the Foreign Investment Ombudsman. The position is commissioned by the President and heads a grievance resolution body that: collects and analyzes information concerning problems foreign firms experience; requests cooperation from and recommends implementation of reforms to relevant administrative agencies; proposes new policies to improve the foreign investment promotion system; and carries out other necessary tasks to assist investor companies.  More information on the Ombudsman can be found at http://ombudsman.kotra.or.kr/eng/index.do  .

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities can establish and own business enterprises and engage in almost all forms of remunerative activity.  The number of industrial sectors open to foreign investors is well above the Organization for Economic Cooperation and Development (OECD) average, according to MOTIE.  However, restrictions on foreign ownership remain for 30 industrial sectors, including three that are closed to foreign investment (see below). Under the KORUS FTA, South Korea treats U.S. companies like domestic entities in select sectors, including broadcasting and telecommunications.  Relevant ministries must approve investments in conditionally or partially restricted sectors. Most applications are processed within five days; cases that require consultation with more than one ministry can take 25 days or longer. The ROK’s procurement processes comply with the World Trade Organization (WTO) Government Procurement Agreement, but some implementation problems remain.

The following is a list of restricted sectors for foreign investment.  Figures in parentheses generally denote the Korean Industrial Classification Code, while those for the air transport industries are based on the Civil Aeronautics Laws:

Completely Closed

  •  Nuclear power generation (35111)
  •  Radio broadcasting (60100)
  •  Television broadcasting (60210)

Restricted Sectors (no more than 25 percent foreign equity)

  •  News agency activities (63910)

Restricted Sectors (less than 30 percent foreign equity)

  • Publishing of daily newspapers (58121)  (Note: Other newspapers with the same industry code 58121 are restricted to less than 50 percent foreign equity)

Restricted Sectors (no more than 30 percent foreign equity)

  • Hydroelectric power generation (35112)
  • Thermal power generation (35113)
  • Solar power generation (35114)
  • Other power generation (35119)

Restricted Sectors (no more than 49 percent foreign equity)

  • Program distribution (60221)
  • Cable networks (60222)
  • Satellite and other broadcasting (60229)
  • Wired telephone and other telecommunications (61210)
  • Mobile telephone and other telecommunications (61220)
  • Other telecommunications (61299)

Restricted Sectors (no more than 50 percent foreign equity)

  • Farming of beef cattle (01212)
  • Transmission/distribution of electricity (35120)
  • Wholesale of meat (46313)
  • Coastal water passenger transport (50121)
  • Coastal water freight transport (50122)
  • International air transport (51)
  • Domestic air transport (51)
  • Small air transport (51)
  • Publishing of magazines and periodicals (58122)

Open but Regulated under Relevant Laws

  • Growing of cereal crops and other food crops, except rice and barley (01110)
  • Other inorganic chemistry production, except fuel for nuclear power generation (20129)
  • Other nonferrous metals refining, smelting, and alloying (24219)
  • Domestic commercial banking, except special banking area (64121)
  • Radioactive waste collection, transportation, and disposal, except radioactive waste management (38240)

Other Investment Policy Reviews

The WTO conducted its seventh Trade Policy Review of the ROK in October 2016.  The Review does not contain any explicit policy recommendations. It can be found at https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language=E&CatalogueIdList=233680,233681,230967,230984,94925,
104614,89233,66927,82162,84639&CurrentCatalogueIdIndex=1&FullText
Hash=&HasEnglishRecord=True&HasFrenchRecord=True&HasSpanishRecord=True
 
.  The ROK has not undergone investment policy reviews or received policy recommendations from the OECD or United Nations Conference on Trade and Development (UNCTAD) within the past three years.

Business Facilitation

Registering a business remains a complex process that varies according to the type of business being established and requires interaction with KOTRA, court registries, and tax offices.  Foreign corporations can enter the market by establishing a local corporation, local branch, or liaison office. The establishment of local corporations by a foreign individual or corporation is regulated by FIPA and the Commercial Act; the latter recognizes five types of companies, of which stock companies with multiple shareholders are the most common.  Although registration can be filed online, there is no centralized online location to complete the process. For small- and medium-sized enterprises (SMEs) and micro-enterprises, the online business registration process takes approximately three to four days and is completed through Korean language websites. Registrations can be completed via the Smart Biz website, https://www.startbiz.go.kr/The UN’s Global Enterprise Registration (GER) rated Smart Biz a low 2.5 on its 10-point evaluation scale and suggested improvements to provide clear and complete instructions for registering a limited liability company.  The GER rated the InvestKorea information portal even lower at 2.0/10. The Korea Commission for Corporate Partnership (http://www.winwingrowth.or.kr/  ) and the Ministry of Gender Equality and Family (http://www.mogef.go.kr/)seek to create a better business environment for minorities and women but do not offer any direct support program for those groups.  Some local governments provide guaranteed bank loans for women or disabled people, but a lack of data on those programs makes it difficult to measure their impact.

Outward Investment

The ROK does not have any restrictions on outward investment.  While Korea’s globally competitive firms complete their investment procedures in-house, the ROK has several offices to assist small business and middle-market firms.

  • KOTRA has an Outbound Investment Support Office that provides counseling to ROK firms and holds regular investment information sessions.
  • The ASEAN-Korea Centre, which is primarily ROKG-funded, provides counseling and matchmaking support to Korean SMEs interested in investing in the Association of Southeast Asian Nations (ASEAN) region.
  • The Defense Acquisition Program Administration in 2019 opened an office to advise Korean SME defense firms on exporting unrestricted defense articles.

4. Industrial Policies

Investment Incentives

The ROK government provides the following general incentives for foreign investors:

  • Cash incentives for qualified foreign investments in free trade zones, foreign investment zones, free economic zones, industrial complexes, and similar facilities;
  • Tax and cash incentives for the creation and expansion of workplaces for high-tech business plants and research and development centers;
  • Reduced rent for land and site preparation for foreign investors;
  • Grants for establishment of convenience facilities for foreigners;
  • Reduced rent for state or public property;
  • Preferential financial support for investing in major infrastructure projects; and
  • Support from the Seoul Metropolitan government, separate from the central government, for SMEs, high-technology businesses, and the biomedical industry.

The ROKG does not issue guarantees or jointly finance foreign direct investment projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Ministry of Economy and Finance (MOEF) administers tax and other incentives to stimulate advanced technology transfer and investment in high-technology services.  There are three types of special areas for foreign investment (i.e., Free Economic Zones, Free Investment Zones, and Tariff Free Zones), where favorable tax incentives and other support for investors are available.  The ROK aims to attract more foreign investment by promoting its seven Free Economic Zones: Incheon (near Incheon airport, to be completed in 2022); Busan/Jinhae (in South Gyeongsang Province, to be completed in 2020); Gwangyang Bay (in South Gyeongsang Province, to be completed in 2020); Yellow Sea (in South Chungcheong Province, to be completed in 2020); Daegu/Gyeongbuk (in North Gyeongsang Province, to be completed in 2022); East Sea (in Donghae and Gangneung, to be completed in 2024); and Chungbuk (in North Chungcheong Province, to be completed in 2020).  Additional information is available at http://www.fez.go.kr/global/en/index.do  .  There are also 26 Foreign Investment Zones designated by local governments to accommodate industrial sites for foreign investors.  Special considerations for foreign investors vary among these options. In addition, there are four foreign-exclusive industrial complexes in Gyeonggi Province designed to provide inexpensive land, with the national and local governments providing assistance for leasing or selling in the sites at discounted rates.

Performance and Data Localization Requirements

There are no local employment requirements in the ROK.  Anyone who is planning to work during his or her stay in the ROK is required by law to apply for a visa.  Sponsoring employers often file the work permit and visa applications, and companies should confirm that a candidate of foreign nationality has a valid work permit prior to making a job offer.  Once an expat’s work permit has been approved, the Ministry of Justice will issue a Certificate of Confirmation of Visa Issuance (CCVI). This certificate must then be submitted with the relevant visa application forms to the South Korean embassy or consulate in the applicant’s country of residence.  Work visas are usually valid for one year, and work visa issuance generally takes two to four weeks.  Changing a tourist visa to a work visa is not possible within the ROK and must be applied for at a ROK embassy or consulate. Sectors such as public administration, national defense, and diplomacy are subject to certain restrictions imposed by the ROK government, but there are no government-imposed conditions or restrictions on investing in the ROK in most sectors. The conditions to invest in the ROK are elaborated in the FIPA.  Foreign companies are not required to use domestic content or technology, nor are they required to turn over source code or provide access for surveillance to ROK authorities. The ROK government, however, is implementing policies to foster the domestic software industry, which sometimes creates obstacles for foreign companies pursuing public procurement projects. The ROK ceased imposing performance requirements on new foreign investment in 1989 and eliminated all pre-existing performance requirements in 1992.  There are no performance requirements that force foreign companies to ensure a certain level of local content, local jobs, R&D activity, or domestic shares in the company’s capital. There are no legal requirements for foreign information technology (IT) providers to turn over source code and/or provide access to encryption. However, the security certifications required for some IT products can prove burdensome. These certifications are referred to as “Common Criteria certification” (CC certification), the standards and assessments for which are established and implemented by the IT Security Certification Center.  The source code for IT products might need to be submitted to the IT Security Certification Center during the review process to apply for CC certification. In January 2016, the ROK government announced guidelines stating that the CC certification is a requirement for cloud computing services to be provided to ROK government agencies or public institutions. ROK data privacy law has various requirements for companies that collect, use, transfer, outsource, or process personal information. This law applies uniformly to both domestic and foreign companies that process personal information in the ROK. The law imposes strict restrictions on transferring personal information outside of the country.  If a data controller intends to transfer the personal information of end-users outside of the ROK, it is required to obtain each end-user’s consent. In the case of overseas transfer of personal information for the purpose of IT outsourcing, the data controller may forgo obtaining each individual’s consent if the data controller discloses in its privacy policy: (i) the purpose of overseas transfer; (ii) the transferees of personal information; and (iii) other certain items about overseas transfer. There are similar requirements for a data controller to transfer the personal information of end-users to a third party within the ROK. To transfer the personal information of end-users to a third party, a data controller must obtain each end-user’s consent.  In addition, regulations prohibit financial companies in the ROK from transferring customers’ personal information and related financial transaction data overseas. As such, this financial transaction data cannot be outsourced to overseas IT vendors, and financial companies in the ROK must store customers’ financial transaction data in the ROK. The Financial Services Commission sets Korea’s financial policies, and directs the Financial Supervisory Service in the enforcement of those policies.

Kuwait

Executive Summary

Kuwait is a country of 1.4 million citizens and 2.4 million expatriate workers.  With a land mass slightly smaller than New Jersey, the country possesses six percent of the world’s proven oil reserves and is a global top ten oil exporter.  The economy is heavily dependent upon oil production and related industries, which are almost wholly owned and operated by the government. The energy sector accounts for more than half of GDP and almost 90 percent of government revenue.

The government employs more than four out of five working-aged Kuwaiti citizens.  In recent years, the size of the government workforce has expanded rapidly to accommodate young Kuwaitis entering the job market.  Because half the population of Kuwaiti citizens is under the age of 21, the government would have to employ over the next 10 years approximately 40 percent more than it does today to maintain the same four-out-of-five employment ratio.  When oil prices fell dramatically in 2014, government revenues also fell, putting pressure on government expenditures and creating a budget deficit.

The government faces two central challenges as it seeks to develop a robust private sector: it must improve the business climate; and it must stimulate attitudes more conducive to competing in the private sector among a Kuwaiti population that has grown accustomed to assured public sector employment and extensive government benefits.  In 2019, Kuwait ranked 97 out of 190 in the World Bank’s Doing Business Report when it came to the ease of doing business, still the lowest of all Gulf Cooperation Council (GCC) countries. A number of opinion leaders have focused attention on the need to improve the educational system to prepare young Kuwaitis to compete in the private sector.

In an attempt to attract foreign investment to help diversify the economy and grow private sector employment, Kuwait passed a new foreign direct investment law in 2013 permitting up to 100 percent foreign ownership of a business, if approved by the Kuwait Direct Investment Promotion Authority (KDIPA).  Without such approval, businesses must be at least 51 percent-owned by Kuwaiti or GCC citizens. In reviewing applications from foreign investors, KDIPA places emphasis on creating jobs and the provision of training and education opportunities for Kuwaiti citizens, technology transfer, diversification of national income sources, increasing exports, support for local small- and medium-sized enterprises, and the utilization of Kuwaiti products and services.  As of March 2019, KDIPA had sponsored 29 foreign firms, including six U.S. companies. In addition to KDIPA assistance in navigating the bureaucracy, investment incentives include tax benefits, customs duties relief, and permission to recruit required foreign labor.

The government has remained committed to executing its long-term national vision, called NewKuwait, which involves investing tens of billions of dollars in major infrastructure projects, including new airport terminals, ports, roads, industrial cities, large residential developments, hospitals, rail and metro rail.  The Northern Gateway (also referred to as the Five Islands or Silk City) project envisions public and private sector investment exceeding USD 400 billion.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 78 of 180 https://www.transparency.org/cpi2018
World Bank’s Doing Business Report “Ease of Doing Business” 2018 97 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 60 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country (M USD, stock positions) 2017 $296 https://apps.bea.gov/international/factsheet/factsheet.cfm?Area=506
World Bank GNI per capita 2017 $31,430 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=KW

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Kuwait reintroduced its national development plan in 2018 as NewKuwait.  Key economic objectives in the plan include creating a business environment that will stimulate private sector growth and attract foreign investors.  The Foreign Direct Investment Law of 2013 allows up to 100 percent foreign ownership in certain industries, including: infrastructure (water, power, wastewater treatment, and communications); insurance; information technology and software development; hospitals and pharmaceuticals; air, land, and sea freight; tourism, hotels, and entertainment; housing projects and urban development; and investment management.  The law also established KDIPA (http://kdipa.gov.kw/en  ) to solicit investment proposals, evaluate their potential, and assist foreign investors in the licensing process.  The government believes that providing greater access to the Kuwaiti market will encourage foreign companies to invest in the private sector elements of the Northern Gateway/Five Islands and other projects that constitute the NewKuwait development plan.

In 2015, KDIPA delivered its first investment license to IBM, allowing the company to establish a 100 percent foreign-owned company in Kuwait and to benefit from the incentives and exemptions granted under the new law.  Since then, KDIPA has granted foreign ownership licenses to 28 additional foreign firms, including U.S. companies GE, Berkeley Research Group, Malka Communications, Maltbie, and McKinsey & Company.

U.S. companies operate successfully in the country.  American engineering firms such as Fluor have participated in large infrastructure development projects, including the USD 16 billion Al-Zour Refinery and Clean Fuels Project.  Dow Chemical Company participates in several joint ventures in the petrochemical industry. General Electric is a major vendor to power generation and desalination facilities. Citibank operates a branch in Kuwait City.  Numerous franchises of U.S. restaurants and retail chains operate successfully.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Companies Law No. 1 of 2016 simplified the process for registering new companies and has helped to reduce wait-times associated with starting a new business.  This law maintained the requirement that a Kuwaiti or GCC national own at least 51 percent of a local company. If non-GCC investors qualify to invest through the Kuwait Direct Investment Promotion Authority , this requirement may be waived.  In 2017, the law was amended to eliminate prohibitive requirements placed on limited liability companies.

Council of Ministers Decision No. 75 of 2015 directs KDIPA to exclude foreign firms from sensitive sectors.  Sensitive sectors include: extraction of crude petroleum, extraction of natural gas, manufacture of coke oven products, manufacture of fertilizers and nitrogen compounds, manufacture of gas, distribution of gaseous fuels through mains, real estate, security and investigation activities, public administration, defense, compulsory social security, membership organizations, and recruitment of labor.

Other Investment Policy Reviews

In the past three years, no investment policy reviews on Kuwait were conducted by the Organization of Economically Developed Countries, the World Trade Organization (WTO), or the United Nations Conference on Trade and Development.

Business Facilitation

Kuwait’s ranking in the World Bank’s Doing Business Index improved to 133 (from 149) out of 190 for Starting a Business in 2019.  The World Bank’s Doing Business project lists the steps required to start a business in Kuwait in the following link: (http://www.doingbusiness.org/data/exploreeconomies/kuwait/starting-a-business  ).

Its time-to-complete estimates may be optimistic, as anecdotal reports indicate that starting a new business in Kuwait can take up to a year.  The government has been working with the World Bank to resolve doing business issues in Kuwait.

In 2016, the Ministry of Commerce and Industry (MOCI) inaugurated the Kuwait Business Center (KBC) (visit website: http://www.kbc.gov.kw  ) to facilitate the issuance of commercial licenses and to start limited liability and single owner companies within 3-5 working days.  However, the business center has encountered challenges in coordinating interagency cooperation. The government outlines steps for starting a business in the following website: https://www.e.gov.kw/sites/kgoenglish/Pages/Business/InfoSubPages/StartingABusiness.aspx  .

KDIPA also established a unit to streamline registration and licensing procedures for qualifying foreign investors.  Its goal is to approve licenses within 30 days of the completed application.

The April 2013 Law No. 98 established the National Fund for the Support and Development of small- and medium-sized enterprises, which it defines as enterprises that employ up to 50 Kuwaitis and require less than Kuwaiti Dinars (KD) 500,000 in financing.  Financing is limited to enterprises established by Kuwaiti citizens. During FY 2017/18, the National Fund approved 350 project applications, including applications for 137 industrial projects.

Outward Investment

The government neither promotes nor restricts outward private investment.  The largest, single outward investor is the country’s Future Generations sovereign wealth fund, managed by the Kuwait Investment Authority (KIA).  By law, however, KIA may not disclose the total amount of its investments. In 2018, the Sovereign Wealth Fund Institute estimated that KIA managed USD 592 billion in assets, which would make it the fourth largest sovereign wealth fund in the world.  Kuwaiti officials have indicated that KIA has invested more than USD 300 billion in the United States across a wide portfolio. The press has reported that KIA holds a significant interest in the New York City Hudson Yards project, one of the largest private redevelopment projects in U.S. history.  Another large Kuwaiti investment involves MEGlobal, a subsidiary of Equate, which is a partnership between Kuwait’s Petrochemicals Industries Company and Dow Chemical Company. MEGlobal is building a billion-dollar monoethylene glycol production facility in Texas, which is scheduled to be completed by the end of 2019.  Individual Kuwaitis have found investments in U.S. securities and real estate attractive.

4. Industrial Policies

Investment Incentives

Incentives under the 2013 Foreign Direct Investment Law include tax benefits (15 percent corporate tax on foreign firms may be waived for up to 10 years), customs duties relief, land and real estate allocations, and permissions to recruit required foreign labor.

Other tax benefits exist.  For example, entities incorporated in the GCC that are 100 percent owned by GCC nationals are exempt from paying a tax on corporate profits.  Capital gains arising from trading in securities listed on Kuwait’s stock market are exempt from tax. Foreign principals selling goods through Kuwaiti distributors are not subject to tax.

Kuwait does not have personal income, property, inheritance, or sales taxes; the government is preparing legislation to implement a value added tax and certain excise taxes.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Kuwait Free Trade Zone was established at Shuwaikh port in 1999.  The Council of Ministers approved legislation that would establish a new Free Trade Zone area as part of Kuwait’s Northern Gateway megaproject.  The legislation is pending in the National Assembly. Many restrictions normally faced by foreign firms, as well as corporate taxes, would not apply within the free trade zone.  The Kuwait Direct Investment Promotion Authority is planning to utilize existing legislation to develop two new free trade zones at Al-Abdali and Al-Nuwaiseeb. The Council of Ministers issued a resolution dissolving the Free Trade Zone status at Shuwaikh port because that area will be used for other purposes.

Performance and Data Localization Requirements

The government requires foreign firms to hire a percentage of Kuwaitis that varies according to sector.  The percentages are as follows:

  • banking: 70 percent
  • communications: 65 percent
  • investment and finance: 40 percent
  • petrochemicals and refining industries: 30 percent
  • insurance: 22 percent
  • real estate: 20 percent
  • air transportation, foreign exchange, cooperatives: 15 percent
  • manufacturing and agriculture: 3 percent.

Employers must obtain a no objection certificate for a work permit for foreign employees from the Public Authority for Manpower (PAM) prior to the employee’s arrival in the country.  Obtaining a no objection certificate may require submission of the employee’s criminal history and a completion of a health screening through a Kuwaiti Embassy or Consulate. Upon arrival, the employee must obtain a work permit from PAM and complete health and security screenings before receiving final status as a resident foreign worker from the Ministry of Interior.

Kuwait does not require that foreign companies store data locally, or that foreign investors use Kuwaiti domestic content when manufacturing goods locally.  Each company may determine whether and how it chooses to store data. Most governmental agencies follow International Organization for Standardization (ISO) certificate standards, which mandate the storage of data for five years.  Banks and other financial institutions are required by the Anti-Money Laundering/Combatting the Financing of Terrorism Law 106 of 2013 to maintain transactions data for five years.

Mexico

Executive Summary

Mexico is one of the United States’ top trade and investment partners.  Bilateral trade grew 650 percent 1993-2018 and Mexico is the United States’ second largest export market and third largest trading partner.  The United States is Mexico’s top source of foreign direct investment (FDI) with USD 12.3 billion (2018 flows) or 39 percent of all inflows to Mexico.

The Mexican economy has averaged 2.6 percent economic growth (GDP) 1994-2017.  Mexico has benefited since the 1994 Tequila Crisis from credible economic management that has allowed the country to weather a period of low oil prices and significant global volatility.  The fiscally prudent 2019 budget targets a one percent primary surplus, and the new government has upheld the Central Bank’s (Bank of Mexico) independence. Inflation at end-2018 was 4.8 percent, an improvement from 6.6 percent at the end of 2017, but still above the Bank of Mexico’s target of 3 percent due to peso depreciation against the U.S. Dollar and higher retail fuel prices caused by government efforts to stimulate competition in that sector.

The United States-Mexico-Canada (USMCA) trade agreement ratification prospects for 2019 and a historic change in the Mexican government December 1, 2018 remain key sources of investment uncertainty.  The new administration has signaled its commitment to prudent fiscal and monetary policies since taking office. Still, conflicting policies, programs, and communication from the new administration have contributed to ongoing uncertainties, especially related to energy sector reforms and the financial health of state-owned oil company Pemex.  Most financial institutions, including the Bank of Mexico, have revised downward Mexico’s GDP growth expectations for 2019 to 1.6 percent (Banxico consensus). Major credit rating agencies have downgraded or put on a negative outlook Mexico’s sovereign and some institutional ratings.

The administration followed through on its campaign promises to cancel the new airport project, cut government employees’ salaries, suspend all energy auctions, and weaken autonomous institutions.  Uncertainty about contract enforcement, insecurity, and corruption also continue to hinder Mexican economic growth. These factors raise the cost of doing business in Mexico significantly.

Table 1:  Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 138 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 54 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 56 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $109,700 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2018 $8,610 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

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

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

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

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

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

Other Investment Policy Reviews

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

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

Business Facilitation

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

Outward Investment

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

4. Industrial Policies

Investment Incentives

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

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

Performance and Data Localization Requirements

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

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

Netherlands

Executive Summary

The Netherlands consistently ranks among the world’s most competitive industrialized economies.  It offers an attractive business and investment climate and remains a welcoming location for business investment from the United States and elsewhere.

Strengths of the Dutch economy include the Netherlands’ stable political and macroeconomic climate, a highly developed financial sector, strategic location, well-educated and productive labor force, and high-quality physical and communications infrastructure.  Investors in the Netherlands take advantage of its highly competitive logistics, anchored by the largest seaport and fourth-largest airport in Europe. In telecommunications, the Netherlands has one of the highest internet penetrations in the European Union (EU) at 96 percent and hosts one of the largest data transport hubs in the world, the Amsterdam Internet Exchange.

The Netherlands is among the largest recipients and sources of foreign direct investment (FDI) in the world and one of the largest historical recipients of direct investment from the United States.  This can be attributed to the Netherlands’ competitive economy, historically business-friendly tax climate, and many investment treaties containing investor protections. The Dutch economy has significant foreign direct investment in a wide range of sectors including logistics, information technology, and manufacturing.  Dutch tax policy continues to evolve in response to EU attempts to harmonize tax policy across member states.

In the wake of the worldwide financial crisis a decade ago, the Dutch government implemented significant reforms in key policy areas, including the labor market, the housing sector, the energy market, the pension system, and health care.  Dutch reform policies were crafted in close consultation with key stakeholders, including business associations, labor unions, and civil society groups. This consultative approach, often referred to as the Dutch “polder model,” is how Dutch policy is generally developed.

After years of recovery, with associated “catch-up” rates of economic growth, the macroeconomic outlook in the Netherlands is for a stable but low-growth economy.  The Dutch government projects a period of lower GDP growth of 1.5 percent in 2019 and 2020. Projected drivers of growth include increased government spending, as well as invigorated domestic consumption by households as unemployment reaches record lows.

  • The Netherlands is a top destination for U.S. FDI abroad, holding just under USD 900 billion out of a total of USD 6 trillion total outbound U.S. investment – about 16 percent.
  • Dutch investors contribute USD 367 billion FDI to the United States of the USD 4 trillion total inbound FDI– about 10 percent.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 8 of 180 https://www.transparency.org/news/feature/corruption_perceptions_index_2017#table
World Bank’s Doing Business Report 2018 36 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 2 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $936,728  http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $46,180 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Netherlands is the sixteenth-largest economy in the world and the fifth largest in the European Monetary Union (the eurozone), with a gross domestic product (GDP) of over USD 900 billion (773 billion euros).  According to the International Monetary Fund (IMF), the Netherlands is consistently among the three largest source and recipient economies for foreign direct investment (FDI) in the world, although the Netherlands is not the ultimate destination for the majority of this investment.  The government of the Netherlands maintains liberal policies toward FDI, has established itself as a platform for third-country investment with some 145 investment agreements in force, and adheres to the Organization for Economic Cooperation and Development (OECD) Codes of Liberalization and Declaration on International Investment, including a National Treatment commitment and adherence to relevant guidelines.

The Netherlands is the recipient of eight percent of all FDI inflow into the EU.  Of all EU member states, it is the top recipient of U.S. FDI, at over 16 percent of all U.S. FDI abroad as of 2017.  The Netherlands has become a key export platform and pan-regional distribution hub for U.S. firms. Roughly 60 percent of total U.S. foreign-affiliate sales in the Netherlands are exports, with the bulk of them going to other EU members.

In 2014, foreign-owned companies made inward direct investment worth USD 15.8 billion (14.2 billion euros) – just over 30 percent of total corporate investment in durable goods in the Netherlands.  Foreign investors provide 19 percent of Dutch employment in the private sector (860,200 jobs). U.S. firms contribute the most among foreign firms to employment, responsible for 214,000 jobs. In its 2017 investment report, the UN Conference on Trade and Development (UNCTAD) identified the Netherlands as the world’s fifth largest destination of global FDI inflows and the third largest source of FDI outflows.

Although policy makers fear that a Brexit will be detrimental for the Dutch economy, so far the Netherlands is benefitting from companies exiting the United Kingdom in anticipation of Brexit.  According to the Netherlands Foreign Investment Agency (NFIA), the number of companies interested in moving to the Netherlands because of Brexit increased from 80 in 2017 to 150 in 2018 to 250 in 2019.  The companies are coming mainly from the health, creative industry, financial services, and logistics sectors.  The Dutch Authority for the Financial Markets (AFM) has predicted Amsterdam will emerge as a main post-Brexit financial trading center in Europe for automated trading platforms and other ‘fintech’ firms, allowing these companies to keep their European trading within the confines of the EU after Brexit.

Dutch tax authorities provide a high degree of customer service to foreign investors, seeking to provide transparent, precise tax guidance that makes long-term tax obligations more predictable.  Advance Tax Rulings (ATR) and Advance Pricing Agreements (APA) are guarantees given by local tax inspectors regarding long-term tax commitments for a particular acquisition or Greenfield investment.  Dutch tax policy continues to evolve as the EU seeks to harmonize tax measures across members states. A more detailed description of Dutch tax policy for foreign investors can be found at http://investinholland.com/incentives-and-taxes/   and http://investinholland.com/incentives-and-taxes/fiscal-climate/  .

Dutch corporations and branches of foreign corporations are currently subject to a corporate tax rate of 25 percent on taxable profits, which puts the Netherlands in the middle third among EU countries’ corporate tax rates and below the tax rates of its larger neighbors.  Profits up to USD 240,000 (200,000 euros) are taxed at a rate of 19 percent.  In October 2018, the Dutch government announced it would lower its corporate tax rate to 20.5 percent in 2021, with profits up to USD 240,000 taxed at a 15 percent rate from 2021 onwards.

Dutch corporate taxation generally allows for exemption of dividends and capital gains derived from a foreign subsidiary.  Surveys of the corporate tax structure of EU member states note that both the corporate tax rate and the effective corporate tax rate in the Netherlands are around the EU average.  Nevertheless, the Dutch corporate tax structure ranks among the most competitive in Europe considering other beneficial measures such as ATAs and/or APAs. The Netherlands also has no branch profit tax and does not levy a withholding tax on interest and royalties.

Maintaining an investment-friendly reputation is a high priority for the Dutch government, which provides public information and institutional assistance to prospective investors through the Netherlands Foreign Investment Agency (NFIA) (https://investinholland.com/  ). Historically, over a third of all “Greenfield” FDI projects that NFI attracts to the Netherlands originate from U.S. companies.  Additionally, the Netherlands business gateway at https://business.gov.nl/   – maintained by the Dutch government – provides information on regulations, taxes, and investment incentives that apply to foreign investors in the Netherlands and clear guidance on establishing a business in the Netherlands.

The NFIA maintains six regional offices in the United States (Washington, DC; Atlanta; Boston; Chicago; New York City; and San Francisco).  The American Chamber of Commerce in the Netherlands (https://www.amcham.nl/  ) also promotes U.S. and Dutch business interests in the Netherlands.

Limits on Foreign Control and Right to Private Ownership and Establishment

With few exceptions, the Netherlands does not discriminate between national and foreign individuals in the establishment and operation of private companies.  The government has divested its complete ownership of many public utilities, but in a number of strategic sectors, private investment – including foreign investment – may be subject to limitations or conditions.  These include transportation, energy, defense and security, finance, postal services, public broadcasting, and the media.

Air transport is governed by EU regulation and subject to the U.S.-EU Air Transport Agreement.  U.S. nationals can invest in Dutch/European carriers as long as the airline remains majority-owned by EU governments or nationals from EU member states.  Additionally, the EU and its member states reserve the right to limit U.S. investment in the voting equity of an EU airline on a reciprocal basis that the United States allows for foreign nationals in U.S. carriers.

In concert with the European Union, the Dutch government is considering how to best protect its economic security but also continue as one of the world’s most open economies.  The Netherlands has no formal foreign investment screening mechanism, but the government has begun discussions about developing targeted investment-screening for certain vital sectors that could represent national security vulnerabilities.  The government is in the process of finalizing legislation that will establish investment screening mechanisms in the first of those vital sectors: telecommunications. The Netherlands has certain limitations on foreign ownership in sectors that are deemed of vital national interest (transportation, energy, defense and security, finance, postal services, public broadcasting, and the media).  There is no requirement for Dutch nationals to have an equity stake in a Dutch registered company.

Other Investment Policy Reviews

The Netherlands has not recently undergone an investment policy review by the OECD, World Trade Organization (WTO), or UNCTAD.

Business Facilitation

All companies must register with the Chamber of Commerce and apply for a fiscal number with the tax administration, which allows expedited registration for small- and medium-sized enterprises (SMEs) with fewer than 50 employees:  https://www.kvk.nl/english/ordering-products-from-the-commercial-register/  .

The World Bank’s 2019 Ease of Doing Business Index ranks the Netherlands as number 22 in starting a business.  The Netherlands ranks better than the OECD average on registration time, the number of procedures, and required minimum capital.

The Netherlands business gateway at https://business.gov.nl/   – maintained by the Dutch government – provides a general checklist for starting a business in the Netherlands: https://business.gov.nl/starting-your-business/checklists-for-starting-a-business/general-checklist-for-starting-a-business-in-the-netherlands/  .  The Dutch American Friendship Treaty (DAFT) from 1956 gives U.S. citizens preferential treatment to operate a business in the Netherlands, providing ease of establishment that most other non-EU nationals do not enjoy.  U.S. entrepreneurs applying under the DAFT do not need to satisfy a strict, points-based test and do not have to meet pre-conditions related to providing an innovative product. U.S. entrepreneurs setting up a sole proprietorship only have to register with the Chamber of Commerce and demonstrate a minimum investment of 4,500 euros.  DAFT entrepreneurs receive a two-year residence permit, with the possibility of renewal for five subsequent years.

4. Industrial Policies

Investment Incentives

General requirements to qualify for investment subsidy schemes apply equally to domestic and foreign investors.  Industry-specific, targeted investment incentives have long been a tool of Dutch economic policy to facilitate economic restructuring and to promote economic priorities.  Such subsidies and incentives are spelled out in detailed regulations. Subsidies are in the form of tax credits disbursed through corporate tax rebates or direct cash payments if there is no tax liability.  For an overview of government subsidies and investment programs, see: http://english.rvo.nl/subsidies-programmes  .

FDI tends to be concentrated in growth sectors including information and communications technology (ICT), biotechnology, medical technology, electronic components, and machinery and equipment.  Investment projects are predominantly in value-added logistics, machinery and equipment, and food.

Since 2010, the government has shifted from traditional industrial support policies to a comprehensive approach to public/private financing agreements in areas where investment is deemed of strategic value.  Government, academia, and industry work together to determine recipient sectors for co-financed (public and private) R&D. The government’s industrial policy focuses on nine “Top Sectors”: creative industries, logistics, horticulture, agriculture and food, life sciences, energy, water, chemical industry, and high tech.  For more information, see https://www.government.nl/topics/enterprise-and-innovation/contents/encouraging-innovation  .

Foreign Trade Zones/Free Ports/Trade Facilitation

The Netherlands has no free trade zones (FTZs) or free ports where commodities can be processed or reprocessed tax-free.  However, FTZs exist for bonded storage, cargo consolidation, and reconfiguration of non-EU goods. This reflects the key role that transport, transit, logistics, and distribution play in the Dutch economy.  Dutch customs authorities oversee a large number of customs warehouses, free warehouses, and free zones along many of the Netherlands trade routes and entry points.

Schiphol Airport handles nearly 1.75 million tons of goods per year for distribution, making it the third largest cargo airport in Europe.  Specific parts of Schiphol are designated customs-free zones. The Port of Rotterdam is Europe’s largest seaport by volume, handling over 37 percent of all cargo shipping on Europe’s Le Havre–Hamburg coastline and processing nearly 470 million tons of goods in 2018.  Many agents operate customs warehouses under varying customs regimes on the premises of the Port of Rotterdam.

Performance and Data Localization Requirements

There are no trade-related investment performance requirements in the Netherlands and no requirements for employment of local capital or managerial personnel.

The Dutch government does not follow a “forced localization” policy, and does not require foreign IT providers to turn over source code or to provide access to surveillance.  The Dutch Data Protection Authority (DPA) monitors and enforces Dutch legislation on the protection of personal data (https://autoriteitpersoonsgegevens.nl/en  ).  The Dutch DPA is active in the EU’s Article 29 Working Party, the collective of EU national DPAs.  The primary law on protection of personal data in the Netherlands is the Dutch law implementing EU directive 95/46/EC.  The new European General Data Protection Regulation (GDPR), which is directly applicable in member states, entered into force May 25, 2018, as part of the EU’s comprehensive reform on data protection.

The Dutch DPA recognized U.S. firms that registered and self-certified with the U.S.-EU Safe Harbor program that began in 2000 and focused on safe transfer of personal data between the European Union and the United States.  On July 12, 2016, the European Commission issued an adequacy decision on the EU-U.S. Privacy Shield Framework (https://www.privacyshield.gov/welcome  ), which replaces the Safe Harbor program, providing a legal mechanism for companies to transfer personal data from the EU to the United States.  The Dutch government strongly supports Privacy Shield, although the DPA joined other EU data protection bodies in requesting resolution of concerns and further clarifications before its implementation.

Norway

Executive Summary

Norway is a modern, highly-developed country with a small but very strong economy.  Per capita GDP is among the highest in the world, boosted by success in the oil and gas sector and other world-class industries like shipping, shipbuilding and aquaculture.  The major industries are supported by a strong and growing professional services industry (finance, ICT, legal), and there are emerging opportunities in cleantech, medtech and biotechnology.  Strong collaboration between industry and research institutions attracts international R&D activity and funding. The economy has rebounded from the 2014-15 downturn in the oil and gas sector.

Norway is a safe and straightforward place to do business, ranked 7 out of 190 countries in the World Bank’s 2018 Doing Business Report, and 7 out of 180 on Transparency International’s 2018 Corruption Perceptions Index.  Norway is politically stable, with strong property rights protection and an effective legal system. Productivity is significantly higher than the EU average.

Norwegian lawmakers and businesses welcome foreign investment as a matter of policy and the government generally grants national treatment to foreign investors.  Some restrictions exist on foreign ownership and use of natural resources and infrastructure. The government remains a major owner in the Norwegian economy and retains monopolies on a few activities, such as the retail sale of alcohol.

While not a member of the European Union (EU), Norway is a member of the European Economic Area (EEA; including Iceland and Liechtenstein) with access to the EU single market’s movement of persons, goods, services and capital).  The Norwegian government continues to liberalize its foreign investment legislation with the aim of conforming more closely to EU standards and has cut bureaucratic regulations over the last decade to make investment easier.  Foreign direct investment in Norway stood at USD 150 billion at the end of 2017 and has more than doubled over the last decade. In 2013, the government established “Invest in Norway,” the official investment promotion agency, to help attract and assist foreign investors.  There are about 5,500 foreign-owned companies in Norway, and over 650 U.S. companies have a presence in the country, employing more than 45,000 people.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 7 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 7 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 19 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 32,318 http://www.bea.gov/international/factsheet/
World Bank GNI per capita (USD) 2017 75,990 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Norwegian lawmakers and businesses welcome foreign investment as a matter of policy and the government generally grants national treatment to foreign investors.  In 2013, the Government established “Invest in Norway,” the official investment promotion agency, to help attract and assist foreign investors, particularly in the key offshore petroleum sector and in less developed regions such as northern Norway .

While not a member of the European Union, Norway is an EEA signatory and continues to liberalize its foreign investment legislation to conform more closely to EU standards.  Current laws, rules, and practices follow below.

Limits on Foreign Control and Right to Private Ownership and Establishment

Norway’s investment policies vis-á-vis third countries, including the United States, will likely continue to be governed by reciprocity principles and by bilateral and international agreements.  The European Economic Area (EEA) free trade accord, which came into force for Norway in 1995, requires the country to apply principles of national treatment to EU members and the other EEA members – Iceland and Liechtenstein – in certain areas where foreign investment was prohibited or restricted in the past.  Norway’s investment regime is generally based on the national treatment principle, but ownership restrictions exist on some natural resources and on some activities (fishing/ maritime/ road transport). State ownership in companies can be used as a means of ensuring Norwegian ownership and domicile for these firms.

Government Monopolies

Norway has traditionally barred foreign and domestic investors alike from investing in certain industries, including postal services, railways, and the retail sale of alcohol.  In 2004, Norway slightly relaxed the restrictions, allowing foreign companies to bid on certain commercial postal services (e.g., air express services between countries) and railway cargo services (notably between Norway and Sweden).  In 2016, the government initiated a reform of the railway sector leading to the first railway line opening for competition in 2018. The government has a mandate to allow foreign investment in hydropower (limited to 20 percent of equity), but rarely does so.  However, the government has fully opened the electricity distribution system to foreign participation, making it one of the most liberalized power sectors in the world.

Ownership of Real Property

Foreign investors may generally own real property, though ownership of certain real assets is restricted.  Companies must obtain a concession to acquire rights to own or use various kinds of real property, including forests, mines, tilled land, and waterfalls.  Foreign companies need not seek concessions to rent real estate, e.g. commercial facilities or office space, provided the rental contract period does not exceed ten years.  The two major laws governing concessions are the Act of December 14, 1917, and the Act of May 31, 1974.

Petroleum Sector

The Petroleum Act of November 1996 (superseding the 1985 Petroleum Act) sets forth the legal basis for Norwegian authorities’ awards of petroleum exploration rights, production blocks and follow-up activity.  The Act covers governmental control over exploration, production, and transportation of petroleum.

Foreign oil companies report no discrimination in the award of petroleum exploration and development blocks in recent licensing rounds.  The Norwegian government has implemented EU directives requiring equal treatment of EEA oil and gas companies. The Norwegian offshore concession system complies with EU directive 94/33/EU of May 30, 1994, which governs conditions for awards and hydrocarbon development.  Norway’s concession process operates on a discretionary basis, with the Ministry of Petroleum and Energy awarding licenses based on which company or group of companies it views will be the best overall operator for a particular field, rather than purely competitive bids. A number of U.S. energy companies are present on the Norwegian Continental Shelf (NCS).

The Norwegian government has dismantled former tight controls over the gas pipeline transit network that carries gas to the European market.  All gas producers and operators on the NCS are free to negotiate gas sales contracts on an individual basis, with access to the gas export pipeline network guaranteed.

Norwegian authorities encourage the use of Norwegian goods and services in the offshore petroleum sector, but do not require it.  The Norwegian share of the total supply of goods and services on the NCS has remained at approximately 50 percent over the last decade.

Manufacturing Sector

Norwegian legislation granting national treatment to foreign investors in the manufacturing sector dates from 1995.  Legislation was repealed in July 2002 that formerly required both foreign and Norwegian investors to notify and, in some cases, file burdensome reports to the Ministry of Industry and Trade if their holdings of a company’s equity exceeded certain threshold levels.  Foreign investors are not currently required to obtain government authorization before buying shares of Norwegian corporations.

Financial and Other Services

In 2004, the Norwegian government liberalized restrictions on acquisitions of equity in Norwegian financial institutions.  Current regulations delegate responsibility for acquisitions to the Norwegian Financial Supervisory Authority and streamline the process. Financial Supervisory Authority permission is required for acquisitions of Norwegian financial institutions that exceed defined threshold levels (20, 25, 33 or 50 percent).  The Authority assesses the acquisitions to ensure that prospective buyers are financially stable and that the acquisition does not unduly limit competition.

The Authority applies national treatment to foreign financial groups and institutions, but nationality restrictions still apply to banks.  At least half the members of the board and half the members of the corporate assembly of a bank must be nationals and permanent residents of Norway or another EEA nation.  Effective January 1, 2005, there is no ceiling on foreign equity in a Norwegian financial institution as long as the Authority has granted permission for the acquisition.

The Finance Ministry has abolished remaining restrictions on the establishment of branches by foreign financial institutions, including banks, mutual funds and others.  Under the liberalized regime, Norway grants branches of U.S. and other foreign financial institutions the same treatment as domestic institutions.

Media

Media ownership is regulated by the Media Ownership Act of 1997 and the Norwegian Media Authority.  No individual party, domestic or foreign, may control more than 1/3 of the national newspaper, radio and/or television markets without a concession.  National treatment is granted in line with Norway’s obligations under the EEA accord. The introduction and growing importance of new media forms (including those emerging from the internet and wireless industries) has raised concerns that the existing domestic legal regime (which largely focuses on printed media) is becoming outmoded.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) conducted an Economic Survey for Norway in 2018:  https://www.oecd-ilibrary.org/economics/oecd-economic-surveys-norway-2018_eco_surveys-nor-2018-en  

Business Facilitation

Altinn is a web portal that serves as a one-stop shop for establishing a company and contains the necessary forms; it also provides an electronic dialogue between the business/industry sector, citizens and other stakeholders, and government agencies.  The business registration processes are straight-forward, complete, and open to foreign companies. Please note, however, that registration of Norwegian Registered Foreign Business Enterprises (NUF) cannot be done electronically. A guide for establishing a business is available at the following address: https://www.altinn.no/en/start-and-run-business/  

Outward Investment

The government does not incentivize outward investment.  Norway’s Government Pension Fund Global, the largest sovereign wealth fund in the world, owns 1.4 percent of all listed companies in the world.

4. Industrial Policies

Investment Incentives

Norway’s SkatteFUNN research and development (R&D) tax incentive scheme is a government program designed to stimulate R&D in Norwegian trade and industry. Businesses and enterprises that are subject to taxation in Norway are eligible to apply for tax relief.  For more information, see: https://www.oecd.org/sti/rd-tax-stats-norway.pdf 

Foreign Trade Zones/Free Ports/Trade Facilitation

Norway has no foreign trade zones and does not contemplate establishing any.

Performance and Data Localization Requirements

Norway generally does not impose performance requirements on foreign investors, nor offer significant general tax incentives for either domestic or foreign investors.  There is an exception, however, for investments in sparsely settled northern Norway where reduced payroll taxes and other incentives apply. There are no free-trade zones, although taxes are minimal on Svalbard, a remote Arctic archipelago which is subject to special treaty provisions but administered by Norway.  A state industry and regional development fund provides support (e.g., investment grants and financial assistance) for industrial development in areas with special employment difficulties or with low levels of economic activity.

Norway does not require “forced localization” nor impose requirements on data storage.

Poland

Executive Summary

In the thirty years since Poland discarded communism and the fifteen years since it joined the European Union (EU), Poland’s investment climate has continued to grow in attractiveness to foreign investors, including U.S. investors.  Poland’s economy has experienced a long period of uninterrupted economic expansion since 1992. In 2018, Poland’s economy again gained momentum with approximately 5 percent growth as consumption continued to increase and spending of EU funds accelerated public investment.  Most economists, however, predict a slowdown in 2019 to around 4 percent gross domestic product (GDP) growth. Poland moved from middle to high-income status according to the FTSE Russell’s annual classification report. However, some proposed economic legislation continued to dampen optimism in some sectors (e.g. retail, media, energy, digital services), and investors have pointed to lower predictability and the outsized role of state-owned and state-controlled companies in the Polish economy as an impediment to long-term balanced growth.  

Prospects for future growth, driven by domestic demand and inflows of EU funds from the 2014-2020 financial framework, will continue to attract investors seeking access to Poland’s dynamic market of over 38 million people, and to the broader EU market of over 500 million.  Poland’s well-diversified economy reduces its vulnerability to external shocks, although it depends heavily on the EU as an export market. Foreign investors also cite Poland’s well-educated work force as a major reason to invest, as well as its proximity to major markets such as Germany.  U.S. firms represent one of the largest groups of foreign investors in Poland. The volume of U.S. investment in Poland is estimated at around USD 6 billion by the national bank of Poland in 2017, although including indirect investment flows through subsidiaries may place it as high as USD 43 billion, according to the American Chamber of Commerce in Poland.  Historically foreign direct investment (FDI) was largest in the automotive and food processing industries, followed by machinery and other metal products and petrochemicals. “Shared office” services such as accounting, legal, and information technology services, including research and development (R&D), are Poland’s fastest-growing sectors for foreign investment.  The government seeks to promote domestic production and technology transfer opportunities in awarding military tenders. There are also some investment and export opportunities in the energy sector—both immediate (natural gas), and longer term (nuclear, energy grid upgrades, and offshore wind)—as Poland seeks to diversify its energy mix and reduce air pollution.

Defense is another promising sector for U.S. exports. The Polish government is actively modernizing its military inventory, presenting good opportunities for U.S. defense industry. In 2018, it signed its largest-ever defense contract when committing to purchase the PATRIOT missile defense system, and in 2019 it signed a contract to buy the High Mobility Artillery Rocket System (HIMARS).  In February 2019, the Defense Ministry announced its updated technical modernization plan listing its top programmatic priorities, with defense modernization budgets forecasted to increase from approximately USD 3.3 billion in 2019 to approximately USD 7.75 billion in 2025.  Information technology and cybersecurity along with infrastructure also show promise, as Poland’s municipalities focus on smart city networks. A USD 10 billion central airport project may present opportunities for U.S. companies in project management, consulting, communications, and construction. The government seeks to expand the economy by supporting high-tech investments, increasing productivity and foreign trade, and supporting entrepreneurship, scientific research, and innovation through the use of domestic and EU funding.

In 2018, Poland saw significant increases in wholesale electricity prices due largely to an increase in the price of coal and EU emissions permits.  The government has proposed a new law to protect household consumers from rising electricity prices, but the bill was at odds with the European Commission (EC) for the lack of notification of what amounted to state aid measures. 

Some organizations, notably private business associations and labor unions, have raised concerns that policy changes have been introduced quickly and without broad consultation, increasing uncertainty about the stability and predictability of Poland’s business environment.  Some examples include a one-time bank holiday (to celebrate 100 years of Poland regaining independence) with less than a month warning, and a major tax overhaul passed after firms had already prepared budgets for the coming year. Previous proposals to introduce legislation on media de-concentration raised concern among foreign investors in the sector; however, these proposals seem to be stalled for the time being.  

The Polish tax system underwent many changes over the last three years with the aim of increasing budget revenues, including more effective tax auditing and collection.  The November 2018 tax bill included a number of changes important for foreign investors, such as penalties for aggressive tax planning, changes to the withholding tax, incentives for R&D, and an exit tax on corporations and individuals.  

As the largest recipient of EU funds (which contribute an estimated 1 percentage point to Poland’s GDP growth per year), any significant decrease in EU cohesion spending would have a large negative impact on Poland’s economy.  Draft EU budgets foresee a 24 percent decrease in Poland’s Cohesion funds in the next cycle. Also, observers are closely watching the European Commission’s proceedings under Article 7 of the Lisbon Treaty, initiated in December 2017, regarding rule of law and judicial reforms.  These include the introduction of an extraordinary appeal mechanism in the enacted Supreme Court Law, which could potentially affect economic interests, in that final judgments issued since 1997 can now be challenged and overturned in whole or in part, including some long-standing judgments on which economic actors have relied.  

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 60/100

36 of 180

http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 33 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 41.70 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 USD 12,604 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 USD 12,730 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Poland welcomes foreign investment as a source of capital, growth, and jobs, and as a vehicle for technology transfer, research and development (R&D), and integration into global supply chains.  The government’s Strategy for Responsible Development identifies key goals for attracting investment, including improving the investment climate, a stable macroeconomic and regulatory environment, and high-quality corporate governance, including in state-controlled companies.  By the end of 2017, according to IMF and National Bank of Poland data, Poland attracted around USD 239 billion (cumulative) in foreign direct investment (FDI), principally from Western Europe and the United States. In 2017, reinvested profits dominated the net inflow of FDI to Poland.  The greatest reinvestment of profits occurred in services and manufacturing, reflecting the change of Poland’s economy to a more service-oriented and less capital-intensive structure.

Foreign companies generally enjoy unrestricted access to the Polish market.  However, Polish law limits foreign ownership of companies in selected strategic sectors, and limits acquisition of real estate, especially agricultural and forest land.  Additionally, the current government has expressed a desire to increase the percentage of domestic ownership in some industries such as banking and retail which have large holdings by foreign companies, and has employed sectoral taxes and other measures to advance this aim.  In March 2018, Sunday trading ban legislation went into effect, which is gradually phasing out Sunday retail commerce in Poland, especially for large retailers. In 2019, stores may operate an average of one Sunday a month, and in 2020 a total ban will be in effect (with the exception of seven Sundays).  Polish authorities have publicly favored introducing a digital services tax. Since no draft has been released, the details of such a tax are unknown, but it would affect mainly foreign digital companies.

There is a variety of Polish agencies involved in investment promotion:

  • The Ministry of Entrepreneurship and Technology has two departments involved in investment promotion and facilitation: the Investment Development and the Trade and International Relations Departments.  The Deputy Minister supervising the Investment Development Department was appointed in 2019 to be ombudsman for foreign investors. https://www.gov.pl/web/przedsiebiorczosc-technologia/  
  • The Ministry of Foreign Affairs (MFA) promotes Poland’s foreign relations including economic relations, and along with the Polish Chamber of Commerce (KIG), organizes missions of Polish firms abroad and hosts foreign trade missions to Poland.   https://www.msz.gov.pl/  ; https://kig.pl/  
  • The Polish Investment and Trade Agency (PAIH) is the main institution responsible for promotion and facilitation of foreign investment. The agency is responsible for promoting Polish exports, for inward foreign investment and for Polish investments abroad. The agency operates as part of the Polish Development Fund, which integrates government development agencies.  PAIH coordinates all operational instruments, such as commercial diplomatic missions, commercial fairs and programs dedicated to specific markets and sectors. The Agency has opened offices abroad including in the United States (San Francisco and Washington, D.C, Los Angeles, Chicago, Houston and New York. PAIH’s services are available to all investors. https://www.paih.gov.pl/en  
  • The Polish Chamber of Commerce in the United States (POLCHAM USA), located in Washington, D.C., promotes the strengthening of economic and trade relationships between the United States and Poland.  It is an independent, non-profit organization. https://polchamusa.org/  

Limits on Foreign Control and Right to Private Ownership and Establishment

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

Pursuant to the Broadcasting Law, a television broadcasting company may only receive a license if the voting share of foreign owners does not exceed 49 percent and if the majority of the members of the management and supervisory boards are Polish citizens and hold permanent residence in Poland.  In January 2017, a team comprised of officials from the Ministry of Culture and National Heritage, the National Broadcasting Council (KRRiT) and the Office of Competition and Consumer Protection (UOKiK) was created in order to review and tighten restrictions on large media, and limit foreign ownership of the media.  While no legislation has been introduced, there is concern that possible future proposals may limit foreign ownership of media sector.

In the insurance sector, at least two management board members, including the chair, must speak Polish.  The Law on Freedom of Economic Activity (LFEA) requires companies to obtain government concessions, licenses, or permits to conduct business in certain sectors, such as broadcasting, aviation, energy, weapons/military equipment, mining, and private security services.  The LFEA also requires a permit from the Ministry of Entrepreneurship and Technology for certain major capital transactions (i.e., to establish a company when a wholly or partially Polish-owned enterprise has contributed in-kind to a company with foreign ownership by incorporating liabilities in equity, contributing assets, receivables, etc.).  A detailed description of business activities that require concessions and licenses can be found here: https://www.paih.gov.pl/publications/how_to_do_business_in_Poland

Polish law restricts foreign investment in certain land and real estate.  Land usage types such as technology and industrial parks, business and logistic centers, transport, housing plots, farmland in special economic zones, household gardens and plots up to two hectares are exempt from agricultural land purchase restrictions.  Since May 2016, foreign citizens from European Economic Area member states, Iceland, Liechtenstein, and Norway, as well as Switzerland, do not need permission to purchase any type of real estate including agricultural land. Investors from outside of the EEA or Switzerland need to obtain a permit from the Ministry of Internal Affairs and Administration (with the consent of the Defense and Agriculture Ministries), pursuant to the Act on Acquisition of Real Estate by Foreigners, prior to the acquisition of real estate or shares which give control of a company holding or leasing real estate.  The permit is valid for two years from the day of issuance, and the ministry can issue a preliminary document valid for one year. Permits may be refused for reasons of social policy or public security. The exceptions to this rule include purchases of an apartment or garage, up to 0.4 hectares of undeveloped urban land, and “other cases provided for by law” (generally: proving a particularly close connection with Poland). Laws to restrict farmland and forest purchases came into force April 30, 2016, and are addressed in more detail in Section 6: Real Property.

Since September 2015 the Act on the Control of Certain Investments has provided for the national security-related screening of acquisitions in high-risk sectors including: energy generation and distribution; petroleum production, processing and distribution; telecommunications; media and mining; and manufacturing and trade of explosives, weapons and ammunition.  Poland maintains a list of strategic companies that can be amended at any time, but is updated at least once a year, usually in January. The national security review mechanism does not appear to constitute a de facto barrier for investment, and does not unduly target U.S. investment.  According to the Act, prior to the acquisition of shares of strategic companies (including the acquisition of proprietary interests in entities and/or their enterprises) the purchaser must notify the controlling government body and receive approval.  The obligation to inform the controlling government body applies to transactions involving the acquisition of a “material stake” in companies subject to special protection. The Act stipulates that failure to notify carries a fine of up to PLN 100,000,000 (approx. USD 25,575,542) or a penalty of imprisonment between six months and five years (or both penalties together) for a person acting on behalf of a legal person or organizational unit that acquires a material stake without prior notification.

The Polish government has drafted an amendment to extend the list of state companies with restrictions on selling shares and to increase the powers of the Prime Minister in the area of state property management.  The companies slated for additional restrictions are pipeline operator PERN, postal service Poczta Polska, aviation group PGL, railway system  PKP and the Special Purpose Vehicle in charge of building Poland’s planned central airport.  The amendment also sanctions possible mergers of such entities.

Other Investment Policy Reviews

The 2018 OECD Economic Survey of Poland can be found here:

http://www.oecd.org/eco/surveys/economic-survey-poland.htm  

Additionally, the OECD Working Group on Bribery has provided recommendations on the implementation of the OECD Anti-Bribery Convention in Poland:  http://www.oecd.org/daf/anti-bribery/poland-oecdanti-briberyconvention.htm  

In March 2018, the OECD published a Rural Policy Review on Poland.  According to this review, Poland has seen impressive growth in recent years, and yet regional disparities in economic and social outcomes remain large by OECD standards.  The review is available at: http://www.oecd.org/poland/oecd-rural-policy-reviews-poland-2018-9789264289925-en.htm  

Business Facilitation

The Polish government has continued to implement reforms aimed at improving the investment climate with a special focus on the SME sector and innovations.  In 2016-18, Poland reformed its R&D tax incentives with new regulations and changes encouraging wider use of the R&D tax breaks. As of January 1, 2019, a new mechanism reducing the tax rate on income derived from intellectual property rights (IP Box) was introduced.  Please see Section 5 of this report for more information.

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

Poland made enforcing contracts easier by introducing an automated system to assign cases to judges randomly.  Despite these reforms and others, some investors have expressed serious concerns regarding over-regulation, over-burdened courts and prosecutors, and overly-burdensome bureaucratic processes.  The way tax audits are performed has changed considerably. For instance, in many cases the appeal against the findings of an audit now must be lodged with the authority that issued the initial finding rather than a higher authority or third party.

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

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

Commercial companies are classified as partnerships (registered partnership, professional partnership, limited partnership, and limited joint-stock partnership) and companies (limited liability company and joint-stock company).  A partnership or company is registered in the National Court Register (KRS) and kept by the competent district court for the registered office of the established partnership or company. Local corporate lawyers report that starting a business remains costly in terms of time and money, though KRS registration in the National Court Register averages less than two weeks according to the Ministry of Justice and four weeks according to the World Bank’s 2019 Doing Business Report.  A 2018 law introduced a new type of company—PSA (Prosta Spółka Akcyjna – Simple Joint Stock Company).  PSAs are meant to facilitate start-ups with simpler and cheaper registration procedures. The minimum initial capitalization is 1 PLN (approx. USD 0.26) while other types of registration require 5,000 PLN (approx. USD 1,315) or 50,000 PLN (approx. USD 13,158).  A PSA has a board of directors, which merges the responsibilities of a management board and a supervisory board. The provision for PSA will enter into force in March 2020.

New provisions of the Public Procurement Law (“PPL”) transposing provisions of EU directives coordinating the rules of public procurement came into force on October 18, 2018.  These regulations apply to proceedings concerning contracts with a value equal to or exceeding the EU thresholds.

Polish lawmakers are gradually digitalizing the services of the KRS.   The first change, which entered into force on March 15, 2018, was the obligation to file financial statements with the Repository of Financial Documents via the Ministry of Finance website.  There is also a new requirement for representatives and shareholders of companies to submit statements on their addresses. A requirement to file financial statements exclusively in electronic form entered into force on October 1, 2018, and, beginning in  March 2020, all applications will have to be filed with the commercial register electronically. A certified e-signature may be obtained from one of the commercial e-signature providers listed on the following website: https://www.nccert.pl/  

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

Both registers are available in English and foreign companies may use them.

Poland’s Single Point of Contact site for business registration and information is: https://www.biznes.gov.pl/en/  and an online guide to choose a type of business registration is: https://www.biznes.gov.pl/poradnik/-/scenariusz/REJESTRACJA_DZIALALNOSCI_GOSPODARCZEJ  

Outward Investment

The Polish Agency for Investment and Trade (PAIH) under the umbrella of the Polish Development Fund, plays a key role in promoting Polish investment abroad.  More information on PFR can be found in Section 7 and at its website: https://pfr.pl/  

The Minister of Foreign Affairs and the Minister of Entrepreneurship and Technology have   significantly reformed Poland’s economic diplomacy. The Polish Information and Foreign Investment Agency (PAIiIZ) was reformed in February 2017 to be the Polish Agency for Investment and Trade (PAIH).  Trade and Investment Promotion Sections in embassies and consulates around the world have been replaced by PAIH offices. These 70 offices worldwide constitute a global network and include six in the United States.  

PAIH offices offer a range of services to include: finding potential partners for Polish manufacturers/exporters; providing information on business opportunities; assisting in the organization of business trips and study tours; and assisting in initiating first contacts between interested local importers, distributors or wholesalers and Polish manufacturers or service providers.  The Agency implements pro-export projects such as the Polish Tech Bridges dedicated to expansion of innovative Polish SMEs.  PAIH has a number of investment/export-oriented government programs specially developed to promote Polish companies abroad such as Go China, Go India, Go Africa, Go ASEAN and Go Arctic.  Vietnam and Iran are also priority investment and export destinations for Poland, though trade with Iran has dropped off since the re-imposition of U.S. sanctions. Poland is a founding member of the Asian Infrastructure Investment Bank (AIIB).  Poland co-founded and actively supports the Three Seas Initiative, which seeks to improve north-south connections in road, energy and telecom infrastructure in 12 countries on NATO’s and the EU’s eastern flank. . PAIH is responsible for the promotion of Poland at the EXPO Dubai 2020. 

The national development bank BGK (Bank Gospodarstwa Krajowego) offers support for goods with a Polish component and depending on the credit can be a minimum of 30-40 percent of net contract revenue.  BGK offers a number of short-term credit instruments like documentary letters of credit for post-financing. BGK offers direct credit for importers to purchase investment goods and services. The Export Credit Insurance Corporation KUKE insures the BGK-issued credit, including for companies from countries with higher trade risk.

4. Industrial Policies

Poland’s Plan for Responsible Development identifies eight industries for development and incentives: aviation, defense, automotive parts manufacturing, ship building, information technology, chemical, furniture manufacturing and food processing.  The full text of the plan can be found at this link: https://www.miir.gov.pl/strony/strategia-na-rzecz-odpowiedzialnego-rozwoju/plan-na-rzecz-odpowiedzialnego-rozwoju/  .  Poland encourages energy sector development through its energy policy, outlined in the November 2018 published draft report “Polish Energy Policy to 2040.”   While the strategy has not yet been finalized, the government has generally followed the directions of development in the policy. The draft policy can be found at:   http://www.me.gov.pl/Energetyka/Polityka+energetyczna  . The draft policy  foresees a primary role for fossil fuels until 2040 as well as  strong growth in electricity production. The construction of the first nuclear plant is planned by 2033, until then coal is to remain the main fuel for electricity generation.  The draft policy foresees a large potential for the development of offshore wind power generation, but the policy remains skeptical of onshore wind. . Poland plans to adopt a  National Energy and Climate Plan by the end of 2019, in line with the EU Regulation on the Governance of the Energy and Climate Action.

Investment Incentives

A company investing in Poland, either foreign or domestic, may receive assistance from the Polish government.  Foreign investors have the potential to access certain incentives such as: income tax and real estate tax exemptions; investment grants of up to 50 percent of investment costs (70 percent for small and medium-sized enterprises); grants for research and development; grants for other activities such as environmental protection, training, logistics, or use of renewable energy sources.

Large priority sector investments may qualify for the “Program for Supporting Investment of Considerable Importance for the Polish Economy for 2011-2020” which provides grants to large investments that create jobs in sectors including automotive, electronics, aviation, biotechnology, R&D, agriculture and food processing, and services (finance, information and communication, professional business services). Companies can learn more at: https://www.miir.gov.pl/strony/zadania/wsparcie-przedsiebiorczosci/program-wspierania-inwestycji-o-istotnym-znaczeniu-dla-gospodarki-polskiej-na-lata-2011-2023/  

The Polish Investment Zone (PSI), the new system of tax incentives for investors replacing the previous system of special economic zones (SEZ), was launched September 5, 2018.  Under the new law on the “Polish Investment Zone,” companies can apply for a corporate income tax (CIT) exemption for a new investment to be placed anywhere in Poland. The CIT exemption is calculated based on the value of the investment multiplied by the percentage of the public aid amount allocated for a given region based on its level of development (set percentage).  The CIT exemption is for 10-15 years, depending on the location of the investment. Special treatment is available for investment in new business services and research and development. A point system determines eligibility for the incentives.

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

More information on government financial support:

The Polish government is seeking to increase Poland’s economic competitiveness by shifting toward a knowledge-based economy.  The government has targeted public and private sector investment in research and development (R&D) to increase to 1.7 percent of GDP by 2020.  During 2014 – 20 Poland will receive approximately USD 88.85 billion in EU Structural and Cohesion funds dedicated to R&D. Businesses may also take advantage of the EU primary research funding program, Horizon 2020.

More information:

The Second Law on Innovation (commonly referred to as the “Big Law on Innovation”) entered into force on January 1, 2018.  Some of its provisions include:

  1. Tax credits for R&D raising the level of tax benefits up to 100 percent for both personal costs and for SMEs and large companies (raised from 50 percent in 2017),
  2. The extension of the catalog of eligible costs of non-durable materials,
  3. Clarification of labor costs and expert opinions as well as consulting services,
  4. Extension of the partial exemption from double taxation of limited partnerships and joint-stock limited companies (for the period of 2016-2023) This is an important incentive for potential investors because it gives startups better access to financing from venture capital funds,
  5. Enabling the use of concessions by companies also benefiting from incentives in Special Economic Zones,
  6. A tax credit of 150 percent for enterprises with Research and Development Center (RDC) status.  The enterprises with this status can also benefit from additional eligible deductions (depreciation of buildings, places and expert reports made by entities other than research units – up to 10 percent of revenues).

As of January 1, 2019, the Innovation Box or IP Box reduces the tax rate applicable to an income derived from IP rights to 5 percent.  Taxpayers applying the IP Box shall be entitled to benefit from the tax preference until a given right expires (in case of a patented invention – 20 years).  In order to benefit from the program, taxpayers will be obliged to separately account for the relevant income. Foreign investors may take advantage of this benefit as long as the relevant IP is registered in Poland.  

The Polish government does not issue sovereign guarantees for FDI projects.  Co-financing may be possible for partnering on large FDI projects, such as the planned central airport project or a possible nuclear project.  For example, the state-owned Polish Development Fund (along with Singaporean and Australian partners) plans to purchase 30 percent of the soon-to-be-expanded Gdansk Deepwater Container Terminal.

Foreign Trade Zones/Free Ports/Trade Facilitation

Foreign-owned firms have the same opportunities as Polish firms to benefit from foreign trade zones (FTZs), free ports, and special economic zones.  The 2004 Customs Law regulates operation of FTZs in Poland. The Minister of Finance and the Minister of Investment and Development establish duty-free zones.  The Ministers designate the zone’s managing authorities, usually provincial governors who issue operating permits to interested companies for a given zone.

Most activity in FTZs involves storage, packaging, and repackaging.  As of March 2018, there were seven FTZs: Gliwice, near Poland’s southern border; Terespol, near Poland’s border with Belarus; Mszczonow, near Warsaw; Warsaw’s Frederic Chopin International Airport; Szczecin; Swinoujscie; and Gdansk.  Duty-free shops are available only for travelers to non-EU countries.

There are fourteen bonded warehouses:  Bydgoszcz-Biale Blota; Krakow-Balice; Wroclaw-Strachowice; Katowice-Pyrzowice; Gdansk-Trojmiasto; Lodz; Braniewo; Poznan-Lawica; Rzeszow-Jasionka, Warszawa-Modlin, Lublin, Szczecin-Goleniow; Radom, Olsztyn-Mazury. Commercial companies can operate bonded warehouses.  Customs and storage facilities must operate pursuant to custom authorities’ permission. Only legal persons established in the EU can receive authorization to operate a customs warehouse.

Performance and Data Localization Requirements

Poland has no policy of “forced localization” designed to force foreign investors to use domestic content in goods or technology.  Investment incentives apply equally to foreign and domestic firms. Over 40 percent of firms in Special Economic Zones are Polish. There is little data on localization requirements in Poland and there are no requirements for foreign information technology (IT) providers to turn over source code and/or provide access to surveillance (backdoors into hardware and software or turn over keys for encryption).  Exceptions exist in sectors where data are important for national security such as critical telecommunications infrastructure and in gambling. The cross-border transfer rules in Poland are reasonable and follow international best practices, although some companies have criticized registration requirements as cumbersome. In Poland, the Telecommunications Law (Act of 16 July 2004 – (unified text, Journal of Laws 2018, item 1954) includes data retention provisions.  The data retention period is 12 months.

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

Post is not aware of excessively onerous visa, residence, work permit, or similar requirements inhibiting mobility of foreign investors and their employees, though investors regularly note long processing times due to understaffing at regional employment offices.  Generally, Poland does not mandate local employment, but there are a few regulations that place de facto restrictions e.g. a certain number of board members of insurance companies must speak Polish.

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

Romania

Executive Summary

Romania welcomes all forms of foreign investment.  The government provides national treatment for foreign investors and does not differentiate treatment by source of capital.  Romania’s strategic location, membership in the European Union, relatively well-educated workforce, competitive wages, and abundant natural resources make it a desirable location for firms seeking to access European, Central Asian, and Near East markets.  U.S. investors have found opportunities in the information technology, automotive, telecommunication, energy, services, manufacturing, consumer products sectors, and banking.

The investment climate in Romania is a mixed picture, and potential investors should undertake due diligence when considering any investment.  The March 2019 EU Country Report for Romania points to persistent legislative instability, unpredictable decision-making, low institutional quality, and the continued weakening of the fight against corruption as factors eroding investor confidence.  The EU noted that important legislation was adopted without proper stakeholder consultation and often lacked impact assessments.

The pace of economic reforms has slowed, and since January 2017, efforts to undermine Romania’s anti-corruption prosecutors and weaken judicial independence have shaken investor confidence in the government’s commitment to combat corruption.  Political rhetoric has reportedly taken an increasingly nationalist tone, with political leaders occasionally accusing foreign companies of not paying taxes, taking advantage of Romanian workers and resources, and sponsoring anti-government protests.

The Government of Romania’s (GOR) mandatory transfer of payroll taxes from employers to employees in January 2018 negatively affected all companies through additional administrative costs resulting from negotiation and registration of new labor contracts.  The government’s sale of minority stakes in SOEs in key sectors, such as energy generation and exploitation, has stalled since 2014. The GOR has weakened enforcement of its state-owned enterprise (SOE) corporate governance code, exempting several SOEs from the code in December 2017 and weakening SOEs’ capability to invest through regular and exceptional dividend distributions.

Consultations with stakeholders and impact assessments are required before enactment of legislation.  However, this requirement has been unevenly followed, and public entities generally do not conduct impact assessments.  Since 2017, frequent government changes have led to rapidly changing policies and priorities that can serve to complicate the business climate.  Romania has made significant strides to combat corruption, but corruption remains an ongoing challenge and recent actions by the government could have in fact hindered anti-corruption efforts.  Inconsistent enforcement of existing laws, including those related to the protection of intellectual property rights, also serves as a disincentive to investment.  Fiscal changes, passed through Emergency Ordinance (EO114) on December 21, 2018 without prior consultation, imposed taxes on the banking, energy, and telecommunications sectors.  The measure shocked markets, causing private sector backlash. On March 29, the Government of Romania softened the bank tax, upholding taxes on energy and telecommunication companies.

Although women in Romania have equal access under the law to investment development and protections, women have been reported to face societal challenges.  The problem is worse in rural areas and for Roma women. According to the World Bank, almost half of rural women in Romania have not completed upper secondary education and 43 percent are in the poorest quintile.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 61 of 180

(down 2 spots)

http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 52 of 190

(down 7 spots)

http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 49 of 126

(down 7 spots)

https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 USD 3.6 billion http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 USD 10,000 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Romania actively seeks foreign direct investment, and offers a market of around 19 million consumers, a relatively well-educated workforce at competitive wages, a strategic location, and abundant natural resources.  To date, favored areas for U.S. investment include IT and telecommunications, energy, services, manufacturing – especially in the automotive sector, consumer products, and banking. InvestRomania is the government’s lead agency for promoting and facilitating foreign investment in Romania.  InvestRomania offers assistance and advisory services free of charge to foreign investors and international companies for project implementation and opening new offices or manufacturing facilities.

Romania’s accession to the European Union (EU) on January 1, 2007 has helped solidify institutional reform.  Conversely, legislative and regulatory unpredictability, as well as weak public administration, continue to negatively impact the investment climate.  As in any foreign country, prospective U.S. investors should exercise careful due diligence, including consultation with competent legal counsel, when considering an investment in Romania.  Allegedly, in past cases, governments in Romania have allowed political interests or budgetary imperatives to supersede accepted business practices in harmful ways to investor interests.

The energy sector has suffered from recent changes.  In 2018, offshore companies benefited from a streamlined permitting process, but were hit with a windfall profit tax that previously applied only to onshore production.  Additionally, in February 2018 the reference price for natural gas royalties was changed from the Romanian market price to the Vienna Central European Gas Hub (CEGH) price, resulting in a significant increase in royalties.  Energy producers have expressed concern about additional regulatory requirements in EO114, which caps the price of wholesale natural gas, among other modifications. Business associations, including the American Chamber of Commerce in Romania (AmCham), the Foreign Investor Council (FIC), and the Coalition for Romania’s Development, have criticized EO114’s new taxes and how it reverses natural gas market liberalization.

Investments involving public authorities can be more complicated than investments or joint ventures with private Romanian companies.  Some allegations cite that large deals involving the government – particularly public-private partnerships and privatizations of key SOEs – can be stymied by vested political and economic interests, or delayed due to a lack of coordination between government ministries.

In May 2018, the Public-Private Partnership (PPP) Law was revised through emergency ordinance (EO) and responsibility for PPPs of national interest was shifted to the National Strategy and Prognosis Commission.  PPPs of regional or local interest are governed by local authorities. The initiative of implementing a project through a PPP lies exclusively with the public partner. The contribution of the public partner can be in cash, provided the public contribution complies with state aid rules and with public finance legislation.  The public partner can cover costs for stages prior to project implementation, including feasibility studies, and can assume payment obligations or provide guarantees to the project company. According to the PPP law, the public partner initiates the PPP project and awards it according to public procurement rules. Implementation of the PPP legislation will be of considerable interest to investors over the next few years.  The EO is subject to parliamentary review.

In April 2018, the Foreign Investors Council (FIC) issued an open letter to the government and Parliament underscoring business climate uncertainty from the government’s failure to finalize EO 79.  In 2017, EO 79 shifted the burden of mandatory payroll deductions for pensions, healthcare, and income taxes from employers to employees. Parliament has yet to confirm or modify the law, leaving employers uncertain.  To avoid reductions in employee net pay, many companies voluntarily increased salaries to offset employee losses. Other companies, wary of further possible changes, offered monthly bonuses rather than formally amending contracts.

As an example of changes to the taxation regime and ongoing systemic tax disputes between the government and foreign investors, the Ministry of Health (MOH) announced February 2018 an increase in “the clawback tax” for Q4 2017, from 19.42 percent to 23.45 percent.  Pharmaceutical companies pay the clawback tax on all sales of drugs reimbursed through the public health system. The MOH calculates the tax to recover the cost for reimbursed drug sales in the previous quarter that exceed its budget. The pharmaceutical industry, both generic and innovative, immediately decried the tax increase.  Industry sees itself as financing the growth in drug consumption in Romania while the MOH’s budget has remained flat since 2011. The International Innovative Pharmaceutical Producers Association (ARPIM) issued a press release noting that from 2013-2017, pharmaceuticals paid USD 1.75 billion in clawback taxes, exceeding one year of the MOH’s annual budget for drugs in the public health system.  Since implementation of the clawback tax in 2009, the pharmaceutical industry has suggested numerous solutions to address the lack of predictability and transparency in the National Health Insurance House’s computations, but the GOR has shown no interest in increasing government spending for medicine to reduce the tax burden on private companies.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities are free to establish and own business enterprises, and to engage in all forms of remunerative activity.  Romanian legislation and regulation provide national treatment for foreign investors, guarantee free access to domestic markets, and allow foreign investors to participate in privatizations.  There is no limit on foreign participation in commercial enterprises. Foreign investors are entitled to establish wholly foreign-owned enterprises in Romania (although joint ventures are more typical), and to convert and repatriate 100 percent of after-tax profits.

Romania has taken established legal parameters to resolve contract disputes expeditiously.  Mergers and acquisitions are subject to review by the Competition Council. According to the Competition Law, the Competition Council notifies Romania’s Supreme Defense Council regarding any merger or acquisition of stocks or assets which could impact national security.  The Supreme Defense Council then reviews these referred mergers and acquisitions for potential threats to national security. To date, the Supreme Defense Council has not blocked any merger or acquisition. The Romanian capital account was fully liberalized in 2006, prior to gaining EU membership in 2007.  Foreign firms are allowed to participate in the management and administration of the investment, as well as to assign their contractual obligations and rights to other Romanian or foreign investors.

Other Investment Policy Reviews

Romania has not undergone any third-party investment policy reviews through multilateral organizations in over ten years.  The Heritage Foundation’s 2019 Economic Freedom Report indicates that secured interests in private property are recognized.  The Report also notes declines in judicial effectiveness and investment freedom, which outweigh improvements in property rights, the tax burden, and government spending.  The Report identifies labor shortages and political instability as the greatest economic risks.

According to the World Bank, economic growth rates have increased, but the benefits have not been felt by all Romanians.  Progress on implementing reforms and improving the business environment has been uneven. The World Bank’s 2019 Doing Business Report and Doing Business in the European Union Report indicates that Romania ranks below the EU average in the ease of starting a business, dealing with construction permits and setting up utility services.  Starting a business was made more cumbersome by introducing fiscal risk assessment criteria for value-added tax applications, thereby increasing the time required to register as a value-added taxpayer. Numerous international bodies including the European Commission, the Group of States Against Corruption, the Venice Commission, and Transparency International have expressed concern about what has been seen as an attempt to roll-back anti-corruption efforts and called on the Romanian government to focus on strengthening anti-corruption efforts, including introducing stronger corporate ethics standards and implementing existing anti-corruption legislation.  No substantive progress has been made in these areas.

Business Facilitation

The National Trade Registry has an online service available in Romanian at https://portal.onrc.ro/ONRCPortalWeb/ONRCPortal.portal  .  Romania has a foreign trade department within the Ministry of Business Climate, Trade, and Entrepreneurship and an investment promotion department in the Ministry of Economy.  InvestRomania is the government’s lead agency for promoting and facilitating foreign investment in Romania. InvestRomania offers assistance and advisory services free of charge to foreign investors and international companies for project implementation and opening new offices or manufacturing facilities.  More information is available at http://www.investromania.gov.ro/web/  .

According to the World Bank, it takes 6 procedures and 35 days to establish a foreign-owned limited liability company (LLC) in Romania, compared to the regional average for Europe and Central Asia of 5 procedures and 13 days.  In addition to the procedures required of a domestic company, a foreign parent company establishing a subsidiary in Romania must authenticate and translate its documents abroad. Foreign companies do not need to seek an investment approval.  The Trade Registry judge must hold a public hearing on the company’s application for registration within 5 days of submission of the required documentation. The registration documents can be submitted, and the status of the registration request monitored, online.

Companies in Romania are free to open and maintain bank accounts in any foreign currency, although, in practice, Romanian banks offer services only in certain hard currencies including: Euros, U.S. dollars, Swiss francs and Romanian Leu.  The minimum capital requirement for domestic and foreign LLCs is RON 200 (USD 47). Areas for improvement include making all registration documents available to download online in English. Currently only some are available online, and they are only in Romanian.

Romania defines microenterprises as having less than nine employees, small enterprises as having less than 50 employees, and medium sized enterprises as having less than 250 employees.  Regardless of ownership, microenterprises and SMEs enjoy “de minimis” and other state aid schemes from EU funds or from the state budget. Business facilitation mechanisms provide for equitable treatment of women in the economy.  According to the World Bank Doing Business Report, women are able to register a LLC with the same amount of time, cost, and number of procedures as men.

Outward Investment

There are no restrictions on outward investment.  There are no incentives for outward investment.

4. Industrial Policies

Investment Incentives

Currently, customs and tax incentives are available to investors in six free trade zones.  State aid is available for investments in free trade zones under EU regional development assistance rules.  In 2018, the government amended the state aid program for large investments instituted under GD 807/2014, lowering the investment threshold to EUR 1 million and moving away from the calls for applications approach.  Investors can apply at any time, and applications are reviewed on a first-come first-served basis. As of December 31, 2018, of the 62 applications submitted in 2018, 19 were approved, 30 had been rejected, and the rest were under review.  Large companies may receive aid of up to 50 percent of their eligible costs. The ceiling is 35 percent in the counties of Ilfov, Timis, Arad, Caras Severin, and Hunedoara while in Bucharest the ceiling is 10 percent. The ceiling for small and medium-sized enterprises (SMEs) is 10 percent higher than permissible aid for large companies, and for the smallest category of companies, the ceiling is 20 percentage points higher.  Prospective investors are advised to thoroughly investigate and verify the status of state incentives.

In 2007, Romania adopted EU regulations on regional investment aid, and instituted state aid schemes for large investments, SMEs, and job creation.  Both Romanian and EU state aid regulations aim to limit state aid in any form, such as direct state subsidies, debt rescheduling schemes, debt for equity swaps, or discounted land prices.  The EC must be notified of, and approve, GOR state aid that exceeds the pre-approved monetary threshold for the corresponding category of aid. To benefit from the remaining state aid schemes, the applicant must secure financing that is separate from any public support for at least 25 percent of the eligible costs, either through his own resources or through external financing, and must document this financing in strict accordance with Ministry of Finance guidelines.  Amendments made in 2010 to the state aid scheme for regional projects score applications based not only on the economics of the project, but also on the GDP per capita and unemployment rate for the county of intended investment. When granting state aid, the Ministry of Finance requires that the state revenues through taxes equals the state aid granted. Numerous foreign and American firms have successfully applied for and received Romanian State Aid.

The renewable energy support through Green Certificate System, part of the Renewable Energy Law, provided incentives for certain types of renewable energy.  The support is not available for renewable energy investments made after January 1, 2017, but investors that qualified under the support system can trade certificates until 2032.  The Green Certificates are traded in parallel with the energy produced. Although the Green Certificates are intended to provide an additional source of revenue for renewable energy producers, repeated revisions to the support system including deferring release of the certificates, and lowering the mandatory green certificate quota that consumers and suppliers have to acquire have created instability in the renewables investment climate.  Energy intensive industrial consumers receive exemptions from acquiring green certificates. In March 2017, the government revised the renewable energy support legislation. The changes include extending the validity of tradable green certificates to allow trading until 2032 and requires green certificates trading to be done anonymously, with the intention of balancing the market for all green certificates sellers.

As an EU member state, Romania must receive EC approval for any state aid it grants that is not covered by the EU’s block exemption regulations.  The Romanian Competition Council acts as a clearinghouse for the exchange of information between the Romanian authorities and the EC. The failure of state aid grantors to notify the EC properly of aid associated with privatizations has resulted in the Commission launching formal investigations into several privatizations.  Investors should ensure that the government entities with which they work fully understand and fulfill their duty to notify competition authorities. Investors may wish to consult with EU and Romanian competition authorities in advance, to ensure a proper understanding of notification requirements.

Companies operating in Romania can also apply for aid under EU-funded programs that are co-financed by Romania.  When planning a project, prospective applicants must bear in mind that the project cannot start before the financing agreement is finalized; the application, selection, and negotiation process can be lengthy.  Applicants also must secure financing for non-eligible expenses and for their co-financing of the eligible expenses. Finally, reimbursement of eligible expenses – which must be financed upfront by the investor – is often very slow.  Procurements financed by EU-funded programs above a certain monetary threshold must comply with public procurement legislation. In an effort to increase the rate of EU funds absorption, Romania has amended regulations to allow applicants to use the assets financed under EU-funded programs as collateral.  Allegedly, understaffing and a lack of expertise on the part of GOR management entities, cumbersome procedures, and applicants’ difficulty obtaining private financing still remain significant obstacles to improved EU funds absorption and project implementation by Romania.

Foreign Trade Zones/Free Ports/Trade Facilitation

Free Trade Zones (FTZs) received legal authority in Romania in 1992.  General provisions include unrestricted entry and re-export of goods, and exemption from customs duties.  The law further permits the leasing or transfer of buildings or land for terms of up to 50 years to corporations or natural persons, regardless of nationality.  Foreign-owned firms have the same investment opportunities as Romanian entities in FTZs.

Currently there are six FTZs, primarily located on the Danube River or close to the Black Sea: Sulina, Constanta-Sud Agigea, Galati, Braila, Curtici-Arad, and Giurgiu.  The administrator of each FTZ is responsible for all commercial activities performed within the zone. FTZs are under the authority of the Ministry of Transportation.

Performance and Data Localization Requirements

The government generally does not mandate local employment.  The notable exception is the Offshore Law (Law 256/2018), which requires that at least 25 percent of the employees of offshore titleholders have to be Romanian citizens with fiscal residence in Romania.  There are no excessively onerous visa, residence, work permit, or similar requirements inhibiting mobility of foreign investors or their employees. There are no government-imposed conditions on permission to invest.  The government does not require investors to establish or maintain data storage in Romania. Romania neither follows nor is there legislation requiring a “forced localization” policy for goods, technology or data. Romania does not have requirements for foreign IT providers to turn over source code or provide access for government surveillance.  Romania’s Constitutional Court has twice ruled such specific legislative drafts are unconstitutional. There are no measures that prevent or unduly impede companies from freely transmitting customer or other business-related data outside the country. There are no performance requirements imposed as a condition for establishing, maintaining or expanding an investment.

Russia

Executive Summary

The Russian Federation continued to implement regulatory reforms in 2018, allowing Russia to climb four notches to 31st place out of 190 economies in the World Bank’s Doing Business 2019 Report. However, fundamental structural problems in its governance of the economy, in addition to Western sanctions, continue to stifle foreign direct investment throughout Russia. In particular, Russia’s judicial system remains heavily biased in favor of the state, leaving investors with little recourse in legal disputes with the government.  Despite on-going anticorruption efforts, high levels of corruption among government officials compound this risk. In February 2019, a prominent U.S. investor was arrested and jailed over a commercial dispute. Moreover, Russia’s import substitution program gives local producers advantages over foreign competitors that do not meet localization requirements. Finally, Russia’s actions in eastern Ukraine and Crimea in 2014, interference in the 2016 U.S. presidential election, 2018 poisoning of Sergey and Yuliya Skripal, and other malign activities, have resulted in EU and U.S. sanctions – restricting business activities and increasing costs.

U.S. investors in Russia must ensure full compliance with U.S. sanctions. The primary sanctions levied against Russia include the SDN (Specially Designated Nationals) lists, targeting persons or entities involved with Russian malign activity; the Sectoral Sanctions list, targeting entities in the Russian energy, defense and financial sectors; and Chemical and Biological Weapon Act sanctions. Additionally, there are Russian sanctions related to human rights violations (Magnitsky Act), malicious cyber activity, North Korea, Syria, and weapons proliferation.  Further information on the U.S. sanctions program is available at the U.S. Treasury’s website: https://www.treasury.gov/resource-center/sanctions/Programs/pages/ukraine.aspx.  U.S. investors can also utilize the “Consolidated Screening List” search tool at https://www.export.gov/csl-search to check sanctions and control lists from the Departments of Treasury, State, and Commerce as a part of comprehensive due diligence in the Russian market.

The Agency for Strategic Initiatives (ASI) has played an important role in improving Russia’s investment climate, and its system of ranking Russian regions, has spurred local authorities to improve their regions’ investment climates. ASI’s ranking system is available at https://asi.ru/investclimate/rating/.  As regions compete for foreign investment, local authorities have substantially reduced local regulations, and in 2018, 78 Russian regions improved their Regional Investment Climate Index scores.

Russia’s Strategic Sectors Law (SSL) establishes an approval process for foreign investments resulting in a controlling stake in one of Russia’s 46 “strategic sectors.”  Amendments to the SSL, approved in 2017, expanded its purview to include offshore companies and their subsidiaries, in addition to foreign states, international organizations, and their subsidiaries. In May 2018, amendments to Federal Law No. 160-FZ “On Foreign Investments in the Russian Federation” replaced the “offshore company” category of the SSL with the category of “non-disclosing investor” (i.e. an investor not disclosing the information on its beneficiaries, beneficial owners, and controlling persons). The new amendments superseded the special regulation of offshore companies introduced in 2017 and provided a new concept of “companies, which do not disclose information on their beneficiaries, beneficiary owners, and controlling persons.” In December 2015, Russia amended the federal law “On the Constitutional Court of the Russian Federation,” giving the Russian Constitutional Court authority to disregard verdicts by international bodies, including investment arbitration bodies, if it determines the ruling contradicts the Russian constitution.

The Russian government has since 2015 had an incentive program for foreign investors called Special Investment Contracts (SPICs).  SPICs offered foreign investors who concluded contracts eligibility for preferential customs treatment, opportunity to compete for government sole-source contracts, and incentives. These contracts, generally negotiated with and signed by the Ministry of Industry and Trade, allow foreign companies to participate in Russia’s import substitution programs by providing access to certain subsidies to foreign producers who established local production. In 2018, the Industry and Trade Ministry tabled draft legislative amendments introducing the “SPIC 2.0” mechanism.  SPIC 2.0, which is expected to be launched in 2019, will only be available to firms that introduce new technologies not currently available in Russia.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 138 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2018 31 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 46 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $13.881   http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $9,239 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Ministry of Economic Development (MED) is responsible for overseeing investment policy in Russia. The Foreign Investment Advisory Council (FIAC), established in 1994, is chaired by the Prime Minister and currently includes 53 international company members and four companies as observers. The FIAC allows select foreign investors to directly present their views on improving the investment climate in Russia, and advises the government on regulatory rule-making. Russia’s basic legal framework governing investment includes 1) Law 160-FZ, July 9, 1999, “On Foreign Investment in the Russian Federation”; 2) Law No. 39-FZ,  February 25, 1999, “On Investment Activity in the Russian Federation in the Form of Capital Investment”; 3) Law No. 57-FZ, April 29, 2008, “Foreign Investments in Companies Having Strategic Importance for State Security and Defense”; and 2) the Law of the RSFSR No. 1488-1, June 26, 1991, “On Investment Activity in the Russian Soviet Federative Socialist Republic (RSFSR).” This framework nominally attempts to guarantee equal rights for foreign and local investors in Russia. However, exemptions are permitted when it is deemed necessary to protect the Russian constitution, morality, health, human rights, and national security or defense, and to promote the socioeconomic development of Russia. Foreign investors may freely use their revenues and profits obtained from Russia-based investments for any purpose provided they do not violate Russian law.

Limits on Foreign Control and Right to Private Ownership and Establishment

Russian law places two primary restrictions on land ownership by foreigners. First are restrictions on foreign ownership of land located in border areas or other “sensitive territories.” The second restricts foreign ownership of agricultural land: foreign individuals and companies, persons without citizenship, and agricultural companies more than 50-percent foreign-owned may hold agricultural land through leasehold right. As an alternative to agricultural land ownership, foreign companies typically lease land for up to 49 years, the maximum legally allowed.

President Vladimir Putin signed in October 2014 the law “On Mass Media,” which took effect on January 1, 2015, and restricts foreign ownership of any Russian media company to 20 percent (the previous law applied a 50 percent limit only to Russia’s broadcast sector). U.S. stakeholders have also raised concerns about similar limits on foreign direct investments in the mining and mineral extraction sectors; they describe the licensing regime as non-transparent and unpredictable as well.  In December 2018, the State Duma approved in its first reading a draft bill introducing new restrictions on online news aggregation services. If adopted, foreign companies, including international organizations and individuals, would be limited to a maximum of 20 percent ownership interest in Russian news aggregator websites.

Russia’s Commission on Control of Foreign Investment (Commission) was established in 2008 to monitor foreign investment in strategic sectors in accordance with the SSL. Between 2008 and 2017, the Commission received 484 applications for foreign investment, 229 of which were reviewed, according to the Federal Antimonopoly Service (FAS). Of those 229, the Commission granted preliminary approval for 216 (94 percent approval rate), rejected 13, and found that 193 did not require approval. (See https://fas.gov.ru/p/presentations/86). In 2018, the Commission reviewed 24 applications and granted approvals for investments worth RUB 400 billion (USD 6.4 billion).  International organizations, foreign states, and the companies they control, are treated as single entities under this law, and with their participation in a strategic business, subject to restrictions applicable to a single foreign entity.

Since January 1, 2019, foreign providers of electronic services to business customers in Russia (B2B e-services) have new Russian value-added tax (VAT) obligations. These include: (1) VAT registration with the Russian tax authorities (even for VAT exempt e-services); (2) invoice requirements; and (3) VAT reporting to the Russian tax authorities and VAT remittance rules.

Other Investment Policy Reviews

The WTO conducted the first Trade Policy Review of the Russian Federation in September 2016. Reports relating to the review are available at: https://www.wto.org/english/tratop_e/tpr_e/tp445_e.htm  .

The United Nations Conference on Trade and Development (UNCTAD) issues an annual review of investment and new industrial policies: https://unctad.org/sections/dite_dir/docs/wir2018/wir18_fs_ru_en.pdf  and an investment policy monitor: https://investmentpolicyhub.unctad.org/IPM 

Business Facilitation

The Agency for Strategic Initiatives (ASI) was created by President Putin in 2011 to increase innovation and reduce bureaucracy. Since 2014, ASI has released an annual ranking of Russia’s regions in terms of the relative competitiveness of their investment climates, and provides potential investors with important information about regions most open to foreign investment. ASI provides a benchmark to compare regions, the “Regional Investment Standard,” and thus has stimulated competition between regions, causing an overall improved investment climate in Russia. See https://asi.ru/investclimate/rating/ (in Russian). The Federal Tax Service (FTS) operates Russia’s business registration website: www.nalog.ru.Per law (Article 13 of Law 129-FZ of 2001), a company must register with a local FTS office within 30 days of launching a new business, and he business registration process must not take more than three days, according to. Foreign companies may be required to notarize the originals of incorporation documents included in the application package. To establish a business in Russia, a company must pay a registration fee of RUB 4,000 and register with the FTS. Starting January 1, 2019, a registration fee waived for online submission of incorporation documents.  See http://www.doingbusiness.org/data/exploreeconomies/russia .

The Russian government established in 2010 an ombudsman for investor rights protection to act as partner and guarantor of investors, large and small, and as referee in pre-court mediation facilitation. The First Deputy Prime Minister was appointed as the first federal ombudsman. In 2011, ombudsmen were established at the regional level, with a deputy of the Representative of the President acting as ombudsman in each of the seven federal districts. The ombudsman’s secretariat, located in the Ministry of Economic Development, attempts to facilitate the resolution of disputes between parties. Cases are initiated with the filing of a complaint by an investor (by e-mail, phone or letter), followed by the search for a solution among the parties concerned. According to the breakdown of problems reported to the ombudsman, the majority of cases are related to administrative barriers, discrimination of companies, exceeding of authority by public officials, customs regulations, and property rights protection.

In June 2012, a new mechanism for protection of entrepreneur’s rights was established. Boris Titov, the head of the business organization “Delovaya Rossia” was appointed as the Presidential Commissioner for Entrepreneur’s Rights.

In 2018, Russia implemented four reforms that increased its score in World Bank’s Doing Business ranking. First, Russia made the process of obtaining a building permit faster by reducing the time needed to obtain construction and occupancy permits.  Russia also increased quality control during construction by introducing risk-based inspections. Second, it made getting electricity faster by imposing new deadlines for connection procedures and by upgrading the utility’s single window as well as its internal processes. Getting electricity was also made cheaper by reducing the costs to obtain a connection to the electric network. Third, Russia made paying taxes less costly by allowing a higher tax depreciation rate for fixed assets. Fourth, Russia made trading across borders easier by prioritizing online customs clearance and introducing shortened time limits for its automated completion.

Outward Investment

The Russian government does not restrict Russian investors from investing abroad. In effect since 2015, Russia’s “de-offshorization law” (376-FZ) requires that Russian tax residents notify the government about their overseas assets, potentially subjecting these to Russian taxes.

While there are no restrictions on the distribution of profits to a nonresident entity, some foreign currency control restrictions apply to Russian residents (both companies and individuals), and to foreign currency transactions. As of January 1, 2018, all Russian citizens and foreign holders of Russian residence permits are considered Russian “currency control residents.” These “residents” are required to notify the tax authorities when a foreign bank account is opened, changed, or closed and when there is a movement of funds in a foreign bank account. Individuals who have spent less than 183 days in Russia during the reporting period are exempt from the reporting requirements and the restrictions on the use of foreign bank accounts.

4. Industrial Policies

Investment Incentives

Since 2005, Russia’s industrial investment incentive regime has granted tax breaks and other government incentives to foreign companies in certain sectors in exchange for producing locally. As part of its WTO Protocol, Russia agreed to eliminate the elements of this regime that are inconsistent with the Trade-Related Investment Measures TRIMS Agreement by July 2018. The TRIMS Agreement requires elimination of measures such as those that require or provide benefits for the use of domestically produced goods (local content requirements), or measures that restrict a firm’s imports to an amount related to its exports or related to the amount of foreign exchange a firm earns (trade balancing requirements). Russia notified the WTO that it had terminated these automotive investment incentive programs as of July 1, 2018. However, shortly thereafter, the Ministry of Industry and Trade announced that it would provide support to automotive manufacturers if they meet certain production quotas and local content requirements. The government is developing a new points-based system to estimate vehicle localization levels to determine original Equipment Manufacturer (OEM)’s eligibility for Russian state support.  The government will provide state support only to OEMs whose finished vehicles are deemed to be of Russian origin, which will depend upon them scoring at least 2,000 points under the new system to get some assistance and 6,000 point to enjoy a full range of support measures. Points will be awarded for localizing the supply of certain components.

The government also introduced Special Investment Contracts (SPIC) as an alternative incentive program in 2015. On December 18, 2017, the government changed the rules for concluding SPIC, to increase investment in Russia by offering tax incentives and simplified procedures for government interactions. These contracts, generally negotiated with and signed by the Ministry of Industry and Trade, ostensibly allow for the inclusion of foreign companies in Russia’s import substitution programs by providing access to certain subsidies to foreign producers if local production is established. In principle, these contracts may also aid in expediting customs procedures. In practice, however, reports suggest even companies that sign such contracts find their business hampered by policies biased in favor of local producers. The amendments aim to improve the SPIC mechanism by clarifying investment requirements and necessary documentation. They also provide a timeframe and procedures for application review, and for amending or terminating a SPIC. Finally, the amendments allow for broader composition of the SPIC private partner: the investor may now procure not only manufacturing services, but also engineering, distribution, and financial services, among others.

The Russian Direct Investment Fund (RDIF) was established in 2011 as a state-backed private equity fund to operate with long term financial and strategic investors and by offering co-financing for foreign investments directed at the modernization of the Russian economy. RDIF participates in projects estimated from USD 50 to USD 500 million, with a share in the project not exceeding 50 percent. RDIF has attracted long-term foreign capital investments totaling more than USD 40 billion in the following sectors: energy, energy saving technologies, telecommunications, healthcare and other areas. RDIF has also developed a system for foreign co-investment in its projects that allows foreign investors to participate automatically in each RDIF project.

Foreign Trade Zones/Free Ports/Trade Facilitation

Russia continues to promote the use of high-tech parks, special economic zones, and industrial clusters, which offer additional tax and infrastructure incentives to attract investment. “Resident companies” can receive a broad range of benefits, including exemption from profit tax, value-added tax, property tax, import duties, and partial exemption from social fund payments. The government evaluates and grants funding for investments on a yearly basis.

Russia has 25 special economic zones (SEZs), which fall in one of four categories: industrial and production zones; technology and innovation zones; tourist and recreation zones; and port zones. As of January 2018, 15 U.S. companies are working in Russian SEZs. According to Russian data, U.S. investors had invested over USD 1 billion in SEZs as of October 2018, making the U.S. the second largest investor in Russian SEZs.  A Russian Audit Chamber investigation of SEZs in April 2017 found the zones have had no measurable impact on the Russian economy since they were founded in 2005. “Territories of Advanced Development,” a separate but similar program, was launched in 2015 with plans to create areas with preferential tax treatment and simplified government procedures in Siberia, Kaliningrad, and the Russian Far East. In May 2016, President Putin ordered work on 10 existing SEZ’s to cease and suspended the creation of any new SEZs, at least until a more integrated approach to SEZ’s and “Territories of Advanced Development” was put in place.

Performance and Data Localization Requirements

Russian law generally does not impose performance requirements, and they are not widely included as part of private contracts in Russia. Some have appeared, however, in the agreements of large multinational companies investing in natural resources and in production-sharing legislation. There are no formal requirements for offsets in foreign investments. Since approval for investments in Russia can depend on relationships with government officials and on a firm’s demonstration of its commitment to the Russian market, these conditions may result in offsets in practice.

In certain sectors, the Russian government has pressed for localization and increased local content. For example, in a bid to boost high-tech manufacturing in the renewable energy sector, Russia guarantees a 12 percent profit over 15 years for windfarms using turbines with at least 65 percent local content. Russia is currently considering local content requirements for industries that have high percentages of government procurement, such as medical devices and pharmaceuticals. Russia is not a signatory to the WTO’s Government Procurement Agreement. Consequently, restrictions on public procurement have been a major avenue for Russia to implement localization requirements without running afoul of international commitments.

Russia’s data storage provisions (the “Yarovaya law”) took effect on July 1, 2018, with providers being required to store data in “full volume” beginning October 1, 2018. The Yarovaya law requires domestic telecoms and ISPs to store all customers’ voice calls and texts for six months; ISPs must store data traffic for one month. The Yarovaya law initially required even longer retention with a shorter implementation window, which companies criticized as costly and unworkable.

The Central Bank of Russia has imposed caps on the percentage of foreign employees in foreign banks’ subsidiaries. The ratio of Russian employees in a subsidiary of a foreign bank is set at less than 75 percent. If the executive of the subsidiary is a non-resident of Russia, at least 50 percent of the bank’s managing body should be Russian citizens.

Saudi Arabia

Executive Summary

During 2018, the Saudi Arabian government (SAG) continued to pursue its ambitious series of socio-economic reforms, collectively known as “Vision 2030.”  Aimed at diversifying the Saudi economy away from oil revenues and creating more private sector jobs for a growing population, Vision 2030 contemplates the development of new economic sectors and a significant transformation of the economy.  Spearheaded by Crown Prince Mohammed bin Salman, the reform program seeks to expand and sharpen the country’s knowledge base, technical expertise, and commercial competitiveness.

To help accomplish these goals, Saudi Arabia seeks increased foreign investment and international participation in the Saudi private sector.  To this end, the SAG took a number of steps in 2018 to improve the investment climate in the Kingdom. During 2018, the SAG established and reinforced a variety of institutions that facilitate investment in new segments of economic activity, such as the entertainment sector.  These efforts led to the April 2018 opening of the first cinema in the Kingdom in over 35 years. Furthermore, as of June 2018, women are permitted to drive in the Kingdom, thereby facilitating increased female workforce participation and increased access to Saudi human capital resources.  Improvements to infrastructure, such as the USD 23 billion Riyadh metro and the new Jeddah airport, also progressed during 2018 and will facilitate future economic activity. Additionally, the incorporation of Saudi Arabia’s Tadawul Stock Exchange into the FTSE Russell Emerging Market Index in March 2019 resulted in sizeable foreign capital infusions into the Kingdom, which increased international interest in Saudi markets and economic sectors.

However, a number of high-profile SAG actions led to a negative impact on the investment climate in the Kingdom during 2018.  Principal among these actions was the killing of journalist Jamal Khashoggi by Saudi government personnel on October 2, 2018, in Istanbul, Turkey.  Subsequently, several U.S. and international investors withdrew or indefinitely put on hold plans to invest in the Kingdom. Other SAG actions in 2018 gave rise to additional investor concerns over rule of law, business predictability, and political risk in Saudi Arabia, such as the Kingdom’s public dispute with Canada, the reported exclusion of German firms from certain Saudi government tenders, the arrest of prominent women’s rights activists, the continued detention and prosecution of prominent Saudi businessmen under the anti-corruption campaign launched in November 2017, and the continuation of the diplomatic rift with Qatar.  

In addition, U.S. and international stakeholders have continued to claim violations of their intellectual property rights in Saudi Arabia.  U.S. and international pharmaceutical companies allege the SAG violated their intellectual property rights and the confidentiality of their trade data by licensing local firms to produce competing generic pharmaceuticals.  Industry attempts to engage the SAG on these issues have not led to satisfactory outcomes for the companies. Furthermore, during 2018, an illicit satellite and online provider of sports and entertainment content known as “beoutQ” became widely available in the Kingdom.  Despite SAG assurances of a crackdown on this unprecedented case of satellite piracy, as of February 2019, beoutQ set-top boxes were openly sold in public markets in Riyadh and the pirated satellite signal continued to beam U.S. and international-sourced entertainment and sports content.  

Lastly, economic pressures to generate non-oil revenue and provide more jobs for Saudi citizens have prompted the SAG to implement measures that may weaken the country’s investment climate.  In particular, increased fees for expatriate workers and their dependents, as well as “Saudization” polices requiring certain businesses to employ a quota of Saudi workers, have led to disruptions in some private sector activities and may lead to a decrease in domestic consumption levels.  


Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 58 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 92 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 61 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $11,085 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $20,090 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

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

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

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

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

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

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

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

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

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

Saudi Arabia fully recognizes rights to private ownership and the establishment of private business.  As outlined above, the SAG excludes foreign investors from some economic sectors and places some limits on foreign control.  With respect to energy, Saudi Arabia’s largest economic sector, foreign firms are barred from investing in the upstream hydrocarbon sector, but the SAG permits foreign investment in the downstream energy sector, including refining and petrochemicals.  There is significant foreign investment in these sectors. ExxonMobil, Shell, China’s Sinopec, and Japan’s Sumitomo Chemical are partners with Saudi Aramco (the SAG’s state-owned oil firm) in domestic refineries. ExxonMobil, Chevron, Shell, and other international investors have joint ventures with Aramco and/or the Saudi Basic Industries Corporation (SABIC) in large-scale petrochemical plants that utilize natural-gas feedstock from Aramco’s operations.  In Saudi Arabia’s Eastern Province, the Dow Chemical Company and Aramco are partners in a USD 20 billion joint venture to construct, own, and operate the world’s largest integrated petrochemical production complex.

With respect to other non-oil natural resources, the national mining company, Ma’aden, has a USD 12 billion joint venture with Alcoa for bauxite mining and aluminum production and a USD 7 billion joint venture with the leading American fertilizer firm Mosaic and SABIC to produce phosphate-based fertilizers.  

Joint ventures almost always take the form of limited-liability partnerships, to which there are some disadvantages.  Foreign partners in service and contracting ventures organized as limited-liability partnerships must pay, in cash or in kind, 100 percent of their contribution to authorized capital.  SAGIA’s authorization is only the first step in setting up such a partnership.

Professionals, including architects, consultants, and consulting engineers, are required to register with, and be certified by, the Ministry of Commerce and Investment (MCI), in accordance with the requirements defined in the Ministry’s Resolution 264 from 1982.  These regulations, in theory, permit the registration of Saudi-foreign joint-venture consulting firms. As part of its WTO accession commitments, Saudi Arabia generally allows consulting firms to establish a local office without a Saudi partner. The requirement that law firms and engineering consulting firms must have a Saudi partner was rescinded in 2017.  Foreign engineering consulting companies must have been incorporated for at least 10 years and have operations in at least four different countries to qualify. However, offices practicing accounting and auditing, architecture, or civil planning, or providing healthcare, dental, or veterinary services must still have a Saudi partner, and the foreign partner’s equity cannot exceed 75 percent of the total investment.  

In recent years, Saudi Arabia has opened additional service markets to foreign investment, including financial and banking services; aircraft maintenance and repair and computer reservation systems; wholesale, retail, and franchise distribution services (traditionally subject to minimum 25 percent local ownership and minimum 20 million Saudi riyal (USD 5.3 million) foreign investment); both basic and value-added telecom services; and investment in the computer and related services sectors.  In 2016, for example, Saudi Arabia formally approved full foreign ownership of retail and wholesale businesses in the Kingdom, thereby removing the former 25 percent local ownership requirement. While some companies have already received licenses under the new rules, the restrictions attached to obtaining full ownership – including a requirement to invest over USD 50 million during the first five years and ensure that 30 percent of all products sold are manufactured locally – have proven difficult to meet and precluded many investors from taking full advantage of the reform.

Other Investment Policy Reviews

Saudi Arabia completed its second WTO trade policy review in late 2015, which included investment policy (https://www.wto.org/english/tratop_e/tpr_e/tp433_e.htm  ).  

Business Facilitation

In addition to applying for a license from SAGIA as described above, foreign and local investors must register a new business via the MCI, which has begun offering online registration services for limited liability companies at:  http://www.mci.gov.sa/en  .  Though users may submit articles of association and apply for a business name within minutes on MCI’s website, final approval from the ministry often takes a week or longer.  Applicants must also complete a number of other steps in order to start a business, including obtaining a municipality (baladia) license for their office premises and registering separately with the Ministry of Labor and Social Development, Chamber of Commerce, Passport Office, Tax Department, and the General Organization for Social Insurance.  From start to finish, registering a business in Saudi Arabia takes a foreign investor on average three to five months from the time an initial SAGIA application is complete, placing the country at 141 of 190 countries in terms of ease of starting a business, according to the World Bank (2019 rankings).  With respect to foreign direct investment, the investment approval by SAGIA is a necessary, but not sufficient, step in establishing an investment in the Kingdom. There are a number of other government ministries, agencies, and departments regulating business operations and ventures.

Saudi officials have stated their intention to attract foreign small- and medium-sized enterprises (SMEs) to the Kingdom.  The SAG established the Small and Medium Enterprises General Authority in 2015 to facilitate the growth of the SME sector. In 2016, the SAG released a new Companies Law designed in part to promote the development of the SME sector.  The law allows one person, rather than the previous minimum of two, to form a corporation, though in very limited cases. It also substantially reduced the minimum capital and number of shareholders required to form a joint stock company (from five previously to two).

Outward Investment

Saudi Arabia does not restrict domestic investors from investing abroad.  Private Saudi citizens, Saudi companies, and SAG entities hold extensive overseas investments.  The SAG is attempting to transform its Public Investment Fund (PIF), traditionally a holding company for government shares in state-controlled enterprises, into a major international investor and sovereign wealth fund.  In 2016, the PIF made its first high-profile international investment by taking a USD 3.5 billion stake in Uber. The PIF has also announced a USD 400 million investment in Magic Leap, a Florida-based company that is developing “mixed reality” technology, and a USD 1 billion investment in Lucid Motors, a California-based electric car company.  Saudi Aramco and SABIC are also major investors in the United States. In 2017, Aramco acquired full ownership of Motiva, the largest refinery in the United States, in Port Arthur, Texas. SABIC has announced a multi-billion dollar joint venture with ExxonMobil in a petrochemical facility in Texas.

4. Industrial Policies

Investment Incentives

SAGIA advertises a number of financial advantages for foreigners looking to invest in the Kingdom, including the lack of personal income taxes and a corporate tax rate of 20 percent on foreign companies’ profits.  SAGIA also lists various SAG-sponsored, regional, and international financial programs to which foreign investors have access, such as the Arab Fund for Economic and Social Development, the Arab Trade Financing Program, and the Islamic Development Bank.  

The Saudi Industrial Development Fund (SIDF), a government financial institution established in 1974, supports private-sector industrial investments by providing medium- and long-term loans for new factories and for projects to expand, upgrade, and modernize existing manufacturing facilities.  The SIDF offers loans of 50 percent to 75 percent of a project’s value, depending on the project’s location. Foreign investors that set up manufacturing facilities in developed areas (Riyadh, Jeddah, Dammam, Jubail, Mecca, Yanbu, and Ras Al-Khair), for example, can receive a 15-year loan for up to 50 percent of a project’s value; investors in the Kingdom’s least developed areas can receive a 20-year loan for up to 75 percent of the project’s value.  The SIDF also offers consultancy services for local industrial projects in the administrative, financial, technical and marketing fields. (The SIDF’s website is at https://www.sidf.gov.sa/en/Pages/default.aspx  .)  

The SAG offers several incentive programs to promote employment of Saudi nationals.  The Saudi Human Resources Development Fund (HRDF) (https://www.hrdf.org.sa/), for example, will pay 30 percent of a Saudi national’s wages for the first year of work, with a wage subsidy of 20 percent and 10 percent for the second and third year of employment, respectively (subject to certain limits and caps).   

American and other foreign firms are able to participate in SAG-financed and/or -subsidized research-and-development programs.  Many of these programs are run though the King Abdulaziz City for Science and Technology (KACST), which funds many of the Kingdom’s R&D programs.   

Foreign Trade Zones/Free Ports/Trade Facilitation

Saudi Arabia does not operate free trade zones or free ports.  However, as part of its Vision 2030 program, the SAG has announced it will create special zones with special regulations to encourage investment and diversify government revenues.  The SAG is discussing the establishment of special regulatory zones in certain areas, including at the NEOM giga-project, and the King Abdullah Financial District project in Riyadh.  

Saudi Arabia has established a network of “economic cities” as part of the country’s efforts to diversify away from oil.  Overseen by SAGIA, these four economic cities aim to provide a variety of advantages to companies that choose to locate their operations within the city limits, including in matters of logistics and ease of doing business.  The four economic cities are: King Abdullah Economic City near Jeddah, Prince AbdulAziz Bin Mousaed Economic City in north-central Saudi Arabia, Knowledge Economic City in Medina, and Jazan Economic City near the southwest border with Yemen.  The cities are in various states of development, and their future development potential is unclear, given competing Vision 2030 economic development projects.

The Saudi Industrial Property Authority (MODON) oversees the development of 35 industrial cities, including some still under development.  MODON offers incentives for commercial investment in these cities, including competitive rents for industrial land, government-sponsored financing, export guarantees, and certain customs exemptions.  (MODON’s website is at https://www.modon.gov.sa/en/Pages/default.aspx  .)

The Royal Commission for Jubail and Yanbu (RCJY) was formed in 1975 and established the industrial cities of Jubail, located in eastern Saudi Arabia on the Gulf coast, and Yanbu, located in north western Saudi Arabia on the Red Sea coast.  A significant portion of Saudi Arabia’s refining, petrochemical, and other heavy industries are located in the Jubail and Yanbu industrial cities. The RCJY’s mission is to plan, promote, develop, and manage petrochemicals and energy intensive industrial cities.  In connection with this mission, RCJY promotes investment opportunities in the two cities and can offer a variety of incentives, including tax holidays, customs exemptions, low cost loans, and favorable land and utility rates. More recently, the RCJY has assumed responsibility for managing the Ras Al Khair City for Mining Industries (2009) and the Jazan City for Primary and Downstream Industries (2015).  (The RCJY’s website is at https://www.rcjy.gov.sa).

Performance and Data Localization Requirements

The government does not impose systematic conditions on foreign investment.  For example, there are no requirements to locate in a specific geographic area (except for some restrictions on the distribution of retail outlets and the location of industrial activities).  Investors are not required to export a certain percentage of output. There is no requirement that the share of foreign equity be reduced over time. Investors are not required to disclose proprietary information to the SAG as part of the regulatory approval process, except where issues of health and safety are concerned.    

Although investors have not been required heretofore to purchase from local sources, the situation is changing.  In line with its bid to diversify the economy and provide more private sector jobs for Saudi nationals, the SAG has embarked upon a broad effort to source goods and services domestically and is seeking commitments from investors to do so.  In 2017, the Council of Economic and Development Affairs (CEDA) established the Local Content and Private Sector Development Unit (NAMAA in Arabic) to promote local content and improve the balance of payments. NAMAA is responsible for monitoring and implementing regulations, suggesting new policies, and coordinating with the private sector on all local content matters.  

Government-controlled enterprises are also increasingly introducing local content requirements for foreign firms.  Aramco’s “In-Kingdom Total Value Added” program, for example, strongly encourages the purchase of goods and services from a local supplier base and aims to double Aramco’s percentage of locally-manufactured energy-related goods and services to 70 percent by 2021.  

In the defense sector, Saudi Arabia’s military is in the process of reforming its procurement processes and policies to incorporate new ambitious goals of Saudi employment and localized production.  The SAG has shifted over the last two years away from offsets in favor of “localization” of purchases of goods and services and “Saudization” of the labor force. Previously, the government required offsets in investments equivalent to up to 40 percent of a program’s value for defense contracts, depending on the value of the contract.  The SAG is currently mandating increasingly strict localization requirements for government contracts in the defense sector. The SAG’s Vision 2030 program calls for 50 percent of defense materials to be produced and procured locally by 2030, and simultaneously seeks comparable increases in the number of Saudis employed in this sector.

The government encourages recruitment of Saudi employees through a series of incentives (see section 11 on “Labor Policies” for details of the “Saudization” program) and limits placed on the number of visas for foreign workers available to companies.  The Saudi electronic visitor visa system defaults to five-year visas for all U.S. citizen applicants. “Business visas” are routinely issued to U.S. visitors who do not have an invitation letter from a Saudi company; the visa applicant must provide evidence that he or she is engaged in legitimate commercial activity.  “Commercial visas” are issued by invitation from Saudi companies to applicants who have a specific reason to visit a Saudi company.

In the fall of 2016, the SAG implemented a series of significant visitor fee increases for expatriates whose countries do not have reciprocity agreements with Saudi Arabia, doubling the cost of a single-entry business visit visa to USD 533.  (U.S. citizens are exempt from such increases on the basis of reciprocity.) The SAG also imposed higher exit and reentry visa fees for all foreign workers residing in the Kingdom, including U.S. citizens. Furthermore, in January 2018, the SAG implemented new fees for expatriate employers ranging between USD 80 and USD 107 per employee per month and increased levies on expatriates with dependents to a USD 54 monthly fee for each dependent (see section 11 on “Labor Policies”).  In January 2019, fees on expatriate employees increased to between USD 133 to USD 160 per month, and levies on expatriate dependents increased to USD 80 per month. These fees are scheduled to increase again in 2020, but no additional increases are planned at this time.

Data Treatment

There are no requirements for foreign IT providers to turn over source code or provide access to encryption.  Other than a requirement to retain records locally for ten years for tax purposes, there is no requirement regarding data storage or access to surveillance.   

Singapore

Executive Summary

Singapore maintains an open, heavily trade-dependent economy, characterized by a predominantly open investment regime, with strong government commitment to maintaining a free market and to actively managing Singapore’s economic development. U.S. companies regularly cite transparency and lack of corruption, business-friendly laws and regulations, tax structure, customs facilitation, intellectual property protections, and well-developed infrastructure as attractive features of the investment climate. The World Bank’s Doing Business 2018 report ranked Singapore as the world’s second-easiest country in which to do business.  The Global Competitiveness Report 2018 by the World Economic Forum ranked Singapore as the second-most competitive economy globally. Singapore typically ranks as the least corrupt country in Asia and one of the least corrupt in the world, and actively enforces its robust anti-corruption laws. Transparency International’s 2018 Corruption Perception Index placed Singapore as the third least corrupt nation. The U.S.-Singapore Free Trade Agreement (USSFTA), which came into force on January 1, 2004, expanded U.S. market access in goods, services, investment, and government procurement, enhanced intellectual property protection, and provided for cooperation in promoting labor rights and environmental protections.

Singapore has a diversified economy and attracts substantial foreign investment in manufacturing (petrochemical, electronics, machinery, and equipment) and services (financial services, wholesale and retail trade, and business services). The government actively promotes the country as a research and development (R&D) and innovation center for businesses by offering tax incentives, research grants, and partnership opportunities with domestic research agencies. U.S. direct investment in Singapore in 2017 reached USD 274.3 billion, primarily in non-bank holding companies, manufacturing (particularly computers and electronic products), and finance and insurance – an increase of 7.4 percent from the previous year.  The investment outlook remains positive due to regional GDP growth. In 2018, U.S. companies pledged USD 4.1 billion in future investments in Singapore’s manufacturing and services sectors.

Looking ahead, Singapore is poised to attract foreign investments in digital innovation and cybersecurity. The Government of Singapore (hereafter, “the government”) is investing heavily in automation, artificial intelligence, and integrated systems under its Smart Nation banner and seeks to establish itself as a regional hub.

In recent years, the government has tightened foreign labor policies to encourage firms to improve productivity and employ more Singaporean workers. The government introduced measures in the 2019 budget to further decrease the ratio of mid- and low-skilled foreign workers to local employees in a firm from 40 percent to 38 percent beginning January 1, 2020 and then down to 35 percent in 2021. These cuts, which target the service sector, were taken despite industry concerns about skills gaps. To address some of these concerns, the government has introduced programs that partially subsidize the cost to firms of recruiting, hiring, and training local workers.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 3 of 175 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2018 2 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 5 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $274,260 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $54,530 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Singapore maintains a heavily trade-dependent economy characterized by an open investment regime, with some licensing restrictions in the financial services, professional services, and media sectors. The World Bank’s Doing Business 2018 report ranked Singapore as the world’s second-easiest country in which to do business. The 2018 Global Competitiveness Report ranks Singapore as the second -most competitive economy globally. The 2004 USSFTA expanded U.S. market access in goods, services, investment, and government procurement, enhanced intellectual property protection, and provided for cooperation in promoting labor rights and the environment.

The Government of Singapore is committed to maintaining a free market, but it also actively plans Singapore’s economic development, including through a network of government-linked corporations (GLCs). As of February 2019, the top three Singapore-listed GLCs accounted for 13.1 percent of total capitalization of the Singapore Exchange (SGX). Some observers have criticized the dominant role of GLCs in the domestic economy, arguing that they have displaced or suppressed private sector entrepreneurship and investment.

Singapore’s legal framework and public policies are generally favorable toward foreign investors. Foreign investors are not required to enter into joint ventures or cede management control to local interests, and local and foreign investors are subject to the same basic laws. Apart from regulatory requirements in some sectors (reference Limits on National Treatment and Other Restrictions), eligibility for various incentive schemes depends on investment proposals meeting the criteria set by relevant government agencies. Singapore places no restrictions on reinvestment or repatriation of earnings or capital. The judicial system, which includes international arbitration and mediation centers and a commercial court, upholds the sanctity of contracts, and decisions are generally considered to be transparent and effectively enforced.

Singapore’s Economic Development Board (EDB) is the lead investment promotion agency that facilitates foreign investment into Singapore (https:www.edb.gov.sg). EDB undertakes investment promotion and industry development and works with international businesses, both foreign and local, by providing information and facilitating introductions and access to government incentives. The government maintains close engagement with investors through the EDB, which provides feedback to other government agencies to ensure that infrastructure and public services remain efficient and cost-competitive.

Exceptions to Singapore’s general openness to foreign investment exist in telecommunications, broadcasting, the domestic news media, financial services, legal and accounting services, and ports and airports sectors, as well as property ownership. Under Singapore law, articles of incorporation may include shareholding limits that restrict ownership in corporations by foreign persons.

Telecommunications

Since 2000, the Singapore telecommunications market has been fully liberalized. This move has allowed foreign and domestic companies seeking to provide facilities-based (e.g. fixed line or mobile networks) or services-based (e.g. local and international calls and data services over leased networks) telecommunications services to apply for licenses to operate and deploy telecommunication systems and services. Singapore Telecommunications (SingTel) – a GLC that is majority owned by Temasek, a state-owned investment company with the Singapore Minister for Finance as its sole shareholder – faces competition in all market segments. However, its main competitors, M1 and StarHub, are also GLCs. In December 2018, Australian telco TPG Telecom announced a limited, free mobile service to run through 2019. TPG offers only subscriber identity module (SIM) services in Singapore. In the past three years, four Singapore start-ups offering mobile virtual network operator services (MVNOs) have also entered the market. The three established Singapore telecommunications competitors are expected to strengthen their partnerships with the MVNOs in a defensive move against TPG’s entry.

As of November 2018, Singapore has 69 facilities-based operators and 257 services-based (individual) operators offering prepaid services. Since 2007, SingTel has been exempted from dominant licensee obligations for the residential and commercial portions of the retail international telephone services. SingTel is also exempted from dominant licensee obligations for wholesale international telephone services, international managed data, international IP transit, leased satellite bandwidth (VSAT, DVB-IP, satellite TV Downlink, and Satellite IPLC), terrestrial international private leased circuit, and backhaul services. The info-communications Media Development Authority (IMDA) granted Singtel’s exemption after assessing that the market for these services had effective competition.

In April 2017, Singapore held a General Spectrum Auction for mobile airwaves, the largest such auction in 16 years, allocating additional blocks of spectrum to accommodate increasing demand for mobile data services. Singtel, Starhub, M1, and TPG paid a combined total of USUSD 870 million (SUSD 1.15billion) in this heavily-bid auction for additional frequency bands.  To facilitate 5G technology and service trials, IMDA has waived frequency fees for companies interested in conducting 5G trials for equipment testing, research, and assessment of commercial potential.

Singapore’s IMDA operates as both the regulatory agency and the investment promotion agency for the country’s telecommunications sector. IMDA conducts public consultations on major policy reviews and provides decisions on policy changes to relevant companies.

Media

The local free-to-air broadcasting, cable, and newspaper sectors are effectively closed to foreign firms. Section 44 of the Broadcasting Act restricts foreign equity ownership of companies broadcasting in Singapore to 49 percent or less, although the Act does allow for exceptions. Individuals cannot hold shares that would make up more than five percent of the total votes in a broadcasting company without the government’s prior approval. The Newspaper and Printing Presses Act (NPPA) restricts equity ownership (local or foreign) of newspaper companies to less than five percent per shareholder and requires directors to be Singapore citizens. Newspaper companies must issue two classes of shares, ordinary and management, with the latter available only to Singapore citizens or corporations approved by the government. Holders of management shares have an effective veto over selected board decisions.

Singapore regulates content across all major media outlets. The government controls the distribution, importation, and sale of any newspaper and has curtailed or banned the circulation of some foreign publications. Singapore’s leaders have also brought defamation suits against foreign publishers, which have resulted in the foreign publishers issuing apologies and paying damages. Several dozen publications remain prohibited under the Undesirable Publications Act, which restricts the import, sale, and circulation of publications that the government considers contrary to public interest. Examples include pornographic magazines, publications by banned religious groups, and publications containing extremist religious views. Following a routine review in 2015, the then-Media Development Authority lifted a ban on 240 publications, ranging from decades-old anti-colonial and communist material to adult interest content.

Singaporeans generally face few restrictions on the internet. However, the IMDA has blocked various websites containing material that the government deems objectionable, such as pornography and racist and religious hatred sites. Online news websites that report regularly on Singapore and have a significant reach are individually licensed, which requires these sites to submit a bond of USD 40,000 (SGD 50,000) and to adhere to requirements to remove prohibited content within 24 hours of notification from IMDA. Some view this regulation as a way to censor online critics of the government. In December 2018 authorities charged the editor of an online news site with criminal defamation following the publication of a contributor’s allegedly defamatory letter, although the editor had removed the post when advised to do so by the authorities.

In April 2019, the government introduced legislation in Parliament to counter “deliberate online falsehoods.” The legislation, called the Protection from Online Falsehoods and Manipulation Bill, would require websites to run corrections alongside “online falsehoods” and would impose penalties on sites or individuals that spread “misinformation,” as determined by the government.

Pay-Television

MediaCorp TV is the only free-to-air TV broadcaster and is 100 percent owned by the government via Temasek Holdings (Temasek). Local Pay-TV providers are StarHub and Singtel, which are both partially owned by Temasek or its subsidiaries. Local free-to-air radio broadcasters are MediaCorp Radio Singapore, which is also owned by Temasek Holdings, SPH Radio, owned by the publically-held Singapore Press Holdings, and So Drama! Entertainment, owned by the Singapore Ministry of Defense. BBC World Services is the only foreign free-to-air radio broadcaster in Singapore.

To rectify the high degree of content fragmentation in the Singapore pay-TV market, and shift the focus of competition from an exclusivity-centric strategy to other aspects such as service differentiation and competitive packaging, the MDA implemented cross-carriage measures in 2011 requiring pay-TV companies designated by MDA to be Receiving Qualified Licensees (RQL) – currently SingTel and StarHub – to cross-carry content subject to exclusive carriage provisions. Correspondingly, Supplying Qualified Licensees (SQLs) with an exclusive contract for a channel are required to carry that content on other RQL pay-TV companies. In February 2019, the IMDA proposed to continue the current cross-carriage measures. The Motion Picture Association of America (MPAA) has expressed concern that this measure restricts copyright exclusivity. Content providers consider the measures an unnecessary interference in a competitive market that denies content holders the ability to negotiate freely in the marketplace, and an interference with their ability to manage and protect their intellectual property. More common content is now available across the different pay-TV platforms, and the operators are beginning to differentiate themselves by originating their own content, offering subscribed content online via PCs and tablet computers, and delivering content via fiber networks.

Streaming services have entered the market, which MPAA has found leads to a significant reduction in intellectual property infringements. StarHub and Singtel have both partnered with multiple content providers, including U.S. companies, to provide streaming content in Singapore and around the region.

Banking and Finance

The Monetary Authority of Singapore (MAS) regulates all banking activities as provided for under the Banking Act. Singapore maintains legal distinctions between foreign and local banks and the type of license (i.e. full service, wholesale, and offshore banks) held by foreign commercial banks. As of March 2019, 28 foreign full-service licensees and 97 wholesale banks operated in Singapore. An additional 27 merchant banks are licensed to conduct corporate finance, investment banking, and other fee-based activities. Offshore and wholesale banks are not allowed to operate Singapore dollar retail banking activities. Only Full Banks and “Qualifying Full Banks” (QFBs) can operate Singapore dollar retail banking activities but are subject to restrictions on the number of places of business, ATMs, and ATM networks. Additional QFB licenses may be granted to a subset of full banks, which provide greater branching privileges and greater access to the retail market than other full banks. As of March 2019, there are ten banks operating QFB licenses.

Except in retail banking, Singapore laws do not distinguish operationally between foreign and domestic banks. Currently, all banks in Singapore are required to maintain a Domestic Banking Unit (DBU) and an Asian Currency Unit (ACU), separating international and domestic banking operations from each other. Transactions in Singapore dollars can be booked only in the DBU whereas transactions in foreign currency are typically booked in the ACU. The ACU is an accounting unit that the banks use to book all their foreign currency transactions conducted in the Asian Dollar Market (ADM). This enables additional prudential requirements to be imposed on banks’ domestic businesses in Singapore, while also avoiding undue restrictions on the offshore activities of banks. Following public consultations, MAS initiated a 30-month implementation timeline from February 2017 for the removal of the DBU-ACU divide, which will be aligned with the revisions made to MAS 610 (Submission of Statistics and Returns).

The government initiated a banking liberalization program in 1999 to ease restrictions on foreign banks and has supplemented this with phased-in provisions under the USSFTA, including removal of a 40 percent ceiling on foreign ownership of local banks and a 20 percent aggregate foreign shareholding limit on finance companies. The Minister in charge of the Monetary Authority of Singapore must approve the merger or takeover of a local bank or financial holding company, as well as the acquisition of voting shares in such institutions above specific thresholds of five percent, 12 percent, or 20 percent of shareholdings.

Although Singapore’s government has lifted the formal ceilings on foreign ownership of local banks and finance companies, the approval of controllers of local banks ensures that this control rests with individuals or groups whose interests are aligned with the long-term interests of the Singapore economy and Singapore’s national interests. Of the 29 full-service licenses granted to foreign banks, three have gone to U.S. banks. U.S. financial institutions enjoy phased-in benefits under the USSFTA. Since 2006, U.S.-licensed full-service banks that are also QFBs, which is only one as of March 2019, have been able to operate at an unlimited number of locations (branches or off-premises ATMs) versus 25 for non-U.S. full-service foreign banks with QFB status. U.S. and foreign full-service banks with QFB status can freely relocate existing branches and share ATMs among themselves. They can also provide electronic funds transfer and point-of-sale debit services and accept services related to Singapore’s compulsory pension fund. In 2007, Singapore lifted the quota on new licenses for U.S. wholesale banks.

Locally and non-locally incorporated subsidiaries of U.S. full-service banks with QFB status can apply for access to local ATM networks. However, no U.S. bank has come to a commercial agreement to gain such access. Despite liberalization, U.S. and other foreign banks in the domestic retail-banking sector have reported to still face barriers. Under the enhanced QFB program launched in 2012, MAS requires QFBs it deems systemically significant to incorporate locally. If those locally incorporated entities are deemed “significantly rooted” in Singapore, with a majority of Singaporean or permanent resident members, Singapore may grant approval for an additional 25 places of business, of which up to ten may be branches. Local retail banks do not face similar constraints on customer service locations or access to the local ATM network. As noted above, U.S. banks are not subject to quotas on service locations under the terms of the USSFTA.  Holders of credit cards issued locally by U.S. banks incorporated in Singapore cannot access their accounts through the local ATM networks. They are also unable to access their accounts for cash withdrawals, transfers, or bill payments at ATMs operated by banks other than those operated by their own bank or at foreign banks’ shared ATM network. Nevertheless, full-service foreign banks have made significant inroads in other retail banking areas, with substantial market share in products like credit cards and personal and housing loans.

In January 2019, MAS announced the passage of the Payment Services Bill after soliciting public feedback for design of the bill. The bill requires more payment services such as digital payment tokens, dealing in virtual currency and merchant acquisition, to be licensed and regulated by MAS. It also limits the amount of money stored in personal mobile wallets and how much can be transferred to another user’s bank accounts in a year. Regulations are tailored to the type of activity preformed and address issues related to terrorism financing, money laundering, and cyber risks.

Singapore has no trading restrictions on foreign-owned stockbrokers. There is no cap on the aggregate investment by foreigners regarding the paid-up capital of dealers that are members of the SGX. Direct registration of foreign mutual funds is allowed provided MAS approves the prospectus and the fund. The USSFTA has relaxed conditions foreign asset managers must meet in order to offer products under the government-managed compulsory pension fund (Central Provident Fund Investment Scheme).

Legal Services

The Legal Services Regulatory Authority (LSRA) under the Ministry of Law oversees the regulation, licensing, and compliance of all law practice entities and the registration of foreign lawyers in Singapore. Foreign law firms with a licensed Foreign Law Practice (FLP) may offer the full range of legal services in foreign law and international law but cannot practice Singapore law except in the context of international commercial arbitration. U.S. and foreign attorneys are allowed to represent parties in arbitration without the need for a Singapore attorney to be present. To offer Singapore law, FLPs require either a Qualifying Foreign Law Practice (QFLP) license, a Joint Law Venture (JLV) with a Singapore Law Practice (SLP), or a Formal Law Alliance (FLA) with a SLP. The vast majority of Singapore’s 127 foreign law firms operate FLPs, while QFLPs and JLVs each number in the single digits.

The QFLP licenses allow foreign law firms to practice in permitted areas of Singapore law, which excludes constitutional and administrative law, conveyancing, criminal law, family law, succession law, and trust law. As of March 2019 there are nine QFLPs in Singapore, including five U.S. firms. In January 2019, the Ministry of Law announced the deferral to 2020 of the decision to renew the licenses of five QFLPs, which were set to expire in 2019 so that the government can better assess their contribution to Singapore along with the other four firms whose licenses were also extended to 2020. Decisions on the renewal considers the firms’ quantitative and qualitative performance such as the value of work that the Singapore office will generate, the extent to which the Singapore office will function as the firm’s headquarter for the region, the firm’s contributions to Singapore, and the firm’s proposal for the new license period.

A Joint Law Venture (JLV) is a collaboration between a Foreign Law Practice and Singapore Law Practice, which may be constituted as a partnership or company. The Director of Legal Services in the Legal Services Regulatory Authority (LSRA) will consider all the relevant circumstances including the proposed structure and its overall suitability to achieve the objectives for which JLV are permitted to be established. There is no clear indication on the percentage of shares that each JLV partner may hold in the JLV.

Law degrees from designated U.S., British, Australian, and New Zealand universities are recognized for purposes of admission to practice law in Singapore. Under the USSFTA, Singapore recognizes law degrees from Harvard University, Columbia University, New York University, and the University of Michigan. Singapore will admit to the Singapore Bar law school graduates of those designated universities who are ranked among the top 70 percent of their graduating class or have obtained lower-second class honors (under the British system).

Engineering and Architectural Services

Engineering and architectural firms can be 100 percent foreign-owned. Engineers and architects are required to register with the Professional Engineers Board and the Board of Architects, respectively, to practice in Singapore. All applicants (both local and foreign) must have at least four years of practical experience in engineering or two years of practical training in architectural works, and pass written and oral examinations set by the respective Board.

Accounting and Tax Services

Major international accounting firms operate in Singapore. Registration as a public accountant under the Accountants Act is required to provide public accountancy services (i.e. the audit and reporting on financial statements and other acts that are required by any written law to be done by a public accountant) in Singapore, although registration as a public accountant is not required to provide other accountancy services, such as accounting, tax, and corporate advisory work. All accounting entities that provide public accountancy services must be approved under the Accountants Act and their supply of public accountancy services in Singapore must be under the control and management of partners or directors who are public accountants ordinarily resident in Singapore. In addition, if the accounting entity firm has two partners or directors, at least one of them must be a public accountant. If the business entity has more than two partners or directors, two-thirds of the partners or directors must be public accountants.

Energy

Singapore further liberalized its gas market with the amendment of the Gas Act and implementation of a Gas Network Code in 2008, which were designed to give gas retailers and importers direct access to the onshore gas pipeline infrastructure. However, key parts of the local gas market, such as town gas retailing and gas transportation through pipelines remain controlled by incumbent Singaporean firms. Singapore has sought to grow its supply of Liquefied Natural Gas (LNG), and BG Singapore Gas Marketing Pte Ltd (acquired by Royal Dutch Shell in February 2016) was appointed in 2008 as the first aggregator with an exclusive franchise to import LNG to be sold in its re-gasified form in Singapore. In October 2017, Shell eastern Trading Pte Ltd and Pavilion Gase Pte Ltd were awarded import licenses to market up to 1 Million Tonnes Per Annum (Mtpa) or for three years, whichever occurs first. This also marked the conclusion of the first exclusive franchise awarded to BG Singapore Gas Marketing Pte Ltd.

In November 2018, Singapore began a progressive launch of an Open Electricity Market that will be completed in May 2019. Over 1.4 million households and business accounts will have the option of buying electricity from a retailer licensed by the Energy Market Authority (EMA). To participate in the Open Electricity Market licensed retailers must satisfy additional credit, technical, and financial requirements set by EMA in order to sell electricity to households and small businesses. There are two types of electricity retailers: Market Participant Retailers (MPRs) and Non-Market Participant Retailers (NMPRs). MPRs have to be registered with the Energy Market Company (EMC) to purchase electricity from the National Electricity Market of Singapore (NEMS) to sell to contestable consumers. NMPRs need not register with EMC to participate in the NEMS since they will purchase electricity indirectly from the NEMS through the Market Support Services Licensee (MSSL). As of April 2019, there were 13 firms in the market, including foreign and local.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and local entities may readily establish, operate, and dispose of their own enterprises in Singapore subject to certain requirements. A foreigner who wants to incorporate a company in Singapore is required to appoint a locally resident director; foreigners may continue to reside outside of Singapore.  Foreigners who wish to incorporate a company and be present in Singapore to manage its operations are strongly advised to seek approval from the Ministry of Manpower (MOM) before incorporation. Except for representative offices (where foreign firms maintain a local representative but do not conduct commercial transactions in Singapore) there are no restrictions on carrying out remunerative activities. As of October 2017, foreign companies may seek to transfer their place of registration and be registered as companies limited by shares in Singapore under Part XA (Transfer of Registration) of the Companies Act. Such transferred foreign companies are subject to the same requirements as locally-incorporated companies.

All businesses in Singapore must be registered with the Accounting and Corporate Regulatory Authority (ACRA). Foreign investors can operate their businesses in one of the following forms: sole proprietorship, partnership, limited partnership, limited liability partnership, incorporated company, foreign company branch or representative office. Stricter disclosure requirements were passed in March 2017 requiring foreign company branches registered in Singapore to maintain public registers of their members, while locally incorporated companies. Foreign company branches registered in Singapore as well as limited liability partnerships will be required to maintain registers of controllers (generally defined as individuals or legal entities with more than 25 percent interest or control of the companies and foreign companies) aimed at preventing money laundering.

While there is currently no cross-sectional screening process for foreign investments, investors are required to seek approval from specific sector regulators for investments into certain firms. These sectors include energy, telecommunications, broadcasting, the domestic news media, financial services, legal services, public accounting services, ports and airports, and property ownership. Under Singapore law, Articles of Incorporation may include shareholding limits that restrict ownership in corporations by foreign persons.

Singapore does not maintain an investment screening mechanism for inbound foreign investment. There are no reports of U.S. investors being especially disadvantaged or singled out relative to other foreign investors.

Other Investment Policy Reviews

Singapore underwent a trade policy review with the World Trade Organization (WTO) in July 2016. No major policy recommendations were raised. This was the country’s only policy review in the past three years. (https://www.wto.org/english/tratop_e/tpr_e/tp443_e.htm)

The OECD and United Nations Industrial Development Organization (UNIDO) released a joint report in February 2019 on the ASEAN-OECD Investment Program. The Program aims to foster dialogue and experience sharing between OECD countries and Southeast Asian economies on issues relating to the business and investment climate. It is implemented through regional policy dialogue, country investment policy reviews, and training seminars. (http://www.oecd.org/countries/singapore/seasia.htm  )

The OECD released a Transfer Pricing Country Profile for Singapore in June 2018. The country profiles focus on countries’ domestic legislation regarding key transfer pricing principles, including the arm’s length principle, transfer pricing methods, comparability analysis, intangible property, intra-group services, cost contribution agreements, transfer pricing documentation, administrative approaches to avoiding and resolving disputes, safe harbors and other implementation measures. (http://www.oecd.org/countries/singapore/transfer-pricing-country-profile-singapore.pdf )

The OECD released a peer review report in March 2018 on Singapore’s implementation of internationally agreed tax standards under Action Plan 14 of the base erosion and profit shifting (BEPS) project. Action 14 strengthens the effectiveness and efficiency of the mutual agreement procedure, a cross-border tax dispute resolution mechanism.

The UNCTAD has not conducted an IPR of Singapore.

Business Facilitation

Singapore’s online business registration process is clear and efficient and allows foreign companies to register branches. All businesses must be registered with the Accounting & Corporate Regulatory Authority (ACRA) through Bizfile, its online registration and information retrieval portal (http://bizfile.gov.sg  ), including any individual, firm or corporation that carries out business for a foreign company. Applications are typically processed immediately after the application fee is paid, but may take between 14 days to two months if the application is referred to another agency for approval or review. The process of establishing a foreign-owned limited liability company in Singapore is among the fastest of the countries surveyed by IAB.

ACRA provides a single window for business registration. However, additional regulatory approvals (e.g. licensing or visa requirements) are obtained via individual applications to the respective Ministries or Statutory Boards. Additional information and business support on registering a branch of a foreign company is available through the EDB (https://www.edb.gov.sg/en/how-we-help/setting-up.html  ). Furthermore, GuideMeSingapore by corporate services firm Hawskford provides details on setting up a business in Singapore (https://www.guidemesingapore.com/).

Foreign companies may lease or buy privately or publicly held land in Singapore, though there are some restrictions on foreign ownership of property. Foreign companies are free to open and maintain bank accounts in foreign currency. There is no minimum paid-in capital requirement, but at least one subscriber share must be issued for valid consideration at incorporation.

At GER (ger.co), Singapore’s online business registration process scores 7/10 in Online Single Windows (https://www.bizfile.gov.sg/).

Business facilitation processes provide for fair and equal treatment of women and minorities, and there are no mechanisms that provide special assistance to women and minorities.

Outward Investment

Singapore places no restrictions on domestic investors investing abroad. The government promotes outward investment through Enterprise Singapore, a statutory board under the Ministry of Trade and Industry (MTI). It provides market information, business contacts, and financial assistance and grants for internationalizing companies. While it has a global reach and runs overseas centers in major cities across the world, a large share of its overseas centers are located in major trading and investment partners and regional markets like China, India, and ASEAN.

4. Industrial Policies

Investment Incentives

Singapore’s Economic Development Board (EDB) is the lead investment promotion agency facilitating foreign investment into Singapore (https://www.edb.gov.sg  ). EDB undertakes investment promotion and industry development, and works with international businesses, both foreign and local, by providing information, connection to partners, and access to government incentives for their investments. The Agency for Science, Technology, and Research (A*STAR) is Singapore’s lead public sector agency focused on economic-oriented research to advance scientific discovery and innovative technology. (https://www.a-star.edu.sg  ) The National Research Foundation (NRF) provides competitive grants for applied research through an integrated grant management system, (https://researchgrant.gov.sg/pages/index.aspx  ). Various government agencies (including Intellectual Property Office of Singapore (IPOS), NRF, and EDB,) provide venture capital co-funding for startups and commercialization of intellectual property.

Foreign Trade Zones/Free Ports/Trade Facilitation

Singapore has nine free-trade zones (FTZs) in five geographical areas operated by three FTZ authorities. The FTZs may be used for storage and repackaging of import and export cargo, and goods transiting Singapore for subsequent re-export. Manufacturing is not carried out within the zones. Foreign and local firms have equal access to the FTZ facilities.

Performance and Data Localization Requirements

Performance requirements are applied uniformly and systematically to both domestic and foreign investors. Singapore has no forced localization policy requiring domestic content in goods or technology. The government does not require investors to purchase from local sources or specify a percentage of output for export. There are no rules forcing the transfer of technology. There are no requirements for foreign IT providers to turn over source code and/or provide access to encryption. The industry regulator is the Info-communications Media Development Authority (IMDA), a statutory board under the Ministry of Communications and Information (MCI).

The industry regulator is the Info-communications Media Development Personal data matters are independently overseen by the Personal Data Protection Commission, which administers and enforces the Personal Data Protection Act (PDPA) of 2012. The PDPA governs the collection, use, and disclosure of personal data by the private sector and covers both electronic and non-electronic data.

Singapore is currently reviewing the PDPA to ensure that it keeps pace with the evolving needs of businesses and individuals in a digital economy such as introducing an enhanced framework for the collection, use, and disclosure of personal data and a mandatory breach notification regime.

Singapore does not have a data localization policy. Singapore participates in various regional and international frameworks that promote interoperability and harmonization of rules to facilitate cross-border data flows. The ASEAN Framework on Digital Data Governance is one example. Another is Singapore’s participation in the APEC Cross-Border Privacy Rules (CBPR) and Privacy Recognition for Processors (PRP) systems, to facilitate data transfers for certified organizations across APEC economies.

South Africa

Executive Summary

South Africa boasts the most advanced, broad-based economy on the African continent.  The investment climate is fortified by stable institutions, an independent judiciary and vibrant legal sector committed to upholding the rule of law, a free press and investigative reporting, a mature financial and services sector, good infrastructure, and a broad selection of experienced local partners.  South Africa encourages investment that develops manufacturing of goods for export.

South Africa is still fighting its way back from a “lost decade” in which economic growth stagnated, largely as a consequence of corruption and economic mismanagement during the term of its former president.  Since assuming office in February 2018, South Africa’s new president, Cyril Ramaphosa, has committed to improving the investment climate. The early steps he has taken are encouraging, but the challenges are enormous.  At a minimum, South Africa will need to strengthen economic growth and stabilize public finances in order to reverse the credit downgrades by two of the three global ratings agencies. Other challenges include: creating policy certainty; reinforcing regulatory oversight; making state-owned enterprises (SOEs) profitable rather than recipients of government bail-outs; weeding out widespread corruption; reducing violent crime; tackling labor unrest; improving basic infrastructure and government service delivery; creating more jobs while reducing the size of the state (unemployment is over 27 percent); and increasing the supply of appropriately-skilled labor.

In dealing with the legacy of apartheid, South African laws, policies, and reforms seek to produce economic transformation to increase the participation of and opportunities for historically disadvantaged South Africans.  The government views its role as the primary driver of development and aims to promote greater industrialization. Government initiatives to accelerate transformation have included tightening labor laws to achieve proportional racial, gender, and disability representation in workplaces, and ascriptive requirements for government procurement such as equity stakes for historically disadvantaged South Africans and localization requirements.  Following the adoption of a resolution calling for land expropriation without compensation at the December 2017 conference of the African National Congress, investors are watching closely how the government will implement land reform initiatives and what Parliament will decide as a result of its review of the constitution on this issue.

Despite these uncertainties and some important structural economic challenges, South Africa is a destination conducive to U.S. investment; the dynamic business community is highly market-oriented and the driver of economic growth.  President Ramaphosa aims to attract USD 100 billion in investment over the next five years. South Africa offers ample opportunities and continues to attract investors seeking a comparatively low-risk location in Africa from which to access the continent with the fastest growing consumer market in the world.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 73 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 82 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 58 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $7,334 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $5,430 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The government of South Africa is generally open to foreign investment as a means to drive economic growth, improve international competitiveness, and access foreign markets.  Merger and acquisition activity is more sensitive and requires advance work to answer potential stakeholder concerns. The 2018 Competition Amendment Bill, which was signed into law on February 13, 2019, introduced a mechanism for South Africa to review foreign direct investments and mergers and acquisitions by a foreign acquiring firm on the basis of protecting national security interests (see section on Laws and Regulations on Foreign Direct Investment below).  Virtually all business sectors are open to foreign investment. Certain sectors require government approval for foreign participation, including energy, mining, banking, insurance, and defense.

The Department of Trade and Industry’s (the dti) Trade and Investment South Africa (TISA) division provides assistance to foreign investors.  In the past year, they opened provincial One-Stop Shops that provide investment support for foreign direct investment (FDI), with offices in Johannesburg, Cape Town, and Durban, and a national One Stop Shop located at the dti in Pretoria and online at http://www.gov.za/Invest percent20SA percent3AOnestopshop  .  An additional one-stop shop has opened at Dube Trade Port, which is a special economic zone aerotropolis linked to the King Shaka International Airport in Durban.  The dti actively courts manufacturing industries in which research indicates the foreign country has a comparative advantage. It also favors manufacturing that it hopes will be labor intensive and where suppliers can be developed from local industries.  The dti has traditionally focused on manufacturing industries over services industries, despite a strong service-oriented economy in South Africa. TISA offers information on sectors and industries, consultation on the regulatory environment, facilitation for investment missions, links to joint venture partners, information on incentive packages, assistance with work permits, and logistical support for relocation.  The dti publishes the “Investor’s Handbook” on its website: www.dti.gov.za  

While the government of South Africa supports investment in principle and takes active steps to attract FDI, investors and market analysts are concerned that its commitment to assist foreign investors is insufficient in practice.  Some felt that the national-level government lacked a sense of urgency to support investment deals. Several investors reported trouble accessing senior decision makers. South Africa scrutinizes merger- and acquisition-related foreign direct investment for its impact on jobs, local industry, and retaining South African ownership of key sectors.  Private sector representatives and other interested parties were concerned about the politicization of South Africa’s posture towards this type of investment. Despite South Africa’s general openness to investment, actions by some South African Government ministries, populist statements by some politicians, and rhetoric in certain political circles show a lack of appreciation for the importance of FDI to South Africa’s growth and prosperity and a lack of concern about the negative impact domestic policies may have on the investment climate.  Ministries often do not consult adequately with stakeholders before implementing laws and regulations or fail to incorporate stakeholder concerns if consultations occur. On the positive side, the President, assisted by his appointment of four investment envoys, and his new cabinet are working to restore a positive investment climate and appear to be making progress as they engage in senior level overseas roadshows to attract investment.

Limits on Foreign Control and Right to Private Ownership and Establishment

Currently there is no limitation on foreign private ownership. South Africa’s transformation efforts – the re-integration of historically disadvantaged South Africans into the economy – has led to policies that could disadvantage foreign and some locally owned companies.  In 2017, the Broad-Based Black Socio-Economic Empowerment Charter proposed for the South African mining and minerals industry required an increase to 30 percent ownership by black South Africans, but was mired in the courts as industry challenged it. The Charter was retracted for revision and a new version was proposed in 2018. The Broad-Based Black Economic Empowerment Act of 2013 (B-BBEE), and associated codes of good practice, requires levels of company ownership and participation by Black South Africans to get bidding preferences on government tenders and contracts. The dti created an alternative equity equivalence (EE) program for multinational or foreign owned companies to allow them to score on the ownership requirements under the law, but many view the terms as onerous and restrictive.  Currently eight multinationals, most in the technology sector, participate in this program, most in the technology sector.

Other Investment Policy Reviews

The World Trade Organization carried out in 2015 a Trade Policy Review for the Southern African Customs Union, in which South Africa accounts for over 90 percent of overall GDP.  Neither the OECD nor the UN Conference on Trade and Development (UNCTAD) has conducted investment policy reviews for South Africa.

Business Facilitation

According to the World Bank’s Doing Business report, South Africa’s rank in ease of doing business in 2019 was unchanged from 2018 at 82nd of 190.  It ranks 134th for starting a business, taking an average of forty days to complete the process. South Africa ranks 143rd of 190 countries on trading across borders.

In 2017, the dti launched a national InvestSA One Stop Shop (OSS) to simplify administrative procedures and guidelines for foreign companies wishing to invest in South Africa.  The dti, in conjunction with provincial governments, opened physical OSS locations in Cape Town, Durban, and Johannesburg. These physical locations bring together key government entities dealing with issues including policy and regulation, permits and licensing, infrastructure, finance, and incentives, with a view to reducing lengthy bureaucratic procedures, reducing bottlenecks, and providing post-investment services.  The virtual OSS web site is: http://www.gov.za/Invest percent20SA percent3AOnestopshop  .

The Companies and Intellectual Property Commission (CIPC), a body of the dti, is responsible for business registrations and publishes a step-by-step process for registering a company.  This process can be done on its website (http://www.cipc.co.za/index.php/register-your-business/companies/  ), through a self-service terminal, or through a collaborating private bank.  New business registrants also need to register through the South African Revenue Service (SARS) to get an income tax reference number for turnover tax (small companies), corporate tax, employer contributions for PAYE (income tax), and skills development levy (applicable to most companies).  The smallest informal companies may not be required to register with CIPC, but must register with the tax authorities. Companies also need to register with the Department of Labour (DoL) – www.labour.gov.za   – to contribute to the Unemployment Insurance Fund (UIF) and a compensation fund for occupational injuries.  The DoL registration takes the longest (up to 30 days), but can be done concurrently with other registrations.

Outward Investment

South Africa does not incentivize outward investments.  South Africa’s stock foreign direct investments in the United States in 2017 totaled USD 4.1 billion (latest figures available), an almost 40 percent increase from 2016.  The largest outward direct investment of a South African company is a gas liquefaction plant in the State of Louisiana by Johannesburg Stock Exchange (JSE) and NASDAQ dual-listed petrochemical company SASOL.  There are some restrictions on outward investment, such as a R1 billion (USD 83 million) limit per year on outward flows per company. Larger investments must be approved by the South African Reserve Bank and at least 10 percent of the foreign target entities voting rights must be obtained through the investment. https://www.resbank.co.za/RegulationAndSupervision/
FinancialSurveillanceAndExchangeControl/FAQs/Pages/Corporates.aspx
 

4. Industrial Policies

Investment Incentives

South Africa offers various investment incentives targeted at specific sectors or types of business activities. The dti has a number of incentive programs ranging from tax allowances to support in the automotive sector and helping innovation and technology companies to film and television production.

12I Tax Allowance: is designed to support new industrial projects that utilize only new and unused manufacturing assets and expansions or upgrades of existing industrial projects. The incentive offers support for both capital investment and training. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=45&subthemeid=26  

Agro-Processing Support Scheme (APSS): aims to stimulate investment by South African agro-processing/beneficiation (agri-business) enterprises. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=69&subthemeid=25  

Aquaculture Development and Enhancement Programme (ADEP): is available to South African registered entities engaged in primary, secondary, and ancillary aquaculture activities in both marine and freshwater classified under SIC 132 (fish hatcheries and fish farms) and SIC 301 and 3012 (production, processing and preserving of aquaculture fish). https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=56&subthemeid=26  

Automotive Investment Scheme (AIS): designed to grow and develop the automotive sector through investment in new and/ or replacement models and components that will increase plant production volumes, sustain employment and/ or strengthen the automotive value chain. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=37&subthemeid=26  

Medium and Heavy Commercial Vehicles Automotive Investment Scheme (MHCV-AIS): is designed to grow and develop the automotive sector through investment in new and/or replacement models and components that will increase plant production volumes, sustain employment and/or strengthen the automotive value chain. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=60&subthemeid=26  

People-carrier Automotive Investment Scheme (P-AIS): provides a non-taxable cash grant of between 20 percent and 35 percent of the value of qualifying investment in productive assets approved by the dti. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=55&subthemeid=26  

Business Process Services (BPS): aims to attract investment and create employment opportunities in South Africa through offshoring activities. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=6&subthemeid=25  

Capital Projects Feasibility Programme (CPFP): is a cost-sharing grant that contributes to the cost of feasibility studies likely to lead to projects that will increase local exports and stimulate the market for South African capital goods and services. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=4&subthemeid=26  

Cluster Development Programme (CDP): aims to promote industrialization, sustainable economic growth and job creation needs of South Africa through cluster development and industrial parks. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=66&subthemeid=28  

Critical Infrastructure Programme (CIP): aims to leverage investment by supporting infrastructure that is deemed to be critical, thus lowering the cost of doing business.  https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=3&subthemeid=26  

Clothing and Textile Competitiveness Improvement Programme (CTCIP): aims to build capacity among manufacturers and in other areas of the apparel value chain in South Africa, to enable them to effectively supply their customers and compete on a global scale. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=35&subthemeid=25  

Export Marketing and Investment Assistance (EMIA): develops export markets for South African products and services and recruits new foreign direct investment into the country. The purpose of the scheme is to partially compensate exporters for costs incurred with respect to activities aimed at developing an export market for South African product and services and to recruit new foreign direct investment into South Africa. https://www.thedti.gov.za/trade_investment/emia.jsp  

Foreign Film and Television Production and Post-Production Incentive: to attract foreign-based film productions to shoot on location in South Africa and conduct post-production activities. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=63&subthemeid=26  

Innovation and Technology Funding instruments: click on the link to see a graphic of the various funding instruments the government has made available. https://www.thedti.gov.za/financial_assistance/Innovation_value_Chain.jsp  

Manufacturing Competitiveness Enhancement Programme (MCEP): aims to encourage manufacturers to upgrade their production facilities in a manner that sustains employment and maximizes value-addition in the short to medium term.  Participants can also apply for incentives for energy efficiency and green economy incentives. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=53&subthemeid=25  

Production Incentive (PI): forms part of the Clothing and Textile Competitiveness Program, and forms part of the customized sector program for the clothing, textiles, footwear, leather and leather goods industries. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=36&subthemeid=25  

Sector-Specific Assistance Scheme (SSAS): is a reimbursable cost-sharing incentive scheme which grants financial support to organizations that support the development of industry sectors and those that contribute to the growth of South African exports. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=8&subthemeid=26  

Shared Economic Infrastructure Facility (SEIF)contact the Department of Small Business Development on +27 861 843 384 (select option 2) or E-Mail: sbdinfo@dsbd.gov.za for more information. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=61&subthemeid=1  

Support Programme for Industrial Innovation (SPII): is designed to promote technology development in South Africa’s industry, through the provision of financial assistance for the development of innovative products and/or processes. SPII is focused on the development phase, which begins when basic research concludes and ends at the point when a pre-production prototype has been produced. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=48&subthemeid=8  

Strategic Partnership Programme (SPP)The SPP aims to develop and enhance the capacity of small and medium-sized enterprises to provide manufacturing and service support to large private sector enterprises. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=67&subthemeid=1  

Workplace Challenge Programme (WPC): managed by Productivity South Africa, WPC aims to encourage and support negotiated workplace change towards enhancing productivity and world-class competitiveness, best operating practices, continuous improvement, lean manufacturing, while resulting in job creation. https://www.thedti.gov.za/financial_assistance/financial_incentive.jsp?id=68&subthemeid=25  

Foreign Trade Zones/Free Ports/Trade Facilitation

South Africa designated its first Industrial Development Zone (IDZ) in 2001. IDZs offer duty-free import of production-related materials and zero VAT on materials sourced from South Africa, along with the right to sell in South Africa upon payment of normal import duties on finished goods.  Expedited services and other logistical arrangements may be provided for small to medium-sized enterprises or for new foreign direct investment. Co-funding for infrastructure development is available from the dti. There are no exemptions from other laws or regulations, such as environmental and labor laws.  The Manufacturing Development Board licenses IDZ enterprises in collaboration with the South African Revenue Service (SARS), which handles IDZ customs matters. IDZ operators may be public, private, or a combination of both. There are currently five IDZs in South Africa: Coega IDZ, Richards Bay IDZ, Dube Trade Port, East London IDZ, and Saldanha Bay IDZ.  For more detailed information on IDZs in South Africa please see: http://www.thedti.gov.za/industrial_development/sez.jsp  

In February 2014, the dti introduced a new Special Economic Zones (SEZs) Bill focused on industrial development. The SEZs encompass the IDZs but also provide scope for economic activity beyond export-driven industry to include innovation centers and regional development.  There are five SEZ in South Africa: Atlantis SEZ, Nkomazi SEZ, Maliti-A-Phofung SEZ, Musina/Makhado SEZ, and OR Tambo SEZ. The broader SEZ incentives strategy allows for 15 percent Corporate Tax as opposed to the current 28 percent, Building Tax Allowance, Employment Tax Incentive, Customs Controlled Area (VAT exemption and duty free), and Accelerated 12i Tax Allowance.

Performance and Data Localization Requirements

Employment and Investor Requirements

Foreign investors who establish a business or who invest in existing businesses in South Africa must show within twelve months of establishing the business that at least 60 percent of the total permanent staff are South African citizens or permanent residents.

The Broad-Based Black Economic Empowerment (B-BBEE) program measures employment equity, management control, and ownership by historically disadvantaged South Africans for companies which do business with the government or bid on government tenders.  Companies may consider the B-BBEE scores of their sub-contractors and suppliers, as their scores can sometimes contribute to or detract from the contracting company’s B-BBEE score.

A business visa is required for foreign investors who will establish a business or who will invest in an existing business in South Africa.  They are required to invest a prescribed financial capital contribution equivalent to R2.5million (USD 178 thousand) and have at least R5 million (USD 356 thousand) in cash and capital available.  These capital requirements may be reduced or waived if the investment qualifies under one of the following types of industries/businesses: information and communication technology; clothing and textile manufacturing; chemicals and bio-technology; agro-processing; metals and minerals refinement; automotive manufacturing; tourism; and crafts.

The documentation required for obtaining a business visa is onerous and includes, among other requirements, a letter of recommendation from the Department of Trade and Industry regarding the feasibility of the business and its contribution to the national interest, and various certificates issued by a chartered or professional South African accountant.

U.S. citizens have complained that the processes to apply for and renew visas and work permits are lengthy, confusing, and difficult.  Requirements frequently change mid-process, and there is little to no feedback about why an application might be considered incomplete or denied.  Many U.S. citizens use facilitation services to help navigate these processes.

Goods, Technology, and Data Treatment

The government does not require the use of domestic content in goods or technology.  The transfer of personal information about a subject to a third party who is in a foreign country is prohibited unless certain conditions are met.  These conditions are outlined in the Protection of Personal Information (PoPI) Act, which the government enacted in 2013 to regulate how personal information may be processed.  The conditions relate to: accountability, processing limitations, purpose specification, information quality, openness, security safeguards, and data subject participation. PoPI also created an Information Regulator (IR) to draft regulations and enforce them; the five member body that comprises the IR was established in 2018.  The IR released regulations on personal information processing in December 2018, but government was not clear if the one year grace period to begin implementation started from the date the regulations were published or from the date the IR is fully operational.

Investment Performance Requirements

There are no performance requirements on investments.

Spain

Executive Summary

Spain is open to foreign investment and is actively seeking to attract additional investment to sustain its strong economic growth. Spain had a GDP growth rate in 2018 of 2.6 percent—one of the highest in the EU. Spain’s excellent infrastructure, large domestic market, well-educated workforce, and robust export possibilities are key selling points for foreign investors. Spanish law permits foreign ownership in investments up to 100 percent, and capital movements are completely liberalized. According to Spanish data, in 2018, foreign direct investment flow into Spain was EUR 52.8 billion, 31.6 percent more than in 2017. Of this total, EUR 948 million came from the United States, the eighth-largest investor in Spain in new foreign direct investment. Foreign investment is concentrated in the energy, real estate, finance and insurance, engineering, and construction sectors.

The Spanish economy sustained its strong and balanced growth in 2018, due in large part to strong domestic consumption, although Spain maintains a relatively high unemployment rate—14.4 percent at the close of 2018—and high levels of household and public indebtedness. Spain’s economy has benefitted from favorable external factors, namely low global energy prices and the European Central Bank’s expansionary monetary policy. As it recovered, Spain’s economy diversified, becoming more export competitive. As a result, Spain has had a current account surplus since 2013.

Following the global financial and euro crises, the Spanish government implemented a series of labor market reforms and restructured the banking system. In 2013, the Spanish government adopted the Market Unity Guarantee Act, which eliminated duplicative administrative controls by implementing a single license system to facilitate the free flow of all goods and services throughout Spain. Since the law’s adoption five years ago, Spain’s National Commission on Markets and Competition (CNMC)—the public-sector authority in charge of competition and regulatory matters—has taken 381 actions to enforce the law. However, certain provisions have been declared unconstitutional by Spanish courts, and some U.S. companies continue to complain about the difficulties in dealing with variances in regional regulations within Spain.

Since its financial crisis, Spain also has regained access to affordable financing from international financial markets, which has improved Spain’s credibility and solvency, in turn generating more investor confidence. Spain’s credit ratings were raised in 2018, and Spanish issuances of public debt have been oversubscribed, reflecting strong investor appetite for investment in Spain. However, small and medium-sized enterprises (SMEs) still have some difficulty accessing credit.

In implementing its fiscal consolidation program, the government took actions between 2012 and 2014 that negatively affect U.S. and other investors in the renewable energy sector on a retroactive basis. As a result, Spain is facing several international arbitration claims. Spanish law protects property rights and those of intellectual property. The government has amended the Intellectual Property Act, the Civil Procedure Law, and the Penal Code to strengthen online protection. In 2018, internet piracy decreased by 3 percent compared to 2017, although piracy continues at high levels.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 41 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2019 30 of 190 https://www.doingbusiness.org/rankings
Global Innovation Index 2018 28 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in Partner Country ($M USD, stock positions) 2017 $33,128 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $27,180 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Foreign direct investment (FDI) has played a significant role in modernizing the Spanish economy during the past 40 years. Attracted by Spain’s large domestic market, export possibilities, and growth potential, foreign companies set up operations in large numbers. Spain’s automotive industry is mostly foreign-owned. Multinationals control half of the food production companies, one-third of chemical firms, and two-thirds of the cement sector. Several foreign investment funds acquired networks from Spanish banks, and foreign firms control about one-third of the insurance market.

The Government of Spain recognizes the value of foreign investment. Spain offers investment opportunities in sectors and activities with significant added value. There have not been any major changes in Spain’s regulations for investment and foreign exchange under the current Spanish Socialist Workers Party (PSOE) administration, which took office in June 2018. Spanish law permits 100 percent foreign ownership in investments (limits apply regarding audio-visual broadcast licenses; see next section), and capital movements are completely liberalized. Due to its degree of openness and the favorable legal framework for foreign investment, Spain has received significant foreign investments in knowledge-intensive activities in the past few years. New FDI into Spain increased by 31.6 percent in 2018 according to Spain’s Industry, Trade, and Tourism Ministry data, continuing the growing path of gross FDI flow into Spain that began significantly in 2014. In 2018, 19.2 percent of total gross investments were investments in new facilities or the expansion of productive capacity, while 59 percent of gross investments were in acquisitions of existing companies. In 2018 the United States had a gross direct investment in Spain of EUR 984 million, accounting for 2.1 percent of total investment and representing a decrease of 52 percent compared to 2017. U.S. FDI stock in Spain stayed relatively steady between 2013 (USD 33.9 billion) to 2017 (USD 33.1 billion).

Limits on Foreign Control and Right to Private Ownership and Establishment

Spain has a favorable legal framework for foreign investors. Spain has adapted its foreign investment rules to a system of general liberalization, without distinguishing between EU residents and non-EU residents. Law 18/1992 of July 1, which established rules on foreign investments in Spain, provides a specific regime for non-EU persons investing in certain sectors: national defense-related activities, gambling, television, radio, and air transportation. For EU residents, the only sectors with a specific regime are the manufacture and trade of weapons or national defense-related activities. For non-EU companies, the Spanish government restricts individual ownership of audio-visual broadcasting licenses to 25 percent. Specifically, Spanish law permits non-EU companies to own a maximum of 25 percent of a company holding a digital terrestrial television broadcasting license; and for two or more non-EU companies to own a maximum of 50 percent in aggregate. In addition, under Spanish law a reciprocity principle applies (art. 25.4 General Audiovisual Law). The home country of the (non-EU) foreign company must have foreign ownership laws that permit a Spanish company to make the same transaction.

Spain is one of the 14 countries of the 28 EU member states that has established mechanisms to evaluate the possible risks of direct foreign investments. The cornerstone on which the control system is structured is the probable impact “on security and public order” of the arrival of foreign capital into Spain. Critical sectors include energy, transport, communications, technology, defense, and data processing and storage, among others.

The Spanish Constitution and Spanish law establish clear rights to private ownership, and foreign firms receive the same legal treatment as Spanish companies. There is no discrimination against public or private firms with respect to local access to markets, credit, licenses, and supplies.

Other Investment Policy Reviews

Spain is a signatory to the convention on the Organization for Economic Co-operation and Development (OECD). Spain is also a member of the World Trade Organization (WTO) and the United Nations Conference on Trade and Development (UNCTAD). Spain has not conducted Investment Policy Reviews with these three organizations within the past three years.

Business Facilitation

For setting up a company in Spain, the two basic requirements include incorporation before a Public Notary and filing with the Mercantile Register (Registro Mercantil). The public deed of incorporation of the company must be submitted. It can be submitted electronically by the Public Notary. The Central Mercantile Register is an official institution that provides access to companies’ information supplied by the Regional Mercantile Registers after January 1, 1990. Any national or foreign company can use it but must also be registered and pay taxes and fees. According to the World Bank’s Doing Business report, the process to start a business in Spain should take about two weeks.

“Invest in Spain” is the Spanish investment promotion agency to facilitate foreign investment. Services are available to all investors.

Useful web sites:

Outward Investment

Among the financial instruments approved by the Spanish Government to provide official support for the internationalization of Spanish enterprise are the Foreign Investment Fund (FIEX), the Fund for Foreign Investment by Small and Medium-sized Enterprises (FONPYME), the Enterprise Internationalization Fund (FIEM), and the Fund for Investment in the tourism sector (FINTUR). The Spanish Government also offers financing lines for investment in the electronics, information technology and communications, energy (renewables), and infrastructure concessions sectors.

4. Industrial Policies

Investment Incentives

A range of investment incentives exist in Spain, and they vary according to the authorities granting incentives and the type and purpose of the incentives. The national government provides financial aid and tax benefits for activities pursued in certain industries that are considered priority industries (e.g., mining, technological development, research and development, etc.), given these industries’ potential effect on the nation’s overall economy. Regional governments also provide similar incentives for most of these industries. Financial aid includes both nonrefundable subsidies and interest relief on loans obtained by beneficiaries—or combinations of the two.

The European Union:

Since Spain is a European Union (EU) Member State, potential investors are able to access European aid programs, which provide further incentives for investing in Spain.

The EU provides incentives primarily to projects that focus on economically depressed regions or that benefit the EU as a whole.

The European Investment Bank (EIB) provides guarantees, microfinance, equity investment, and global loans for small and medium enterprises (SMEs) as well as individual loans focused on innovation and skills, energy, and strategic infrastructure. Projects aiming to extend and modernize infrastructure in the health and education sectors may also qualify for EIB support.

The European Investment Fund (EIF) provides venture capital to small and medium-sized enterprises, particularly new firms and technology-oriented businesses, via financial intermediaries. It also provides guarantees to financial institutions (such as banks) to cover their loans to SMEs. The EIF does not grant loans or subsidies to businesses, nor does it invest directly in any firms. Instead, it works through banks and other financial intermediaries. It uses either its own funds or those entrusted to it by the EIB or the EU.

The European Structural and Investment Funds (ESI Funds) include the Funds under the Cohesion Policy (Structural Funds (ERDF and ESF) and the Cohesion Fund), which contribute to enhancing economic, social and territorial cohesion. Most autonomous regions of Spain qualify for structural funds under the EU’s 2014-2020 budget (EUR 454 billion). Investments under the European Regional Development Fund (ERDF) are concentrated in four key priority areas: innovation and research, the digital agenda, support for small and medium-sized enterprises (SMEs) and the low-carbon economy, depending on the category of region. The European Social Fund (ESF)’s Cohesion Fund provides funding for programs aiming to reduce economic and social disparities and to promote sustainable development.

EU financial incentives are routed through major Spanish financial institutions, such as the Instituto de Credito Oficial (ICO) and Banco Bilbao-Vizcaya Argentaria (BBVA); EU financial incentives must also be applied for through the financial intermediary.

The Central Government:

Spain’s central government provides numerous financial incentives for foreign investment, which are designed to complement European Union financing. The Ministry of Economy and Competitiveness (MINECO) assists businesses seeking investment opportunities through the Directorate General for International Trade and Investments and the Directorate General for Innovation and Competitiveness. These Directorates provide support to foreign investors in both the pre- and post-investment phases. Most grants seek to promote the development of select economic sectors; however, while these sectoral subsidies are often preferential, they are not exclusive.

A comprehensive list of incentive programs is available at the website: www.investinspain.org  

Using this tool, companies can access up-to-date information regarding grants available for investment projects. Users can also sign up for the automatic alert system, which provides customized updates as suitable grants or subsidies are published. Applications for these incentives should be made directly with the relevant government agency.

Spain provides some support to SMEs through a national program designed to strengthen innovative business groups and networks and boost their competitiveness. In 2013, Spain passed the “Law of Entrepreneurs,” which established an entrepreneur visa for investors and entrepreneurs. Entrepreneurs may apply for the visa with a business plan that has been approved by the Spanish Commercial Office. Entrepreneurs must also demonstrate the intent to develop the project in Spain for at least one year. Investors who purchase at least EUR 2 million in Spanish bonds or acquire at least EUR 1 million in shares of Spanish companies or Spanish banks deposits may also apply. Foreigners who acquire real estate with an investment value of at least EUR 500,000 are also eligible.

The central government provides financial aid and tax benefits for certain industries that it considers priority sectors given their potential growth resultant effect on the nation’s overall economy. Such activities include, for example: new industrial plants, increases in production capacity, relocations that industries undertake to boost competitiveness, new infrastructure projects, and the extension of projects, which are already mature. Preferred sectors are transportation, energy and environment, and social infrastructure and services. Furthermore, priority activities also include those involving Research &Development (R&D) and innovation—including the acquisition, upgrade and maintenance of scientific-technological equipment for R&D activities, private technology centers, and private centers of innovation support. Regional governments also offer similar incentives for most of these industries. Financial aid includes both nonrefundable subsidies and interest relief on loans obtained by the beneficiaries—or combinations of the two. Companies are classified according to size, which can be a limiting factor in accessing certain types of public aid. According to the current usage, the term “micro” company refers to those employing 0-9 employees, with a turnover of less than EUR 2 million, and with a EUR 2 million limit for total assets. A “small” company has 10-49 employees, a turnover below EUR 10 million, and total assets below EUR 10 million. “Medium” enterprises 50-249 employees, annual turnover not exceeding EUR 50 million, and total assets less than EUR 43 million.

The state-owned financial institution (Instituto de Credito Oficial, ICO), which is attached to the Ministry of Economy and Competitiveness, has the status of State Financial Agency. Its mission is to promote economic activities that contribute to economic growth and development as well as the improved distribution of wealth within Spain. As part of this mission, the ICO seeks to foster the growth of small- and medium-sized companies, to encourage technological innovation and renewable energy projects, and to provide financial relief to those affected by natural disasters. The ICO’s direct financing programs are aimed at financing large-scale investment projects in strategic sectors in Spain, backing large-scale investments by Spanish companies abroad, and supporting projects which are economically, financially, technologically and commercially sound and involve a Spanish interest. The maximum amount that can be applied for is EUR 12.5 million.

Other official bodies that grant aid and incentives:

  • Ministry of Finance
  • MINCORUR – Ministry of Industry, Trade, and Tourism
  • ENISA – National Innovation Company S.A. (under MINCOTUR)
  • AXIS ICO Group (under MINECO)
  • INVEST IN SPAIN (under MINCOTUR)
  • RED.ES (under MINECO)
  • IDAE – Institute for Energy Diversification and Saving (under MITECO)
  • CERSA – Spanish Guarantee Company S.A. (under MINCOTUR)
  • CDTI – Center for Industrial Technological Development (under Ministry of Science, Innovation and Universities)
  • Tripartite Foundation for training in employment (under Ministry of Employment and Social Security)
  • CESGAR – Spanish Confederation of Mutual Guarantee Companies

The Regional Governments:

Spain’s 17 regional governments, known as autonomous communities, provide additional incentives for investments in their region. Many are similar to the incentives offered by the central government and the EU, but they are not all compatible. Additionally, some autonomous community governments grant investment incentives in areas not covered by state legislation but which are included in EU regional financial aid maps. Royal Decree 899/2007, of July 6 2007, sets out the different types of areas that are entitled to receive aid, along with their ceilings. Each area’s specific aspects and requirements (economic sectors, investments which can be subsidized, and conditions) are set out in the Royal Decrees determining the different areas. Most are granted on an annual basis.

Generally, the regional governments are responsible for the management of each type of investment. This provides a benefit to investors as each autonomous community has a specific interest in attracting investment that enhances its economy. No investment project can receive other financial aid if the amount of the aid granted exceeds the maximum limits on aid stipulated for each approved investment in the legislation defining the eligible areas. Therefore, the subsidy received is compatible with other aid, provided that the sum of all the aid obtained does not exceed the limit established by the legislation of demarcation and EU rules do not preclude the provision of funding (i.e., due to incompatibilities between Structural Funds).

Incentives from national, regional, or municipal governments and the European Union are granted to Spanish and foreign companies alike without discrimination.

Municipalities:

Municipal corporations offer incentives for direct investment by facilitating infrastructure needs, granting licenses, and allowing for the operation and transaction of permits, although these have been reduced significantly due to budget constraints. Municipalities such as Madrid also offer varied support services for potential foreign investors. Local economic development agencies often provide free advice on the local business environment and relevant laws, administrative support, and connections to human capital in order to facilitate the establishment of new businesses. Spain recently made starting a business easier by eliminating the requirement to obtain a municipal license before starting operations and by improving the efficiency of the commercial registry.

Research and Development

Incentives from national, regional or municipal governments and the European Union are granted to Spanish and foreign companies alike without discrimination. The most notable incentives include those aimed at fostering innovation, technological improvement (TI), and research and development (R&D) projects, which have been priorities of the Spanish government in recent years. The Science, Technology and Innovation Law 14/2011, of June 1, 2011, establishes the legal framework for promoting scientific and technical research, experimental development, and innovation in Spain. On February 2013 the Council of Ministers approved, in a combined document, “the Spanish Strategy for Science and Technology and for Innovation” for the 2013-2020 period, the essential purpose of which is to promote the scientific, technological, and business leadership of the country as a whole and to increase the innovation capacities of the Spanish company and the Spanish economy. The beneficiaries may be: individuals, public research agencies, public and private universities, other public R&D centers, public and private health entities and institutions related to or assisted by the National Health System, certified health research institutes, public and private non-profit entities (foundations and associations) engaging in R&D activities, enterprises (including SMEs), state technological centers, state technological and innovation support centers, business groupings or associations (joint ventures, economic interest groupings, industry-wide business associations), innovative business groupings and technological platforms, and organizations supporting technological transfer and technological and scientific dissemination and disclosure.

The aid can take the form of subsidies, loans, venture capital instruments, and other instruments (tax guarantees and incentives).

In 2013, the European Commission implemented Horizon 2020, the largest-ever EU research and innovation program with nearly EUR 80 billion of funding available from 2014 – 2020. The goal of the program is to attract additional private investment to promote breakthroughs and discoveries and take new ideas from the laboratory to the market. Horizon 2020 is open to all EU Member States and seeks to promote public and private collaboration in delivering innovation. EU Members States are eligible for funding on international collaborations; however, Horizon 2020 expressly prohibits funding on international collaboration with advanced economies outside of the EU.

Foreign Trade Zones/Free Ports/Trade Facilitation

Both the mainland and islands (and most Spanish airports and seaports) have numerous free trade zones where manufacturing, processing, sorting, packaging, exhibiting, sampling, and other commercial operations may be undertaken free of any Spanish duties or taxes. Spain’s seven free zone ports are located in Vigo, Cadiz, Barcelona, Santander, Seville, Tenerife, and the Canary Islands—all of which fall under the EU Customs Union, permitting the free circulation of goods within the EU. The entire province of the Canary Islands is a Special Economic Zone (SEZ), offering fiscal benefits that include a reduced corporate tax rate, a reduced Value-Added Tax (VAT) rate, and exemptions for transfer taxes and stamp duties. The Spanish territories of Ceuta and Melilla also offer unique tax incentives; they do not impose a VAT but instead tax imports, production, and services at a reduced rate. Spanish customs legislation also allows companies to have their own free trade areas. Duties and taxes are payable only on those items imported for use in Spain. These companies must abide by Spanish labor laws.

Performance and Data Localization Requirements

Spain does not have performance and localization requirements for investors.

The Spanish Data Protection Agency and the Spanish Police request data from companies, although the companies may refuse unless required by court order.

Sweden

Executive Summary

Sweden is generally considered a highly-favorable investment destination.  Sweden offers an extremely competitive, open economy with access to new products, technologies, skills, and innovations.  Sweden also has a well-educated labor force, outstanding communication infrastructure, and a stable political environment, which makes it a choice destination for U.S. and foreign companies.  Low levels of corporate tax, the absence of withholding tax on dividends, and a favorable holding company regime are additional incentives for doing business in Sweden.

Sweden’s attractiveness as an investment destination is tempered by a few structural, business challenges.  These include high personal and VAT tax regimes. In addition, the high cost of labor, rigid labor laws and regulations, a persistent housing shortage, and the general high cost of living in Sweden can present challenges to attracting, hiring, and maintaining talent for new firms entering Sweden.  Historically, the telecommunications, information technology, healthcare, energy, and public transport sectors have attracted the most foreign investment. However, manufacturing, wholesale, and retail trade have also recently attracted increased foreign funds.

Overall, investment conditions remain largely favorable.  Forbes Magazine ranked Sweden second in “The Best Countries for Business for 2019,” a ranking that takes into account factors such as property rights, innovation, taxes, technology, corruption, freedom, red tape, and investor protection.  In the World Economic Forum’s 2017-2018 Competitiveness Report Sweden was ranked twelfth out of 138 countries in overall competiveness and productivity.  Also in 2018, Transparency International ranked Sweden as one of the most corruption-free countries in the world –third out of 180.

In addition, Sweden is well equipped to embrace the Fourth Industrial Revolution, with a superior IT infrastructure.  Bloomberg’s 2019 Innovation Index ranked Sweden in seventh place among the most innovative nations on earth. Sweden is a global leader in adopting new technologies and setting new consumer trends.  U.S. and other exporters can take advantage of a test market full of demanding, highly sophisticated customers.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 3 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 12 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 3 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country (Millions USD, stock positions) 2018 $54,150 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2018 $52,590 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

There are no laws or practices that discriminate or are alleged to discriminate against foreign investors, including and especially U.S. investors, by prohibiting, limiting or conditioning foreign investment in a sector of the economy [either at the pre-establishment (market access) or post-establishment phase of investment].  Until the mid-1980s, Sweden’s approach to direct investment from abroad was quite restrictive and governed by a complex system of laws and regulations. Sweden’s entry into the European Union (EU) in 1995 largely eliminated all restrictions. National security restrictions to investment remain in the defense and other sensitive sectors, as addressed in the next section “Limits on Foreign Control and Right to Private Ownership and Establishment.”

The Swedish Government recognizes the need to further improve the business climate for entrepreneurs, education, and the flow of research from lab to market.  Swedish authorities have implemented a number of reforms to improve the business regulatory environment and to attract more foreign investment.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are very few restrictions on where and how foreign enterprises can invest, and there are no equity caps, mandatory joint-venture requirements, or other measures designed to limit foreign ownership or market access.  However, Sweden does maintain some limitations in a select number of situations:

  • Accountancy:  Investment in the accountancy sector by non-EU-residents cannot exceed 25 percent.
  • Legal services:  Investment in a corporation or partnership carrying out the activities of an “advokat,” or lawyer, cannot be done by non-EU residents.
  • Air transport:  Foreign enterprises may be restricted from access to international air routes unless bilateral intergovernmental agreements provide otherwise.
  • Air transport:  Cabotage is reserved to national airlines.
  • Maritime transport:  Cabotage is reserved to vessels flying the national flag.
  • Defense:  Restrictions apply to foreign ownership of companies involved in the defense industry and other sensitive areas.

Swedish company law provides various ways a business can be organized.  The main difference between these forms is whether the founder must own capital and to what extent the founder is personally liable for the company’s debt.  The Swedish Act (1992:160) on Foreign Branches applies to foreign companies operating through a branch and also to people residing abroad who run a business in Sweden.  A branch must have a president who resides within the European Economic Area (EEA). All business enterprises in Sweden (including branches) are required to register at the Swedish Companies Registration Office, Bolagsverket.  An invention or trademark must be registered in Sweden in order to obtain legal protection. A bank from a non-EEA country needs special permission from the Financial Supervision Authority (Finansinspektionen) to establish a branch in Sweden.

Sweden does not maintain a national security screening mechanism for inbound foreign investment.  However, the government is currently considering how to implement the EU Commission’s recently approved investment screening framework, as well as tightening national investment policies.  Suggested regulations would not likely be in place until 2021 at the earliest. U.S. investors are treated equally relative to other foreign investors in terms of ownership and scrutiny of investments.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) published an economic snapshot for Sweden in March 2019:  https://www.oecd.org/economy/surveys/OECD-economic-survey-Sweden-2019-executive-summary-brochure.pdf 

Business Facilitation

Business Sweden’s Swedish Trade and Investment Council is the investment promotion agency tasked with facilitating business.  The services of the agency are available to all investors.

At http://www.verksamt.se , a collaboration of several Swedish government agencies have posted relevant guides and services pertaining to registering, starting, running, expanding and/or closing a business.  Sweden defines a micro enterprise as one with less than 10 employees, a small enterprise with less than 50 employees, and a medium enterprise with less than 250 employees.  All forms of business enterprise, except for sole traders, must register with the Swedish Companies Registration Office, Bolagsverket, before starting operations. Sole traders may apply for registration in order to be given exclusive rights to the name in the county where they will be operating. Online applications to register an enterprise can be made at http://www.bolagsverket.se/en .  The process of registering an enterprise can take a few days or up to a few weeks, depending on the complexity and form of the business enterprise.  All business enterprises, including sole traders, must also register with the Swedish Tax Agency, Skatteverket, before starting operations. Relevant information and guides can be found at http://www.skatteverket.se .  Depending on the nature of business, companies may also need to register with the Environmental Protection Agency, Naturvårdsverket, or, if real estate is involved, the county authorities.  Non EU/EEA citizens need a residence permit, obtained from the Swedish Board of Migration, Migrationsverket, in order to start up and/or run a business.

Outward Investment

The Government of Sweden has commissioned the Swedish Exports Credit Guarantee Board (EKN) to promote Swedish exports and the internationalization of Swedish companies.  EKN insures exporting companies and banks against non-payment in export transactions, thereby reducing risk and encouraging expanding operations. As part of its export strategy presented in 2015, the Swedish Government has also launched Team Sweden to promote Swedish exports and investment.  Team Sweden is tasked with making export market entry clear and simple for Swedish companies and consists of a common network for all public initiatives to support exports and internationalization.

The Government does not generally restrict domestic investors from investing abroad.  The only exceptions are related to matters of national security and national defense; the Inspectorate of Strategic Products (ISP) is tasked with control and compliance regarding the sale and exports of defense equipment and dual-use products. ISP is also the National Authority for the Chemical Weapons Convention and handles cases concerning targeted sanctions.

4. Industrial Policies

Investment Incentives

The Swedish government offers certain incentives to set up a business in targeted depressed areas.  Loans are available on favorable terms from the Swedish Agency for Economic and Regional Growth (Tillväxtverket) and from regional development funds.  A range of regional support programs, including location and employment grants, low rent industrial parks, and economic free zones are available. Regional development support is concentrated in the lightly populated northern two-thirds of the country.  In addition, EU grant and subsidy programs are generally available only for nationals and companies registered in the EU, usually on a national treatment basis. For more information, see Chapter 7 “Trade and Project Financing” in Country Commercial Guide for Sweden.  The Swedish government does not have a practice of issuing guarantees or jointly financing direct investment projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Sweden has foreign trade zones with bonded warehouses in the ports of Stockholm, Gothenburg, Malmö, and Jönköping.  Goods may be stored indefinitely in these zones without customs clearance, but they may not be consumed or sold on a retail basis.  Permission may be granted to use these goods as materials for industrial operations within a free trade zone. The same tax and labor laws apply to foreign trade zones as to other workplaces in Sweden.

Performance and Data Localization Requirements

As an EU Member State, Sweden adheres to the EU’s General Data Protection Directive (GDPR) (95/46/EC) which spells out strict rules concerning the processing of personal data.  Businesses must tell consumers that they are collecting data, what they intend to use it for, and to whom it will be disclosed. Data subjects must be given the opportunity to object to the processing of their personal details and to opt-out of having them used for direct marketing purposes.  This opt-out should be available at the time of collection and at any point thereafter. While the EU institutions are considering new legislation, the 1995 Directive remains in force.

The EU-U.S. Privacy Shield Frameworks were designed by the U.S. Department of Commerce and the European Commission to provide companies on both sides of the Atlantic with a mechanism to comply with data protection requirements when transferring personal data from the European Union to the United States in support of transatlantic commerce.  On July 12, 2016, the European Commission deemed the EU-U.S. Privacy Shield Framework adequate to enable data transfers under EU law. For further information and guidance on the Privacy Shield Framework, please see: https://www.commerce.gov/privacyshield .

The Swedish Data Protection Authority, Datainspektionen, works to prevent encroachment upon privacy through information and by issuing directives and codes of statutes.  Datainspektionen also handles complaints and carries out inspections. By examining government bills, the DPA ensures that new laws and ordinances protect personal data in an adequate manner.  Further guidance and information is available in English on their website at www.datainspektionen.se .

There are no measurements that prevent or unduly impede companies from freely transmitting customer or other business-related data outside Sweden’s territory.  Sweden imposes no performance requirements on presumptive foreign investors.

In general, there is no government policy that requires the hiring of nationals.  There are no excessively onerous visa, residence, work permit, or similar requirements inhibiting mobility of foreign investors and their employees.  Sweden does not follow “forced localization,” the policy in which foreign investors must use domestic content in goods or technology and there are no requirements for foreign IT providers to turn over source code and/or provide access to encryption.

Switzerland and Liechtenstein

Executive Summary

At the national level, the Swiss government enacts laws and regulations governing corporate structure, the financial system, and immigration, and concludes international trade and investment treaties.  The Swiss federal system grants Switzerland’s 26 cantons (i.e., states) and largest municipalities significant independence to shape investment policies and set incentives to attract investment.  This federal approach to governance has helped the Swiss maintain long-term economic and political stability, a transparent legal system, an extensive and reliable infrastructure, efficient capital markets, and an excellent quality of life for the country’s 8.4 million inhabitants.  Many U.S. firms base their European or regional headquarters in Switzerland, drawn to the country’s low corporate tax rates, productive and multilingual workforce, and famously well maintained infrastructure and transportation networks.  U.S. companies also choose Switzerland as a gateway to markets in Eastern Europe, the Middle East, and beyond.  Furthermore, U.S. companies select Switzerland because hiring and firing practices are less restrictive than in other European locations.

In 2018, the World Economic Forum rated Switzerland the world’s fourth most competitive economy.  This high ranking reflects the country’s sound institutional environment and high levels of technological and scientific research and development.  With very few exceptions, Switzerland welcomes foreign investment, accords national treatment, and does not impose, facilitate, or allow barriers to trade.  According to the OECD, Swiss public administration ranks high globally in output efficiency and enjoys the highest public confidence of any national government in the OECD.  Switzerland’s judiciary system is equally efficient, posting the shortest trial length of any of the OECD’s 35 member countries. The country’s competitive economy and openness to investment brought Switzerland’s cumulative inward direct investment to USD 750 billion in 2016 (latest available figures) according to Swiss government sources.

Many of Switzerland’s cantons make significant use of financial incentives to attract investment to their jurisdictions.  Some of the more forward-leaning cantons have occasionally waived taxes for new firms for up to ten years. However, this practice has been criticized by the European Union – Switzerland’s top trading partner – with which Switzerland has many bilateral treaties.  The first proposal to introduce legislation that would have abolished preferential corporate tax treatment for foreign companies (CTR III) was rejected by Swiss voters in a February 12, 2017 referendum. The new Federal Act on Tax Reform and Swiss Pension System (AHV) Financing (TRAF) proposal to bring Switzerland’s corporate tax system in line with OECD standards was approved by the Swiss parliament on September 28, 2018 and was accepted by 64.4 percent of Swiss voters in a May 19, 2019 popular vote. 

Entering into force on January 1, 2020, TRAF will oblige Swiss cantons to offer the same corporate tax rates to both Swiss and foreign companies, but will allow cantons to continue to set their own cantonal rates and offer incentives for corporate investment through deductions and preferential tax treatment for certain types of income.

Individual income tax and corporate tax rates vary widely across Switzerland’s 26 cantons, depending upon cantonal tax incentives.  In 2017–2018, Zurich, which is sometimes used as a reference point for corporate location tax calculations within Switzerland, had a combined corporate tax rate of 21.15 percent, which includes municipal, cantonal, and federal tax.

Key sectors that have attracted significant investments in Switzerland include IT, precision engineering, scientific instruments, pharmaceuticals, and machine building.  Switzerland hosts a significant number of startups.

There are no “forced localization” laws designed to require foreign investors to use domestic content in goods or technology (e.g., data storage within Switzerland).  The Swiss Federal Council decided on February 9, 2014, to exclude foreign-held companies from bidding on particular critical infrastructure projects that have a strong nexus between information and communication technologies (ICT) and the Federal Administration.  While the Federal Council’s decision does not spell out specific sectors subject to this exclusion, it is widely interpreted to apply to ICT projects linked to areas such as Switzerland’s defense, railways, energy grid, and the Swiss National Bank. A legal interpretation of this decision is still pending.  Were a foreign bidder to challenge a bidding exclusion based on this decision, a Swiss court would determine whether the ruling applied to the specific sector involved.

Switzerland follows strict privacy laws and certain data may not be collected in Switzerland, as it is deemed personal and particularly “worthy of protection.”

According to WIPO’s World Intellectual Property Indicators, in 2017 (latest available) Switzerland ranked 8th globally in filing patents, 11th in industrial designs, and 14th in trademarks, reflecting Switzerland’s overall strong intellectual property protection.  While Switzerland enforces intellectual property rights linked to patents and trademarks effectively, enforcement of copyright on the internet has been less effective. In 2018, USTR confirmed Switzerland’s ranking on its Special 301 Watch List due to protection of copyrighted material online.  If approved by parliament in 2019, a new Copyright Act is expected to address this issue as of 2020.

Some formerly public Swiss monopolies continue to retain market dominance despite partial or full privatization.  As a result, foreign investors sometimes find it difficult to enter these markets (e.g., telecommunications, certain types of public transportation, postal services, alcohol and spirits, aerospace and defense, certain types of insurances and banking services, and salt).  Additionally, the OECD ranks Switzerland’s educational, healthcare, and agriculture costs and subsidies as relatively “high” when rated against output. The Swiss agricultural sector remains one of the most protected and heavily subsidized markets in the world. Switzerland’s agricultural sector receives heavy government support (direct payments comprise two thirds of an average farm’s profits) and has one of the lowest levels of productivity among OECD members.

Liechtenstein

Liechtenstein’s investment conditions are identical in most key aspects to those in Switzerland, due to its integration into the Swiss economy.  The two countries form a customs union and Swiss authorities are responsible for implementing import and export regulations. Both countries are members of the European Free Trade Association (EFTA, including Iceland and Norway), an intergovernmental trade organization and free trade area that operates in parallel with the European Union (EU).  Liechtenstein participates in the EU single market through the European Economic Area (EEA), unlike Switzerland, which has opted for a set of bilateral agreements with the EU instead.  Liechtenstein has a stable and open economy employing 38,661 people (2017), exceeding its domestic population of 38,114 (2017) and requiring a substantial number of foreign workers. In 2017, 70.1 percent of the Liechtenstein workforce were foreigners, mainly Swiss, Austrians and Germans, 55 percent of which commute daily to Liechtenstein.  (Liechtenstein was granted an exception to the EU Free Movement of People Agreement, enabling the country not to grant residence permits to its workers). Liechtenstein is one of the world’s wealthiest countries. Liechtenstein’s gross domestic product per capita (at current USD) amounted to USD 164,993 in 2016 and is the highest in the world.  According to the Liechtenstein Statistical Yearbook, the services sector, particularly in finance, accounts for 61.9 percent of Liechtenstein’s jobs, followed by the manufacturing sector (particularly machine tools, precision instruments, and dental products), which employs 38 percent of the workforce.  Agriculture accounts for less than 1 percent of the country’s employment.

Liechtenstein reformed its tax system in 2011.  Its corporate tax rate, at 12.5 percent, is one of the lowest in Europe.  Capital gains, inheritance, and gift taxes have been abolished. The Embassy has no recorded complaints from U.S. investors stemming from market restrictions in Liechtenstein.

Table 1: Switzerland – Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 3 of 180 https://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report “Ease of Doing Business” 2018 38 of 190 https://www.doingbusiness.org/rankings 
Global Innovation Index 2018 1 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $249, 968 https://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $80,560 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

With the exception of a heavily protected agricultural sector, foreign investment into Switzerland is generally not hampered by significant barriers, with no reported discrimination against foreign investors or foreign-owned investments.  Incidents of trade discrimination do exist, for example with regards to agricultural goods such as bovine genetics products. Some city and cantonal governments offer access to an ombudsman, who may address a wide variety of issues involving individuals and the government, but does not focus exclusively on investment issues.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic enterprises may engage in various forms of remunerative activities in Switzerland and may freely establish, acquire, and dispose of interests in business enterprises in Switzerland.  There are, however, some investment restrictions in areas under state monopolies, including certain types of public transportation, postal services, alcohol and spirits, aerospace and defense, certain types of insurance and banking services, and the trade in salt.  Restrictions (in the form of domicile requirements) also exist in air and maritime transport, hydroelectric and nuclear power, operation of oil and gas pipelines, and the transportation of explosive materials. Additionally, the following legal restrictions apply within Switzerland:

Corporate boards: The board of directors of a company registered in Switzerland must consist of a majority of Swiss citizens residing in Switzerland; at least one member of the board of directors who is authorized to represent the company (i.e., to sign legal documents) must be domiciled in Switzerland.  If the board of directors consists of a single person, this person must have Swiss citizenship and be domiciled in Switzerland. Foreign controlled companies usually meet these requirements by nominating Swiss directors who hold shares and perform functions on a fiduciary basis. Mitigating these requirements is the fact that the manager of a company need not be a Swiss citizen and, with the exception of banks, company shares can be controlled by foreigners.  The establishment of a commercial presence by persons or enterprises without legal status under Swiss law requires an establishment authorization according to cantonal law. The aforementioned requirements do not generally pose a major hardship or impediment for U.S. investors.

Hostile takeovers: Swiss corporate shares can be issued both as registered shares (in the name of the holder) or bearer shares.  Provided the shares are not listed on a stock exchange, Swiss companies may, in their articles of incorporation, impose certain restrictions on the transfer of registered shares to prevent hostile takeovers by foreign or domestic companies (article 685a of the Code of Obligations).  Hostile takeovers can also be annulled by public companies; however, legislation introduced in 1992 made this practice more difficult.  Public companies must cite in their statutes significant justification (relevant to the survival, conduct, and purpose of their business) to prevent or hinder a takeover by a foreign entity.  Furthermore, public corporations may limit the number of registered shares that can be held by any shareholder to a percentage of the issued registered stock. In practice, many corporations limit the number of shares to 2-5 percent of the relevant stock.  Under the public takeover provisions of the 2015 Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading and its 2019 amendments, a formal notification is required when an investor purchases more than 3 percent of a Swiss company’s shares.  An “opt-out” clause is available for firms which do not want to be taken over by a hostile bidder, but such opt-outs must be approved by a super-majority of shareholders and must take place well in advance of any takeover attempt.

Banking: Those wishing to establish banking operations in Switzerland must obtain prior approval from the Swiss Financial Market Supervisory Authority (FINMA), a largely independent agency, administered under the Swiss Federal Department of Finance.  FINMA promotes confidence in financial markets and works to protect customers, creditors, and investors. FINMA approval of bank operations is generally granted if the following conditions are met: reciprocity on the part of the foreign state; the foreign bank’s name must not give the impression that the bank is Swiss; the bank must adhere to Swiss monetary and credit policy; and a majority of the bank’s management must have their permanent residence in Switzerland.  Otherwise, foreign banks are subject to the same regulatory requirements as domestic banks.

Banks organized under Swiss law must inform FINMA before they open a branch, subsidiary, or representation abroad.  Foreign or domestic investors must inform FINMA before acquiring or disposing of a qualified majority of shares of a bank organized under Swiss law.  If exceptional temporary capital outflows threaten Swiss monetary policy, the Swiss National Bank, the country’s independent central bank, may require other institutions to seek approval before selling foreign bonds or other financial instruments.  On December 20, 2008, government deposit insurance of individual current accounts held in Swiss banks was raised from CHF 30,000 to CHF 100,000.

Insurance: A federal ordinance requires the placement of all risks physically situated in Switzerland with companies located in the country.  Therefore, it is necessary for foreign insurers wishing to provide liability coverage in Switzerland to establish a subsidiary or branch in-country.

U.S. investors have not identified any specific restrictions that create market access challenges for foreign investors.

Other Investment Policy Reviews

The World Trade Organization’s (WTO) September 2017 Trade Policy Review of Switzerland and Liechtenstein includes investment information.  Other reports containing elements referring to the investment climate in Switzerland include the OECD Economic Survey of November 2017.

Business Facilitation

The Swiss government-affiliated non-profit organization Switzerland Global Enterprise (SGE) has a nationwide mandate to attract foreign business to Switzerland on behalf of the Swiss Confederation.  SGE promotes Switzerland as an economic hub and fosters exports, imports, and investments. Larger regional offices include the Greater Geneva-Berne Area (that covers large parts of Western Switzerland), the Greater Zurich Area, and the Basel Area.  Each canton has a business promotion office dedicated to helping facilitate real estate location, beneficial tax arrangements, and employee recruitment plans. These regional and cantonal investment promotion agencies do not require a minimum investment or job-creation threshold in order to provide assistance. However, these offices generally focus resources on attracting medium-sized entities that have the potential to create between 50 and 249 jobs in their region.

References:

Switzerland has a dual system for granting work permits and allowing foreigners to create their own companies in Switzerland.  Employees who are citizens of the EU/EFTA area can benefit from the EU Free Movement of Persons Agreement. U.S. citizens who are not citizens of an EU/EFTA country and want to become self-employed in Switzerland must meet Swiss labor market requirements.  The criteria for admittance, usually not creating a hindrance for U.S. persons, are contained in the Federal Act on Foreign Nationals (FNA), the Decree on Admittance, Residence and Employment (VZAE) and the provisions of the FNA and the VZAE.

Setting up a company in Switzerland requires registration at the relevant cantonal Commercial Registry.  The cost for registering a company is typically USD 1,300 – USD 15,200, depending on the company type. These costs mainly cover the Public Notary and entry into the Commercial Registry.

Other steps/procedures for registration include: 1) placing paid-in capital in an escrow account with a bank; 2) drafting articles of association in the presence of a notary public; 3) filing a deed certifying the articles of association with the local commercial register to obtain a legal entity registration; 4) paying the stamp tax at a post office or bank after receiving an assessment by mail; 5) registering for VAT; and 6) enrolling employees in the social insurance system (federal and cantonal authorities).

The World Bank Doing Business Report 2019 ranks Switzerland 38th in the ease of doing business among the 190 countries surveyed, and  77th in the ease of starting a business, with a  six-step registration process and 10 days required to set up a company.

Outward Investment

While Switzerland does not explicitly promote or incentivize outward investment, Switzerland’s export promotion agency Switzerland Global Enterprise facilitates overseas market entry for Swiss companies through its Swiss Business Hubs in several countries, including the United States.  Switzerland does not restrict domestic investors from investing abroad.

4. Industrial Policies

Investment Incentives

Many of Switzerland’s cantons make significant use of financial incentives to attract investment to their jurisdictions.  Some of the more forward-leaning cantons have occasionally waived taxes for new firms for up to ten years. However, this practice has been criticized by the OECD and European Union.  To satisfy OECD and EU standards, the Federal Council proposed the “Corporate Tax Reform III” (later renamed “Tax Reform and AHV Financing” (TRAF), which was approved by the Swiss parliament on September 28, 2018 and was accepted by 64.4 percent of Swiss voters in a May 19, 2019 popular vote.  Left-leaning parties had successfully organized opposition to CTR III, arguing that the proposed reform would benefit business while creating a tax revenue shortfall that would ultimately be borne by individual households.  TRAF appeased some on the Left by including a provision for the federal government to boost Swiss pension system (AHV) funding by CHF 2 billion (USD 2 billion) annually.  The Swiss Finance Ministry notes, however, that this injection will not resolve the structural problem that the pay-as-you-go AHV system is facing.  Green Party leaders criticized TRAF’s passage in Swiss media, stressing that an anticipated CHF 2 billion (USD 2 billion) tax revenue shortfall created by the tax reform would ultimately affect social services, regardless of the government’s additional AHV financing.  TRAF’s proponents have argued that greater investment and job growth resulting from the lower tax rates would likely offset the revenue shortfall. Whatever the economic reasoning, commentators note sweetening the pension pot favorably impacted some voters’ view of the tax reform law.

Entering into force on January 1, 2020, TRAF will oblige Swiss cantons to offer the same corporate tax rates to both Swiss and foreign companies, but will allow cantons to continue to set their own cantonal rates and offer incentives for corporate investment through deductions and preferential tax treatment for certain types of income.  Observers note that tax-friendly cantons such as Zug will likely remain competitive for foreign investment by continuing to offer aggressive incentives.  Swiss firms will also likely benefit, as overall cantonal tax rates are expected to decrease under TRAF.

The new proposed corporate tax code aims to create an internationally compliant, competitive tax system for companies while strengthening the AHV (Swiss pension scheme).  The TRAF tax reform is intended to safeguard the appeal and competitiveness of Switzerland as a business location and secure jobs and tax receipts in the medium to longer term.  In addition, the proposal will generate additional receipts for the AHV, thus helping to secure pensions. If approved by the Swiss public, TRAF would enter into force on January 1, 2020, abolishing special tax privileges that only apply to foreign firms and establishing a level playing field between Swiss and foreign companies, while allowing cantons to offer various tax deductions to incentivize investment.  Many cantons have already lowered their overall corporate tax rate independently of the reform to accommodate foreign companies. Zurich, which is sometimes used as a reference point for corporate location tax calculations within Switzerland, has a combined corporate tax rate of roughly 25 percent, including municipal, cantonal, and federal tax.

Individual income tax rates also vary widely across the 26 cantons.

Foreign Trade Zones/Free Ports/Trade Facilitation

Switzerland’s free ports remain an important hub particularly for art works and collectibles from all over the world.  The country has taken steps in recent years to minimize the risks of abuse in free ports and to ensure that processes are in line with international standards.

Performance and Data Localization Requirements

There are no “forced localization” laws designed to require foreign investors to use domestic content in goods or technology (e.g., data storage within Switzerland).  In a June 2017 court decision regarding a February 2014 Federal Council decision to exclude a foreign competitor from bidding on services related to the government’s critical infrastructure, the court ruled in favor of the Swiss State-Owned Enterprise involved in the bid.  U.S. companies have to date not voiced concerns.

Switzerland follows strict privacy laws and certain data may not be collected in Switzerland, as it is deemed personal and particularly “worthy of protection.”  The collection of certain data may need to be registered at the office of the Federal Data Protection and Information Commissioner. Some foreign companies have located data centers in Switzerland due to the country’s strict privacy rules and neutrality.  On April 1, 2018, FINMA published an outsourcing circular clarifying regulations for data storage for the banking and insurance sector at: https://www.finma.ch/en/documentation/circulars/  

Thailand

Executive Summary

Thailand, the second largest economy in Association of Southeast Asian Nations (ASEAN) after Indonesia, is an upper middle-income country with pro-investment policies and well-developed infrastructure. The interim military coup government held elections on March 24, 2019 and 2014 coup leader General Prayut Chan-o-cha was elected by Parliament as Prime Minister on June 5.   Thailand celebrated the coronation of King Maha Vajiralongkorn May 4-6, 2019, further stabilizing the country. Despite some political uncertainty, Thailand continues to encourage foreign direct investment as a means of promoting economic development, employment, and technology transfer. In recent decades, Thailand has been a major destination for foreign direct investment, and hundreds of U.S. companies have invested in Thailand successfully. Thailand continues to encourage investment from all countries and seeks to avoid dependence on any one country as a source of investment.

The Foreign Business Act (FBA) governs most investment activity by non-Thai nationals. Many U.S. businesses also enjoy investment benefits through the U.S.-Thai Treaty of Amity and Economic Relations, signed in 1833 and updated in 1966. The Treaty allows U.S. citizens and U.S. majority-owned businesses incorporated in the United States or Thailand to engage in business on the same basis as Thai companies (national treatment) and exempts them from most FBA restrictions on foreign investment, although the Treaty excludes some types of business.  Notwithstanding their Treaty rights, many U.S. investors choose to form joint ventures with Thai partners who hold a majority stake in the company, leveraging their partner’s knowledge of the Thai economy and local regulations.

The Thai government maintains a regulatory framework that broadly encourages investment, though the process of rule-making and interpretation is not always transparent or predictable. Government policies generally do not restrict the free flow of financial resources to support product and factor markets, and credit is generally allocated on market terms rather than by directed lending.

The Board of Investment (BOI) is Thailand’s principal investment promotion authority. The BOI offers business support and investment incentives uniformly to qualified domestic and foreign investors through clearly articulated application procedures. Investment incentives include both tax and non-tax privileges.

The government launched the Eastern Economic Corridor (EEC) development plan in 2017. The EEC is a part of the “Thailand 4.0” economic development strategy introduced in 2016. Many planned infrastructural projects, such as high-speed trains, U-Tapao Airport commercialization, and Laem Chabang Port expansion, could provide opportunities for investments, and good and services support. Thailand 4.0 offers to incentives for investments in ten “new” targeted industries, namely advanced robotics, digital technology, integrated aviation, medical, biofuels/biochemical, defense manufacturing, and human resource development.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 36/ 99 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2018 27 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 44 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 USD 15,006 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 USD 5,950 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Thailand continues to welcome investment from all countries and seeks to avoid dependence on any one country as a source of investment. The FBA prescribes a wide range of business that may not be conducted by foreigners unless a relevant license has been obtained or an exemption applies. The term “foreigner” includes Thai-registered companies in which half or more of the capital is held by non-Thai individuals, foreign-registered companies, and Thai-registered companies that are themselves majority foreign-owned.  BOI, Thailand’s investment promotion agency, assists Thai and foreign investors to start and conduct businesses in targeted economic sectors by offering both tax and non-tax incentives.

Limits on Foreign Control and Right to Private Ownership and Establishment

Various Thai laws set forth foreign-ownership restrictions in certain sectors, primarily in services such as banking, insurance, and telecommunications. The FBA details the types of business activities reserved for Thai nationals. Foreign investment in those businesses must comprise less than 50 percent of share capital, unless specially permitted or otherwise exempt.

The following three lists detail restricted businesses for foreigners:

List 1. This contains activities non-nationals are prohibited from engaging in, including:  newspaper and radio broadcasting stations and businesses; rice and livestock farming; forestry and timber processing from a natural forest; fishery in Thai territorial waters and specific economic zones; extraction of Thai medicinal herbs; trading and auctioning of antique objects or objects of historical value from Thailand; making or casting of Buddha images and monk alms bowls; and land trading.

List 2. This contains activities related to national safety or security, arts and culture, traditional industries, folk handicrafts, natural resources, and the environment. Restrictions apply to the production, sale and maintenance of firearms and armaments; domestic transportation by land, water, and air; trading of Thai antiques or art objects; mining, including rock blasting and rock crushing; and timber processing for production of furniture and utensils. A foreign majority-owned company can engage in List 2 activities if Thai nationals or legal persons hold not less than 40 percent of the total shares and the number of Thai directors is not less than two-fifths of the total number of directors.

List 3. Restricted businesses in this list include:  accounting, legal, architectural, and engineering services; retail and wholesale; advertising businesses; hotels; guided touring; selling food and beverages; and other service-sector businesses. A foreign company can engage in List 3 activities if a majority of the limited company’s shares are held by Thai nationals. Any company with a majority of foreign shareholders (more than 50 percent) cannot engage in List 3 activities unless it receives an exception from the Ministry of Commerce under its Foreign Business License (FBL) application.

Thailand does not maintain an investment screening mechanism, but investors can receive additional incentives/privileges if they invest in priority areas, such as high-technology industries. Investors should contact the Board of Investment [https://www.boi.go.th/index.php?page=index  ] for the latest information on specific investment incentives.

The U.S. Commercial Service, U.S. Embassy Bangkok, is responsible for issuing a certification letter to confirm that a U.S. company is qualified to apply for benefits under the Treaty of Amity. The applicant must first obtain documents verifying that the company has been registered in compliance with Thai law. Upon receipt of the required documents, the U.S. Commercial Service office will then certify to the Foreign Administration Division, Department of Business Development, Ministry of Commerce (MOC) that the applicant is seeking to register an American-owned and managed company or that the applicant is an American citizen and is therefore entitled to national treatment under the provisions of the Treaty. For more information on how to apply for benefits under the Treaty of Amity, please e-mail: ktantisa@trade.gov.

Other Investment Policy Reviews

The World Trade Organization conducted a Trade Policy Review of Thailand in November 2015https://www.wto.org/english/tratop_e/tpr_e/tp426_e.htm  . The next review is scheduled for October 2020.

Business Facilitation

The MOC’s Department of Business Development (DBD) is generally responsible for business registration, which can be performed online or manually. A legal requirement that documentation must be submitted in Thai language has caused foreign entities to spend three to six months to complete the process, as they typically have to hire a law firm or consulting firm to handle their applications. Firms engaging in production activities also must register with the Ministry of Industry and the Ministry of Labor and Social Development.

To operate restricted businesses as defined by the FBA’s List 2 and 3, non-Thai entities must obtain a foreign business license, approved by the Council of Ministers (Cabinet) and/or Director-General of the MOC’s Department of Business Development, depending on the business category.

Effective June 9, 2017, the MOC removed certain business categories from FBA’s Annex 3 list. Businesses no longer subject to restrictions include regional office services and contractual services provided to government bodies and state-owned enterprises.

American investors who wish to take majority shares or wholly own businesses under FBA’s Annex 3 list may apply for protection under the U.S.-Thai Treaty of Amity. https://2016.export.gov/thailand/treaty/index.asp#P5_233  

Americans planning to invest in Thailand are advised to obtain qualified legal advice, especially considering Thai business regulations are governed predominantly by criminal, not civil, law. Foreigners are rarely jailed for improper business activities, but violations of business regulations can carry heavy criminal penalties. Thailand has an independent judiciary and government authorities are generally not permitted to interfere in the court system once a case is in process.

In March 2019, the MOC’s Department of Business Development completed an annual report on suggestions for FBA changes, particularly the possible removal of certain service businesses from FBA’s List 3.  The report is pending the Cabinet’s review, which is expected to take place after a new government assumes office.

A company is required to have registered capital of two million Thai baht per foreign employee in order to obtain work permits. Foreign employees must enter the country on a non-immigrant visa and then submit work permit applications directly to the Department of Labor. Application processing takes approximately one week. For more information on Thailand visas, please refer to http://www.mfa.go.th/main/en/services/4908/15388-Non-Immigrant-Visa- percent22B percent22-for-Business-and.html  .

In February 2018, the Thai government launched a Smart Visa program for foreigners with expertise in specialized technologies in ten targeted industries. Under this program, foreigners can be granted a maximum four-year visa to work in Thailand without having to obtain a work permit and can enjoy relaxed immigration rules for their spouses and children. More information is available at https://www.boi.go.th/index.php?page=detail_smart_visa&language=en.

Outward Investment

Thai companies are expanding and investing overseas, especially in neighboring ASEAN countries to take advantage of lower production costs, but also in the United States, Europe and Asia. A stronger domestic currency, rising cash holdings, and subdued domestic growth are helping to drive outward investment. Food, agro-industry, and chemical sectors account for the main share of outward flows. Thai corporate laws allow outbound investments in the form of an independent affiliate (foreign company), as a branch of a Thai legal entity, or by a financial investment abroad from a Thai company. BOI and the MOC’s Department of International Trade Promotion (DITP) share responsibility for promoting outward investment, with BOI focused on outward investment in leading economies and DITP covering smaller markets.

4. Industrial Policies

Investment Incentives

The Board of Investment is Thailand’s central investment promotion authority. BOI offers investment incentives to qualified domestic and foreign investors based on clear application procedures. To upgrade the country’s technological capacity, the BOI presently gives more weight to applications in high-tech, innovative, and sustainable industries, such as digital technology, “smart agriculture” and biotechnology, aviation and logistics, medical and wellness tourism, and other high-value services.

Two of the most significant privileges offered by the BOI for promoted projects are:

  • Tax privileges, such as corporate income tax exemptions, and tariff reductions or exemptions on the import of machinery and/or imported raw materials used in the investment.
  • Nontax privileges, such as permission to own land, permission to bring foreign experts to work on the promoted projects, exemptions on foreign ownership limitations of companies, and exemptions from work permit and visa rules.

Thailand’s flagship investment zone, the “Eastern Economic Corridor (EEC),” spans the provinces of Chachoengsao, Chonburi, and Rayong with a combined area of 5,129 square miles. The EEC leverages the adjacent Eastern Seaboard industrial area that has been an investment destination for more than 30 years. The Thai government aims to establish the EEC as a primary investment and infrastructure hub in ASEAN, serving as a central gateway to east and south Asia. Among the EEC development projects are:  smart cities; an innovation district (EECi); a digital park (EECd); an aerotropolis (EEC-A); and other state-of-the-art facilities to help promote EEC’s following targeted industries:

  • Next-generation automotives
  • Intelligent electronics
  • Advanced agriculture and biotechnology
  • Food processing
  • Tourism
  • Advance robotics and automation
  • Integrated aviation industry
  • Medical hub and total healthcare services
  • Biofuels and biochemicals
  • Digital technology
  • Defense industry
  • Human resource development

The EEC Act provides investment incentives and privileges. Investors will be able to obtain long-term land leases of 99 years (with an initial lease of up to 50 years and a renewal of up to 49 years). The public-private partnership approval process is shortened to approximately nine months. The BOI will offer corporate income tax exemptions of up to 13 years for strategic projects in the EEC area. Foreign experts who work in the EEC will be subject to a maximum personal income tax rate of 17 percent; a 15 percent personal income tax rate will apply to executives whose companies have International Business Centers in the EEC. Investment projects with a significant R&D, innovation, or human resource development component may be eligible for additional grants and incentives. Moreover, grants will be provided to support targeted technology development under the Competitive Enhancement Act. There will be a one-stop service to expedite multiple business processes for investors.

On March 26, 2019, the Thai Cabinet approved Royal Decrees cancelling grandfathered tax incentives under former incentive regimes for foreign investors who establish:  regional operating headquarters; international headquarters (including a treasury center); and international trading centers. The repeal will become effective June 1, 2019 for corporate income tax incentives and effective January 1, 2020 for individual income tax incentives.  The Ministry of Finance (MOF) asserts this measure is in response to a 2017 OECD report (2017 Progress Report on Preferential Regimes (Inclusive Framework on Base Erosion and Profit Shifting (BEPS) 2: Action 5); the report labelled Thailand’s regional/international headquarters and trading and treasury hub regimes as harmful tax practices. MOF also indicated its  actions will ensure Thailand will not be classified as ”Potentially Harmful” or ”Actually Harmful” by the Forum on Harmful Tax Practices (FHTP) and BEPS. The Thai government has announced current beneficiaries of the suspended regimes will be able to transition into a new scheme, the “International Business Center” (IBC) investment incentive program, provided the applicant meets the IBC regime’s to-be-announced conditions.

For additional information, contact the Thai Board of Investment, 555 Vibhavadi-Rangsit Road, Chatuchak, Bangkok 10900. Tel: 0-2553-8111. Website: www.boi.go.th  .

Foreign Trade Zones/Free Ports/Trade Facilitation

The Industrial Estate Authority of Thailand (IEAT), a state-enterprise under the Ministry of Industry, has established a network of industrial estates in Thailand, including Laem Chabang Industrial Estate in Chonburi Province (eastern) and Map Ta Phut Industrial Estate in Rayong Province (eastern). Foreign-owned firms generally have the same investment opportunities in the industrial zones as Thai entities, but the IEAT Act requires that in the case of foreign-owned firms, the IEAT Committee must consider and approve the amount of space/land that such firms plan to buy or lease in industrial estates. In practice, there is no record of disapproval for requested land. Private developers are heavily involved in the development of these estates. The IEAT currently operates 9 estates, plus 41 more in conjunction with the private sector, in 15 provinces nationwide. Private-sector developers operate over 50 industrial estates, most of which have received promotion privileges from the Board of Investment.

The IEAT has established 12 special IEAT Free Zones reserved for industries manufacturing for export only. Businesses may import raw materials into and export finished products from these zones free of duty (including value added tax). These zones are located within industrial estates and many have customs facilities to speed processing. The free trade zones are located in Chonburi, Lampun, Pichit, Songkhla, Samut Prakarn, Bangkok (at Lad Krabang), Ayuddhya, and Chachoengsao. In addition to these zones, factory owners may apply for permission to establish a bonded warehouse within their premises to which raw materials, used exclusively in the production of products for export, may be imported duty free.

Thailand is focusing on improving trade and investment with neighboring countries. It is therefore establishing Special Economic Zones (SEZs) in ten provinces bordering neighboring countries e.g., Tak, Nong Khai, Mukdahan, Sa Kaeo, Trad, Narathiwat, Chiang Rai, Nakhon Phanom, and Kanchanaburi. Business sectors and industries that might benefit from tax and non-tax incentives offered in the SEZs include logistics, warehouses near border areas, distribution, services, tourism, labor-intensive factories, and manufacturers using raw materials from neighboring countries.

Performance and Data Localization Requirements

In 2018, Thailand enacted a Royal Decree on Foreign Worker Management (no.2), which replaced the Foreign Employment Act and the Royal Decree on the Management of Migrant Employment, to manage the employment of foreigners, regardless of industry, in a more systematic fashion. The new decree eliminates mandatory prison time for undocumented workers. It also narrows the range of penalties from a minimum of USD 157 to a maximum of USD 1,571 (THB 5,000-50,000) (compared to USD 63 to USD 3,142 (THB 2,000-100,000) under the prior law). The new decree also bans sub-contract employers from hiring migrant workers and requires employers to provide to migrant workers a copy of their employment contracts.

The decree prohibits employers and employment agencies from charging workers fees other than “personal expenses,” defined as passport fees, medical checks, and work permit fees. Employers may only deduct the actual cost of these personal expenses, and these deductions may not exceed 10 percent of any worker’s monthly salary. The law makes retention of worker documents illegal and prescribes mandatory penalties of between USD 12,517 to USD 25,142 (THB 400,000 to THB 800,000) and/or imprisonment of up to six months to employers who violate these rules. The decree also increases the grace period for migrant workers to change employers from 15 to 30 days. Employers and employment agencies are required by law to bear the cost of repatriating migrant workers back to their home country when workers resign or when their employment contract ends.

Thai law requires foreign workers to have a work permit issued by the Ministry of Labor in order to work legally in Thailand. The Ministry of Labor considers the following factors when deciding whether to issue a work permit:

  •  whether a Thai employee could perform the job;
  •  whether the foreigner is qualified for the job; and
  •  whether the job fits the present economic needs of the Kingdom.

Thai law also reserves 39 occupations for Thai workers; the Ministry of Labor will not grant work permits for foreigners to engage in these occupations, which include lawyers, architects, and civil engineers. Generally, employers must hire four Thai nationals for every one foreign employee.

Different requirements apply to companies promoted by the BOI, which typically result in greater flexibility and ease in obtaining work permits for foreign nationals. Such schemes apply equally to senior management and boards of directors. According to the Foreign Business Act, if a foreigner is the firm’s managing partner or the manager, the company is subject to the restrictions applicable to foreign businesses and the Foreign Business License application.

While the employment of foreigners in some sectors is subject to the foreign equity restrictions of the Foreign Business Act, exceptions can be granted as promotional privileges by BOI or IEAT, or, as a temporary measure, in the form of government approval issued by the Thai government. Exceptions can also be provided based on international treaties to which Thailand is a party. Under the Treaty of Amity and Economic Relations between Thailand and the United States, U.S. companies or nationals can be eligible for national treatment, allowing them, with some exceptions, to obtain the same treatment in their business dealings as Thai nationals.

The Thai government does not currently have any specific law governing “forced localization” policy, under which foreign investors must use domestic content in goods or technology, but it has encouraged such an approach through domestic preferences in procurement. While there are currently no requirements for foreign IT providers to turn over source code and/or provide access to surveillance, the Thai government in February 2019 passed new laws and regulations on cybersecurity and personal data protection that raise concerns over Thai authorities’ broad power to demand confidential and sensitive information without sufficient legal protections or a company’s ability to appeal or limit such access. IT providers have expressed concern that the new laws might place unreasonable burdens on them and have introduced new uncertainties in the technology sector. Thailand has implemented a requirement that all debit transactions processed by a domestic debit card network must use a proprietary chip. Regarding Thailand’s import permitting process for several agricultural products, such as soybean and milk, the government imposes separate domestic absorption rate requirements to purchase local products at fixed prices.

United Arab Emirates

Executive Summary

The Government of the United Arab Emirates (UAE) is pursuing economic diversification to promote the development of the private sector as a complement to the historical economic dominance of the state.  The country’s seven emirates have implemented numerous initiatives, laws, and regulations that aim to develop a more conducive environment for foreign investment.

The UAE maintains a position as a major trade and investment hub for a large geographic region, which includes not only the Middle East and North Africa, but also South Asia, Central Asia, and Sub-Saharan Africa.  Multinational companies cite the UAE’s political and economic stability, rapid population and Gross Domestic Product (GDP) growth, fast-growing capital markets, and a perceived absence of systemic corruption as positive factors contributing to the UAE’s attractiveness to foreign investors.

While the UAE implemented an excise tax on certain products in October 2017 and a five percent Value-Added Tax (VAT) on all products and services beginning in January 2018, many investors continue to cite the absence of corporate and personal income taxes as a strength of the local investment climate, relative to other regional options.

While foreign investment continues to grow, the regulatory and legal framework in the UAE continues to favor local over foreign investors.  There is no national treatment for investors in the UAE and foreign ownership of land and stocks remains restricted. In September 2018, the UAE issued Decree-Law No. 19 on Foreign Direct Investment (FDI), which grants licensed foreign investment companies the same treatment as national companies, within the limits permitted by the legislation in force.  Sectors restricted from 100 percent foreign ownership appear on a negative list that includes 14 major sectors. The new law does not mention sectors on the positive list, but these details are expected to be issued in 2019. The Minister of Economy said publicly that increased foreign ownership would be permitted in sectors of strategic importance including technology, space, renewable energy, and artificial intelligence.

Foreign investors expressed concern over spotty intellectual property rights protection, a lack of regulatory transparency, and weak dispute resolution mechanisms and insolvency laws.  In March 2019, the Abu Dhabi Judicial Department oversaw the first restructuring of a UAE company under the bankruptcy law issued in 2016. Labor rights and conditions, although improving, continue to be an area of concern as the UAE prohibits both labor unions and worker strikes.

Free trade zones form a vital component of the local economy, and serve as major re-export centers to other markets in the Gulf, South Asia, and Africa.  U.S. and multinational companies indicate that these zones tend to have stronger and more equitable frameworks than the onshore economy. For example, in free trade zones, foreigners may own up to 100 percent of the equity in an enterprise; have 100 percent import and export tax exemptions; have 100 percent exemption from commercial levies; and may repatriate 100 percent of capital and profits.  Commercial transactions in most free trade zones are now subject to the five percent VAT.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 23 of 180 http://www.transparency.org/research/cpi/overview 
World Bank “Ease of Doing Business” Report 2018 11 of 190 www.doingbusiness.org/rankings 
Global Innovation Index 2018 38 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($B USD, stock positions) 2017 $16.8 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $39,130 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The UAE is generally open to FDI, citing it as a key part of its long-term economic plans.  The UAE Vision 2021 strategic plan aims to achieve FDI flows of five percent of Gross National Product (GNP), a number one rank for the UAE in the Global Index for Ease of Doing Business, and a place among the top 10 countries worldwide in the Global Competitiveness Index.  The Eight-Point Plan and the Fifty-Year Charter, issued by the ruler of Dubai, Sheikh Mohammed Bin Rashid Al Maktoum, stressed that Dubai is a politically neutral, business-friendly global hub and emphasized the importance of combating corruption.

UAE investment laws and regulations are evolving in support of these goals.  The long-awaited law on foreign direct investment was issued in 2018, and granted licensed foreign investment companies the same treatment as national companies, in certain sectors.

While some laws allow foreign-owned free zone companies to operate “onshore” in some instances, and permit majority-Gulf Cooperation Council (GCC) ownership of public joint stock companies, there remains no national treatment for foreign investors, and foreign ownership of land and stocks is restricted.  Non-tariff barriers to investment persist in the form of restrictive agency, sponsorship, and distributorship requirements, although several emirates have recently introduced new long-term residency visas in an attempt to keep expatriates with sought-after skills in the UAE. Each emirate has its own investment promotion agency.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign companies or individuals are limited to 49 percent ownership/control in any part of the UAE not in a free trade zone.  These restrictions have been waived on a case-by-case basis. The 2015 Commercial Companies Law allows for full ownership by GCC nationals.  Neither Embassy Abu Dhabi nor Consulate General Dubai (collectively referred to as Mission UAE) has received any complaints from U.S. investors that they have been disadvantaged or singled out relative to other non-GCC investors.

Other Investment Policy Reviews

The UAE government underwent a World Trade Organization (WTO) Trade Policy Review in 2016.  The full WTO Review is available at:  https://www.wto.org/english/tratop_e/tpr_e/s338_e.pdf 

Business Facilitation

UAE officials emphasize the importance of facilitating business and tout the broad network of free trade zones as being attractive to foreign investment.  The UAE’s business registration process varies based on the emirate. The business registration process is not available online, and generally happens through an emirate’s Department of Economic Development.  Links to information portals from each of the emirates are available at https://ger.co/economy/197  .  At a minimum, a company must generally register with the Department of Economic Development, the Ministry of Labor, and the General Authority for Pension and Social Security with a required notary in the process.  In 2017, the Department of Economic Development of the Emirate of Dubai introduced an “Instant License” valid for one year, under which investors can obtain a license in minutes without a registered lease agreement.

Outward Investment

The UAE is an important participant in global capital markets, primarily through its various well-capitalized sovereign wealth funds, as well as through a number of emirate-level, government-related investment corporations.

4. Industrial Policies

Investment Incentives

All free trade zones provide incentives to foreign investors.  Outside the free trade zones, the UAE provides no incentives, although the ability to purchase property as freehold in certain favored projects could be considered an incentive to attract foreign investment.

Foreign Trade Zones/Free Ports/Trade Facilitation

There are numerous free trade zones throughout the UAE.  Foreign companies generally enjoy the same investment opportunities within those zones as Emirati citizens.  The chief attraction of free trade zones is that foreigners may own up to 100 percent of the equity in a free trade zone enterprise.  All free trade zones provide 100 percent import and export tax exemption, 100 percent exemption from commercial levies, 100 percent repatriation of capital and profits, multi-year leases, easy access to ports and airports, buildings for lease, energy connections (often at subsidized rates), and assistance in labor recruitment.  In addition, free trade zone authorities provide significant support services, such as sponsorship, worker housing, dining facilities, recruitment, and physical security.

Free trade zones have their own independent authority with responsibility for licensing and helping companies establish their businesses.  Investors can register new companies in a free trade zone, or license branch or representative offices. Free trade zones have limited liability and are governed by special laws and regulations.  Companies in free trade zones seeking to operate within the UAE may be governed by the new Commercial Companies Law, if the laws of the relevant free trade zone permit companies to operate outside of the free zones.

Performance and Data Localization Requirements

The Emiratization Initiative is a federal incentive program that aims to increase the number of Emirati citizens employed within the private sector.  Exact requirements vary by industry, but the Vision 2021 national strategic plan aims to increase the percentage of Emiratis working in the private sector from five percent in 2014 to eight percent by 2021.  Most Emirati citizens are employed by the government or one of its many government-related entities (GREs). A guest worker system generally guarantees transportation back to country of origin at conclusion of employment.  There have been no reports of excessively onerous visa, residence, work permit, or similar requirements inhibiting mobility of foreign investors and their employees. There are government and government authority-imposed conditions on permission to invest, in the form of the 49 percent limitation of ownership/control by foreign individuals or corporations.  The UAE does not force foreign investors to use domestic content in goods or technology or compel foreign IT providers to turn over source code.

All foreign defense contractors with over USD 10 million in contract value over a five-year period must participate in the Tawazun Economic Program, previously known as the UAE Offset Program.  This program also requires defense contractors that are awarded contracts valued at more than USD 10 million to establish commercially viable joint ventures with local business partners, which would be projected to yield profits equivalent to 60 percent of the contract value within a specified period, usually seven years.

In February 2018, the Abu Dhabi National Oil Company piloted a new In-Country Value (ICV) strategy, which gives preference in awarding contracts to foreign companies that use local content and employ Emirati citizens.  UAE government officials have indicated plans to expand the ICV program to other sectors of the economy, and to other emirates, in the coming years.

United Kingdom

Executive Summary

The United Kingdom (UK) actively encourages foreign direct investment (FDI).  The UK imposes few impediments to foreign ownership and throughout the past decade, has been Europe’s top recipient of FDI.  The UK government provides comprehensive statistics on FDI in its annual inward investment report: https://www.gov.uk/government/statistics/department-for-international-trade-inward-investment-results-2017-to-2018.

On June 23, 2016, the UK held a referendum on its continued membership in the European Union (EU) resulting in a decision to leave the EU.  On March 29, 2017, the UK initiated the formal process of withdrawing from the EU, widely known as “Brexit”.  Under EU rules, the UK and the EU had two years to negotiate the terms of the UK’s withdrawal.  At the time of writing, the deadline for the UK’s departure has been extended until October 31, 2019.  The terms of the UK’s future relationship with the EU are still under negotiation, but it is widely expected that trade between the UK and the EU will be more difficult and expensive in the short-term.  At present, the UK enjoys relatively unfettered access to the markets of the other 27 EU member-states, equating to roughly 450 million consumers and USD 15 trillion worth of GDP. Prolonged uncertainty surrounding the terms of the UK’s departure from the EU and the terms of the future UK-EU relationship may continue to detrimentally impact the overall attractiveness of the UK as an investment destination for U.S. companies. 

Market entry for U.S. firms is facilitated by a common language, legal heritage, and similar business institutions and practices.  The UK is well supported by sophisticated financial and professional services industries and has a transparent tax system in which local and foreign-owned companies are taxed alike.  The British pound is a free-floating currency with no restrictions on its transfer or conversion. Exchange controls restricting the transfer of funds associated with an investment into or out of the UK do not exist.

UK legal, regulatory, and accounting systems are transparent and consistent with international standards.  The UK legal system provides a high level of protection. Private ownership is protected by law and monitored for competition-restricting behavior.  U.S. exporters and investors generally will find little difference between the United States and the UK in the conduct of business, and common law prevails as the basis for commercial transactions in the UK.

The United States and UK have enjoyed a “Commerce and Navigation” Treaty since 1815 which guarantees national treatment of U.S. investors.  A Bilateral Tax Treaty specifically protects U.S. and UK investors from double taxation. There are early signs of increased protectionism against foreign investment, however.  HM Treasury announced a unilateral digital services tax which is due to come into force in April 2020, targeting digital firms, such as social media platforms, search engines, and marketplaces, with a 2 percent tax on revenue generated in the UK.  

The United States is the largest source of FDI into the UK.  Many U.S. companies have operations in the UK, including all top 100 of the Fortune 500 firms.  The UK also hosts more than half of the European, Middle Eastern and African corporate headquarters of American-owned firms.  For several generations, U.S. firms have been attracted to the UK both for the domestic market and as a beachhead for the EU Single Market.    

Companies operating in the UK must comply with the EU’s General Data Protection Regulation (GDPR).  The UK has incorporated the requirements of the GDPR into UK domestic law though the Data Protection Act of 2018.  After it leaves the EU, the UK will need to apply for an adequacy decision from the EU in order to maintain current data flows      

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 11 of 180 www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2018 9 of 189 www.doingbusiness.org/rankings
Global Innovation Index 2018 5 of 127 www.globalinnovationindex.org/gii-2018-report
U.S. FDI in partner country (M USD, stock positions) 2017 $747,600 www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $40,530 data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

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

Other Investment Policy Reviews

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

Business Facilitation

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

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

Special Section on the British Overseas Territories and Crown Dependencies

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

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

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

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

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

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

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

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

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

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

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

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

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

The Crown Dependencies:

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

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

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

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

This tax data is current as of April 2019.  

Outward Investment

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

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

4. Industrial Policies

Investment Incentives

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

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

Performance and Data Localization Requirements

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

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

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

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

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

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