Slovakia is a small, open, export-oriented economy, with a population of 5.5 million. Slovakia joined the European Union (EU) and NATO in 2004 and the Eurozone in 2009. Slovakia is an attractive destination for foreign direct investment (FDI), with a favorable geographic location in the heart of Europe, and an investment-friendly regulatory environment. The current ruling coalition took power in March 2020 and has implemented a range of measures to simplify business regulations.
The Slovak economy contracted 5.2 percent in 2020 due to the impact of COVID-19. The country began a prolonged lockdown in October 2020, which is expected to significantly slow the economic recovery. As of March 2021, much of the economy remains shuttered. The hospitality and restaurant sectors have been hit particularly hard by the restrictions.
Employers’ combined social and health contributions are equivalent to 35 percent of wages. The corporate income tax rate is 21 percent for companies with revenues at or above 100,000 euro. The tax rate for companies with revenues below 100,000 euro was lowered to 15 percent in 2020.
Attracting higher value-added investment is a top priority of the current ruling coalition, as well as attracting investment in less-developed regions of Slovakia. Priorities for EU fund spending include reforms to the underperforming education and healthcare systems, and efforts to root out endemic corruption. Inefficiencies in drawing available EU funds persist. In 2020, the Slovak police launched a major anti-corruption drive charging a number of high-ranking judges and prosecutors, two former police presidents, and several high-profile businessmen with corruption-related crimes. The judiciary is also currently undergoing a major reform aimed at improving the efficiency and predictability of the system.
Slovakia remains the largest per capita car producer in the world, with four major car producers and hundreds of suppliers. Manufacturing industries, including automotive; machinery and transport equipment; metallurgy and metal processing; electronics; chemicals; and pharmaceuticals remain attractive and have the potential for further growth.
Positive aspects of the Slovak investment climate include:
Membership in the EU and the Eurozone
An open, export-oriented economy close to western European markets
Investment incentives, including for foreign investors
A firm government commitment to EU deficit and debt targets
A sound banking sector deeply integrated with Europe
Negative aspects of the Slovak investment climate include:
High sensitivity to regional economic developments
Weak public administration, allegations of corruption, and a weak judiciary
Significant regional disparities, suboptimal national transport network
Low rates of public and private R&D investment
Heavy reliance on EU structural funds, chronic deficiencies in allocation of funds
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Slovakia is one of the most open economies in the EU. The government’s overall attitude toward foreign direct investment (FDI) is positive, and the government does not limit or discriminate against foreign investors. FDI plays an important role in the country’s economy, with major foreign investments in manufacturing and industry, financial services, information and communication technologies (ICT), and Business Service Centers, where U.S. companies have a significant presence.
Slovakia’s assets, including skilled labor, EU and Eurozone membership, and a central location in Europe have attracted a significant U.S. commercial and industrial presence, with investments from Accenture, Adient, Amazon, Amphenol, AT&T, Cisco, Dell, Garrett, GlobalLogic, Hewlett-Packard, IBM, Lear, Oracle, U.S. Steel, Whirlpool, and others.
The Ministry of Economy coordinates efforts to improve the business environment, innovation, and support for less-developed regions. Within the Ministry of Economy, the Slovak Investment and Trade Development Agency (SARIO) is responsible for identifying and advising potential investors, providing in-depth information on the Slovak business environment, investment incentives, the process for setting up a business, as well as advising on suitable locations and real estate leasing. The government encourages investment through tax incentives and grants to support employment, regional development, and training. Section Four of the Regional Investment Aid Act (57/2018) specifies the eligibility criteria for receiving assistance.
According to the National Bank of Slovakia’s preliminary data, in 2019, inward FDI flows to Slovakia reached 2.2 billion EUR, and inward FDI stock was 54 billion EUR. EU Member States, including the Netherlands, Austria, the Czech Republic, Luxembourg, and Germany, are the largest foreign investors in Slovakia. South Korea remains by far the largest investor among non-EU countries.
The Act on Special Levy on Regulated Sectors (235/2012 Coll., and later amendments) imposes a special tax on regulated industries, including the energy and network industries, insurance companies, electronic communications companies, healthcare, air transport, and others. The levy applies to profits generated from regulated activities above 3 million EUR.
The Slovak government requires ride-sharing and app-based hospitality platforms that are active on the local market to register a permanent office in Slovakia for tax collection purposes. Platforms that have not yet registered an office must pay either a 19 or 35 percent withholding tax on the fees it pays to a foreign entity, based on the residence of the recipient of such fee and whether bilateral taxation treaties exist.
The government actively works with investors to keep them operating in the country. In late 2020, Volkswagen, already one of the largest private employers in the country, credited a decision to expand its investment, in part, to the government’s assistance in negotiations with local partners.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity in Slovakia. Businesses can contract directly with foreign entities. Private enterprises are free to establish, acquire, and dispose of business interests, but must pay all Slovak obligations of liquidated companies before transferring any remaining funds out of Slovakia. All new businesses registered from October 2020 onwards must provide the national registration numbers of their partners, authorized representatives, and members of the boards of directors and supervisory boards when registering the business. Foreigners must provide their passport or residence permit numbers when registering the business.
In February 2021, Slovak Parliament approved legislation, over the opposition of representatives of the business community, requiring government review of ownership transfers larger than 10 percent of companies considered “critical infrastructure” – which includes a number of companies with foreign ownership. The law was passed through a fast-track procedure in response to a reported demand from Russian Sberbank that Slovakia’s electricity generator Slovenske Elektrarne back its debt to the bank with equity. The Economy Ministry has said that it will release a more robust Investment Screening Mechanism in 2021, which will be based on the EU Investment Screening Regulation 2020/1298, and will replace the fast-tracked legislation.
Slovakia has no formal performance requirements for establishing, maintaining, or expanding foreign investments. Large-scale privatizations are possible via direct sale or public auction. There are no formal requirements to approve FDI, though the government ultimately approves investment incentives. If investment incentives apply, the Economy Ministry manages the associated government approval process. The Act on Regional Investment Aid (57/2018) specifies that only three categories of projects may be subsidized: industrial production, technology, or business services. An amendment to the Act in force from January 2021 slightly relaxed the conditions for receiving investment aid, increasing the maximum time to finish work on the investment project from three to five years.
The Slovak government treats foreign entities established in Slovakia in the same manner as domestic entities, and foreign entities face no impediments to participating in R&D programs financed and/or subsidized by the Slovak government. Since January 2020, up to 200 percent of R&D spending is tax deductible.
The Slovak government holds stakes in a number of energy companies. It has historically been less open to private investment in energy assets that it considers to be in the national security interest. There are no domestic ownership requirements for telecommunications and broadcast licenses. The Act on Civil Air Transport (143/1998 Coll.) sets out rules for foreign operators seeking to operate in Slovakia.
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In its Investment Policy Monitor, The United Nations Conference on Trade and Development (UNCTAD) highlights Slovakia’s 2018 adoption of the Act on Regional Investment Aid and notes that tourism was excluded. The report highlights that income tax exemptions are the primary form of state aid, but direct subsidies for land purchase are also available, and investors may apply for job creation contributions from the government or may be permitted to let or own property at lower than a market value.
According to the World Bank’s Doing Business 2020 report, Slovakia ranks 118 out of 190 countries surveyed on the ease of starting a business, up from 127 in 2019. It takes, on average, 21.5 days to start a business versus 26.5 days in 2019, and involves seven procedures. There are business development companies that provide assistance with navigating the process of establishing a new business. The main agencies with which a company must register are the business registry, tax office, and social security agency.
In 2020, the Economy Ministry presented more than 500 measures that will decrease the administrative burden on businesses. More than 100 of these measures were approved by Parliament in July 2020. The Economy Ministry also announced plans for regular reviews of existing legislation to ensure it still serves its purpose, and stricter reviews during the transposition of EU legislation to ensure that the laws are not adding administrative burden beyond what is required.
The Central Government Portal “ slovensko.sk ” provides useful information on e-Government services for starting and running a business, citizenship, justice, registering vehicles, social security, etc. Checklists of procedures necessary for registrations, applications for permits, etc., are currently available on the websites of the business registry, tax office and social security agency. The Economy Ministry is working on streamlining the information into one common platform. The government has also announced plans for a major overhaul to the e-Government service portal to streamline access to public services.
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Due to their limited size, Slovak companies have not made significant outward foreign direct investments.
Several state agencies share responsibility for facilitating outward investment and trade. SARIO is officially responsible for export facilitation and attracting investment. The Slovak Export-Import Bank (EXIM Bank) supports exports and outward investments with financial instruments to reduce risks related to insurance, credit, guarantee, and financial activities; it assists both large companies and small and medium sized enterprises (SMEs), and is the only institution in Slovakia authorized to provide export and outward investment-related government financial assistance. The Ministry for Foreign and European Affairs runs a Business Center that provides services for exporters and helps identify investment opportunities. Slovakia’s diplomatic missions, the Ministry of Finance’s Slovak Guarantee and Development Bank, and the Deputy Prime Minister’s Office for Investments and Regional Development also play a role in facilitating external economic relations. Slovakia does not restrict domestic investors from investing abroad.
Slovakia has signed 54 Bilateral Investment Treaties (53 remain in force) and another 72 Treaties with Investment Provisions (57 remain in force) both before and after accession to the EU. Some of these are legacies of the former Czechoslovakia, while others have come into force following independence in 1993. The 1992 U.S.-Slovakia Bilateral Investment Treaty governs the basic framework for investment protection and dispute resolution between the two countries. An amended bilateral investment treaty entered into force on May 14, 2004, after Slovakia joined the EU. Slovakia signed a Bilateral Income Tax Treaty with the United States in 1993.
The United States and Slovakia agreed to the Foreign Account Tax Compliance Act (FATCA) in July 2015, and Slovakia subsequently approved the Act on Automatic Exchange of Information on Financial Accounts (359/2015) in order to fully comply with FATCA. Slovak financial institutions are now required to report tax information of American account holders to the Slovak Government, which then forwards that information to the U.S. Internal Revenue Service (IRS).
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Companies in Slovakia frequently complain about the country’s complex and unpredictable legislative environment. The current ruling coalition is making significant efforts to address this issue. Starting January 1, 2021, the Economy Ministry has said that it will work on a “one-in-one-out” principle, meaning every new regulation that will increase administrative burden by 1 euro will have to be matched with a proposal to decrease the administrative burden by 1 euro. The Economy Ministry has announced it will follow a “one-in-two-out” principle starting January 2022.
Regulations are drafted on the local and national level, those on the national level typically have more direct consequences to foreign investors. The Legislative and Information Portal of the Ministry of Justice, Slov-Lex, is a publicly accessible centralized online portal for laws and regulations, including draft texts and information about the inter-agency and public review processes. Draft bills, including investment laws proposed by ministries through a standard legislative procedure, are available for public comment through the portal. The public, however, is often granted little time to comment on draft legislation, and there is no obligation for a government reaction to comments prior to final submission to the cabinet.
While the process of adopting new laws and regulations follows clearly defined rules, MPs or parliamentary groups have the option of proposing fast-tracked draft bills. This process has no rules guaranteeing opportunities for public comment, thus rendering the legislative process less predictable and transparent. During the COVID-19 pandemic there has been a sharp increase in the number of laws adopted this way. While there were a total of 28 laws passed using fast-track procedures during the previous four years, there have already been 67 such laws adopted between March 2020 and February 2021. Though the use of extraordinary procedure is conditioned on extraordinary circumstances, potential threats to the public safety, or imminent economic damage, the government has used the procedure to approve bills seemingly unconnected to these criteria.
Regulations are, in most cases, not reviewed on the basis of scientific data assessments. At their discretion, analytical institutes at some ministries may produce data-driven assessments of proposed policies or large investment projects. However, the selection of projects for assessment occurs internally within the institutes or ministries without the opportunity for public comment. Assessments are usually published once completed.
The Commercial Code ( 98/1991 Coll.) and the Act on Protection of Economic Competition (136/2001 Coll.) govern competition policy in Slovakia. As an EU Member State, Slovakia follows relevant EU legislation. The Anti-Monopoly Office, a part of the EU’s European Competition Network (ECN), is an independent state administrative body responsible for ensuring a competitive marketplace.
The Public Procurement Office (PPO) supervises and administers public procurement. Public procurement legislation is frequently amended, and challenges remain to ensure fair competition and eliminate corruption. The PPO has made efforts to improve transparency and communication with stakeholders, as well as to strengthen supervisory activities. All procurers, including ministries and municipalities, may now publish online tenders for low-value purchases, increasing transparency and increasing possibilities for businesses to participate in public tenders. In December 2020, the government proposed major reforms of the public procurement system aimed at streamlining the process by increasing the threshold for when public tenders are required, moving procurement complaint proceedings from the PPO to the courts, and removing the PPO’s authority to request information from the police or the financial administration, as well as other measures. The proposals were met with heavy criticism from anti-corruption campaigners as well as from the PPO itself claiming the reforms would undermine its independence, decrease oversight over public tenders, and increase corruption. As of March 2021, there was no agreement in the government on the final wording of the proposed reforms.
As an EU Member State, Slovakia conforms to the European System of National and Regional Accounts (ESA 2010), which is the EU’s most recent internationally compatible accounting framework, as well as the International Financial Reporting Standards (IFRS-EU). Slovakia meets the minimum criteria of the U.S. Fiscal Transparency Report. Budget proposals, enacted budgets, and closing statements are substantially complete and publicly available. Departures from budget goals are common. The current ruling coalition introduced a number of changes to the 2021 State Budget that have improved transparency and led to better projections compared to previous years. The Ministry of Finance publishes monthly reviews of budget execution, which provide an overview of public revenues and expenditures broken down by source and type. Annex 6 of the State budget describes the Debt Management Strategy including volume, total cost, debt service, structure, financing, forecast, and risk assessments.
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Legislative and Information Portal Slov-Lex: https://www.slov-lex.sk/domov(Note: all legal acts and regulations mentioned throughout this report can be found on this portal.)
Slovakia is subject to European Court of Justice (ECJ) jurisdiction and must comply with all EU legislation and standards, including the Trade Facilitation Agreement (TFA). The national regulatory system is enforced in areas not governed by EU regulatory mechanisms. Slovakia is a WTO member, and the government notifies the WTO Committee on Technical Barriers to Trade of technical regulations.
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Slovakia is a civil law country. The Slovak judicial system is comprised of the Constitutional Court and general courts, including the Specialized Criminal Court and the Supreme Court. General courts decide civil, commercial, and criminal matters, and review the legality of decisions by administrative bodies. The Specialized Criminal Court focuses on cases involving corruption, organized crime, serious crimes like premeditated murder, crimes committed by senior public officials, and crimes related to extremism, such as hate crimes. Enforcement actions are appealable and are adjudicated in the national court system. The right to appeal against regulations is limited to some state institutions and selected public officials.
The Slovak Constitution and the European Convention of Human Rights guarantee property rights. Slovakia has a written Commercial Code including contract law in the civil and commercial sectors. The basic framework for investment protection and dispute resolution between Slovakia and the U.S. is outlined in the 1992 U.S.-Slovakia Bilateral Investment Treaty.
Court judgments by EU Member States are recognized and enforced in compliance with existing EU Regulations. Third country judgments are governed by bilateral treaties or by the Act on International Private Law. Contracts are enforced through litigation or arbitration – a largely applied form of alternative dispute resolution.
Laws guarantee judicial independence, however, in practice, public perception of judicial independence is among the lowest in the EU. A Focus Agency public survey from August 2019 commissioned by the Supreme Court Office showed 64 percent of Slovaks lack full trust in Slovak courts. Accountability mechanisms ensuring judicial impartiality and independence exist and are increasingly utilized. In 2019 and 2020 numerous investigations into judicial corruption were opened and almost 20 judges were arrested on suspicion of corruption. Businesses and NGOs report that the justice system remains relatively slow and inefficient and suggest verdicts are unpredictable and are often poorly justified. Judges remain divided on the need for reform. Investors generally prefer international arbitration to resolution in the national court system.
Laws and Regulations on Foreign Direct Investment
Slovakia is a politically and economically safe destination for foreign investment. Investment incentives are available to motivate investors to place new projects in regions with higher unemployment and to attract projects with higher added value. In February 2021, the government approved a law that allows the Economy Ministry to review and potentially stop ownership transfers larger than 10 percent of companies classified as critical infrastructure.
The Slovak Investment and Trade Development Agency (SARIO) is a specialized government agency in charge of attracting foreign investments to Slovakia and serves as a one-stop shop for foreign investors. Their website offers easily accessible information on laws, rules, procedures and reporting requirements relevant to investors or those wanting to register a business. The Slovak Business Agency (SBA) runs a National Business Center (NBC) in Bratislava and several other cities; it provides information and services for starting and establishing businesses. Startups can use a simplified procedure to register their company in order to facilitate the entry of potential investors. The Interior Ministry operates Client Centers around the country where many formal administrative procedures can be completed under one roof.
Slovakia ranked 45 out of 190 countries in the World Bank’s Doing Business 2020 ranking.
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The Anti-Monopoly Office of the Slovak Republic is an independent body charged with the protection of economic competition. The Office intervenes in cases of cartels, abuse of a dominant position, vertical agreements, and controls compliance of mergers with antitrust law. The Office always specifies if its intervention decision can be appealed based on the relevant laws. The key antitrust legislation regarding fair competition is the Competition Law (136/2001 Coll.) Slovakia complies with EU competition policy.
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The Slovak Constitution guarantees the right to property. There is an array of legal acts stipulating property rights. The Act on Expropriation of Land and Buildings (282/2015 Coll.) mandates that expropriation must only occur to the extent necessary, be in the public interest, provide appropriate compensation, and shall only occur when the goal of expropriation cannot be achieved through agreement or other means.
The most recent case of expropriation is from 2016, when Slovak government began expropriating land needed for the construction of an automobile manufacturing plant and accompanying road infrastructure. The state proceeded with expropriation only after it failed to directly purchase the land from the owners.
Dispute Settlement
ICSID Convention and New York Convention
Slovakia is a contracting state to the International Centre for Settling International Disputes (ICSID) and the World Bank’s Commercial Arbitration Tribunal (established under the 1966 Washington Convention). Slovakia is a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitrage Awards, which obligates Slovakia to accept binding international arbitration. The Finance Ministry leads on bilateral investment treaty matters and manages and represents Slovakia in international arbitration. Investment contracts with foreign investors in Slovakia are covered by respective ministries depending on the sector, in most cases by the Ministry of Economy.
Investor-State Dispute Settlement
The basic framework for investment protection and dispute resolution between Slovakia and the United States is governed by the 1992 U.S.-Slovakia Bilateral Investment Treaty with an additional protocol that came into force in 2004.
To date, twelve known cases of international arbitration have concluded, all of which Slovakia won. In one of the international arbitrations, a U.S. investor made claims under the U.S.-Slovakia Bilateral Investment Treaty, but respected the decision of ICSID, which ruled in Slovakia’s favor.
The legal system generally enforces property and contractual rights, but decisions may take years, thus limiting the relevance of the courts in dispute resolution. According to the World Bank Doing Business 2020 report, Slovakia ranked 46 out of 190 countries in the “enforcing contracts” indicator, with a 775-day average for enforcing contracts. The report notes that Slovakia made enforcing contracts easier by implementing electronic processing services. Slovak courts recognize and enforce foreign judgments, subject to the same delays. Although the commercial code generally appears to be applied consistently, the business community continues to cite a lack of legislation protecting creditor rights, corruption, political influence, lengthy procedures, and weak enforcement of court rulings as persistent problems. U.S. and other investors privately described instances of multi-million-dollar losses that were settled out of court because of doubts about the court system’s ability to offer a credible legal remedy.
International Commercial Arbitration and Foreign Courts
There are two acts applicable to alternative dispute resolution in Slovakia – the Act on Mediation (420/2004 Coll.) and the Act on Arbitration (244/2002 Coll.). The Slovak Act on Arbitration is largely modeled after UNCITRAL model law. Local courts in Slovakia recognize and enforce foreign arbitral awards.
The alternative dispute resolution mechanisms in Slovakia are relatively fast compared to the court system. The list of permanent arbitration courts authorized by the Slovak Ministry of Justice is published on the Ministry’s website. Decisions should be reached within 90 days of the date when the lawsuit was filed. It is possible to lodge an appeal to a civil court against an arbitration decision within three months of the date of its issuance or lodge a complaint about an arbitration decision to the chairman of the permanent arbitration court or to the Ministry of Justice.
Alternative dispute resolution proceedings can also be initiated by filing a motion with one of the alternative dispute resolution entities from a list maintained by the Ministry of Economy. Dispute settlement takes place through written communication and has a 90-day timeframe for completion. Unless the parties reach an agreement, the alternative dispute resolution entity will prepare a justified opinion. If any attempt to settle the dispute by mutual agreement fails, and the arbitration entity issues an opinion, there is no avenue for appeal.
The other option for extrajudicial dispute settlement is mediation. Mediation can be used even after a court proceeding has started. The agreement resulting from mediation is legally enforceable only if it has the form of a notarial record or court settlement. The list of mediators is published on the website of the Association of Mediators. In the case of an unsuccessful mediation, parties can still take the case to arbitration or to court.
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The Law on Bankruptcy and Restructuring (377/2016 Coll.) governs bankruptcy issues. Companies can undergo court-protected restructuring, and both individuals and companies can discharge their debts through bankruptcy. The International Monetary Fund praised the Act for speeding up the process, strengthening creditor rights, limiting the discretion bankruptcy judges may use in adjudicating cases, and randomizing the allocation of cases to judges to reduce potential corruption. The Act contains provisions to prevent preferential treatment for creditors over company shareholders, reduce arbitrariness in bankruptcy administrators’ conduct, and impose stricter liability rules for those initiating the bankruptcy proceedings. The Commercial Code also contains provisions on bankruptcy and restructuring preventing speculative mergers during ongoing bankruptcy proceedings.
Slovakia ranked 46 out of 190 in the World Bank’s Doing Business 2020 ranking of the ease of resolving insolvency (42 in 2019), with an average of four years for resolving insolvency.
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The Economy Ministry manages and coordinates investment aid with other relevant agencies (see Policies Towards Foreign Direct Investment in Chapter 1). Eligibility for investment incentives is defined in the Act on Regional Investment Aid (57/2018 Coll.). Investors are encouraged to implement projects in less-developed regions, and to invest in high value-added activities.
Investment incentives are available to foreign and domestic investors for projects in sectors including industrial production, technology, and shared service centers. The incentives are provided as tax relief, cash grants, contributions for newly created jobs, and transfers of state or municipal property at a discounted price. Eligible costs include acquisition of land, acquisition and construction of buildings, acquisition of technology equipment and machinery, as well as intangible assets (e.g., licenses, patents, etc.) and wages of new employees for a period of two years.
Apart from investment aid, the Economy Ministry offers innovation vouchers and special loans through its Investment Fund. Individual ministries run EU-supported projects in their respective areas of responsibility.
State aid granted by the Slovak government must comply with valid EU regulations. The Anti-Monopoly Office of the Slovak Republic is the coordinating body for state aid granted by individual ministries, as per the Act on State Aid (358/2015 Coll.), and there is a dedicated state aid web portal.
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Slovakia eliminated all foreign trade zones and free ports in 2006.
Performance and Data Localization Requirements
There are no special requirements for foreign IT providers to turn over their source code or to provide access to encrypted documents. However, according to the Act on Electronic Communications (351/2011 Coll.), entities providing public networks or public services that use coding, compression, encryption, or other form of concealing signal transfer must, at their own expense, provide information obtained through wiretapping and network traffic recording or monitoring to relevant authorities. Slovakia follows the EU General Data Protection Regulation (GDPR) regulating data protection and privacy. There are no automated or systemic mechanisms in place enforcing rules on local data storage. Slovakia follows the EU regulation on the free flow of non-personal data 2017/0228 (COD) that sets out the principle that non-personal data is allowed to be located and processed anywhere in the EU without unjustified restrictions, with some exceptions on the grounds of public security. The relevant authority for data localization is the Deputy Prime Minister’s Office for Investments and Digitalization and the Office for Personal Data Protection.
Slovakia does not mandate local employment or that host country nationals should serve in roles of senior management or boards of directors, follow “forced localization,” or impose conditions on permissions to invest.
Foreign entities have equal access to investment incentives, as per the Act on Regional Investment Aid (57/2018 Coll.). For more details on eligible projects, please see Chapter 1 on Investment Incentives.
The Alien Police Department issues temporary and long-term residence permits as specified in the Act on Residency of Foreign Nationals (404/2011 Coll.; 108/2018 Coll.). Immigration regulations do not differ significantly from those of other EU countries, however the quality of customer service at the Alien Police Department is reportedly very low. Slovak authorities have made some concessions to improve this process for American citizens, including accepting FBI background checks that are up to 90 days expired and accepting applications at the Slovak Embassy in Washington, D.C. prior to departure for Slovakia. The U.S. Embassy’s Consular Section has reported a drop in the number of Americans looking for help with this issue since the implementation of these changes. Even with these changes, authorities are still inconsistent in their recommendations or enforcement of regulations. Some Americans have also reported low level bribery solicitations at the registration center, although less since the introduction of the new online registration system.
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The mortgage market in Slovakia is growing rapidly, and a reliable system of record keeping exists. Secured interests in property and contractual rights are recognized and enforced.
Less than 10 percent of the land in Slovakia lacks a clear title, however, there are instances when a property’s owner is unknown. In such cases, real estate titling can take a significant amount of time to determine. Legal decisions may take years, limiting the utility of the court system for dispute resolution.
Parcels commonly have a very high number of co-owners. There are currently 8.4 million parcels, 4.4 million recorded owners of land, and 100 million co-owning relations. On average, one parcel has 11.93 co-owners, and one owner has an average of 22.74 parcels. To address this issue, the Agriculture Ministry started a robust land ownership reform in 2019, projected to last 30 years, to gradually consolidate parcels and simplify ownership records in the cadaster database. In 2020, 141 land readjustments were initiated. A dedicated web portal allows verification of information about land and property ownership.
Foreigners can acquire real property without restrictions. In February 2019, the Slovak Constitutional Court ruled against a Law on Agricultural Land Ownership (140/2014 Coll.), which indirectly limited the sale of land to foreigners by requiring at least three years of previous agricultural business activity and having at least 10 years of residency in Slovakia.
The Agriculture Ministry announced plans to submit amendments to the respective laws including 140/2014 Coll. in 2021, addressing acreage limits; establishing preemption rights for local governments in order to prevent speculative leases and land sales; and ensuring transparent publication, registration, control, and regulation of the agricultural land market.
Squatting is illegal in Slovakia and ownership of unoccupied property will not revert to squatters or other parties unless they are entitled to own the land.
Slovakia was 8 out of 190 countries in the World Bank’s 2020 Doing Business “registering property” indicator, averaging 16.5 days to register a property compared to average of OECD high income countries of 23.6 days.
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The Slovak legal system provides strong protection for intellectual property rights (IPR). The country is bound by robust EU regulations and adheres to major international IPR treaties, including the Berne Convention, the Paris Convention, and numerous others on design classification, registration of goods, appellations of origin, patents, etc. The protection of IPR falls under the jurisdiction of two agencies. The Industrial Property Office of the Slovak Republic is the central government body that oversees industrial property protection, including patents, and the Culture Ministry is responsible for copyrights, including software. The Financial Administration, which is part of the Finance Ministry, plays an important role in enforcing IPR and deals with customs, which fights against counterfeit goods. In the case of IPR infringement, rights holders can bring a civil lawsuit in the district courts in Bratislava, Banska Bystrica, and Kosice and, if applicable, have the right to claim lost profits. The courts can issue injunctions to prevent further infringement of IPR. In certain cases, violation of IPR can be considered a criminal offense.
No major IPR-related laws were passed in 2020. Recent EU Directives on copyright (2019/790 and 2019/789) are required to be transposed by June 2021. Slovakia is not included in USTR’s Special 301 Report or the Notorious Markets List.
There were 2,781 suspected breaches of IPR in 2019 for goods imported from third countries (up from 1,901 cases in 2018, especially in the form of perfumes, cosmetics, jewelry and other accessories, sports shoes, and toys), and the value of seized counterfeit goods increased nine-fold from 2018 to 6.6 million EUR. The number of domestic IPR infringement cases grew from 996 in 2018 to 1,108 in 2019 but with a decrease in value in 2019 by 22 percent to 2.1 million EUR. In February 2021, the Financial Administration uncovered the largest illegal cigarette production site located in Slovakia to date worth 6 million EUR in VAT and excise duty.
For additional information about treaty obligations and points of contact at local IPR offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .
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The Bratislava Stock Exchange (BSSE) is a member of the Federation of European Securities Exchanges (FESE). An effective regulatory system exists that encourages and facilitates portfolio investment. BSSE is a joint-stock company whose activities are governed primarily by the Stock Exchange Act No 429/2002 (Coll.) on the Stock Exchange and Stock Exchange Rules. The stock market in Slovakia is among the smallest in Europe, and dominated by bonds, which constitute 95 percent of sales volume. In 2020, the total volume of transactions at the BSSE was slightly more than $220 million (a 17 percent decline compared to 2019). As of December 31, 2020, book-entry securities with the total nominal value Market capitalization of shares was roughly $3 billion and market capitalization of bonds $51 billion.
The European Single Market and existing European policies facilitate the free flow of financial resources. Slovakia respects International Monetary Fund (IMF) Article VIII by refraining from restricting payments and transfers for current international transactions. Credit is allocated on market terms in Slovakia and is available to foreign investors on the local market.
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Slovakia became part of the Euro system, which forms the central banking system of the euro area within the European System of Central Banks, upon its integration into the Eurozone on January 1, 2009. The Central Bank of Slovakia (NBS) is the independent central bank of the Slovak Republic.
Most banks operating in Slovakia are subsidiaries of foreign-owned institutions. Slovak branches operate conservatively and showed strong resilience during the 2009 financial crisis and subsequent EU-wide stress tests. The combined total assets of the financial institutions active in the Slovak market were over 85 billion euro at the end of 2019.
While the COVID-19 pandemic will have significant negative impacts on the profitability of the banking sector, simulations of both baseline and adverse scenarios of the economic recovery in NBS’ Financial Stability Report suggest that the stability of the banking sector is not threatened. Despite the pandemic crisis, the non-performing loan ratio for the first eight months of 2020 fell from 2.9 percent to 2.6 percent. The report points to a risk of a sharp increase in non-performing loans in the adverse scenario, with up to 7.7 percent of loans to non-financial corporations and 3.2 percent of loans to households potentially becoming non-performing by end of 2021. The COVID-19 pandemic has resulted in a sharp increase in the risk of firm bankruptcies with approximately 11.7 to 13.7 percent of companies at risk of insolvency by the end of 2021. The banking sector’s aggregate total capital ratio increased from 18.2 percent to 19.5 percent.
Foreign nationals can open bank accounts by presenting their passport and/or residence permit, depending on the bank.
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Slovakia joined the Eurozone on January 1, 2009. The exchange rate is free floating.
The Foreign Exchange Act (312/2004) governs foreign exchange operations and allows for easy conversion or transfer of funds associated with an investment. The Act liberalized operations with financial derivatives and abolished the limit on the export and import of banknotes and coins (domestic and foreign currency). It also authorizes Slovak residents to open accounts abroad and eliminates the obligation to transfer financial assets acquired abroad to Slovakia. Slovakia meets all international standards for conversion and transfer policy. Non-residents may hold foreign exchange accounts. No permission is needed to issue foreign securities in Slovakia, and Slovak citizens are free to trade, buy, and sell foreign securities.
Remittance Policies
The basic framework for investment transfers between Slovakia and the United States is set within the 1992 U.S. – Slovakia Bilateral Investment Treaty.
Following Slovakia’s approval of the Foreign Account Tax Compliance Act (FATCA) in July 2015, and per the Act on Automatic Exchange of Information on Financial Accounts (359/2015), Slovak financial institutions are obligated to report tax information of American account holders to the Slovak Government, which then forwards that information to the U.S. Internal Revenue Service (IRS).
Slovakia does not impose any limitations on remittances. Dividends are taxed at 7 percent. Transfer pricing for controlled transactions must be based on market prices. An obligation to pay a 21 percent tax applies to companies that are moving their assets or activities abroad.
Please consult the following websites for more information:
Slovakia does not maintain a Sovereign Wealth Fund (SWF). Slovak Investment Holding (SIH) is a fund of funds fully owned by the Slovak Guarantee and Development Bank. Resources are allocated as revolving financial instruments, through financial intermediaries or directly to final beneficiaries, and focus on strategic investment priorities in transport infrastructure, energy efficiency, waste management, SMEs, and social economy.
Please consult the following websites for more information:
There are 95 fully or partially State-Owned Enterprises (SOEs) in Slovakia that employ approximately 85,000 employees. SOEs are mostly active in strategic sectors, including health and social insurance, aerospace, ground transportation, and energy. Gas industry SOEs are the most profitable with SPP Infrastructure (gas infrastructure) at the top of the list with a profit of 584 million euro in 2020. Slovak Rails, a rail infrastructure company with a net loss of 2 million euro in 2019 and assets worth 3.7 billion euro, and Slovak Post, with a net income of 1.4 million euro in 2019 and assets worth 500 million euro, are the two biggest employers in Slovakia, each with around 13,000 employees. In an effort to improve competitiveness, Slovak Post announced layoffs of 6 percent of its employees in January 2021.
Among fully state-owned SOEs Narodna Dialnicna Spolocnost (National Highway Company) has the most assets, totaling 10 billion euro. The second biggest SOE in terms of assets is SPP Infrastructure with 6 billion euro. The 30 biggest fully state-owned enterprises have assets of roughly 25 billion euro. In 2019, the Slovak budget received roughly 430 million euro in revenue from SOEs with 300 million euro coming from SPP and another 110 million euro from key electricity distribution companies ZSE, SSE, and VSE. Slovenske Elektrarne, a major utility company with 34 percent state ownership, has assets worth 10.5 billion euro. According to the government’s Value for Money unit, 37 percent of SOEs have a good financial health and the same percentage have serious financial problems.
In 2019, Transparency International Slovakia (TIS) published a ranking of 100 Slovak companies with state, municipal, and regional ownership, assessing how open these companies are when it comes to publishing economic results and access to information. Transparency International has deemed the SOEs to be generally non-transparent and with limited openness to public control. In February 2021, the Supreme Court responded to a TIS complaint regarding SPP’s concealment of the salaries paid to its board members, ruling that SOEs manage public funds and citizens have a right to know how they manage them. Wider concerns over transparency of public tenders persist, including those involving the SOEs.
Most SOEs are structured as joint-stock companies governed by boards that include government representatives and government appointees, and the government plays a key role in SOE decision making. Significant SOEs are required to publish their audited financial statements in accordance with the Accounting Act. They submit their audited financial statements to the Finance Ministry’s dedicated portal.
Most ministries publish a list of companies they own on their web portals. The list includes SOE equities and profits broken down by enterprise and is publicly available.
Slovak SOE ownership is exercised in accordance with the Act on State-Owned Enterprises (111/1990) and is consistent with the OECD Guidelines on Corporate Governance for SOEs.
Please consult the following website for more information:
Foreign investors are free to participate in privatization programs for SOEs, however, no privatization efforts are currently under way. Privatization programs are usually executed through direct sale, although Slovakia tends to complete major privatization projects through public tenders, especially in the energy sector.
According to Act on Transfer of State Assets to Other Entities (92/1991 Coll.), the appropriate ministry plays a central role in the SOE privatization process. Previous privatization programs commonly resulted in foreign investors bidding and winning the tenders.
Responsible Business Conduct (RBC) has not yet been officially defined nor standardized by the Slovak government. The current ruling coalition pledged in its 2020 to 2024 Program Statement to become more responsible towards business and the environment. The Ministry of Labor, Social Affairs and Family continues to refer to Howard R. Bowen’s 1953 text on Social Responsibilities of the Businessman for its definition of social responsibility. The Ministry has not updated the generic webpage on social responsibility nor boosted the awareness of RBC during recent years.
Slovakia is a party to the Aarhus Protocol. Consumer protection is guaranteed and enforced through the Civil Rights Act, Consumer Protection Act, and the Act on E-Commerce. Slovakia has ratified the Extractive Industry Transparency Initiative (EITI). As an EU member state, Slovakia adheres to the 2017/821 regulation based on the Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. Also, as an OECD member, Slovakia adheres to the OECD Guidelines for Multinational Enterprises. A National Contact Point (NCP) was established to promote these guidelines among the wider public (business community, government, trade unions, etc.) and to help resolve RBC disputes. The latest NCP annual report available on their website was issued in 2016.
The Acts on Environmental Impact Assessment (24/2006), Air (137/2010), and Waste (313/2016) govern the environmental protections affecting businesses. The mandatory Environmental Impact Assessment (EIA) process applies to a number of industries, including mining, energy, steel, chemical, pharmaceutical, wood, food, and agriculture, as well as infrastructure projects. The Act on Air defines legal obligations for businesses causing emissions, including emissions limits, monitoring, and reporting in line with valid national and EU legislation. The Act on Waste establishes the obligations for companies producing packaging, as well as rules on waste recycling and recovery, and other waste management issues.
The Ministry of Environment intends to revise the Low Carbon Strategy and the National Integrated Energy and Climate Plan, with the goal to transition to a carbon neutral economy by 2050, including stopping coal power production at the Novaky Power Plant by 2023. The Ministry also aims to introduce a Forest Stewardship Council for state-owned forests.
There have not been any specific human or labor rights violations reported, though Amnesty International reports Roma face widespread discrimination and social exclusion in Slovakia.
Many companies and NGOs adhere to the principles of RBC and actively promote and advocate for this concept. The most significant program is the Via Bona Awards, developed by the Pontis Foundation, which annually recognizes Slovakia’s best RBC programs. The American Chamber of Commerce in Slovakia also plays an important and active role in promoting and advocating for RBC.
Slovakia is not a signatory of The Montreux Document on Private Military and Security Companies nor a participant in the International Code of Conduct for Private Security Service Providers’ Association (ICoCA).
The NCP can be contacted here:
Ministry of Economy of the Slovak Republic
The Strategy Unit
Department of Bilateral Trade Cooperation
Mierova 19
827 15 Bratislava 212
Slovak Republic
Tel.: +421 2 4854 2309
E-mail: nkm@mhsr.sk
Slovakia is a party to international treaties on corruption. Among them are the OECD Convention on Combating Bribery of Foreign Public Officials, the UN Anti-Organized Crime Convention, the UN Anti-Corruption Convention, and the Criminal Law Convention on Corruption and Civil Law Convention on Corruption. Slovakia is a member of the Group of States against Corruption (GRECO).
The giving or accepting of a bribe constitutes a criminal act according to Slovak law. Slovak criminal law incorporates criminal liability for legal persons, including corporations. Nevertheless, corruption continues to be among the most serious issues for the business community. According to the Special Eurobarometer survey of December 2019, 79 percent of respondents believed that corruption is part of Slovakia’s business culture. In the 2020 Transparency International global corruption perception ranking Slovakia ranked 60th place, down from 59 in 2019. There is no data available on whether U.S. firms identify corruption as an obstacle to foreign direct investment. In a March 2018 survey by five foreign chambers of commerce (Slovak-German Chamber of Commerce, Slovak-Austrian Chamber of Commerce, Dutch Chamber of Commerce, Swedish Chamber of Commerce, and Advantage Austria), respondents highlighted the fight against criminality and corruption as the largest problem among evaluated investment criteria.
NGO analysts and GRECO point out that conflict of interest and asset declaration regulations lack the necessary level of detail to be implemented and enforced in practice. There is a high threshold for reporting gifts accepted by judges and prosecutors. Government authorities do not require private companies to establish internal codes of conduct that would prohibit bribery of public officials, although some companies have adopted such measures voluntarily. The law requires that public entities and private companies having at least 50 employees set up an internal channel to report corruption or unlawful conduct. While law enforcement has effectively investigated some cases of petty bribes and mid-level corruption, anti-corruption NGOs assess that high-level corruption was rarely investigated or prosecuted effectively until 2019. Prior to that, only two ministerial-level officials had been convicted of corruption-related crimes since Slovak independence in 1993. According to a survey published by Transparency International Slovakia, between October 2016 and 2019 only 10 percent of corruption cases decided by the Specialized Criminal Court involved amounts greater than 5,000 EUR. NGOs investigating corruption do not enjoy any special protection.
Following the murder of investigative journalist Jan Kuciak and his fiancée Martina Kusnirova in February 2018 and the resulting changes in the government and police leadership, one individual involved in high-level tax fraud was convicted in March 2019. In the course of 2019 and 2020 a number of judges, the former Special Prosecutor, high-level police officers, internal revenue officers and several businessmen and lawyers were charged with corruption, interference in the independence of courts and organized crime. In December 2020, the former Environment and Economy Minister was charged with bribery. In January 2021, Pavol Rusko, a former director of TV Markiza, and Marian Kočner, a businessman who was accused of plotting the murder of Jan Kuciak and his fiancée, were sentenced to 19 years in jail for obstruction of justice and promissory notes fraud. The fraudulent promissory notes allowed Kočner to receive 69 million EUR from TV Markiza. TV Markiza is part of NASDAQ-traded Central European Media Enterprise (CME), and was majority owned by AT&T. CME was sold to Czech firm PPF in 2019, pending approval from EU and national regulatory authorities.
The new government’s agenda has been heavily focused on strengthening anti-corruption measures. In February 2021, Parliament selected the head of the new Whistleblower Protection Office responsible for enhancing the country’s system of whistleblower protections. The new Office will become active in August 2021. In June 2019, Parliament streamlined the anti-shell company law that requires private companies to reveal their ownership structure before entering into business contracts with public entities. In January 2020, a conflict of interest in civil service regulation was adopted by Cabinet decree, introducing a Code of Conduct for Civil Servants (400/2019 Coll.).
Disclosure of contracts in the Central Registry of Contracts by public administrators and state-owned enterprises is compulsory.
Private businesses, especially those with foreign ownership, often have internal codes of ethics, in many cases also extending to contractors.
Resources to Report Corruption
Contact details of government agencies responsible for combating corruption:
Daniel Lipsic
Head of the Special Prosecutor’s Office
Office of the Special Prosecution under the General Prosecutor’s Office
Suvorovova 4343
902 01 Pezinok
Telephone: +421 33 690 3171 Daniel.Lipsic@genpro.gov.sk
Branislav Zurian
Director of the National Criminal Agency
Ministry of Interior, National Police Headquarters
Račianska 45
812 72 Bratislava
Telephone: +421 964052102 Branislav.Zurian@minv.sk
Contact details of “watchdog” organizations:
Michal Pisko
Executive Director
Transparency International Slovakia
Bajkalska 25
82718 Bratislava
Telephone: +421 2 5341 7207 sipos@transparency.sk
Zuzana Petkova
Executive Director
Stop Corruption Foundation
Stare Grunty 18
841 04 Bratislava petkova@zastavmekorupciu.sk
Peter Kunder
Executive Director
Fair Play Alliance
Smrecianska 21
811 05 Bratislava
Telephone: +421 2 207 39 919 kunder@fair-play.sk
Politically motivated violence and civil disturbances are rare in Slovakia. There have been no recent reports of politically motivated damage to property, projects, and installations nor violence directed toward foreign-owned companies. Slovak citizens have responded well to stringent government measures introduced during March and April 2020 to contain the spread of the COVID-19 pandemic, with polls showing that nine out of ten Slovaks considered the restrictions appropriate. As the pandemic continued and the country returned to a prolonged lockdown in October 2020, the willingness of the general public to abide by the restrictions, however, decreased. Enforcement of the measures was low across the country. In October and December 2020, protests against COVID restrictions attracted several thousand participants including several high-ranking opposition politicians. The protests resulted in minor damage of government property, a police response with tear gas and water cannon, several arrests and minor injuries to three policemen and two participants. In February 2020, Slovakia elected a new four-party government coalition, which ran on a campaign of anti-corruption, good governance, and accountability. The transfer of power from the previous government was smooth and effective.
Slovakia is one of the most industrialized economies in the EU with almost 32 percent of the workforce employed in industry, 65 percent in services (including construction), and the rest in agriculture. Due to COVID-19, the unemployment rate increased to 7.8 percent by the end of 2020 from 4.92 percent in December 2019. Long-term unemployment remains prevalent in poorer regions, especially in the marginalized Romani communities.
Foreign companies frequently praise workers’ motivation and productivity, and especially commend younger workers for their proficiency with foreign languages. However, businesses complain about the growing gap between their labor market needs and popular areas of study, with shortages in technical education at both the high school and higher education levels, and a lack of support for critical thinking and managerial skills. Slovak PISA scores are persistently below average with skill shortages particularly prevalent in knowledge and technology-intensive sectors. The health and IT sectors are among those facing the most severe long-term labor shortages, but most regions also report shortages in workers for lower-skill construction and machinery operation jobs.
The minimum wage law indexes the minimum wage to overall wage growth in the economy. The minimum wage increased to 623 EUR per month in 2021. Nominal wages grew by 7.8 percent in 2019. The average nominal wage in 2020 remained almost identical to the previous year at 1,096 EUR per month. In 2019, the average hourly labor cost was 12.50 EUR, significantly lower than the EU average of 27.70 EUR. According to Eurostat, the gender pay gap stood at 19.4 percent and the gender employment gap at 13 percent in 2018. A lack of childcare facilities for children below three years of age combined with three years of paid maternity leave discourages mothers from returning to work and aggravates the gender pay gap. According to the European Commission Country Report on Slovakia, formal childcare of children under 3 years remains among the lowest in the EU. In November 2020, the Education Ministry has presented an education reform plan, which will include increasing funding for pre-school infrastructure.
The Slovak Labor Code (311/2001 Coll. and later amendments) governs the national labor market, including for foreigners. Businesses cite burdensome labor regulations, frequent and arbitrary changes to the labor code, and a lack of stakeholder input as some of the obstacles to doing business in Slovakia. A number of labor related measures came into force in March 2021, including an increase in the minimum wage; a requirement for employers to pay for any additional costs arising from telework and clarifying that employees do not have to read e-mails or accept phone calls outside of working hours; and simplifying employer options for providing meal vouchers to employees.
In February 2021, the government approved a permanent “kurzarbeit” social insurance program, in which employers may reduce their employees’ work hours instead of laying them off. Pending approval by Parliament, the act will require the state to subsidize 60 percent of a worker’s salary, with the employer providing another 20 percent.
On January 1, 2020, the Amendment to the Act on Employment Services (5/2004 Coll.) simplified the process for hiring non-EU nationals by decreasing wait times for temporary residence permits from 90 to 30 days and limiting the wait time for work permits to 20 days.
The number of foreign nationals from non-EU countries in the Slovak labor market was steadily increasing, but, likely due to COVID-19, dropped from just over 28,500 in December 2019 to 24,000 in December 2020. According to statistics from the Slovak Labor Office, Ukrainian and Serbian nationals account for 80 percent of all non-EU foreign laborers. There are roughly 69,000 foreign workers in Slovakia in total, including EU and non-EU nationals not requiring work permits.
The Anti-discrimination Act (365/2004 Coll.) and the Labor Code ban discrimination in the workplace based on gender, race, nationality, sexual orientation, health impairment, age, language, religion, and political affiliation. It does not, however, specifically prohibit discrimination based on HIV status. Activists frequently allege that employers refused to hire Roma, and an estimated 70 percent of Roma are unemployed.
Slovakia has a standard workweek of 40 hours and the law mandates a maximum workweek of 48 hours, including overtime, except for employees in the health-care sector, whose maximum work week is 56 hours. The Labor Code caps overtime at 400 hours annually and sets minimum remuneration for overtime and work during public holidays or on weekends. There are no serious concerns regarding compliance with international labor standards.
The Labor Code differentiates between layoffs and firing. The cost to lay off employees stipulated by the Labor Code is generally less expensive than in Western Europe and depends mostly on the employee’s time in service.
Social insurance contributions are compulsory and include healthcare, unemployment, and pension insurance. Both employers and employees must pay social contributions – employers’ combined social and health contributions amount to 35 percent of wages.
Collective bargaining is voluntary and takes place without interference from the state. No national-level collective bargaining exists in Slovakia. Provisions agreed in multiemployer as well as single-employer collective agreements are legally binding for the contracting parties. EU Agency Eurofound reports up to 35 percent of employees in the national economy are covered by a collective agreement. At the sectoral or regional level, the coverage is about 10 percent. No official national data exist on collective bargaining coverage. The standard mechanism for dealing with collective labor disputes is conciliation, which is used in vast majority of cases, and arbitration.
Union membership has declined in recent years. A “tripartite arrangement” is used as a discussion platform including state representatives, labor unions, and employers’ associations. Slovakia is a member of the International Labor Organization and has ratified all eight core conventions. Strikes are infrequent in Slovakia. In January 2020, truck drivers organized a series of strikes, which affected production at two car making factories.
Please consult the following websites for more information:
As a high-income economy, Slovakia does not qualify for DFC support outside of energy infrastructure projects. Before OPIC transformed into DFC, it offered U.S. investors in Slovakia insurance against political risk and expropriation of assets or damages due to political violence. Slovakia is a member of the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA) which also provides political risk insurance.
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data
Year
Amount
Year
Amount
Host Country Gross Domestic Product (GDP) ($M USD)
(Note: Final end-of-year data are usually published in Q2 of the next year. Values from host country sources are converted from their original euro denomination with the conversion rate valid at the end of the respective year. Data on FDI is inconsistent since much of U.S. FDI is channeled through subsidiaries located inside the EU.)
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Isaac Hansen-Joseph
Economic Officer
U.S. Embassy Bratislava
Hviezdoslavovo námestie
+421 (2) 5443 3412
hansen-josephis@state.gov
Slovenia
Executive Summary
Several factors make Slovenia an attractive location for foreign direct investment (FDI): modern infrastructure with access to important EU transportation corridors, a major port on the Adriatic Sea with access to the Mediterranean, a highly educated and professional workforce, proximity to Central European and Balkan markets, and membership in the Schengen Area, EU, and Eurozone. With a small domestic market of just over two million people, Slovenia’s economy is heavily dependent on foreign trade and susceptible to international price and currency fluctuations as well as economic conditions among its major trading partners.
In recent years, Slovenia’s economic growth rate has outpaced those of most other EU member states, and the country has enjoyed rising incomes, growing domestic consumption, falling unemployment, low inflation, and burgeoning consumer confidence. However, in 2020, GDP contracted by 5.5 percent to EUR 46 billion due to the COVID-19 pandemic, in line with previous estimates. The COVID-19 pandemic impacted certain industries, including retail and hospitality sectors, more severely than others. Overall, the economy faired relatively well, with a series of government COVID-19 stimulus measures – worth approximately EUR 2.5 billion (USD 2.9 billion) – mainly focused on preserving jobs. Slovenia’s economy is expected to rebound in 2021 as the pandemic is expected to improve in the second half of the year, with projected GDP growth of between 3.5 and 5.2 percent.
Although the government privatized the country’s first and third largest state-owned banks in 2019 and the fourth one in 2020, roughly 35 percent of Slovenia’s economy remains state-owned or state-controlled, and there is widespread skepticism in some quarters toward privatization and foreign direct investment, despite general awareness of FDI’s importance to economic growth, job creation, and developing new technologies. Potential investors in Slovenia may face significant challenges, including a lack of transparency in economic and commercial decision-making, time-consuming bureaucratic procedures, opaque public tender processes, regulatory red tape, and a heavy tax burden for high earners.
According to Bank of Slovenia figures, FDI in Slovenia totaled EUR 16.0 billion in 2019, a 4.9 percent increase over the previous year. Slovenia’s most important sources for direct foreign investment were Austria (24.7 percent), Luxembourg (13.0 percent), Switzerland (11.4 percent), Germany (8.5 percent), and Italy (7.9 percent). However, Bank of Slovenia data indicated U.S. companies accounted for almost ten percent of total inward foreign direct investment (FDI) in 2019, EUR 172 million (USD 206 million) invested directly and an additional EUR 1.3 billion (USD 1.56 billion) invested indirectly through U.S. subsidiaries in other European countries. This combined investment of EUR 1.48 billion (USD 1.78 billion) placed the United States as Slovenia’s fourth largest source of direct and indirect foreign investment, behind Austria (EUR 2.28 billion), Germany (EUR 2.28 billion), and Italy (EUR 1.5 billion). The most important sectors for FDI were manufacturing (34.6 percent), financial and insurance activities (22.3 percent), wholesale and retail trade and repair of motor vehicles and motorcycles (17.0 percent).
Firms with foreign owners generated EUR 1.4 billion in profits in 2019, with average returns on investment of 5.2 percent. Although they represented just 1.8 percent of all Slovenian firms in 2019, firms with FDI accounted for 24 percent of capital, 25.8 percent of assets, and 23.8 of corporate sector employees. Their capital and workforce generated EUR 31.0 billion in net sales revenue and EUR 1.4 billion in operating profit. Foreign companies accounted for more than 44 percent of corporate sector exports and 49 percent of corporate sector imports.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Although Slovenia has no formal business roundtable or foreign investment ombudsman, the Slovenian Public Agency for the Promotion of Entrepreneurship, Innovation, Development, Investment and Tourism (SPIRIT) promotes FDI and advocates for foreign investors in Slovenia, often in collaboration with diplomatic missions and business associations based in Slovenia. Its mission is to enhance Slovenia’s economic competitiveness through technical and financial assistance to entrepreneurs, businesses, and investors.
Foreign companies conducting business in Slovenia have the same rights, obligations, and responsibilities as domestic companies. The principles of commercial enterprise, including national treatment, apply to the operations of foreign companies as well. The Law on Commercial Companies and the Law on Foreign Transactions guarantee their basic rights.
According to SPIRIT’s annual survey on foreign investors’ perceptions of Slovenia’s business environment, investors cite the high quality of Slovenia’s labor force as the deciding factor in choosing the country as an investment destination, followed by widespread knowledge of foreign languages, employees’ technical expertise, innovation potential, and strategic geographic position offering easy access to EU and Balkan markets.
While generally welcoming greenfield investments, Slovenia presents a number of informal barriers that may prove challenging to foreign investors. According to SPIRIT’s survey, the most significant disincentives to FDI are high taxes, high labor costs, lack of payment discipline, an inefficient judicial system, difficulties in firing employees, and excessive bureaucracy. There are no formal limits on foreign investors’ ability to establish an investment or operate in the market.
Foreign companies doing business in Slovenia and the local American Chamber of Commerce have also cited additional factors that adversely affect the local investment climate, including the lack of a high-level FDI promotion strategy, a sizable judicial backlog, difficulties in obtaining building permits, labor market rigidity, and disproportionately high social contributions and personal income taxes coupled with excessive administrative tax burdens. Businesses have also reported a lack of transparency in public procurement, unnecessarily complex and time-consuming bureaucracy, frequent changes in regulation, relatively high real estate prices in some parts of the country, and confusion over lead responsibility or jurisdiction regarding foreign investment among government agencies.
Limits on Foreign Control and Right to Private Ownership and Establishment
Both foreign and domestic private entities have the right to establish and own business enterprises and engage in different forms of remunerative activity. Slovenia has relatively few formal limits on foreign ownership or control. In May 2020, Slovenia enacted a screening mechanism for foreign investments that will remain in force until June 2023. The investment screening mechanism was enacted as part of the COVID-19 stimulus package and will need to be made permanent before the legislation sunsets. The investment screening mechanism stipulates that foreign investments acquiring at least 10 percent of share capital or voting rights in Slovenian companies with activities involving critical infrastructure, critical technologies and dual use items, supply of critical inputs, access to sensitive information, the freedom and pluralism of the media, and certain projects and programs in the interest of the EU must seek approval from the Ministry of Economic Development and Technology. The ministry was also authorized to retroactively screen foreign direct investment transactions within the past five years. The application for such approval must be submitted to the ministry within 15 days from the date of the execution of the agreement. The Slovenian government envisages that the review process can take up to two months. Failure to comply to this new legislation may result in a fine ranging between EUR 50,000 and EUR 500,000 for companies based on their size and a fine of EUR 10,000 for individuals.
Sector-specific restrictions:
Professional services: There are limits on banking and investment services, private pensions, insurance services, asset management services, and settlement, clearing, custodial, and depository services provided in Slovenia by companies headquartered in non-EU countries. Companies from non-EU countries can operate freely only through an affiliate with a license granted by an appropriate Slovenian or EU institution.
Gaming: There is a 20 percent cap on private ownership of individual companies.
Air transport: Aircraft registration is only possible for aircraft owned by Slovenian or EU nationals or companies controlled by such entities. Companies controlled by Slovenian nationals or carriers complying with EU regulations on ownership and control are the only entities eligible for Air Operator’s Certificates (AOC) for performing airline services.
Maritime transport: The law forbids majority ownership by non-EU residents of a Slovenian-flagged maritime vessel unless the operator is a Slovenian or other EU national.
Other Investment Policy Reviews
Slovenia underwent an OECD Investment Policy Review and a WTO Trade Policy Review in 2002. The Economist Intelligence Unit and World Bank’s “Doing Business 2020” provide current economic profiles of Slovenia.
Business Facilitation
Individuals or businesses may adopt a variety of different legal and organizational forms to conduct economic activities. Businesses most commonly incorporate legally as limited liability companies (LLC or d.o.o.) and public limited companies (PLC or d.d.).
Non-residents of the Republic of Slovenia must obtain a Slovenian tax number before beginning the process of establishing a business. Slovenia’s Companies Act, which is fully harmonized with EU legislation, regulates the establishment, management, and organization of companies.
Generally, bureaucratic procedures and practices for foreign investors wishing to start a business in Slovenia are sufficiently streamlined and transparent. Start-up costs for businesses are among the lowest in the EU. To establish a business in Slovenia, a foreign investor must produce capital of at least EUR 7,500 (USD 8,835) for a limited liability company and EUR 25,000 (USD 29,450) for a stock company. The investor must also establish a business address and file appropriate documentation with the courts. The entire process usually takes three weeks to one month, but may take longer in Ljubljana due to court backlogs.
Slovenia does not restrict domestic investors from investing abroad, nor are there any incentives for outward investments. The majority of Slovenia’s outward investments are in the Western Balkans. Croatia is the most popular destination for Slovenian outward investment, constituting 34.5 percent of Slovenia’s investments abroad, followed by Serbia (13.9 percent), Bosnia and Herzegovina (8.7 percent), Russia (6.8 percent), and North Macedonia (6.3 percent).
3. Legal Regime
Transparency of the Regulatory System
Accounting, legal, and regulatory procedures in Slovenia are transparent and consistent with international norms.
Financial statements should be prepared by the Slovenian Institute of Auditors in accordance with the Slovenian Accounting Standards and International Financial Reporting Standards (IFRS), as adopted by the EU. Annual reports of for-profit business entities are publicly available on the website of AJPES, the Slovenian Business Database.
There are three levels of regulatory authority: supra-national (Slovenia is a member of the EU), national, and sub-national (municipalities have limited regulatory power over local affairs, and regulations must comply with state regulations). Laws may be proposed by the government, member(s) of parliament, or through signatures of at least 5,000 voters.
Slovenia adopted a comprehensive regulatory policy in 2013, focusing on measures aimed at raising the quality of the regulatory environment to improve the business environment and increase competitiveness.
Slovenia’s Ministry of Public Administration is required by several legal and policy documents to solicit and include public stakeholder engagement in decision-making processes. Public authorities must solicit stakeholder engagement and inform the public about their work to the greatest extent possible.
Government entities that propose regulations must invite experts and the general public to participate by publishing a general invitation, together with a draft regulation, on their websites. The experts and general public must respond by the deadline, ranging from 30 to 60 days from the day of its publication. In addition to the relevant ministry, the proposals are also published on government websites and on the Ministry of Public Administration’s eDemocracy portal.
Through the eDemocracy web portal, citizens may actively cooperate in the decision-making process by expressing opinions and submitting proposals and comments on draft regulations. When possible, government entities take into consideration proposals and opinions on proposed regulations submitted by experts and the general public. If such opinions and proposals are not taken into consideration, those proposing the regulation must inform stakeholders in writing and explain the reasons.
The public, however, is not invited to comment on proposed regulations when the nature of the issue precludes such consideration, such as in emergency situations and in matters relating to the national budget, the annual financial statement, the rules of procedure of the government, ordinances, resolutions, development and planning documents, development policies, declarations, acts ratifying international treaties, and official decisions.
A regulatory impact assessment (RIA) is obligatory for all primary legislation; however, the quality of such assessments varies, and analyses are often only qualitative or incomplete due to the lack of an external body to conduct quality control. The quality of such assessments has improved, however, since the Ministry of Public Administration introduced its Small and Medium Enterprise (SME) test in 2012 to measure regulatory impacts on small and medium-sized businesses.
The General Secretariat of the Republic of Slovenia is responsible for administrative oversight to ensure the government follows administrative procedures. There are no informal regulatory processes managed by non-governmental organizations or private sector associations.
Slovenia’s executive branch initiates approximately 92 percent of primary laws, with regulations often developed rapidly. The government’s frequent use of urgent procedures (normally reserved for national emergencies) to pass legislation often limits the stakeholder engagement process.
After the adoption of new legislation, the text is published in the Official Gazette of the Republic of Slovenia and online at https://www.uradni-list.si/glasilo-uradni-list-rs. Slovenia lacks a systematic process to evaluate regulations after their implementation.
To measure regulatory burdens on businesses, Slovenia adopted the Standard Cost Model, which has led to a significant reduction of such burdens. The United Nations awarded its Public Service Award to Slovenia in 2009 for its system of one-stop shops (the so-called “VEM points”) to incorporate and establish businesses. The introduction of e-government processes has simplified administrative procedures. The World Bank assigned Slovenia a score of 4.75 out of 5 on its Global Indicators of Regulatory Governance measure, while the International Budget Partnership gave Slovenia 68 points out of 100 on its Open Budget Survey 2019, assessing Slovenia’s budget transparency as sufficient with substantial information available.
Slovenia meets the Department of State’s minimum requirements for fiscal transparency. In 2020, Slovenia’s budget and information on debt obligations were widely and easily accessible to the general public, including online. The budget was substantially complete and considered generally reliable. Slovenia’s supreme audit institution reviewed the government’s accounts and made its reports publicly available. The criteria and procedures by which the national government awards contracts or licenses for natural resource extraction were outlined in law and appeared to be followed in practice. Basic information on natural resource extraction awards was public.
International Regulatory Considerations
Slovenia joined the World Trade Organization (WTO) in 1995, and to date there have been no cases of Slovenia violating WTO rules. The law treats domestic and foreign investors equally. The government does not impose performance requirements or any condition for establishing, maintaining, or expanding an investment. As a WTO member country, Slovenia is required by the Agreement on Technical Barriers to Trade (TBT Agreement) to report to the WTO all proposed technical regulations that could affect trade with other member countries. Slovenia is a signatory to the Trade Facilitation Agreement (TFA) and has implemented all TFA requirements.
As an EU member state, Slovenia applies two principles in its regulatory system: the supremacy of EU laws and the principle of direct effect. In areas subject to EU responsibility, EU laws override any conflicting member state laws. Direct effect enables Slovenians and other EU citizens to use EU laws in national courts against the government or private parties.
Legal System and Judicial Independence
Slovenia is a civil law jurisdiction with a codified system of law. It has a well-developed, independent legal system based on a five-tier (district, regional, appeals, supreme, and administrative) court system. These courts deal with a wide array of legal cases, including criminal, probate, domestic relations, land disputes, contracts, and other business-related issues. A separate social and labor court system, comprised of regional, appeals, and supreme courts, deals strictly with labor disputes, pensions, and other social welfare claims. As with most other European countries, Slovenia has a Constitutional Court which hears complaints alleging violations of human rights and personal freedoms. The Constitutional Court also issues opinions on the constitutionality of international agreements and state statutes and deals with other high-profile political issues. In 1997, Slovenia’s National Assembly established an administrative court to handle legal disputes among local authorities, between state and local authorities, and between local authorities and executors of public authority.
In 1999, the National Assembly passed legislation to streamline legal proceedings and speed up administrative judicial processes. The law established a stricter and more efficient procedure for serving court documents and providing evidence. In commercial cases, defendants are required to file their defense within 15 days of receiving a notice of a claim.
Laws and Regulations on Foreign Direct Investment
In 2018, the National Assembly passed Slovenia’s Investment Promotion Act, defining the types of incentives, criteria, and procedures to promote long-term investment in Slovenia. The act establishes that domestic and foreign investors are equal and mandates priority treatment of strategic investments, defined as investments totaling EUR 40 million or more and creating 400 new jobs in manufacturing and services, while R&D strategic investments are defined as totaling at least EUR 200 million and creating 200 new jobs. Under the law, a working group headed by the Ministry of Economic Development and Technology will assist strategic investors in obtaining necessary permits. The Invest Slovenia website serves as a resource for investors to obtain relevant information on investment regulations and incentives.
Competition and Antitrust Laws
Slovenia’s Prevention of Restriction of Competition Act regulates restrictive practices, concentrations, unfair competition, regulatory restrictions of competition, and measures to prevent restrictive practices and concentrations that significantly impede effective competition. The law applies to corporate bodies and natural persons engaged in economic activities regardless of their legal form, organization, or ownership. The law also applies to the actions of public companies and complies with EU legislation.
Slovenia’s competition and anti-trust laws prohibit restrictive agreements; direct or indirect price fixing; sharing markets or supply sources; limiting or controlling production, sales, technical progress, or investment; applying dissimilar conditions to different trading parties; or subjecting the conclusion of contracts to acceptance of supplementary obligations that, by their nature or according to commercial usage, have no connection with the subject of their contracts.
Companies and entities whose domestic market share exceeds 40 percent for a single undertaking and 60 percent for two or more undertakings (joint dominance) are prohibited from abusing dominant market positions. Slovenian law defines a non-exhaustive list of dominant position abuses describing the most common practices.
The government may, however, prescribe market restrictions by means of regulatory instruments and actions in cases of natural disasters, epidemics, or states of emergency; significant market disturbances due to a shortage of goods or disturbances in other fields that represent a risk to the safety and health of the population; or when necessary to satisfy product requirements, raw materials, and semi-finished goods of special or strategic importance to the defense of the nation.
The fines for restrictive agreements and abuses of dominant positions may total as much as 10 percent of an undertaking’s annual turnover in the preceding business year. Those legally responsible for a legal entity or sole proprietorship may be subject to a fine of EUR 5,000-10,000, or EUR 15,000-30,000 for more serious violations.
Slovenia’s Competition Protection Agency (CPA) supervises the implementation of the Restriction of Competition Act. The agency monitors market conditions to ensure effective competition, conducts procedures and issues decisions, and submits opinions to the National Assembly and the government. The CPA is also responsible for the enforcement of Slovenia’s antitrust and merger control rules. An independent administrative authority, the CPA was established in 2013 through a reorganization of the former Slovenian Competition Protection Office, which was part of the Ministry of the Economy. Some private sector representatives expressed concern about the CPA’s susceptibility to outside influence and ability to reach timely decisions on complex cases, which added an element of unpredictability for some investors and their legal counsel.
Expropriation and Compensation
According to Article 69 of Slovenia’s Constitution, the government may take real property or limit rights to possess real property for public purposes in the public interest, in exchange for in-kind compensation or financial compensation under conditions determined by law. Article 7 of Slovenia’s Investment Promotion Act stipulates that, if the government deems an investment strategic, it may expropriate private property for construction in exchange for compensation, under conditions determined by law. In such cases, a special government task force monitors the investment and coordinates the acquisition of environmental and building permits.
The current government is not involved in any expropriation-related investment disputes. National law offers adequate protection to all investments. However, legal disputes continue over private property expropriated by the former Yugoslav government for state purposes. Following its secession from Yugoslavia, Slovenia’s 1991 Denationalization Act established a process to “denationalize” these properties, return them to their rightful owners or their heirs, or pay just compensation if returning the property was not feasible. In some of these cases, the rightful owners and heirs are U.S. citizens.
Since the 1993 deadline for filing claims, over 99 percent of denationalization cases have been closed, although only 88 percent of cases involving American owners and heirs have been resolved. Cases involving U.S. citizens have taken longer in part because the claimants generally do not live in Slovenia. In such cases, the Ministry of Justice must determine the nationality of the property’s former owners at the time the property was seized – a generally simple question for Slovenians who never acquired another citizenship, but more complicated in cases involving naturalized American citizens. In addition, some claims may involve property currently controlled by prominent and influential Slovenians, thereby creating additional informal obstacles to restitution.
Dispute Settlement
ICSID Convention and New York Convention
Slovenia is a contracting state to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and a signatory to the New York Convention on Recognition of Foreign Arbitral Awards, which requires local courts to enforce international arbitration awards that meet certain criteria.
Investor-State Dispute Settlement
The government accepts binding international arbitration of disputes between foreign investors and the state. There have been no investment disputes involving a U.S. person within the past 10 years. Local courts are expected to enforce foreign arbitral awards issued against the government. To date, there has been no evidence of extrajudicial action against foreign investors.
International Commercial Arbitration and Foreign Courts
Slovenia is a signatory to the 1961 European Convention on International Commercial Arbitration. The Slovenian Arbitration Act is modeled after the United Nations Commission on International Trade Law’s model law.
Slovenia’s regional court specializing in economic issues has jurisdiction over business disputes. However, parties may agree in writing to settle disputes in another court or jurisdiction. Parties may also agree to court-annexed mediation. Local courts recognize and enforce foreign arbitral awards and foreign court judgments.
Parties may also exclude the court as the adjudicator of a dispute if they agree in writing to arbitration, whether ad hoc or institutional. In the former, applicable procedures and laws must be determined. In the case of institutional arbitration, Slovenian law requires a clear definition of the type of arbitration to be implemented.
The Slovenian Chamber of Commerce’s Ljubljana Arbitration Center is an independent institution that resolves domestic and international disputes arising out of business transactions among companies. Arbitration rulings are final, and decisions are binding.
Bankruptcy Regulations
Competition is lively in Slovenia, and bankruptcies are an established and reliable means of working out firms’ financial difficulties. By law, there are three procedural methods for dealing with bankrupt debtors. The first procedure, compulsory settlement, allows the insolvent debtor to submit a plan to the court for financial reorganization. Creditors whose claims represent more than 60 percent of the total amount owed may vote on the proposed compulsory settlement plan. If the settlement is accepted, the debtor is not obligated to pay the creditor any amount exceeding the payment agreed to in the confirmed settlement. The procedure calls for new terms, extended in accordance with the conditions of forced liquidation settlement (see below). Confirmed compulsory settlement agreements affect creditors who have voted against the compulsory settlement as well as creditors who have not reported their claims in the settlement procedure.
Creditors or debtors may also initiate bankruptcy proceedings. In such instances, the court names a bankruptcy administrator who sells the debtor’s property according to a bankruptcy senate, the senate president’s instructions, and court-sponsored supervision. Generally, the debtor’s property is sold at public auction. Otherwise, the creditors’ committee may prescribe a different mode of sale such as collecting offers or placing conditions on potential buyers. The legal effect of the completed bankruptcy is the termination of the debtor’s legal status to conduct business, and distribution of funds from the sale of assets to creditors according to their share of total debt.
In accordance with the Law on Commercial Companies, the state can impose forced liquidation on a debtor subject to liquidation procedures and legal conditions for ending its existence as a business entity. This would occur, for example, in cases in which an entity’s management has ceased operations for more than 12 months, if the court finds the registration void, or by court order.
In 2013, the National Assembly adopted an amendment to the Financial Operations, Insolvency Procedures, and Compulsory Dissolution Act to simplify and speed up bankruptcy procedures and deleveraging.
Capital markets remain relatively underdeveloped given Slovenia’s level of prosperity. Enterprises rarely raise capital through the stock market and tend to rely on the traditional banking system and private lenders to meet their capital needs.
Established in 1990, the Ljubljana Stock Exchange (LSE) is a member of the International Association of Stock Exchanges (FIBV). In 2015, the Zagreb Stock Exchange acquired the LSE. However, the number of companies listed on the exchange is limited and trading volume is very light, with annual turnover similar to a single day’s trading on the NYSE. Low liquidity remains an issue when entering or exiting sizeable positions.
In 1995, the Central Securities Clearing Corporation (KDD) was established to provide central securities custody services, clear and settle securities transactions, and maintain the central securities registry on the LSE electronic trading system. In 2017, KDD successfully aligned its procedures to that of the uniform European securities settlement platform TARGET2-Securities (T2S). In 2019, Slovenia’s Securities Market Agency (ATVP) licensed KDD to operate under the EU’s Central Securities Depository Regulation (CSDR) and provide services as a Central Securities Depository (CSD), pursuant to Article 17 of the Regulation (EU) 909/2014 on improving securities settlement in the European Union and on central securities depositories.
Established in 1994, the ATVP has powers similar to those of the U.S. Securities and Exchange Commission and supervises investment firms, the Ljubljana Stock Exchange (LSE), the KDD, investment funds, and management companies. It also shares responsibility with the Bank of Slovenia for supervision of banking and investment services.
Slovenia adheres to Article VIII of the International Monetary Fund’s Article of Agreement and is committed to full current account convertibility and full repatriation of dividends.
The LSE uses different dissemination systems, including real-time online trading information via Reuters and the Business Data Solutions System. The LSE also publishes information on the Internet at http://www.ljse.si/.
Foreign investors in Slovenia have the same rights as domestic investors, including the ability to obtain credit on the local market.
Money and Banking System
There is a relatively high degree of concentration in Slovenia’s banking sector, with 11 commercial banks, three savings banks, and two foreign bank branches in Slovenia serving two million people. All commercial banks are private as of January 2021, and most have foreign owners and shareholders. SID Bank (Slovenian Export and Development Bank), which supports Slovenian companies’ export activities and provides financing for economic development, remains state-owned. In 2008, the combined effects of the global financial crisis, the collapse of the construction sector, and diminished demand for exports led to significant capital shortfalls. Bank assets declined steadily after 2009 but rebounded in 2016 and have remained steady since then. Since the crisis, most banks have refocused their business activities towards SMEs and individuals/households, prompting larger companies to search for alternative financing sources. According to European Banking Federation data, Slovenia’s banking sector assets totaled EUR 41.2 billion (USD 49.4 billion) at the end of 2019, equaling approximately 86 percent of GDP, still EUR 8.2 billion less than the total banking assets volume at the end of 2009, when banking sector assets equaled 146 percent of GDP.
Slovenia’s banking sector was devastated by the 2009 economic crisis. Nova Ljubljanska Banka (NLB) and Nova Kreditna Banka Maribor (NKBM) faced successive downgrades by credit rating agencies due to the large numbers of nonperforming loans in their portfolios. In 2013, the government established a Bank Asset Management Company (BAMC) with a management board comprised of financial experts to promote stability and restore trust in the financial system. In exchange for bonds, BAMC agreed to manage the nonperforming assets of three major state banks, conducting three such operations from December 2013 through March 2014. The government also injected EUR 3.5 billion (USD 4.2 billion) into Slovenia’s three largest banks, NLB, NKBM, and Abanka. These measures helped recapitalize and revitalize the country’s largest commercial banks.
According to World Bank data, 2.8 percent of NLB’s total assets and an estimated 3.4 percent of all Slovenian banking assets were non-performing as of the end of 2019. According to European Bank Authority statistics, 5.3 percent of all loans in Slovenia were past due in June 2019, a marked turnaround from the post-crisis period.
NLB, the country’s largest bank, was privatized in 2019, although the government remains a major shareholder with a 25 percent plus one share stake. Of the remaining shares, more than fifty percent are spread among several international investors on fiduciary account at Bank of New York, while a number of Slovenian institutional and private investors purchased the remainder. The country’s second largest bank, Nova Kreditna Banka Maribor (NKBM), was sold to an American fund (80 percent) and the European Bank of Reconstruction and Development (EBRD) (20 percent) in 2016. In 2020, NKBM acquired the country’s third largest state-owned bank, Abanka. As of January 2021, the banks have been fully merged. With a total asset of EUR 9.2 billion (USD 11 billion) and approximately 22 percent market share, NKBM is on par with the country’s largest commercial bank NLB.
Banking legislation authorizes commercial banks, savings banks, and stock brokerage firms to purchase securities abroad. Investment funds may also purchase securities abroad, provided they meet specified diversification requirements. The Slovenian government adopted in March 2021 a draft banking legislation, which transposed provisions of an EU directive on exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers, and capital conservation measures. The new legislation also addresses the 2019 Constitutional Court decision that invalidated a provision that exempted banks from worker representation requirements in corporate governance. Under the proposed legislation, workers will be entitled to at least one seat of a bank’s supervisory board, but these workers’ representatives must meet professional qualifications of the supervisory board. The banking legislation is expected to be finalized by the National Assembly in summer 2021.
Despite Slovenia’s vibrant blockchain technology ecosystem and several global blockchain companies headquartered in the country, Slovenian banks have been slow to adopt blockchain technologies to process banking transactions.
The Bank of Slovenia, established on June 25, 1991, is Slovenia’s central bank. The Bank of Slovenia has been a member of the European System of Central Banks (ESCB) since Slovenia joined the European Union in 2004. The Bank of Slovenia gave up responsibility for monetary policy to the Eurosystem when Slovenia adopted the euro as its currency in 2007. As a member of the Eurosystem, the Bank of Slovenia coordinates with other EU central banks to implement the common monetary policy, manage foreign exchange reserves, ensure the smooth functioning of payment systems, and issue euro banknotes.
Slovenian law allows non-residents to open bank accounts in Slovenia on presentation of a passport, a Slovenian tax number, and a foreign tax number. Company owners must be present to open a business bank account.
Slovenia’s takeover legislation is fully harmonized with EU regulations. In 2006, Slovenia implemented EU Directive 2004/25/ES by adopting a new takeover law. The law was amended in 2008 to reflect Slovenia’s adoption of the euro as its currency. The law defines a takeover as a party’s acquisition of 25 percent of a company’s voting rights and requires the public announcement of a potential takeover offer for all current shareholders. The acquiring party must publicly issue a takeover offer for each additional acquisition of 10 percent of voting rights until it has acquired 75 percent of voting rights. The law also stipulates that the acquiring party must inform the share issuer whenever its stake in the target company reaches, surpasses, or drops below five, 10, 20, 25, 33, 50, or 75 percent. The law applies to all potential takeovers.
It is common for acquisitions to be blocked or delayed, and drawn out negotiations and stalled takeovers have hurt Slovenia’s reputation in global financial markets. In 2015, the privatization of Slovenia’s state-owned telecommunications company, Telekom Slovenije, failed in large part due to political attempts to discourage the sale of a state-owned company. Slovenia’s biggest retailer, Mercator, faced similar challenges in 2014 when a lengthy and arduous process and strong domestic opposition preceded its eventual sale to a Croatian buyer. The U.S.-owned Central European Media Enterprises dropped its politically controversial sale of Slovenian media house Pro Plus to then-U.S. owned United Group in January 2019 after the Competition Protection Agency failed to issue a ruling on the proposed acquisition despite reviewing the case for more than 18 months. The government has also struggled to meet its commitment to open Slovenia’s economy to international capital markets.
Thirteen insurance companies, two re-insurance companies, three retirement companies, and five branches of foreign firms operate in Slovenia. The three largest insurance companies in Slovenia account for over 60 percent of the market, with the largest, state-owned Triglav d.d., controlling 37 percent, while foreign insurance companies constitute less than 10 percent. In 2016, two Slovenian and two Croatian insurance companies merged into a new company, SAVA. Insurance companies primarily invest their assets in non-financial companies, state bonds, and bank-issued bonds.
Since 2000, there have been significant changes in legislation regulating the insurance sector. The Ownership Transformation of Insurance Companies Act, which seeks to privatize insurance companies, has stalled on several occasions due to ambiguity over the estimated share of state-controlled capital. Although plans for insurance sector privatization have been under discussion since 2005, there has been no implementation.
Slovenia currently has three registered health insurance companies and a variety of companies offering other kinds of insurance. Under EU regulations, any insurance company registered in the EU can market its services in Slovenia, provided the insurance supervision agency of the country where the company is headquartered has notified the Slovenian Supervision Agency of the company’s intentions.
Foreign Exchange and Remittances
Foreign Exchange
Slovenia adheres to Article VIII of the IMF Article of Agreement and is committed to full current account convertibility and full repatriation of dividends. To repatriate profits, joint stock companies must provide evidence of the settlement of tax liabilities, notarized evidence of distribution of profits to shareholders, and proof of joint stock company membership (Article of Association). All other companies must provide evidence of the settlement of tax liabilities and the company’s act of establishment.
For the repatriation of shares in a domestic company, the party must submit its act of establishment, a contract on share withdrawal, and evidence of the settlement of tax liabilities to the authorized bank.
Slovenia replaced its previous currency, the Slovenian tolar, with the euro in January 2007. The Eurozone has a freely floating exchange rate.
Remittance Policies
Not applicable/information not available.
Sovereign Wealth Funds
Slovenia does not have a sovereign wealth fund.
7. State-Owned Enterprises
Private enterprises compete on the same terms and conditions as public enterprises with respect to access to markets, credit, and other business operations.
State-owned and partially state-owned enterprises (SOE) are present across most industries in Slovenia. The state has never undergone a wholesale privatization program and has retained significant ownership shares in many large companies since independence. According to a 2017 OECD report on SOEs, 37 companies with a total value of USD 12.5 billion and employing 47,000 people were majority state owned. In 2020, an OECD report assessed that privatization has progressed slowly, with the Slovenian Sovereign Holdings (SSH) maintaining controlling shares in most SOEs. Most state-owned companies are in the energy, transportation, public utilities, telecommunications, insurance, and financial sectors, although the government successfully completed the privatization of the three largest state-owned banks by 2020. Other economic sectors, including retail, entertainment, construction, tourism, and manufacturing, include important firms that are either wholly state-owned or in which the state maintains a controlling interest by virtue of holding the largest single block of shares.
In general, SOEs do not receive a greater share of contracts or business than private sector competitors in sectors that are open to private and foreign competition. SOEs acquire goods and services from private and foreign firms. SOEs must follow strict government procurement agreements which require transparent procedures available to all firms. Private firms compete under the same terms and conditions with respect to market share, products, and incentives. All firms have the same access to financing.
SOEs are subject to the same laws as private companies and must fully comply with all legal obligations. They must submit to independent audits and publish annual reports if required (for example, if the SOE is listed on the stock exchange or the size of the company meets a certain threshold). Reporting standards are comparable to international financial reporting standards.
Slovenia is an active participant in the Organization for Economic Cooperation and Development (OECD) Working Party on State Ownership and Privatization Practices and adheres to the OECD Guidelines on Corporate Governance for SOEs.
Following OECD recommendations, the government established the Capital Asset Management Agency (AUKN) in 2010 to increase transparency and promote more efficient management of SOEs. In 2013, authorities transformed the AUKN into the Slovenian Sovereign Holding (SSH), which is charged with simplifying and shortening the administrative process of privatizing state assets. SSH took over all AUKN portfolios as well as the portfolios of two other smaller state-owned funds. More than 95 percent of SSH funds are invested domestically. SSH is an independent state authority that reports to the National Assembly. It provides the National Assembly with annual reports regarding the previous year’s implementation of the Annual Plan of the Corporate Governance of Capital Investments. The government then adopts the Annual Plan of the Corporate Governance of Capital Investments based on SSH’s proposal.
Foreign investors may participate in the public-bidding processes on an equal basis. However, interested parties often describe the bidding process as opaque, with unclear or unenforced deadlines.
In 2015, the government prepared an asset management strategy that classified state-owned assets as strategic, important, or portfolio assets. In companies classified as strategic, the state will maintain or obtain at least a 50 percent plus one share. In companies classified as important, the state will maintain a controlling share (25 percent plus one share). In companies classified as portfolio, it is not mandatory for the state to maintain a controlling share. The government reclassified the list of companies in 2017.
N.B.: The Bank of Slovenia (BoS), in its official data, lists U.S. FDI at approximately EUR 172 million in 2019, or 1.1 percent of total inward FDI. However, this amount does not reflect significant investments by U.S. firms not listed as U.S. in origin by the BoS, as U.S. funds are often routed through third-country subsidiaries. In 2017, the BoS began reporting FDI according to the ultimate investing country or originating country of capital. It estimated that USD 1.78 billion (EUR 1.48 billion euros) or 9.3 percent of Slovenia’s total FDI originated in the United States in 2019, putting the United States behind Austria, Germany, and Italy as a source of foreign investment in Slovenia.
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Comment: IMF data are consistent with Bank of Slovenia data.
Note: The Bank of Slovenia has made an additional breakdown of inward FDI according to the ultimate source of capital. It shows that Germany, the United States, Japan, the Russian Federation, and Mexico are all much more important investor countries in Slovenia than is suggested by the breakdown by the immediate partner country. The U.S. ranks fourth with 1.48 billion euros (USD 1.78 billion) in 2019.
Although the Federal Government of Somalia (FGS) welcomes foreign direct investment, Somalia remains a difficult place to do business. The government’s collapse in 1991 led to a period of conflict and clan warfare. Although there has been some progress since the 2012 establishment of the FGS, potential investors still face challenges such as the lack of a comprehensive legal framework, a civil judicial system incapable of solving disputes and enforcing contracts, and endemic corruption. Investors also face the threat of al-Shabaab, which controls portions of the country and routinely extorts taxes from businesses. Finally, businesses face challenges moving money into and out of Somalia, have no intellectual property protection, and must cope with expensive and unreliable electricity.
The current government was elected in 2017 and has pursued a policy of economic reforms that broadened the government’s tax base and strengthened tax administration, leading to steady increases in domestic revenue for the first time in two decades. These reforms also allowed Somalia to start re-engaging with international financial institutions, and in March 2020, the IMF and the World Bank approved Somalia’s eligibility for debt relief under the Heavily Indebted Poor Countries Initiative. If Somalia takes the additional steps required to reach “Completion Point,” the final stage of debt relief, the country’s total external debt will be reduced from $5.2 billion to $557 million, or nine percent of GDP. However, 2020 brought challenges associated with the COVID-19 pandemic, floods, drought, and locust infestations, which led to decreased tax revenue and an economic contraction.
Moving money into and out of Somalia remains difficult, and the financial sector is constrained by the lack of private sector correspondent banking relationships. The main obstacles are weak “know your customer” (KYC) capabilities and concerns that al-Shabaab is using Somalia’s financial institutions to collect, store, and move money. To address these concerns, the Financial Reporting Center (FRC), Somalia’s financial investigation body, hired its first investigators in 2019 and is slowly improving its capabilities to investigate illegal transactions. Additionally, the Central Bank of Somalia (CBS) is becoming increasingly professional and asserting its jurisdiction over additional financial activities, such as mobile money.
Despite economic reforms, according to Transparency International’s Corruption Perceptions Index, Somalia again ranked as one of the most corrupt countries in the world in 2020, tied with South Sudan in last place.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The FGS and the Federal Member States (FMS) have a positive attitude towards foreign direct investment (FDI). However, insecurity and uncertainty driven by terrorist groups, lack of transparency, failure to fully constitute governing bodies per the 2012 provisional constitution, and widespread corruption in government sectors present considerable barriers to FDI.
Parliament passed a foreign investment law in 2015 to promote and protect foreign investment. The law also provides some incentives to foreign investors, such as tax advantages and guarantees against expropriation.
In September 2020, Somalia’s investment promotion authority, Sominvest, released a five-year National Investment Promotion Strategy, which aims to improve the investment climate and Somalia’s image abroad. This strategy paints a rosy picture of doing business in Somalia and suggests the key areas with potential for foreign investment are agriculture, fishing, energy, and banking.
Limits on Foreign Control and Right to Private Ownership and Establishment
There are no laws that address private ownership rights or limit foreign control.
Other Investment Policy Reviews
There has not yet been a third-party investment review of Somalia.
The FGS is not a member of the World Trade Organization (WTO) or the Organization for Economic Cooperation and Development. In 2017 Somalia submitted a notification of intent to join the WTO, and in May 2020, after working through the accession stages, Somalia submitted a Memorandum on the Foreign Trade Regime, a document that outlines its trade and economic policies and its trade agreements with other countries. The WTO confirmed Somalia’s Working Party chairperson, Swedish Ambassador to the WTO Mikael Anzen, in October 2020 and is planning the first Working Party meeting for mid-2021.
The FGS rejoined the Common Market for Eastern and Southern Africa in July 2018. As a member, Somalia is required to undertake several institutional, policy, and regulatory reforms to meet the organization’s free trade protocols.
The FGS has applied for East African Community (EAC) membership, which would allow Somalia to formalize trade with its neighbors and facilitate movement of Somali citizens to other EAC member states through acquisition of the common EAC passport. However, at the February 2021 Heads of State Summit, the EAC found that Somalia’s application was not yet ready for a decision.
Somalia has also indicated its intent to participate in negotiations on the African Continent Free Trade Agreement.
Business Facilitation
In 2019 the FGS passed a company law formalizing the legal requirements to create and register a company. Also in 2019, the Ministry of Commerce and Industry announced the launch of a “one-stop shop” business registration website, but it has not yet become operational.
The World Bank ranked Somalia 190 of 190 countries in its 2020 Ease of Doing Business Report.
Outward Investment
The Somali government does not have a policy that promotes or incentivizes outward investment. Anecdotal evidence suggests that Somalis who accumulate wealth seek to move it overseas to avoid the uncertain domestic investment environment.
3. Legal Regime
Transparency of the Regulatory System
Somalia’s regulatory system is largely nonexistent. The 2012 provisional constitution has not been finalized, and there is not yet a constitutional court to enforce it. Many of the current investment laws and regulations predate the 1991 government collapse. The FGS has revised some of these regulations and has begun to develop modern business and investment legislation to conform to the global business environment, but it has a long way to go. Somalia has a procurement act that is intended to provide for transparency in public contracts and concessions, but it is not always followed. In 2020 the FGS passed a petroleum law that provides a regulatory framework for issuing exploration and development licenses.
International Regulatory Considerations
Somalia is a member of the Intergovernmental Authority on Development, as well as the Arab League and the Organization of Islamic Cooperation. In 2018 Somalia obtained provisional membership in the Common Market for Eastern and Southern Africa, but it has several conditions to fulfill before achieving full membership. Somalia is not yet a member of the WTO.
Legal System and Judicial Independence
Somalia’s legal system derives from Italian and British law, customary dispute resolution (xeer) principles, and Islamic law. The provisional constitution establishes a judicial system that is theoretically independent of the executive and the legislature, but in practice the legal system depends on the executive. There are no courts dedicated to commercial disputes. A November 2020 USAID-funded report found that the courts lack political independence, are marked by “pervasive graft,” and face competition from a parallel al-Shabaab court system. There are reports that some citizens choose to bring cases to al-Shabaab courts, finding them less corrupt than government courts.
Laws and Regulations on Foreign Direct Investment
Somalia’s 2015 foreign investment law provides some guidance for foreign investors, but a comprehensive investor and investment bill remains stuck in parliament. In 2019 the Ministry of Planning opened its investment promotion office, Sominvest, to provide potential investors with guidance on working in Somalia.
Competition and Antitrust Laws
Competition and anti-trust laws do not exist in Somalia. Local business disputes often are informally settled through the intervention of traditional elders.
Expropriation and Compensation
Somalia is rebuilding from decades of civil war, and its legal and regulatory environment remains undeveloped. There are no laws that define how the government can expropriate private property. However, the provisional constitution provides a right to just compensation from the government if property has been compulsorily acquired in the public interest. After the 1991 government collapse, many state-owned properties ended up in private hands, and the FGS has indicated interest in repossessing these properties. There is a draft investors protection bill in parliament that will address expropriation, dispute resolution, and the transfer and repatriation of investments.
Dispute Settlement
ICSID Convention and New York Convention
Somalia is not a party to the Convention on the International Centre for Settlement of Investment Disputes or the New York Convention of 1958.
Investor-State Dispute Settlement
The government has limited capacity to enforce laws or settle disputes domestically. Many businesses in Somalia are owned by members of the diaspora, many of whom operate them as Somali businesses rather than foreign entities. The FGS still has not passed the investor and investment bill, which could provide a legal framework for investor-state dispute settlement. Somalia is not a signatory to any internationally binding treaty or investment agreement to arbitrate investment disputes. The government has no bilateral investment treaty or free trade agreement with an investment chapter with the United States. There have been no investment disputes involving U.S. persons or other foreign investors for the past 30 years.
International Commercial Arbitration and Foreign Courts
Somalia is not a signatory to any convention on commercial arbitration, and local courts have limited capacity to enforce their own decisions. Domestically, parties often resort to a local council of elders, clan elders, religious leaders, or al-Shabaab to settle disputes. Many foreign companies rely on arbitration courts in Djibouti or the United Arab Emirates (UAE). The Intergovernmental Authority on Development is developing a regional initiative to establish a business dispute and arbitration center in Djibouti.
Bankruptcy Regulations
Somalia has no bankruptcy laws.
6. Financial Sector
Capital Markets and Portfolio Investment
Somalia has no structured financial system and does not have portfolio investment financial products in the market. Somalia does not issue government bonds or corporate bonds. There is one private stock exchange operating in Somalia, but the government has no authority to regulate trade in stocks and securities.
Money and Banking System
Somalia’s banking system has yet to recover from years of conflict. Moving money into and around the country through traditional banking mechanisms is difficult. The Somali shilling lacks legitimacy, as it has not been printed since 1991 and more than 98 percent of the bills in circulation are counterfeit, printed by warlords and rogue businessmen. Consequently, much of the Somali economy relies on the U.S. dollar.
Since the FGS reestablished the CBS in 2009, it has been slowly developing the tools and capabilities to oversee licensing and supervision of commercial banks and money transfer businesses. The CBS has issued licenses to 10 banks and seven informal money transfer systems known as hawalas. A 2019 anti-money laundering/countering the financing of terrorism law requires enhanced KYC controls and created the government’s financial investigation unit, the FRC. Nevertheless, a 2020 UN report found that al-Shabaab moves millions of dollars through the formal banking system, which keeps Somalia’s financial risk profile high. Somalia’s banks are also stymied by the lack of any national identification, which creates challenges in verifying client identity.
Only 15 percent of Somalis have formal bank accounts due to a lack of branches in many towns and the difficulty of obtaining acceptable forms of identification to open accounts. Mobile finance therefore plays an important role in the economy. Mobile money platforms have been essentially unregulated since their introduction in 2012. In February 2021 the CBS issued its first mobile money license.
There is no publicly available data regarding the assets of privately owned banks. No foreign banks operate in Somalia. The CBS issued an interim license to an Egyptian bank in April 2019, but the bank has not opened.
Foreign Exchange and Remittances
Foreign Exchange
While the official currency for Somalia is the Somali shilling, almost all of the currency in circulation is counterfeit. As a result, Somalia’s economy is largely dollarized, and a significant portion of daily transactions are conducted through phone-based mobile money managed by telecommunications companies.
There is no restriction or limitation on converting or repatriating funds associated with outside investment. The shilling is volatile and fluctuates rapidly against the dollar. Since there is no government agency that determines monetary policy at this time, the exchange rate is set by currency traders located in Mogadishu’s Bakara market. The government has plans to print a new currency but does not have the budget do so in the near term.
Remittance Policies
For two decades there was no functioning banking system in Somalia. Instead, hawalas transferred money into, out of, and within Somalia. Somalis in the diaspora remit more than $1 billion annually, accounting for between 20 and 40 percent of Somalia’s GDP. While the effects of the COVID-19 pandemic on Somalia’s financial sector are still uncertain, during the early stages of the pandemic the country saw a drop in remittances.
Sovereign Wealth Funds
There are no sovereign wealth funds or any other state-owned investment fund.
Somalia has no fully or partially state-owned enterprises.
Privatization Program
Since the government does not own any business entities, there are no entities to privatize. The World Bank has supported the development of a public-private partnership law, but parliament has not yet acted on it.
7. State-Owned Enterprises
Somalia has no fully or partially state-owned enterprises.
Privatization Program
Since the government does not own any business entities, there are no entities to privatize. The World Bank has supported the development of a public-private partnership law, but parliament has not yet acted on it.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data
Year
Amount
Year
Amount
Host Country Gross Domestic Product (GDP) ($M USD)
Table 3: Sources and Destination of FDI
Data not available.
Table 4: Sources of Portfolio Investment
Data not available.
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 a robust legal sector committed to upholding the rule of law; a free press and investigative reporting; a mature financial and services sector; good infrastructure; and experienced local partners.
In dealing with the legacy of apartheid, South African laws, policies, and reforms seek economic transformation to accelerate 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, often employing tariffs and other trade measures that support domestic industry while negatively impacting foreign trade partners. President Ramaphosa’s October 2020 Economic Reconstruction and Recovery Plan unveiled the latest domestic support target: the substitution of 20% of imported goods in 42 categories with domestic production within 5 years. Other government initiatives to accelerate transformation include labor laws to achieve proportional racial, gender, and disability representation in workplaces and prescriptive government procurement requirements such as equity stakes and employment thresholds for historically disadvantaged South Africans.
South Africa continued to fight its way back from a “lost decade” in which economic growth stagnated, hovering at zero percent pre-COVID-19, largely due to corruption and economic mismanagement. South Africa suffered a four-quarter technical recession in 2019 and 2020 with economic growth registering only 0.2 percent growth for the entire year of 2019 and contracting 7 percent in 2020. As a result, Moody’s rating agency downgraded South Africa’s sovereign debt to sub-investment grade. S&P and Fitch ratings agencies made their initial sovereign debt downgrades to sub-investment grade earlier.
As the country continues to grapple with these challenges, it implemented one of the strictest economic and social lockdown regimes in the world at a significant cost to its economy. In a 2020 survey of over 2,000 South African businesses conducted by Statistics South Africa (StatsSA), over eight percent of respondents permanently ceased trading, while over 36 percent indicated short-term layoffs. South Africa had a -7 percent rate of GDP growth for the year and the official unemployment rate in the fourth quarter of 2020 was 32.5 percent. Other challenges include: creating policy certainty; reinforcing regulatory oversight; making state-owned enterprises (SOEs) profitable rather than recipients of government money; 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; and increasing the supply of appropriately-skilled labor.
Despite structural challenges, South Africa remains a destination conducive to U.S. investment as a comparatively low-risk location in Africa, the fastest growing consumer market in the world. Google (US) invested approximately USD 140 million and PepsiCo invested over USD 1 billion in 2020. Ford announced a USD 1.6 billion investment, including the expansion of its Gauteng province manufacturing plant in January 2021.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment (FDI)
The Government of South Africa is generally open to foreign investment to drive economic growth, improve international competitiveness, and access foreign markets. The Department of Trade and Industry and Competition’s (the DTIC) Trade and Investment South Africa (TISA) division assists foreign investors. It actively courts manufacturing in sectors where it believes South Africa has a competitive advantage. It favors sectors that are labor intensive and with the potential for local supply chain development. The DTIC publishes the “Investor’s Handbook” on its website: www.the DTIC.gov.za and TISA provides investment support through One Stop Shops in Pretoria, Johannesburg, Cape Town, Durban, and online at http://www.investsa.gov.za/one-stop-shop/ (see Business Facilitation). The 2018 Competition Amendment Bill introduced a government review mechanism for FDI in certain sectors on national security grounds, including energy, mining, banking, insurance, and defense (see section on Laws and Regulations on Foreign Direct Investment). The private sector has expressed concern about the politicization of mergers and acquisitions.
Limits on Foreign Control and Right to Private Ownership and Establishment
Currently there is no limitation on foreign private ownership. South Africa’s efforts to re-integrate historically disadvantaged South Africans into the economy have led to policies that could disadvantage foreign and some locally owned companies. 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 obtain bidding preferences on government tenders and contracts. The DTIC 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. Only eight multinationals, primarily in the technology sector, participate in the EE program. The government also is considering a new Equity Employment Bill that will set a numerical threshold, purportedly at the discretion of each Ministry, for employment based on race, gender and disability, over and above other B-BBEE criteria.
Other Investment Policy Reviews
The World Trade Organization published a Trade Policy Review for the Southern African Customs Union, which South Africa joined in 2015. OECD published an Economic Survey on South Africa, with investment-related information in 2020. UN Conference on Trade and Development (UNCTAD) has not conducted investment policy reviews for South Africa. https://www.oecd.org/economy/surveys/South-africa-2020-Overview_E.pdf
Business Facilitation
According to the World Bank’s Doing Business report, South Africa’s rank in ease of doing business in 2020 was 84 of 190, down from 82 in 2019. It ranks 139th for starting a business, 5 points lower than in 2019. In South Africa, it takes an average of 40 days to complete the process. South Africa ranks 145 of 190 countries on trading across borders.
The DTIC has established One Stop Shops (OSS) to simplify administrative procedures and guidelines for foreign companies wishing to invest in South Africa in Cape Town, Durban, and Johannesburg. OSS are supposed to have officials from government entities that handle regulation, permits and licensing, infrastructure, finance, and incentives, with a view to reducing lengthy bureaucratic procedures, reducing bottlenecks, and providing post-investment services. Some users of the OSS complain that some of the inter-governmental offices are not staffed, so finding a representative for certain transactions may be difficult. The virtual OSS web site is: http://www.investsa.gov.za/one-stop-shop/.
The Companies and Intellectual Property Commission (CIPC) issues business registrations, and publishes a step-by-step guide and allows for online registration at (http://www.cipc.co.za/index.php/register-your-business/companies/), through a self-service terminal, or through a collaborating private bank. New businesses must also request through the South African Revenue Service (SARS) an income tax reference number for turnover tax (small companies), corporate tax, employer contributions for PAYE (income tax), and skills development levy (applicable to most companies). The smallest informal companies may not be required to register with CIPC but must register with the tax authorities. Companies must also register with the Department of Labour (DoL) – www.labour.gov.za – to contribute to the Unemployment Insurance Fund (UIF) and a compensation fund for occupational injuries. DoL registration may take up to 30 days but may be done concurrently with other registrations.
Outward Investment
South Africa does not incentivize outward investments. South Africa’s stock foreign direct investments in the United States in 2019 totaled USD 4.1 billion (latest figures available), a 5.1 percent increase from 2018. The largest outward direct investment of a South African company was a gas liquefaction plant in the State of Louisiana by Johannesburg Stock Exchange (JSE) and NASDAQ dual-listed petrochemical company SASOL. There are some restrictions on outward investment, such as a R1 billion (USD 83 million) limit per year on outward flows per company. Larger investments must be approved by the South African Reserve Bank and at least 10 percent of the foreign target entities’ voting rights must be obtained through the investment. https://www.resbank.co.za/RegulationAndSupervision/FinancialSurveillanceAndExchangeControl/FAQs/Pages/Corporates.aspx
3. Legal Regime
Transparency of the Regulatory System
South African laws and regulations are generally published in draft form for stakeholder comment. However, foreign stakeholders have expressed concern over the adequacy of notice and the government’s willingness to address comments. Legal, regulatory, and accounting systems are generally transparent and consistent with international norms. The DTIC is responsible for business-related regulations. It develops and reviews regulatory systems in the areas of competition, standards, consumer protection, company and intellectual property registration and protections, as well as other subjects in the public interest. It also oversees the work of national and provincial regulatory agencies mandated to assist the DTIC in creating and managing competitive and socially responsible business and consumer regulations. The DTIC publishes a list of Bills and Acts that govern its work at: http://www.theDTIC.gov.za/legislation/legislation-and-business-regulation/?hilite=%27IDZ%27
South Africa’s Consumer Protection Act (2008) reinforces various consumer rights, including right of product choice, right to fair contract terms, and right of product quality. The law’s impact varies by industry, and businesses have adjusted their operations accordingly. A brochure summarizing the Consumer Protection Act can be found at: http://www.theDTIC.gov.za/wp-content/uploads/CP_Brochure.pdf . Similarly, the National Credit Act of 2005 aims to promote a fair and non-discriminatory marketplace for access to consumer credit and for that purpose to provide the general regulation of consumer credit and improves standards of consumer information. A brochure summarizing the National Credit Act can be found at: http://www.theDTIC.gov.za/wp-content/uploads/NCA_Brochure.pdf
International Regulatory Considerations
South Africa is a member of the African Continental Free Trade Area, which commenced trading in January 2021. It is a signatory to the SADC-EAC-COMESA Tripartite FTA and a member of the Southern Africa Customs Union (SACU), which has a common external tariff and tariff-free trade between its five members (South Africa, Botswana, Lesotho, Namibia, and Eswatini, formerly known as Swaziland). South Africa has free trade agreements with the Southern African Development Community (SADC); the Trade, Development and Cooperation Agreement (TDCA) between South Africa and the European Union (EU); the EFTA-SACU Free Trade Agreement between SACU and the European Free Trade Association (EFTA) – Iceland, Liechtenstein, Norway, and Switzerland; and the Economic Partnership Agreement (EPA) between the SADC EPA States (South Africa, Botswana, Namibia, Eswatini, Lesotho, and Mozambique) and the EU and its Member States. SACU and Mozambique (SACUM) and the United Kington (UK) signed an Economic Partnership Agreement (EPA) in September 2019.
South Africa is a member of the WTO. While it notifies some draft technical regulations to the Committee on Technical Barriers to Trade (TBT), it is often after implementation. In November 2017, South Africa ratified the WTO’s Trade Facilitation Agreement, implementing many of its commitments, including some Category B notifications. The South African Government is not party to the WTO’s Government Procurement Agreement (GPA).
Legal System and Judicial Independence
South Africa has a strong legal system composed of civil law inherited from the Dutch, common law inherited from the British, and African customary law. Generally, South Africa follows English law in criminal and civil procedure, company law, constitutional law, and the law of evidence, but follows Roman-Dutch common law in contract law, law of delict (torts), law of persons, and family law. South African company law regulates corporations, including external companies, non-profit, and for-profit companies (including state-owned enterprises). Funded by the Department of Justice and Constitutional Development, South Africa has district and magistrate courts across 350 districts and high courts for each of the provinces. Cases from Limpopo and Mpumalanga are heard in Gauteng. The Supreme Court of Appeals hears appeals, and its decisions may only be overruled by the Constitutional Court. South Africa has multiple specialized courts, including the Competition Appeal Court, Electoral Court, Land Claims Court, the Labor and Labor Appeal Courts, and Tax Courts to handle disputes between taxpayers and SARS. Rulings are subject to the same appeals process as other courts.
Laws and Regulations on Foreign Direct Investment
The February 2019 ratification of the Competition Amendment Bill (CAB) introduced, among other revisions, section 18A that mandates the President create an as-of-yet-unestablished committee comprised of 28 Ministers and officials chosen by the President to evaluate and intervene in a merger or acquisition by a foreign acquiring firm on the basis of protecting national security interests. The law also states that the President must identify and publish in the Gazette, the South African equivalent of the U.S. Federal Register, a list of national security interests including the markets, industries, goods or services, sectors or regions for mergers involving a foreign acquiring firm.
Competition and Antitrust Laws
The Competition Commission, separate from the above committee, is empowered to investigate, control, and evaluate restrictive business practices, abuse of dominant positions, and review mergers to achieve equity and efficiency. Its public website is www.compcom.co.za . The Competition Tribunal has jurisdiction throughout South Africa and adjudicates competition matters in accordance with the CAB. While the Commission is the investigation and enforcement agency, the Tribunal is the adjudicative body, very much like a court.
Expropriation and Compensation
Racially discriminatory property laws and land allocations during the colonial and apartheid periods resulted in highly distorted patterns of land ownership and property distribution in South Africa. Given land reform’s slow and mixed success, the National Assembly (Parliament) passed a motion in February 2018 to investigate amending the constitution (specifically Section 25, the “property clause”) to allow for land expropriation without compensation (EWC). Some politicians, think-tanks, and academics argue that Section 25 already allows for EWC in certain cases, while others insist that amendments are required to implement EWC more broadly. Parliament tasked an ad hoc Constitutional Review Committee composed of parliamentarians from various political parties to report back on whether to amend the constitution to allow EWC, and if so, how it should be done. In December 2018, the National Assembly adopted the committee’s report recommending a constitutional amendment. Following elections in May 2019 the new Parliament created an ad hoc Committee to Initiate and Introduce Legislation to Amend Section 25 of the Constitution. The Committee drafted constitutional amendment language explicitly allowing for EWC and accepted public comments on the draft language through March 2021. Parliament awaits the committee’s submission after granting a series of extensions to complete its work. Constitutional amendments require a two-thirds parliamentary majority (267 votes) to pass, as well as the support of six out of the nine provinces in the National Council of Provinces. Because no single political party holds such a majority, a two-third vote can only be achieved with the support of two or more political parties. Academics foresee EWC test cases in the next year primarily targeted at abandoned buildings in urban areas, informal settlements in peri-urban areas, and property with labor tenants in rural areas.
In October 2020, the Government of South Africa also published a draft expropriation bill in its Gazette, which would introduce the EWC concept into its legal system. The application of the draft’s provisions could conflict with South Africa’s commitments to international investors under its remaining investment protection treaties as well as its obligations under customary international law. Submissions closed in February 2021.
Existing expropriation law, including The Expropriation Act of 1975 (Act) and the Expropriation Act Amendment of 1992, entitles the government to expropriate private property for reasons of public necessity or utility. The decision is an administrative one. Compensation should be the fair market value of the property as agreed between the buyer and seller, or determined by the court per Section 25 of the Constitution.
In 2018, the government operationalized the 2014 Property Valuation Act that creates the office of Valuer-General charged with the valuation of property that has been identified for land reform or acquisition or disposal. The Act gives the government the option to expropriate property based on a formulation in the Constitution termed “just and equitable compensation.”
The Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA), enacted in 2004, gave the state ownership of South Africa’s mineral and petroleum resources. It replaced private ownership with a system of licenses controlled by the government and issued by the Department of Mineral Resources. Under the MPRDA, investors who held pre-existing rights were granted the opportunity to apply for licenses, provided they met the licensing criteria, including the achievement of certain B-BBEE objectives. Parliament passed amendment to the MPRDA in 2014 but the President never signed them. In August 2018, the Minister for the Department of Mineral Resources, Gwede Mantashe, called for the recall of the amendments so that oil and gas could be separated out into a new bill. He also announced the B-BBEE provisions in the new Mining Charter would not apply during exploration but would start once commodities were found and mining commenced. In November 2019, the newly merged Department of Mineral Resources and Energy (DMRE) published draft regulations to the MPRDA. In December 2019, the DMRE published the Draft Upstream Petroleum Resources Development Bill for public comment. Parliament continues to review this legislation. Oil and gas exploration and production is currently regulated under the Mineral and Petroleum Resources Development Act, 2002 (MPRDA), but the new Bill will repeal and replace the relevant sections pertaining to upstream petroleum activities in the MPRDA.
Dispute Settlement
ICSID Convention and New York Convention
South Africa is a member of the New York Convention of 1958 on the recognition and enforcement of foreign arbitration awards as implemented through the Recognition and Enforcement of Foreign Arbitral Awards Act, No. 40 of 1977 . It is not a member of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States or the World Bank’s International Center for the Settlement of Investment Disputes.
Investor-State Dispute Settlement
The 2015 Promotion of Investment Act removes the option for investor state dispute settlement through international courts typically afforded through bilateral investment treaties (BITs). Instead, investors disputing an action taken by the South African government must request the DTIC to facilitate the resolution by appointing a mediator. A foreign investor may also approach any competent court, independent tribunal, or statutory body within South Africa for the resolution of the dispute. Dispute resolution can be a time-intensive process in South Africa. If the matter is urgent, and the presiding judge agrees, an interim decision can be taken within days while the appeal process can take months or years. If the matter is a dispute of law and is not urgent, it may proceed by application or motion to be solved within months. Where there is a dispute of fact, the matter is referred to trial, which may take several years so there is a growing preference for Alternative Dispute Resolution.
International Commercial Arbitration and Foreign Courts
The Arbitration Act of 1965, which does not distinguish between domestic and international arbitration and is not based on UNCITRAL model law, governs arbitration in South Africa. South African courts retain discretion to hear a dispute over a contract using the law of a foreign jurisdiction. However, the South African court will interpret the contract with the law of the country or jurisdiction provided for in the contract. South Africa recognizes the International Chamber of Commerce, which supervises the resolution of transnational commercial disputes. It applies commercial and bankruptcy laws with consistency and has an independent, objective court system for enforcing property and contractual rights. Alternative Dispute Resolution is increasingly popular in South Africa for many reasons, including the confidentiality which can be imposed on the evidence, case documents, and the judgment. South Africa’s new Companies Act also provides a mechanism for Alternative Dispute Resolution.
Bankruptcy Regulations
South Africa’s bankruptcy regime grants many rights to debtors, including rejection of overly burdensome contracts, avoiding preferential transactions, and the ability to obtain credit during insolvency proceedings. South Africa ranks 68 out of 190 countries for resolving insolvency according to the 2020 World Bank Doing Business report, a drop from its 2019 ranking of 65.
6. Financial Sector
Capital Markets and Portfolio Investment
South Africa recognizes the importance of foreign capital in financing persistent current account and budget deficits, and South Africa’s financial markets are regarded as some of the most sophisticated among emerging markets. A sound legal and regulatory framework governs financial institutions and transactions. The fully independent South African Reserve Bank (SARB) regulates a wide range of commercial, retail and investment banking services according to international best practices, such as Basel III, and participates in international forums such as the Financial Stability Board and G-20 Finance Ministers and Central Bank Governors. The Johannesburg Stock Exchange (JSE) serves as the front-line regulator for listed firms but is supervised by the Financial Services Board (FSB). The FSB also oversees other non-banking financial services, including other collective investment schemes, retirement funds and a diversified insurance industry. The South African government has committed to tabling a Twin Peaks regulatory architecture to provide a clear demarcation of supervisory responsibilities and consumer accountability and to consolidate banking and non-banking regulation.
South Africa has access to deep pools of capital from local and foreign investors that provides sufficient scope for entry and exit of large positions. Financial sector assets amount to almost three times the country’s GDP, and the JSE is the largest on the continent with capitalization of approximately USD 670 billion and 335 companies listed on the main, alternative, and other smaller boards as of January 2021. Non-bank financial institutions (NBFI) hold about two thirds of financial assets. The liquidity and depth provided by NBFIs make these markets attractive to foreign investors, who hold more than a third of equities and government bonds, including sizeable positions in local-currency bonds. A well-developed derivative market and a currency that is widely traded as a proxy for emerging market risk allows investors considerable scope to hedge positions with interest rate and foreign exchange derivatives.
SARB’s exchange control policies permit authorized currency dealers, to buy and borrow foreign currency freely on behalf of domestic and foreign clients. The size of transactions is not limited, but dealers must report all transactions to SARB. Non-residents may purchase securities without restriction and freely transfer capital in and out of South Africa. Local individual and institutional investors are limited to holding 25 percent of their capital outside of South Africa.
Banks, NBFIs, and other financial intermediaries are skilled at assessing risk and allocating credit based on market conditions. Foreign investors may borrow freely on the local market. In recent years, the South African auditing profession has suffered significant reputational damage with allegations that two large foreign firms aided, and abetted irregular client management practices linked to the previous administration, or engaged in delinquent oversight of listed client companies. South Africa’s WEF competitiveness rating for auditing and reporting fell from number one in the world in 2016, to number 60 in 2019.
Money and Banking System
South African banks are well capitalized and comply with international banking standards. There are 19 registered banks in South Africa and 15 branches of foreign banks. Twenty-nine foreign banks have approved local representative offices. Five banks – Standard, ABSA, First Rand (FNB), Capitec, and Nedbank – dominate the sector, accounting for over 85 percent of the country’s banking assets, which total over USD 390 billion. SARB regulates the sector according to the Bank Act of 1990. There are three alternatives for foreign banks to establish local operations, all of which require SARB approval: separate company, branch, or representative office. The criteria for the registration of a foreign bank are the same as for domestic banks. Foreign banks must include additional information, such as holding company approval, a letter of “comfort and understanding” from the holding company, and a letter of no objection from the foreign bank’s home regulatory authority. More information on the banking industry may be found at www.banking.org.za .
The Financial Services Board (FSB) governs South Africa’s non-bank financial services industry (see website: www.fsb.co.za/ ). The FSB regulates insurance companies, pension funds, unit trusts (i.e., mutual funds), participation bond schemes, portfolio management, and the financial markets. The JSE Securities Exchange SA (JSE), the sixteenth largest exchange in the world measured by market capitalization, enjoys the global reputation of being one of the best regulated. Market capitalization stood at USD 670 billion as of January 2021, with 335 firms listed. The Bond Exchange of South Africa (BESA) is licensed under the Financial Markets Control Act. Membership includes banks, insurers, investors, stockbrokers, and independent intermediaries. The exchange consists principally of bonds issued by government, state-owned enterprises, and private corporations. The JSE acquired BESA in 2009. More information on financial markets may be found at www.jse.co.za . Non-residents can finance 100 percent of their investment through local borrowing. A finance ratio of 1:1 also applies to emigrants, the acquisition of residential properties by non-residents, and financial transactions such as portfolio investments, securities lending and hedging by non-residents.
Foreign Exchange and Remittances
Foreign Exchange
The SARB Exchange Control Department administers foreign exchange policy. An authorized foreign exchange dealer, normally one of the large commercial banks, must handle international commercial transactions and report every purchase of foreign exchange, irrespective of the amount. Generally, there are only limited delays in the conversion and transfer of funds. Due to South Africa’s relatively closed exchange system, no private player, however large, can hedge large quantities of Rand for more than five years. While non-residents may freely transfer capital in and out of South Africa, transactions must be reported to authorities. Non-residents may purchase local securities without restriction. To facilitate repatriation of capital and profits, foreign investors should ensure an authorized dealer endorses their share certificates as “non-resident.” Foreign investors should also be sure to maintain an accurate record of investment.
Remittance Policies
Subsidiaries and branches of foreign companies in South Africa are considered South African entities, treated legally as South African companies, and subject to SARB’s exchange control. South African companies generally may freely remit to non-residents repayment of capital investments; dividends and branch profits (provided such transfers are made from trading profits and are financed without resorting to excessive local borrowing); interest payments (provided the rate is reasonable); and payment of royalties or similar fees for the use of know-how, patents, designs, trademarks or similar property (subject to SARB prior approval).
While South African companies may invest in other countries, SARB approval/notification is required for investments over R500 million (USD 33.5 million). South African individuals may freely invest in foreign firms listed on South African stock exchanges. Individual South African taxpayers in good standing may make investments up to a total of R4 million (USD 266,000) in other countries. As of 2010, South African banks are permitted to commit up to 25 percent of their capital in direct and indirect foreign liabilities. In addition, mutual and other investment funds can invest up to 25 percent of their retail assets in other countries. Pension plans and insurance funds may invest 25 percent of their retail assets in other countries.
Before accepting or repaying a foreign loan, South African residents must obtain SARB approval. SARB must also approve the payment of royalties and license fees to non-residents when no local manufacturing is involved. DTIC must approve the payment of royalties related to patents on manufacturing processes and products. Upon proof of invoice, South African companies may pay fees for foreign management and other services provided such fees are not calculated as a percentage of sales, profits, purchases, or income.
Sovereign Wealth Funds
Although the President and the Finance Minister announced in February 2020 the aim to create a Sovereign Wealth Fund, no action has been taken.
7. State-Owned Enterprises
State-owned enterprises (SOEs) play a significant role in the South African economy in key sectors such as electricity, transport (air, rail, freight, and pipelines), and telecommunications. Limited competition is allowed in some sectors (e.g., telecommunications and air). The government’s interest in these sectors often competes with and discourages foreign investment.
The Department of Public Enterprises (DPE) oversees in full or in part for seven of the approximately 700 SOEs at the national, provincial, and local levels. These include: Alexkor (diamonds); Denel (military equipment); Eskom (electricity generation, transmission, and distribution); South African Express and Mango (budget airlines); South African Airways (national carrier); South African Forestry Company (SAFCOL); and Transnet (transportation). The seven SOEs employ approximately 105,000 people. For other national-level SOEs, the appropriate cabinet minister acts as shareholder on behalf of the state. The Department of Transport, for example, oversees South African’s National Roads Agency (SANRAL), Passenger Rail Agency of South Africa (PRASA), and Airports Company South Africa (ACSA), which operates nine of South Africa’s airports. The Department of Communications oversees the South African Broadcasting Corporation (SABC).
SOEs under DPE’s authority posted a combined loss of R13.9 billion (USD 0.9 billion) in 2019. Many are plagued by mismanagement and corruption, and repeated government bailouts have exposed the public sector’s balance sheet to sizable contingent liabilities. The debt of Eskom alone represents about 10 percent of GDP of which two-thirds is guaranteed by government, and the company’s direct cost to the budget has exceeded 9 percent of GDP since 2008/9.
Eskom, provides generation, transmission, and distribution for over 90 percent of South Africa’s electricity of which 80 percent comes from 15 coal-fired power plants. Eskom’s coal plants are an average of 39 years old, and a lack of maintenance has caused unplanned breakdowns and rolling blackouts, known locally as “load shedding,” as old coal plants struggle to keep up with demand. Load shedding reached a record 859 hours in 2020 costing the economy an estimated $7 billion and is expected to continue for the next several years until the South African Government can increase generating capacity and increase its Energy Availability Factor (EAF). In October 2019 the DMRE finalized its Integrated Resource Plan (IRP) for Electricity, which outlines South Africa’s policy roadmap for new power generation until 2030, which includes replacing 10,000 Mega Watts (MW) of coal-fired generation by 2030 with a mix of technologies, including renewables, gas and coal. The IRP also leaves the possibility open for procurement of nuclear technology at a “scale and pace that flexibly responds to the economy and associated electricity demand” and DMRE issued a Request for Information on new nuclear build in 2020. In accordance with the IRP, the South African government recently approved almost 14,000 Mega Watts (MW) of power to address chronic electricity shortages. The government announced the long-awaited Bid Window 5 (BW5) of the Renewable Energy Independent Power Procurement Program (REIPPP) in September 2020, the primary method by which renewable energy has been introduced into South Africa. The REIPP relies primarily on private capital and since the program launched in 2011 it has already attracted approx. ZAR 210 billion (USD 14 billion) of investment into the country. All three major credit ratings agencies have downgraded Eskom’s debt following Moody’s downgrade of South Africa’s sovereign debt rating in March 2020, which could impact investors’ ability to finance energy projects.
Transnet National Ports Authority (TNPA), the monopoly responsible for South Africa’s ports, charges some of the highest shipping fees in the world. High tariffs on containers subsidize bulk shipments of coal and iron. According to the South African Ports Regulator, raw materials exporters paid as much as one quarter less than exporters of finished products. TNPA is a division of Transnet, a state-owned company that manages the country’s port, rail, and pipeline networks. In April 2012, Transnet launched its Market Driven Strategy (MDS), a R336 billion (USD 28 billion) investment program to modernize its port and rail infrastructure. In March 2014, Transnet announced an average overall tariff increase of 8.5 percent at its ports to finance a USD 240 million modernization effort. In 2016, Transnet reported it had invested R124 billion (USD 10.3 billion) in the previous four years in rail, ports, and pipeline infrastructure. In May 2020 S&P downgraded Transnet’s local currency rating from BB to BB- based on a generally negative outlook for South Africa’s economy rather than Transnet’s outlook specifically.
Direct aviation links between the United States and South Africa have been sharply curtailed by the COVID-19 pandemic. The emergence of a more contagious South African strain of COVID-19 in December 2020 spurred a deadly spike in infections and led the United States and many African countries to restrict entry of persons traveling from South Africa. Consequently, many airlines suspended transcontinental flights between South Africa and Europe, as well as the United States. United Airlines and Delta Air Lines provided regular service between Atlanta (Delta) and Newark (United) to Johannesburg and Cape Town before the pandemic, but both airlines have suspended service indefinitely pending resumption of sufficient demand. The state-owned carrier, South African Airways (SAA), entered business rescue in December 2019 and suspended all operations indefinitely in September 2020. The pandemic exacerbated SAA’s already dire financial straits and complicated its attempts to find a strategic equity partner to help it resume operations. Industry experts doubt the airline will be able to resume operations.
The telecommunications sector, while advanced for the continent, is hampered by regulatory uncertainty and poor implementation of the digital migration, both of which contribute to the high cost of data. In 2006, South Africa agreed to meet an International Telecommunication Union deadline to achieve analogue-to-digital migration by June 1, 2015. As of March 2021, South Africa has initiated but not completed the migration due to legal delays. Until this process is finalized, South Africa will not be able to effectively allocate the resulting additional spectrum. The independent communications regulator initiated a spectrum auction in September 2020, which was enjoined by court action in February 2021 following suits by two of the three biggest South African telecommunications companies. The regulator temporarily released high-demand spectrum to mobile network operators in June 2020 and extended the temporary release in March 2021.
Privatization Program
The government has not taken any concrete action to privatize SOEs. Candidates for unbundling are Eskom and defense contractor Denel.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data
Year
Amount
Year
Amount
Host Country Gross Domestic Product (GDP) ($M USD)
UNCTAD data available at https://stats.unctad.org/
handbook/EconomicTrends/Fdi.html
* Source for Host Country Data: N/A
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
Total Inward
145,247
100%
Total Outward
214, 998
100%
United Kingdom
45, 366
31.3%
The Netherlands
93, 532
43.5%
The Netherlands
25, 615
17.6%
United Kingdom
26, 163
12.2%
Belgium
15, 940
10.9%
United States
15, 705
7.3%
Japan
8, 784
6.1%
Mauritius
11, 226
5.2%
United States
8,784
6.1%
Australia
7, 930
3.7%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total
Equity Securities
Total Debt Securities
All Countries
149, 455
100%
All Countries
139, 515
100%
All Countries
9, 940
100%
United Kingdom
47, 384
32%
United Kingdom
45, 104
32%
United Kingdom
2, 280
X%
Ireland
21, 642
14%
Ireland
20, 614
15%
United States
1, 902
X%
United States
19, 735
13%
United States
17, 834
13%
Ireland
1, 028
X%
Luxembourg
15, 711
11%
Luxembourg
15, 140
11%
Italy
783
X%
The Netherlands
9, 283
6%
The Netherlands
9, 034
6%
Luxembourg
571
X%
South Korea
Executive Summary
The Republic of Korea (ROK) offers foreign investors political stability, public safety, world-class infrastructure, a highly skilled workforce, and a dynamic private sector. Following market liberalization measures in the 1990s, foreign portfolio investment has grown steadily, exceeding 36 percent of the Korea Composite Stock Price Index (KOSPI) total market capitalization as of February 2021.
Studies by the Korea International Trade Association, however, have shown that the ROK underperforms in attracting FDI relative to the size and sophistication of its economy due to a complicated, opaque, and country-specific regulatory framework, even as low-cost producers, most notably China, have eroded the ROK’s competitiveness in the manufacturing sector. A more benign regulatory environment will be crucial to foster innovations such as fifth generation (5G) mobile communications that enable smart manufacturing, autonomous vehicles, cloud computing, and the Internet of Things – technologies that could fail to mature under restrictive regulations that do not align with global standards. The ROK government has taken steps to address regulatory issues over the last decade, notably with the establishment of a Foreign Investment Ombudsman to address the concerns of foreign investors. In 2019, the ROK government created a “regulatory sandbox” program to spur creation of new products in the financial services, energy, and tech sectors. Industry observers recommend additional procedural steps to improve the investment climate, including Regulatory Impact Analyses (RIAs) and wide solicitation of substantive feedback from foreign investors and other stakeholders.
The revised U.S.-Korea Free Trade Agreement (KORUS) entered into force January 1, 2019, and helps secure U.S. investors broad access to the ROK market. Types of investment assets protected under KORUS include equity, debt, concessions, and intellectual property rights. With a few exceptions, U.S. investors are treated the same as ROK investors in the establishment, acquisition, and operation of investments in the ROK. Investors may elect to bring claims against the government for alleged breaches of trade rules under a transparent international arbitration mechanism.
The ROK’s COVID-19 response has been exemplary, serving as a global role model. It has been science-driven, with the Korea Disease Control and Prevention Agency leading from day one; transparent, with public health experts briefing the public almost every day; and trusted, with public compliance on social distancing guidelines, including universal mask-wearing. Largely due to successful handling of COVID-19, including through sound fiscal and monetary responses, the ROK was able to manage the pandemic without shutting down the economy, and GDP dropped a mere one percent in 2020. The ROK government was also aggressive in pursuing economic stimulus, devoting more than USD 220 billion to stimulus in 2020. As a result, the Korean domestic economy fared better than nearly all its OECD peers. The risk of a COVID resurgence still looms, and Korea’s export-oriented economy remains vulnerable to external shocks, including supply chain disruptions, going forward. The attention of the public, the government, and the health establishment has now turned to the task and logistics of mass vaccination. In late February, the Moon administration launched the vaccination program nationwide, with the goal of achieving herd immunity by November. President Moon has promised to inoculate all residents for free in 2021, beginning with front-line healthcare workers.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The ROK government welcomes foreign investment. In a March 2019 meeting, President Moon Jae-in equated the foreign business community’s success with the Korean economy’s progress. The ROK government offers incentives to foreign companies bringing in technology and investments contributing to the ROK’s manufacturing sector. Hurdles for foreign investors in the ROK include regulatory opacity, inconsistent interpretation of regulations, unanticipated regulatory changes, underdeveloped corporate governance, rigid labor policies, Korea-specific consumer protection measures, and the political influence of large conglomerates, known as chaebol.
The 1998 Foreign Investment Promotion Act (FIPA) is the principal 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 also includes:
Simplified procedures to apply to invest in the ROK;
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;
Creation 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 Korea Trade-Investment Promotion Agency (KOTRA) facilitates foreign investment through its Invest KOREA office (also on the web at http://investkorea.org). For investments exceeding 100 million won (about USD 88,000), KOTRA helps investors establish domestically-incorporated foreign-invested companies. KOTRA and the Ministry of Trade, Industry and Energy (MOTIE) organize a yearly Foreign Investment Week to attract investment to South Korea. In February 2021, Trade Minister Yoo Myung-hee met with representatives of foreign-invested firms in the ROK and noted the critical role they play in the ROK economy and job creation. The ROK’s key official responsible for FDI promotion and retention is the Foreign Investment Ombudsman. The position is commissioned by the ROK President and heads a grievance resolution body that collects and analyzes concerns from foreign firms; coordinates reforms with relevant administrative agencies; and proposes new policies to promote foreign investment. 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 remunerative activity across many sectors of the economy. However, under the Foreign Exchange Transaction Act (FETA), restrictions on foreign ownership remain for 30 industrial sectors, including three that are closed to foreign investment (see below). 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.
The following is a list of restricted sectors for foreign investment. Figures in parentheses generally denote the Korean Industrial Classification Code, while those for 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)
Newspaper publication, daily (58121) (Note: Other newspapers with the same industry code 58121 are restricted to less than 50 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)
Newspaper publication, non-daily (58121) (Note: Daily newspapers with the same industry code 58121 are restricted to less than 30 percent foreign equity.)
Television program/content 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 Separately 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 areas (64121)
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://www.wto.org/english/tratop_e/tpr_e/tp446_e.htm
The ROK has not undergone investment policy reviews 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), which evaluates whether a country’s online registration process is clear and complete, awarded Smart Biz 2.5 of 10 possible points and suggested improvements in registering limited liability companies. The Invest KOREA information portal received 2 of 10 points. The Korea Commission for Corporate Partnership and the Ministry of Gender Equality and Family (http://www.mogef.go.kr/) are charged with improving the business environment for minorities and women. Some local governments provide guaranteed bank loans for women and/or the disabled.
Outward Investment
The ROK does not have any restrictions on outward investment. The ROK has several institutions to assist small business and middle-market firms with such investments.
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 funded by the ROK government, provides counseling and business introduction services to Korean SMEs considering investments in the Association of Southeast Asian Nations (ASEAN) region.
The Defense Acquisition Program Administration opened an office in 2019 to advise Korean defense SMEs on exporting unrestricted defense articles.
3. Legal Regime
Transparency of the Regulatory System
ROK regulatory transparency has improved, due in part to Korea’s membership in the WTO and negotiated FTAs. However, the foreign business community continues to face numerous rules and regulations unique to the ROK. National Assembly legislation on environmental protection or the promotion of SMEs has created new trade barriers that disadvantage foreign companies. Also, some laws and regulations lack sufficient detail and are subject to differing interpretations by government regulatory officials. In other cases, ministries issue non-legally binding guidelines on implementation of regulations, yet these become the bases for legal decisions in ROK courts. Regulatory authorities also issue oral or internal guidelines or other legally-enforceable dictates that prove burdensome for foreign firms. Intermittent ROK government deregulation plans to eliminate oral guidelines or impose the same level of regulatory review as written regulations have not led to concrete changes. Despite KORUS FTA provisions designed to address transparency issues, they remain persistent and prominent.
The ROK constitution allows both the legislative and executive branches to introduce bills. Ministries draft subordinate statutes (presidential decrees, ministerial decrees, and administrative rules), which largely govern the procedural matters addressed by the respective laws. Administrative agencies shape policies and draft bills on matters within their respective jurisdictions. Drafting ministries must clearly define policy goals and complete regulatory impact assessments (RIAs). When a ministry drafts a regulation, it must consult with other relevant ministries before it releases the regulation for public comment. The constitution also allows local governments to exercise self-rule legislative authority to draft ordinances and rules within the scope of federal acts and subordinate statutes. The enactment of laws and their subordinate statutes, ranging from the drafting of bills to their promulgation, must follow formal ROK legislative procedures in accordance with the Regulation on Legislative Process enacted by the Ministry of Government Legislation. Since 2011, all publicly listed companies must follow International Financial Reporting Standards (IFRS, or K-IFRS in the ROK). The Korea Accounting Standards Board facilitates ROK government endorsement and adoption of IFRS and sets accounting standards for companies not subject to IFRS. According to the Administrative Procedures Act, authorities proposing laws and regulations (acts, presidential decrees, or ministerial decrees) must seek public comments at least 40 days prior to their promulgation. Regulations are sometimes promulgated after only the minimum required comment period and with minimal consultation with industry.
Regulatory changes originating from legislation proposed by members of the National Assembly are not subject to public comment periods. As a result, 80 percent of all new regulations are written and passed by the National Assembly without rigorous consideration of possible effects or solicitation of public comments. The Official Gazette and the websites of relevant ministries and the National Assembly simultaneously post the Korean language text of draft acts and regulations, accompanied by executive summaries, for a 40-day comment period. Comments are not made public, and firms may struggle to translate complex documentation, analyze, and respond adequately before the expiration of this period. After the comment period, the Ministry of Government Legislation reviews the laws and regulations to ensure they conform to the constitution and monitors government adherence to the Regulation on Legislative Process. While the Regulatory Reform Committee (RRC) reviews all laws and regulations to minimize government intervention in the economy and to abolish all economic regulations that fall short of international standards or hamper national competitiveness, the committee has been less active in recent years.
In January 2019, Korea introduced a “regulatory sandbox” program intended to reduce the regulatory burden on companies that seek to test innovative ideas, products, and services. Depending on the business sector in which a particular proposal falls, either MOTIE, the Ministry of Science and ICT, or the Financial Services Commission manages the program. The program is open to Korean companies and foreign companies with Korean branch offices. Websites and applications are only available in Korean. The business community has welcomed this effort by regulators to spur innovation.
The ROK government enforces regulations through penalties (either fines or criminal charges) in the case of violations of the law. The government’s enforcement actions can be challenged through an appeal process or administrative litigation. The CEOs of local branches can be held legally responsible for all actions of their company and at times have been arrested and charged for their companies’ infractions. Foreign CEOs have cited this as a significant burden to their business operations in Korea.
The ROK’s public finances and debt obligations are generally transparent, with the exception of state-owned enterprise debt.
International Regulatory Considerations
The ROK has revised local regulations to implement commitments under international treaties and trade agreements. Treaties duly concluded and promulgated in accordance with the constitution and the generally recognized rules of international law are accorded the same standing as domestic laws. ROK officials consistently express intent to harmonize standards with global norms by benchmarking the United States and the EU. The U.S., U.K., and Australian governments exchange regulatory reform best practices with the ROK government to encourage local regulators to employ more regulatory analytics, increase transparency, and improve compliance with international standards; however, unique local rules and regulations continue to pose difficulties for foreign companies operating in the ROK. The ROK is a member of the WTO and notifies the Committee on Technical Barriers to Trade of all draft technical regulations. The ROK is also a signatory of the Trade Facilitation Agreement (TFA). The ROK amended the ministerial decree of the Customs Act in 2015, creating a committee charged with implementing the TFA. The ROK is a global leader of modernized and streamlined procedures for transportation and customs clearance. Industry sources report the Korea Customs Service enforces rules of origin issues largely in compliance with ROK obligations under its free trade agreements.
Legal System and Judicial Independence
The ROK legal system is based on civil law. Subdivisions within the district and high courts govern commercial activities and bankruptcies and enforce property and contractual rights with monetary judgments, usually levied in the domestic currency. The ROK has a written commercial law, and matters regarding contracts are covered by the Civil Act. There are also three specialized courts in the ROK: patent, family, and administrative courts. The ROK court system is independent and not subject to government interference in cases that may affect foreign investors. Foreign court judgments, with the exception of foreign arbitral rulings that meet certain conditions, are not enforceable in the ROK. Rulings by district courts can be appealed to higher courts and to the Supreme Court.
Laws and Regulations on Foreign Direct Investment
The ROK has a transparent legal system with a strong rule-of-law tradition and an independent judiciary. FIPA is the principal basic law pertaining to foreign investment in the ROK. The Invest KOREA website (http://investkorea.org) provides information on relevant laws, rules, and procedures for foreign investment in the ROK.
Laws and regulations enacted within the past year include:
On August 5, 2020, three new data protection laws took effect: the Personal Information Protection Act (PIPA), the Promotion of Information Communications Network Utilization and Information Protection Act (the “Network Act”), and the Use and Protection of Credit Information Act (the “Credit Information Act”). These laws are intended to strengthen privacy rights by reducing unnecessary collection of personal information and prohibiting its unauthorized use or disclosure.
On April 6, 2021, an amended Labor Standards Act (LSA) took effect. The amendments modify certain restrictions on allowable work hours for employees and add certain health and safety requirements for overtime labor.
Key pending/proposed laws and regulations as of April 2021 include:
On September 28, 2020, the Ministry of Justice proposed bills expanding the scope of class action lawsuits and to provide for punitive damages.
On December 9, 2020, the National Assembly passed amendments to the Trade Union and Labor Relations Adjustment Act (TULRAA). The revised TULRAA is intended to bring ROK law into compliance with International Labor Organization standards and is scheduled to take effect on July 6, 2021.
On January 6, 2021, the Personal Information Protection Committee (PIPC) of the National Assembly proposed an amendment to the Personal Information Protection Act (PIPA) to define how businesses may use personal information and to strengthen protection of personal information.
On January 8, 2021, the National Assembly passed the Serious Accident Penalty Act (SAPA), to take effect one year after promulgation. The SAPA establishes new health-and-safety obligations for businesses and executives and imposes stiff penalties on those that fail to comply.
Competition and Antitrust Laws
The Monopoly Regulation and Fair Trade Act (MRFTA) authorizes the Korea Fair Trade Commission (KFTC) to review and regulate competition and consumer safety matters.
KFTC has a broad mandate that includes promoting competition, strengthening consumers’ rights, and creating a suitable environment for SMEs. In addition to investigating corporate and financial restructuring, the KFTC can levy sizeable administrative fines for violations of law and for failure to cooperate with investigators. Decisions by KFTC are subject to appeal in Korean courts. As part of KORUS implementation, KFTC instituted a “consent decree” process in 2014, whereby firms can settle disputes with KFTC without resorting to the court system.
Over the last several years, a number of U.S. firms have raised concerns that KFTC targets foreign companies with aggressive enforcement. An amendment to the MRFTA in September 2020 improved the administrative decision-making process by the KFTC, including permitting access to confidential business information, limited to outside legal counsel, in order to protect possible trade secrets.
Expropriation and Compensation
The ROK follows generally-accepted principles of international law with respect to expropriation. ROK law protects foreign-invested enterprise property from expropriation or requisition. Private property can be expropriated for public purposes such as urban redevelopment, new industrial complexes, or constructing roads, and claimants are afforded due process and compensation. Private property expropriation in the ROK for public use is generally conducted in a non-discriminatory manner, with claimants compensated at or above market value. Embassy Seoul is aware of one case in which a U.S. investor filed an investor-state dispute lawsuit in 2018 against the ROK government, claiming that the government had violated the KORUS FTA in expropriating the investor’s land. The case was dismissed in the ROK judicial system on jurisdictional grounds in September 2019. The ROK government allotted USD 20 billion in its 2019 budget for land expropriation – a 38 percent increase from the previous year.
Dispute Settlement
ICSID Convention and New York Convention
The ROK acceded to the International Centre for Settlement of Investment Disputes (ICSID) in 1967 and the New York Arbitration Convention in 1973. While there are no specific domestic laws on enforcement, South Korean courts have made rulings based on the ROK’s membership in the conventions.
Investor-State Dispute Settlement
The ROK is a member of the International Commercial Arbitration Association and the World Bank’s Multilateral Investment Guarantee Agency. These bodies can call upon ROK courts to enforce an arbitrated settlement. When drafting contracts, some firms choose arbitration by a third party such as the International Commercial Arbitration Association. Companies have access to local expert legal counsel when drawing up contracts with a South Korean entity. The KORUS FTA contains strong, enforceable investment provisions. The United States also has a bilateral Treaty of Friendship, Commerce, and Navigation with the ROK with general provisions pertaining to business relations and investment. Foreign court judgments, with the exception of foreign arbitral rulings that meet certain conditions, are not enforceable in the ROK. There is no history of extrajudicial action against foreign investors. As noted above, one U.S. investor filed an investor-state dispute (ISD) lawsuit in 2018 against the ROK government, claiming that the government had violated the KORUS FTA in expropriating the investor’s land. The case was dismissed on jurisdictional grounds in September 2019. A U.S. activist fund submitted a notice of arbitration over an ISD pertaining to the KORUS FTA, also in 2018. This firm claimed to have suffered serious financial losses due to the merger of two large conglomerates, stating the ROK government illicitly intervened by mobilizing the National Pension Service as a large shareholder in the process of approving the merger. Another U.S. investor filed for arbitration seeking compensation for losses incurred from the same controversial merger. Both cases are pending before a United Nations Commission on International Trade Law (UNCITRAL) tribunal.
International Commercial Arbitration and Foreign Courts
ROK civil courts can adjudicate commercial disputes, though foreign firms note the following impediments to litigation:
Proceedings are conducted in Korean;
ROK law prohibits foreign lawyers who have not passed the Korean Bar Examination from representing clients in ROK courts;
Civil procedures common in the United States such as pretrial discovery do not exist in the ROK; and
During litigation of a dispute, courts may bar foreign citizens from leaving the country until the court reaches a decision.
Due to the expense and time required to obtain judgement, lawsuits are generally initiated only as a last resort, signaling the end of a business relationship. ROK law governs commercial activities and bankruptcies, with the judiciary serving as the means to enforce property and contractual rights, usually through monetary judgments levied in the domestic currency.
Firms may also bring commercial disputes before the Korean Commercial Arbitration Board (KCAB). The Korean Arbitration Act and its implementing rules outline the following sequential steps in the arbitration process: 1) Parties may request the KCAB to act as an informal intermediary to a settlement; 2) if informal arbitration is unsuccessful, either or both parties may request formal arbitration, in which the KCAB appoints a mediator to conduct conciliatory talks for 30 days; and 3) if formal arbitration is unsuccessful, the KCAB assigns an arbitration panel consisting of one-to-three arbitrators to decide the case. If either party is not resident in the ROK, either may request an arbitrator from a neutral country. If foreign arbitral awards or foreign court rulings meet the requirements of Civil Procedure Act Article 217, local courts can enforce their terms. ROK authorities emphasize non-discriminatory arbitration of disputes, but statistics on outcomes are unavailable. Embassy Seoul is not aware of statistics on court rulings on investment disputes with state-owned enterprises.
Bankruptcy Regulations
The Debtor Rehabilitation and Bankruptcy Act (DRBA) stipulates that bankruptcy is a court-managed liquidation procedure where both domestic and foreign entities are afforded equal treatment. The procedure commences after a filing by a debtor, creditor, or a group of creditors, and determination by the court that a company is bankrupt. The court designates a Custodial Committee to take an accounting of the debtor’s assets, claims, and contracts. The Custodial Committee may grant voting rights among creditors. Shareholders and contract holders may retain their rights and responsibilities based on shareholdings and contract terms. The World Bank ranked ROK policies and mechanisms to address insolvency 11th among 190 economies in its 2020 Doing Business report. Debtors may be subject to arrest once a bankruptcy petition has been filed, even if the debtor has not been declared bankrupt. Individuals found guilty of negligent or false bankruptcy are subject to criminal penalties. The Seoul Bankruptcy Court (SBC) has nationwide jurisdiction to hear major bankruptcy or rehabilitation cases and to provide effective, specialized, and consistent guidance in bankruptcy proceedings. Any Korean company with debt equal to or above KRW 50 billion (about USD 44 million) and/or 300 or more creditors may file for bankruptcy rehabilitation with the SBC. Thirteen local district courts continue to oversee smaller bankruptcy cases in areas outside Seoul.
6. Financial Sector
Capital Markets and Portfolio Investment
The ROK has an effective regulatory system that encourages portfolio investment. The Korea Exchange (KRX) is comprised of a stock exchange, futures market, and stock market following the 2005 merger of the Korea Stock Exchange, Korea Futures Exchange, and Korean Securities Dealers Automated Quotations (KOSDAQ) stock markets. It is tracked by the Korea Composite Stock Price Index (KOSPI). There is sufficient liquidity in the market to enter and exit sizeable positions. At the end of February 2021, over 2,400 companies were listed with a combined market capitalization of USD 2.2 trillion. The ROK government uses various incentives, such as tax breaks, to facilitate the free flow of financial resources into the product and factor markets. The ROK does not restrict payments and transfers for current international transactions, in accordance with the general obligations of member states under International Monetary Fund (IMF) Article VIII. Credit is allocated on market terms. The private sector has access to a variety of credit instruments. While non-resident foreigners can issue bonds in South Korean won, they are otherwise unable to borrow money in local currency. Foreign portfolio investors enjoy open access to the ROK stock market. Aggregate foreign investment ceilings were abolished in 1998, and foreign investors owned 36.7 percent of benchmark KOSPI stocks and 9.9 percent of the KOSDAQ as of February 2021. Foreign portfolio investment decreased slightly over the past year. Foreign investors owned 31.7 percent of benchmark stocks and 7.7 percent of listed bonds, according to the Financial Services Commission in March 2021. U.S. investors represent 41.4 percent of total foreign holdings, a gradual increase over the last three years. The ROK Financial Services Commission in March 2020 banned the short-selling of stocks to stabilize stock price volatility during the COVID-19 pandemic. The ban is currently set to expire in May 2021.
Money and Banking System
Financial sector reforms enacted to increase transparency and promote investor confidence are often cited as a reason for the ROK’s rapid rebound from the 2008 global financial crisis. Since 1998, the ROK government has recapitalized its banks and non-bank financial institutions, closed or merged weak financial institutions, resolved many non-performing assets, introduced internationally-accepted risk assessment methods and accounting standards for banks, forced depositors and investors to assume appropriate levels of risk, and taken steps to help end the policy-directed lending of the past. These reforms addressed the weak supervision and poor lending practices in the Korean banking system that helped cause and exacerbate the 1997-1998 Asian financial crisis. The ROK banking sector is healthy overall, with a low non-performing loan ratio of 0.28 percent at the end of 2020, dropping 0.09 percentage points from the prior year. Korean commercial banks held more than USD 3.3 trillion in total assets at the end of 2020. Foreign commercial banks or branches can establish local operations, which would be subject to oversight by ROK financial regulators. The ROK has not lost any correspondent banking relationships in the past three years, nor are any relationships in jeopardy. There are no legal restrictions on a foreigner’s ability to establish a bank account in the ROK; however, commercial banks may refuse to accept foreign nationals as customers unless they show local residency or identification documents. The Bank of Korea (BOK) is the central bank.
Foreign Exchange and Remittances
Foreign Exchange
All ROK banks, including branches of foreign banks, are permitted to deal in foreign exchange. Applicants must notify foreign exchange banks in advance of applications for foreign investment. In effect, these notifications are pro forma, and can be approved within hours. Applications are denied only on specific grounds, including national security, public order and morals, international security obligations, and health and environmental concerns. Exceptions to the advance notification approval system exist for project categories subject to joint-venture requirements and certain projects in the shipping and distribution sector. According to the Foreign Exchange Transaction Act (FETA, as noted), transactions that could harm international peace or public order require additional monitoring or screening for concerns such as money laundering or gambling. Three specific types of transactions are restricted:
Non-residents are not permitted to buy won-denominated hedge funds, including forward currency contracts;
The Financial Services Commission will not permit foreign currency borrowing by “non-viable” domestic firms; and
The ROK government monitors and ensures that South Korean firms that have extended credit to foreign borrowers collect their debts. The ROK government has retained the authority to re-impose restrictions in the case of severe economic or financial emergency.
Funds associated with any form of investment can be freely converted into any world currency. In 2020, 77 percent of spot transactions in the market were between the U.S. dollar and South Korean won, while daily transaction (spot and future) was equal to USD 52.84 billion, down 5.3 percent from the previous year. Exchange rates are generally determined by the market. The U.S. Department of the Treasury assessed that ROK authorities had historically intervened on both sides of the currency market, with a net impact that resisted won appreciation as demonstrated by a sustained rise in reserves and a net forward position. In its January 2020 report to Congress, the Treasury Department assessed that in 2018 and the first half of 2019, ROK government authorities on balance intervened to support the won through small net sales of foreign exchange. The BOK’s most recent intervention report, released in December 2020 and covering the third quarter of 2020, showed zero net intervention.
Remittance Policies
The right to remit profits is granted at the same time as the original investment approval. Banks control the pro forma approval process for FETA-defined open sectors. For conditionally- or partially-restricted investments (as defined by FETA), the relevant ministry must approve both the initial investment and eventual remittance. When foreign investment royalties or other payments are included in a technology licensing agreement, either a bank or the MOEF must approve the agreement and the projected stream of royalties. Approvals are quick and routine. An investor wishing to send a remittance must present an audited financial statement to a bank to substantiate the payment. The ROK routinely permits the repatriation of funds but reserves the right to limit capital outflows in exceptional circumstances, such as situations when uncontrolled outflows skew the national balance of payments, cause excessive fluctuation in interest or exchange rates, or threaten the stability of domestic financial markets. To repatriate funds, firms must also present a stock valuation report issued by a recognized securities company or the ROK appraisal board. There are no time restrictions on remittances.
Sovereign Wealth Funds
The Korea Investment Corporation (KIC) is a wholly government-owned sovereign wealth fund established in July 2005 under the KIC Act. KIC’s steering committee is comprised of its Chief Executive Officer, the Minister of Economy and Finance, the Bank of Korea Governor, and six private sector members appointed by the ROK President. KIC is on the Public Institutions Management Act (PIMA) list. The KIC Act mandates that KIC manage assets entrusted by the ROK government and central bank; the KIC generally adopts a passive role as a portfolio investor. The corporation’s assets under management stood at USD 183.1 billion at the end of 2020. KIC is required by law to publish an annual report, submit its books to the steering committee for review, and follow all domestic accounting standards and rules. It follows the Santiago Principles and participates in the IMF-hosted International Working Group on Sovereign Wealth Funds. The KIC does not invest in domestic assets, aside from a one-time USD 23 million investment into a domestic real estate fund in January 2015.
7. State-Owned Enterprises
Many ROK state-owned enterprises (SOEs) continue to exert significant control over the economy. There are 36 SOEs active in the energy, real estate, and infrastructure (i.e., railroad and highway construction) sectors. The legal system has traditionally ensured a role for SOEs as sectoral leaders, but in recent years, the ROK has sought to attract more private participation in the real estate and construction sectors. SOEs are currently subject to the same regulations and tax policies as private sector competitors and do not have preferential access to government contracts, resources, or financing. The ROK is party to the WTO Government Procurement Agreement; a list of SOEs subject to WTO government procurement provisions is available in Annex 3 of Appendix I to the Government Procurement Agreement (GPA). The state-owned Korea Land and Housing Corporation enjoys privileged status on state-owned real estate projects, notably housing. The court system functions independently and gives equal treatment to SOEs and private enterprises. The ROK government does not provide official market share data for SOEs. It requires each entity to disclose financial information, number of employees, and average compensation figures. The PIMA gives the Ministry of Economy and Finance oversight authority over many SOEs, mainly pertaining to administration and human resource management. However, there is no singular government entity that exercises ownership rights over SOEs. SOEs subject to PIMA must report to a cabinet minister. Alternatively, the ROK President or relevant cabinet minister appoints a CEO or director, often from among senior government officials. PIMA explicitly obligates SOEs to consult with government officials on budget, compensation, and key management decisions (e.g., pricing policy for energy and public utilities). For other issues, government officials informally require either prior consultation or subsequent notification of SOE decisions. Market analysts generally acknowledge the de facto independence of SOEs listed on local security markets, such as the Industrial Bank of Korea and Korea Electric Power Corporation; otherwise, SOEs are regarded either as fully-guaranteed by the government or as parts of the government. The ROK adheres to the OECD Guidelines for Multinational Enterprises and reports significant changes in the regulatory framework for SOEs to the OECD. A list of South Korean SOEs is available in Korean at: http://www.alio.go.kr/home.html. The ROK government does not confer advantages on SOEs competing in the domestic market. Although the state-owned Korea Development Bank may enjoy lower financing costs because of a governmental guarantee, this does not appear to have a major effect on U.S. retail banks operating in Korea.
Privatization Program
Privatization of government-owned assets has historically faced protests by labor unions and professional associations, and has sometimes suffered a lack of interested buyers. No state-owned enterprises were privatized between 2002 and November 2016. In December 2016, the ROK sold part of its stake in Woori Bank, recouping USD 2.1 billion, and plans to sell its remaining stake gradually by 2022. As of March 2021, the government holds a 17.25 percent stake in Woori Bank. Most analysts do not expect significant movement toward privatization in the near future. Foreign investors may participate in privatization programs if they comply with ownership restrictions stipulated for the 30 industrial sectors indicated in the FETA (see Section 1: Openness To, and Restrictions Upon, Foreign Investment). These programs have a public bidding process that is clear, non-discriminatory, and transparent.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data
Year
Amount
Year
Amount
Host Country Gross Domestic Product (GDP) ($M USD)
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
Total Inward
$219,137
100%
Total Outward
$418,832
100%
Japan
$53,951
24.6%
United States
$100,239
23.9%
United States
$35,102
16%
China, P.R. (Mainland)
$82,323
19.7%
Netherlands
$20,249
9.2%
Vietnam
$24,501
5.8%
Singapore
$16,287
7.4%
Cayman Islands
$18,764
4.5%
United Kingdom
$15,535
7%
Singapore
$18,653
4.5%
Note that ROK data differs significantly due to different calculation methods and data sources.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total
Equity Securities
Total Debt Securities
All Countries
$572,011
100%
All Countries
$344,704
100%
All Countries
$227,308
100%
United States
$254,129
44%
United States
$161,543
47%
United States
$92,586
41%
United Kingdom
$36,100
6%
Luxembourg
$24,458
7%
France
$18,724
8%
Luxembourg
$30,373
5%
Japan
$19,396
6%
United Kingdom
$16,901
7%
France
$27,897
5%
United Kingdom
$19,199
6%
Brazil
$10,538
5%
Japan
$26,878
5%
Cayman Islands
$14,024
4%
Australia
$9,944
4%
Note that ROK data differs significantly due to different calculation methods and data sources.
South Sudan
Executive Summary
Trade and investment conditions in South Sudan have slightly improved in the past year, but many challenges remain. The peace process has moved into the transition phase with the constitution of a new presidency structure and cabinet as components of a new Revitalized Transitional Government of National Unity in February and March 2020. The expanded cabinet included new ministries of investment and East African Community Affairs. In accordance with tenets of the 2018 peace deal, the new government included representatives from the incumbent government and opposition parties (signatories to the peace agreement). In May 2021 President Salva Kiir Mayardit reconstituted the Transitional National Legislative Assembly (TNLA). (Note: The TNLA has been expanded from 400 to 550 members comprising representatives from the parties signing the peace agreement. End Note.) While these steps are positive, implementation of the terms of the peace deal has been significantly behind schedule and remains incomplete. The country continues to be plagued by large-scale displacement, widespread food insecurity, severe human-rights abuses, restricted humanitarian access, and harassment of aid workers and journalists.
South Sudan is one of the most oil-dependent economies in the world and the sector is fraught with corruption. In March 2018, the United States Department of Commerce added the Ministry of Petroleum, the Ministry of Mining, and state-owned oil company Nilepet to the Entity List, barring export of certain U.S. goods or technologies to them due to their contribution to the conflict. Removal of these entities will require the implementation of transparency and accountability measures, consistent with aspects of Chapter IV of the peace deal.
Humanitarian and development aid is a major source of employment in South Sudan. Difficulties of changing regulations, multiple layers of taxation, and labor harassment faced in this sector may provide insight to difficulties private investors would face. Bureaucratic impediments faced by NGOs include recruitment interference, airport obstructions, and duplicate registration and permit issues by different levels of authority.
The government has made efforts to simplify and centralize taxation, with the creation of the National Revenue Authority. The Bank of South Sudan has launched a website where it posts key financial data. However, the legal system is ineffective, underfunded, overburdened, and subject to executive interference and corruption. High-level government and military officials are immune from prosecution and parties in contract disputes are sometimes arrested and imprisoned until the party agrees to pay a sum of money, often without going to court and sometimes without formal charges.
The then-South Sudan Investment Authority (SSIA) in 2018 and 2019 conducted investment roadshows, promoting South Sudan as an ideal location for investment. The SSIA which was upgraded to the Ministry of Investment in March 2020, compared its laws that govern investment practices in South Sudan with those in the region and determined themselves to be more favorable for investment than their neighbors; however, laws in South Sudan are not routinely enforced.
Other factors inhibiting investment in South Sudan include limited physical infrastructure and a lack of both skilled and unskilled labor. The World Bank’s 2020 Doing Business report ranked South Sudan 185 out of 190 economies on overall ease of doing business. The legal framework governing investment and private enterprises remained underdeveloped as of April 2020.
The U.S. Department of State maintains a Travel Advisory warning against travel to South Sudan due to critically high risks from crime, kidnapping, and armed conflict.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
In May 2021, South Sudan’s newly installed Minister of Investment presented to President Kiir plans to upgrade South Sudan’s investment policy and increase capacity for international investors to invest in South Sudan. As of the date of publication, the government has not taken any concrete steps to implement these proposals. Reported unfair practices have included effective expropriation of assets, inconsistent taxation policies, harassment by security services, extortion attempts, and a general perception that foreigners are not afforded fair results in court proceedings or labor disputes.
In the past the country makes few investment facilitation efforts. In March 2020 South Sudan upgraded the South Sudan Investment Authority (SSIA) to the Ministry of Investment, as recommended in Chapter I of the peace agreement. In theory the Ministry of Investment has a One Stop Shop Investment Center. However, both organizations are poorly resourced and neither maintains an active website. There is no business registration website. The ministries that handle company registration include the Ministry of Trade and Industry, Ministry of Investment, Ministry of Finance, and Ministry of Justice. There is no single window registration process, and an investor must visit all the above-mentioned agencies to complete the registration of a company. It is estimated that the registration process could take several months.
In January 2018, South Sudan joined the African Trade and Insurance Agency (ATI), which provides export insurance and other assistance to foreign investors and traders. Several local lawyers are willing to advise investors and guide them through the registration process, for a fee. There is a private-sector Chamber of Commerce, but it is a government run organization. There is no ombudsman.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity, as well as freely establish, acquire, and dispose of interests in business enterprises. Under the investment law, the government of South Sudan leases land to foreign investors for limited periods of time, generally not to exceed 30-60 years, with the possibility of renewal. In the case of leases for mining or quarrying, the lease shall not exceed the life of the mine or quarry. Under the 2009 Land Act, non-citizens are not allowed to own land in South Sudan. Years of conflict and internal displacement have left a complex land rights picture with many properties having been usurped by squatters or soldiers. There is no title insurance to speak of and no formal way to determine ownership outside of current possession. Particularly lucrative extractive or land-based ventures should assume claims on ownership, and therefore claims to royalties or rents, will abound.
For investors who wish to start a business in South Sudan, there is a local shareholder requirement, but the foreign investor can usually retain majority control. For foreign-based companies that wish to establish a subsidiary in South Sudan, the local shareholder requirement does not apply. South Sudanese businesses are given priority in several areas, including micro-enterprises, postal services, car hire and taxi operations, public relations, retail, security services, and the cooperative services. Exact details, and the extent of enforcement of these requirements, are sometimes unclear.
Subject to the Private Security Companies Rules and Regulations of 2013, registering and setting up a protection services security company in South Sudan requires a South Sudanese citizen to hold at least 51 percent of the company. Companies in the extractives sector must also have a South Sudanese national as part owner, but the exact percentage of ownership required is not always clear.
According to the Investment Act, foreign investors must apply for an investment certificate from the Ministry of Investment to ensure that the investment will be beneficial to the economy or of general benefit to South Sudan.
Other Investment Policy Reviews
In the past three years, the government has not undergone any third-party investment policy reviews.
Business Facilitation
The government’s fiscal and economic strategy sees government facilitating investment in economic priority sectors, particularly in agriculture, transport infrastructure, petroleum, mining, and energy, to unlock South Sudan’s economic potential and boost diversified growth. Investment incentives exist, but the exact procedures are somewhat opaque.
There is no business registration website. The process to register a business is lengthy and complex, and involves visiting multiple offices at the national, state, and local levels. The Chamber of Commerce recommends hiring a local lawyer to register a business. To register a new company, investors can get a check list with the steps and the name of ministries they need to visit to complete registration process from the Ministry of Trade and Industry.
Outward Investment
3. Legal Regime
Transparency of the Regulatory System
Bureaucratic procedures for opening a business are long and cumbersome, particularly for foreigners trying to navigate the system without the assistance of a well-connected national.
The private sector is governed by a mix of laws from Sudan, the pre-independence semi-autonomous Government of Southern Sudan, and since 2011, the Government of South Sudan. The Transitional National Legislative Assembly (TNLA) passed laws to improve the transparency of the regulatory system, including the 2012 Companies Act and the 2012 Banking Act, however enforcement regulations are still lacking and there is little transparency. The government does not consult with the public about proposed regulations and information about regulations is not widely published. Several key pieces of legislation governing customs, imports and exports, leasing and mortgaging, procurement, and labor have not been approved by the government and are needed to improve the business environment in South Sudan.
The oil sector is the major industry that attracts FDI, but transparency in the oil sector is absent, despite statutory reporting requirements. The Ministry of Petroleum does not share data at an institutional level with the Bank of South Sudan and does not release it to the public. The Ministry of Petroleum does not publish oil production data. The contract process for oil companies that are planning to bid and invest in South Sudan is controlled by the Ministry of Petroleum, but the law appears to grant this authority exclusively to the National Petroleum and Gas Commission. Bidding and tender information is not publicly available.
There are no known informal regulatory processes managed by NGOs or private sector associations that would affect U.S. investors. National and state bodies are the main source of regulation, but county and sub-county level officials also impose regulations. In 2018 and 2019, international non-governmental organizations regularly reported that local officials demanded taxes and fees that differed with those set out in national policy. An opaque Presidential Decree issued in late 2018, for example, resulted in weeks of customs clearance disruptions at the country’s main land border in Nimule. In April 2021 hundreds of commercial trucks importing goods into South Sudan had been stuck at Elegu border crossing on the Ugandan side, protesting the killings of Ugandan and Kenyan truck drivers along the Juba-Nimule highway, Juba-Mundri, and Yei-Juba roads. The drivers demanded security guarantees from the government of South Sudan. After two days of negotiation between Ugandan and South Sudanese security chiefs, the striking Ugandan and Kenyan truck drivers resumed cargo deliveries to South Sudan. COVID regulations also created delays in the spring of 2020. NGOs report regular discrepancies between tax and labor rules issued by the national government and those enforced by local authorities. At some state levels, private contractors moving goods earmarked for humanitarian relief have been prevented entry at state borders in 2020. As of January 2021, there are appointed governors in each of South Sudan’s ten states and chief administrators for three administrative areas. However, tax collection and enforcement at the state level remains limited, uneven, and unpredictable.
In October 2020 the IMF reported that the COVID-19 pandemic has severely disrupted South Sudan’s economy, leading to a sharp decline in projected growth (-3.6 percent in FY20/21, about 10 percentage points below the pre-pandemic baseline) and a contraction of oil export proceeds (the main source of exports and fiscal revenue), causing an urgent balance of payments need and opening a large fiscal financing gap.
There are no publicly listed companies. Government accounting is non-transparent. In 2019, the legislative assembly held public budget hearings, which was the latest public budget hearing, due to delay in reconstituting the parliament in February 2020. The government did not pass or publish a budget for FY 2020/2021. In general, most bills and regulations are passed without public comment and are poorly disseminated. There is no centralized online platform publishing key regulatory actions. There is no government ombudsman. Parliament has not been able to provide effective oversight of government ministers. There were no significant corruption prosecutions in 2020.
No enforcement reforms have been announced or implemented. The establishment of the National Revenue Authority in 2018 was expected to provide a stronger foundation for development and implementation of accounting and regulatory standards. South Sudan is working to develop sources of non-oil revenue, including more centralized and effective enforcement of personal income tax and customs revenue. If transparently collected and managed, these funds could assist in development of the country’s infrastructure. In October 2020 South Sudan hired a Tanzanian national to lead the National Revenue Authority as Commissioner General. Since then, non-oil revenues have increased dramatically, in some months showing a 100 percent increase over the previous year, suggesting strongly that prior revenue collection efforts were corrupt, inept, or both.
South Sudan’s parliament is responsible for developing laws, but bodies such as the National Revenue Authority have also been influential in developing tax procedures. There is no indication that regulations are informed by quantitative analysis and public comments received by regulators are not made public.
Laws and regulations are randomly enforced and are not well-publicized, creating uncertainty among domestic and foreign investors. The Ministry of Labor, for example, rarely if ever conducts inspections, but NGOs and foreign investors have reported that employees have colluded with labor inspectors to extort fines from business managers.
South Sudan’s public finances are extremely opaque. The government released some debt obligation information during budget hearings in 2018 regarding certain infrastructure loans, but to date has not disclosed the amount of forward-sold oil (the country’s main source of revenue). As of March 2019, the IMF evaluated short-term oil advances at $338 million or 7.3 percent of GDP but noted that this estimate might not capture all outstanding advances as authorities were unable to provide a full list of contracted oil advances and their repayment terms, complicating fiscal projections. As noted, there was no official budget in FY 2020/2021. The FY 2019/2020 budget infrastructure expenditure line increased to $611 million. At 47 percent of total expenditures, this was a large increase by percentage, up from three percent of total expenditures in FY 2018/2019. The vast majority of this increase was earmarked for the Road Infrastructure Fund. It is widely understood these monies will be used to pay for the $711 million oil-collateralized road construction contract with Chinese-firm Shandong Hi-Speed Group for the 392-kilometer Juba-Rumbek road, still under construction as of May 2021. As of May 2021, the company has resumed work on the road, installing eleven modern bridges. The government had halted work on the road in May 2020 after heavy flooding washed away some sections of the unpaved and poorly constructed road.
The government has three other major road projects. Construction on the oil revenue -funded 204-kilometer Juba-Bor road started in February 2020 and is expected to finish in 2021. The project’s contractor African Resource Company (ARC) is thought to have close ties to President Kiir. Construction started on the 365-kilometer Juba-Torit-Nadapalroad in August 2020. This road will connect Juba with a key border crossing to Kenya, reducing transit times and costs for key imports and eliminating the need for a circuitous detour via (better) Ugandan roads. from that country. The government also has announced plans for a Kaya-Yei-Raja road upgrade.
In December 2019, the Egyptian company Elswedy Electric Company signed a contract South Sudan’s Ministry of Energy and Dams to build a $45 million hybrid photovoltaic project with a battery storage system. The contract includes engineering, procurement, and installation of the project and is expected to supply electricity to 59,000 homes in Juba by May 2022. Despite the statutory requirements, South Sudan’s parliament did not review this project.
International Regulatory Considerations
South Sudan became a member of the African Union in 2012 and the East African Community (EAC) in April 2016. It is making progress in adapting its national regulatory system to regional standards. South Sudan has joined the customs union of the EAC but is behind in implementing regulations. With the establishment of the National Revenue Authority, South Sudan had begun to implement EAC customs regulations and procedures. In March 2020, the President established the Ministry of East African Community Affairs in accordance with the peace agreement, which is tasked with overseeing integration into the EAC. South Sudan currently has nine members in EAC parliament and one South Sudanese judge in the EAC Court of Justice. While the government claimed it paid its arrears to the EAC in the fall of 2019, this has not been independently confirmed. South Sudan is not a member of the WTO.
Legal System and Judicial Independence
South’s Sudan’s legal system is a combination of statutory and customary laws. There are no dedicated commercial courts and no effective arbitration act for handling business disputes. The only official means of settling disputes between private parties in South Sudan is civil court, but enforcement of judgements and awards is weak or nonexistent. The weak civil justice system has led businesses to seek informal mediation, including through private lawyers, tribal elders, law enforcement officials, and business organizations. As a part of its membership in the EAC, South Sudan is subject to the jurisdiction of the East African Court of Justice (EACJ). The EAC treaty gives the EACJ broad jurisdiction including trade disputes and human rights violations, but the court only reviews 40 cases annually and results for South Sudanese legal community have been inconclusive.
The executive branch regularly interferes with the work of the judicial branch. State security forces have arrested and detained without charge parties to business disputes. The detention continues until the party agrees to make payments as directed by the authorities to “resolve” the case. High-level government and military officials are immune from prosecution in practice and frequently interfere with court decisions.
The lack of a unified, formal judicial system encourages “forum shopping” by businesses motivated to find the venue in which they can achieve the most favorable outcome. U.S. companies seeking to invest in South Sudan face a complex commercial environment with extraordinarily weak enforcement of the law. While major U.S. and multinational companies may have enough leverage to extricate themselves from business disputes, medium-sized enterprises (the more natural counterparts to South Sudan’s fledgling business community) will find themselves held to often capricious local rules.
Laws and Regulations on Foreign Direct Investment
Despite some improvements to the taxation system, the opacity and lack of capacity in the country’s legal system poses high risk to foreign investors. South Sudan’s National Revenue Authority had centralized and standardized collection of Personal Income Tax and customs duties. A One-Stop Shop Investment Centre (OSSIC) was established in 2012 but there is no website or advertised physical office. In practice, someone who wishes to register a business must rely on a local lawyer to register the business with the registrar at the Ministry of Justice and with other relevant authorities such as tax authorities.
Competition and Antitrust Laws
South Sudan does not review transactions for competition-related concerns. There were no significant developments in 2020.
Expropriation and Compensation
The Investment Promotion Act of 2009 prohibits nationalization of private enterprises unless the expropriation is in the national interest for a public purpose. The act does not define the terms “national interest” or “public purpose.” According to the act, expropriation must be in accordance with due process and provide fair and adequate compensation, which is ultimately determined by the local domestic courts.
Government officials have pressured development partners to hand over assets at the end of programs. While some donor agreements call for the government to receive goods at the close-out of a project, local government officials have seized assets even in the absence of a formal agreement.
Although officially denied, credible reports from humanitarian aid agencies indicate that both government and opposition forces routinely extort money at checkpoints to allow the delivery of humanitarian aid throughout the country.
In practice, the government has not offered compensation for expropriated property. For example, in October 2018 the government expropriated the assets of Kerbino Wol Agok, a high-profile prisoner of the National Security Service, with no apparent judicial process. The government seized his companies and their bank accounts and fired all company employees. In 2019, a court sentenced Kerbino to ten years in prison for acts committed after his arrest; he was released in January 2020 under presidential pardon.
Due to the insufficiencies in the legal system, investors should not expect to receive due process or have the terms of their contracts honored. Investors face a complex commercial environment with a relatively weak civil justice system.
Dispute Settlement
ICSID Convention and New York Convention
South Sudan signed and ratified the ISCID Convention on April 18, 2012 and it entered into force on May 18, 2012. Currently South Sudan is not a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).
There is no specific domestic legislation that enforces awards under the ICSID convention.
Investor-State Dispute Settlement
South Sudan does not have a Bilateral Investment Treaty (BIT) or Free Trade Agreement (FTA) with the United States.
Numerous private companies, including at least one U.S. company, claim the government has reneged on or delayed payment for work under contract in recent years. For example, in November 2017, South Sudan stopped issuing and renewing passports and other travel documents after its production system was shut down for two weeks by the country’s German supplier, due to the government’s failure to pay an annual software license fee of around $500,000. The government again failed to pay its annual fees in November 2019 and the service provider stopped issuing passports for South Sudan for two weeks.
In March 2018, the government suddenly suspended Lebanese-owned cell phone service provider Vivacell, which had previously been South Sudan’s largest telecommunications company with a 51 percent market share and equipment installed throughout the country, due to an alleged failure to pay taxes.
There is a history of extrajudicial action against foreign investors. Parties in contract disputes are sometimes arrested and imprisoned until the party agrees to pay a sum of money, often without going to court and sometimes without formal charges.
International Commercial Arbitration and Foreign Courts
There are no official arbitration bodies in South Sudan. South Sudan lacks any dedicated legal framework to enforce foreign judgments.
As a part of its membership in the EAC South Sudan is subject to the jurisdiction of the East African Court of Justice (EACJ). The EAC treaty gives the EACJ broad jurisdiction beyond trade disputes, including human rights violations. Though results have proved inconclusive, members of South Sudan’s legal community have taken cases to the EACJ in the past. The capacity of the EACJ is limited, however, as it only hears about 40 cases per year. Moreover, cases must be filed in Arusha, Tanzania. Plans for opening an office in Juba are ongoing.
Bankruptcy Regulations
The 2011 Insolvency Act provides for both personal and corporate bankruptcies. Given the lack of commercial courts, there is little information available about the rights of creditors in practice. South Sudan is tied for last place in the World Bank’s 2020 Doing Business Report ranking for “resolving insolvency.”
6. Financial Sector
Capital Markets and Portfolio Investment
The Investment Act mentions portfolio investment, but South Sudan does not have a functioning market for financial assets. South Sudan does not have a stock market or related regulatory system. There are no known policies for promotion of investment into product and factor markets.
South Sudan’s formal financial system offers few financial products. It is difficult for foreign investors to get credit on the local market due to the shortage of hard currency, the lack of accurate means of obtaining reliable figures or audited accounts, the absence of a credit reference bureau, and South Sudan’s failure to document land ownership properly. According to the World Bank, 50 percent of all South Sudanese firms cite access to finance as a constraint.
Banks are often unwilling to lend due to the lack of adequate laws to protect lenders and difficulties related to personal identification. After the Bank of South Sudan confiscated commercial banks’ reserves on deposit at the central bank in 2015, diverting them to the use of the government, companies and individuals had difficulty accessing their funds. This made depositors reluctant to trust their funds to the banking system.
The Bank of South Sudan launched treasury bills on August 18, 2016 for purchase by members of the public, companies, and commercial banks. This lasted until April 2017, when people stopped investing in the bills due to high inflation and a lack of a secondary market for them. The bank had previously issued treasury bills in 2012 without success. In November 2020, the government said the Bank of South Sudan would issue central bank bonds as investment vehicles, but these have not yet appeared in the market.
Money and Banking System
The public and private financial sectors are in distress. The banking sector faces significant challenges because of the civil conflict, high inflation, and a volatile currency. The economy of South Sudan is cash-based with limited use of demand deposits. The IMF has categorized South Sudan’s financial sector as small and undeveloped. There are nine foreign-owned banks. There are no known restrictions on a foreigner’s ability to establish a bank account. In September 2019, South Sudan introduced mobile money via two private sector companies to boost digital transactions. Remittances to Uganda and Kenya across one of the platforms began in April 2020.
Many international banks operating in South Sudan had to restructure and recapitalize following government defaults in 2015. As a result, most international banks operate as foreign exchange traders or deposit holders. The limited lending banks do conduct are to businesses with well- documented contracts with international organizations and government employees. Anecdotal reports indicate, however, that even this limited lending contracted in 2019. This behavior would seem to be confirmed by the IMF’s April 2019 report where it indicated that non-performing loans for foreign and domestic banks were on the rise. Many domestic banks are heavily undercapitalized.
The Bank of South Sudan, the central bank, has limited assets and functions more as a commercial bank servicing the governments transactions than as a monetary policy institution.
Foreign Exchange and Remittances
Foreign Exchange
Foreign investors cannot remit funds through the parallel market. They are required by law to remit through banks or foreign exchange bureaus at an exchange rate that is below the market rate.
The Executive Board of the IMF on March 20, 2021 approved a disbursement of SDR 123 million (50 percent of quota or about US$ 174.2 million) to South Sudan under the Rapid Credit Facility (RCF) program. This second IMF disbursement to South Sudan will provide foreign exchange and budgetary support, both necessitated in part due to the sharp decline in international oil prices triggered by the COVID-19 pandemic and devastating floods. This disbursement follows a smaller disbursement of approximately $52 million in December 2020 used to pay civil service salary arrears. The Bank of South Sudan has been holding weekly dollar auctions since December 2020 for foreign exchange bureaus and expanded this practice to commercial banks in April 2021. As of May 2021, sales of dollars into the economy have caused an approximately 30 percent appreciation in the value of South Sudanese Pound against the dollar in the unofficial forex parallel market. Simultaneously, the Bank of South Sudan has been devaluing the official SSP-dollar exchange rate daily at a controlled rate. As a result, the gap between the official reference exchange rate and the unofficial parallel market rate shrank by 90 percent in four weeks (April 18 – May 18, 2021).
The 2009 Investment Promotion Act guarantees unconditional transferability in and out of South Sudan “in freely convertible currency of capital for investment; payments in respect of loan servicing where foreign loans have been obtained; and the remittance of proceeds, net of all taxes and other statutory obligations, in the event of sale or liquidation of the enterprise.” In reality, the ability to exchange local currency for foreign currency is severely restricted. Some international and U.S. businesses have complained that the inability to repatriate proceeds has hurt their businesses.
Remittance Policies
The World Bank estimated remittances to South Sudan at roughly $600 million in 2018, roughly 14 percent of GDP. As markets contract globally and earners are impacted by lockdowns, trade disruptions, layoffs, and illness, the amount of remittance inflows is likely to drop. During the 2008 financial crisis and the 2017 oil slump, remittance inflows dropped by 4 percent and 11 percent, respectively. Given the global scale and economic impact of COVID-19, decreases in remittances are likely to be larger than in the two previous crises. Interconnectivity of mobile money platforms between Kenya, Uganda and South Sudan, might counter this by boosting transactions.
There have been no recent changes to investment remittance policies, and no known waiting periods on remittances.
Sovereign Wealth Funds
The Petroleum Revenue Management Act of 2013 created a sovereign wealth fund (SWF) to set aside surplus profits from oil sales. The law established the Oil Revenue Stabilization Account to act as a buffer against volatility in oil prices and the Future Generations Fund to set aside some funds for future generations. The SWF is supposed to distribute 10 percent of oil profits into the Oil Revenue Stabilization Account and 15 percent to the Future Generations Fund. To date, however, neither has received any financing. The Comprehensive Peace Agreement (CPA) that ended the civil war with Sudan set a 2 percent share of oil revenue for the oil producing states along with a 3 percent share to the local communities. However, in August 2017, the government announced that it would stop paying these shares. The September 2018 peace agreement calls for full implementation of Petroleum Revenue Management Act revenue sharing provisions. In April 2021 the Auditor-General reported that the shared intended for state and local governments in the oil producing regions have been diverted to the Office of President, the Ministry of Finance, and other unauthorized entities with an estimated loss to the intended recipients of over $31 million.
7. State-Owned Enterprises
The national oil company – Nile Petroleum Corporation, or Nilepet – remains the primary fully State-owned enterprise (SOE) in South Sudan. The government owns stakes in construction and trade companies and in several banks. Limited data are available on number, total income, and employment figures of SOEs. There is no published list of SOEs.
Nilepet, created by statute, is the technical and operational branch of the Ministry of Petroleum. Nilepet took over Sudan’s national oil company’s shares in six exploration and petroleum sharing agreements in South Sudan at the time of the country’s independence in 2011. Nilepet also distributes petroleum products in South Sudan. The government, through Nilepet, holds minority stakes in other oil producing joint ventures operating in South Sudan.
The Petroleum Revenue Management Bill, which governs how Nilepet’s profits are invested, was enacted into law in 2013; however, the company has yet to release any information on its activities, even though the law states that comprehensive, audited reports on the company’s finances must be made publicly available.
The government is not transparent about how it exercises ownership or control of Nilepet. Its director reports to the Minister of Petroleum. Nilepet’s revenues and expenditures are not disclosed in the central government budget. No audited accounts of Nilepet are publicly available. After the January 2012 oil production shutdown, oil production recovered to more than 235,000 barrels per day at end of 2013, only to fall to about 160,000 barrels per day in early 2014 as a result of the conflict that started in December 2013. As of January 2021, the Undersecretary at the Ministry of Petroleum reported that oil production dropped to 165,000-170,000 barrels per day from the 178,000 barrels per day in early 2020.
In March 2018, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce amended the Export Administration Regulations (EAR) to add Nilepet and several related companies to the Entity List, along with the Ministry of Petroleum and the Ministry of Mining, due to their role in worsening the conflict in South Sudan. The Entity List identifies entities, including corporations, private or government organizations, and natural persons, and other persons reasonably believed to be involved, or to pose a significant risk of being or becoming involved, in activities contrary to the national security or foreign policy interests of the United States.
The U.S. Government assesses the 15 entities BIS added to the Entity List as contributing to the ongoing crisis in South Sudan because they are a source of substantial revenue that, through public corruption, is used to fund the purchase of weapons and other material that undermine the peace, security, and stability of South Sudan rather than support the welfare of the South Sudanese people. Adding these entities to the Entity List is intended to ensure that items subject to the EAR are not used to generate revenue to finance the continuing violence in South Sudan. The following 15 entities are the first South Sudanese entities added to the Entity List: Ascom Sudd Operating Company; Dar Petroleum Operating Company; DietsmannNile; Greater Pioneer Operating Co. Ltd; Juba Petrotech Technical Services Ltd; Nile Delta Petroleum Company; Nile Drilling and Services Company; Nile Petroleum Corporation; Nyakek and Sons; Oranto Petroleum; Safinat Group; SIPET Engineering and Consultancy Services; South Sudan Ministry of Mining; South Sudan Ministry of Petroleum; and Sudd Petroleum Operating Co.
These 15 entities are subject to a license requirement for all exports and reexports destined for any of the entities and transfers (in-country) to them of all items subject to the EAR with a licensing review policy of a presumption of denial. This license requirement also applies to any transaction involving any of these entities in which such entities act as a purchaser, intermediate consignee, ultimate consignee, or end-user. Additionally, no license exceptions are available to these entities.
If any person participates in a transaction described above involving any of these 15 entities without first obtaining the required license from BIS, that person would be in violation of the EAR and could be subject to civil or criminal enforcement proceedings. Civil enforcement could result in the imposition of monetary penalties or the denial of the person’s export privileges. Additionally, a person’s supplying or procuring items subject to the EAR or engaging in other activity involving an entity on the Entity List could result in a determination to add that person to the Entity List consistent with the procedures set forth in the EAR.
The country does not adhere to the OECD Guidelines on Corporate Governance for SOEs.
Privatization Program
South Sudan does not have a privatization program. So far, the government has no plans for privatization, and there are few government-owned entities that provide services to individuals.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data
Year
Amount
Year
Amount
Host Country Gross Domestic Product (GDP) ($M USD)
UNCTAD data available athttps://unctad.org/topic/investment/world-investment-report
Table 3: Sources and Destination of FDI
Data not available.
Table 4: Sources of Portfolio Investment
Data not available.
Sri Lanka
Executive Summary
Sri Lanka is a lower middle-income country with a Gross Domestic Product (GDP) per capita of about $ 3,682 (according to the Central Banka of Sri Lanka (CBSL) and a population of approximately 22 million in 2020. The island’s strategic location off the southern coast of India along the main east-west Indian Ocean shipping lanes gives Sri Lanka a regional logistical advantage.
After 30 years of civil war, Sri Lanka is transitioning from a predominantly rural-based economy to a more urbanized economy focused on manufacturing and services. Sri Lanka’s export economy is dominated by apparel and cash-crop exports, mainly tea, but technology service exports are a significant growth sector. Prior to the April 21, 2019, Easter Sunday attacks, the tourism industry was rapidly expanding, with Lonely Planet naming Sri Lanka its top travel destination in 2019. However, the attacks led to a significant decline in tourism that continued into 2020 due to COVID-19 and the government’s related decision to close its main international airport for commercial passenger arrivals in March 2020. The airport reopened for limited commercial passengers in January 2021, but newly reimposed travel restrictions are resulting in severe contractions for both the tourism and apparel export sectors with potential follow-on impacts in related sectors including services, construction, and agriculture. Tourism revenue dropped 73 percent year-over-year (YoY) in 2020 while apparel exports dropped 15.6 percent in the same period. However, official figures for migrant labor remittances, another significant source of foreign exchange, increased to $7.1 billion in 2020 due to the collapse of informal money transfer systems during the pandemic, despite the job losses to Sri Lankan migrant workers, especially in the Middle East.
The administration of President Gotabaya Rajapaksa, who was elected in November 2019, has largely promoted pro-business positions, including announcing tax benefits for new investments to attract foreign direct investment (FDI). As outlined in its election manifesto, the Rajapaksa government’s economic goals, include positioning Sri Lanka as an export-oriented economic hub at the center of the Indian Ocean (with government control of strategic assets such as Sri Lankan Airlines), improving trade logistics, attracting export-oriented FDI, and boosting firms’ abilities to compete in global markets. However, COVID-19 and the subsequent lockdowns brought new economic challenges, forcing the government to adapt policies to the situation on the ground. In April 2020, the Ministry of Finance restricted imports of luxury and semi-luxury consumer products such as consumer durables, motor vehicles, and the import of certain agricultural products as a means of saving foreign reserves and creating employment in labor intensive agriculture. With a debt-to-GDP ratio now above 100 percent (of which 60 percent is foreign debt), Sri Lanka is facing a potential liquidity crisis, exacerbated by declining export receipts due to the pandemic. Exports of goods fell 15.6 percent to $10 billion in 2020, down from $12 billion in 2019. Exports of services fell roughly 60 percent to $3 billion in 2020 down from $7.5 billion in 2019.
FDI in Sri Lanka has largely been concentrated in tourism, real estate, mixed development projects, ports, and telecommunications in recent years. With a growing middle class, investors also see opportunities in franchising, information technology services, and light manufacturing for the domestic market. The Board of Investment (BOI) is the primary government authority responsible for investment, particularly foreign investment, aiming to provide “one-stop” services for foreign investors. The BOI is committed to facilitating FDI and can offer project incentives, arrange utility services, assist in obtaining resident visas for expatriate personnel, and facilitate import and export clearances. However, Sri Lanka’s import regime is one of the most complex and protectionist in the world. Sri Lanka ranks 99th out of 190 countries on the World Bank’s Doing Business Index and ranks very poorly in several areas, including contract enforcement (164 out of 190); paying taxes (142/190); registering property (138/190); and obtaining credit (132/190). Sri Lanka ranks well in protecting minority investors, coming in at 28/190 in 2020.
Sri Lanka’s GDP contracted 3.6 percent to approximately $81 billion in 2020 due to COVID-19, an improvement on the International Monetary Fund (IMF) projection for a 4.6 percent contraction. FDI fell to approximately $550 million in 2020, significantly less than the $1.2 billion in 2019 and $2.3 billion in 2018. The IMF projects a four percent growth in 2021.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Sri Lanka is a constitutional multiparty socialist republic. In 1978, Sri Lanka began moving away from socialist, protectionist policies and opening up to foreign investment, although changes in government are often accompanied by swings in economic policy. While the incumbent government largely promoted pro-business positions, including announcing tax benefits for new investments to attract FDI, the government also made interventionist policies to arrest the ongoing economic fallout from COVID-19. This in turn has altered the field of foreign direct investment towards manufacturing intended to the domestic market.
The BOI (www.investsrilanka.com), an autonomous statutory agency, is the primary government authority responsible for investment, particularly foreign investment, with BOI aiming to provide “one-stop” services for foreign investors. BOI’s Single Window Investment Facilitation Taskforce (SWIFT) helps facilitate the investment approvals process and works with other agencies in order to expedite the process. BOI can grant project incentives, arrange utility services, assist in obtaining resident visas for expatriate personnel, and facilitate import and export clearances.
Importers to Sri Lanka face high barriers. According to a World Bank study, Sri Lanka’s import regime is one of the most complex and protectionist in the world. U.S. stakeholders have raised concerns the government does not adequately consult with the private sector prior to implementing new taxes or regulations – citing the severe import restrictions imposed as a reaction to COVID-19 as an example. These restrictions, quickly imposed without consulting the private sector, further complicated Sri Lanka’s import regime. Similarly, stakeholders have raised concerns that the government does not allow adequate time to implement new regulations. Additionally, the Sri Lankan government has banned the importation of several “non-essential” items since April 2020 in an attempt to curtail foreign exchange outflow as the Sri Lankan rupee (LKR) depreciated around five percent year-to-date in 2021 and is expected to come under further pressure.
Sri Lanka is a challenging place to do business, with high transaction costs aggravated by an unpredictable economic policy environment, inefficient delivery of government services, and opaque government procurement practices. Investors noted concerns over the potential for contract repudiation, cronyism, and de facto or de jure expropriation. Public sector corruption is a significant challenge for U.S. firms operating in Sri Lanka and a constraint on foreign investment. While the country generally has adequate laws and regulations to combat corruption, enforcement is weak, inconsistent, and selective. U.S. stakeholders and potential investors expressed particular concern about corruption in large infrastructure projects and in government procurement. The government pledged to address these issues, but the COVID-19 response remains its primary concern. Historically, the main political parties do not pursue corruption cases against each other after gaining or losing political positions.
While Sri Lanka is a challenging place for businesses to operate, investors report that starting a business in Sri Lanka is relatively simple and quick, especially when compared to other lower middle-income markets. However, scalability is a problem due to the lack of skilled labor, a relatively small talent pool and constraints on land ownership and use. Investors note that employee retention is generally good in Sri Lanka, but numerous public holidays, a reluctance of employees to work at night, a lack of labor mobility, and difficulty recruiting women decrease efficiency and increase start-up times. A leading international consulting firm claims the primary issue affecting investment is lack of policy consistency.
Limits on Foreign Control and Private Ownership
Foreign ownership is allowed in most sectors, although foreigners are prohibited from owning land with a few limited exceptions. Foreigners can invest in company shares, debt securities, government securities, and unit trusts. Many investors point to land acquisition as the biggest challenge for starting a new business. Generally, Sri Lanka prohibits the sale of public and private land to foreigners and to enterprises with foreign equity exceeding 50 percent. However, on July 30, 2018, Sri Lanka amended the Land (Restriction of Alienation) Act of 2014 to allow foreign companies listed on the Colombo Stock Exchange (CSE) to acquire land. Foreign companies not listed on the CSE—but engaged in banking, financial, insurance, maritime, aviation, advanced technology, or infrastructure development projects identified and approved as strategic development projects—may also be exempted from restrictions imposed by the Land Act of 2014 on a case-by-case basis.
The government owns approximately 80 percent of the land in Sri Lanka, including the land housing most tea, rubber, and coconut plantations, which are leased out, typically on 50-year terms. Private land ownership is limited to fifty acres per person. Although state land for industrial use is usually allotted on a 50-year lease, the government may approve 99-year leases on a case-by-case basis depending on the project. Many land title records were lost or destroyed during the civil war, and significant disputes remain over land ownership, particularly in the North and East. The government has started a program to return property taken by the government during the war to residents in the North and East.
The government allows up to 100 percent foreign investment in any commercial, trading, or industrial activity except for the following heavily regulated sectors: banking, air transportation; coastal shipping; large scale mechanized mining of gems; lotteries; manufacture of military hardware, military vehicles, and aircraft; alcohol; toxic, hazardous, or carcinogenic materials; currency; and security documents. However, select strategic sectors, such as railway freight transportation and electricity transmission and distribution, are closed to any foreign capital participation. Foreign investment is also not permitted in the following businesses: pawn brokering; retail trade with a capital investment of less than $5 million; and coastal fishing.
Foreign investments in the following areas are restricted to 40 percent ownership: a) production for export of goods subject to international quotas; b) growing and primary processing of tea, rubber, and coconut, c) cocoa, rice, sugar, and spices; d) mining and primary processing of non-renewable national resources, e) timber based industries using local timber, f) deep-sea fishing, g) mass communications, h) education, i) freight forwarding, j) travel services, k) businesses providing shipping services.
In areas where foreign investments are permitted, Sri Lanka treats foreign investors the same as domestic investors. However, corruption reportedly may make it difficult for U.S. firms to compete against foreign bidders not subject to the U.S. Foreign Corrupt Practices Act when competing for public tenders.
Business Facilitation
The Department of Registrar of Companies (www.drc.gov.lk) is responsible for business registration. Online registration (http://eroc.drc.gov.lk/) was recently introduced and registration averages four to five days. In addition to the Registrar of Companies, businesses must register with the Inland Revenue Department to obtain a taxpayer identification number (TIN) for payment of taxes and with the Department of Labor for social security payments.
Outward Investment
The government supports outward investment, and the Export Development Board offers subsidies for companies seeking to establish overseas operations, including branch offices related to exports. New outward investment regulations came into effect November 20, 2017. Sri Lankan companies, partnerships, and individuals are permitted to invest in shares, units, debt securities, and sovereign bonds overseas subject to limits specified by the new Foreign Exchange Regulations. Sri Lankan companies are also permitted to establish overseas companies. Investments over the specified limit require the Central Bank Monetary Board’s approval. All investments must be made through outward investment accounts (OIA). All income from investments overseas must be routed through the same OIA within three months of payment. (Note: In the wake of the COVID-19 pandemic, the Sri Lankan government introduced a series of measures attempting to ease pressure on the Sri Lankan rupee. These measures included a temporary suspension on OIA transactions and additional foreign exchange controls.)
3. Legal Regime
Transparency of the Regulatory System
Many foreign and domestic investors view the regulatory system as unpredictable with outdated regulations, rigid administrative procedures, and excessive leeway for bureaucratic discretion. BOI is responsible for informing potential investors about laws and regulations affecting operations in Sri Lanka, including new regulations and policies that are frequently developed to protect specific sectors or stakeholders. Effective enforcement mechanisms are sometimes lacking, and investors cite coordination problems between BOI and relevant line agencies. Lack of sufficient technical capacity within the government to review financial proposals for private infrastructure projects also creates problems during the tender process.
Corporate financial reporting requirements in Sri Lanka are covered in a number of laws, and the Institute of Chartered Accountants of Sri Lanka (ICASL) is responsible for setting and updating accounting standards to comply with current accounting and audit standards adopted by the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB). Sri Lanka follows International Financial Reporting Standards (IFRS) for financial reporting purposes set by the IASB. Sri Lankan accounting standards are applicable for all banks, companies listed on the stock exchange, and all other large and medium-sized companies in Sri Lanka. Accounts must be audited by professionally qualified auditors holding ICASL membership. ICASL also has published accounting standards for small companies. The Accounting Standards Monitoring Board (ASMB) is responsible for monitoring compliance with Sri Lankan accounting and auditing standards.
Overall legislative authority lies with Parliament. Line ministries draft bills and, together with regulatory authorities, are responsible for crafting draft regulations, which may require approval from the National Economic Council, the Cabinet, and/or Parliament. Bills are published in the government gazette http://documents.gov.lk/en/home.php at least seven days before being placed on the Order Paper of the Parliament (the first occasion the public is officially informed of proposed laws) with drafts being treated as confidential prior to this. Any member of the public can challenge a bill in the Supreme Court if they do so within one week of its placement on the Order Paper of the Parliament. If the Supreme Court orders amendments to a bill, such amendments must be incorporated before the bill can be debated and passed. Regulations are made by administrative agencies and are published in a government gazette, similar to a U.S. Federal Notice. In addition to regulations, some rules are made through internal circulars, which may be difficult to locate.
The Central Bank and the Finance Ministry published information on Central Government debt including contingent liabilities and government finance. Central Bank publishes information on debt of major SOE’s. Debt obligations are available online in the Central Bank Annual Report; Fiscal Management Report of the Finance Ministry; Annual Report of the Ministry of Finance. Information on contingent liabilities is available in the Annual Report of the Ministry of Finance. Since 2018, the Central Bank published guaranteed debt and central government debt annually.
International Regulatory Considerations
Sri Lanka is a member of the World Trade Organization (WTO) and has made WTO notifications on customs valuation, agriculture, import licensing, sanitary and phytosanitary measures, the Agreement on Technical Barriers to Trade, the Agreement on Trade-Related Investment Measures, and the Agreement on Trade-Related Aspects of Intellectual Property Rights. Sri Lanka ratified the WTO Trade Facilitation Agreement (TFA) in 2016 and a National Trade Facilitation Committee was tasked with undertaking reforms needed to operationalize the TFA. The WTO conducted a review of the TFA in June 2019 in which Sri Lankan officials noted challenges related to accessing technical assistance and capacity building support for implementation of TFA recommendations.
Legal System and Judicial Independence
Sri Lanka’s legal system reflects diverse cultural influences. Criminal law is fundamentally British-based while civil law is Roman-Dutch. Laws on marriage, divorce, inheritance, and other issues can also vary based on religious affiliation. Sri Lankan commercial law is almost entirely statutory, reflecting British colonial law, although amendments have largely kept pace with subsequent legal changes in the United Kingdom. Several important legislative enactments regulate commercial issues: the BOI Law; the Intellectual Property Act; the Companies Act; the Securities and Exchange Commission Act; the Banking Act; the Inland Revenue Act; the Industrial Promotion Act; and the Consumer Affairs Authority Act.
Sri Lanka’s court system consists of the Supreme Court, the Court of Appeal, provincial High Courts, and the Courts of First Instance (district courts with general civil jurisdiction) and Magistrate Courts (with criminal jurisdiction). Provincial High Courts have original, appellate, and reversionary criminal jurisdiction. The Court of Appeal is an intermediate appellate court with a limited right of appeal to the Supreme Court. The Supreme Court exercises final appellate jurisdiction for all criminal and civil cases. Citizens may apply directly to the Supreme Court for protection if they believe any government or administrative action has violated their fundamental human rights.
Laws and Regulations on Foreign Direct Investment
The principal law governing foreign investment is Law No. 4 (known as the BOI Act), created in 1978 and amended in 1980, 1983, 1992, 2002, 2009 and 2012. The BOI Act and implementing regulations provide for two types of investment approvals, one for concessions and one without concessions. Under Section 17 of the Act, the BOI is empowered to approve companies satisfying minimum investment criteria with such companies eligible for duty-free import concessions. The BOI acts as the “one-stop-shop” to facilitate all the requirements of the foreign investors to Sri Lanka. Investment approval under Section 16 of the BOI Act permits companies to operate under the “normal” laws and applies to investments that do not satisfy eligibility incentive criteria. From April 1, 2017, Inland Revenue Act No. 24 of 2017 created an investment incentive regime granting a concessionary tax rate (for specific sectors) and capital allowances (depreciation) based on capital investments. Commercial Hub Regulation No 1 of 2013 applies to transshipment trade, offshore businesses, and logistic services. The Strategic Development Project Act of 2008 (SDPA) provides tax incentives for large projects that the Cabinet identifies as “strategic development projects.”
Sri Lanka does not have a specific competition law. Instead, the BOI or respective regulatory authorities may review transactions for competition-related concerns. In March of 2017, Parliament approved the “Anti-Dumping and Countervailing” and “Safeguard Measures” Acts. These laws provide a framework against unfair trade practices and import surges and allow government trade agencies to initiate investigations relating to unfair business practices to impose additional and/or countervailing duties.
Expropriation and Compensation
Since economic liberalization policies began in 1978, the government has not expropriated a foreign investment, with the last expropriation dispute resolved in 1998. The land acquisition law (Land Acquisition Act of 1950) empowers the government to take private land for public purposes with compensation based on a government valuation. Still, there have been reported cases of the military taking over businesses in the North and East part of the country, by claiming they were on government land, with little or no compensation.
Dispute Settlement
ICSID Convention and New York Convention
Sri Lanka is a member state to the International Centre for the Settlement of Investment Disputes (ICSID convention) and a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) without reservations.
Investor-State Dispute Settlement
Sri Lanka signed a Bilateral Investment Treaty (BIT) with the United States in 1991. Over the past ten years, according to the United Nations, two investment disputes in Sri Lanka have involved foreign investors: 1) a dispute between a major European bank and the national Ceylon Petroleum Corporation regarding an oil hedging agreement, concluded with the proceeding being decided in favor of the foreign bank; and 2) an arbitration involving British and local investors (with the Attorney General as respondent) regarding a tourism development project that concluded in 2020 with the ICSID tribunal dismissing the $20 million claim for failure to prove the claim.
International Commercial Arbitration and Foreign Courts
Sri Lanka ranks very poorly on contract enforcement (164 out of 190) on the World Bank’s Doing Business Indicators. As a result, many investors prefer arbitration over litigation. Sri Lanka has a community mediation system, which primarily handles non-commercial mediations and commercial disputes where the amount in controversy is less than $3,333.00. There is no-mediation system for commercial disputes over that threshold amount. The Institute for the Development of Commercial Law and Practice (ICLP) (www.iclparbitrationcentre.com) and the Sri Lanka National Arbitration Centre (www.slnarbcentre.com) also help settle private commercial disputes through arbitration.
Bankruptcy Regulations
The Companies Act and the Insolvency Ordinance provide for dissolution of insolvent companies, but there is no mechanism to facilitate the reorganization of financially troubled companies. Other laws make it difficult to keep a struggling company solvent. The Termination of Employment of Workmen Special Provisions Act (TEWA), for example, makes it difficult to fire or lay off workers who have been employed for more than six months for any reason other than serious, well-documented disciplinary problems. In the absence of comprehensive bankruptcy laws, extra-judicial powers granted by law to financial institutions protect the rights of creditors. A creditor may petition the court to dissolve the company if the company cannot make payments on debts in excess of LKR 50,000 ($320.00). Lenders are also empowered to foreclose on collateral without court intervention. However, loans below LKR 5 million ($32,000) are exempt, and lenders cannot foreclose on collateral provided by guarantors to a loan.
Sri Lanka ranked 94 out of 190 countries in the resolving insolvency index in the World Bank’s Doing Business Report 2020. Resolving insolvency takes, on average, 1.7 years at a cost equivalent to 10 percent of the estate’s value.
6. Financial Sector
Capital Markets and Portfolio Investment
The Securities and Exchange Commission (SEC) governs the CSE, unit trusts, stockbrokers, listed public companies, margin traders, underwriters, investment managers, credit rating agencies, and securities depositories. Foreign portfolio investment is encouraged. Foreign investors can purchase up to 100 percent of equity in Sri Lankan companies in permitted sectors. Investors may open an Inward Investment Account (IIA) with any commercial bank in Sri Lanka to bring in investments. As of August 30, 2020, 289 companies representing 20 business sectors are listed on the CSE. As stock market liquidity is limited, investors need to manage exit strategies carefully.
In accordance with its IMF Article VIII obligations, the government and the Central Bank of Sri Lanka (CBSL) generally refrain from restrictions on current international transfers. When the government experiences balance of payments difficulties, it tends to impose controls on foreign exchange transactions. Due to pressures on the balance of payments caused by the COVID-19 economic crisis, Sri Lanka took several measures to restrict imports and limit outward capital transactions.
The state consumes over 50 percent of the country’s domestic financial resources and has a virtual monopoly on the management and use of long-term savings. This inhibits the free flow of financial resources to product and factor markets. High budget deficits have caused interest rates to rise and resulted in higher inflation. On a year-to-year basis, inflation was approximately 5.1 percent in March of 2021, and the average prime lending rate was 9.91 percent. Retained profits finance a significant portion of private investment in Sri Lanka with commercial banks as the principal source of bank finance and bank loans as the most widely used credit instrument for the private sector. Large companies also raise funds through corporate debentures. Credit ratings are mandatory for all deposit-taking institutions and all varieties of debt instruments. Local companies can borrow from foreign sources. FDI finances about 6 percent of overall investment. Foreign investors can access credit on the local market and are free to raise foreign currency loans.
Money and Banking System
Sri Lanka has a diversified banking system. There are 25 commercial banks: 13 local and 12 foreign. In addition, there are seven specialized local banks. Citibank N.A. is the only U.S. bank operating in Sri Lanka. Several domestic private commercial banks have substantial government equity acquired through investment agencies controlled by the government. Banking has expanded to rural areas, and by end of 2020 there were over 3,619 commercial bank branches and over 6,176 Automated Teller Machines throughout the country. Both resident and non-resident foreign nationals can open foreign currency banking accounts. However, non-resident foreign nationals are not eligible to open Sri Lankan Rupee accounts.
CBSL is responsible for supervision of all banking institutions and has driven improvements in banking regulations, provisioning, and public disclosure of banking sector performance. Credit ratings are mandatory for all banks. CBSL introduced accounting standards corresponding to International Financial Reporting Standards for banks on January 1, 2018, and the application of the standards substantially increased impairment provisions on loans. The migration to the Basel III capital standards began in July of 2017 on a staggered basis, with full implementation was kicking in on January 1, 2019 and some banks having had to boost capital to meet full implementation of Basel III requirements. In addition, banks must increase capital to meet CBSL’s new minimum capital requirements deadline, which is set for December 31, 2022. A staggered application of capital provisions for smaller banks unable to meet capital requirements immediately will likely be allowed.
Total assets of the banking industry stood at LKR 14,666 billion ($75.2 billion) as of December 31, 2020. The two fully state-owned commercial banks – Bank of Ceylon and People’s Bank – are significant players, accounting for about 33 percent of all banking assets. The Bank of Ceylon currently holds a non-performing loan (NPL) ratio of 4.98 percent (up from 4.79 percent in 2019). The People’s Bank currently holds a NPL ratio of 3.85 percent (up from 3.68 percent in 2019). Both banks have significant exposure to SOEs but, these banks are implicitly guaranteed by the state. The six-month debt moratorium issued by the CBSL for distressed borrowers will expired in March 2021, the impact of this is yet to be reflected on the banking sector NPL
In October 2019, Sri Lanka was removed from the Financial Action Task Force (FATF) gray list after making significant changes to its Anti-Money Laundering/Countering the Finance of Terrorism (AML/CFT) laws. CBSL is exploring the adoption of blockchain technologies in its financial transactions and appointed two committees to investigate the possible adoption of blockchain and cryptocurrencies.
Sri Lanka has a rapidly growing alternative financial services industry that includes finance companies, leasing companies, and microfinance institutes. In response, CBSL has established an enforcement unit to strengthen the regulatory and supervisory framework of non-banking financial institutions. Credit ratings are mandatory for finance companies as of October 1, 2018. The government also directed banks to register with the U.S. Internal Revenue Service (IRS) to comply with the U.S. Foreign Accounts Tax Compliance Act (FATCA). Almost all commercial banks have registered with the IRS.
Foreign Exchange and Remittances
Foreign Exchange
Sri Lanka generally has investor-friendly conversion and transfer policies. Companies say they can repatriate funds relatively easily. In accordance with its Article VIII obligations as a member of the IMF, Sri Lanka liberalized exchange controls on current account transactions in 1994 and, in 2010-2012, the government relaxed exchange controls on several categories of capital account transactions. A new Foreign Exchange Act, No. 12 of 2017, came into operation on November 20, 2017 and further liberalized capital account transactions to simplify current account transactions. Foreign investors are required to open Inward Investment Accounts (IIA) to transfer funds required for capital investments but there are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment through an IIA in any foreign currency designated by CBSL.
Remittance Policies
No barriers exist, legal or otherwise, to remittance of corporate profits and dividends for foreign enterprises since 2017 when Sri Lanka relaxed investment remittance policies with the new Foreign Exchange Act. Remittances are done through IIAs. There are no waiting periods for remitting investment returns, interest, and principal on private foreign debt, lease payments, royalties, and management fees provided there is sufficient evidence to prove the originally invested funds were remitted into the country through legal channels. Exporters must repatriate export proceeds within 120 days.
Sovereign Wealth Funds
Sri Lanka does not have a sovereign wealth fund. The government manages and controls large retirement funds from private sector employees and uses these funds for budgetary purposes (through investments in government securities), stock market investments, and corporate debenture investments.
7. State-Owned Enterprises
SOEs are active in transport (buses and railways, ports and airport management, airline operations); utilities such as electricity; petroleum imports and refining; water supply; retail; banking; telecommunications; television and radio broadcasting; newspaper publishing; and insurance. Following the end of the civil war in 2009, Sri Lankan armed forces began operating domestic air services, tourist resorts, and farms crowding out some private investment. In total, there are over 400 SOEs of which 55 have been identified by the Sri Lanka Treasury as strategically important, and 345 have been identified as non-commercial.
Privatization Program
The government currently have not adopted a strategy of privatizing SOEs. Several attempts to sell the government’s stake in the heavily indebted national carrier, Sri Lankan Airlines, were not successful. The government is also seeking to improve the efficiency of SOEs through private sector management practices. SOE labor unions and opposition political parties often oppose privatization and are particularly averse to foreign ownership. Privatization through the sale of shares in the stock market is likely to be less problematic.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data
Year
Amount
Year
Amount
Host Country Gross Domestic Product (GDP) ($M USD)
* Source for Host Country Data: Central Bank of Sri Lanka
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
Total Inward
Amount
100%
Total Outward
Amount
100%
People’s Republic of China:
2,186
17%
Singapore
303
20%
India
1,688
13%
India
205
14%
Netherlands
1,593
13%
Netherlands
150
10%
Singapore
1,130
9%
Malaysia
136
9%
Malaysia
1,083
8%
Bangladesh
126
8%
“0” reflects amounts rounded to +/- $500,000.
According to CBSL, the United States is the 13th largest foreign investor in Sri Lanka in terms of stock of foreign direct investment (FDI). The United States stock of FDI in 2020 was $274 million. FDI inflows from the United States were $13 million in 2020. United States FDI in Sri Lanka has remained steady over the past five years.
Table 4: Sources of Portfolio Investment
Data not available.
Suriname
Executive Summary
The government of Suriname (GOS) officially supports and encourages business development through local and foreign investment. The overall investment climate favors U.S. investors with experience working in developing countries. To attract FDI, authorities have planned to update institutional and legal frameworks to protect investors and eliminate restrictions regarding investment income transfers and control related FDI flows. However, the World Trade Organization’s 2019 Trade Policy Review concluded that Suriname’s investment regime has not changed since its last review in 2013. The report states that the overall regime, particularly the approval of FDI, may be discretionary rather than rules-based.
The extractives sector has historically attracted significant foreign direct investment, but numerous factors negatively impact the investment climate as a whole. These factors include an unclear process for awarding concessions and public tenders, corruption, institutional capacity constraints, and a lack of overall transparency. In January 2020, Apache and Total announced a “significant oil discovery” off the coast of Suriname, followed by similar discoveries in April 2020, July 2020, and January 2021. In December 2020, Malaysian national oil company Petronas and ExxonMobil announced a discovery of hydrocarbons in Suriname’s Block 52. Experts estimate that it will take 5-10 years to begin offshore oil production, assuming world oil prices support it. In 2020, the CEO of state-owned oil company Staatsolie estimated that the government of Suriname could earn $10-$15 billion over the course of 20 years if production reaches similar levels as in neighboring Guyana. U.S.-based Newmont Corporation and Canada-based IAMGOLD – the two major multinational gold companies in Suriname – continue to be the key players in Suriname’s gold mining sector, generating significant revenues for the government.
Public debt has increased. The government’s debt burden reached 75% of GDP in 2019, up from 43% in 2015. In November 2019, the National Assembly raised the country’s debt ceiling from 60% of GDP to 95% of GDP. In December 2019, Suriname completed a $125 million sovereign bond offering that allowed the government to take ownership of the Afobaka Hydroelectric Dam. In February 2020, the government admitted that it had taken $197 million from the Central Bank for imports, debt payments, and other unspecified purposes. This led to a steady decrease in the value of the Surinamese dollar, a reduction in foreign currency reserves, and a rise in the price of consumer goods. These developments prompted a series of downgrades from international credit rating agencies. In January 2020, Fitch downgraded Suriname’s Long-Term Foreign Currency Issuer Default Rating from B- to CCC. In April 2020, Standard & Poor lowered Suriname’s long-term sovereign credit rating from B+ to CCC+, while Moody’s changed its outlook on Suriname from stable to negative. The COVID-19 pandemic also damaged Suriname’s economy as health restrictions dampened economic activity, and a near total halt of international travel undermined a key source of foreign currency.
In May 2020, national elections brought a new political coalition to power. Assuming office in July 2020, the government of President Chandrikapersad Santokhi has sought to reverse the economic policies of his predecessor, with a particular focus on addressing the debt burden and diversifying the economy. His government opened negotiations with the International Monetary Fund to arrange a financial assistance package, while also starting talks with international bondholders to restructure Suriname’s repayment schedule. Since taking office, the Santokhi administration has depreciated the Surinamese dollar, raised taxes on fuel and high income-earners, passed a new law on foreign currency matters, amended the State Debt Act to allow the government to take on loans to address COVID-19, and begun reforms of Suriname’s large civil service sector, which constitutes one of the government’s top expenditures. Policy measures that have been announced but not yet enacted include the institution of a value-added tax and a reduction in Suriname’s generous electricity subsidies.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The Government of Suriname (GOS) officially supports and encourages business development through foreign and local investment. The overall investment climate favors U.S. investors with experience working in developing countries. Investment opportunities exist in mining, agriculture, the oil and gas sector, timber, fishing, financial technology and tourism.
With the exception of petroleum, Suriname has no sector-specific laws or practices that discriminate against foreign investors, including U.S. investors, by prohibiting, limiting or conditioning foreign investment. In the oil sector, the state oil company, Staatsolie, maintains sole ownership of all oil-related activities. Foreign investment is possible through exploration and product sharing contracts (PSCs) with Staatsolie. Five U.S. companies participate in PSCs as operators and/or as contract partners. A full list of PSCs can be found on Staatsolie’s website: https://www.staatsolie.com/en/staatsolie-hydrocarbon-institute/active-production-sharing-contracts/
In February 2021, the Government of Suriname announced that it will terminate its two existing investment entities, namely the Institute for Promoting Investments in Suriname (InvestSur) and the Investment and Development Corporation of Suriname (IDCS) in order to establish a new investment company. In March 2021, the National Assembly launched debate on a draft law to establish a State-owned investment company to be named the Suriname Investment Enterprise NV. The government also created an International Business Directorate at the Ministry of Foreign Affairs to act as a first point of entry for foreign investors.
Suriname does not have a formal business roundtable or ombudsman aimed at investment retention or maintaining an ongoing dialogue with investors.
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 all forms of remunerative activity.
There are no general limits on foreign ownership or control – statutory, de facto, or otherwise. No law requires that domestic nationals own a minimum percentage of domestic companies or that foreign nationals hold seats on the board. No law caps or reduces the percentage of foreign ownership of any private business enterprise.
Except for petroleum, there are no sector-specific restrictions applied to foreign ownership and control. Within the petroleum sector, the law limits ownership to Staatsolie, the state-owned oil company, which maintains sole ownership of all petroleum-related activities. Caribbean Single Market and Economy (CSME) countries do enjoy favored status over other sources of foreign investment, but in practice international firms from beyond the CSME are not denied investment opportunities. An Economic Partnership Agreement (EPA) with the European Union aims to provide European companies better access to Suriname. Suriname has not yet ratified the EPA.
Government ministries screen inbound foreign investments intended for the sector of the economy that they oversee. Special commissions screen all necessary legal and financial documents. Screening criteria vary, but are intended to determine a proposed investment’s compliance with local law. The screening process is neither public nor transparent, and therefore could be considered a barrier to investment. The Department of International Business at the Ministry of Foreign Affairs requests that prospective investors fill out an intake form. The intake form will enable its appraisal committee to conduct a quick scan and conclude whether the FDI in question fits the development goals of the government.
The Inter-American Development Bank published a report called Framework for Private Development in Suriname in 2013.The World Bank Group published Suriname Sector Competitiveness Analysis, focusing on the agribusiness and extractive sectors in 2017.
Business Facilitation
The Santokhi administration has emphasized its desire to diversify Suriname’s economy and deepen business ties with the United States, Europe, and others. In 2020, Suriname’s new government began publishing public tenders on the website of the Ministry of Public Works. The government created a Presidential Commission on the Surinamese Diaspora in an effort to explore possibilities for raising capital and increasing business ties with the Surinamese community in the Netherlands. In March 2021, the National Assembly launched debate on a draft law to establish a State-owned investment company to be named the Suriname Investment Enterprise NV. The government also created an International Business Directorate at the Ministry of Foreign Affairs to act as a first point of entry for foreign investors.
There is no online registration system. Companies must register with the local Chamber of Commerce and Industry, which provides guidance on registration procedures. At the time of registration, the company needs a local notary’s assent to ratify the company bylaws. For non-residents, the notary also sends a request to the Foreign Exchange Commission for approval. Applicants must obtain a tax number at the registration office of the tax department. Applications then go to the Ministry of Justice and Police and finally to the President for approval. The Ministry of Trade, Industry and Tourism launched the Suriname Electronic Single Window (SESW) in September 2019. Online submission and processing of documents required for import, transit of goods, and export is now possible. The World Bank’s Doing Business report indicates starting a business requires 66 days. The local Chamber of Commerce and Industry states it can take as little as 30 days.
Outward Investment
The Government does not promote or incentivize outward investment. Suriname’s outward investment is minimal.
The Government does not restrict domestic investors from investing abroad, but there are no specific mechanisms in place to promote the practice. Due to the small size of the local market, some domestic companies have expanded to CARICOM member states, such as Guyana and Trinidad & Tobago.
3. Legal Regime
Transparency of the Regulatory System
Suriname does not use transparent policies and effective laws to foster competition. The previous National Assembly (2015-2020) indicated that it would vote on a draft competition law, but did not do so. The Competitiveness Unit of Suriname coordinates and monitors national competitiveness and is working towards establishing policies and suggesting legislation to foster competition. Current legislation on topics such as taxes, the environment, health, safety, and other matters are not purposely used to impede investment, but may still form obstacles. Employment protection legislation is among the most stringent in the world. Labor laws, for instance, prohibit employers from firing an employee without the permission of the Ministry of Labor once the employee has fulfilled his or her probationary period, which by law is limited to two months. Tax laws are criticized for overburdening the formal business sector, while a large informal sector goes untaxed. Public sector contracts and concessions are not always awarded in a clear and transparent manner. The current administration has announced its commitment to greater transparency in the public tendering process, and the Ministry of Public Works is publishing procurement notices on its website on a regular basis.
There are no informal regulatory processes managed by non-governmental organizations or private sector associations.
Rule-making and regulatory authority exist within relevant ministries at the national level. It is this level of regulation that is most relevant for foreign businesses. The government may consult with relevant stakeholders on regulations, but there is no required public process. The government presents draft laws and regulations to the Council of Minsters for discussion and approval. Once approved, the President’s advisory body, the State Council, considers the draft. If approved, the government presents a draft to the National Assembly for discussion, amendment, and approval, and then to the President for signature. Legislation only goes into effect with the signature of the President and after publication in the National Gazette.
Legal, regulatory, and accounting systems are often outdated and therefore not transparent nor consistent with international norms. The National Assembly passed the Act on Annual Accounts in 2017 to create more fiscal transparency by requiring all companies, including state owned enterprises, to publish annual accounts based on the International Financial Reporting Standards (IFRS). The law went into effect in 2020 for large companies, while it went into effect for small and medium sized companies (SMEs) in 2021. Small companies can use the IFRS for SMEs.
Suriname passed new legislation in October 2018 to professionalize and institute better standards in the accountancy profession. The legislation created the Suriname Chartered Accountants Institute (SCAI) and makes membership mandatory for accountants in Suriname. The board of the SCAI has the responsibility to monitor the quality of the profession and apply disciplinary measures.
Draft bills or regulations are discussed in view of the public, and relevant stakeholders may be consulted. The National Assembly has established the email address feedbackwetgeving@dna.sr as a place where individuals can give their opinion on draft legislation.
There is no centralized online location similar to the Federal Register in the United States where key regulatory actions are published. However, the National Assembly publishes the actual text of adopted laws on its website.
It is unclear what the regulatory enforcement mechanisms that ensure the government follows administrative processes might be, as the processes have not been made accountable to the public. There is no public administration law. The Auditor General’s office is an independent body in charge of supervising the financial management of government funds. The Supreme Audit Institution reports to the National Assembly. The Central Accountant Service exercises control on administrative processes at the ministries and reports to the Ministry of Finance. There is no centralized online location where key regulatory actions or their summaries are published, similar to the Federal Register in the United States.
The minimum wage law was revised by State Decree on July 18, 2019. The government will determine the minimum wage biennially. Regulatory reform efforts announced in prior years have largely not been fully implemented. In January 2021, the government announced its intent to implement a value-added tax (VAT) by January 1, 2022.
Reforms such as the revised minimum wages had at most a modest impact due to inflation.
It is unclear what the regulatory enforcement mechanisms are, as the process has not been made public. Regulations are developed by ministries that have jurisdiction over the relevant area, in consultation with involved stakeholders.
The government’s executive budget proposal and enacted budget are easily accessible to the public. The previous government, led by President Desire Delano Bouterse, submitted an executive budget proposal for 2020, but the budget was not passed. The current administration, led by President Chandrikapersad Santokhi, submitted a draft amended budget for 2020, which the National Assembly passed in November 2020. Actual revenues and expenditures regularly deviate from the enacted budget, and the origin and level of accuracy of some information in the budget were not reliable. A full end-of-year report is not publicly available. The Supreme Audit Institution publishes a limited audit based on self-reporting by the ministries. The State Debt Management Office (SDMO) is responsible for the operational management of the public debt of the government. Data regarding public debt is published every three months in the Government Gazette of Suriname and on the SDMO website.
International Regulatory Considerations
As a member of CARICOM, Suriname has committed to regionally-coordinated regulatory systems.
Suriname uses national and international standards. Standards developed by other (international/regional) standardization bodies that Suriname utilizes include: ISO, Codex Alimentarius, International Electro Technical Commission, CROSQ, ASTM International, COPANT, SMIIC (Standards and Metrology Institute for Islamic Countries), NEN (Nederland Normalisatie Instituut), ETSI, GLOBAL GAP, etc..
Suriname is a member of the World Trade Organization (WTO). The WTO Committee on Technical Barriers to Trade (TBT) lists only one notification from Suriname in 2015.
Legal System and Judicial Independence
Suriname’s legal system is based on the Dutch civil system. Judges uphold the sanctity of contracts and enforce them in accordance with their terms. When an individual or company disputes a signed contract, they have the right to take the case to court. The judiciary consistently upholds local law, applies it, and enforces it for local and international businesses.
Laws are defined in criminal, civil, and commercial codes and verdicts are based on the judge’s interpretation of those codes. There is no specialized commercial court. The commercial codes contain commercial legislation.
Historically, the judicial system has been considered to be independent of the executive branch. Most observers consider the judicial system to be procedurally competent, fair, reliable, and free of overt government interference. Due to a shortage of judges and administrative staff, processing of civil cases can be delayed. Last year, the Court of Justice appointed seven new judges to ease the delay in court cases. The number of judges is now 30.
Draft regulations may be reviewed by involved stakeholders and they may be given the opportunity to comment. Since October 2019, individuals have also had the option to comment on draft legislation via email at feedbackwetgeving@dna.sr. There is no formal, required public consultation process. Suriname has no general administrative law, so there are no special administrative tribunals. Judges of the regular courts also hear cases of administrative law.
Laws and Regulations on Foreign Direct Investment
The overall regime, and more particularly the approval of foreign direct investment (FDI), may be discretionary rather than rules-based, leading to heightened unpredictability and uncertainty, and associated risks of favoritism and corruption.
In March 2020, the previous National Assembly passed the Foreign Exchange Act, which placed constraints on the use of foreign currency in cash transactions and established a strict exchange rate for the Surinamese dollar. It also granted the government broad authorities to enforce the law, as well as the power to halt the import of “non-essential” goods. In May 2020, a judge suspended the law over questions concerning its constitutionality. In March 2021, the Santokhi govenrment revoked the law and submitted an amended version to the National Assembly for debate.
In April 2020, the previous National Assembly passed the COVID-19 State of Emergency Law, which granted the government broad powers to enforce COVID-19-related precautionary measures. It also created a $53 million fund to assist struggling businesses, and it allowed the government to take loans and advances from local institutions and consolidate them into a single mega-loan. The new National Assembly extended the law in August 2020 and extended it once again in February 2021.
In September 2020, the new National Assembly amended the State Debt Act and the COVID-19 State of Emergency Law. The changes in these laws allow the government to take out local and international loans in order to respond to the global pandemic. In November 2019, the previous National Assembly amended the State Debt Act in order to raise the government’s debt ceiling from 60% of GDP to 95% of GDP.
In February 2021, the Foreign Exchange Commission announced three new measures regarding exchange rate policy. First, exporters will be required to repatriate all their earned export revenues to Suriname, which also means that the buyer abroad will have to pay for the purchased goods through a Surinamese commercial bank. Second, exporters and foreign exchange offices will be required to exchange 30% of their income in foreign currency to the local currency, the Surinamese Dollar (SRD). Third, importers are required to pay for their imports via Surinamese commercial banks. The stated intention of this measure is to foreclose the possibility that exporters act as illegal “cambios” to finance imports and thus make illegal profits. It is also designed to combat trade-based money laundering.
Several criminal investigations of former government officials began in 2020. In February 2020, former Central Bank Governor Robert van Trikt was arrested on fraud charges. In August 2020, the new National Assembly officially indicted ex-Minister of Finance Gillmore Hoefdraad, which allowed the Attorney General to launch an investigation into alleged financial mismanagement conducted by Hoefdraad in collaboration with the ex-Governor of the Central Bank of Suriname, Robert van Trikt. In December 2020, the new National Assembly voted to indict former Vice President (and current National Assembly member) Ashwin Adhin, which allowed the Attorney General to pursue a criminal investigation for embezzlement, fraud, and destruction of government property. The cases remain ongoing.
There is no primary one-stop-shop website for investments that provide relevant laws, rules, procedures, and reporting requirements for investors.
Competition and Antitrust Laws
There are no domestic agencies currently reviewing transactions for competition-related concerns. The previous National Assembly (2015-2020) considered draft laws on competition and consumer protection, but did not ultimately vote on them. According to the authorities, no date for enactment is foreseen. Both draft laws also cover state-owned enterprises. The CARICOM Competition Commission is based in Suriname, and it monitors potential anti-competitive practices for enterprises operating within the CARICOM Single Market and Economy.
Expropriation and Compensation
According to Article 34 of Suriname’s constitution, expropriation will take place “only for reasons of public utility” and with prior compensation. In practice, the government has no history of expropriations. However, Article 42 of Suriname’s constitution specifically refers to all natural resources as property of the nation, and states that the nation has inalienable rights to take possession of all natural resources to utilize them for the economic, social, and cultural development of Suriname.
There is no history of expropriation.
Dispute Settlement
ICSID Convention and New York Convention
Suriname is not a party to the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID). Suriname has been a member of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards since 1964, when the country was still a colony of the Netherlands. Upon becoming independent in 1975, Suriname automatically continued its membership in international conventions and treaties.
There is no specific domestic legislation providing enforcement of awards under the 1958 New York Convention or under the ICSID convention.
Investor-State Dispute Settlement
The government is a member state of the Multilateral Investment Guarantee Agency (MIGA).
Suriname has no BIT or FTA with an investment chapter with the United States.
There have been no publicly known investment disputes in the past 10 years involving a U.S person or other foreign investor. Every effort is made to settle investment disputes outside the court system or via arbitration.
Judgments of foreign arbitral awards are enforced by the local courts only if Suriname has a legal treaty of jurisprudence with the foreign country involved. If not, the foreign judgment can be brought before the Surinamese court for consideration as long as the court determines it has jurisdiction and doing so does not otherwise violate any Surinamese laws. With Suriname’s participation and membership in the Caribbean Court of Justice, judgments from this court are also binding for local courts. Cases have been successfully filed against Suriname before the Inter-American Court of Justice and the Organization of American States. Judgments from these courts have been upheld by the Surinamese legal system.
There is no known history of extrajudicial action against foreign investors.
International Commercial Arbitration and Foreign Courts
Suriname’s civil law includes options for arbitration. The government reactivated the Suriname Arbitration Institute (SAI) in August 2014 to offer arbitration and mediation services. The SAI collaborates with the Dutch Arbitration Institute.
The Mediation Council, pursuant to the Labor Mediation Act of 1946, promotes the peaceful settlement of disputes concerning labor issues and the prevention of such disputes in Suriname.
Local courts only recognize and enforce foreign arbitral awards if doing so is stipulated in the contract or agreement and it does not contradict local law. Foreign arbitration is an accepted means of settling disputes between private parties, but only if local alternatives are exhausted.
There have been no publicly known investment disputes in which state-owned enterprises are involved. Court processes are, in general, considered transparent and non-discriminatory.
Bankruptcy Regulations
Suriname has bankruptcy legislation. Creditors, equity shareholders, and holders of other financial contracts, including foreign contract holders, have the right to file for liquidation of debts due to insolvency. In a case where there is a loan from a commercial bank, repayment of the bank loan takes precedence. Bankruptcy, in principle, is not criminalized. However, in cases where a board of directors encouraged a company to pursue bankruptcy to avoid creditors, courts have viewed this behavior as a criminal offense. In the World Bank’s Doing Business Report, Suriname stands at 139 in the ranking of 190 economies on the ease of resolving insolvency.
6. Financial Sector
Capital Markets and Portfolio Investment
The government does not promote portfolio investment.
There is a small self-regulating stock market with eleven companies registered. It meets twice a month but does not have an electronic exchange. There is no effective regulatory system to encourage and facilitate portfolio investment. At present, Suriname is facing liquidity shortfalls. Sufficient policies do exist to facilitate the free flow of financial resources.
As an IMF Article VIII member, Suriname has agreed to refrain from restrictions on payments and transfers for current international transactions.
Credit is allocated on market terms and at market rates. Foreign investors that establish businesses in Suriname are able to get credit on the local market, usually with a payment guarantee from the parent company. The private sector has access to a variety of credit instruments. Larger companies can obtain customized credit products. There is, however, a Central Bank regulation that limits a commercial bank’s credit exposure to a single client.
Money and Banking System
The private sector has access to a variety of credit instruments. Larger companies can obtain customized credit products
According to the IMF Article IV Consultation in 2019, the banking system faces pressing vulnerabilities.
Based on the latest (July 2019) data, the capital adequacy ratio for the banking system stood at 10.5 percent (above the 10 percent minimum requirement), but non-performing loans in the banking system remained high (12.5 percent of gross loans), and profitability was low (0.7 percent return on assets). Deposit and loan dollarization remain high.
Total estimated assets of Suriname’s largest banks:
DSB Bank (annual report, 2018): $1,007 million. DSB annual report 2019 is delayed due to COVID-19 and time needed to implement IFRS.
Hakrin Bank (annual report 28, 2019): $671.2 million
Republic Bank Limited (2020 annual report, Suriname-based assets): $396.5 million. (The Republic Bank Limited of Trinidad and Tobago acquired Royal Bank of Canada’s Suriname holdings in 2015.)
Finabank (annual report, 2019): $322.8 million
Suriname has a central bank system.
Foreign banks or branches are allowed to establish operations in Suriname. They are subject to the same measures and regulations as local banks. According to an IMF assessment in 2016, banks in Suriname are among those in the region that have lost their correspondent relationships. The IMF notes that though the loss of correspondent banking relationships has not reached systemic proportions, a critical risk still exists. According to the IMF’s Article IV Consultation report in 2019, there is a possibility of losing corresponding banking relationships given recent overseas investigations of potential money laundering via Suriname’s financial sector. The reputational risk to both local and foreign banks acting as their correspondents is substantial. In March 2021, Suriname announced that it had completed a National Risk Assessment to identify and assess its vulnerability to money laundering and the financing of terrorism.
There are no restrictions for foreigners to open a bank account. Banks require U.S. citizens to provide the information necessary to comply with the Foreign Accounts Tax Compliance Act (FATCA).
Foreign Exchange and Remittances
Foreign Exchange
There are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment, such as remittances of investment capital, earnings, loan or lease payments, or royalties. There can be shortages in the availability of U.S. cash dollars at local banks, which can affect businesses.
Funds associated with any form of investment can be freely converted into a usable currency at legal market clearing rates with the permission of the Foreign Exchange Commission. However, the criteria for obtaining permissions are opaque.
In September 2020, the Central Bank of Suriname (CBvS) announced the depreciation of the Surinamese Dollar (SRD). The previous official exchange rate was SRD7.52 to $1 dollar. The new sale rate was adjusted to SRD14.29 to $1 dollar. In March 2021, the CBvS announced that it had come to an agreement with the government to establish a minimum and maximum exchange rate for the U.S. dollar, namely that the rate must stay between SRD14.29 and SRD16.30 to $1. In addition to the official exchange rate, different rates are available unofficially in parallel exchange markets. Media reports indicate that exchange rate policy is a key component of Suriname’s negotiations with the International Monetary Fund – negotiations which began in 2020.
Remittance Policies
There are no recent changes or plans to change investment remittance policies.
The waiting period on remittances can be relatively short for dividends; return on investments, interest, and principal on private foreign debt; lease payments; royalties; and management fees. The time needed to process the requests depends on the sector and the amount transferred. Transfers through the banking system can range from same day to one week waiting times, contingent upon approval by the Foreign Exchange Commission.
Sovereign Wealth Funds
On May 4, 2017, the National Assembly passed legislation establishing a Sovereign Wealth Fund (SWF). In August 2020, President Santokhi announced that the government would operationalize Suriname’s SWF, as the previous government had not instituted the necessary state decrees to do so. In December 2020, the government held talks with experts from Norway to learn more from the Norwegian Sovereign Wealth Fund.
Suriname does not participate in the International Forum of Sovereign Wealth Funds.
7. State-Owned Enterprises
State owned enterprises (SOEs) operate in the oil, agribusiness, mining, communications, travel, energy, and financial sectors. SOEs provide little information regarding their operations. Only a few produce annual reports accessible to the public. Staatsolie, Suriname’s state-owned oil company, has publicly available audited accounts. As of 2020, all state-owned enterprises will be required to publish annual accounts. Several have been accused of fraud or corrupt practices. In August 2020, President Santokhi installed a Presidential Committee on the Improper Use of Public Goods. The task of the committee is to conduct an inventory of goods purchased on behalf of the government, as well as semi-governmental entities and SOEs.
There is no public list of SOEs.
SOEs receive advantages when competing in the domestic market. These include access to government guarantees and government loans otherwise unavailable to private enterprises. Additionally, SOEs have access to land and raw materials inaccessible to private entities.
The government does not yet adhere to the OECD Guidelines on Corporate Governance for SOEs.
Privatization Program
The GoS did announce a privatization program largely in the agricultural sector, but the only privatization was the state-owned banana company in 2014. The official governing accord of the ruling coalition states that privatization of SOEs will be considered where appropriate, while President Santokhi has indicated that some SOEs will need to be privatized. However, no such privatizations have taken place under the new government.
Foreign investors can participate in privatization programs. In 2014, the Belgium multinational, UNIVEG, acquired a 90 percent stake in the state-owned banana company through a public, international bidding process. The European Commission assisted with the bidding process. UNIVEG later pulled out of Suriname. The Government took over the remaining 90 percent shares and $15 million debt of UNIVEG and is now the only share holder. As this is the only example of privatization within Suriname, no standard privatization or public bidding processes have been established by the government.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International
Source of Data: BEA; IMF;
Eurostat; UNCTAD, Other
Economic Data
Year
Amount
Year
Amount
Host Country Gross Domestic Product (GDP) ($M USD)
* Source for Host Country Data: Central Bank of Suriname
Table 3: Sources and Destination of FDI
Data not available.
Note: Suriname does not release foreign direct investment data publicly. The IMF’s Coordinated Direct Investment Survey (CDIS) has no information on Suriname. There are no tax haven sources of inward FDI.
Table 4: Sources of Portfolio Investment
Data not available.
Note: Portfolio investment data are not available in Suriname on the IMF’s Coordinated Portfolio Investment Survey. The host government does not publish portfolio investment data.
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 taxes. In addition, the high cost of labor, rigid labor legislation 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. Sweden ranked tenth on the World Bank 2020 Doing Business Report, which highlighted Sweden’s overall business environment as among the most business friendly measured. In the World Economic Forum’s 2019 Competitiveness Report, Sweden was ranked eight out of 138 countries in overall competitiveness and productivity. The report highlighted Sweden’s strengths: human capital (health, education level, and skills of the population), macroeconomic stability, and technical and physical infrastructure. Bloomberg’s 2021 Innovation Index ranked Sweden fifth among the most innovative nations on earth; a pattern reinforced by Sweden ranked first on the European Commission’s 2020 European Innovation Scoreboard and second on the World Intellectual Property Organization/INSEAD 2020 Global Innovation Index. Also in 2020, Transparency International ranked Sweden as one of the most corruption-free countries in the world – third out of 180.
Sweden is perceived as a creative place with interesting research and technology. It is well equipped to embrace the Fourth Industrial Revolution with a superior IT infrastructure and is seen as a frontrunner 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.
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. 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. In addition, Sweden is implementing an EU investment screening regulation (EU Foreign Investment Screening Mechanism – adopted in March 2019), and plans to announce a national investment screening mechanism by the end of 2020 or early 2021.
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,” a 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.
On January 1, 2020, Sweden enacted new regulations giving Swedish armed forces and security services authority to deny or revoke operating licenses to mobile radio providers that threaten national security.
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 Supervisory Authority, Finansinspektionen, to establish a branch in Sweden. Sweden also adheres to EU regulations on investment screening and approval mechanisms for inbound foreign investment.
Other Investment Policy Reviews
Sweden has in the past three years not undergone an investment policy review by the World Trade Organization (WTO), or the United Nations Committee on Trade and Development (UNCTAD), or the Organization for Economic Cooperation and Development (OECD).
Business Facilitation
Business Sweden’s Swedish Trade and Invest Council is the investment promotion agency tasked with facilitating business. The services of the agency are available to all investors.
All forms of business enterprise, except for sole traders, have to be registered 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 https://www.bolagsverket.se/en and is open to foreign companies. The process of registering an enterprise is clear and 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, need also to be registered 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 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. A compilation of Swedish government agencies that work with registering, starting, running, expanding and/or closing a business can be found at http://www.verksamt.se.
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 the expansion of 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 export of defense equipment and dual-use products. ISP is also the National Authority for the Chemical Weapons Convention and handles cases concerning targeted sanctions.
3. Legal Regime
Transparency of the Regulatory System
As an EU member, Sweden has altered its legislation to comply with the EU’s stringent rules on competition. The country has made extensive changes in its laws and regulations to harmonize with EU practices, all to avoid distortions in, or impediments to the efficient mobilization and allocation of investment. The institutions of the European Union are publicly committed to transparent regulatory processes. The European Commission has the sole right of initiative for EU regulations and publishes extensive, descriptive information on many of its activities. More information can be found at: http://ec.europa.eu/atwork/decision-making/index_en.htm; http://ec.europa.eu/smart-regulation/index_en.htm.
There are no informal regulatory processes managed by nongovernmental organizations or private sector associations. Nongovernmental organizations and private sector associations may submit comments to government draft bills. The submitted comments are made public in the public consultation process.
Rule-making and regulatory authority on a national level exists formally in the legislative branch, the Riksdag. As a member of the EU, a growing proportion of legislation and regulation stem from the EU. These laws apply in some case directly as national law or are put before the Riksdag to be enacted as national law. The executive branch, the Government of Sweden, and its various agencies draft laws and regulations that are put before the Riksdag and are adopted on a national level when they enter into force. Municipalities may draft regulations that are within their spheres of competence. These regulations apply at the respective municipality only and may vary between municipalities.
Draft bills and regulations, which include investment laws, are made available for public comment through a public consultation process, along the lines of U.S. federal notice and comment procedures. Current and newly adopted legislation can be found at the Swedish Parliament’s homepage and in the various government agencies dealing with the relevant regulation: http://www.riksdagen.se/sv/dokument-lagar/. Key regulatory actions are published at Lagrummet: https://lagrummet.se/. Lagrummet serves as the official site for information on Swedish legislation and provides information on legislation in the public domain, all statutes currently in force, and information on impending legislation. “Post och Inrikes Tidningar” serves in certain aspects a similar role as the Federal Register in the U.S., through which public notifications are published. The proclamations of “Post och Inrikes Tidningar” can be found at the Swedish Companies Registration Office (Bolagsverket): https://poit.bolagsverket.se/poit/PublikPoitIn.do.
The judicial branch and various agencies are tasked with regulation oversight and/or regulation enforcement. The Swedish Parliamentary Ombudsmen, known as the Justitieombuds-männen (JO), are tasked to make sure that public authority complies with the law and follows administrative processes. They also investigate complaints from the general public.
Regulations are reviewed on the basis of scientific and/or data-driven assessments. The principle of public access to official documents, offentlighetsprincipen, governs the availability of the results of studies that are conducted by government entities and furthermore to comments made by government entities. The principle provides the Swedish public with the right to study public documents as specified in the Freedom of the Press Act.
As an EU-member, Sweden complies with EU-legislation in shaping its national regulations.
If a national law, norm, or standard is found to be in conflict with EU-law, then the national law is altered to be in compliance with EU-law. Sweden adheres to the practices of WTO and coordinates its actions in regard to WTO with other EU-member countries as the EU-countries have a common trade policy.
Legal System and Judicial Independence
Sweden’s legal system is based on the civil law tradition, common to Europe, and founded on classical Roman law, but has been further influenced by the German interpretation of this tradition. Swedish legislation and Swedish agencies provide guidance on whether regulations or enforcement actions are appealable and adjudicated in the national court system. Swedish courts are independent and free of influence from other branches of government, including the executive. Sweden has a written commercial law and contractual law and there are specialized courts, such as commercial and civil courts. The Swedish courts are divided into:
Courts of general jurisdiction (the District Courts, the Courts of Appeal, and the Supreme Court) which have jurisdiction with respect to civil and criminal cases;
Administrative courts (County Administrative Courts, Administrative Courts of Appeal, and the Supreme Administrative Court) which have jurisdiction with respect to issues of public law, including taxation;
Specialist courts for disputes within certain legal areas such as labor law, environmental law and market regulation.
Sweden is a signatory to the New York Convention on Recognition and Enforcement of Foreign Arbitral Law; foreign awards may be enforced in Sweden regardless of which foreign country the arbitral proceedings took place. The main source of arbitration law in Sweden is the Swedish Arbitration Act, which contains both procedural and substantive regulations. Sweden is a party to the Lugano and the Brussels Conventions, and, by its membership of the EU, Sweden is also bound by the Brussels Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters. An arbitral award is considered final and is not subject to substantive review by Swedish courts. However, arbitral awards may be challenged for reasons set out in the Arbitration Act. An award may, for example, be set aside after a challenge because of procedural errors, which are likely to have influenced the outcome.
Laws and Regulations on Foreign Direct Investment
During the 1990s, Sweden undertook significant deregulation of its markets. In a number of areas, including the electricity and telecommunication markets, Sweden has been on the leading edge of reform, resulting in more efficient sectors and lower prices. Nevertheless, a number of practical impediments to direct investments remain. These include a fairly extensive, though non-discriminatory, system of permits and authorizations needed to engage in many activities and the dominance of a few very large players in certain sectors, such as construction and food wholesaling. Foreign banks, insurance companies, brokerage firms, and cooperative mortgage institutions are permitted to establish branches in Sweden on equal terms with domestic firms, although a permit is required. Swedes and foreigners alike may acquire shares in any company listed on NASDAQ OMX.
Sweden’s taxation structure is straightforward and corporate tax levels are low. In 2013, Sweden lowered its corporate tax from 26.3 percent to 22 percent in nominal terms and lowered it again to 21.4 percent in 2019. The effective rate can be even lower as companies have the option of making deductible annual appropriations to a tax allocation reserve of up to 25 percent of their pretax profit for the year. Companies can make pre-tax allocations to untaxed reserves, which are subject to tax only when utilized. Certain amounts of untaxed reserves may be used to cover losses. Due to tax exemptions on capital gains and dividends, as well as other competitive tax rules such as low effective corporate tax rates, deductible interest costs for tax purposes, no withholding tax on interest, no stamp duty or capital duties on share capital, and an extensive double tax treaty network, Sweden is among Europe’s most favorable jurisdictions for holding companies. Unlisted shares are always tax-exempt, meaning there is no qualification time or minimum holding of votes or capital. Listed shares are exempt if the holding represents at least 10 percent of the voting rights (or is contingent on the holder’s business) and the shares are held for at least one year. As part of a COVID-19 stimulus package, the government lowered the payroll tax for persons aged 19-23 from 31.42 percent to 19.73 percent.
Personal income taxes are among the highest in the world. Since public finances have improved due to extensive consolidation packages to reduce deficits, the government has been able to reduce tax pressure as a percentage of GDP. Though well below the national average in the EU area, public debt, as a share of GDP, rose to approximately 40 percent as a result of the enactment of several fiscal stimulus packages which aimed to boost the economy in the COVID-19 pandemic. Significant tax increases in the near future remain unlikely. One particular focus of the Swedish government has been tax reductions to encourage employers to hire the long-term unemployed.
Dividends paid by foreign subsidiaries in Sweden to their parent company are not subject to Swedish taxation. Dividends distributed to other foreign shareholders are subject to a 30 percent withholding tax under domestic law, unless dividends are exempt or taxed at a lower rate under a tax treaty. Tax liability may also be eliminated under the EU Parent Subsidiary Directive. Profits of a Swedish branch of a foreign company may be remitted abroad without being subject to any other tax than the regular corporate income tax. There is no exit taxation and no specific rules regarding taxation of stock options received before a move to Sweden. Instead, cases of double taxation are solved by applying tax treaties and cover not only moves within the EU but all countries, including the United States.
There is no primary or “one-stop-shop” website that provides relevant laws, rules, procedures, and reporting requirements for investors. Business Sweden, Sweden’s official trade and investment organization, is the investment promotion agency tasked with developing business in Sweden. The services of the agency are available to all investors.
Competition and Antitrust Laws
As an EU member, Sweden has altered its legislation to comply with the EU’s stringent rules on competition. The competition law rules are contained in the Swedish Competition Act (2008:579), which entered into force in November 2008. The fundamental antitrust provisions have been the same since 1993. The Swedish Competition Authority (SCA) is the main enforcement authority of the Swedish Competition Act. The agency adheres to transparent norms and procedures, which are made available on its homepage: https://www.konkurrensverket.se/en/omossmeny/about-us/uppgifter. SCA decisions can be appealed to the administrative courts. This can be done by submitting a written appeal to the Swedish Competition Authority within three weeks from the day the applicant received the SCA’s initial decision.
Expropriation and Compensation
Private property is only expropriated for public purposes, in a non-discriminatory manner, with fair compensation, and in accordance with established principles of international law.
Dispute Settlement
ICSID Convention and New York Convention
Sweden is a member of the World Bank-based International Center for the Settlement of Investment Disputes (ICSID) and includes ICSID arbitration of investment disputes in many of its bilateral investment treaties (BITs). Sweden is a signatory to the New York Convention on Recognition and Enforcement of Foreign Arbitral Law.
Investor-State Dispute Settlement
There have been no major disputes over investment in Sweden in recent years. There is no history of extrajudicial action against foreign investors.
International Commercial Arbitration and Foreign Courts
Swedish arbitration law is advanced and in line with current best practice of international arbitration. The main source of arbitration law in Sweden is the Swedish Arbitration Act, which contains both procedural and substantive regulations. A revised version of the Swedish Arbitration Act (SAA) entered into force on March 1, 2019. The revised SAA intends to preserve Sweden’s position among Europe’s leading seats for international arbitration proceedings.
Sweden is a party to the Lugano and the Brussels Conventions and by its membership of the EU Sweden is bound by the Brussels Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters. An arbitral award is considered final and is not subject to substantive review by Swedish courts. However, arbitral awards may be challenged for reasons set out in the Arbitration Act. An award may, for example, be set aside after challenge because of procedural errors, which are likely to have influenced the outcome. The Arbitration Institute of the Stockholm Chamber of Commerce (SCC) has administered arbitrations under the UNCITRAL Arbitration Rules for many years, usually acting as the Appointing Authority. Parties to a dispute may adopt the Procedures by agreement before or after the dispute has arisen.
The SCC maintains different versions of the Procedures depending on which version of the UNCITRAL Arbitration Rules applies to the arbitration agreement in question (1976 or 2010 versions).
Bankruptcy Regulations
The Swedish legislation on bankruptcy is found in a number of laws that came into force in different periods of time and to serve different purposes. The main laws on insolvency are the Bankruptcy Act (1987:672) and the Company Reorganization Act (1996:764), but the Preferential Rights of Creditors Act (1970:979), the Salary Guarantee Act (1992:497), and the Companies Act (1975:1385) are equally important. In 2010, Sweden strengthened its secured transactions system through changes to the Rights of Priority Act that give secured creditors’ claims priority in cases of debtor default outside bankruptcy. According to data collected by the World Bank’s 2020 Doing Business Report, resolving insolvency takes two years on average and costs nine percent of the debtor’s estate, with the most likely outcome being that the company will be sold as a going concern. The average recovery rate is 78 cents on the dollar. Globally, Sweden ranked 17 of 190 economies on the ease of resolving insolvency in the Doing Business 2020 report.
6. Financial Sector
Capital Markets and Portfolio Investment
Credit is allocated on market terms and is made available to foreign investors in a non-discriminatory fashion. The private sector has access to a variety of credit instruments. Legal, regulatory, and accounting systems are transparent and consistent with international norms. NASDAQ-OMX is a modern, open, and active forum for domestic and foreign portfolio investment. It is Sweden’s official stock exchange and operates under specific legislation. Furthermore, the Swedish government is neutral toward portfolio investment and Sweden has a fully capable regulatory system that encourages and facilitates portfolio investments.
Money and Banking System
Several foreign banks, including Citibank, have established branch offices in Sweden, and several niche banks have started to compete in the retail bank market. The three largest Swedish banks are Skandinaviska Enskilda Banken (SEB), Svenska Handelsbanken, and Swedbank. Nordea is the largest foreign bank and largest bank in Sweden, while Danske Bank is the second largest foreign bank and the fifth largest bank in Sweden. A deposit insurance system was introduced in 1996, whereby individuals received protection of up to SEK 250,000 (USD 29,250) of their deposits in case of bank insolvency. On December 31, 2010, the maximum compensation was raised to the SEK equivalent of 100,000 euro.
The banks’ activities are supervised by the Swedish Financial Supervisory Authority, Finansinspektionen, http://www.fi.se, to ensure that standards are met. Swedish banks’ financial statements meet international standards and are audited by internationally recognized auditors only. The Swedish Bankers’ Association, http://www.bankforeningen.se, represents banks and financial institutions in Sweden. The association works closely with regulators and policy makers in Sweden and Europe. Sweden is not part of the Eurozone; however, Swedish commercial banks offer euro-denominated accounts and payment services.
On July 1, 2014, Sweden signed the Foreign Account Tax Compliance Act (FATCA) agreement with the U.S. Financial institutions in Sweden are now obligated to submit information in accordance with FATCA to the Swedish Tax Agency. In February 2015, the Swedish Parliament decided on new laws and regulations needed to implement FATCA. The Parliamentary decision means the government’s proposals in Bill 2014/15:41 were adopted, including for example, the introductions of:
a new law on the identification of reportable accounts with respect to the agreement;
changes to tax procedure act;
new legislation on the exchange of information with respect to the agreement; and
consequential amendments to the Income Tax Act and other laws.
Foreign banks or branches offering financial services must have an authorization from the Swedish Financial Supervisory Authority, Finansinpektionen, to conduct operations. As part of the authorization application process, FI reviews the firm’s capital situation, business plan, owners, and management. Parts of the firm’s daily operations may also require authorization from FI. The applicable regulatory code can be found at http://www.fi.se/en/our-registers/search-fffs/2009/20093/.
There are no reported losses of correspondent banking relationships in the past three years and there are no current correspondent banking relationships that are in jeopardy. Foreigners have the right to open an account in a bank in Sweden provided he/she can identify him/herself and the bank conducts an identity check. The bank cannot require the person to have a Swedish personal identity number or an address in Sweden.
Foreign Exchange and Remittances
Foreign Exchange
Sweden adheres to a floating exchange rate regime and the national currency rate fluctuates.
Remittance Policies
Sweden does not impose any restrictions on remittances of profits, proceeds from the liquidation of an investment, or royalty and license fee payments. A subsidiary or branch may transfer fees to a parent company outside of Sweden for management services, research expenditures, etc. Funds associated with any form of investment can be freely converted into any world currency. In general, yields on invested funds, such as dividends and interest receipts, may be freely transferred. A foreign-owned firm may also raise foreign currency loans both from its parent corporation and credit institutions abroad. There are no recent changes or plans to change investment remittance policies. There are no time limitations on remittances.
Sovereign Wealth Funds
Sweden does not maintain a sovereign wealth fund or similar entity.
7. State-Owned Enterprises
The Swedish state is Sweden’s largest corporate owner and employer. Forty-six companies are entirely or partially state-owned, of which two are listed on the Stockholm stock exchange, and have government representatives on their boards. Approximately 129,000 people are employed by these companies, including associated companies. Sectors, which feature State-Owned Enterprises (SOEs), include energy/power generation, forestry, mining, finance, telecom, postal services, gambling, and retail liquor sales. These companies operate under the same laws as private companies, although the government appoints board members, reflecting government ownership. Like private companies, SOEs have appointed boards of directors, and the government is constitutionally prevented from direct involvement in the company’s operations. Like private companies, SOE’s publish their annual reports, which are subject to independent audit. Private enterprises compete with public enterprises under the same terms and conditions with respect to access to markets, credit, and other business operations. Moreover, Sweden is party to the General Procurement Agreement (GPA) within the framework of the World Trade Organization (WTO). Swedish SOEs adhere to the OECD Guidelines on Corporate Governance for SOEs. Further information regarding the Swedish SOEs can be found here: http://www.regeringen.se/regeringens-politik/bolag-med-statligt-agande/.
Privatization Program
The current Sweden’s Government, voted into office in September 2014 and returned to office after the most recent general elections in 2018, has a mandate to divest or liquidate its holdings in Bilprovningen (Swedish Motor-Vehicle Inspection Company), Bostadsgaranti, Lernia, Orio (formerly Saab Automobile Parts), SAS, and Svensk Exportkredit (SEK). If the Government of Sweden decides to divest or liquidate holdings, then a public bidding process would be implemented.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data
Year
Amount
Year
Amount
Host Country Gross Domestic Product (GDP) ($M USD)
* Source for Host Country Data: Statistics Sweden (SCB).
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
Total Inward
340,853
100%
Total Outward
410,493
100%
The Netherlands
51,701
15%
United States
62,575
15%
United Kingdom
47,967
14%
The Netherlands
42,056
10%
Luxembourg
45,815
13%
Norway
30,179
7%
Germany
30,467
9%
United Kingdom
29,872
7%
Norway
29,050
8%
Finland
27,434
6%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total
Equity Securities
Total Debt Securities
All Countries
668,500
100%
All Countries
531,227
100%
All Countries
137,272
100%
United States
212,917
31.8%
United States
178,934
33.7%
United States
33,984
24.8%
Luxembourg
99,715
14.9%
Luxembourg
95,029
17.9%
Germany
14,309
10.4%
United Kingdom
41,171
6.2%
United Kingdom
34,607
6.5%
Norway
10,147
7.4%
Finland
33,081
4.9%
Finland
22,959
4.3%
Finland
10,122
7.3%
Germany
24,208
3.6%
Japan
22,186
4.2%
France
8,857
6.5%
Taiwan
Executive Summary
Taiwan is an important market in regional and global trade and investment. It is one of the world’s top 25 economies in terms of gross domestic product (GDP) and was the United States’ 9th largest trading partner in 2020. An export-dependent economy of 23 million people with a highly skilled workforce, Taiwan is also a critical link in global supply chains, a central hub for shipments and transshipments in East Asia, and a major center for advanced research and development (R&D).
Taiwan welcomes and actively courts foreign direct investment (FDI) and partnerships with U.S. and other foreign firms. The administration of President Tsai Ing-wen aims to promote economic growth in part by increasing domestic investment and FDI. Taiwan authorities offer investment incentives and seek to leverage Taiwan’s strengths in advanced technology, manufacturing, and R&D. Expanded investment by the central authorities in physical and digital infrastructure across Taiwan complements this investment promotion strategy. The authorities convene a monthly interagency meeting to address common investment issues, such as land scarcity. Some Taiwan and foreign investors regard Taiwan as a strategic relocation alternative to insulate themselves against potential supply chain disruptions resulting from regional trade frictions. In January 2019, the Taiwan authorities launched a reshoring initiative to lure Taiwanese companies to shift production back to Taiwan from the People’s Republic of China (PRC) in response to rising tariffs on Taiwan’s critical electronics manufacturing industry and to diversify risks.
Taiwan’s finance, wholesale and retail, and electronics sectors remain top targets of inward FDI. Taiwan attracts a wide range of U.S. investors, including in advanced technology, digital, traditional manufacturing, and services sectors. The United States is Taiwan’s second-largest single source of FDI after the Netherlands, through which some U.S. firms choose to invest. In 2019, according to U.S. Department of Commerce data, the total stock of U.S. FDI in Taiwan reached USD 17.3 billion. U.S. services exports to Taiwan totaled USD 8.9 billion in 2020. Leading services exports from the United States to Taiwan were intellectual property, transport, and financial services.
Structural impediments in Taiwan’s investment environment include: excessive or inconsistent regulation; market influence exerted by domestic and state-owned enterprises (SOEs) in the utilities, energy, postal, transportation, financial, and real estate sectors; foreign ownership limits in sectors deemed sensitive; and regulatory scrutiny over the possible participation of PRC-sourced capital. Taiwan has among the lowest levels of private equity investment in Asia, although private equity firms are increasingly pursuing opportunities in the market. Foreign private equity firms have expressed concern about a lack of transparency and predictability in the investment approvals and exit processes, and regulators’ reliance on administrative discretion in rejecting some transactions. These challenges are especially apparent in sectors deemed sensitive for national security reasons, but that allow foreign ownership. Businesses have questioned the feasibility of Taiwan’s long-term energy policy in light of plans to phase out nuclear power by 2025 and increase the use of Liquified Natural Gas (LNG) and renewables.
Taiwan is at the center of regional high-technology supply chains due to its dominant role in the international technology supply chain with its advanced R&D capability in developing products for emerging technologies such as semiconductor, 5G telecommunication, AI, and the Internet of Things (IoT.) Taiwan authorities have been actively launching initiatives for partnerships with foreign investors in fostering a resilient production network in the region. Taiwan in late 2016 implemented new rules mandating a 60-day public comment period for draft laws and regulations emanating from regulatory agencies, but the new rules have not been consistently applied. Proposed amendments to foreign investment regulations, if passed, would help promote inward investment through streamlined reporting and approval procedures.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Promoting inward FDI has been an important policy goal for the Taiwan authorities because of Taiwan’s self-imposed public debt ceiling limiting public spending and its low levels of private investment. Despite the global economic recession caused by the COVID-19 pandemic, Taiwan’s domestic private investment continued to rise by 5.0 percent in 2020 due to increased reshoring investment by overseas Taiwan companies since late 2018. Taiwan has pursued various measures to attract FDI from both foreign companies and Taiwan firms operating overseas. A network of science and industrial parks, technology industrial zones, and free trade zones aim to expand trade and investment opportunities by granting tax incentives, tariff exemptions, low-interest loans, and other favorable terms. Incentives tend to be more prevalent for investment in the manufacturing sector.
In January 2019, Taiwan launched a reshoring incentive program to attract Taiwan firms operating in the PRC to return to Taiwan and has received favorable responses from Information Communication Technology (ICT) manufacturers. The Ministry of Economic Affairs (MOEA) Department of Investment Services (DOIS) Invest in Taiwan Center serves as Taiwan’s investment promotion agency and provides streamlined procedures for foreign investors, including single-window services and employee recruitment. For investments over New Taiwan Dollar (NTD) 500 million (USD 17.6 million), authorities will assign a dedicated project manager to the investment process. DOIS services are available to all foreign investors. The Centre’s website contains an online investment aid system (https://investtaiwan.nat.gov.tw/smartIndexPage?lang=eng) to help investors retrieve all the required application forms based on various investment criteria and types. Taiwan also passed the Foreign Talent Retention Act to attract foreign professionals with a relaxed visa and work permit issuance process and tax incentives. In the past two years, over 2000 foreigners have received the Taiwan Employment Gold Card, which is a government initiative to attract highly skilled foreign talent to Taiwan (https://goldcard.nat.gov.tw/en/). The MOEA is drafting a proposed amendment to the Statute for Investment by Foreign Nationals, which would replace the existing pre-approval investment review process with an ex-post reporting mechanism and strengthen screening of investment in industries of national security concerns.
Taiwan maintains a negative list of industries closed to foreign investment because the authorities assert relate to national security and environmental protection, including public utilities, power distribution, natural gas, postal service, telecommunications, mass media, and air and sea transportation. These sectors constitute less than one percent of the production value of Taiwan’s manufacturing sector and less than five percent of the services sector. Railway transport, freight transport by small trucks, pesticide manufactures, real estate development, brokerage, leasing, and trading are open to foreign investment. The negative list of investment sectors, last updated in February 2018, is available at http://www.moeaic.gov.tw/download-file.jsp?do=BP&id=ZYi4SMROrBA=.
The Taiwan authorities have been actively promoting the “5+2 Innovative Industries” and six strategic industries development program to accelerate industrial transformation that would boost domestic demand and external market expansion. Target industries include smart machinery, biomedicine, IoT, green energy, national defense, advanced agriculture, circular economy, and semiconductors, among other key sectors. Taiwan authorities also offer subsidies for the research and development expenses for Taiwan-foreign partnership projects. The central authorities take a cautious approach to approving foreign investment in innovative industries that utilize new and potentially disruptive business models, such as the sharing economy.
The American Chamber of Commerce in Taiwan (AmCham Taiwan) meets regularly with Taiwan agencies such as the National Development Council (NDC) to promote the resolution of concerns highlighted in the AmCham Taiwan’s annual White Paper. The authorities also regularly meet with other foreign business groups. Some U.S. investors have expressed concerns about a lack of transparency, consistency, and predictability in the investment review process, particularly regarding private equity investment transactions. Current guidelines on foreign investment state that those private equity investors seeking to acquire companies in “important industries” must provide, for example, a detailed description of the investor’s long-term operational commitment, relisting choices, and the investment’s impact on competition within the sector. U.S. investors have claimed to experience lengthy review periods for private equity transactions and redundant inquiries from the MOEA Investment Commission and its constituent agencies. Some report that public hearings convened by Taiwan regulatory agencies about specific private equity transactions have appeared to advance opposition to private equity rather than foster transparent dialogue. Private equity transactions and other previously approved investments have, in the past, attracted Legislative Yuan scrutiny, including committee-level resolutions opposing specific transactions.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign entities are entitled to establish and own business enterprises and engage in all forms of remunerative activity as local firms unless otherwise specified in relevant regulations. Taiwan sets foreign ownership limits in certain industries, such as a 60 percent limit on foreign ownership of wireless and fixed-line telecommunications firms, including a direct foreign investment limit of 49 percent in that sector. State-controlled Chunghwa Telecom, which controls 97 percent of the fixed-line telecom market, maintains a 49 percent limit on direct foreign investment and a 55 percent limit on overall foreign investment, including indirect ownership. There is a 20 percent limit on foreign direct investment in cable television broadcasting services, and foreign ownership of up to 60 percent is allowed through indirect investment via a Taiwan entity. In practice, however, this kind of investment is subject to heightened regulatory and political scrutiny. In addition, there is a foreign ownership limit of 49.99 percent for satellite television broadcasting services and piped distribution of natural gas and a 49 percent limit for high-speed rail services. The foreign ownership cap on airport ground services firms, air-catering companies, aviation transportation businesses (airlines), and general aviation businesses (commercial helicopters and business jet planes) is less than 50 percent, with a separate limit of 25 percent for any single foreign investor. Foreign investment in Taiwan-flagged merchant shipping services is limited to 50 percent for Taiwan shipping companies operating international routes.
Taiwan has opened more than two-thirds of its aggregate industrial categories to PRC investors, with 97 percent of manufacturing sub-sectors and 51 percent of construction and services sub-sectors open to PRC capital. PRC nationals are prohibited from serving as chief executive officer in a Taiwan company, although a PRC board member may retain management control rights. The Taiwan authorities regard PRC investment in media or advanced technology sectors, such as semiconductors, as a national security concern. The Cross-Strait Agreement on Trade in Services and the Cross-Strait Agreement on Avoidance of Double Taxation and Enhancement of Tax Cooperation were signed in 2013 and 2015, respectively, but have not taken effect. Negotiations on the Agreement on Trade in Goods halted in 2016.
The Investment Commission screens applications for FDI, mergers, and acquisitions. Taiwan authorities claim that 95 percent of investments not subject to the negative list and, with capital less than NTD 500 million (USD 17.6 million), obtain approval at the Investment Commission staff level within two to four days. Investments between NTD 500 million (USD 17.6 million) and NTD 1.5 billion (USD 53 million) in capital take three to five days to screen. The approval authority for these types of transactions rests with the Investment Commission’s executive secretary. For investment in restricted industries, in cases where the investment amount or capital increase exceeds NTD 1.5 billion, or for mergers, acquisitions, and spin-offs, screening takes 10 to 20 days and includes review by relevant supervisory ministries. Final approval rests with the Investment Commission’s executive secretary. Screening for foreign investments involving cross-border mergers and acquisitions or other special situations takes 20-30 days, as these transactions require interagency review and deliberation at the Investment Commission’s monthly meeting.
The screening process provides Taiwan’s regulatory agencies opportunities to attach conditions to investments to mitigate concerns about ownership, structure, or other factors. Screening may also include an assessment of the impact of proposed investments on a sector’s competitive landscape and protection of the rights of local shareholders and employees. Screening is also used to detect investments with unclear funding sources, especially PRC-sourced capital. To ensure monitoring of PRC-sourced investment in line with Taiwan law and public sentiment, Taiwan’s National Security Bureau has participated in every PRC-related investment review meeting regardless of the size of the investment. Blocked deals in recent years have reflected the authorities’ increased focus on national security concerns beyond the negative-list industries. The proposed revisions to the principal investment statute would, if passed, allow the authorities to apply political, social, and cultural sensitivity considerations in their investment review process.
Foreign investors must submit an application form containing the funding plan, business operation plan, entity registration, and documents certifying the inward remittance of investment funds. Applicants and their agents must provide a signed declaration certifying that any PRC investors in a proposed transaction do not hold more than a 30 percent ownership stake and do not retain managerial control of the company. When an investment fails review, an investor may re-apply when the reason for the denial no longer exists. Foreign investors may also petition the regulatory agency that denied approval or may appeal to the Administrative Court.
Other Investment Policy Reviews
Taiwan has been a member of the World Trade Organization (WTO) since 2002. In September 2018, the WTO conducted the fourth review of the trade policies and practices of Taiwan. Related reports and documents are available at: https://www.wto.org/english/tratop_e/tpr_e/tp477_crc_e.htm
Business Facilitation
MOEA has taken steps to improve the business registration process and has been finalizing amendments to the Company Act to make business registration more efficient. Since 2014, the application review period for company registration has been shortened to two days. Applications for a taxpayer identification number, labor insurance (for companies with five or more employees), national health insurance, and pension plans can be processed at the same time and granted decisions within five to seven business days. Since January 1, 2017, foreign investors’ company registration applications are processed by the MOEA’s Central Region Office.
In recent years, the Taiwan authorities revised rules to improve the business climate for startups. To develop Taiwan into a startup hub in Asia, Taiwan authorities launched an entrepreneur visa program allowing foreign entrepreneurs to remain in Taiwan if they meet one of the following requirements: raise at least NTD 2 million (USD 70,400) in funding; hold patent rights or a professional skills certificate; operate in an incubator or innovation park in Taiwan; win prominent startup or design competitions; or receive grants from Taiwan authorities. Starting from 2019, startup entrepreneurs can use intellectual property (IP) as collateral to obtain bank loans, which applies to foreign investors. In September 2020, the Taiwan authorities proposed a new draft amendment to relax the criteria to attract more foreign professionals working in Taiwan.
By the end of 2020, nearly 2,000 people had obtained the Employment Gold Card, which includes a residency permit for the applicant and his/her immediate relatives (parents, spouse, children), a work permit for three years, an alien resident certificate, and a re-entry permit. More than 30 percent of the recipients were Americans. The Employment Gold Card policy helped alleviate recruiting companies’ liability in work permit applications and associated administrative expenditures.
Further details about business registration process can be found in Invest Taiwan Center’s business one-stop service request website at http://onestop.nat.gov.tw/oss/web/Show/engWorkFlow.do
The Investment Commission website lists the rules, regulations, and required forms for seeking foreign investment approval: https://www.moeaic.gov.tw/businessPub.view?lang=en&op_id_one=1
Approval from the Investment Commission is required for foreign investors before proceeding with business registration. After receiving an approval letter from the Investment Commission, an investor can apply for capital verification and then file an application for a corporate name and proceed with business registration. The new company must register with the Bureau of Labor Insurance and the Bureau of National Health Insurance before recruiting and hiring employees.
For the manufacturing, construction, and mining industries, the MOEA defines small and medium-sized enterprises (SMEs) as companies with less than NTD 80 million (USD 2.8 million) of paid-in capital and fewer than 200 employees. For all other industries, SMEs are defined as having less than NTD 100 million (USD 3.5 million) of paid-in capital and fewer than 100 employees. Taiwan runs a Small and Medium Enterprise Credit Guarantee Fund to help SMEs obtain financing from local banks. Firms established by foreigners in Taiwan may receive a guarantee from the Fund. Taiwan’s National Development Fund has set aside NTD 10 billion (USD 350 million) to invest in SMEs.
Outward Investment
The PRC used to be the top destination for Taiwan companies’ overseas investment given the low cost of factors of production there, such as wages and land. With rising trade tensions between the United States and the PRC starting in 2018, the Taiwan authorities have intensified their efforts to assist Taiwan firms to diversify production by either relocating back home or to other markets, including in Southeast Asia. The Tsai administration launched the New Southbound Policy to enhance Taiwan’s economic connection with 18 countries in Southeast Asia, South Asia, and the Pacific. In 2020, Taiwan companies’ investment in the 18 countries totaled USD 2.8 billion. The Taiwan authorities seek investment agreements with these countries to incentivize Taiwan firms’ investment in those markets. Invest in Taiwan provides consultation and loan guarantee services to Taiwan firms operating overseas. Taiwan’s financial regulators have urged Taiwan banks to expand their presence in Southeast Asian economies either by setting up branches or acquiring subsidiaries.
According to the Act Governing Relations between the People of the Taiwan Area and the Mainland Area, all Taiwan individuals, juridical persons, organizations, or other institutions must obtain approval from the Investment Commission to invest in or have any technology-oriented cooperation with the PRC. The Taiwan authorities maintain a negative list for Taiwan firms’ investment and have special rules governing technology cooperation in the PRC. The Taiwan authorities, Taiwan companies, and foreign investors in Taiwan are increasingly vigilant about the threat of IP theft and illegal talent poaching in key strategic industries, such as the semiconductor industry.
3. Legal Regime
Transparency of the Regulatory System
Taiwan generally maintains transparent regulatory and accounting systems that conform to international standards. Publicly listed Taiwan companies have fully adopted International Financial Reporting Standards (IFRS) since 2015 and adopted IFRS 16 in January 2019. Taiwan’s Financial Supervisory Commission has affirmed that Taiwan will begin implementing IFRS 17 in January 2026. Ministries generally originate business-related draft legislation and submit it to the Executive Yuan for review. Following approval by the Executive Yuan, draft legislation is forwarded to the Legislative Yuan for consideration. Legislators can also propose legislation. While the cabinet-level agencies are the primary contact windows for foreign investors before entry, foreign investors also need to abide by local government rules, including those related to transportation services and environmental protection, among others.
Draft laws, rules, and orders are published on The Executive Yuan Gazette Online for public comment. On December 25, 2015, the Taiwan authorities first instituted a 14-day public comment period for new rules but extended it to no less than 60 days beginning December 29, 2016. All draft regulations and laws are required to be available for public comment and advanced notice unless they meet specific criteria allowing a shorter window. While welcomed by the U.S. business community, the 60-day comment period is not uniformly applied. Draft laws and regulations of interest to foreign investors are regularly shared with foreign chambers of commerce for their comments. For the ongoing amendment to the Statute for Investment by Foreign Nationals, the authorities held several regional public hearings and professional consultation meetings before finalizing its draft for the Executive Yuan review.
These announcements are also available for public comment on the NDC’s public policy open discussion forum at https://join.gov.tw/index. Foreign chambers of commerce and Taiwan business groups’ comments on proposed laws and regulations, and Taiwan ministries’ replies, are posted publicly on the NDC website. In October 2017, the NDC launched a separate policy discussion forum specifically for startups, which can be found online at http://law.ndc.gov.tw/, serving as the central platform to harmonize regulatory requirements governing innovative businesses and startups operation.
The Executive Yuan Legal Affairs Committee oversees the enforcement of regulations. Ministries are responsible for enforcement, impact analysis, draft amendments to existing laws, and petitions to laws pursuant to their respective authorities. Impact assessments may be completed by in-house or private researchers. To enhance Taiwan’s regulatory coherence in the wake of regional economic integration initiatives, the NDC in August 2017 released a Regulatory Impact Analysis Operational Manual as a practical guideline for central government agencies.
Taiwan regularly discloses government finance data to the public, including all debts incurred by all levels of government. Past information is also retrievable in a well-maintained fiscal database. Taiwan’s national statistics agency also publishes contingent debt information each year.
International Regulatory Considerations
Taiwan is not a member of any regional economic agreements but is a full member of international economic organizations such as the WTO, APEC, ADB, and Egmont Group. Although Taiwan is not a member of many international organizations, it voluntarily adheres to or adopts international norms, including in the area of finance, such as IFRS. MOEA in July 2014 notified other Taiwan agencies of the requirement to notify the WTO of all draft regulations covered by the WTO’s Agreement on Technical Barriers to Trade and the Agreement on Sanitary and Phytosanitary Measures. Taiwan is a signatory to the Trade Facilitation Agreement (TFA) and has met some of the customs facilitation requirements specified in the TFA, such as single-window customs services and preview of the origin. In January 2018, citing tax parity for domestic retailers and the risk of fraud, Taiwan lowered the de minimis threshold from NTD 3,000 (USD 150) to NTD 2,000 (USD 70), an approach regarded as contrary to facilitating customs clearance and trade, especially for small- and medium-sized U.S. businesses. NDC is in the process of drafting a proposed amendment to the Personal Information Protection Act and related regulations to meet the European Union’s General Data Protection Regulation (GDPR) standards and obtain adequacy status.
Legal System and Judicial Independence
Taiwan has a codified system of law. In addition to the specialized courts, Taiwan has a three-tiered court system composed of the District Courts, the High Courts, and the Supreme Court. The Compulsory Enforcement Act provides a legal basis for enforcing the ownership of property. Taiwan does not have discrete commercial or contract laws. Various laws regulate businesses and specific industries, such as the Company Law, the Commercial Registration Law, the Business Registration Law, and the Commercial Accounting Law. Taiwan’s Civil Code provides the basis for enforcing contracts.
Taiwan’s court system is generally viewed as independent and free from overt interference by other branches of government. Taiwan established its Intellectual Property Court in July 2008 in response to the need for a more centralized and professional litigation system for IPR disputes. There are also specialized labor courts at every level of the court system to deal with labor disputes. Foreign court judgments are final and binding and enforced on a reciprocal basis. Companies can appeal regulatory decisions in the court system.
Laws and Regulations on Foreign Direct Investment
Regulations governing FDI principally derive from the Statute for Investment by Foreign Nationals and the Statute for Investment by Overseas Chinese. These two laws permit foreign investors to transact either in foreign currency or the NTD. The laws specify that foreign-invested enterprises must receive the same regulatory treatment accorded to local firms. Foreign companies may invest in state-owned firms undergoing privatization and are eligible to participate in publicly financed R&D programs.
Amendments the Legislative Yuan passed in June 2015 to the Merger and Acquisition Act clarified investment review criteria for mergers and acquisition transactions. The Investment Commission is drafting amendments to the Statute for Investment by Foreign Nationals to simplify the investment review process. Included is an amendment that would replace a pre-investment approval requirement with a post-investment reporting system for investments under a USD 1 million threshold, which many stakeholders consider too low. Ex–ante approval would still be required for investments in restricted industries and those exceeding the threshold. The new proposal would also allow the authorities to impose various penalties for violations of the law. Guidance that previously required special consideration of the impact of a private equity fund’s investment has been folded into the set of general evaluation criteria for foreign investment in important industries. The MOEA in November 2016 released a supplementary document to clarify required certification for different types of investment applications. This document, which was last revised in 2018 and in Chinese only, can be found at http://www.moeaic.gov.tw/download-file.jsp?do=BP&id=5dRl9fU97Fk=
In December 2020, Taiwan authorities amended the Regulations Governing the Approval of PRC Investment in Taiwan to ensure the complex structure of foreign investments by investors from the PRC do not circumvent the investment control through any indirect investment structure. The new PRC investment rules introduced stricter criteria for identifying PRC investment through third-area intermediary, expanded the scope of investment subject to the authorities’ approval, and forbid PRC investment with any political or military affiliation.
All foreign investment-related regulations, application forms, and explanatory information can be found on the Investment Commission’s website, at http://run.moeaic.gov.tw/MOEAIC-WEB-SRC/OfimDownloadE.aspx
The Invest in Taiwan Portal also provides other relevant legal information of interest to foreign investors, such as labor, entry and exit regulations, at https://investtaiwan.nat.gov.tw/showPageeng1031003?lang=eng&search=1031003
Competition and Antitrust Laws
Taiwan’s Fair Trade Act was enacted in 1992. Taiwan’s Fair Trade Commission (TFTC) examines business practices that might impede fair competition. Parties may appeal a TFTC decision directly to the High Administrative Court. After the High Administrative Court issues its opinion, either party may file an appeal to the Supreme Administrative Court, which will only review decisions to determine if the lower court failed to apply the law.
Expropriation and Compensation
According to Taiwan law, the authorities may expropriate property whenever it is deemed necessary for the public interest, such as for national defense, public works, and urban renewal projects. The U.S. government is not aware of any recent cases of nationalization or expropriation of foreign-invested assets in Taiwan. There are no reports of indirect expropriation or any official actions tantamount to expropriation. Under Taiwan law, no venture with 45 percent or more foreign investment may be nationalized, as long as the 45 percent capital contribution ratio remains unchanged for 20 years after establishing the foreign business. Taiwan law requires fair compensation must be paid within a reasonable period when the authorities expropriate constitutionally protected private property for public use.
Dispute Settlement
ICSID Convention and New York Convention
In part due to its unique political status, Taiwan is neither a member of the International Centre for the Settlement of Investment Disputes (ICSID) nor a signatory to the 1966 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). It also is not a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).
Investor-State Dispute Settlement
Foreign investment disputes with the Taiwan authorities are rare. Taiwan resolves disputes according to its domestic laws and based on national treatment or investment guarantee agreements. Taiwan has entered into bilateral investment agreements with Singapore, Thailand, Malaysia, India, and Vietnam. Taiwan does not have an investment agreement with the United States. Taiwan’s bilateral investment agreements serve to promote and protect foreign investments. DOIS is not aware of investment disputes involving U.S. investors, although there have been reports of disputes between U.S. investors and their local Taiwan partners.
International Commercial Arbitration and Foreign Courts
Parties to a dispute may pursue mediation by a court, a town or city mediation committee, and/or the Public Procurement Commission. Mediation is generally non-binding unless parties agree otherwise. Civil mediation approved by a court has the same power as a binding ruling under civil litigation. The Judicial Yuan has been promoting alternative dispute resolution, one of its judiciary reform goals. Arbitration associations in Taiwan include the Chinese Arbitration Association, Taiwan Construction Arbitration Association, Labor Dispute Arbitration Association, and Chinese Construction Industry Arbitration Association in Taiwan.
A court order on recognition and enforcement must be obtained before a foreign arbitral award can be enforced in Taiwan. Any foreign arbitral award may be enforceable in Taiwan, provided that it meets the requirements of Taiwan’s Arbitration Act. In November 2015, the Legislative Yuan amended the Arbitration Act to stipulate that a foreign arbitral award, after a court has granted an application for recognition, shall be binding on the parties and have the same force as a final judgment of a court, and is enforceable. Taiwan referred to the United Nations Commission on International Trade Law (UNCITRAL) model law when the Arbitration Act was revised in 1998.
Bankruptcy Regulations
Taiwan has a bankruptcy law that guarantees creditors the right to share a bankrupt debtor’s assets on a proportional basis. Secured interests in property are recognized and enforced through a registration system. Bankruptcy is not criminalized in Taiwan. Corporate bankruptcy is generally governed by the Company Act and the Bankruptcy Act, while the Consumer Debt Resolution Act governs personal bankruptcy. The quasi-public Joint Credit Information Center is the only credit-reporting agency in Taiwan. In 2020, there were 200 rulings on bankruptcy petitions.
6. Financial Sector
Capital Markets and Portfolio Investment
Taiwan authorities welcome foreign portfolio investment in the Taiwan Stock Exchange (TWSE) and Taipei Stock Exchange, with foreign investment accounting for approximately 45 percent of TWSE capitalization in 2020. Taiwan allows the establishment of offshore banking, securities, and insurance units to attract a broader investor base. The Financial Supervisory Commission (FSC) utilizes a negative list approach to regulating local banks’ overseas business not involving the conversion of the NTD.
Taiwan’s capital market is mature and active. At the end of 2020, 948 companies were listed on the TWSE, with a total market trading volume of USD 157.4 billion (including transactions of stocks, Taiwan Depository Receipts, exchange-traded funds, and warrants). Foreign portfolio investors are not subject to a foreign ownership ceiling, except in certain restricted companies, and are not subject to any ceiling on portfolio investment. The turnover ratio in the TWSE rose to 126 percent in 2020 as the TWSE Capitalization Weighted Stock Index (TAIEX) soared 23 percent in 2020. Payments and transfers resulting from international trade activities are fully liberalized in Taiwan. A wide range of credit instruments, all allocated on market terms, is available to domestic- and foreign-invested firms alike.
Money and Banking System
Taiwan’s banking sector is healthy, tightly regulated, and competitive, with 36 banks servicing the market. The sector’s non-performing loan ratio has remained below 1 percent since 2010, with a sector average of 0.24 in September 2020. Capital-adequacy ratios (CAR) are generally high, and several of Taiwan’s leading commercial lenders are government-controlled, enjoying implicit state guarantees. The sector as a whole had a CAR of 14.1 percent as of September 2020, far above the Basel III regulatory minimum of 10.5 percent required by 2019. Taiwan banks’ liquidity coverage ratio, which was required by Basel III to reach 100 percent by 2019, averaged 132.6 percent in September 2020. Taiwan’s banking system is primarily deposit-funded and has limited exposure to global financial, wholesale markets. Regulators have encouraged local banks to expand to overseas markets, especially in Southeast Asia, and minimize exposure in the PRC. Taiwan Central Bank statistics show that Taiwan banks’ PRC net exposure on an ultimate risk basis was USD 49.8 billion in the third quarter of 2020, trailing the United States’ USD 94.2 billion. Taiwan’s largest bank in terms of assets is the wholly state-owned Bank of Taiwan, which had USD 186.2 billion of assets as of December 2020. Taiwan’s eight state-controlled banks (excluding the Taiwan Export and Import Bank) jointly held nearly USD 912 billion, or 48 percent of the banking sector’s total assets.
The Taiwan Central Bank operates as an independent agency and state-owned company under the Executive Yuan, free from political interference. The Central Bank’s mandates are to maintain financial stability, develop Taiwan’s banking business, guard the stability of the NTD’s external and internal value, and promote economic growth within the scope of the three aforementioned goals.
Foreign Exchange and Remittances
Foreign Exchange
Foreign banks are allowed to operate in Taiwan as branches and foreign-owned subsidiaries, but financial regulators require foreign bank branches to limit their customer base to large corporate clients. As a measure to promote the asset management business in Taiwan, since May 2015, foreigners holding a valid visa entering Taiwan have been allowed to open an NTD account with local banks with passports and an ID number issued by the immigration office. These requirements replaced the previous dual-identification (passport and resident card) requirements. Please refer to the Taiwan Bankers’ Association’s webpage: https://www.ba.org.tw/PublicInformation/BusinessDetail/10?returnurl=%2Ffor detailed information regarding various types of bank services (credit card, loans, etc.) for foreigners in Taiwan.
There are few restrictions in place in Taiwan on converting or transferring direct investment funds. Foreign investors with approved investments can readily obtain foreign exchange from designated banks. The remittance of capital invested in Taiwan must be reported in advance to the Investment Commission, but the Commission’s approval is not required. Funds can be freely converted into major world currencies for remittance, but to retain funds in Taiwan, they must be held in currency denominations offered by banks. In addition to commonly used U.S. dollar, euro, and Japanese yen-denominated deposit accounts, most Taiwan banks offer up to 15 foreign currency denominations. The exchange rate is based on the market rate offered by each bank. The NTD fluctuates under a managed float system.
Remittance Policies
There are no restrictions on remittances deriving from approved direct investment and portfolio investment. Prior approval is not required if the cumulative amount of inward or outward remittances does not exceed the annual limit of USD 5 million for an individual or USD 50 million for a corporate entity. Declared earnings, capital gains, dividends, royalties, management fees, and other returns on investment may be repatriated at any time. For large transactions requiring the exchange of NTD into foreign currency that could potentially disrupt Taiwan’s foreign exchange market, the Taiwan Central Bank may require the transaction to be scheduled over several days. According to law firms servicing foreign investors, there is no written guideline on the size of such transactions but amounts more than USD 100 million may be affected. Capital movements arising from trade in merchandise and services, as well as from debt servicing, are not restricted. No prior approval is required to move foreign currency funds not involving conversion between NTD and foreign currency.
Sovereign Wealth Funds
Taiwan does not have a sovereign wealth fund, although the American business community has advocated for one. Taiwania Capital Management Company, a partially government-funded investment company, was established in October 2017 to promote investment in innovative and other target industries. In December 2018, Taiwania raised USD 350 million for two funds investing in IoT and biotech industries.
7. State-Owned Enterprises
According to the NDC, 17 SOEs with stakes by the central authorities exceeding 50 percent, including official agencies such as the Taiwan Central Bank. Please refer to the list of all central government, majority–owned SOEs available online at https://ws.ndc.gov.tw/Download.ashx?u=LzAwMS9hZG1pbmlzdHJhdG9yLzEwL3JlbGZpbGUvMC8xMjk1LzM3NGExNjVjLWM5MzAtNDYxZS1iYjViLTA3ODkzYjNlNWVhMi5kb2M%3d&n=M2ZjMzZmMDItZjVjOC00ZjU2LThiMTctZmM3Y2EzMTE1MDRhLmRvYw%3d%3d&icon=..doc Some of theseSOEs are large in scale and exert significant influence in their industries, especially monopolies such as Taiwan Power (Taipower) and Taiwan Water. MOEA has stated that Taipower’s privatization will not occur in the near future but plans to restructure it as a new holding company under Electricity Industry Act revisions passed in January 2017 that will gradually liberalize power generation and distribution. CPC Corporation (formerly China Petroleum Corporation) controls over 70 percent of Taiwan’s gasoline retail market. The most recent privatization took place in August 2014, when the Aerospace Industrial Development Corporation (AIDC) was successfully privatized through a public listing on the TWSE. Taiwan authorities retain control over some SOEs that were privatized, including managing appointments to boards of directors. These enterprises include Chunghwa Telecom, China Steel, China Airlines, Taiwan Fertilizer, Taiwan Salt, CSBC Corporation (shipbuilding), Yang Ming Marine Transport Corp., and eight public banks.
In 2019 (latest data available), the 17 SOEs together had a net income of NTD 325 billion (USD 11.2 billion), down 7 percent from the NTD 350 billion (USD 12.1 billion) in 2018. The SOEs’ average return on equities continued to decline from a recent peak of 11.13 percent in 2015 to 8.73 percent in 2019. These 17 SOEs employed a total of 120,198 workers.
Taiwan has not adopted the OECD Guidelines on Corporate Governance for SOEs. In Taiwan, SOEs are defined as public enterprises in which the government owns more than 50 percent of shares. Public enterprises with less than a 50 percent government stake are not subject to Legislative Yuan supervision. Still, authorities may retain managerial control through senior management appointments, which may change with each administration. Public enterprises owned by local governments exist primarily in the public transportation sector, such as regional bus and subway services. Each SOE operates under the supervising ministry’s authority, and government-appointed directors should hold more than one-fifth of an SOE’s board seats. The Executive Yuan, the Ministry of Finance, and MOEA have criteria for selecting individuals for senior management positions. Each SOE has a board of directors, and some SOEs have independent directors and union representatives sitting on the board.
Taiwan acceded to the WTO’s Agreement on Government Procurement (GPA) in 2009. Taiwan’s central and local government entities, and SOEs are now all covered by the GPA. Except for state monopolies, SOEs compete directly with private companies. SOEs’ purchases of goods or services are regulated by the Government Procurement Act and are open to private and foreign companies via public tender. Private companies in Taiwan have the same access to financing as SOEs. Taiwan banks are generally willing to extend loans to enterprises meeting credit requirements. SOEs are subject to the same tax obligations as private enterprises and are regulated by the Fair Trade Act as private enterprises. The Legislative Yuan reviews SOEs’ budgets each year.
Privatization Program
There are no privatization programs in progress. Taiwan’s most recent privatization of AIDC in 2014 included the imposition of a foreign ownership ceiling of 10 percent due to the sensitive nature of the defense sector. In August 2017, Taiwan authorities identified CPC Corporation, Taipower Company, and Taiwan Sugar as their next privatization targets. Following the passage of the Electricity Industry Act amendments in January 2017, the authorities planned to submit a Taipower privatization plan within six to nine years after successfully separating Taipower’s power distribution/sales business from its power generation business.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data
Year
Amount
Year
Amount
Host Country Gross Domestic Product (GDP) ($M USD)
* Source for Host Country Data: GDP: Directorate General of Budget, Accounting, and Statistics; FDI: Investment Commission, Ministry of Economic Affairs
Table 3: Sources and Destination of FDI
Data not available.
Table 4: Sources of Portfolio Investment
Data not available. 14. Contact for More Information
Tajikistan
Executive Summary
Tajikistan is a challenging place to do business but presents potential high-risk, high-reward opportunities for foreign investors who have experience in the region, a long-term investment horizon, and the patience and resources to conduct significant research and due diligence. At the most senior levels, the Tajik government continues to express interest in attracting more U.S. investment, and in 2020 President Rahmon signaled the importance of outreach to U.S. companies by appointing the former head of the government’s Investment Committee as Tajikistan’s ambassador to the United States. Nevertheless, the poorest of the Central Asian countries harbors few U.S. investors and remains an uncompetitive investment destination.
President Rahmon publicly emphasizes the need to foster private-sector-led growth, and attracting investment is prioritized in the government’s 2016-2030 National Development Strategy and in-progress 2021-2025 Economic Development Strategy. Strategy documents notwithstanding, authoritarian policies, bureaucratic and financial hurdles, widespread corruption, a flawed banking sector, non-transparent tax system, and countless business inspections greatly hinder investors. The absence of private investment and the government’s decision to dedicate significant financial resources to the construction of the Roghun Dam hydropower plant, creates pressure for the Tax Committee to enforce or reinterpret arbitrary tax regulations in order to meet ever-increasing revenue targets. The government launched a tax reform project in 2019 to ease the burden for the private sector; it is intended to enter into force in 2022.
Politics also play a role. Tajikistan is saturated in opaque loans connected to China’s Belt and Road Initiative, and Chinese investments account for more than three-quarters of the country’s total Foreign Direct Investment. Tajikistan also reportedly continues to face pressure to join the Russian-led Eurasian Economic Union. Should it apply for and receive membership, firms could experience higher trade tariffs. Finally, despite Tajikistan’s 2013 accession to the World Trade Organization, the Tajik government has imposed trade policies to protect private interests without notifying its partners, notably in the poultry and mining sectors.
Additionally, the Tajik economy faces endemic challenges, and the novel coronavirus pandemic exposed a number of systemic economic weaknesses. Consumption, the major driver of Tajikistan’s economic growth, is driven by migrant remittance flows from Russia, where about one million labor migrants reside. In 2020, closed borders depressed both the flow of remittances and foreign trade, leading to a three percent contraction of Tajikistan’s Gross Domestic Product, and precipitating an 11-percent currency devaluation in the face of foreign exchange shortages. Tajikistan’s banking sector is plagued by politically directed, non-performing loans, high interest rates, and the absence of correspondent banking accounts in the West.
Despite these challenges and risks to potential investors, Tajikistan is pursuing greater trade links with its neighbors and has made modest progress on trade facilitation and increasing transparency in the extractives sector to improve its investment climate in past years. In 2020 authorities continued small steps towards compliance on intellectual property rights protections. Should the government pursue an economic reform path, opportunities in energy, agribusiness, food processing, tourism, textiles, and mining could prove promising.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The Tajik government is consistent in its calls for greater U.S. investment. Despite this, Tajikistan has traditionally courted state-led investment and external loans from China and Russia. In 2020, overall Foreign Direct Investment (FDI) to Tajikistan fell 53 percent to USD 162 million, and Chinese investments, which account for three-quarters of all FDI, fell 50 percent to USD 120.3 million. Russia (USD 13.9 million) was the second largest source of FDI last year, followed by Cyprus (USD 8.2 million) and Turkey (USD 7.8 million).
Tajikistan’s Investment Law (Article 7) guarantees equal rights for both local and foreign investors. According to this law, foreigners can invest by jointly owning shares in existing companies with other Tajik companies or Tajik citizens; by creating fully foreign-owned companies; or by concluding agreements with legal entities or citizens of Tajikistan that provide for other forms of foreign investment activity. Foreign firms may acquire assets, including shares and other securities, as well as land leasing and mineral usage rights. Foreign firms may also exercise all property rights to which they are entitled, either independently or shared with other Tajik companies and citizens of Tajikistan. Most of Tajikistan’s current international agreements provide most-favored-nation status.
Tajikistan’s legal code does not discriminate against foreign investors by prohibiting, limiting, or conditioning foreign investment. To receive permission and licenses for operation, however, a foreign investor must navigate a complicated, cumbersome, and often corrupt bureaucratic system.
Several Tajik government agencies are responsible for investment promotion, but they frequently have competing interests. The State Committee on Investments and State Property Management (https://www.investcom.tj/) chiefly facilitates FDI. In addition, state-owned enterprise Tajinvest under the State Committee on Investments and State Property Management is responsible for attracting investment into Tajikistan (https://www.tajinvest.tj.)
Tajikistan has established several formal mechanisms to maintain open channels of communication with existing and potential investors. With donor support, the government established a Consultative Council on the Improvement of the Investment Climate in 2007. This annual council provides a formal venue for dialogue with donors, international financial institutions, and members of the private sector (http://investmentcouncil.tj/en). Nevertheless, investors continue to claim that many of their complaints to the government go unheeded.
Limits on Foreign Control and Right to Private Ownership and Establishment
Tajikistan’s legislation provides a right for all forms of foreign and domestic ownership to establish business enterprises and engage in remunerative activity. There are no limits on foreign ownership or control of firms and no sector-specific restrictions that discriminate against market access. Local law considers all land and subsoil resources to belong exclusively to the state, although initial efforts to establish a private land market are underway.
Tajikistan’s legislation allows for 100 percent foreign ownership of local companies. In the context of jointly owned companies, local partners generally seek to possess a controlling share (51 percent or more) at the initial stage of business development and in some cases may seek to increase their stake over time.
All sectors of Tajikistan’s economy are open to foreign participation except for aviation, defense, security, and law enforcement, which require special government permission for the operation of such types of businesses or services. Tajikistan does not restrict foreign investment; it does not mandate local stakeholder equity positions or local partnership. In some cases, the government requires specific licenses. There are no mandatory IP/technology transfer requirements.
Tajikistan’s government maintains an investment screening mechanism for inbound foreign investments involving government interests, including investments into its five Free Economic Zones, issuing approval or rejection statements in particular for investments requiring government financial support or state guarantees. The State Committee on Investments and State Property Management is responsible for filing and coordinating foreign investment project proposals as they pass through the review pipeline. The government takes particular interest in determining whether the proposed project may impact the county’s national security and/or economic performance.
Investors must submit their proposals for screening to all relevant government agencies. This process can be lengthy and cumbersome. The State Committee on Investments and State Property Management circulates the investor’s proposal among the relevant government offices and ministries with instructions to review and then provide a formal opinion. If a ministry objects to the proposed investment activity, it submits an official note to the State Committee on Investments and State Property Management.
Screening proposals often involve background checks on the company, the person(s) representing the company, and identification of a financial source to comply with anti-money laundering regulations. U.S. businesses have not identified screening mechanisms as a barrier to investment.
The purpose of the investment screening process is to ensure that a proposed project does not violate Tajik laws. The review process could reject the proposal and the Tajik government may flag it as “incomplete.” Applicants may appeal the government’s decision by submitting a claim to the Tajik Economic Court.
Other Investment Policy Reviews
The COVID-19 outbreak forced the postponement of Tajikistan’s first WTO Trade Policy Review, which had been scheduled for March 2020. Additionally, the OECD launched a 2020 Peer Review of Investment Promotion in Tajikistan, and has suggested that Tajikistan enhance communication with existing investors and establish a clear investment strategy that articulates economic objectives and agency roles.
Business Facilitation
Although the Tajik government has simplified the business registration process by adopting a single-window registration system for investors in 2019, that process still requires significant legal and human resources, government connections, and time. The Tax Committee is the primary agency responsible for business registration (www.andoz.tj). In addition to obtaining state registration through a single-window, a company must also register with the Social Protection Agency (www.nafaka.tj); Statistics Agency under the President of Tajikistan (www.stat.tj); Ministry of Labor, Migration, and Employment (www.mehnat.tj); Sanitary-Epidemiological Service at the Ministry of Health (www.moh.tj); as well as with local authorities, municipal services, and other agencies. According to the country’s regulations, registering a business should take less than five business days; in reality, it may take several days weeks or even months due to the inappropriate or illegal actions of registering agencies.
The Tajik Tax Code recognizes three types of enterprises: small-scale (up to USD 100,000 annual turnover), medium scale (up to USD 2.5 million annual turnover), and large-scale (above USD 2.5 million annual turnover). The international donor community, in coordination with the government, funds a number of projects that stimulate development of small and medium enterprises in Tajikistan.
Outward Investment
The Tajik government does not promote outward investments. Private companies from Tajikistan have invested in Kazakhstan, Uzbekistan, the Kyrgyz Republic, Turkey, Russia, the United Kingdom, the United States, and the UAE, primarily in trade, food processing, real estate, and business development. The Tajik government does not restrict domestic investors from investing abroad.
3. Legal Regime
Transparency of the Regulatory System
Tajikistan’s regulatory system lacks transparency. Despite recent improvements to allow access to presidential decrees and laws online, governmental instructions, ministerial memos, and regulations are often inaccessible to the public. Businesspeople and investors must purchase access to Adliya, a commercial legal database, to obtain updated legal and regulatory information – http://www.adlia.tj/. Each ministry has its own set of unpublished regulations and these may contradict the laws and/or regulations of other ministries.
The Tajik government rarely publishes proposed laws and regulations in draft form for public comment. Although the Tajik government solicited public comment on the 2013 Tax Code, it did not modify the draft law based on the input received. The government has provided a period for public comment on its ongoing tax reform project.
TajikStandard, the government agency responsible for certifying goods and services, calibrating and accrediting testing laboratories, and supervising compliance with state standards, lacks experts and appropriate equipment. TajikStandard does not publish its fees for licenses and certificates, or its regulatory requirements.
Ongoing assistance from the World Bank’s Public Financial Management Modernization Project helps the Ministry of Finance and some parastatals adopt International Public Sector Accounting Standards (IPSAS) and International Financial Reporting Standards (IFRS) in order to comply with the government’s 2011 Accounting Law.
The Tajik central government is the highest rule-making and regulatory authority. On a case-by-case basis, this office may delegate regulatory functions to regional or district levels. The Office of the General Prosecutor, Anti-Corruption Agency, the Tax Committee, and the State National Security Committee oversee government and administrative procedures.
The Tajik government did not announce any regulatory system or enforcement reforms in 2020. Government agencies submit proposed draft regulations to government commissions. Once cleared, draft regulations receive final review by the relevant ministries and the Executive Office of President. Legally, the public has the right to review and monitor the enforcement process. In practice, however, Tajikistan does not regularly enforce or review regulations. Tajikistan archives its laws, regulations, and policies at www.mmk.tj.
Although the government has taken steps to improve its fiscal transparency, publicly available budget documents fall short of internationally accepted standards. International assessments recommend that Tajikistan break down data by ministry and include information about debt held by State-Owned Enterprises.
International Regulatory Considerations
Tajikistan is a member of the CIS (Commonwealth of Independent States). Government officials are still studying the prospect of membership in the Eurasian Economic Union. The regulatory system that governs Tajikistan’s cotton sector incorporates CIS and U.S. technical norms.
Tajikistan became a WTO member in 2013 and notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade.
Legal System and Judicial Independence
Tajikistan has a civil legal system in which parties to a contract can seek enforcement by submitting claims or disputes to Tajikistan’s Economic Court. Tajikistan has written laws on commercial activities and contracts.
Nominally, the judicial system is independent. In practice, the executive branch interferes in judiciary matters. The current judicial process is neither fair nor reliable. Outcomes tend to favor the government’s executive branch.
By law, regulation and enforcement actions are appealable and the national court system adjudicates appeals. In practice, national courts typically carry out executive preferences, leaving business and commercial interests vulnerable to government interference.
Laws and Regulations on Foreign Direct Investment
Several government websites provide information on laws/regulations:
The Tajik government regulates investments through a number of laws, inter alia, the Law on Investment Agreement, Law on Concessions, Law on Resources, Law on Legal Status of Foreigners, Law on Free Economic Zones, Law on Investments, Concept of State Policy on Investments and Protection of Investments, Law on Natural Resources Tenders, and Law on Privatization of Housing. Historically, inspections lack justification and are a means to extract fines and revenue from the private sector.
The Antimonopoly Service under the Government (http://www.ams.tj) is responsible for regulating prices for products of monopolistic enterprises, preventing and eliminating monopolistic activity, and monitoring potential monopolistic abuse and unfair competition. The agency’s decisions are subject to a legal appeals process, although there are few instances in which decisions have been overruled.
Expropriation and Compensation
The Tajik government can legally expropriate property under the terms of Tajikistan’s Law on Investments, Law on Privatization, civil code, and criminal code. The laws authorize expropriation if the Tajik government identifies procedural violations in privatizations of state-owned assets or determines a property has been used for anti-government or criminal activities, as defined in the criminal code. Under the Law on Joint Stock Companies, the government may request that a court cancel the private purchase of shares in SOEs if it determines that there was a violation to the procedure within the original sale.
Tajikistan has a history of expropriating land that was illegally privatized following independence. After an investigation by government anti-corruption, anti-monopoly, and other law enforcement agencies, the State Committee for Investments and State Property Management can issue a finding that the asset was illegally privatized, and request that the Tajik court system order its return to government control. Domestic law requires owners be reimbursed for expropriated property, but the amount of the compensation is usually well below the property’s fair market value.
In several cases, Tajik officials have used government regulatory agencies to pressure businesses and individuals into ceding properties and business assets. The Tajik government has not shown any pattern of discrimination against U.S. persons by way of illegal expropriation. All privately owned operations are vulnerable to expropriation actions.
The Tajik government may threaten to impose inflated and baseless taxation charges on companies, and use this as leverage to negotiate the transfer of some share of a company to the government. In cases of expropriations, claimants and others have generally had no access to due process.
Dispute Settlement
ICSID Convention and New York Convention
Tajikistan is not a member state of the International Centre for the Settlement of Investment Disputes (ICSID) Convention.
Tajikistan became the 147th country to sign and ratify the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), and acceded to the Convention on August 14, 2012. The convention entered into force on November 12, 2012 – 90 days after depositing the signed text at the UN in accordance with Article XII (2) of the Convention.
Nonetheless, Tajik courts have overturned arbitral awards in favor of connected officials. Tajikistan signed the Convention with a number of reservations regarding types of arbitration agreements and decisions that Tajikistan can recognize and implement. One of the reservations established that Tajikistan does not apply the provisions of the Convention to disputes with immovable property – Norway has established a similar reservation. Another reservation established that Tajikistan applies the Convention only to disagreements and decisions “arising after the entry into force of the Convention and to decisions made in the territories of third countries.”
Investor-State Dispute Settlement
In 2011, Tajikistan joined the Cape Town Convention on International Interests and Mobile Equipment. This convention and its protocol on Matters Specific to Aircraft Equipment is intended to standardize transactions involving movable property, particularly aircraft and aircraft engines. The treaty creates international standards for registration of ownership, security interests (liens), leases, and conditional sales contracts, and various legal remedies for default in financing agreements, including repossession and the effect of a particular state’s bankruptcy laws.
Disputes involving foreign investors have primarily centered on the implementation of tax incentives. In the last ten years, numerous foreign investors have reported difficulty utilizing promised value-added tax exemptions on imported items to Embassy officials. Tajik procedures require businesses to submit in January of the calendar year a list of goods to be imported, and the exemption then expires at the end of December in that same year. According to Tajikistan’s Economic Procedural Code, dispute resolution decisions take 30-60 days after the process begins. In practice, companies say the process typically takes much longer.
International Commercial Arbitration and Foreign Courts
Tajik law recognizes the role of local courts in dispute resolution and arbitration but in reality, there is no reputable arbitration institution for resolving disputes domestically among individuals and businesses. In practice, local courts are primarily used to resolve disputes over agricultural plot demarcations as part of the land reform process, and do not serve as venues to resolve non-agricultural commercial disputes. State-owned enterprise TALCO lost an international dispute process in 2013, and eventually came to terms on the dispute settlement in 2017.
Tajikistan has signed bilateral agreements with several countries on arbitration and investment disputes, but local domestic courts do not always properly enforce or recognize these rulings.
Bankruptcy Regulations
Under Tajikistan’s 2003 Law on Bankruptcy, both creditors and debtors may file for an insolvent firm’s liquidation. The debtor may reject overly burdensome contracts, and choose whether to continue contracts supplying essential goods or services, or avoid preferential or undervalued transactions. The law does not provide for the possibility of the debtor obtaining credit after the commencement of insolvency proceedings. Creditors have the right to demand the debtor return creditors’ property if that property was assigned to the debtor less than four months prior to the institution of bankruptcy proceedings. Tajik law does not criminalize bankruptcy.
6. Financial Sector
Capital Markets and Portfolio Investment
Foreign portfolio investment is not a priority for the Tajik government, and the country lacks a securities market. According to government statistics, portfolio investment in Tajikistan totaled USD 502.5 million at the end of 2020. This includes the USD 500 million Eurobond the National Bank of Tajikistan issued in 2017. The National Bank of Tajikistan has made efforts to develop a system to encourage and facilitate portfolio investments, including credit rating mechanisms implemented by Moody’s and S&P. Apart from these initial steps, however, Tajikistan has not established policies to facilitate the free flow of financial resources into product and factor markets.
Tajikistan does not place any restrictions on payments and transfers for current international transactions, per IMF Article VIII. It regards transfers from all international sources as revenue, however, and taxes them accordingly. Commercial banks apply market terms for credits, but are also under considerable pressure by governing elites and their family and friends to provide favorable loans for commercially questionable projects. The private sector offers access to several different credit instruments. Foreign investors can get credit on the local market, but those operating in Tajikistan avoid local credit because of comparatively high interest rates.
Money and Banking System
According to the latest National Bank of Tajikistan (NBT) report from December 2020, 69 credit institutions, including 18 banks, including one Islamic bank, 18 microcredit deposit organizations, five microcredit organizations, and 27 microcredit funds, function in Tajikistan. Tajikistan has 356 bank branches, an eight percent increase from 2019.
Tajikistan’s banking system is on a recovery path following a 2015 financial crisis. AgroInvestBank and TojikSodirotbank, two of Tajikistan’s largest, are in fact collapsed banks awaiting liquidation. Tajikistan’s banking sector has assets of USD 2.32 billion as of December 2020, a 2.2 percent increase from 2019. Total liabilities in 2019 were unchanged from 2018, reaching USD 1.6 billion. Banking-sector capital adequacy and liquidity indicators exceed the NBT’s minimum requirements. Although authorities report 23.4 percent of commercial loans are non-performing, other estimates range as high as 50 percent.
The NBT is Tajikistan’s central bank and, in recent years, has pursued policies to strengthen financial inclusion and cashless payments. Foreign banks can establish operations but are subject to National Bank of Tajikistan regulations. United States commercial banks discontinued correspondent banking relations with Tajik commercial banks in 2012. To establish a bank account, foreigners must submit a letter of application, a passport copy, and Tajik government-issued taxpayer identification number.
Foreign Exchange and Remittances
Foreign Exchange
Tajikistan places no legal limits on commercial or non-commercial money transfers, and investors may freely convert funds associated with any form of investment into any world currency. However, businesses often find it difficult to conduct large currency transactions due to the limited amount of foreign currency available on the domestic financial market. Investors are free to import currency, but once they deposit it in a Tajik bank account it may be difficult to withdraw.
In 2015, the National Bank of Tajikistan reorganized foreign currency operations and shut down all private foreign exchange offices in Tajikistan. Since that time, only commercial bank exchange offices may exchange money and transactions require customers to register with an identity document. In 2019, the National Bank of Tajikistan launched a national money transfer center that centralizes the receipt of all remittances from abroad.
The government’s policy supports a stable exchange rate but remains susceptible to changes in the Russian ruble due to the high volume of remittances. During 2020, the Tajik somoni fell 16.6 percent against the U.S. dollar to TJS 11.3 for 1 U.S. dollar. Defending the somoni’s rate to the dollar puts pressure on Tajikistan’s foreign currency and gold reserves and leads to differences between the official exchange rate and the non-bank market rate.
Remittance Policies
Beginning in 2016, the National Bank of Tajikistan mandated that commercial banks disburse remittances in local currency. There are no official time or quantity limitations on the inflow or outflow of funds for remittances. Tajikistan’s tax code classifies all inflows as revenue and taxes them accordingly; however, the Tajik government does not tax remittances from labor migrants.
Sovereign Wealth Funds
Tajikistan does not have a sovereign wealth fund. The country does have a “Special Economic Reforms Fund,” but, according to official statistics, it is empty.
7. State-Owned Enterprises
World Bank and IMF reports indicate there are 920 state-owned enterprises (SOEs) (up from 583 in 2004) which employ 24 percent of the labor force, use 50 percent of all available credit, and account for 17 percent of the country’s economic output.
SOEs are active in travel, transportation, energy, mining, metal manufacturing/products, food processing/packaging, agriculture, construction, heavy equipment, services, finance, and information and communication sectors. The government divested itself of smaller SOEs in successive waves of privatization but retained ownership of the largest Soviet-era enterprises and any sector deemed to be a natural monopoly.
The government appoints directors and boards to SOEs but the absence of clear governance and internal control procedures means the government retains full control. Tajik SOEs do not adhere to the Organisation for Economic Co-operation and Development (OECD) Guidelines on Corporate Governance for SOEs. When SOEs are involved in investment disputes, it is highly likely that domestic courts will rule in favor of state enterprises. Court processes are generally non-transparent and discriminatory.
The State Committee for Investments and State Property Management maintains a database of all SOEs in Tajikistan, but does not make this information publicly available.
Major SOEs include:
Travel: Tajik Air, Dushanbe International Airport, Kulob Airport, Qurghonteppa Airport, Khujand Airport, and Tajik Air Navigation;
Information and Communication: Tajik Telecom, Tajik Postal Service, and TeleRadioCom
In sectors that are open to private sector and foreign competition, SOEs receive a larger percentage of government contracts/business than their private sector competitors. In practice, private companies cannot compete successfully with SOEs unless they have good government connections.
SOEs purchase goods and services from, and supply them to, private sector and foreign firms through the Tajik government’s tender process. Tajikistan has undertaken a commitment, as part of its WTO accession protocol, to initiate accession to the Government Procurement Agreement (GPA). At present, however, GPA does not cover Tajik SOEs.
Per government policy, private enterprises cannot compete with SOEs under the same terms and conditions with respect to market share (since the government continually increases the role and number of SOEs in any market), products/services, and incentives. Private enterprises do not have the same access to financing as SOEs as most lending from state-owned banks is politically directed. Local tax law makes SOEs subject to the same tax burden and tax rebate policies as their private sector competitors, but the Tajik government favors SOEs and regularly writes off tax arrears for SOEs.
Privatization Program
The Tajik government conducted privatization on an ad-hoc basis in the 1990s, and then again in the early 2000s. Following a World Bank recommendation, in 2020 the government continued implementing its plan to split national electrical utility Barqi-Tojik into three public/private partnerships, responsible for generation, transmission, and distribution but progress has been slow.
Foreign investors are able to participate in Tajikistan’s privatization programs. There is a public bidding process, but the privatization process is not transparent. Privatized properties have been subject to re-nationalization, often because Tajik authorities claim an illegal privatization process.
In 2020 Tajikistan’s lower house of parliament approved amendments to the state privatization law that remove the Roghun energy project and TALCO aluminum company from the list of state facilities precluded from foreign investment.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International
Source of Data: BEA; IMF;
Eurostat; UNCTAD, Other
Economic Data
Year
Amount
Year
Amount
Host Country Gross Domestic Product (GDP) ($M USD)
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
Total Inward
3.722
100%
Total Outward
130
100%
China, P.R.
1.454
39.6%
n/a
n/a/
n/a
Russian Federation
765
20.57%
United Kingdom
369
9.92%
Islamic Republic of Iran
354
9.52%
Switzerland
139
3.74%
“0” reflects amounts rounded to +/- USD 500,000.
Source: TajStats
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total
Equity Securities
Total Debt Securities
All Countries
Amount
100%
All Countries
Amount
100%
All Countries
Amount
100%
USA
250
50%
Country #1
Amount
X%
Country #1
Amount
X%
Austria
250
50%
Country #2
Amount
X%
Country #2
Amount
X%
Comment: Tajikistan issued 500 million Eurobonds in 2017. European and U.S banks and funds are key shareholders of the Eurobonds.
Tanzania
Executive Summary
The United Republic of Tanzania achieved lower-middle income country status in July 2020, which reflects two decades of sustained macroeconomic stability. The country’s rich natural endowments and strategic geographic position fostered a diverse economy resilient to external shocks. Tanzania’s economy fared better than many regional peers during the COVID-19 pandemic, but still suffered significant losses due to decline in tourism and related services. The pandemic also compounded preexisting financial sector issues, and private sector credit growth slowed while nonperforming loans continue to be high.
The Government of Tanzania welcomes foreign direct investment. However, over the past several years there was a marked deterioration in the business and investment climate. Tanzania ranked 141 out of 190 countries on the 2020 World Bank Ease of Doing Business Report, the lowest among its regional peers. According to the report, the biggest challenges lie in tax administration, opening and closing businesses, and trading across borders. In recent years, aggressive and arbitrary tax collection policies targeted foreign companies and individuals, and labor regulations make it difficult to hire foreign employees, even when the required skills are not available within the local labor force. Corruption, especially in government procurement, privatization, taxation, and customs clearance remains a concern for foreign investors, though the government has prioritized efforts to combat the practice.
On March 19, 2021, President Samia Suluhu Hassan became the sixth President of the United Republic of Tanzania, following the death of President John Pombe Magufuli. In her first months in office, President Hassan promised reforms to improve the business climate, and identified attracting foreign investment as a key priority. The Government of Tanzania has signaled that new Investment Policy and Investment Promotion legislation as well as changes to prevailing tax and labor regulations will be adopted in 2021. Hassan’s government is also engaging in dialogue with stakeholders including private sector organizations and development partners to identify measures to improve the business climate and win back investor confidence. There remain significant legislative obstacles to foreign investment such as the Natural Resources and Wealth Act, Permanent Sovereignty Act, Public Private Partnership Act, and the Mining Laws and Regulations.
Sectors traditionally attracting U.S. investment include infrastructure, transportation, energy, mining and extractive industries, tourism, agriculture, fishing, agro-processing and other manufacturing. Other opportunities exist in workforce development, microfinance solutions, technology, and consumer products and services.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The United Republic of Tanzania welcomes foreign direct investment (FDI) as it pursues its industrialization and development agenda. On her inauguration in March 2021, President Samia Suluhu Hassan identified removing obstacles to inward foreign investment as a key priority, along with other measures to improve the overall business climate and rebuild trust between the private sector and government. This follows declining FDI and investor confidence over the past six years. The 2020 World Investment Report indicates that FDI flows to Tanzania increased from USD 1,056 billion in 2018 to USD 1.112 billion in 2019 (latest figures) but remain below 2015 levels. Investors and potential investors note the biggest challenges to investment include difficulty in hiring foreign workers, unfriendly and opaque tax policies, increased local content requirements, regulatory/policy instability, lack of trust between the GoT and the private sector, and mandatory initial public offerings (IPOs) in key industries. In 2020 and 2021, the GoT recognized many of these concerns’ impact on both foreign and domestic investment and created a number of task forces and working groups to engage the private sector to identify solutions. These efforts were renewed by President Hassan’s new government, and legislative and policy changes are anticipated in 2021.
The United Republic of Tanzania has framework agreements on investment and offers various incentives and the services of investment promotion agencies. Investment is mainly a non-Union matter, thus there are different laws, policies, and practices for the Mainland and Zanzibar. Zanzibar updated its investment policy in 2019, while the Mainland/Union policy dates from 1996. Efforts to update the Mainland Investment Policy and Investment Act are underway, but incomplete as of the date of this publication. International agreements on investment are covered as Union matters and therefore apply to both regions.
The Tanzania Investment Center (TIC) is intended to be a one-stop center for investors, providing services such as permits, licenses, visas, and land. The Zanzibar Investment Promotion Authority (ZIPA) provides the same function in Zanzibar.
The Government of Tanzania has an ongoing dialogue with the private sector via the Tanzania National Business Council (TNBC). TNBC meetings are chaired by the President of the United Republic of Tanzania and co-chaired by the head of the Tanzania Private Sector Foundation (TPSF). President Samia Suhulu Hassan reinvigorated this formal mechanism during her first months in office. There is also a Zanzibar Business Council (ZBC), as well as Regional Business Councils (RBCs), and District Business Councils (DBCs).
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign investors generally receive treatment equivalent to domestic investors, but limits still persist in a number of sectors. There are no geographical restrictions on private establishments with foreign participation or ownership, no limitations on number of foreign entities that can operate in a given sector, and no sectors in which approval is required for foreign investment greenfield FDI but not for domestic investment.
However, Tanzania discourages foreign investment in several sectors through limitations on foreign equity ownership or other activities, including aerospace, agribusiness (fishing), construction and heavy equipment, travel and tourism, energy and environmental industries, information and communication, and publishing, media, and entertainment. In 2020, Tanzania relaxed but did not eliminate the foreign ownership limitations in the mining sector.
Specific examples include the following:
The Tourism Act of 2008 bars foreign companies from engaging in mountain guiding activities, and states that only Tanzanian citizens can operate travel agencies, car rental services, or engage in tour guide activities (with limited exceptions).
Per the Merchant Shipping Act of 2003, only citizen-owned ships are authorized to engage in local trade, a requirement that can be waived at the Minister’s discretion. Furthermore, the Tanzania Shipping Agencies Act of November 2017 gives exclusive monopoly power to the Tanzania Shipping Agency Corporation (TASAC) to conduct business as shipping agents, shipping regulator, and licensor of other private shipping agencies. The Act also gives TASAC an exclusive mandate to provide clearing and forwarding functions relating to imports and exports of minerals, mineral concentrates, machinery and equipment for the mining and petroleum sector, products and/or extracts related to minerals and petroleum arms and ammunition, live animals, government trophies and any other goods that the Minister responsible for maritime transport may specify. A 2019 amendment extended this exclusive mandate to additional imports, including fertilizers, sugar (both industrial and domestic), cooking oil, wheat, oil products, liquefied gas and chemicals related to the products. As of May 2021, the extended mandate has yet to go into effect following extensive objections for private sector stakeholders.
A 2009 amendment to the Fisheries Regulations imposes onerous conditions for foreign citizens to engage in commercial fishing and the export of fishery products, sets separate licensing costs for foreign citizens and Tanzanians, and limits the types of fishery products that foreign citizens may work with.
Foreign construction contractors can only obtain temporary licenses, per the Contractors Registration Act of 1997, and contractors must commit in writing to leave Tanzania upon completion of the set project. 2004 amendments to the Contractors Registration By-Laws limit foreign contractor participation to specified, more complex classes of work.
Foreign capital participation in the telecommunications sector is limited to a maximum of 75 percent.
All insurers require one-third controlling interest by Tanzania citizens, per the Insurance Act.
The Electronic and Postal Communications (Licensing) Regulations 2011 limits foreign ownership of Tanzanian TV stations to 49 percent and prohibits foreign capital participation in national newspapers.
Mining projects must be at least partially owned by the GoT and “indigenous” companies, and hire, or at least favor, local suppliers, service providers, and employees. (See Chapter 4: Laws and Regulations on FDI for details.). Gemstone mining is limited to Tanzanian citizens with waivers of the limitation at ministerial discretion. In February 2019, responding to low growth and investment in the sector, the government revised the 2018 Mining Regulations to reduce local ownership requirements from 51 percent to 20 percent.
Currently, foreigners can invest in stock traded on the Dar es Salaam Stock Exchange (DSE), but only East African residents can invest in government bonds. East Africans, excluding Tanzanian residents, however, are not allowed to sell government bonds bought in the primary market for at least one year following purchase.
Other Investment Policy Reviews
There have not been any third-party investment policy reviews (IPRs) on Tanzania in the past three years, the most recent OECD report is for 2013. The World Trade Organization (WTO) published a Trade Policy Review in 2019 on all the East African Community states, including Tanzania.
WTO – Trade Policy Review: East African Community (2019)
UNCTAD– Tanzania Investment Policy Review (2002)
WTO – Secretariat Report of Tanzania https://www.wto.org/english/tratop_e/tpr_e/s384-04_e.pdf
UNCTAD – Trade and Gender Implications (2018) –
Business Facilitation
The World Bank’s Doing Business 2020 Indicators rank Tanzania 141 out of 190 overall for ease of doing business, and 162nd for ease of starting a business. There are ten procedures to open a business, higher than the sub-Saharan Africa average of 7.4. The Business Registration and Licensing Agency (BRELA) issues certificates of compliance for foreign companies, certificates of incorporation for private and public companies, and business name registration for sole proprietor and corporate bodies. After registering with BRELA, the company must: obtain a taxpayer identification number (TIN) certificate, apply for a business license, apply for a VAT certificate, register for workmen’s compensation insurance, register with the Occupational Safety and Health Authority (OSHA), receive inspection from the Occupational Safety and Health Authority (OSHA), and obtain a Social Security registration number.
The Tanzania Investment Center (TIC) now sits under the Prime Minister’s Office (PMO), after being moved around several times in recent years. The TIC is a one-stop shop which provides simultaneous registration with BRELA, TRA, and social security (http://tiw.tic.co.tz/ ) for enterprises whose minimum capital investment is not less than USD 500,000 if foreign-owned or USD 100,000 if locally owned.
The government has been slow to implement its May 2018 Blueprint for Regulatory Reforms to improve the business environment and attract more investors. The reforms seek to improve the country’s ease of doing business through regulatory reforms and to increase efficiency in dealing with the government and its regulatory authorities. The official implementation of the Business Environment Improvement Blueprint started on July 1, 2019, though there have been little tangible changes or advancements. President Hassan’s new government identified implementation of the Blueprint as a priority for her term.
Outward Investment
Tanzania does not promote or incentivize outward investment. There are restrictions on Tanzanian residents’ participation in foreign capital markets and ability to purchase foreign securities. Under the Foreign Exchange (Amendment) Regulations 2014 (FEAR), however, there are circumstances where Tanzanian residents may trade securities within the East African Community (EAC). In addition, FEAR provides some opportunities for residents to engage in foreign direct investment and acquire real assets outside of the EAC.
3. Legal Regime
Transparency of the Regulatory System
According to the World Bank’s Global Indicators of Regulatory Governance (https://rulemaking.worldbank.org/en/rulemaking), Tanzania scores low in regulatory governance with 1.25 out of 5 totals in transparency of regulatory governance (neighboring Kenya and Uganda, by contrast, both score 3.25).
Tanzania has formal processes for drafting and implementing rules and regulations. Generally, after an Act is passed by Parliament, the creation of regulations is delegated to a designated ministry. In theory, stakeholders are legally entitled to comment on regulations before they are implemented. However, ministries and regulatory agencies frequently fail to provide adequate opportunity for meaningful input as there is no minimum period of time for public comment set forth in law. Stakeholders often report that they are either not consulted or given too little time to provide meaningful input. Ministries or regulatory agencies do not have the legal obligation to publish the text of proposed regulations before their enactment. Sometimes, it is difficult to obtain the final, adopted version of a bill in a timely manner nor is it always public information if and when the President signed the bill. Moreover, the government over the past few years used presidential decree powers to bypass regulatory and legal structures.
The 2016 Access to Information law in theory grants citizens more rights to information; however, some claim that the Act gives too much discretion to the GoT to withhold disclosure. Although information, including rules and regulations, is available on the GoT’s “Government Portal” (https://www.tanzania.go.tz/documents), the website is generally not current and is incomplete. Alternatively, rules and regulations can be obtained on the relevant ministry’s website, but many offer insufficient information.
Nominally, independent regulators are mandated with impartially following the regulations. The process, however, has sometimes been criticized as being subject to political influence, depriving the regulator of the independence it is granted under the law.
Tanzania is part of both the East African Community and the Southern African Development Community (SADC) and subject to their respective regulations. However, according to the 2016 East African Market Scorecard (most recent), Tanzania is not compliant with several EAC regulations. Of note, Tanzania is the only EAC Member Country not to ratify the EAC’s 2013 Sanitary and Phytosanitary Protocol (SPS).
Tanzania is a member of the International Organization for Standardization (ISO). The national standards body, the Tanzania Bureau of Standards, was established in 1975. It has been most active in promoting standards and quality in process technology, including agro-processing, chemicals and textiles, and engineering, including mining and construction.
Tanzania is a member of the World Trade Organization (WTO) and its National Enquiry Point (NEP) is the Tanzania Bureau of Standards (TBS). As the WTO NEP, TBS handles information on adopted or proposed technical regulations, as well as on standards and conformity assessment procedures. Tanzania does not notify all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).
Legal System and Judicial Independence
Tanzania’s legal system is based on the English Common Law system. The first source of law is the 1977 Constitution, followed by statutes or acts of Parliament; and case law, which are reported or unreported cases from the High Courts and Courts of Appeal and are used as precedents to guide lower courts. The Court of Appeal, which handles appeals from Mainland Tanzania and Zanzibar, is the highest court, followed by the High Court, which handles civil, criminal and commercial cases. There are four specialized divisions within the High Courts: Labor, Land, Commercial, and Corruption and Economic Crimes. The Labor, Land, and Corruption and Economic Crimes divisions have exclusive jurisdiction over their respective matters, while the Commercial division does not claim exclusive jurisdiction. The High Court and the District and Resident Magistrate Courts also have original jurisdiction in commercial cases subject to specified financial limitations.
Apart from the formal court system, there are quasi-judicial bodies, including the Tax Revenue Appeals Tribunal and the Fair Competition Tribunal, as well as alternate dispute resolution procedures in the form of arbitration proceedings. Judgments originating from countries whose courts are recognized under the Reciprocal Enforcement of Foreign Judgments Act (REFJA) are enforceable in Tanzania. To enforce such judgments, the judgment holder must make an application to the High Court of Tanzania to have the judgment registered. Countries currently listed in the REFJA include Botswana, Lesotho, Mauritius, Zambia, Seychelles, Somalia, Zimbabwe, Swaziland, the United Kingdom, and Sri Lanka.
The Tanzanian constitution guarantees judicial independence. However, the degree of judicial independence has varied significantly in the past few years, and many perceive that political interference in justice is a concern.
Regulations and enforcement actions are appealable, and they are adjudicated in the national court system.
Laws and Regulations on Foreign Direct Investment
Several laws and regulations enacted over the past six years affect the risk-return profile on foreign investments, especially those in the extractives and natural resources industries. The laws/regulations include the Natural Wealth and Resources (Permanent Sovereignty) Act 2017, Natural Wealth and Resources Contracts (Review and Renegotiation of Unconscionable Terms) Act 2017, Written Laws (Miscellaneous Act) 2017, and Mining (Local Content) Regulations 2019. These acts were introduced by the executive branch under a certificate of urgency, meaning that standard advance publication requirements were waived to expedite passage. As a result, there was minimal stakeholder engagement. Stakeholders continue to call for revision to these laws.
Investors, especially those in natural resources and mining, express concern about the effects of these laws. Two laws apply to “natural wealth and resources,” which are broadly defined and not only include oil and gas, but in theory, could include wind, sun, and air space. Investors are encouraged to seek legal counsel to determine the effect these laws may have on existing or potential investments. For natural resource contracts, the laws remove rights to international arbitration and subject contracts, past and present, to Parliamentary review. More specifically, the law states “Where [Parliament] considers that certain terms …or the entire arrangement… are prejudicial to the interests of the People and the United Republic by reason of unconscionable terms it may, by resolution, direct the Government to initiate renegotiation with a view to rectifying the terms.” Further, if the GoT’s proposed renegotiation is not accepted, the offending terms are automatically expunged. “Unconscionable” is defined broadly, including catch-all definitions for clauses that are, for example, “inequitable or onerous to the state.” Under the law, the judicial branch does not play a role in determining whether a clause is “unconscionable.”
The Mining (Local Content) Regulations 2019 require that indigenous Tanzanian companies are given first preference for mining licenses. An ‘indigenous Tanzanian company’ is one incorporated under the Companies Act with at least 20 percent of its equity owned by and 100 percent of its non-managerial positions held by Tanzanians (this is an improvement from the 2018 regulations which required 51 percent Tanzanian ownership). Furthermore, foreign mining companies must have at least 5 percent equity participation from an indigenous Tanzanian company and must grant the GoT a 16 percent carried interest. Lastly, foreign companies that supply goods or services to the mining industry must incorporate a joint venture company in which an indigenous Tanzanian company must hold equity participation of at least 20 percent.
The Tanzania Investment Center contains many relevant laws, rules, procedures, and reporting requirements for investors on its portal at http://tanzania.eregulations.org, but it is not comprehensive.
Note: As of date of this publication, there were ongoing efforts to revise this legislation and accompanying regulations. Investors are encouraged to contact the U.S. Embassy or to seek legal counsel with a firm operating in Tanzania.
Competition and Antitrust Laws
The Fair Competition Commission (FCC) is an independent government body mandated to intervene, as necessary, to prevent significant market dominance, price fixing, extortion of monopoly rent to the detriment of the consumer, and market instability. The FCC has the authority to restrict mergers and acquisitions if the outcome is likely to create market dominance or lead to uncompetitive behavior.
Expropriation and Compensation
The constitution and investment acts require government to refrain from nationalization. However, the GoT may expropriate property after due process for the purpose of national interest. The Tanzanian Investment Act guarantees payment of fair, adequate, and prompt compensation; access to the court or arbitration for the determination of adequate compensation; and prompt repatriation in convertible currency where applicable. For protection under the Tanzania Investment Act, foreign investors require USD 500,000 minimum capital and Tanzanian investors require USD 100,000.
GoT authorities do not discriminate against U.S. investments, companies, or representatives in expropriation. There have been cases of government revocation of hunting concessions that grant land rights to foreign investors, including a U.S.-based company with strategic investor status. At least one factory with substantial U.S. investment reports that the GoT blocked the sale of its assets.
There are numerous examples of indirect expropriation, such as confiscatory tax regimes or regulatory actions that deprive investors of substantial economic benefits from their investments. This is another area the GoT promised to address in 2021.
Dispute Settlement
ICSID Convention and New York Convention
Tanzania is a member of both the International Centre for Settlement of Investment Disputes (ICSID) and the Multilateral Investment Guarantee Agency (MIGA). Tanzania is a signatory to the New York Convention on the Recognition and Enforcement of Arbitration Awards.
A new Arbitration Act adopted in February 2020 replaces the 1931 Arbitration Act and is generally a replica of the English Arbitration Act, 1996. The act supersedes the Public Private Partnership (PPP) (Amendment) Act, No. 9 of 2018 (the PPP Amendment Act) which stated that PPP agreements are subject to local arbitration under the arbitration laws of Tanzania and must take place on Tanzanian soil. With the change, however, the arbitrator body may be international. There was a similar semantic change to the Natural Wealth and Resources (Permanent Sovereignty) Act, 2017 and the Natural Wealth and Resources (Review and Re-Negotiation of Unconscionable Terms) Act, 2017 (collectively the Natural Wealth Laws) to again allow for international arbitration as long as they are governed by Tanzanian law and the venue is in Tanzania. However, it is important to note that interpretations of this act vary among legal practitioners and thus far, there has been no foreign arbitral body to travel to Tanzania.
Investor-State Dispute Settlement
Investment-related disputes in Tanzania can be protracted. The Commercial Court of Tanzania operates two sub-registries located in the cities of Arusha and Mwanza. The sub-registries, however, do not have resident judges. A judge from Dar es Salaam conducts a monthly one-week session at each of the sub-registries. The government said it intends to establish more branches in other regions including Mbeya, Tanga, and Dodoma, though progress has stalled. Court-annexed mediation is also a common feature of the country’s commercial dispute resolution system.
Despite legal mechanisms in place, foreign investors have claimed that the GoT sometimes does not honor its agreements. Additionally, investors continue to face challenges receiving payment for services rendered for GoT projects. One high profile example of such a dispute is that of a U.S.-based energy company, which in 2017 filed an application for ICSID arbitration seeking USD 561 million for alleged breach of contract of a purchase power agreement. At the time of this publication, the dispute is ongoing.
International Commercial Arbitration and Foreign Courts
The common alternative dispute resolution (ADR) methods used in Tanzania are (1) Arbitration, (2) Mediation and (3) Settlement. Arbitration is legislated by the Arbitration Act of 2020 which came into force in January 2021. The Arbitration Act is only applicable on Mainland Tanzania.
There are two arbitration bodies in Tanzania; the Arbitral tribunal, where the parties agree on the number of arbitrators. If no agreement is reached, the arbitral tribunal will have a sole arbitrator. The second body is the Commission for Mediation and Arbitration (MCA) which deals specifically with labor issues i.e., employer and employee relations.
The new Arbitration Act emulates the United Kingdom’s model with some significant limitations. For example, the Act states that the adjudication of the International Arbitration be physically in Tanzania. The law also introduces some mandatory provisions in which the Arbitration Act shall be used regardless of the nature of the Arbitration. The Mandatory provisions deal with procedures such as stay of proceedings, limitation of time, power of court to remove arbitrators, immunity of arbitrators, duties of the arbitral tribunal, expenses of arbitrators, attendance of witnesses, enforcement of the award, and other provisions. It also amends existing laws which restrict arbitration locales to Tanzania only using Tanzanian judicial bodies, such as Section 11 of the Natural Wealth and Resources (Permanent Sovereignty) Act of 2017.
Bankruptcy Regulations
Tanzania has a bankruptcy law which allows for companies to declare insolvency. The insolvency process includes the appointment of receiver managers, administrative receivers, or liquidators. In practice the process is very long and expensive. Preferential debts such as government taxes and rents, outstanding wages and salaries, and other employee compensation take priority over other claims, including those from creditors. Insolvent or illiquid companies may also seek the protection of the courts by seeking a compromise or arrangement as proposed between a company and its creditors, a certain class of creditors, or its shareholders.
According to the 2020 World Bank’s Ease of Doing Business report, it takes an average of three years to conclude bankruptcy proceedings in Tanzania. The recovery rate for creditors on insolvent firms was reported at 20.4 U.S. cents on the dollar, with judgments typically made in local currency.
6. Financial Sector
Capital Markets and Portfolio Investment
Tanzania’s Dar es Salaam Stock Exchange (DSE) is a self-listed publicly owned company. In 2013, the DSE launched a second-tier market, the Enterprise Growth Market (EGM) with lower listing requirements designed to attract small and medium sized companies with high growth potential. As of March 1, 2021, DSE’s total market capitalization reached USD 6.7 billion, a 36.1 percent drop from December 2017 figure, with the drop is primarily attributed to the effects of the COVID 19 pandemic. The Capital Markets and Securities Authority (CMSA) Act facilitates the flow of capital and financial resources to support the capital market and securities industry. Tanzania, however, restricts the free flow of investment in and out of the country, and Tanzanians cannot sell or issue securities abroad unless approved by the CMSA.
Under the Capital Markets and Securities (Foreign Investors) Regulation 2014, there is no aggregate value limitation on foreign ownership of listed non-government securities. Only foreign individuals or companies from other EAC nations are permitted to participate in the government securities market. Even with this recent development allowing EAC participation, foreign ownership of government securities is still limited to 40 percent of each security issued.
Tanzania’s Electronic and Postal Communications Act 2010 amended in 2016 by the Finance Act 2016 requires telecom companies to list 25 percent of their shares via an initial public offering (IPO) on the DSE. Of the seven telecom companies that filed IPO applications with the CMSA, only Vodacom’s application received approval.
As part of the Mining (Minimum Shareholding and Public Offering) Regulations 2016, large scale mining operators were required to float a 30 percent stake on the DSE by October 7, 2018. Currently, no mining companies are listed on the DSE.
Money and Banking System
Tanzania’s financial inclusion rate increased significantly over the past decade thanks to mobile phones and mobile banking. However, participation in the formal banking sector remains low. Low private sector credit growth and high non-performing loan (NPL) rates are persistent problems. The NPL ratios further deteriorated with the COVID 19 pandemic.
According to the IMF’s most recent Financial System Stability Assessment, Tanzania’s bank-dominated financial sector is small, concentrated, and at a relatively nascent stage of development. Financial services provision is dominated by commercial banks, with the ten largest institutions being preeminent in terms of mobilizing savings and intermediating credit. The report found that nearly half of Tanzania’s 45 banks are vulnerable to adverse shocks and risk insolvency in the event of a global financial crisis. (Source: https://www.imf.org/en/Publications/CR/Issues/2018/12/04/United-Republic-of-Tanzania-Financial-Sector-Assessment-Program-Press-Release-Staff-Report-46418 )
The two largest banks are CRDB Bank and National Microfinance Bank (NMB), which represent almost 30 percent of the market. The only U.S. bank is Citibank Tanzania Limited. Private sector companies have access to commercial credit instruments including documentary credits (letters of credit), overdrafts, term loans, and guarantees. Foreign investors may open accounts and earn tax-free interest in Tanzanian commercial banks.
The Banking and Financial Institution Act 2006 established a framework for credit reference bureaus, permits the release of information to licensed reference bureaus, and allows credit reference bureaus to provide to any person, upon a legitimate business request, a credit report. Currently, there are two private credit bureaus operating in Tanzania – Credit Info Tanzania Limited and Dun & Bradstreet Credit Bureau Tanzania Limited.
Foreign Exchange and Remittances
Foreign Exchange
Tanzanian regulations permit unconditional transfers through any authorized bank in freely convertible currency of net profits, repayment of foreign loans, royalties, fees charged for foreign technology, and remittance of proceeds. The only official limit on transfers of foreign currency is on cash carried by individuals traveling abroad, which cannot exceed USD 10,000 over a period of 40 days. Investors rarely use convertible instruments.
The Bank of Tanzania’s new Bureau de Change regulations with stringent requirements came into force in June 2019. The regulations include a minimum capital requirement of TZS 1 billion (Approx. USD 431,000) and a non-interest-bearing deposit of USD 100,000 with the Bank of Tanzania (the regulator). Regulations also require the business premises to be fitted with CCTV cameras, and new stringent procedures and policies for detecting and reporting money laundering and terrorism finance. The Bank of Tanzania closed more than ninety percent of all forex shops in the country, stating that they did not pass inspection for compliance with these requirements. In response, commercial banks and Tanzania Posts Corporation were licensed to provide forex services.
The value of the Tanzanian currency, the shilling, is determined by a free-floating exchange rate system based on supply and demand in international foreign exchange markets. However, Interbank Foreign Exchange Market (IFEM) and the rates quoted by commercial banks and exchange bureaus often vary considerably. There are anecdotal reports that the Bank of Tanzania has artificially fixed the exchange rate.
The last Article IV Executive Board Consultation was on March 18, 2019. The GoT did not consent to publication of the report and discussions for an IMF staff monitored program are stalled.
Remittance Policies
There are no recent changes or known plans to change investment remittance policies that either tighten or relax access to foreign exchange for investment remittances.
Sovereign Wealth Funds
Tanzania does not have a sovereign wealth fund.
7. State-Owned Enterprises
Public enterprises do not compete under the same terms and conditions as private enterprises because they have access to government subsidies and other benefits. SOEs are active in the power, communications, rail, telecommunications, insurance, aviation, and port sectors. SOEs generally report to ministries and are led by a board. Typically, a presidential appointee chairs the board, which usually includes private sector representatives. SOEs are not subjected to hard budget constraints. SOEs do not discriminate against or unfairly burden foreigners, though they do have access to sovereign credit guarantees.
Specific details on SOE financials and employment figures are not publicly available.
As of June 2019, the GoT’s Treasury Registrar reported shares and interests in 266 public parastatals, companies and statutory corporations. (See the Treasury Registrar financial statements for the year ending June 2019 – https://www.tro.go.tz/ripoti-za-fedha/ )
Privatization Program
The government retains a strong presence in energy, mining, telecommunication services, and transportation. The government is increasingly empowering the state-owned Tanzania Telecommunications Corporation Limited (TTCL) with the objective of safeguarding the national security, promoting socio-economic development, and managing strategic communications infrastructure. The government also acquired 51 percent of Airtel Telecommunication Company Limited and became the majority shareholder. In the past, the GoT has sought foreign investors to manage formerly state-run companies in public-private partnerships, but successful privatizations have been rare. Though there have been attempts to privatize certain companies, the process is not always clear and transparent. The GoT currently has 20 companies/assets awaiting privatization.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
* Source for Host Country Data: host country data not publicly available.
Table 3: Sources and Destination of FDI There is no data for Tanzania in the IMF’s Coordinated Direct Investment Survey (CDIS).
According to the Bank of Tanzania, the top sources for inward foreign investment into Tanzania are South Africa, Canada, Nigeria, Netherlands, United Kingdom, Mauritius, Kenya, United States, Vietnam, and France.
Data on outward direct investment is not available.
Table 4: Sources of Portfolio Investment There is no data for Tanzania in the IMF’s Coordinated Direct Investment Survey (CDIS).
Thailand
Executive Summary
Thailand is an upper middle-income country with a half-trillion-dollar economy, pro-investment policies, and well-developed infrastructure. General Prayut Chan-o-cha was elected by Parliament as Prime Minister on June 5, 2019. Thailand celebrated the coronation of King Maha Vajiralongkorn May 4-6, 2019, formally returning a King to the Head of State of Thailand’s constitutional monarchy. 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) of 1999 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 maintain a majority shareholding or to wholly own a company, branch office, or representative office located in Thailand, and engage in business on the same basis as Thai companies (national treatment). The Treaty exempts such U.S.-owned businesses from most FBA restrictions on foreign investment, although the Treaty excludes some types of businesses. 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. Some investors have nonetheless expressed views that the framework is overly restrictive, with a lack of consistency and transparency in rulemaking and interpretation of law and regulations.
The Board of Investment (BOI), Thailand’s principal investment promotion authority, acts as a primary conduit for investors. BOI offers businesses assistance in navigating Thai regulations and provides investment incentives to qualified domestic and foreign investors through straightforward application procedures. Investment incentives include both tax and non-tax privileges.
The government passed laws on cybersecurity and personal data protection in 2019; as of April 2021, they are still in the process of drafting implementing regulations. The government unveiled in January 2021 a Made In Thailand initiative that will set aside 60 percent of state projects for locally made products.
Gratuity payments to civil servants responsible for regulatory oversight and enforcement remain a common practice, though some government agencies enforce strict “gift” bans. Firms that refuse to make such payments can be placed at a competitive disadvantage to other firms that do engage in such practices. The government launched its 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 infrastructure projects, including a high-speed train linking three airports, U-Tapao Airport commercialization, and Laem Chabang Port expansion, could provide opportunities for investments and sales of U.S. goods and services. In support of its “Thailand 4.0” strategy, the government offers incentives for investments in twelve targeted industries: next-generation automotive vehicles; intelligent electronics; advanced agriculture and biotechnology; food processing; tourism; advanced robotics and automation; digital technology; integrated aviation; medical hub and total healthcare services; biofuels/biochemical; defense manufacturing; and human resource development.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Americans planning to invest in Thailand are advised to obtain qualified legal advice. Thai business regulations are governed predominantly by criminal, not civil, law. Foreigners are rarely jailed for improper business activities, yet 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.
Thailand continues to generally welcome investment from all countries and seeks to avoid dependence on any one country as a source of investment. However, the FBA prescribes a wide range of business that may not be conducted by foreigners without additional licenses or exemptions. The term “foreigner” includes Thai-registered companies in which half or more of the capital is held by non-Thai individuals and foreign-registered companies. Although the FBA prohibits majority foreign ownership in many sectors, U.S. investors registered under the United States-Thailand Treaty of Amity and Economic Relations (AER) are exempt. Nevertheless, the AER’s privileges do not extend to U.S. investments in the following areas: communications; transportation; fiduciary functions; banking involving depository functions; the exploitation of land or other natural resources; domestic trade in indigenous agricultural products; and the practice of professions reserved for Thai nationals.
The Board of Investment (BOI) assists Thai and foreign investors to establish and conduct businesses in targeted economic sectors by offering both tax and non-tax incentives. In recent years Thailand has taken steps to reform its business regulations and has improved processes and reduced time required to start a business from 29 days to 6 days. Thailand has steadily improved its ranking in the World Bank’s Doing Business Report in the last several years and now occupies the 21st position out of 190 countries in the 2019 ranking, trailing only Singapore (2) and Malaysia (12) in the ASEAN bloc. Thai officials routinely make themselves available to investors through discussions with foreign chambers of commerce.
Limits on Foreign Control and Right to Private Ownership and Establishment
Various Thai laws set forth foreign-ownership restrictions in certain sectors. These restrictions primarily concern 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 FBA-restricted businesses for foreigners.
List 1. This contains activities non-nationals are prohibited from engaging in, including: newspaper and radio broadcasting stations and businesses; agricultural businesses; 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, distribution 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. Foreign companies also require prior approval and a license from the Council of Ministers (Cabinet).
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.
Aside from these general categories, Thailand does not maintain a national security screening mechanism for investment, and 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.-Thai Treaty of Amity and Economic Relations allows approved businesses to engage in FBA restricted businesses detailed above in Lists 1, 2, and 3. However, the Treaty does not exempt U.S. investments from restrictions applicable to: owning land; fiduciary functions; banking involving depository functions; inland communications & transportation; exploitation of land and other natural resources; and domestic trade in agricultural products.
To operate restricted businesses as defined by the FBA’s List 2 and 3, non-Thai entities must obtain a foreign business license. These licenses are approved by the Council of Ministers (Cabinet) and/or Director-General of the MOC’s Department of Business Development, depending on the business category.
Every year, the MOC reviews business categories on the three FBA lists. Businesses no longer subject to restrictions include regional office services and contractual services provided to government bodies and state-owned enterprises. In an effort to further reduce obstacles to foreign investment, four business types under List 3, otherwise supervised by specific acts, were removed from the restricted list in 2019 and 2020. Those businesses include telecommunication services for license type 1 (telecommunication business operator without its own network for services); financial centers; aviation/aircraft maintenance; and software development.
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.
The MOC’s Department of Business Development (DBD) is generally responsible for business registration. Registration can be performed online or manually. Registration documentation must be submitted in the Thai language. Many foreign entities hire a local 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.
A company is required to have registered capital of two million Thai baht per foreign employee in order to obtain work permits. Additionally, foreign companies may have no more than 20% foreign employees on staff. Companies that have obtained special BOI investment incentives may be exempted from this requirement. 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 investors in targeted industries and foreigners with expertise in specialized technologies. Under this program, foreigners can be granted a maximum four-year visa to work in Thailand without having to obtain a work permit or re-entry permit. Other relaxed immigration rules include having visa holders report to the Bureau of Immigration just once per year (instead of every 90 days) and providing the visa holder’s spouse and children many of the same privileges as the primary visa holder. More information is available online at https://smart-visa.boi.go.th/home_detail/general_information.php and by telephone at +662-209-1100 ext. 1109-1110.
Outward Investment
In 2020, Thai companies continued to expand and invest overseas despite the pandemic. These investments primarily target neighboring ASEAN countries, China, the United States, and Europe. A relatively strong domestic currency, rising cash holdings, and subdued domestic growth prospects are helping to drive outward investment. The baht depreciated over 4 percent against the dollar in Q1 2021. Faced with the effects of the pandemic, the government may prioritize domestic investment to stimulate the economy.
Previously, food, ago-industry, energy, and chemical sectors accounted for the main share of outward flows. Purchasing shares, developing partnerships, and making acquisitions help Thai investors acquire technologies for parent companies and expand supply chains in international markets. Thai corporate laws allow outbound investments to be made by an independent affiliate (foreign company), a branch of a Thai legal entity, or by any Thai company in the case of financial investments abroad. BOI and the MOC’s Department of International Trade Promotion (DITP) share responsibility for promoting outward investment. BOI focuses on outward investment in ASEAN (especially Cambodia, Laos, Myanmar, and Vietnam) and emerging economies. DITP covers smaller markets.
3. Legal Regime
Transparency of the Regulatory System
Generally, Thai regulations are readily available to the public. Foreign investors have, on occasion, expressed frustration that draft regulations are not made public until they are finalized. Comments that stakeholders submit on draft regulations are not always taken into consideration. Non-governmental organizations report; however, the Thai government actively consults them on policy, especially in the health sector and on intellectual property issues. In other areas, such as digital and cybersecurity laws, the Thai government has taken stakeholders’ comments into account and amended draft laws accordingly.
U.S. businesses have repeatedly expressed concerns about Thailand’s customs regime. Complaints center on lack of transparency, the significant discretionary authority exercised by Customs Department officials, and a system of giving rewards to officials and non-officials for seized goods based on a percentage of their sales price. Specifically, the U.S. government and private sector have expressed concern about inconsistent application of Thailand’s transaction valuation methodology and the Customs Department’s repeated use of arbitrary values. Thailand’s latest Customs Act, which entered into force on November 13, 2017, is a moderate step forward. The Act removed the Customs Department Director General’s discretion to increase the customs value of imports. I t also reduced the percentage of remuneration awarded to officials and non-officials from 55 percent to 40 percent of the sale price of seized goods (or of the fine amount) with an overall limit of five million baht (USD160,000). While a welcome development, reduction of this remuneration is insufficient to remove the personal incentives given Customs officials to seize goods nor to address the conflicts of interest the system entails. Thai Customs is expected to announce new revisions to the Customs Act in 2021.
Consistent and predictable enforcement of government regulations remains problematic. In 2017, the Thai government launched a “regulatory guillotine” initiative to cut down on red tape, licenses, and permits. The policy focused on reducing and amending outdated regulations in order to improve Thailand’s ranking on the World Bank “Ease of Doing Business” report. The regulatory guillotine project has helped improve Thailand’s ranking and, although making slow progress, is still underway.
Gratuity payments to civil servants responsible for regulatory oversight and enforcement remain a common practice despite stringent gift bans at some government agencies. Firms that refuse to make such payments can be placed at a competitive disadvantage to other firms that do engage in such practices.
The Royal Thai Government Gazette (www.ratchakitcha.soc.go.th) is Thailand’s public journal of the country’s centralized online location of laws, as well as regulation notifications.
International Regulatory Considerations
Thailand is a member of the World Trade Organization (WTO) and notifies most draft technical regulations to the Technical Barriers to Trade (TBT) Committee and the Sanitary and Phytosanitary Measures Committee. However, Thailand does not always follow WTO and other international standard-setting norms or guidance but prefers to set its own standards in many cases. In October 2015, the country ratified the WTO Trade Facilitation Agreement, which came into effect in February 2017.
Legal System and Judicial Independence
Thailand’s legal system is primarily based on the civil law system with a strong common law influence. Thailand has an independent judiciary that is generally effective in enforcing property and contractual rights. Most commercial and contractual disputes are generally governed by the Civil and Commercial Codes. The legal process is slow in practice and monetary compensation is based on actual damage that resulted directly from the wrongful act. Decisions of foreign courts are not accepted or enforceable in Thai courts.
There are three levels to the judicial system in Thailand: The Court of First Instance, which handles most matters at inception; the Court of Appeals; and the Supreme Court. There are also specialized courts, such as the Labor Court, Family Court, Tax Court, the Central Intellectual Property and International Trade Court, and the Bankruptcy Court.
The Specialized Appeal Court handles appeals from specialized courts. The Supreme Court has discretion whether to take a case that has been decided by the Specialized Appeal Court. If the Supreme Court decides not to take up a case, the Specialized Appeal Court decision stands.
Laws and Regulations on Foreign Direct Investment
The Foreign Business Act or FBA (described in detail above) governs most investment activity by non-Thai nationals. Other key laws governing foreign investment are the Alien Employment Act (1978) and the Investment Promotion Act (1977). However, as explained above, many U.S. businesses enjoy investment benefits through the U.S.-Thailand Treaty of Amity and Economic Relations (often referred to as the ‘Treaty of Amity’), which was established to promote friendly relations between the two nations. Pursuant to the Treaty, American nationals are entitled to certain exceptions to the FBA restrictions.
Pertaining to the services sector, the 2008 Financial Institutions Business Act unified the legal framework and strengthened the Bank of Thailand’s (the country’s central bank) supervisory and enforcement powers. The Act allows the Bank of Thailand to raise foreign ownership limits for existing local banks from 25 percent to 49 percent on a case-by-case basis. The Minister of Finance can authorize foreign ownership exceeding 49 percent if recommended by the central bank. Details are available at https://www.bot.or.th/English/AboutBOT/LawsAndRegulations/SiteAssets/Law_E24_Institution_Sep2011.pdf.
Apart from acquiring shares of existing (traditional) local banks, foreign banks can enter the Thai banking system by obtaining new licenses. The Ministry of Finance issues such licenses, following a consultation process with the Bank of Thailand. The Thai central bank is currently studying new licenses for digital-only banks, a tool meant to enhance financial inclusion and keep pace with consumer needs in the digital age. Digital-only banks can operate at a lower cost and offer different services than traditional banks.
The 2008 Life Insurance Act and the 2008 Non-Life Insurance Act apply a 25 percent cap on foreign ownership of insurance companies. Foreign boards of directors’ membership is also limited to 25 percent. However, in January 2016 the Office of the Insurance Commission (OIC), the primary insurance industry regulator, notified that Thai life or non-life insurance companies wishing to exceed these limits may apply to the OIC for approval. Any foreign national wishing to hold more than 10 percent of the voting shares in an insurance company must seek OIC approval. With approval, a foreign national can acquire up to 49 percent of the voting shares. Finally, the Finance Minister, with OIC’s positive recommendation, has discretion to permit greater than 49 percent foreign ownership and/or a majority of foreign directors, when the operation of the insurance company may cause loss to insured parties or to the public. OIC launched an insurtech sandbox in 2017 to allow industry to test new products. While OIC has not issued a new insurance license in the past 20 years, OIC is now contemplating issuing new virtual licenses for entrants wishing to sell insurance digitally without an intermediary, and digital licenses for existing insurers wishing to switch to digital sales only. Full details have not yet been announced.
The Board of Investment offers qualified investors several benefits and provides information to facilitate a smoother investment process in Thailand. Information on the BOI’s “One Start One Stop” investment center can be found at http://osos.boi.go.th. A physical office is located on the 18th floor of Chamchuri Square on Rama 4/Phayathai Road in Bangkok.
Competition and Antitrust Laws
Thailand updated the Trade Competition Act on October 5, 2017. The updated Act covers all business activities, except state-owned enterprises exempted by law or cabinet resolution; specific activities related to national security, public benefit, common interest and public utility; cooperatives, agricultural and cooperative groups; government agencies; and other enterprises exempted by the law. The Act broadens the definition of a business operator to include affiliates and group companies, and broadens the liability of directors and management, subjecting them to criminal and administrative sanctions if their actions (or omissions) resulted in violations. The Act also provides details about penalties in cases involving administrative court or criminal court actions. The amended Act has been noted as an improvement over the prior legislation and a step towards Thailand’s adoption of international standards in this area.
The Office of Trade Competition Commission (OTCC) is an independent agency and the main enforcer of the Trade Competition Act B.E. 2560 (2018). The OTCC is comprised of seven members nominated by a selection committee and endorsed by the Cabinet. The Commission has the following responsibilities: advises the government on issuance of relevant regulations; ensures fair and free trade practices; investigates cases and complaints of unfair trade; and pursues criminal and disciplinary actions against those found guilty of unfair trade practices stipulated in the law. The law focuses on the following areas: unlawful exercise of market dominance; mergers or collusion that could lead to monopoly; unfair competition and restricting competition; and unfair trade practices. In November 2020, OTCC approved conglomerate Charoen Pokphand’s (CP Group) USD 10 billion acquisition of retail giant Tesco Lotus. Academics and consumer groups claim this merger would allow CP Group to hold more than 80 percent market share of Thailand’s wholesale and retail sector in some provinces, which would be non-compliant with the Trade Competition Act that aims to prevent any operator from holding more than 50 percent of the market share in any sector.
The Thai government, through the Central Commission on Price of Goods and Services, has the legal authority to control prices or set de facto price ceilings for selected goods and services, including staple agricultural products and feed ingredients (such as, pork, cooking oil, wheat flour, feed wheat, distiller’s dried grains with solubles (DDGs), and feed quality barley), liquefied petroleum gas, medicines, and sound recordings. In February 2020, the government added surgical masks, polypropylene (spunbond) for surgical mask production, alcohol for hand sanitizer, and wastepaper or recycled paper to the price-controlled products list. The controlled list is reviewed at least annually, but the price-control review mechanisms are non-transparent. In practice, Thailand’s government influences prices in the local market through its control of state monopoly suppliers of products and services, such as in the petroleum, oil, and gas industry sectors.
Expropriation and Compensation
Thai laws provide guarantees regarding protection from expropriation without compensation and non-discrimination for some, but not all, investors. Thailand’s Constitution provides protection from expropriation without fair compensation and requires the government to pass a specific, tailored expropriation law if the expropriation is required for the purpose of public utilities, national defense, acquisition of national resources, or for other public interests. The Investment Promotion Act also guarantees the government shall not nationalize the operations and assets of BOI-promoted investors.
The Expropriation of Immovable Property Act (EIP), most recently amended in 2019, applies to all property owners, whether foreign or domestic nationals. The Act provides a framework and clear procedures for expropriation; sets forth detailed provision and measures for compensation of landowners, lessees and other persons that may be affected by an expropriation; and recognizes the right to appeal decisions to Thai courts. The 2019 EIP requires the government to return land that was expropriated but has not been used back to the original property owners. However, the EIP and Investment Promotion Act do not protect against indirect expropriation and do not distinguish between compensable and non-compensable forms of indirect expropriation.
Thailand has a well-established system for land rights that is generally upheld in practice, but the legislation governing land tenure still significantly restricts foreigners’ rights to acquire land.
Dispute Settlement
ICSID Convention and New York Convention
Thailand is a signatory to the New York Convention, which means that investors can enforce arbitral awards in any other signatory country. Thailand signed the Convention on the Settlement of Investment Disputes in 1985 but has not ratified it. Therefore, most foreign investors covered under Thailand’s treaties with investor-state dispute settlement (ISDS) provisions that are limited to ICSID arbitration have not been able to bring ISDS claims against Thailand under these treaties.
Investor-State Dispute Settlement
Thailand is party to bilateral investment treaties with 46 nations. Two treaties – with the Netherlands and United States (Treaty of Amity) – do not include binding dispute resolution provisions. This means that investors covered under these treaties are unable to pursue international arbitration proceedings against the Thai government without first obtaining the government’s consent. There have been two notable cases of investor-state disputes in the last fifteen years, neither of which involved U.S. companies. The first case involved a concession agreement for a construction project filed under the Germany-Thailand bilateral investment treaty. In the second case, Thailand is engaged in a dispute over the government’s invocation of special powers to shut down a gold mine in early 2017.
International Commercial Arbitration and Foreign Courts
Thailand’s Arbitration Act of 2002, modeled in part after the UNCITRAL Model Law, governs domestic and international arbitration proceedings. The Act states that “in cases where an arbitral award was made in a foreign country, the award shall be enforced by the competent court only if it is subject to an international convention, treaty, or agreement to which Thailand is a party.” Any arbitral award between parties subject to the New York Convention should thus be enforced. The following organizations provide arbitration services in Thailand: the Thai Arbitration Institute of the Alternative Dispute Resolution Office; Office of the Judiciary; and the Office of the Arbitration Tribunal of the Board of Trade of Thailand. In addition, the semi-public Thai Arbitration Center offers mediation and arbitration for civil and commercial disputes. An amendment to the Arbitration Act that allows foreign arbitrators to take part in cases involving foreign parties came into force on April 15, 2019. Under very limited circumstances, a court can set aside an arbitration award.
Bankruptcy Regulations
Thailand’s bankruptcy law is modeled after that of the United States. The law authorizes restructuring proceedings that require trained judges who specialize in bankruptcy matters to preside. According to the law, bankruptcy is defined as a state in which courts permit the distribution of assets belonging to a debtor among the creditors within the parameters of the law. Thailand’s bankruptcy law allows for corporate restructuring similar to U.S. Chapter 11 and does not criminalize bankruptcy. The law also distinguishes between secured and unsecured claims, with the former prioritized. While bankruptcy is under consideration, creditors can request the following ex parte applications from the Bankruptcy Court: an examination by the receiver of all the debtor’s assets and/or that the debtor attend questioning on the existence of assets; a requirement that the debtor provide satisfactory security to the court; and immediate seizure of the debtor’s assets and/or evidence in order to prevent the loss or destruction of such items.
The law stipulates that all applications for repayment must be made within one month after the Bankruptcy Court publishes the appointment of an official receiver. If a creditor eligible for repayment does not apply within this period, the creditor forfeits his/her right to receive payment or the court may cancel the order to reorganize the business. If any person opposes a filing, the receiver shall investigate the matter and approve, partially approve, or dismiss the application. Any objections to the orders issued by the receiver may be filed with the court within 14 days after learning of the issued order.
Within bankruptcy proceedings, it is also possible to undertake a “composition” in order to avoid a long and protracted process. A composition takes place when a debtor expresses in writing a desire to settle his/her debts, either partially or in any other manner, within seven days of submitting an explanation of matters related to the bankruptcy or during a time period prescribed by the receiver. After the proposal for a composition has been submitted, the receiver calls for a meeting among creditors to consider whether or not to accept the proposal. If the proposal is accepted, the court will approve the composition in order to legally execute the proposal; however, it will only do so if the proposal includes clear provisions for the repayment of debts. Despite these laws, some U.S. businesses complain that Thailand’s bankruptcy courts in practice can slow legislative processes to the detriment of outside firms seeking to acquire assets liquidated in bankruptcy processes.
The National Credit Bureau of Thailand (NCB) provides the financial services industry with information on consumers and businesses. The NCB is required to provide the financial services sector with payment history information from utility companies, retailers and merchants, and trade creditors.
6. Financial Sector
Capital Markets and Portfolio Investment
The Thai government maintains a regulatory framework that broadly encourages and facilitates portfolio investment. The Stock Exchange of Thailand, the country’s national stock market, was established under the Securities Exchange of Thailand Act B.E. 2535 in 1992. There is sufficient liquidity in the markets to allow investors to enter and exit sizeable positions. Government policies generally do not restrict the free flow of financial resources to support product and factor markets. The Bank of Thailand, the country’s central bank, has respected IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions.
Credit is generally allocated on market terms rather than by “direct lending.” Foreign investors are not restricted from borrowing on the local market. In theory, the private sector has access to a wide variety of credit instruments, ranging from fixed term lending to overdraft protection to bills of exchange and bonds. However, the private debt market is not well developed. Most corporate financing, whether for short-term working capital needs, trade financing, or project financing, requires borrowing from commercial banks or other financial institutions.
Money and Banking System
Thailand’s banking sector, with 15 domestic commercial banks, is sound and well-capitalized. As of December 2020, the non-performing loan rate was low (around 3.25 percent industry wide), and banks were well prepared to handle a forecast rise in the NPL rate in 2021 due to the pandemic. The ratio of capital funds/risk-weighted assets (capital adequacy) was high (20.1 percent). Thailand’s largest commercial bank is Bangkok Bank, with assets totaling USD 100 billion as of December 2020. The combined assets of the five largest commercial banks totaled USD 492.6 billion, or 70.82 percent of the total assets of the Thai banking system, at the end of 2020.
In general, Thai commercial banks provide the following services: accepting deposits from the public; granting credit; buying and selling foreign currencies; and buying and selling bills of exchange (including discounting or re-discounting, accepting, and guaranteeing bills of exchange). Commercial banks also provide credit guarantees, payment, remittance and financial instruments for risk management. Such instruments include interest-rate derivatives and foreign-exchange derivatives. Additional business to support capital market development, such as debt and equity instruments, is allowed. A commercial bank may also provide other services, such as bank assurance and e-banking.
Thailand’s central bank is the Bank of Thailand (BOT), which is headed by a Governor appointed for a five-year term. The BOT serves the following functions: prints and issues banknotes and other security documents; promotes monetary stability and formulates monetary policies; manages the BOT’s assets; provides banking facilities to the government; acts as the registrar of government bonds; provides banking facilities for financial institutions; establishes or supports the payment system; supervises financial institutions manages the country’s foreign exchange rate under the foreign exchange system; and determines the makeup of assets in the foreign exchange reserve.
Apart from the 15 domestic commercial banks, there are currently 11 registered foreign bank branches, including three American banks (Citibank, Bank of America, and JP Morgan Chase), and four foreign bank subsidiaries operating in Thailand. To set up a bank branch or a subsidiary in Thailand, a foreign commercial bank must obtain approval from the Ministry of Finance and the BOT. Foreign commercial bank branches are limited to three service points (branches/ATMs) and foreign commercial bank subsidiaries are limited to 40 service points (branches and off-premise ATMs) per subsidiary. Newly established foreign bank branches are required to have minimum capital funds of 125 million baht (USD 3.99 million at 2020 average exchange rates) invested in government or state enterprise securities, or directly deposited with the Bank of Thailand. The number of expatriate management personnel is limited to six people at full branches, although Thai authorities frequently grant exceptions on a case-by-case basis.
Non-residents can open and maintain foreign currency accounts without deposit and withdrawal ceilings. Non-residents can also open and maintain Thai baht accounts; however, in an effort to curb the strong baht, the Bank of Thailand capped non-resident Thai deposits to 200 million baht across all domestic bank accounts. However, in January 2021, the Bank of Thailand began allowing non-resident companies greater flexibility to conduct baht transactions with domestic financial institutions under the non-resident qualified company scheme. Participating non-financial firms which trade and invest directly in Thailand are allowed to manage currency risks related to the baht without having to provide proof of underlying baht holdings for each transaction. This will allow firms to manage baht liquidity more flexibly without being subject to the end-of-day outstanding limit of 200 million baht for non-resident accounts. Withdrawals are freely permitted. Since mid-2017, the BOT has allowed commercial banks and payment service providers to introduce new financial services technologies under its “Regulatory Sandbox” guidelines. Recently introduced technologies under this scheme include standardized QR codes for payments, blockchain funds transfers, electronic letters of guarantee, and biometrics.
Thailand’s alternative financial services include cooperatives, micro-saving groups, the state village funds, and informal money lenders. The latter provide basic but expensive financial services to households, mostly in rural areas. These alternative financial services, with the exception of informal money lenders, are regulated by the government.
Foreign Exchange and Remittances
Foreign Exchange
There are no limitations placed on foreign investors for converting, transferring, or repatriating funds associated with an investment; however, supporting documentation is required. Any person who brings Thai baht currency or foreign currency in or out of Thailand in an aggregate amount exceeding USD 15,000 or the equivalent must declare the currency at a Customs checkpoint. Investment funds are allowed to be freely converted into any currency.
The exchange rate is generally determined by market fundamentals but is carefully scrutinized by the BOT under a managed float system. During periods of excessive capital inflows/outflows (i.e., exchange rate speculation), the central bank has stepped in to prevent extreme movements in the currency and to reduce the duration and extent of the exchange rate’s deviation from a targeted equilibrium.
Remittance Policies
Thailand imposes no limitations on the inflow or outflow of funds for remittances of profits or revenue for direct and portfolio investments. There are no time limitations on remittances.
Sovereign Wealth Funds
Thailand does not have a sovereign wealth fund and the Bank of Thailand is not pursuing the creation of such a fund. However, the International Monetary Fund has urged Thailand to create a sovereign wealth fund due to its large accumulated foreign exchange reserves. As of December 2020, Thailand had the world’s 13th largest foreign exchange reserves at USD 258.1 billion.
7. State-Owned Enterprises
Thailand’s 52 state-owned enterprises (SOEs) have total assets of USD 523.5 billion and a combined gross income of USD 159.3 billion (end of 2019 figures, latest available). In 2020, they employed 249,400 people, or 0.65 percent of the Thai labor force. Thailand’s SOEs operate primarily in-service delivery, in particular in the energy, telecommunications, transportation, and financial sectors. More information about SOEs is available at the website of the State Enterprise Policy Office (SEPO) under the Ministry of Finance at www.sepo.go.th .
A 15-member State Enterprises Policy Commission, or “superboard,” oversees operations of the country’s 52 SOEs. In May 2019, the Development of Supervision and Management of State-Owned Enterprise Act B.E. 2562 (2019) went into effect. The law aims to reform SOEs and ensure transparent management decisions. The Thai government generally defines SOEs as special agencies established by law for a particular purpose that are 100 percent owned by the government (through the Ministry of Finance as a primary shareholder). The government recognizes a second category of “limited liability companies/public companies” in which the government owns 50 percent or more of the shares. Of the 52 total SOEs, 42 are wholly owned and 10 are majority-owned. Three are publicly listed on the Stock Exchange of Thailand: Airports of Thailand Public Company Limited, PTT Public Company Limited, and MCOT Public Company Limited. By regulation, at least one-third of SOE boards must be comprised of independent directors.
Private enterprises can compete with SOEs under the same terms and conditions with respect to market share, products/services, and incentives in most sectors, but there are some exceptions, such as fixed-line operations in the telecommunications sector.
While SEPO officials aspire to adhere to the OECD Guidelines on Corporate Governance for SOEs no level playing field exists between SOEs and private sector enterprises, which are often disadvantaged in competing with Thai SOEs for contracts.
Generally, SOE senior management reports directly to a line minister and to SEPO. Corporate board seats are typically allocated to senior government officials or politically affiliated individuals.
The 1999 State Enterprise Corporatization Act provides a framework for conversion of SOEs into stock companies. Corporatization is viewed as an intermediate step toward eventual privatization. (Note: “corporatization” describes the process by which an SOE adjusts its internal structure to resemble a publicly traded enterprise; “privatization” denotes that a majority of the SOE’s shares is sold to the public; and “partial privatization” refers to a situation in which less than half of a company’s shares are sold to the public.) Foreign investors are allowed to participate in privatizations, but restrictions are applied in certain sectors, as regulated by the FBA and the Act on Standards Qualifications for Directors and Employees of State Enterprises of 1975, as amended. However, privatizations have been on hold since 2006 largely due to strong opposition from labor unions.
A 15-member State Enterprises Policy Commission, or “superboard,” oversees operations of the country’s 56 SOEs. In May 2019, the Development of Supervision and Management of State-Owned Enterprise Act B.E. 2562 (2019) went into effect. The law aims to reform SOEs and ensure transparent management decisions; however, privatization is not part of this process.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International
Source of Data: BEA; IMF;
Eurostat; UNCTAD, Other
Economic Data
Year
Amount
Year
Amount
Host Country Gross Domestic Product (GDP) ($M USD)
* Source for Host Country Data: Bank of Thailand (http://bot.or.th/)
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
Total Inward
$259,830
100%
Total Outward
$134,022
100%
Japan
$89,682
34.5%
China, P.R.: Hong Kong
$25,059
18.7%
Singapore
$41,464
16.0%
Singapore
$13,486
10.1%
China, P.R.: Hong Kong
$22,669
8.7%
The Netherlands
$10,481
7.8%
United States
$17,232
6.6%
Vietnam
$7,693
5.7%
The Netherlands
$14,298
5.5%
Mauritius
$7,553
5.6%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total
Equity Securities
Total Debt Securities
All Countries
$662319
100%
All Countries
$37625
100%
All Countries
$28606
100%
United States
$9,423
14%
Luxembourg
$7,473
19%
China, P.R. Mainland
$6565
23%
Luxembourg
$7951
12%
United States
$7,209
19%
Japan
$3,072
11%
Singapore
$4429
7%
Singapore
$3723
10%
Laos
2452
9%
Ireland
$4,063
6%
Ireland
$4,000
10%
United States
UAE
$2214
8%
Japan
$3387
5%
China, P.R.: Hong Kong
$1,202
3%
UAE
$2,026
7%
Togo
Executive Summary
Togo was unable to replicate the strong economic growth of 2019 due to the COVID-19 pandemic. Real GDP, which grew by 5% in 2018 and 5.5% in 2019, increased by only 0.4% in 2020, the result of a fall in foreign direct investment, financial investment, private funds, and the slowdown in world trade. Nonetheless, Togo continued to pursue reforms in 2020 aimed at encouraging economic development and a better business environment. Specifically, the Government of Togo launched a new roadmap for 2020-2025 to engage better with the donor community and private sector in support of the National Development Plan (PND). Togo also took steps towards greater industrialization with the June 2021 opening of the Industrial Platform of Adetikope (PIA), an industrial zone focused on textile production, agro-processing, and logistics.
Since 2018, Togo rose by almost 60 places in the World Bank’s Doing Business report and now ranks 97th, the highest ranking in West Africa. Agriculture remains one of the engines of economic growth in Togo. In 2019, Togo became the top exporter of organic products to Europe in the Economic Community of West African States (ECOWAS) and the second in Africa after Egypt. The export volume of these organic products (mainly soybeans and pineapples) more than doubled, from 22,000 tons in 2018 to 45,000 tons in 2019.
The government of Togo implemented various business reforms and completed several large infrastructure projects over the last five years to attract investment. In 2018, the government launched its five-year PND with three major axes. The plan’s first goal is to leverage the country’s geographic position by transforming Lome into a regional trading center and transport hub. Togo has already completed hundreds of kilometers of refurbished roadways, expanded and modernized the Port of Lome, and inaugurated in 2016 the new Lome international airport that conforms to international standards. The second goal is to increase agricultural production through agricultural centers (Agropoles) and increase manufacturing. The third goal is improving social development, including electrification of the country. The government is searching for private sector investment to fulfill these PND goals.
In January 2021, Prime Minister Victoire Tomégah-Dogbe presented a detailed developmental roadmap to supplement and focus the goals of the PND for the remainder of the presidential term, which ends in 2025. Dogbe presented the roadmap to the private sector and donor partners to mobilize resources for implementation of the government’s five-year vision. The plan focuses on 42 specific projects and reforms in the economic and social sectors. These projects include the provision of identity documents for all, the construction of 20,000 social housing units; health coverage; creation of a digital bank; increased access to drinking water and sanitation; electrification for all; construction of an industrial park around the port of Lome; increased access to education; the extension of the road network and the upgrading of the Lomé-Cinkasse highway.According to the Prime Minister, between 2008 and 2019, the contribution of donor partners increased from $243.37 million to $511.95 million. For 2020-2025, the Prime Minister expressed the wish to see this partnership grow even further. After a decade of sustained 5% GDP growth, Togo aspires to 7.5% GDP growth by 2025.
In September 2017, the government established the Business Climate Unit (CCA). The CCA coordinated economic reforms and played a key role in improving the business climate for the private sector. Since November 2020, the new Ministry of Investment Promotion is the main government interface for investors. The Ministry aims to improve the business climate and identify together with the private sector key sectors and strategic projects for the country.
Nevertheless, Togo must face a number of challenges to maintain this momentum. Challenges include a weak and opaque legal system, lack of clear land titles, and government interference in various sectors. Corruption remains a common problem in Togo, especially for businesses. Often “donations” or “gratuities” result in shorter delays for obtaining registrations, permits, and licenses, thus resulting in an unfair advantage for companies that engage in such practices. Although Togo has government bodies charged with combatting corruption, corruption-related charges are rarely brought or prosecuted. The government has made efforts to professionalize key institutions such as the Public Procurement Regulatory Authority (ARMP), the Chamber of Commerce (CCIT), and the National Employment Agency (ANPE) including with new anti-corruption, ethics and transparency measures.
The 2019 Investment Code provided a legal framework to attract more investment and promote the economic and social development policy of Togo. With an improving investment climate and modern transportation infrastructure, Togo’s steadily improving economic outlook offers opportunities for U.S. firms interested in doing business locally and in the sub-region.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Attracting foreign direct investment (FDI) is a priority for Togo. The new Ministry of Investment Promotion created in November 2020 serves as an interface for potential investors, allowing them to target investment sectors and provide priority projects. Although the government was unable to host high-profile international events to showcase its economic reforms and infrastructure investments as in previous years due to COVID-19, government officials have made many trips abroad (including to Germany, France, and Russia) to promote Togo as a place to invest. Notably, Dangote Industries signed an agreement in November 2019 for a $2 billion phosphate fertilizer project. The government hopes that its strategic focus on improving the business environment will facilitate an increase in FDI in the coming years. Investment opportunities are available in transportation, logistics, agribusiness, energy, banking, and mining.
Togo does not have laws or practices that discriminate against foreign investors. The Investment Code, adopted in June 2019, prescribes equal treatment for Togolese and foreign businesses and investors; free management and circulation of capital for foreign investors; respect of private property; protection of private investment against expropriation; and investment dispute resolution regulation. The code meets West African Economic and Monetary Union (WAEMU) standards.
As an Investment Holding Company, Togo Invest Corporation focuses on investments involving the government through Public-Private-Partnerships. Although Togo prioritizes investment retention, the government does not maintain a formal dialogue channel with investors.
Limits on Foreign Control and Right to Private Ownership and Establishment
There is a right for foreign and domestic private entities to establish and own business enterprises and engage in all forms of remunerative activities. The foreign investor can also create a wholly owned subsidiary. It has no obligation to associate itself with a local investor. This right is contained in the Investment Code “le Code des Investissements,” adopted June 17, 2019, and there are no general limits on foreign ownership or control. Section 3 of the Investment Code states that any company established in the Togolese Republic freely determines its production and marketing policy, in compliance with the laws and regulations in force in the Togolese Republic. Additionally, there are no formal investment approval mechanisms in place for inbound foreign investment nor rules, restrictions, limitations, or requirements applied to private investments.
Over the last decade, Togo has significantly reduced the costs and procedures required to establish a business. In 2013, Togo established a center for starting new businesses – the “Centre de Formalité des Entreprises” that manages new business registration with an online business registration process. It only takes seven hours to register a company: https://www.cfetogo.org/eentreprise. In 2014, Togo made starting a business easier by permitting the Centre de Formalité des Entreprises to publish notices of incorporation, as well as eliminating the requirement to obtain an economic operator card. The World Bank Doing Business Report 2020 places Togo at 15 of 190 for the “Starting a Business” indicator, in comparison to 74 of 190 in 2019. The World Bank announced it will publish theDoing Business Report 2021 in mid-2021, incorporating data corrections for several previous reports (the World Bank announcement noted that Togo’s previous reports are unaffected).
Togo has enacted reforms to improve the process for obtaining construction permits. First, Togo removed a cumbersome and costly bureaucratic hurdle by eliminating the requirement of providing a certificate of registration from the National Association of Architects as a condition precedent to receiving a construction permit. Second, Togo has streamlined the entire procedure by establishing a “One-Stop Shop” for property transactions (called the Guichet Unique Foncier) at the Togolese Revenue Office (OTR). This “One-Stop Shop” within the OTR allows applicants to drop off their applications and retrieve their permits in one place, thus eliminating the need to visit multiple administrative offices to process paperwork.
The government created a Business Climate Unit in the Presidency in late 2017. The unit is committed to improving operating conditions for business, especially young entrepreneurs and women.
The creation of two commercial courts in Lomé and Kara favors private investors as these legal authorities allow for greater transparency in the treatment of commercial disputes.
Outward Investment
Togo does not promote outward investment, nor does it restrict domestic investors from investing abroad.
3. Legal Regime
Transparency of the Regulatory System
In June 2019, the National Assembly adopted a new investment code, which is in line with the objectives of the National Development Plan (PND) and embraces the government’s desire to make the private sector the engine of economic growth.
The Investment Code seeks to make Togo an attractive place for international companies, supporting the development of logistics hubs by offering tax incentives. The incentives are proportional to the size of the investments made and the number of jobs created. At a time when Togo is committed to decentralization, the new investment code provides additional advantages to investments that create jobs outside of major urban centers. The code operationalizes the National Agency for the Promotion of Investments and the Free Zone (API-ZF) which simplifies formalities. The deadline for adjudicating files is now set at 30 days maximum.
As a member of West African Economic and Monetary Union (WAEMU), Togo participates in zone-wide plans to harmonize and rationalize regulations governing economic activity within the Organization for the Harmonization of Business Law in Africa (OHADA – Organisation pour L’Harmonisation en Afrique du Droit des Affaires). OHADA includes sixteen African countries, including Togo, and one of the principal goals is a common charter on investment. Togo directly implements WAEMU and OHADA regulations without requiring an internal ratification process by the National Assembly.
Although the government does not make draft bills and proposed regulations available for public comment, ministries, and regulatory agencies in Togo generally give notice of and distribute the text of proposed regulations to relevant stakeholders. Ministries and regulatory agencies also generally request and receive comments on proposed regulations through targeted outreach to business associations and other stakeholders.
Togo is a member of UNCTAD’s international network of transparent investment procedures http://togo.eregulations.org . Foreign and national investors can find detailed information on administrative procedures applicable to investment and income generating operations including the number of steps, name and contact details of the entities, persons in charge of procedures, required documents and conditions, costs, processing time, and legal bases justifying the procedures. The site is generally up-to-date and useful.
The Public Procurement Regulatory Authority (ARMP) ensures compliance and transparency with respect to government procurements. Each responsible ministry ensures compliance with its regulations which are developed in conformity with international standards and agreements such as WTO or WAEMU norms. Regulations are not reviewed on the basis of scientific or data-driven assessments. The government has not announced any upcoming changes to the regulatory enforcement system. A July 2019 Decree No. 2019-097 / PR sets out a code of ethics and professional conduct in public procurement.
Togo joined the Development Center of OECD in June 2019, an opportunity to share experiences and pool resources.
International Regulatory Considerations
Togo is a member of the World Trade Organization (WTO). It is not known if the government notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).
For the most part, in economic terms, the Togolese legal and administrative framework is aligned with the community texts of UEMOA, ECOWAS or larger groups.
On the financial side, Togo depends on sub-regional institutions, notably the Central Bank of West African States (BCEAO) whose head office is in Dakar. The Regional Council for Public Savings and Financial Markets (CREPMF), headquartered in Abidjan, regulates financial markets.
The Togolese insurance market is subject to the rules of the CIMA zone (Inter African Conference of Insurance Markets).
With regard to intellectual property, Togo relies on OAPI (African Intellectual Property Organization).
The main laws and directives of these different legal and administrative areas are available, among others, on the website www.droit-afrique.com under the heading Togo.
More broadly, Togo is a member of the United Nations (UN), the World Trade Organization (WTO) or the International Renewable Energy Agency (IRENA).
At the African level, the country is also party to the Council of the Agreement, the Benin Electric Community (CEB), the African Peer Review Mechanism (APRM), the Alliance Zone and the Co-operation Zone for Prosperity (ZACOP), and the African Union.
Legal System and Judicial Independence
Togo practices a code-based legal system inherited from the French system. The judiciary is recognized as the third power after the executive and the legislative (the press being the 4th) and thus remains independent of the executive branch. Togo, as a member of the OHADA, has a judicial process that is procedurally competent, fair, and reliable. Regulations or enforcement actions are appealable like any other civil actions and are adjudicated in the national court system.
A Court of Arbitration and Mediation created in 2011 legally enforces contracts. The main law covering commercial issues is the Investment Code adopted in 2012. In 2013, Togo created three commercial Chambers within the Lomé tribunal with specialized magistrates who have exclusive trial court level jurisdiction over contract enforcement and business disputes.
Laws and Regulations on Foreign Direct Investment
The Investment Code allows the resolution of investment disputes involving foreigners through: (a) bilateral agreements between Togo and the investor’s government; (b) arbitration procedures agreed to between the interested parties; or (c) through the offices of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. The OHADA also provides a forum and legal process for resolving legal disputes in 16 African countries.
Investment dispute are managed by SEGUCE Togo (Societe d’Exploitation du Guichet Unique pour le Commerce Exterieur), and can be accessed at www.segucetogo.tg
Togo is a member of UNCTAD’s international network of transparent investment procedures http://togo.eregulations.org . Foreign and national investors can find detailed information on administrative procedures applicable to investment and income generating operations including the number of steps, name and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time and legal bases justifying the procedures.
Competition and Anti-Trust Laws
The Public Procurement Regulatory Authority (ARMP) ensures compliance and transparency for competition-related concerns. The government regularly seeks to improve the framework for public procurement (including professionalizing the public procurement sector, moving procurement online, enacting legislative regulations, etc). These reforms directly benefit the private sector, which serves as the engine for the National Development Plan (PND).
Expropriation and Compensation
The government can legally expropriate property through a Presidential decree submitted by the cabinet of ministers and signed by the President.
Only two major expropriations of property have taken place in Togo’s history. The first was the February 1974 nationalization of the then French-owned phosphate mines. The second was the November 2014 nationalization of the Hôtel du 2 Février after it had ceased operations for several years. Shortly after the nationalization of the hotel, Togo announced that it was establishing a commission to determine the fair market amount owed as compensation to the hotel’s Libyan owners/investors. Setting aside the case of the Hôtel du 2 Février as an isolated example, there is little evidence to suggest a trend towards expropriation or “creeping expropriation.” The government designed the 2012 Investment Code to protect against government expropriations. There are some claimants from lands expropriated for recent road construction, however, and the procedure to investigate and resolve those claims is slow. Another issue is that land titles are very unclear with traditional and modern systems overlapping. The government has occasionally earmarked land for development with unclear title that has raised complaints from local communities.
Dispute Settlement
ICSID Convention and New York Convention
Togo is not a party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Togo is, however, a party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention – also known as the Washington Convention), which it ratified in 1967.
Investor-State Dispute Settlement
Togo does not have Bilateral Investment Treaty (BIT) or Free Trade Agreement (FTA) with an investment chapter with the United States.
Togo does not have a history of extrajudicial action against foreign investors, notwithstanding the two historical examples above. There do not appear to be any investment disputes involving U.S. persons from the past ten years. Local courts recognize and enforce foreign arbitral awards issued against the government.
International Commercial Arbitration and Foreign Courts
The dispute resolution alternative is the Court of Arbitration of Togo (CATO), which conforms to standards as established by the Investment Climate Facility for Africa (ICF). Local courts recognize and enforce foreign arbitral awards and there are no known State Owned Enterprise investment disputes that have gone to the domestic court system.
The World Bank’s International Finance Corporation (IFC) worked with the Government of Togo to improve commercial justice through the strengthening of alternative dispute resolution mechanisms. The aim of the project was to increase the speed and efficiency of settlement of commercial disputes through the procedures used by the CATO.
As a result of the project, 30 new arbitrators and 100 magistrates and professionals received training in mediation/arbitration techniques. Further, the new CATO procedure manual is explicit that the time between filing and judgment shall be a maximum of 6 months as per article 36 of the ruling procedures.
Bankruptcy Regulations
Togo uses the standards set forth under the Organization for the Harmonization of Business Law in Africa (OHADA). That law states that if bankruptcy occurs, the competent jurisdiction designates an expert that concludes an agreement with creditors and stakeholders (preventive arrangement). The Manager (or managers) can be put under “patrimonial sanctions”, meaning they can be personally liable for the debts of the company. The manager is then forbidden to do business, to manage, administer, or control an enterprise, or hold political or administrative office, for three to ten years. Bankruptcy is criminalized, but generally as a last resort.
According to data collected by the World Bank, insolvency proceedings take three years on average and cost approximately 15 percent of the debtor’s estate, with the most likely outcome being that the company will be sold off in pieces. The average recovery rate is 27.9 cents on the dollar. The World Bank’s Doing Business 2020 places Togo at 88 of 190 for the “Resolving Insolvency” indicator, well above the Sub-Saharan Africa regional average.
6. Financial Sector
Capital Markets and Portfolio Investment
Togo and the other West African Economic and Monetary Union (WAEMU) member countries are working toward greater regional integration with unified external tariffs. Togo relies on the West African Economic and Monetary Union (WAEMU) Regional Stock Exchange in Abidjan, Cote d’Ivoire to trade equities for Togolese public companies.
WAEMU has established a common accounting system, periodic reviews of member countries’ macroeconomic policies based on convergence criteria, a regional stock exchange, and the legal and regulatory framework for a regional banking system. The government and central bank respect IMF Article VIII and refrain from restrictions on payments and transfers for current international transactions. Credit is generally allocated on market terms. With sufficient collateral, foreign investors are generally able to get credit on the local market. The private sector in general has access to a variety of credit instruments when and if collateral is available.
Money and Banking System
The penetration of banking services in the country is low and generally only available in major cities.
The government and the banking sector have worked to restore Togo’s reputation as a regional banking center, which was weakened by political upheavals from 1991 to 2005, and several regional and sub-regional banks now operate in Togo, including Orabank, Banque Atlantique, Bank of Africa, Diamond Bank, International Bank of Africa in Togo (BIAT), and Coris Bank.
Additionally, Togo is home to the headquarters of the ECOWAS Bank for Investment and Development (EBID), the West African Development Bank (BOAD – the development bank of the West African Economic and Monetary Union), Oragroup, and Ecobank Transnational Inc. (ETI), the largest independent regional banking group in West Africa and Central Africa, with operations in 36 countries in Sub-Saharan Africa.
The banking sector is generally healthy, and the total assets of Togo’s largest banks are approximately $25-30 billion, including Ecobank, a very large regional bank headquartered in Lomé.
Togo’s monetary policy and banking regulations are managed by the Central Bank of West African States (BCEAO). No known correspondent relationships were lost in the past four years. No known correspondent banking relationships are in jeopardy.
Foreign Exchange and Remittances
Foreign Exchange
There are no restrictions on the transfer of funds to other FCFA-zone countries or to France. The transfer of more than FCFA 500,000 (about $1,000) outside the FCFA-zone requires justification documents (e.g. pro forma invoice) to be presented to bank authorities.
The exchange system is free of restrictions for payments and transfers for international transactions. Some American investors in Togo have reported long delays (30 – 40 days) in transferring funds from U.S. banks to banks located in Togo. This is reportedly because banks in Togo have limited contacts with U.S. banks to facilitate the transfer of funds.
Togo uses the CFA franc (FCFA), which is the common currency of the eight (8) West African Economic and Monetary Union (WAEMU) countries. The currency is fixed to the Euro at a rate of 656 FCFA to 1 Euro. As a result of this fixed exchange rate, Togo’s inflation rate is consistently below 2%.
Remittance Policies
The 2012 Investment Code provides for the free transfer of revenues derived from investments, including the liquidation of investments, by non-residents.
Sovereign Wealth Funds
Togo does not maintain a Sovereign Wealth Fund (SWF) or other similar entity.
7. State-Owned Enterprises
The government published a list of 16 State-owned Enterprises (SOEs) and the shareholding of twenty-six (26) other semi-public companies in December 2019. These SOEs may enjoy non-market based advantages received from the host government, such as the government delaying private enterprise investment in infrastructure that could disadvantage the market share of the SOE.
All SOEs have a Board of Directors and Supervisory Board, although the Togolese government has not specified how it exercises ownership in the form of an ownership policy or governance code. The SOEs also have auditors who certify their accounts. Once certified by these auditors, the accounts of these companies are sent to the Court of Auditors, Togo’s supreme audit institution, which verifies and passes judgment on these financial statements and reports to the National Assembly. The Court publishes the results of its audits annually, including at http://courdescomptestogo.org.
SOEs control or compete in the fuel, cotton, telecommunications, banking, utilities, phosphate, and grain-purchasing markets. The government wants to revitalize the phosphate sector and become a leading global player via the state-owned New Phosphate Company of Togo (SNPT).
In June 2020, the New Cotton Company of Togo (NSCT) which produces cotton domestically was sold to the Singaporean Company OLAM Group (51%) with 40% to Cotton Producers Consortium (FNGPC) (40%), while the Government of Togo maintained a 9% stake. Through this privatization, the Government hopes to further develop the textile industry. Before this privatization, NSCT was 60% state-controlled after the bankruptcy and dissolution of the 100% state-owned Togolese Cotton Company (SOTOCO) in 2009.
In September 2012, Togo sold the formerly state-owned Togolese Development Bank to Orabank Group, which has some U.S. investors. Likewise, in March 2013, Togo sold the formerly state-owned Banque Internationale pour l’Afrique au Togo to the Attijariwafa Bank Group of Morocco.
Following these sales, Union Togolaise de Banque (UTB) and Banque Togolaise pour le Commerce et l’Industrie (BTCI) are now the only two state-owned banks. Togo’s first call for tenders for these two banks, completed in 2011, was unsuccessful. Togolese authorities are working in consultation with the IMF to either merge the two banks into a single entity, or try to privatize one or both. These two remaining state-owned banks hold weak loan portfolios characterized by high exposure (about one-third of total bank credit) to the government, as well as to the cotton and phosphate industries.
In the telecommunications sector, the government combined in 2017 the two state-owned entities Togo Telecom and TogoCell into a holding company, TogoCom. In November 2019, Agou Holding consortium, made up of the Madagascan conglomerate Axian (majority) and the capital-investor Emerging Capital Partners (ECP) bought a 51% stake in TogoCom. The Togolese Government maintains a 49% stake. Agou Holding plans to invest $271 million in TogoCom over seven years to improve international connectivity and expand its high-speed fiber-optic and mobile networks. However, such investment is not yet apparent, with 4G restricted to a small area in Lomé. Nonetheless, Togocom announced in March 2021 that it is launching 5G service at the Port of Lome, the main government administrative area, and the Adetikope Industrial Platform (PIA), using Nokia equipment.
The new entity stills directly competes with a private cell phone company, Moov Togo. Atlantique Telecom, a subsidiary of Emirates Telecommunications Corporation (Etisalat), owns and controls Moov Togo. The Government of Togo has licensed Togocom and Moov for 4G. Private company CAFÉ Informatique also offers satellite-based internet access and other services, mainly to the business sector. Two new internet service providers, Teolis and Vivendi Africa Group (GVA-Togo), entered the market in 2018 and the government is installing new fiber optic cable in the country.
Public utilities such as the Post Office, Lomé Port Authority, Togo Water, and the Togolese Electric Energy Company (CEET) hold monopolies in their sectors.
The National Agency for Food Security (ANSAT) is a government agency that purchases cereals on the market during the harvest for storage. When cereal prices increase during the dry season, it is ANSAT’s task to release cereals into the markets to maintain affordable cereal prices. When supplies permit, ANSAT also sells cereals on international markets, including Ghana, Niger, and Gabon.
Previous privatization in Togo covered many sectors, such as hotels, banking, and mining. Foreign investors are encouraged to compete in new privatization programs via a public bidding processes. The government publishes all notifications in the French language, but unfortunately, a relevant government website is not available.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data
Year
Amount
Year
Amount
Host Country Gross Domestic Product (GDP) ($M USD)
UNCTAD data available at
https://stats.unctad.org/handbook/
EconomicTrends/Fdi.html
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data (2018)
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
Total Inward
2,302
100%
Total Outward
5,312
100%
South Africa
943
41%
Niger
1,763
33%
Qatar
546
24%
Benin
561
11%
Cyprus
138
6%
Gambia
541
10%
Côte d’Ivoire
112
5%
Sao Tome & Principe
444
8%
Gibraltar
83
4%
Côte d’Ivoire
428
8%
“0” reflects amounts rounded to +/- USD 500,000.
Note: U.S. based ContourGlobal built a 100 megawatt power plant in Togo in 2010. This FDI is not recorded in official U.S. government statistics.
Table 4: Sources of Portfolio Investment
Data not available.
Trinidad and Tobago
Executive Summary
Trinidad and Tobago (TT) is a high-income developing country with a gross domestic product (GDP) per capita of $17,397 and an annual GDP of $24.3 billion (2019). It has the largest economy in the English-speaking Caribbean and is the third most populous country in the region with 1.4 million inhabitants. The International Monetary Fund predicts GDP for 2021 will increase by 2.6 percent as the economy rebounds following the economic impact of coronavirus mitigation. TT’s investment climate is generally open and most investment barriers have been eliminated, but stifling bureaucracy and opaque procedures remain.
Energy exploration and production drive TT’s economy. This sector has historically attracted the most foreign direct investment. The energy sector usually accounts for approximately half of GDP and 80 percent of export earnings. Petrochemicals and steel are other sectors accounting for significant foreign investment. Since the economy is tethered to the energy sector, it is particularly vulnerable to fluctuating prices for hydrocarbons and petrochemicals.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The government of Trinidad and Tobago seeks foreign direct investment and has traditionally welcomed U.S. investors.
The U.S. Mission is not aware of laws or practices that discriminate against foreign investors but some have seen the decision-making process for tenders and the subsequent awarding of contracts turn opaque without warning, especially when their interests compete with those of well-connected local firms.
InvesTT is the country’s investment promotion agency that assists investors through the process of setting up a non-energy business and provides aftercare services once established. Specifically, it provides market information; offers advice on accessing investment incentives; and assists with regulatory and registry issues; property and location services; creation of business linkages; problem solving; and advocacy to the government. The Trinidad and Tobago International Financial Center is another investment promotion agency whose mission is to attract and facilitate foreign direct investment in the financial services sector.
While Trinidad and Tobago prioritizes investment retention, the U.S. Mission is not aware of a formal, ongoing dialogue with investors, either through an Ombudsman or formal business roundtable.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity.
There are no limits on foreign ownership. Under the Foreign Investment Act of 1990, a foreign investor is permitted to own 100 percent of the share capital in a private company. A license is required to own more than a 30 percent of a public company.
The U.S. Mission is not aware of any sector-specific restrictions or limitations applied to U.S. investors.
Trinidad and Tobago maintains an investment screening mechanism for foreign investment related to specific projects that have been submitted for the purpose of accessing sector-specific incentives, such as for those offered in the tourism industry.
The government’s business facilitation efforts focus primarily on investor services (helping deal with rules and procedures) through its investment promotion agency and trying to make the rules more transparent and predictable overall. However, more work needs to be done to achieve efficient administrative procedures and dispute resolution. Trinidad and Tobago ranks 158th of 190 countries for registering property, 174th for enforcing contracts, and 160th for payment of taxes in the World Bank’s Doing Business 2020 report, representing a deterioration of indicators that reflect a difficulty of doing business.
The business registration website is: www.ttbizlink.gov.tt. The Global Enterprise Registration Network (GER) gives the TT business registration website a below-average score of 3 out of 10 for its single electronic window, and 4.5 out of 10 for providing information on how to register a business (TTconnect.gov.tt). While the process is clear, the inability to make online payments, and submit certificates online requests are the two main reasons for the low score. A feedback mechanism allowing users to communicate with authorities is a strength of the TT business registration website. Foreign companies can use the website and business registration requires completion of seven procedures over a period of 10 days. The agencies with which a company must typically register include:
Companies Registry, Ministry of Legal Affairs
Board of Inland Revenue
National Insurance Board; and
Value Added Tax (VAT Office, Board of Inland Revenue)
Outward Investment
The host government does not promote or incentivize outward investment.
The host government does not restrict domestic investors from investing abroad.
3. Legal Regime
Transparency of the Regulatory System
Through the Trinidad and Tobago Fair Trading Commission, the government develops transparent policies and effective laws to foster market-based competition on a non-discriminatory basis and establishes “clear rules of the game.” Legal, regulatory, and accounting systems are generally transparent and consistent with international norms
There are no informal regulatory processes managed by non-governmental organizations or private sector associations.
Rule-making and regulatory authority exist within the ministries and regulatory agencies at the national level. The government consults frequently, but not always, with international agencies and business associations in developing regulations. The government submits draft regulations to parliament for approval. The process is the same for each ministry.
Accounting, legal, and regulatory procedures are transparent and consistent with international norms. International financial reporting standards are required for domestic public companies.
Proposed laws and regulations are often published in draft form electronically for public review at http://www.ttparliament.org/, though there is no legal obligation to do so. The government often solicits private sector and business community comments on proposed legislation, though there is no timeframe for the length of a consultation period when it happens, nor is reporting on the consultations mandatory.
The U.S. Mission is not aware of an oversight or enforcement mechanism that ensures that the government follows administrative processes.
There has not been any announcement regarding reforms to the regulatory system, including enforcement, since the last ICS report. Regulatory reform efforts announced in prior years, such as the mechanism to calculate and collect property tax and the establishment of the revenue authority, have not been fully implemented.
Establishment of the revenue authority is intended to increase collections and streamline the system for paying taxes.
At present, regulatory enforcement mechanisms are usually a combination of moral suasion and the use of applicable administrative, civil, or criminal sanctions. The enforcement process is not legally reviewable.
Regulation is usually reviewed based on scientific or data-driven assessments. Scientific studies or quantitative analyses are not made publicly available. Public comments received by regulators are generally not made public.
Public finances and debt obligations are transparent and publicly available on the central bank website: https://www.central-bank.org.tt
International Regulatory Considerations
Trinidad and Tobago is not a part of a regional economic block, though it is part of the Caribbean Community (CARICOM), a regional trading bloc that gives duty-free access to member goods, free movement to some members and establishes common treatment of non-members on specific issues. The Caribbean Single Market and Economy (CSME) is an initiative currently being explored by CARICOM that would eventually integrate its member-states into a single economic unit. When fully completed, the CSME would succeed CARICOM.
Legal, regulatory, and accounting systems are generally consistent with United Kingdom standards.
The government has not consistently notified the World Trade Organization (WTO) Committee on Technical Barriers to Trade (TBT) of draft technical regulations.
Legal System and Judicial Independence
TT’s legal system is based on English common law. Contracts are legally enforced through the court system.
The country has a written commercial law. There are few specialized courts, making the resolution of legal claims time consuming. An industrial court exclusively handles cases relating to labor practices but also suffers from severe backlogs and is widely seen to favor claimants.
Civil cases of less than $2,250 are heard by the Magistrate’s Court. Matters exceeding that amount are heard in the High Court of Justice, which can grant equitable relief. There is no court or division of a court dedicated solely to hearing commercial cases.
TT’s judicial system is independent of the executive, and the judicial process is competent, procedurally and substantively fair, and reliable, although very slow. According to the World Bank’s Doing Business 2020 report, Trinidad and Tobago ranks 174 of 190 in ease of enforcing contracts, and its court system requires 1,340 days to resolve a contract claim, nearly double the Latin American and Caribbean regional average.
Decisions may be appealed to the Court of Appeal in the first instance. The United Kingdom Privy Council Judicial Committee is the final court of appeal.
Laws and Regulations on Foreign Direct Investment
TT’s judicial system respects the sanctity of contracts and generally provides a level playing field for foreign investors involved in court matters. Due to the backlog of cases, however, there can be major delays in the process. It is imperative that foreign investors seek competent local legal counsel. Some U.S. companies are hesitant to pursue legal remedies, preferring to attempt good faith negotiations in order to avoid an acrimonious relationship that could harm their interests in the country’s small, tight-knit business community.
There is no “one-stop-shop” website for investment providing relevant laws, rules, and procedures. Useful websites to help navigate foreign investment laws, rules, and procedures include: http://www.legalaffairs.gov.tt
Competition and Antitrust Laws
The Trinidad and Tobago Fair Trading Commission is an independent statutory agency responsible for promoting and maintaining fair competition in the domestic market. It is tasked with investigating the various forms of anti-competitive business conduct set out in the Fair-Trading Act. Legislation operationalizing this agency in 2006 was not proclaimed by the president until February 2020, and in that time no cases that involve foreign investment have arisen.
Expropriation and Compensation
The government can legally expropriate property based on the needs of the country and only after due process including adequate compensation, generally based on market value. Various pieces of legislation make provisions for compulsory licensing in the interest of public health or intellectual property rights.
The U.S. Mission is not aware of any direct or indirect expropriation actions since the 1980s. All prior expropriations were compensated to the satisfaction of the parties involved. Energy sector contacts occasionally describe the tax regime as confiscatory, pointing to after-the-fact withdrawal or weakening of tax incentives offered to entice investment once investment occurs.
Claimants did not allege a lack of due process in prior expropriation cases.
Dispute Settlement
ICSID Convention and New York Convention
TT is a party to the International Centre for the Settlement of Investment Disputes (ICSID Convention) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York convention).
Local courts recognize and enforce foreign arbitral awards according to chapter 20 of the Arbitration (Foreign Arbitral Awards) Act 1996.
Investor-State Dispute Settlement
The bilateral investment treaty between the United States and TT recognizes binding arbitration of investment disputes.
The U.S. Mission is not aware of any claims by U.S. investors under the bilateral investment treaty with the United States.
The U.S. Mission is unaware of any disputes involving U.S. or other foreign investors over the past 10 years. There is no history of extrajudicial action against foreign investors.
International Commercial Arbitration and Foreign Courts
Some of the available types of alternative dispute resolution include mediation and arbitration. The Civil Proceedings Rules encourage parties to make reasonable attempts to resolve their disputes amicably with litigation as a last resort. Mediation and arbitration are most commonly used.
There is a domestic dispute resolution center that offers arbitration services. Domestic legislation, the Arbitration Act of 1939, is based on early English arbitration legislation and is not modeled on internationally accepted regulations.
The U.S. Mission has no records of any investment disputes involving an state-owned enterprises (SOEs).
Bankruptcy Regulations
Creditors have the right to be notified within 10 days of the appointment of a receiver and to receive a final report, a statement of accounts, and an assessment of claim. Claims of secured creditors are prioritized under the Bankruptcy Act. No distinction is made between foreign and domestic creditors or contract holders. Bankruptcy is not criminalized.
The World Bank ranked TT 83rd out of 190 countries in resolving insolvency in its Doing Business 2020 report. This reflects TT’s recovery rate (cents on the dollar), which is worse than the regional average, and cost as a percentage of estate.
6. Financial Sector
Capital Markets and Portfolio Investment
The government welcomes foreign portfolio investment.
TT has its own stock market and has an established regulatory framework to encourage and facilitate portfolio investment. There is enough liquidity in the markets to enter and exit sizeable positions.
Existing policies facilitate the free flow of financial resources into the product and factor markets.
The government and central bank respect IMF article VIII by refraining from restrictions on payment and transfers for current international transactions. Shortages of foreign exchange, exacerbated by the government’s maintenance of the local currency at values higher than those which the market would bear, however, cause considerable delays in payments and transfers for international transactions.
A full range of credit instruments is available to the private sector. There are no restrictions on borrowing by foreign investors, who are able to access credit. Credit is allocated on market terms, but interest rates tend to be higher for foreign borrowers.
Money and Banking System
Banking services are widespread throughout urban areas, but penetration is significantly lower in rural areas.
Although the banking sector is healthy and well-capitalized, the IMF in its 2020 Financial Stability Assessment Program noted Trinidad and Tobago’s banks are exposed to sovereign risk and potential liquidity risks stemming from non-bank financial entities in the group. The financial system as a whole faces risks of increasing household debt, a lack of supervisory independence and out-of-date regulatory frameworks, the sovereign-bank nexus and the absence of a macro-prudential toolkit, and contagion risks between investment funds and banks. The report further states that the financial sector legislation and regulation have not kept pace with international best practice. The supervisors operate with guidelines in key areas instead of binding powers, which limits their authority
In 2019, the estimated total assets of Trinidad and Tobago’s largest banks was $21.9 billion.
TT has a central bank system. Foreign banks may establish operations in TT provided they obtain a license from the central bank. Trinidad and Tobago has lost correspondent banking relationships in the past three years. The U.S. Mission is not aware of any current correspondent banking relationships that are in jeopardy.
There are no restrictions on a foreigner’s ability to establish a bank account.
Foreign Exchange and Remittances
Foreign Exchange
There are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment.
Shortages of foreign exchange, exacerbated by the government’s maintenance of the local currency at values higher than those which the market would bear, cause considerable delays in conversion into world currencies. Businesses continue to report a cumbersome bureaucratic process and a minimum three-month delay in such conversions.
The central bank intervenes to maintain an unofficial peg to the U.S. dollar, using a managed float in which the exchange rate fluctuates mildly day-to-day, and limits the availability of foreign currency.
Remittance Policies
While there are no recent changes or plans to change investment remittance policies to tighten or relax access to foreign exchange for investment remittances, commercial banks have enacted policies that limit access to foreign exchange due to national shortages, on guidance from the Ministry of Finance and the central bank.
Although there are no official time limitations on remittances, timeliness of remittances depends on availability of foreign currency.
Sovereign Wealth Funds
The value of TT’s Heritage and Stabilization Fund the fund as of September 2020 is approximately $5.7 billion. The fund invests in U.S. short duration fixed income, U.S. core domestic fixed income, U.S. core domestic equities, and non-U.S. core international equities.
The sovereign wealth fund (SWF) follows the voluntary code of good practices known as the Santiago Principles. TT participates in the IMF-hosted International Working Group on Sovereign Wealth Funds.
None of the SWF is invested domestically. There are no potentially negative ramifications for U.S. investors in the local market.
7. State-Owned Enterprises
TT has 57 SOEs comprised of 44 wholly owned companies, eight majority-owned, and five in which the government has a minority share. SOEs are in the energy, manufacturing, agriculture, tourism, financial services, transportation, and communication sectors. Information on the total assets of SOEs, total net income of SOEs and number of people employed by SOEs is not available. The Investments Division of the Ministry of Finance appoints directors to the boards of state enterprises, reportedly at the direction of the minister of finance. SOEs are often informally or explicitly obligated to consult with government officials before making major business decisions. According to TT’s constitution, the government is entitled to: exercise control directly or indirectly over the affairs of the enterprise
exercise control directly or indirectly over the affairs of the enterprise
appoint a majority of directors of the board of directors of the enterprise; and
hold at least 50 per cent of the ordinary share capital of the enterprise
In sectors that are open to both the private sector and foreign competition, SOEs are sometimes favored for government contracts, which might negatively impact U.S. investors in the market.
The country has not adhered to the OECD corporate governance guidelines for SOEs.
Privatization Program
TT does not have a privatization program in place, but the government has issued initial public offerings of various state-owned companies to obtain revenue, primarily in the finance and energy sectors.
Foreign investors can participate in the initial public offerings of SOEs.