Policies Towards Foreign Direct Investment

The government of Armenia officially welcomes foreign investment. The Ministry of Economy is the main government body responsible for the development of investment policy in Armenia. Armenia has achieved respectable rankings on some global indices measuring the country’s business climate. Armenia’s investment and trade policy is relatively open; foreign companies are entitled by law to the same treatment as Armenian companies. Armenia has strong human capital and a well-educated population, particularly in the science, technology, engineering, and mathematics fields, leading to significant investment in the high-tech and information technology sectors. Many international companies have established branches or subsidiaries in Armenia to take advantage of the country’s pool of qualified specialists and position within the Eurasian Economic Union (EAEU). However, many businesses have identified challenges with Armenia’s investment climate in terms of the country’s small market (with a population of less than three million), limited consumer buying power, relative geographic isolation due to closed borders with Turkey and Azerbaijan, and concerns related to weaknesses in the rule of law.

Following a revolution in April/May 2018 fueled in large measure by popular frustration with endemic corruption, Armenia’s government launched a high-profile anti-corruption campaign. The campaign has yielded a number of high-profile cases. Beyond these successes, the fight against corruption needs to be institutionalized in the long term, especially in critical areas such as the judiciary, tax and customs operations, and health, education, military, and law enforcement sectors. Foreign investors remain concerned about the rule of law, equal treatment, and ethical conduct by government officials. U.S companies have reported that the investment climate is tainted by a failure to enforce intellectual property rights. There have been concerns regarding the lack of an independent and strong judiciary, which undermines the government’s assurances of equal treatment and transparency and reduces access to effective recourse in instances of investment or commercial disputes. Concerns about equal treatment, particularly on the basis of nationality, are fueled by perceptions of the uneven application of laws and regulations across enterprises in specific industries. Representatives of U.S. entities have raised concerns about the quality of stakeholder consultation by the government with the private sector and government responsiveness in addressing concerns among the business community. Government officials have publicly responded to private sector concerns about perceptions of slow movement in the government bureaucracy as a function of needing to guard against corruption-related risks. The Armenian National Interests Fund and Investment Support Center are responsible for attracting and facilitating inward foreign direct investment.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are very few restrictions with regard to limitations on foreign ownership or control of commercial enterprises. There are some restrictions on foreign ownership within the media and commercial aviation sectors. Local incorporation is required to obtain a license for the provision of auditing services.

The Armenian government does not maintain investment screening mechanisms for foreign direct investment in particular. Government approval is required to take advantage of certain tax and customs privileges, and foreign investors are subject to the same requirements as domestic investors where regulatory approvals may be involved.

Other Investment Policy Reviews

In 2019, the U.N. Conference on Trade and Development (UNCTAD) published its first  investment policy review for Armenia . The World Trade Organization (WTO) published a  Trade Policy Review for Armenia  in 2018.

Business Facilitation

Armenia has traditionally fared well in the World Bank’s Ease of Doing Business report.  The government has announced its commitment to addressing deficiencies that prevent Armenia from obtaining a higher ranking. Companies can register electronically here .  This single window service was launched in 2011 and allows individual entrepreneurs and companies to complete name reservation, business registration, and tax identification processes all at once.  The application can be completed in one day. An electronic signature is needed in order to be able to register online. Foreign citizens can obtain an e-signature and more detailed information from the e-signature portal .  In December 2019, the government launched a new e-regulations platform that provides a step-by-step guide for business and investment procedures. The platform is available here . According to the World Bank’s most recent Ease of Doing Business report, it takes four days to complete the company registration process in Armenia.

Outward Investment

The Armenian government does not restrict domestic investors from investing abroad.

Transparency of the Regulatory System

The Armenian government nominally uses transparent policies and laws to foster competition.  Some report that Armenia’s new government has pursued a more consistent execution of these laws and policies in an effort to improve market competition and remove informal barriers to market entry, especially for small- and medium-sized enterprises.  Armenia’s legislation on the protection of competition has been improved with a number of clarifications regarding key concepts. There have been some procedural improvements for delivering conclusions and notifications of potential anti-competitive behavior via electronic means.  However, companies regard the efforts of the State Commission for the Protection of Economic Competition (SCPEC) alone as insufficient to ensure a level playing field. They indicate that improvements in other state institutions and authorities that support competition, like the courts, tax and customs, public procurement, and law enforcement, are necessary.  Numerous studies observe a continuing lack of contestability in local markets, many of which are dominated by a few incumbents. Banking supervision is relatively well developed and largely consistent with the Basel Core Principles. The Central Bank of Armenia is the primary regulator of the financial sector and exercises oversight over banking, securities, insurance, and pensions. Armenia has adopted IFRS as the accounting standard for enterprises. Data on Armenia’s public finances and debt obligations are broadly transparent, and the Ministry of Finance publishes periodic reports that are available online.

Safety and health requirements, many of them holdovers from the Soviet period, generally do not impede investment activities.  Nevertheless, investors consider bureaucratic procedures to be sometimes burdensome, and discretionary decisions by individual officials may present opportunities for petty corruption.  A unified online platform for publishing draft legislation was launched in March 2017 and is available here .  Proposed legislation is available for the public to view. Registered users can submit feedback and see a summary of comments on draft legislation. However, the time period devoted to public comments is often regarded as insufficient to solicit proper feedback.  The results of consultations have not been reported by the government in the past. The government maintains other portals, including  http://www.e-gov.am  and  http://www.arlis.am , that make legislation and regulations available to the public. Some regulations that affect Armenia are developed within the Eurasian Economic Commission, the executive body for the EAEU.

International Regulatory Considerations

Armenia is a member of the EAEU and adheres to relevant technical regulations. Armenia’s entry into CEPA will lead it to pursue harmonization efforts with the EU on a range of laws, regulations, and policies relevant to economic affairs. Armenia is also a member of the WTO, and the Armenian government notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade. Armenia is a signatory to the Trade Facilitation Agreement and has already sent category “A”, “B,” and “C” notifications to the WTO.

Legal System and Judicial Independence

Armenia has a hybrid legal system that includes elements of both civil and common law. Although Armenia is developing an international commercial code, the laws regarding commercial and contractual matters are currently set forth in the civil code. Thus, because Armenia lacks a commercial court, all disputes involving contracts, ownership of property, or other commercial matters are resolved by litigants in courts of general jurisdiction, which handle both civil and criminal cases. Courts that handle civil matters may be overwhelmed by the volume of cases before them and are frequently seen by the public as corrupt. Despite the ability of courts to use the precedential authority of the Court of Cassation and the European Court of Human Rights, many judges presiding over civil matters do not do so, increasing the unpredictability of civil court decisions in the eyes of investors.

Businesses tend to perceive that many Armenian courts suffer from low levels of efficiency, independence, and professionalism, which drives a need to strengthen the judiciary. Very often in proceedings when additional forensic expertise is requested, the court may suspend a case until the forensic opinion is received, a process that can take several months. Businesses have noted that many judges at courts of general jurisdiction may be reluctant to make decisions without getting advice from higher court judges. Thus, the public opinion is that decisions may be influenced by factors other than the law and merits of individual cases. In general, the government honors judgments from both arbitration proceedings and Armenian national courts.

Due to the nature and complexity of commercial and contractual issues and the caseload of judges presiding over civil matters, many matters involving investment or commercial disputes take months or years to work their way through the civil courts. In addition, businesses have complained of the inefficiencies and institutional corruption of the courts. Even though the Armenian constitution provides investors the tools to enforce awards and their property rights, investors claim that there is little predictability in what a court may do.

Laws and Regulations on Foreign Direct Investment

Basic legal provisions covering foreign investment are specified in the 1994 Law on Foreign Investment.  Foreign companies are entitled by law to the same treatment as Armenian companies. A Law on Public-Private Partnership (PPP), adopted in 2019, establishes a framework for the government to attract investment for projects focused on infrastructure. The secondary implementing legislation to clarify key aspects of the PPP framework, including comprehensive criteria for project selection, is being developed.

The Investment Support Center is Armenia’s national authority for investment and export promotion.  It provides information to foreign investors on Armenia’s business climate, investment opportunities, and legislation; supports investor visits; and serves as a liaison for government institutions.  More information is available via the Investment Support Center’s  website .

Competition and Antitrust Laws

SCPEC reviews transactions for competition-related concerns.  Relevant laws, regulations, commission decisions, and more information can be found on SCPEC’s  website .  Concentrations, including mergers, acquisitions of shares or assets, amalgamations, and incorporations, are subject to ex ante control by SCPEC in accordance with the law.  Whenever a concentration gives rise to concerns about harm to competition, including the creation or strengthening of a dominant position, SCPEC can prohibit such a transaction or impose certain remedies.  Armenia’s Law on Protection of Economic Competition has been amended several times in recent years to bring Armenia’s competition framework into alignment with EAEU and CEPA requirements. The law was recently changed to improve SCPEC’s capabilities to investigate anti-competitive behavior, in collaboration with Armenia’s investigative bodies, whereas before SCPEC had to rely primarily on document studies and request information from other state bodies.

Expropriation and Compensation

Under Armenian law, foreign investment cannot be confiscated or expropriated except in extreme cases of natural or state emergency upon obtaining an order from a domestic court. According to the Armenian constitution, equivalent compensation is owed prior to expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Armenia is party to the ICSID Convention (Washington Convention) and Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

Under Article 5 of the Armenian constitution, international treaties ratified by Armenia take precedence over domestic law.

Investor-State Dispute Settlement

According to the Law on Foreign Investment, all disputes that arise between a foreign investor and Armenia must be settled in Armenian courts. A Law on Commercial Arbitration, enacted in 2007, provides a wider range of options for resolving commercial disputes. The U.S.–Armenia BIT provides that in the event of a dispute involving a U.S. investor and the state, the investor may take the case to international arbitration. As of March 2021, two investment disputes brought against Armenia under the U.S.–Armenia BIT were pending with the International Center for Settlement of Investment Disputes.

International Commercial Arbitration and Foreign Courts

Commercial disputes may be brought before an Armenian or any other competent court, as provided by law or in accordance with party agreements. Commercial disputes are heard in courts of general jurisdiction. Specialized administrative courts adjudicate cases brought against state entities. Decisions of general and administrative courts may be appealed first to the Civil Court of Appeal and Administrative Court of Appeal, then to the Civil and Administrative Chamber of the Court of Cassation.

The Law on Arbitration Courts and Arbitration Procedures provides rules governing the settlement of disputes by arbitration. In accordance with the New York Convention and Article 5 of the Armenian constitution, domestic courts must recognize foreign arbitral awards.

Armenia intends to develop an alternative dispute resolution (ADR) mechanism that will include mediation and arbitration. ADR could be used not only in commercial matters, including those involving mobile property and secured transactions, but also in cases involving family and labor disputes. While ADR options are available to those who seek alternatives to litigation, they currently are not widely used or trusted.

Bankruptcy Regulations

According to the Law on Bankruptcy adopted in 2006, creditors and equity and contract holders (including foreign entities) have the right to participate and defend their interests in bankruptcy cases. Armenia decided with the passage of a new Judicial Code in 2018 to adopt a new, specialized bankruptcy court, which began operations in 2019. Creditors have the right to access all materials relevant to cases, submit claims to court, participate in meetings of creditors, and nominate candidates to administer cases. Monetary judgments are usually made in local currency. The Armenian Criminal Code defines penalties for false and deliberate bankruptcy, concealment of property or other assets of the bankrupt party, or other illegal activities during the bankruptcy process. UNCTAD observes that Armenia’s framework for bankruptcy procedures needs improvement, adding that insolvency cases are expensive and almost always result in liquidation. Armenia amended its bankruptcy law in December 2019 to reduce the cost of bankruptcy proceedings. In addition, premiums have been set for bankruptcy managers for submitting financial recovery plans, as well as for the recovery of a bankrupt person, with the aim of raising rates of financial recovery. In 2020, the debt threshold to launch bankruptcy proceedings was raised to grant companies a greater ability to pay off debts rather than having their assets frozen.

According to the World Bank’s 2020 Ease of Doing Business Index, Armenia stands at 95 in the ranking of 190 economies on the ease of resolving insolvency. Resolving insolvency takes 1.9 years on average and costs 11 percent of the debtor’s estate, with the most likely outcome being that the company will be broken up and sold. The average recovery rate is 39.2 cents on the dollar.

Investment Incentives

Armenia offers incentives for exporters (e.g., no export duty, VAT refund on goods and services exported) and foreign investors (e.g. income tax holidays, the ability to carry forward losses indefinitely, VAT deferral, and exemptions from customs duties for investment projects). Starting in 2018, the Armenian government began exempting imports of capital investment-related goods from VAT payments at the border. In 2015, the Armenian government began exempting from customs duties investment-related imports of equipment and raw materials from non-EAEU member countries. VAT and customs duties exemptions are implemented by government decisions made on a case-by-case basis. Also, in accordance with the Law on Foreign Investment, several ad hoc incentives may be negotiated on a case-by-case basis for investments that are targeted at certain sectors of the economy or are of strategic interest. As part of its response to COVID-19, the government launched several economic response and social support measures in 2020, including to subsidize commercial lending, promote investment in agriculture and other industries, and create an investment fund with authority to undertake equity investment alongside private investors.

Foreign Trade Zones/Free Ports/Trade Facilitation

In June 2011, Armenia adopted a Law on Free Economic Zones (FEZ), amended in October 2018, and developed several key regulations to attract foreign investments into FEZs: exemptions from VAT, profit tax, customs duties, and property tax. The Alliance FEZ was opened in August 2013 to focus on high-tech industries, including information and communication technologies, electronics, pharmaceuticals and biotechnology, architecture and engineering, industrial design, and alternative energy. In 2014, the government expanded operations in the Alliance FEZ to include industrial production. In 2015, the Meridian FEZ, focused on jewelry production, watchmaking, and diamond cutting, opened in Yerevan. The Meghri FEZ, located on Armenia’s border with Iran, opened in 2017. A new FEZ, located in Hrazdan, opened in late 2018 and is focused on the high-tech and information technology sectors. Armenia has signaled an interest in developing logistics hubs, including one in Gyumri, to facilitate goods trade.

Performance and Data Localization Requirements

There are no performance requirements for investment in terms of mandating local employment. The processes for obtaining visas, residence, or work permits are straightforward. There are no government-imposed conditions on permission to invest.

Armenia does not follow any policy that would force foreign investors to use domestic content in goods and technology. There are no requirements for foreign information technology providers to turn over source code or provide keys for encryption. There are no requirements to store data within the country.

Real Property

Armenian law protects secured interests in property, both personal and real. Armenian law provides a basic framework for secured lending, collateral, and pledges and provides a mechanism to support modern lending practices and title registration. According to Armenia’s constitution, foreign citizens are prohibited from owning land, though they may take out long-term leases. In the World Bank’s 2020 Ease of Doing Business report, Armenia ranked 13th among 190 economies for the ease of registering property. Lack of clear title to land is generally not an issue in Armenia. The World Bank observes that while all land plots in Armenia are mapped, some may not be formally registered with the body responsible for immovable property registration.

Intellectual Property Rights

Armenia has a strong legislative and regulatory framework to protect intellectual property rights (IPR).  Domestic legislation, including the 2006 Law on Copyright and Related Rights, provides for the protection of copyright with respect to literary, scientific, and artistic works (including computer programs and databases), patents and other rights of invention, industrial design, know-how, trade secrets, trademarks, and service marks.  The Intellectual Property Agency (IPA) in the Ministry of Economy is responsible for granting patents and overseeing other IPR-related matters. The collective management organization ARMAUTHOR manages authors’ economic rights. Trademarks and patents require state registration by the IPA, but copyright does not.  There is no special trade secret law in Armenia, but the protection of trade secrets is covered by Armenia’s Civil Code. Formal registration is straightforward, the database of registered IPR is public, and applications to register IPR are published online for two months for comment by third parties. Armenia’s legislation has been harmonized with the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

In 2005, Armenia created an IPR Enforcement Unit in the Organized Crime Department of the Armenian Police, which acts only based on complaints from right holders and does not exercise ex-officio powers.

Despite the existence of relevant legislation and executive government structures, the concept of IPR remains unrecognized by a large part of the local population. The onus for IPR complaints rests with the offended party.  The police assert that the majority of cases are settled through out-of-court proceedings. While the Armenian government has made some progress on IPR issues, strengthening enforcement mechanisms remains necessary. UNCTAD reports that low awareness and poor monitoring of IPR violations harm the business climate.

A new Law on Copyright has been drafted.  It includes provisions from new international agreements (Marrakesh and Beijing Treaties). A new Law on Patents and Law on Industrial Design have been adopted by the parliament. The new Law on Patents strengthens the requirement for substantive examination before rights registration and introduces the concept of a short-term patent. The new Law on Industrial Design includes some procedural changes, including publishing applications for industrial designs and objects during the state registration process.

Armenia is not included in USTR’s Special 301 Report or Notorious Markets List.

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

Capital Markets and Portfolio Investment

The banking system in Armenia is sound and well-regulated, but the financial sector is not highly developed, according to investors. Banking sector assets account for over 80 percent of total financial sector assets. Financial intermediation tends to be poor. Nearly all banks require collateral located in Armenia, and large collateral requirements often prevent potential borrowers from entering the market. U.S. businesses have noted that this creates a significant barrier for small- and medium-sized enterprises and start-up companies.

The Armenian government welcomes foreign portfolio investment and there is a supporting system and legal framework in place. Armenia’s securities market is not well developed and has only minimal trading activity through the Armenia Securities Exchange, though efforts to grow capital markets are underway. Liquidity sufficient for the entry and exit of sizeable positions is often difficult to achieve due to the small size of the Armenian market. The Armenian government hopes that as a result of pension reforms in 2014, which brought two international asset managers to Armenia, capital markets will play a more prominent role in the country’s financial sector. Armenia adheres to its IMF Article VIII commitments by refraining from restrictions on payments and transfers for current international transactions. Credit is allocated on market terms and foreign investors are able to access credit locally.

Money and Banking System

Since 2020, the banking sector has withstood the twin shocks created by COVID-19 and the Nagorno-Karabakh conflict. Indicators of financial soundness, including capital adequacy and non-performing loan ratios, have remained broadly strong, though with some deterioration more recently. The sector is well capitalized and liquid. Non-performing loans have ticked upward slightly from rates of around five percent of all loans. Dollarization, historically high for deposits and lending, has been falling in recent years. There are 17 commercial banks in Armenia and 13 universal credit organizations. There are extensive branch networks throughout Armenia. At the end of 2020, the top three Armenian banks by estimated total assets were Ameriabank (909 billion Armenian drams (AMD), or $1.7 billion), Armbusinessbank (889 billion AMD, or $1.7 billion), and Ardshinbank (880 billion AMD, or $1.7 billion). The minimum capital requirement for banks is 30 billion AMD (around $58 million). There are no restrictions on foreigners to open bank accounts. Residents and foreign nationals can hold foreign currency accounts and import, export, and exchange foreign currency relatively freely in accordance with the Law on Currency Regulation and Currency Control. Foreign banks may establish a subsidiary, branch, or representative office, and subsidiaries of foreign banks are allowed to provide the same types of services as domestically-owned banks.

The Central Bank of Armenia (CBA) is responsible for the regulation and supervision of the financial sector. The authority and responsibilities of the CBA are established under the Law on the Central Bank of Armenia. Numerous other articles of legislation and supporting regulations provide for financial sector oversight and supervision.

Foreign Exchange and Remittances

Foreign Exchange

Armenia has no limitations on the conversion and transfer of money or the repatriation of capital and earnings, including branch profits, dividends, interest, royalties, or management or technical service fees. Most banks can transfer funds internationally within two to four days. Armenia maintains the Armenian dram as a freely convertible currency under a managed float. The AMD/USD exchange rate has been generally stable in recent years, but the dram experienced a notable depreciation against the dollar following the fall 2020 intensive fighting in the Nagorno-Karabakh conflict. The depreciation was stemmed in part by sales of foreign exchange reserves by the CBA. The CBA maintains levels of reserves that are broadly seen as adequate.

According to the Law on Currency Regulation and Currency Control, prices for all goods and services, property, and wages must be set in AMD. There are exceptions in the law, however, for transactions between resident and non-resident businesses and for certain transactions involving goods traded at world market prices. The law requires that interest on foreign currency accounts be calculated in that currency, but paid in AMD.

Remittance Policies

Armenia imposes no limitations on the conversion and transfer of money or the repatriation of capital and earnings, including branch profits, dividends, interest, royalties, lease payments, private foreign debt, or management or technical service fees.

Sovereign Wealth Funds

Armenia does not have a sovereign wealth fund.

Most of Armenia’s state-owned enterprises (SOEs) were privatized in the 1990s and early 2000s, but SOEs are still active in a number of sectors.  SOEs in Armenia operate as state-owned closed joint stock companies that are managed by the Department of State Property Management and state non-commercial organizations.  There are no laws or rules that ensure a primary or leading role for SOEs in any specific industry. Armenia is party to the WTO Government Procurement Agreement, and SOEs are covered under that agreement.  SOEs in Armenia are subject to the same tax regime as their private competitors, and private enterprises in Armenia can compete with SOEs under the same terms and conditions. The Department of State Property Management maintains a public list of state-owned closed joint stock companies on its  website .

Privatization Program

Most of Armenia’s state owned enterprises were privatized in the 1990s and early 2000s.  Many of the privatization processes for Armenia’s large assets were reported to be neither competitive nor transparent, and political considerations in some instances prevailed over fair tender processes.  The most recent law on privatization, the fifth, is the Law on the 2017–2020 Program for State Property Privatization, which lists 47 entities for privatization. The Department of State Property Management oversees the management of the state’s shares in entities slated for privatization. Details of the privatization program are available on the Department of State Property Management  website .

There is not a widespread understanding of responsible business conduct (RBC) in Armenia, but several larger companies with foreign ownership or management are introducing the concept. Initiatives, where they do exist, are primarily limited to corporate social responsibility efforts. However, RBC programs that do exist are viewed favorably. Some civil society groups and business associations are playing a more active role to promote RBC and develop awareness.

Major pillars of corporate governance in Armenia include the Law on Joint Stock Companies, the Law on Banks and Banking Activity, the Law on Securities Market, and a Corporate Governance Code. International observers note inconsistencies in this legislation and generally rate corporate governance practices as weak to fair. Specific areas for potential improvement cited by the local business community include improving internal and external auditing for firms, enhancing the powers of independent directors on company boards, and boosting shareholders’ rights. Armenia has outlined commitments to corporate governance reforms, including with regard to mandatory audit, accounting, and financial reporting, within the context of an ongoing Stand-By Arrangement with the International Monetary Fund.

Armenia joined the Extractive Industries Transparency Initiative (EITI) in March 2017 as a candidate country. The first EITI national report for Armenia was published in January 2019. As part of its EITI membership aspirations, the government in March 2018 adopted a roadmap to disclose beneficial owners in the metal ore mining industry. Relevant implementing legislation, including for beneficial ownership disclosure, was adopted in 2019.

Armenia is not a signatory to the Montreux Document on Private Military and Security Companies, and no Armenian party is a member of the International Code of Conduct for Private Security Providers’ Association.

Domestic laws and regulations related to labor, employment rights, consumer protection, and environmental protection are not always enforced effectively. These laws and regulations cannot be waived to attract foreign investment.

Additional Resources

Department of State

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

Department of Labor

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

Despite the challenges facing Armenia due to the dual shocks of COVID-19 and the Nagorno-Karabakh conflict, the Armenian government’s commitment to eradicating corruption continues. Policy action and systemic change remain strong, and the government has pressed forward with legislative actions to establish investigative and judicial anti-corruption bodies. The government’s anti-corruption agenda is outlined in a 2019–2022 strategy and implementation plan. These documents establish a new anti-corruption institutional framework with separate entities tasked with preventive and investigative functions, set out specific measures for strengthening these functions, and prioritize strategic communication and public education to give citizens ownership of anti-corruption reforms.

The government took concrete steps in 2020 to establish and develop four key anti-corruption institutions: 1) the Corruption Prevention Commission (CPC), which conducts integrity checks on judges and other key justice sector personnel; 2) a civil asset forfeiture department within the Prosecutor General’s Office (PGO); 3) an anti-corruption court; and 4) a new anti-corruption investigative body. The CPC and PGO asset forfeiture department are already established, while the anti-corruption court and investigative body are expected to launch before the end of 2021. International experts are expected to play a role in the selection process for anti-corruption court judges and the head of the new anti-corruption investigative agency, which will serve to improve the legitimacy of the court’s judges and the investigative agency’s leadership.

The government has increased corruption investigations against mid- and high-level government officials since the 2018 revolution. Investigation targets include those appointed by the government that took power following the revolution.  Numerous high-ranking officials have stated publicly that corruption within their respective institutions will no longer be tolerated. Though some report that the government has mainly targeted ex-government officials in corruption investigations, there is no indication that Armenia’s anti-corruption laws are being applied by the post-revolutionary government in a discriminatory manner.  Armenia’s anti-corruption laws extend to all Armenian citizens.

Corruption remains a significant obstacle to U.S. investment in Armenia, particularly as it relates to critical areas such as the justice system and concerns related to the rule of law, enforcement of existing legislation and regulations, and equal treatment.  Investors claim that the health, education, military, corrections, and law enforcement sectors lack transparency in procurement and have in the past used selective enforcement to elicit bribes. Judges presiding over civil matters are still widely perceived by the public to be corrupt and under the influence of former authorities.  Anecdotal allegations of corruption or unethical behavior by sitting officials and associates, while less common than in the past, continue to arise and have dampened business sentiment. Although bribery is illegal in Armenia, the government does not actively encourage private companies to establish internal codes of conduct. Several multinational companies, select local companies, and foreign and local companies working with international financial institutions have implemented corporate governance mechanisms to tackle corruption internally.  However, such corporate governance principles are not widely implemented among local companies.

According to Transparency International’s 2020 Corruption Perceptions Index, Armenia made the second-best improvement in the world and received a score of 49 out of 100, ranking it 60th among 180 countries. This reflects an improvement by 17 places over 2019.

Armenia’s ability to counter, deter, and prosecute corruption has historically been hindered by the lack of robust enforcement of official disclosure laws meant to prevent corrupt officials from entering and retaining positions of authority and influence.  The objective and systematic scrutiny of declarations by government officials had been lacking due to dysfunction within the Commission on Ethics of High-Ranking Officials, but is gradually improving with the establishment of the CPC in November 2019. The CPC has inherited responsibility for scrutinizing officials’ declarations and is scheduled to launch a fully automated system for declarations of assets, income, and conflicts of interest. The CPC has also conducted integrity checks and issued opinions on nominees to public positions. According to international evaluations, Armenian authorities have limited capacities to investigate money laundering and bring such cases to prosecution.

Various laws prohibit the participation of civil and municipal servants, as well as local government elected officials such as mayors and councilors, in commercial activities.  However, powerful officials at the national, district, and local levels often acquire direct, partial, or indirect control over private firms. Such control is often exercised through a hidden partner or majority ownership of fully private parent companies. This involvement can occur through close relatives and friends. According to foreign investors, these practices reinforce protectionism, hinder competition, and undermine the image of the government as a facilitator of private sector growth.  Because of the historically strong interconnectedness of the political and economic spheres, Armenia has often struggled to introduce legislation to encourage strict ethical codes of conduct and the prevention of bribery in business transactions. In 2016, Armenia adopted legislation on criminal penalties for illicit enrichment and noncompliance or fraud in filing declarations.

Armenia is a member of the UN Convention against Corruption.  While not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, Armenia is a member of the OECD Anti-Corruption Network for Eastern Europe and Central Asia and has signed the Istanbul Action Plan.  A monitoring report released by the OECD in 2018 cited Armenia’s lack of enforcement of anti-corruption laws, together with the continued presence of oligopolistic interests in the economy, as points of serious concern. The report contains a series of recommendations, including to take bold measures to ensure judicial and prosecutorial independence and integrity, introduce corporate liability for corruption offenses, investigate and prosecute high profile and complex corruption cases, and increase transparency and strengthen monitoring in public procurement.  Armenia is also a member of the global Open Government Partnership initiative.

No specific law exists to protect NGOs dealing with anti-corruption investigations.

Resources to Report Corruption

For investigating corruption:Investigation Department of Corruption, Organized and Official CrimesSpecial Investigation Service of Armenia13A Vagharsh Vagharshyan StreetYerevan, Armenia+374 11 900 002 press@investigatory.am 

For prosecuting corruption:Artur ChakhoyanHead of Department for Combating Corruption and Economic CrimesRA Prosecutor General’s Office5 V. Sargsyan StreetYerevan, Armenia+374 10 511 655 info@prosecutor.am

For financial and asset declarations of high-level officials:Haykuhi HarutyunyanChairpersonCorruption Prevention Commission24 Baghramyan StreetYerevan, Armenia hhcpcarmenia@gmail.com 

Watchdog organization:Sona Ayvazyan
Executive Director
Transparency International Anti-Corruption Center
12 Saryan Street
Yerevan, Armenia
+374 10 569 589
sona@transparency.am 

Armenia has a history of political demonstrations, some of which have turned into violent confrontations between the police and protesters. The last major violent protest occurred in November 2020 following the release of a tripartite ceasefire statement by Armenia, Azerbaijan, and Russia, which brought an end to the fall 2020 intensive fighting in the Nagorno-Karabakh conflict. Individuals and groups displeased with the announcement stormed government buildings and destroyed property. Protestors assaulted the speaker of parliament in the streets of Yerevan and broke into the prime minister’s residence. Since the release of the tripartite statement, groups opposed to the government have organized regular marches and rallies in Yerevan that have remained largely peaceful and caused minimal disruption to ordinary business. Pro-government groups have also organized peaceful rallies, although less frequently. Throughout Armenia, protestors use road blockades as a common tactic to register discontent, most often with the government over community-level issues. The disruption created by such road blockades is usually minimal. Protests have not resulted in any damage to projects of installations of international businesses. It is unlikely that civil disturbances, should they occur, would be directed against U.S. businesses or the U.S. community.

Armenia’s human capital is one of its strongest resources. The labor force is generally well educated, particularly in the science, technology, engineering, and mathematics fields. Almost 100 percent of Armenia’s population is literate. According to official information, enrollment in secondary school is over 90 percent, and enrollment in senior school (essentially equivalent to American high school) is about 85 percent. Despite this, official statistics indicate a high rate of unemployment, at around 20 percent. Unemployment is particularly pronounced among women and youth, and significant underemployment is also a problem.

Considerable foreign investment in Armenia has occurred in the high-tech sector. High-tech companies have established branches or subsidiaries in Armenia to take advantage of the country’s pool of qualified specialists in electrical and computer engineering, optical engineering, and software design. There is a shortage of workers with vocational training. About 20 percent of the non-agricultural workforce is employed in the informal economy, primarily in the services sector. Armenian law protects the rights of workers to form and to join independent unions, with exceptions for personnel of the armed forces and law enforcement agencies. The law also provides for the right to strike, with the same exceptions, and permits collective bargaining. The law stipulates that workers’ rights cannot be restricted because of membership in a union. It also differentiates between layoffs and firing with severance. According to some reports, labor organizations remain weak because of employer resistance, high unemployment, and unfavorable economic conditions; collective bargaining is not common in Armenia. Experts observe that the right to strike, although enshrined in the constitution, is difficult to realize due to mediation and voting requirements. However, since the 2018 change of government, there have been consistent reports of grassroots movements to create unions in various spheres, including for doctors, teachers, and academics. Still, traditional labor unions are generally inactive with the exception of those connected with the mining and chemical industries. Labor laws cannot be waived to retain or attract investment.

The current Labor Code is considered to be largely consistent with international standards. The law sets a standard 40-hour workweek, with 20 days of mandatory annual paid leave. However, there are consistent reports that many private sector employees, particularly in the service sector, are unable to obtain paid leave and are required to work more than eight hours a day without additional compensation. The treatment of labor in FEZs is no different than elsewhere in the country. Employers are generally able to adjust employment in light of fluctuating market conditions. Severance in general does not exceed 60 working days. Benefits for workers laid off for economic reasons are mostly limited to receiving qualification trainings and job search assistance.

Individual labor disputes can usually be resolved through courts; however, the courts are often overburdened, causing significant delays. Collective labor disputes should be resolved through collective bargaining.

Since 2019, Armenia’s Health and Labor Inspection Body (HLIB) has gradually begun to exercise more robust enforcement of labor legislation and fulfill its oversight function, with its full mandate scheduled to come into force in July 2021.  Throughout 2020, the government adopted inspection checklists and risk assessment methodologies to enable HLIB to carry out inspections.  HLIB also continued to add new inspectors throughout the year and carried out 27 inspections in the mining sector.

Amendments to the Labor Code that entered into force in 2015 clarified the procedures for making changes in labor contracts and further specified the provisions required in labor contracts, notably those relating to probationary periods, vacation, and wage calculations.

The current legal minimum wage is AMD 68,000 (approximately $130) per month. Most companies pay an unofficial extra-month bonus for the New Year’s holiday. Wages in the public sector are often significantly lower than those in the private sector. 12. U.S. International Development Finance Corporation (DFC), and Other Investment Insurance or Development Finance Programs

* Source for Host Country Data: Statistical Committee of the Republic of Armenia

Source: IMF Consolidated Direct Investment Survey (CDIS) (2019) $351 million of inward direct investment is not specified by origin in the CDIS. $77 million of outward direct investment is not specified by destination in the CDIS.

$351 million of inward direct investment is not specified by origin in the CDIS. $77 million of outward direct investment is not specified by destination in the CDIS.

Table 4: Sources of Portfolio Investment
Data not available.

Economic & Commercial Officer
U.S. Embassy Yerevan
American Avenue 1
Yerevan, Armenia
+374 10 494 200
YerevanBusiness@state.gov 

Policies Towards Foreign Direct Investment

Ecuador is open to FDI in most sectors. The 2008 Constitution established that the state reserves the right to manage strategic sectors through state-owned or -controlled companies. The sectors identified are energy, telecommunications, non-renewable natural resources, transportation, hydrocarbon refining, water, biodiversity, and genetic patrimony (i.e. flora, fauna and ancestral knowledge). Although in recent years Ecuador took steps to attract FDI, its overall investment climate remains challenging as economic, commercial, and investment policies are subject to frequent change. From January to September 2020 (latest information available), FDI flows to Ecuador amounted to USD 897 million, 45 percent more than 2019 levels (USD 619 million) but still 36 percent lower than 2018 levels (USD 1.4 billion). FDI continues to be lower compared to other countries in the region.

There are no laws or practices that discriminate against foreign investors, but the legal complexity resulting from the inconsistent application and interpretation of existing laws and regulations increases the risks and costs of doing business in Ecuador. Under the prior Correa administration, disputes involving U.S. companies were politicized, especially in sensitive areas such as the energy sector. This resulted in several high-profile international investment dispute cases, with companies awarded damages in international arbitral rulings against Ecuador in the last few years. In addition, several cases are pending final arbitral rulings.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities are allowed to establish and own business enterprises and engage in all forms of remunerative activity, with limitations in strategic sectors as enumerated in the Constitution. There are no investment screening mechanisms for inbound investment, and the Ecuadorian government actively seeks international investors. One hundred percent foreign equity ownership is allowed.

For license and franchise transactions, no limits exist on royalties that may be remitted, although financial outflows are subject to a five percent capital exit tax. All license and franchise agreements must be registered with the National Service for Intellectual Property Rights (SENADI). In addition to registering with the Superintendence of Companies, Securities, and Insurance, foreign investors must register investments with Ecuador’s Central Bank for statistical purposes.

Other Investment Policy Reviews

Ecuador conducted a trade policy review with the World Trade Organization in March 2019; information can be found at https://www.wto.org/english/tratop_e/tpr_e/tp483_e.htm.

In the past three years, Ecuador has not conducted an investment policy review with the Organization for Economic Cooperation and Development (OECD) or the United Nations Conference on Trade and Development (UNCTAD).

Business Facilitation

In 2018, Ecuador folded ProEcuador (https://www.proecuador.gob.ec/), the entity that is responsible for promoting economic development through exports, imports, and investment in Ecuador, into the Ministry of Production, Foreign Trade, Investments and Fisheries (MPCIEP). ProEcuador is now a Vice Ministry within MPCIEP and has 27 offices in 23 countries, including three in the United States. Ecuador is ranked 129th out of 190 countries in the World Bank’s Ease of Doing Business report for 2020, with particularly low rankings for Starting a Business (177), Resolving Insolvency (160), and Paying Taxes (147).

A newly created company will at a minimum be required to register with the Superintendence of Companies, Securities, and Insurance (http://www.supercias.gob.ec/), the municipal government, the Internal Revenue Service, and the Social Security Institute. The registry with the Superintendence of Companies is a completely online process as of April 2019. The incorporation of companies in Ecuador grew almost eight percent in 2020 (10,800 new companies), propelled by the introduction of the simplified joint-stock company (SAS). The SAS came into effect in May 2020 following the enactment of the Organic Law on Entrepreneurship and Innovation.

Outward Investment

Ecuador does not restrict domestic investors from investing abroad. ProEcuador (see above) is responsible for promotion of outward investment from Ecuador. Foreign investments are subject to a currency exit tax of five percent.

In February 2017, voters passed a government-backed referendum prohibiting elected officials and public servants from having financial dealings in tax havens and other suspect jurisdictions. The list includes several U.S. states and territories that do not have state income taxes. The prohibition entered into force in September 2017.

The United States and Ecuador signed the Protocol on Trade Rules and Transparency in December 2020 under the Ecuador-U.S. Trade and Investment Council Agreement (TIC). The agreement updates the TIC with new annexes in four areas: Trade Facilitation and Customs Administration, Good Regulatory Practices, Anti-Corruption, and SMEs. The Protocol awaits legislative ratification (as of April 2021).

Transparency of the Regulatory System

While there is a focus within the Moreno administration to improve transparency and government accountability, progress has been slow. Economic, commercial, and investment policies are subject to frequent changes and can increase the risks and costs of doing business in Ecuador. National and municipal level regulations can conflict with each other. Regulatory agencies are not required to publish proposed regulations before enactment, and rulemaking bodies are not required to solicit public comments on proposed regulations, although there has been some movement toward public consultative processes. Government ministries generally consult with relevant national actors when drafting regulations, but not always and not broadly.

The Government of Ecuador publishes regulatory actions in the Official Registry and posts them online at https://www.registroficial.gob.ec/ . Publicly listed companies generally adhere to International Financial Reporting Standards (IFRS). While there are some transparency enforcement mechanisms within the government, they tend to be weak and rarely enforced.

There are no identified informal regulatory processes led by private sector associations or nongovernmental organizations.

International Regulatory Considerations

Ecuador is a member of the Andean Community of Nations (CAN) along with Bolivia, Colombia, and Peru. Ecuador is an associate member of the Southern Cone Common Market (MERCOSUR). Ecuador is a member of the World Trade Organization (WTO) and notifies draft regulations to the WTO Technical Barriers to Trade (TBT) Committee. Ecuador ratified the WTO Trade Facilitation Agreement on October 16, 2018.

Legal System and Judicial Independence

Ecuador has a civil codified legal system. Systemic weakness in the judicial system and its susceptibility to political and economic pressures constitute challenges faced by U.S. companies investing in Ecuador. While Ecuador updated its Commercial Code in May 2019, enforcement of contract rights, equal treatment under the law, intellectual property protections, and unstable regulatory regimes continue to be concerns for foreign investors.

Laws and Regulations on Foreign Direct Investment

Ecuador does not have laws specifically on FDI, but several have effects on overall investment. The Organic Law for Production Incentives and Tax Fraud Prevention, passed in December 2014, includes provisions to improve tax stability and lower the income tax rate in the mining sector. The Organic Law of Incentives for Public-Private Associations and Foreign Investment from 2015 includes provisions to improve legal stability, reduce red tape, and exempt public private partnerships from paying income and capital exit taxes under certain conditions. The Productive Development Law of 2018 enumerates tax incentives for new investments and investments in rural or border areas. ProEcuador’s website https://www.proecuador.gob.ec/  provides a guide for investors in English and Spanish and highlights the procedures to register a company, types of incentives for investors, and relevant taxes related to investing in Ecuador.

Competition and Antitrust Laws

The Superintendence of Control of Market Power reviews transactions for competition-related concerns. Ecuador’s 2011 Organic Law for Regulation and Control of Market Power includes mechanisms to control and sanction market power abuses, restrictive market practices, market concentration, and unfair competition. The Superintendence of Control of Market Power can fine up to 12 percent of gross revenue companies found to be in violation of the law.

Expropriation and Compensation

The Constitution establishes that the state is responsible for managing the use and access to land, while recognizing and guaranteeing the right to private property. It also provides for the redistribution of land if it has not been in active use for more than two years.

The Article 101 of the 2015 Telecommunications Law grants permission for the occupation or expropriation of private property for telecommunication network installation provided there are no other economically viable alternatives. Service providers must assume costs associated with the property’s expropriation or occupation.

Dispute Settlement

ICSID Convention and New York Convention

Ecuador withdrew from the International Centre for the Settlement of Investment Disputes (ICSID Convention) in 2010. Ecuador is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). The 2018 Productive Development Law clarifies the permissibility of international investor-state arbitration under the 2008 constitution and includes provisions permitting arbitration at venues within Latin America.

Investor-State Dispute Settlement

Ecuador’s National Assembly voted on May 3, 2017 to terminate 12 of its bilateral investment treaties, including its agreement with the United States. The Government of Ecuador notified the U.S. government of its withdrawal from the BIT on May 18, 2017, with the effective date of May 18, 2018. The treaty further specifies that all U.S. investments in place at the date of termination enjoy the protections of the treaty for the subsequent 10 years. There have been numerous claims against Ecuador under the BIT that have gone to international arbitration. There are two active cases awaiting a final decision.

International Commercial Arbitration and Foreign Courts

Several U.S. companies operating in Ecuador, most notably in the petroleum sector, have filed for international arbitration due to investment claims. The Government of Ecuador in the past treated these disputes as a political issue, speaking negatively about investors involved in these cases. Payment of arbitration awards generally takes longer than a year, although the Government of Ecuador has paid all final awards. Ecuador’s 2008 Constitution limited investor-state arbitration to regional arbitration entities and was the primary driver of the 2017 termination of BITs.

Bankruptcy Regulations

Ecuador is ranked 160 out of 190 in the category of Ease of Resolving Insolvency in the World Bank’s 2020 Ease of Doing Business Report. With the goal of protecting consumers and preventing a real estate bubble, the National Assembly approved in June 2012 a law that allows homeowners to default on their first home and car loan without penalty if they forfeit the asset. The provisions do not apply to homes with a market value of more than 500 times the basic monthly salary (currently USD 200,000) or vehicles worth more than 100 times the basic monthly salary (currently USD 40,000).

In cases of foreclosure, the average time for banks to collect on debts is 5.3 years, usually taking 4.5 years for courts to approve the initiation of foreclosures. After the appointment and acceptance of an auctioneer, it takes about six months for the auction to take place. World Bank’s Doing Business Report estimates that foreclosure proceedings result in costs equal to about 18 percent of the value of the estate in question, and a recovery rate of 18.3 cents on the dollar.

Investment Incentives

In August 2018, the National Assembly approved the Productive Development Law that provides income tax exemptions and VAT exemptions to attract investments, good for 12 years in all areas except the cities of Quito and Guayaquil, where it is 8 years, and border regions, where it is 20 years. In December 2015, Ecuador’s National Assembly approved a Public-Private Partnership law intended to attract investment. The law offers incentives, including the reduction of the income tax, value added tax, and capital exit tax, for investors in certain projects. It designates Latin American arbitration bodies as the dispute resolution mechanism. The law came into effect upon publication in the Official Registry on December 18, 2015. The Organic Law of Production Incentives and Tax Fraud Prevention, which took effect on December 30, 2014, provides tax incentives related to depreciation calculations and income tax rates, which could benefit some foreign investors. The Ecuadorian government is moving toward a Public-Private Partnership model to attract investments particularly in the energy and transportation sectors but does not yet offer sovereign guarantees or joint finance on those projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

The 2010 Production Code authorized the creation of Special Economic Development Zones (ZEDEs) that are subject to reduced taxes and tariffs. The government considers the extent to which projects promote technology transfer, innovation, and industrial diversification when granting ZEDE status. Foreign-owned firms have the same investment opportunities as national firms.

Performance and Data Localization Requirements

Nationally the government does not mandate local employment. However, the Organic Law of the Amazon, approved by the National Assembly on May 21, 2018, mandates that any company, national or foreign, operating within the area covered by the law (the Amazon Basin) must hire at least 70 percent of their staff locally, unless they cannot find qualified labor from that area. The 2015 Organic Law for the Special Regime of the Galapagos (LOREG) and its regulations enacted in April 2017 include the mandatory hiring of local residents. The law stipulates non-residents can be hired only if companies demonstrate there are no local candidates with the required skill set.

There are no requirements for foreign IT providers to turn over source code and/or provide access to encryption. Companies can currently transmit data freely into and out of Ecuador, and there are no requirements to store data within the country. The National Assembly is considering a draft data protection bill that may include high fines for data protection infractions, prior consent for cross-border data transfer, and parental consent requirements.

On October 11, 2016, Ecuador’s National Assembly passed the Code of the Social Economy of Knowledge, Creativity, and Innovation, covering a wide range of intellectual property matters. Article 148 of the Code establishes that agencies must give preference to open-source software with content developed in Ecuador when procuring software for government use. Executive Decree 1073 of June 2020 mandated an order of preference when procuring software for the government: 1) Open-Source; 2) Ecuadorian-Developed; 3) Software with Some Ecuadorian Content; and 4) Internationally-Developed.

Visa and residency requirements are relatively relaxed and do not inhibit foreign investment.

Real Property

Ecuador ranks 73rd out of 190 in the 2019 World Bank’s Doing Business Report’s category for Ease of Registering Property. Foreign citizens are allowed to own land. Mortgages are available and the recording system is generally reliable.

Intellectual Property Rights

Enforcement against intellectual property infringement remains a problem in Ecuador.

In April 2016, the United States Trade Representative (USTR) moved Ecuador from Priority Watch List to Watch List in its annual Special 301 Report on intellectual property, and Ecuador has remained on the Watch List since then. In December 2020, SENADI issued implementing regulations for the Code of Knowledge, Creativity, and Innovation Social Economy (Ingenuity Code) – the legislation that covers intellectual property rights. Nonetheless, SENADI has limited enforcement capacity and remains hampered by a lack of funding and personnel due to budget cuts. The Ingenuity Code itself also requires reform to address several gaps limiting effective IP enforcement.

Piracy of computer software and counterfeit activity in brand name apparel is widespread, and enforcement is weak. Pirated CDs and DVDs are readily available on many streets and in shopping malls, and copyright enforcement remains a significant problem. The Bahia Market in Guayaquil is mentioned in USTR’s 2020 Review of Notorious Markets for Piracy and Counterfeiting. A lack of ex-officio authority for the Ecuadorian Customs Service limits its scope of action to seize IPR infringing products, and there have been few enforcement actions to protect IPR. SENADI was established in January 1999 to handle patent, trademark, and copyright registrations. SENADI reports information on its activities on its website at http://www.propiedadintelectual.gob.ec/ .

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

Capital Markets and Portfolio Investment

The 2014 Law to Strengthen and Optimize Business Partnerships and Stock Markets created the Securities Market Regulation Board to oversee the stock markets. Investment options on the Quito and Guayaquil stock exchanges are very limited. Sufficient liquidity to enter and exit sizeable positions does not exist in the local markets. The five percent currency exit tax also inhibits free flow of financial resources into the product and factor markets. Foreigners are able to access credit on the local market, but interest rates are high and the number of credit instruments is limited.

Money and Banking System

Ecuador is a dollarized economy, and its banking sector is healthy. According to the Ecuadorian Central Bank’s Access to the Financial System Report, approximately 59 percent of the adult (over 15 years old) population (6.9 million people) has access to a bank account. Ecuador’s banks hold in total USD 47.9 billion in assets, with the largest banks being Banco Pichincha with about USD 12.2 billion in assets, Banco del Pacifico with about USD 6.9 billion, Banco de Guayaquil with about USD 5.7 billion, and Produbanco with about USD 5.4 billion. The Banking Association (ASOBANCA) estimates 2.7 percent of loans are non-performing. Foreigners require residency to open checking accounts in Ecuador.

Ecuador’s Superintendence of Banks regulates the financial sector. Between 2012 and 2013, the financial sector was the target of numerous new restrictions. By 2012, most banks had sold off their brokerage firms, mutual funds, and insurance companies to comply with Constitutional changes following a May 2010 referendum. The amendment to Article 312 of the Constitution required banks and their senior managers and shareholders with more than six percent equity in financial entities to divest entirely from any interest in all non-financial companies by July 2012. These provisions were incorporated into the Anti-Monopoly Law passed in September 2011.

The Organic Monetary and Financial Code, published in the Official Registry September 12, 2014, created a five-person Monetary and Financial Policy and Regulation Board of presidential appointees to regulate the banking sector. The law gives the Monetary and Financial Policy and Regulation Board the ability to prioritize certain sectors for lending from private banks. The Code also established that finance companies had to become banks, merge, or close their operations by 2017. Of the 10 finance companies in Ecuador, two became banks, six closed their operations or are in the process of closing, and two were absorbed by other financial institutions. There are 24 private banks in Ecuador as of December 2020.

Electronic currency appeared in 2014 with the approval of the Organic Monetary and Financial Code, which established the exclusive management of the system by Ecuador’s Central Bank. In 2017, with the approval of the Law for the Reactivation of the Economy, Strengthening of Dollarization and Modernization of Financial Management, electronic currency management was transferred to private banks. The Central Bank issued Regulation 29 in July 2012 requiring all financial transfers (inflows and outflows) to be channeled through the Central Bank’s accounts. In principle, the regulation increases monetary authorities’ oversight and prevents banks from netting their inflows and outflows to avoid paying the five percent currency exit tax.

Foreign Exchange and Remittances

Foreign Exchange

Ecuador adopted the U.S. dollar as the official currency in 2000. Foreign investors may remit 100 percent of net profits and capital, subject to a five percent currency exit tax. There are no restrictions placed on foreign investors in transferring or repatriating funds associated with an investment.

Remittance Policies

Resolution 107-2015-F from Ecuador’s Monetary and Finance Board issued in July 2015 exempted some payments to foreign lenders from the capital exit tax. Among other requirements, the duration of the loan must be more than 360 days, the loan must be registered with the Central Bank, and the resources must be destined for specific purposes, such as to fund small businesses or social housing.

The Financial Action Task Force (FATF) announced October 23, 2015 that it had removed Ecuador from the list of countries with strategic deficiencies in anti-money laundering and countering the financing of terrorism (AML/CFT) regimes. Ecuador will undergo its next FATF mutual evaluation in 2021.

Sovereign Wealth Funds

The Government of Ecuador does not maintain a Sovereign Wealth Fund (SWF). Approved in July 2020, Ecuador’s Public Finance Law (COPLAFIP) established a Fiscal Stabilization Fund to invest excess revenues from extractive industries and hedge against oil and metal price fluctuations.

Article 66 of the 2008 Constitution guarantees the right to pursue economic activities in a manner that is socially and environmentally responsible. NGOs such as the Institute of Corporate Social Responsibility and the Ecuadorian Consortium for Social Responsibility promote responsible business conduct. Many Ecuadorian companies have programs to further responsible business conduct within their organizations. The Energy Ministry announced Ecuador’s adherence to the Extractive Industries Transparency Initiative (EITI) in October 2020 and set up a multi-stakeholder group to develop an EITI work plan.

Ecuadorian law prohibits all forms of forced or compulsory labor, including all forms of labor exploitation and child labor. Article 42 of the labor code establishes that all companies engaged in global or domestic supply chains are required by law to pay minimum wage, ensure eight-hour workdays, and pay into social security. The Ministry of Labor’s Directorate for Control and Inspections is the authority that enforces the law. Ecuador currently has four products included on the Department of Labor’s Bureau of International Labor Affairs list of goods which it has reason to believe are produced by child labor or forced labor in violation of international standards, as required under the Trafficking Victims Protection Reauthorization Act (TVPRA) of 2005. These include the exploitation of child labor in the production of bananas, bricks, flowers, and gold.

Ecuador’s flower production consortium, in coordination with the International Labor Organization and the Ministry of Labor (MoL), undertook a series of efforts to eliminate child labor from flower farms in 2020. The MoL reported that labor inspections of large flower farms in 2020 in Pichincha province did not find instances of child labor. This positive outcome is largely because these farms are part of the Business Network for a Free Child Labor Ecuador and are committed to the elimination of child labor. In contrast, Ecuadorian media in 2020 covered child labor violations at abaca fiber (Manila hemp) plantations run by a Japanese subsidiary company. According to media reports, the Ombudsman’s office and MoL carried out inspections from 2017 to 2020 at the company’s 32 plantations and fined the company over $150,000 including for child labor violations. The MoL said in a 2019 report that it had found child labor, inhumane working conditions, labor risks, and work accidents at the company plantations.

Additional Resources 

Department of State

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

Department of Labor

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

Corruption is a serious problem in Ecuador, and one that the Moreno administration is confronting. Numerous cases of corruption have recently been tried, resulting in convictions of high-level officials, including former President Correa, former Vice President Jorge Glas, and former Vice President Maria Alejandra Vicuña, among others. U.S. companies have cited corruption as an obstacle to investment, with concerns related specifically to non-transparent public tenders, dispute resolution, and payment of arbitration awards.

Ecuadorian law provides criminal penalties for corruption by public officials, but the government has not implemented the law effectively, and officials have engaged in corrupt practices. Ecuador ranked 92 out of 180 countries surveyed for Transparency International’s 2020 Perceptions of Corruption Index and received a score of 39 out of 100. High-profile cases of alleged official corruption involving an Equadorian state-owned petroleum company and a Brazilian construction firm illustrate the significant challenges that confront Ecuador with regards to corruption. The Ecuadorian National Assembly approved anti-corruption legislation in December 2020. The legislation, which reforms the Comprehensive Organic Penal Code, creates new criminal acts including circumvention of public procurement procedures, acts of corruption in the private sector, and obstruction of justice. It also includes 11 provisions reforming the laws governing the public procurement system and the Comptroller General’s Office.

Illicit payments for official favors and theft of public funds reportedly take place frequently. Dispute settlement procedures are complicated by the lack of transparency and inefficiency in the judicial system. Offering or accepting a bribe is illegal and punishable by imprisonment for up to five years. The Comptroller General is responsible for the oversight of public funds, and there are frequent investigations and occasional prosecutions for irregularities.

Ecuador ratified the UN Anticorruption Convention in September 2005. Ecuador is not a signatory to the OECD Convention on Combating Bribery. The 2008 Constitution created the Commission for Citizen Participation and Social Control (CPCCS), tasked with preventing and combating corruption, among other responsibilities. The 2018 national referendum converted the CPCCS from an appointed to a popularly-elected body. In December 2008, President Correa issued a decree that created the National Secretariat for Transparency (SNTG) to investigate and denounce acts of corruption in the public sector. The SNTG became an undersecretariat and was merged with the National Secretariat of Public Administration June 2013. President Moreno established the Anticorruption Secretariat within the Presidency in February 2019 but disbanded it in May 2020 for allegedly intervening in corruption investigations conducted by the Office of the Attorney General. The CPCCS can receive complaints and conduct investigations into alleged acts of corruption. Responsibility for prosecution remains with the Office of the Attorney General.

Resources to Report Corruption

Alleged acts of corruption can be reported by dialing 159 within Ecuador. The CPCCS also maintains a web portal for reporting alleged acts of corruption: http://www.cpccs.gob.ec . The Attorney General’s Office actively pursues corruption cases and receives reports of corruption as well.

Widespread public protests in 1997, 2000, and 2005 contributed to the removal of three elected presidents before the end of their terms. Large-scale but peaceful demonstrations against the Correa government occurred in June 2015. Some indigenous communities opposed to natural resource development have blocked access by petroleum and mining companies. Opposition to the government’s decision to remove fuel subsidies led to nationwide violent protests in October 2019. The protests paralyzed the country for 11 days, causing significant property damage, including to petroleum and telecommunications infrastructure. A dialogue between the government and indigenous protest leaders, mediated by the United Nations and the Catholic Church, led to the government’s decision to restore the fuel subsidies. Security along the northern border with Colombia deteriorated significantly in late 2017 and early 2018, when dissident Revolutionary Armed Forces of Colombia groups attacked police and military units and kidnapped civilians, resulting in several deaths. Military and police increased their presence in the zone, and violence in the northern border area calmed in 2019, although illicit activities continue. Violence related to drug-trafficking organizations increased in 2020 and 2021, particularly in Ecuador’s port cities.

While Ecuador’s Statistics Institute shows 66 percent workforce participation, and an unemployment rate of 5.7 percent, the official underemployment rate is 22.3 percent, and it is estimated that 47.3 percent of workers are in the informal sector. Semi-skilled and unskilled workers are relatively abundant at low wages. The supply of available workers is high due to layoffs in sectors affected by Ecuador’s flat economic growth since 2014. The COVID-19 economic crisis is estimated to have resulted in the loss of 230,000 jobs in the formal sector in 2020. In addition, first Colombian and now Venezuelan migrants have added to the informal labor pool. The National Wages Council and Ministry of Labor Relations set minimum compensation levels for private sector employees annually. The minimum basic monthly salary for 2020 is USD 400 per month.

Ecuador’s Production Code requires workers be paid a dignified wage, defined as an amount that would enable a family of four with 1.6 wage earners to be able to afford basic necessities. Ecuador’s Statistics Institute (INEC) determines the cost and the products that are considered basic necessities. In February 2021, the monthly cost of basic necessities was USD 712.07, while the official family wage level is at USD 746.67. As of January 2021, INEC estimated 34.0 percent of workers had adequate employment. INEC defines adequate employment as earning at least the minimum basic salary working 40 hours per week.

Ecuador’s National Assembly approved in June 2020 limited labor reforms in an emergency law (Humanitarian Law) valid for two years to address the economic impacts of COVID-19. These reforms allowed for the reduction of working hours up to 50 percent and salary up to 45 percent; ability to modify a labor contract with mutual agreement between employer and employee; new temporary contracts for new investments that can be changed to permanent contracts at the end of the temporary period; and layoffs without severance payments only when the company closes entirely.

Ecuador’s National Assembly passed a labor reform law in March 2016 intended to promote youth employment, support unemployed workers, and introduce greater labor flexibility for companies suffering from reduced revenue. The law established a new unemployment insurance program, a subsidized youth employment scheme, temporary reductions in workers’ hours for financially strapped companies, and nine months of unpaid maternity or paternity leave.

The Law for Labor Justice and Recognition of Work in the Home, which included several changes related to labor and social security, took effect in April 2015. The law limits the yearly bonus paid to employees, which is equal to 15 percent of companies’ profits and is required by law, to 24 times the minimum wage. Any surplus profits are to be handed over to IESS. The law also mandates that employees’ thirteenth and fourteenth month bonuses be paid in installments throughout the year instead of in lump sums. Employees have the option to opt out of this change and continue to receive the payments in lump sums. The law eliminated fixed-term employee contracts and replaced them with indefinite contracts, which shortens the allowable trial period for employees to 90 days. The law also allows participation in social security pensions for non-paid work at home.

The Labor Code provides for a 40-hour work week, 15 calendar days of annual paid vacation, restrictions and sanctions for those who employ child labor, general protection of worker health and safety, minimum wages and bonuses, maternity leave, and employer-provided benefits. The 2008 Constitution bans child labor, requires hiring workers with disabilities, and prohibits strikes in most of the public sector. Unpaid internships are not permitted in Ecuador.

Most workers in the private sector and at SOEs have the constitutional right to form trade unions, and local law allows for unionization of any company with more than 30 employees. Private employers are required to engage in collective bargaining with recognized unions. The Labor Code provides for resolution of conflicts through a tripartite arbitration and conciliation board process. The Code also prohibits discrimination against union members and requires that employers provide space for union activities.

Workers fired for organizing a labor union are entitled to limited financial indemnification, but the law does not mandate reinstatement. The Public Service Law enacted in October 2010 prohibits public sector workers in strategic sectors from joining unions, exercising collective bargaining rights, or paralyzing public services in general. The Constitution lists health; environmental sanitation; education; justice; fire brigade; social security; electrical energy; drinking water and sewerage; hydrocarbon production; processing, transport, and distribution of fuel; public transport; and post and telecommunications as strategic sectors. Public workers who are not under the Public Service Law may join a union and bargain collectively since they are governed by the provisions under the Labor Code.

* Source for Host Country Data: Central Bank of Ecuador. The Central Bank publishes FDI calculated as net flows only. Outward Direct Investment statistics are not published by the Central Bank.

Source: Central Bank of Ecuador – September 2020 data. The Central Bank publishes FDI calculated as net flows only. The Central Bank does not publish Outward Direct Investment statistics, nor is there information available on the IMF’s CDIS website.

Post contact for this report at Embassy Quito is Georgina Scarlata at scarlatagm@state.gov .

Policies Towards Foreign Direct Investment (FDI)

The GOI has publicly and repeatedly stated its desire to attract foreign investment as part of national plans to strengthen local industries and promote the “Made in Iraq” brand.  The GOI has yet to follow through on commitments made at the Kuwait International Conference for the Reconstruction of Iraq in February 2018 to reform processes and regulations that hinder investment.  Iraq has claimed that countries have not followed through on their financial pledges either.

Iraq operates under its National Investment Law (Investment Law), amended in December 2015.  The Investment Law outlines improved investment terms for foreign investors, the purchase of land in Iraq for certain projects, and an investment license process.  The purchase of land for commercial or residential development remains extremely difficult.  Since 2015, Iraq has been a party to the International Convention on the Settlement of Investment Disputes between States and Nations of Other States (ICSID).

Foreign investors continue to encounter bureaucratic challenges, corruption, and a weak banking sector, which make it difficult to successfully conclude investment deals.  State-owned banks in Iraq serve predominantly to settle the payroll of the country’s public sector.  Privately-owned banks, until recently, served almost entirely as currency exchange businesses, with the exception of a handful of mostly regionally owned commercial banks.  Some privately-owned banks have commercial lending programs, but Iraq’s lack of a credit monitoring system, insufficient legal guarantees for lenders, and limited connections to international banks hinder commercial lending.  The financial sector in the IKR is still recovering from years of financial instability, and the Central Bank of Iraq (CBI) levied sanctions against the IKR’s financial institutions immediately following the Kurdistan independence referendum in September 2017.

Recently, the GOI has been exploring multi-year financing options to pay for large-scale development projects rather than relying on its previous practice of funding investments entirely from current annual budget outlays.

According to Iraqi law, a foreign investor is entitled to make investments in Iraq on terms no less favorable than those applicable to an Iraqi investor, and the amount of foreign participation is not limited.  However, Iraq’s Investment Law limits foreign direct and indirect ownership of most natural resources, particularly the extraction and processing of natural resources.  It does allow foreign ownership of land to be used for residential projects and co-ownership of land to be used for industrial projects when an Iraqi partner is participating.

Despite this legal equity between foreign and domestic investment, the GOI reserves the right to screen FDI.  The screening process is vague, although it does not appear to have been used to block foreign investment.  Still, bureaucratic barriers to FDI, such as a requirement to place a significant portion of the capital investment in an Iraqi bank prior to receiving a license, remain significant.

The IKR operates under a 2006 investment law and its supporting regulations.  Under the law, foreign investors are entitled to incentives, including full property ownership, and capital repatriation and tax holidays for 10 years.  The KRG is generally open to public-private partnerships and long-term financing, as demonstrated by the KRG’s oil and gas sector contracts that increase production.  In 2020, the KRG Ministry of Planning (MOP) published a framework for creating public-private partnerships in the region but has not drafted legislation to codify it.  Legislation to amend the investment law to broaden its reach to potential investors remains pending in the Iraqi Kurdistan Parliament (IKP).

The GOI established the National Investment Commission (NIC) in 2007, along with its provincial counterparts Provincial Investment Commissions (PICs), as provided under Investment Law 13 (2006).  This cabinet-level organization provides policy recommendations to the Prime Minister and support to current and potential investors in Iraq.  The NIC’s “One Stop Shop” is intended to guide investors through the investment process, though investors have reported challenges using NIC services.

Limits on Foreign Control and Right to Private Ownership and Establishment

Iraqi law stipulates that 50% of a project’s workers must be Iraqi nationals in order to obtain an investment license (National Investment Regulation No. 2, 2009).  Investors must prioritize Iraqi citizens before hiring non-Iraqi workers.  The GOI pressures foreign companies to hire more local employees and has encouraged foreign companies to partner with local industries and purchase Iraqi-made products.  The KRG permits full foreign ownership under its 2006 investment law.

The GOI generally favors State Owned Enterprises (SOE) and state-controlled banks in competitions for government tenders and investment.  This preference discriminates against both local and foreign investors.

Other Investment Policy Reviews

In the past three years, the GOI did not conduct any investment policy reviews through the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), or the UN Conference on Trade and Development (UNCTAD).

Business Facilitation

Foreign investors interested in establishing an office in Iraq or bidding on a public tender are required to register as a foreign business with the Ministry of Trade’s (MOT) Companies Registration Department.  The procedure costs and time to obtain a business license can be found at https://baghdad.eregulations.org/procedure/108?l=en. Many international companies use a local agent to assist in this process due to its complexity.  The GOI is working with UNCTAD to streamline the business registration process and make it available online, as per procedures of obtain investment licenses from NIC according to the amount of capital can be found at:

https://baghdad.eregulations.org/procedure/60?l=en and https://baghdad.eregulations.org/procedure/51/step/230?l=en&reg=0.

The KRG offers business registration for companies seeking business only in the IKR; however, companies that seek business in both the IKR and greater Iraq must register with both the GOI MOT and the KRG MOT.

Iraqi laws give the NIC and PICs authority to provide information, sign contracts, and facilitate registration for new foreign and domestic investors.  The NIC offers investor facilitation services on transactions including work permit applications, visa approval letters, customs procedures, and business registration.  Investors can request these services through the NIC website: http://investpromo.gov.iq/.  The NIC does not exclude businesses from taking advantage of its services based on the number of employees or the size of the investment project.  The NIC can also connect investors with the appropriate provincial investment council.

These official investment commissions do struggle to operate amid unclear lines of authority, budget constraints, and the absence of regulations and standard operating procedures. Importantly, the investment commissions lack the authority to resolve investors’ bureaucratic obstacles with other Iraqi ministries.

The Kurdistan Board of Investment (KBOI) manages an investment licensing process in the IKR that can take from three to six months and may involve more than one KRG ministry or entity, depending on the sector of investment.  Due to oversaturated commercial and residential real estate markets, the KBOI has moved away from approving licenses in these sectors but may still grant them on a case-by-case basis.  The KBOI has prioritized industrial and agricultural projects.  Businesses reported some difficulties establishing local connections, obtaining qualified staff, and meeting import regulations.  Some businesses have reported that the KRG has not provided all of the promised support infrastructure such as water, electricity, or wastewater services, as required under the investment law framework.  Additional information is available at the KBOI’s website:  http://www.kurdistaninvestment.org/.

Outward Investment

Iraq does not restrict domestic investors from investing abroad.

Iraq does not have a bilateral investment treaty (BIT) or a bilateral taxation treaty with the United States.  The United States and Iraq signed an Agreement for Economic and Technical Cooperation on July 11, 2005, and it entered into force December 18, 2013.

The U.S.-Iraq Strategic Framework Agreement (SFA) provides for bilateral mechanisms to address trade and investment issues.  A second TIFA meeting was held under the auspices of the SFA in 2019, with special emphasis on visa facilitation, customs, and taxes.  Both governments held a Strategic Dialogue in August 2020 to discuss progress in these areas.  The U.S. International Development Finance Corporation signed a $1 billion MOU with the Ministry of Finance (MOF) to enable private sector investment in Iraq.  In March 2021, the Council of Representatives (COR) voted to ratify the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention); at the time of this report, the GOI still needs to formalize its ratification with the UN.  Also, in March 2021, Iraq’s Ministry of Interior (MOI) issued a new directive that would allow visitors from more than 30 countries, including the United States, to obtain visas on arrival at Iraq’s ports of entry, rather than having to do so prior to traveling there.

Iraq is a signatory to investor protection agreements or MOUs with 35 bilateral partners and nine multilateral groups.  The agreements include arrangements within the Arab League, as well as arrangements with Afghanistan, Armenia, Bangladesh, France, Germany, India, Iran, Japan, Jordan, Kuwait, Mauritania, the Republic of Korea, Sri Lanka, Syria, Tunisia, Turkey, the United Kingdom, Vietnam, and Yemen.

Iraq currently has BITs with Armenia, France, Germany, Japan, Jordan, and Kuwait.  Only the BITs with Japan and Kuwait are in force.  Iraq’s investment agreements include general provisions on promoting and protecting investments, including clauses on profit repatriation, access to arbitration and dispute settlements, fair expropriation rules, and compensation for losses.  The GOI’s ability and willingness to enforce such provisions is unclear.

U.S. companies have raised significant concerns about the use by the MOF’s General Commission for Taxes (GCT), of the “deemed tax” method to calculate corporate taxes, which applies a standard deduction to every company, regardless of the firm’s actual profit.  U.S. investors also complain about the application of the social tax, equivalent to 5% of employees’ pay and a 12% employer contribution, to third country national employees who cannot receive benefits from the Iraqi health and pension systems.

Transparency of the Regulatory System

Iraq’s overall regulatory environment remains opaque, and the Investment Law does not establish a full legal framework governing investment.  Corruption, unclear regulations, and bureaucratic bottlenecks are major challenges for companies that bid on public procurement contracts or seek to invest in major infrastructure projects.  The KRG procurement reform measures, beginning in 2016, sought to address these problems, but with little result.  Iraq’s commercial and civil laws generally fall short of international norms.

The GOI’s rulemaking process can be opaque and lends itself to arbitrary application.  To illustrate, while ministries must publish regulations imposing duties on citizens or private businesses in the official government gazette, internal ministerial regulations have no corresponding requirement.  This loophole allows officials to create internal requirements or procedures with little or no oversight, which can result in additional burdens for investors and businesses.  Furthermore, the lack of regulatory coordination between GOI ministries and national and provincial authorities can result in conflicting regulations, which makes it difficult to accurately interpret the regulatory environment.  In addition, accounting and legal procedures are opaque, inconsistent, and generally do not meet international standards.

Draft bills, including investment laws, are not available for public comment.  The promulgation of new regulations with little advance notice and requirements related to investment guarantees have also slowed projects.

The GOI encourages private sector associations but these associations are generally not influential, given the dominant role of SOEs in Iraq’s economy.  In the IKR, private sector associations have some influence and many, such as the contractors’ union, are very active in advocacy with the KRG.

Iraq has limited transparency of its public finances or government held debt.  Publicly available budgets did not include expenditures by ministry or revenues by source and type.  The budget provided limited details regarding allocations to, and earnings from, SOEs.  Financial statements for most SOEs were generally not publicly available.  Limited information on debt obligations was available on the Central Bank and MOF websites.

International Regulatory Considerations

Iraq is not a member of the WTO and is not a signatory to the Trade Facilitation Agreement.

Legal System and Judicial Independence

Iraq has a civil law system, although Iraqi commercial jurisprudence is relatively underdeveloped.  Over decades of war and sanctions, Iraqi courts did not keep up with developments in international commercial transactions.  Corruption and bureaucratic bottlenecks remain significant problems.  As trade with foreign parties increases, Iraqi courts have seen a significant rise in complex commercial cases.  Although contracts should be enforceable under Iraqi law, such enforcement remains a challenge due to unclear regulations, lack of decision-making authority, and rampant corruption.

Laws and Regulations on Foreign Direct Investment (FDI)

Iraq is a signatory to the League of Arab States Convention on Commercial Arbitration (1987) and the Riyadh Convention on Judicial Cooperation (1983).  Iraq formally joined the ICSID Convention on December 17, 2015, and on February 18, 2017, Iraq joined the Investor-State Dispute Settlement (ISDS) process agreement between investors and states.

Additional information can be found in “A Legal Guide to Investment in Iraq:” http://cldp.doc.gov/programs/cldp-in-action/details/1551.

Competition and Anti-Trust Laws

The COR passed a Competition Law and a Consumer Protection Law in 2010.  However, the Iraqi government has yet to form the Competition and Consumer Protection Commissions authorized by these laws.  The COR has also amended Iraqi law several times to promote fair competition and “competitive capacities” in the local market (2010, 2015).

The COR has also issued many recommendations regarding the amendments of investment licenses and to improve the investment and businesses environment in Iraq.  The August 2019 Resolution 245 announced investment opportunities through the NIC.

The prominent role of SOEs and corruption undermine the competitive landscape in Iraq.

Expropriation and Compensation

The Iraqi Constitution prohibits expropriation, unless done for the purpose of public benefit and in return for just compensation.  The Constitution stipulates that expropriation may be regulated by law, but the COR has not drafted specific legislation regarding expropriation.  Article 9 of the Investment Law guarantees non-seizure or nationalization of any investment project that the provisions of this law cover, except in cases with a final judicial judgment.  The law prohibits expropriation of an investment project, except in cases of public benefit and with fair compensation.  Iraq’s Commercial Court is charged with resolving expropriation cases.  In recent years, there have not been any government actions or shifts in government policy that would indicate possible expropriations in the foreseeable future.

In the IKR, the KBOI can impose fines and potentially confiscate land if it determines that investors are using land awarded under investment licenses for purposes other than those outlined in the license or if the projected was not started during the specified time limits.  The IKR investment law (Article 17) outlines an investor’s arbitration rights, which fall under the civil court system, as the IKR lacks a commercial court system.  Arbitration clauses should be written into local contracts in order to facilitate enforcement in the event of a dispute.

Dispute Settlement

ICSID Convention and New York Convention

In March 2021 the COR voted to ratify the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention); the GOI still needs to formalize its ratification with the UN for it to go into effect.   Until then, the enforcement of arbitral awards must comply with the special requirements set forth in current Iraqi civil procedure law and other related laws.

Investor-State Dispute Settlement

In November 2010, Iraq’s Higher Judicial Council established the First Commercial Court of Iraq — a court of specialized jurisdiction for disputes involving foreign investors — as part of a national strategy to improve Iraq’s investment climate.

In the IKR, commercial disputes are handled through the civil court system.  Additional

information can be found in “A Legal Guide to Investment in Iraq:”  http://cldp.doc.gov/programs/cldp-in-action/details/1551.

International Commercial Arbitration and Foreign Courts

Iraq is a signatory to the League of Arab States Convention on Commercial Arbitration (1987) and the Riyadh Convention on Judicial Cooperation (1983).  Iraq formally joined the ICSID on December 17, 2015, and on February 18, 2017, Iraq joined the ISDS process agreement between investors and states.

Bankruptcy Regulations

Under Iraqi law, an Iraqi debtor may file for bankruptcy, and an Iraqi creditor may file for liquidation of the debtor.  Bankruptcy is not criminalized.  The Iraqi Companies Law regulates the process for the liquidation of legal entities.  Nevertheless, the mechanism for resolving insolvency remains opaque.  Iraq ranks 168 out of 190 countries in the category of Resolving Insolvency, according to the World Bank’s 2020 Doing Business Report.

Investment Incentives

The Iraqi Investment Law offers foreign investors several exemptions for qualified investments, including a 10-year exemption from taxes, exemptions from import duties for the necessary equipment and materials throughout the period of project implementation, and exemption from taxes and fees for primary materials imported for commercial operations.  The exemption increases to 15 years if Iraqi investors own more than 50% of the project.  The law allows investors to repatriate capital brought into Iraq, along with proceeds.  Foreign investors are able to trade in shares and securities listed on the Iraqi Stock Exchange.  Hotels, tourist institutions, hospitals, health institutions, schools, and colleges enjoy additional exemptions from duties and taxes for the import of furniture, tools, equipment, machinery, and means of transportation, but foreign companies that sell goods or services to any entity in Iraq may be subject to Iraqi taxes.

Foreign and domestic companies may have tax-exempt profits if their project is with the GOI and the project is listed in the National Investment Plan, which the MOP prepares annually.  The GOI ministries overseeing investment projects provide updates for the list of investment contracts to the MOF, including its tax commission, the GCT.  Foreign and domestic companies that have registered businesses in order to execute contracts outside the National Investment Plan do not receive tax exemptions.  Companies have reported difficulties obtaining favorable tax treatment after deals are struck.  However, in some cases, GOI entities have negotiated partial or short-term tax exemptions for companies as part of a project contract.

Income tax language is included in GOI petroleum contracts with the MOO and applies to each consortium and its partners.  The Council of Ministers (COM) ratified the contract language, which supersedes the Tax Code.  Secondary contracts that a consortium issues are treated differently.  The consortium is required to withhold 7 percent from secondary contracts for remittance to the GOI.  Companies pay a profit tax of 15 percent unless they operate in the oil sector, which has a 35 percent tax profit rate.  The definition of “petroleum activities” is subject to interpretation.  Any business or individual considering doing business in Iraq should obtain competent advice from a private accountant and attorney.

Under the IKR’s investment law, foreign and national investors are treated equally and are eligible for the same benefits.  Foreign investors may choose to invest in the IKR with or without local partners, and full repatriation of profits is allowed.  While investors have the right to employ foreign employees in their projects, priority is given to awarding projects that employ a high share of local staff and involve significant knowledge transfer.  Additionally, the law allows an investor to transfer his investment totally or partially to another foreign investor with the approval of the KBOI.

Foreign Trade Zones/Free Ports/Trade Facilitation

Free Trade Zones (FZs) are permitted under Iraqi law per the Free Zone Authority Law No. 3/1998, for industrial, commercial, and service projects.  The Free Zone Commission in the MOF administers the law but lacks a specific mandate to develop the FZs.  Under the law, capital, profits, and investment income from projects in an FZ are exempt from all taxes and fees throughout the life of the project.  Goods entering into Iraq’s market from FZs are subject to normal import tariffs; no duty is levied on exports from FZs.

Activities permitted in FZs include industrial activities such as assembly, installation, sorting, and refilling processes; storage, re-export, and trading operations; service and storage projects and transport of all kinds; banking, insurance, and reinsurance activities; and supplementary and auxiliary professional and service activities.  Prohibited activities include weapons manufacture and environmentally polluting industries.

Iraq currently has four FZs with tax exemptions and other incentives for the transportation, industrial, and logistics sectors.  The largest is the Basrah/Khor al-Zubair FZ, comprising 18 square km and located southwest of Basrah at the Khor al-Zubair seaport.  Operational since June 2004, it hosts a number of local and foreign companies.  The Ninewa/Falafel Free Zone is located in the north.  Plans to develop the FZ in Fallujah are ongoing.  The Falafel and Fallujah zones are located in formerly ISIS-held areas, and the possibility of continued political instability makes further development in the near future unlikely.  There is also an FZ in Baghdad.  In May 2019, Iraq and Kuwait announced a new joint FZ project in Safwan port, pending approvals.

More information can be found at the MOF website: http://www.mof.gov.iq/pages/ar/FreeZonesInIraq.aspx.

In the IKR, there are currently no FZs.  The KRG has approved plans for zones in all IKR provinces.

Performance and Data Localization Requirements

Iraqi labor law describes two categories of workers:  local Iraqis and foreign workers whom the GOI and other Iraqi entities employ.  The Investment Law stipulates that foreign workers may be hired for investment projects, after priority has been given to Iraqi workers.  At least 50 percent of an investment project’s workers must be Iraqi nationals.  International companies have noted that Iraq lacks skilled labor, and it can be a challenge to meet this requirement.  Foreign investors are expected to help train Iraqi employees to increase their efficiency, skills, and capabilities.

In the IKR, hiring locally is encouraged, but not mandated.  Before applying for the residency permit required for legal employment, foreign workers must obtain a security clearance from the KRG MOI, a medical clearance which includes an HIV test, and a work permit from the KRG Ministry of Labor and Social Affairs (MOLSA).  Some foreign companies have reported prolonged delays in obtaining necessary residency permits for foreign workers.  In 2020, the KRG significantly increased its fees for foreign residency permits.  The appointment of foreign nationals as managers of foreign-owned limited liability companies requires additional clearances.

In March 2021, Iraq’s MOI issued a new directive that would allow visitors from more than thirty countries, including the United States, to obtain visas on arrival at Iraq’s ports of entry, rather than having to do so prior to traveling to Iraq.  In announcing the policy, the GOI said the move aimed to “encourage investment and support jobs.”  At the time of this report the GOI had yet to publicize the details of the policy on any official website.  Preliminary information indicates the visa-on-arrival will cost $75 and permit a single entry for a maximum two-month stay.

At the time of this report, Iraq’s entry policy requires all airline passengers to provide a negative COVID-19 PCR and/or serology result less than 72 hours prior to departure for Iraq.  Some reports indicate that even if passengers provide a negative PCR or serology test result at the port of entry, some have had to pay for and submit to new tests in Iraq.

U.S. citizens traveling to the IKR can obtain a visa upon arrival at the airport, valid for 30 days.  This visa is not valid for travel in Iraq outside the IKR, as the GOI does not honor KRG-issued visas.  U.S. citizens who plan to stay for longer than 30 days must extend their IKR visa or obtain a residency permit.  The KRG does not require HIV tests if the travel is shorter than 15 days.  Additional information can be found on the U.S. Department of State’s website: www.travel.state.gov.

The GOI does not follow any forced localization policy in which foreign investors must use domestic content in their goods and technology.  There are no requirements for IT providers to turn over source code and/or provide access to surveillance.

The GOI strongly resists offering ownership or profit sharing with any potential foreign investor.  The GOI prefers to structure foreign investments as contracts by which it agrees to pay for services or equipment at a price that a clause in the annual budget law guarantees, as opposed to a price based on profits or returns.  The KRG, in contrast, has employed “build-own-operate” project structures and production sharing contracts in its management of the energy, oil, and gas sectors.

Real Property

Since 2009, Iraqi law has allowed foreigners to own land and the amended Investment Law expressly provides foreigners the right to own land for the purpose of developing residential real estate projects.  It also allows foreign investors to own land for industrial projects if they have an Iraqi partner.  Additionally, foreign investors are permitted to rent or lease land for up to 50 years, with an option to renew.  The GOI approved implementing regulations in 2010 that allow investors to obtain land for residential housing projects free of charge on the condition that land value is excluded from the sales price.  The land registration can be revoked if the domestic or foreign investor does not carry out the obligations of their agreement.

For non-residential, commercial investment projects — including agriculture, services, tourism, commercial, and industrial projects — investors can lease government land.  The terms and duration of these leases vary by project type and the result of negotiations between the parties.  Land for non-residential projects will be leased free of initial down payment, and compensation will be either a percentage of pre-tax revenue or a specified percentage of the “rent allowance” for the land.  These smaller percentages of the “rent allowance” rate, ranging from 1 percent to 25 percent, amount to significant rent reductions for leased land.

In the IKR, foreign land ownership is allowed under Law Number 4 (2006).  The KBOI initially awarded more than half of all investment licenses to housing projects, but that percentage has declined in favor of priority sector development areas of agriculture, industry, and tourism. Delays in the transfer of land title have sometimes slowed projects.

Mortgages and liens exist in Iraq, and there is a national record system.  However, mortgages are not common.  Iraq ranks 121 out of 190 countries in the World Bank’s “registering property” index of its 2020 Doing Business report.

Intellectual Property Rights

Legal structures that protect intellectual property (IP) rights in Iraq are inadequate and infringements are common.  Counterfeit products are widespread in the Iraqi marketplace, including pharmaceutical drugs.  According to a 2018 study (latest data available) by the Business Software Alliance on self-reported piracy, 85 percent of Iraq’s software was unlicensed in 2017, consistent with the levels found in each survey since 2009.  During the past year, the COR has not enacted any new IP-related laws or regulations.  The GOI attempts to track seizures of counterfeit medicines.  Reporting is inconsistent.  The IKR has no independent IP protections, and outsources all IP complaints to the GOI.

The GOI’s ability to enforce IP protections remains weak and spread across several ministries.  The Ministry of Culture handles copyrights, and the Ministry of Industry and Minerals (MIM) houses the trademarks office.  The Central Organization for Standardization and Quality Control, an agency under the MOP, handles the patent registry and the industrial design registry.  The MOP’s patent registry office has occasionally included Arab League Israel Boycott questionnaires in the patent registry application, which U.S. companies are not allowed to complete under U.S. law.  IP infringement cases are primarily heard in commercial courts, although infrequently transferred to the criminal courts.

A draft IP law, which would comply with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and consolidate all IP responsibilities into a single body, has been redrafted several times but has not progressed in the COR.

In 2018, the COM Secretariat reviewed IP forms and processes for simplification.  As a result, the patent application is now based on World Intellectual Property Organization (WIPO) standards.  However, the application processes for all classes of IP protection favor domestic applicants through requirements for local Iraqi-national agents and optional, but advantageous, in-person review committee meetings.

Iraq is a signatory to several international intellectual property conventions and to regional and bilateral arrangements, which include:  1) the Paris Convention for the Protection of Industrial Property (1967 Act), ratified by Law No. 212 of 1975; 2) the WIPO Convention, ratified by Law No. 212 of 1975 (Iraq became a member of the WIPO in January 1976); 3) the Arab Agreement for the Protection of Copyrights, ratified by Law No. 41 of 1985; and 4) the Arab Intellectual Property Rights Treaty (Law No. 41 of 1985).  GOI recently approved joining the Patent Cooperation Treaty (PCT) in March 2021.

Iraq is not listed in USTR’s Special 301 Report, but it was noted in the 2020 notorious market report for online piracy available at:

https://ustr.gov/sites/default/files/files/Press/Releases/2020%20Review%20of%20Notorious%20Markets%20for%20Counterfeiting%20and%20Piracy%20(final).pdf.

Resources for Intellectual Property Rights Holders:

Peter Mehravari

Patent Attorney

Intellectual Property Attaché for the Middle East & North Africa

U.S. Embassy Abu Dhabi | U.S. Department of Commerce U.S. Patent & Trademark Office Tel: +965 2259 1455 Peter.Mehravari@trade.gov

A copy of a public list of local lawyers can be obtained by emailing BaghdadACS@state.gov.   The American Chamber of Commerce in Iraq can be reached at:  inquiries@amcham-iraq.org.

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

Capital Markets and Portfolio Investment

Iraq remains one of the most under-banked countries in the Middle East.  The Iraqi banking system includes around 68 private banks and seven state-owned banks.  As of early 2021, 20 foreign banks have licensed branches in Iraq and several others have strategic investments in Iraqi banks.  The three largest banks in Iraq are Rafidain Bank, Rasheed Bank, and the Trade Bank of Iraq (TBI), which account for roughly 85 percent of Iraq’s banking sector assets.  Iraq’s economy remains primarily cash based, with many banks acting as little more than ATMs.  Rafidain and Rasheed offer standard banking products but primarily provide pension and government salary payments to individual Iraqis.

Credit is difficult to obtain and expensive.  Iraq ranks 186 out of 190 in terms of ease of getting credit in the World Bank’s 2020 Doing Business Report.  Although the volume of lending by privately-owned banks is growing, most privately-owned banks do more wire transfers and other fee-based exchange services than lending.  Businesses are largely self-financed or between individuals in private transactions.  State-owned banks mainly make financial transfers from the government to provincial authorities or individuals, rather than business loans.

The CBI introduced a small and medium enterprise lending program in 2015, in which 35 private banks have reportedly participated.  In early 2020, the CBI launched a real estate lending initiative and an Islamic finance consolidation program.

The main purpose of TBI is to provide financial and related services to facilitate trade, particularly through letters of credit.  Although CBI granted private banks permission to issue letters of credit below $50 million, TBI continues to process nearly all government letters of credit.

Money and Banking System

Although banking sector reform was a priority of Iraq’s IMF Stand-By Arrangement, the GOI has had only incremental success reforming its two largest state-owned banks, Rafidain and Rasheed.  Private banks are mostly active in currency exchanges and wire transfers.  CBI is headquartered in Baghdad, with branches in Basrah and Erbil.  CBI’s Erbil branch, and the IKR’s state-owned banking system, are now electronically linked to the CBI system.  The CBI now has full supervisory authority over the financial sector in the IKR, including the banks and non-bank financial institutions.

Foreign Exchange and Remittances

Foreign Exchange

The currency of Iraq is the dinar (IQD).  Iraqi authorities confirm that in practice, there are no restrictions on current and capital transactions involving currency exchange as long as valid documentation supports underlying transactions.  The Investment Law allows investors to repatriate capital brought into Iraq, along with proceeds.  Funds can be associated with any form of investment and freely converted into any world currency.  The Investment Law also allows investors to maintain accounts at banks licensed to operate in Iraq and transfer capital inside or outside of the country.

The GOI’s monetary policy since 2003 has focused on ensuring price stability primarily by maintaining a de facto peg between the IQD and the U.S. dollar, while seeking exchange rate predictability by supplying U.S. dollars to the Iraqi market.  In December 2020, the GOI announced that it would officially devalue the dinar’s peg to the U.S. dollar by 22 percent.  Banks may engage in spot transactions in any currency; however, they are not allowed to engage in forward transactions in Iraqi dinars for speculative purposes through auction but can do so through wire transfer.  There are no taxes or subsidies on purchases or sales of foreign exchange.

Remittance Policies

There are no recent changes to Iraq’s remittance policies.  Foreign nationals are allowed to remit their earnings, including U.S. dollars, in compliance with Iraqi law.  Iraq does not engage in currency manipulation.

Sovereign Wealth Funds

Iraq does not have a sovereign wealth fund.

SOEs are active across all sectors in Iraq.  GOI ministries currently own and operate over 192 SOEs, a legacy of the state planning system.  The GOI’s continued support of unprofitable entities places a substantial fiscal burden on Iraq, as many SOEs are unproductive.  These firms employ over half a million Iraqis, many of whom are underemployed.  The degree to which SOEs compete with private companies varies by sector; SOEs face the most competition in the market for consumer goods.  The GOI had expressed a commitment to reforming the SOEs and taking steps toward privatization as part of its previous international financing programs.

Iraqi law permits SOEs to partner with foreign companies.  When parent ministries wish to initiate a partnership for an SOE under their purview, they generally advertise the tender on their ministry’s website.  Partnerships are negotiated on a case-by-case basis and require the respective minister’s approval.  The MIM, which oversees the largest number of Iraq’s SOEs, established the following requirements for partnerships:  minimum duration to three years, the foreign company must register a company office in Iraq, and the foreign company must participate in the production of goods.  Foreign companies have faced challenges in partnerships because the GOI has, at times, cut subsidies to SOEs after partnerships were formed and due to conflicts between the parent ministry and the GOI’s official policy.  In addition, the MIM has often required that the foreign investor pay all SOE employees’ salaries regardless of whether they are working on the agreed project.

GOI entities are required to give preferential treatment to SOEs, under multiple laws.  A 2009 COM decision requires all Iraqi government agencies to procure goods from SOEs unless SOEs cannot fulfill the quality and quantity requirements of the tender.  A Board of Supreme Audit decision requires government agencies to award SOEs tenders if their bids are no more than 10% higher than other bids.  Furthermore, some GOI entities, including the MIM, have also issued their own internal regulations requiring tenders to select Iraqi SOEs, unless Iraqi SOEs state that they cannot fulfill the order.  Sometimes a foreign firm must form a partnership with an Iraqi firm to fulfill SOE-promulgated tenders.  Further, SOEs are exempt from the bid bond and performance bond requirements that private businesses are subject to.

Iraq is not a party to the Government Procurement Agreement within the framework of the WTO.

Iraqi law supports a degree of autonomy in the selection process of an SOE’s board of directors.  For example, it requires that a minister’s sole appointment to a board of directors receive the approval of an “opinion board.”  Nevertheless, in practice, the majority of board members have close personal and political connections to their parent ministry’s leadership.

SOEs do not adhere to OECD guidelines.  Iraq does not have a centralized ownership entity that exercises ownership rights for each of the SOEs.  SOEs are required to seek their parent ministry’s approval for certain categories of financial decisions and operation expansions. However, in practice, SOEs defer to the parent ministry for the vast majority of decisions.  SOEs submit financial reports to their parent ministry’s audit departments and the Board of Supreme Audit.  These reports are not published and sometimes exclude salary expenses.

Privatization Program

The GOI has repeatedly announced that it plans to reorganize failing SOEs across multiple sectors.  Additionally, the GOI is eager to modernize Iraq’s financial and banking institutions.  There are, however, no concrete timelines for these initiatives, and entrenched patronage networks tying SOEs to ministries remain a stumbling block.

The international oil companies active in Iraq are required to observe international best practices in corporate social responsibility (CSR) as part of their contracts with the GOI.  Nevertheless, the GOI does not have policies in place to promote Responsible Business Conduct (RBC) and raise awareness of environmental and social issues among investors.  The concept of RBC is not widely recognized in Iraq and few NGOs and business associations are monitoring it.  Iraq has not subscribed to the OECD’s guidelines for multinational enterprises.

In the IKR, oil companies are mandated in their production sharing contracts with the KRG to give back to the communities in which they work through corporate responsibility agreements.  These agreements require yearly payments from which the KRG prioritizes and allocates funds for projects such as improved roads, university training for local youth in the geotechnical and energy fields, and health clinics.

Investors are required to protect the environment and adhere to quality control systems.  These include soil testing requirements on the land designated for the project as well as conducting an environmental impact study.  In practice, the GOI lacks a mechanism to enforce environmental protection laws and implementation is limited.

Iraq became a member of the Extractive Industries Transparency Initiative (EITI) in 2009.  The GOI established a 15-person committee to work on EITI, including several directors general within the Ministry of Oil (MOO), four representatives from NGOs, and oil company executives.  The committee provided required reports through 2013.  In November 2017, the EITI Board concluded Iraq had made inadequate progress and temporarily suspended Iraq’s membership.

Additional Resources

Department of State

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

Department of Labor

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

Iraq ranked 160 out of 180 on Transparency International’s 2020 Corruption Perception Index.  Public corruption is a major obstacle to economic development and political stability.  Corruption is pervasive in government procurement, in the awarding of licenses or concessions, dispute settlement, and customs.

While large-scale investment opportunities exist in Iraq, corruption remains a significant impediment to conducting business, and foreign investors can expect to contend with corruption in many forms, at all levels.  While the GOI has moved toward greater effectiveness in reducing opportunities for procurement corruption in sectors such as electricity, oil, and gas, credible reports of corruption in government procurement are widespread, with examples ranging from bribery and kickbacks to awards involving companies connected to political leaders.  Investors may come under pressure to take on well-connected local partners to avoid systemic bureaucratic hurdles to doing business.  Similarly, there are credible reports of corruption involving large-scale problems with government payrolls, ranging from “ghost” employees and salary skimming to nepotism and patronage in personnel decisions.

Moving goods into and out of the country continues to be difficult, and bribery of or extortion by port officials is commonplace; Iraq ranks 181 out of 190 countries in the category of “Trading Across Borders” in the World Bank’s 2020 Doing Business report.

U.S. firms frequently identify corruption as a significant obstacle to FDI, particularly in government contracts and procurement, as well as performance requirements and performance bonds.  U.S. companies operating in the energy and other sectors continue to be obligated to follow U.S. laws such as the Foreign Corrupt Practices Act (FCPA).

Several institutions have specific mandates to address corruption in Iraq.  The Commission of Integrity (COI), initially established under the Coalition Provisional Authority (CPA), is an independent government agency responsible for pursuing anti-corruption investigations, upholding the enforcement of laws, and preventing crime.  The COI investigates government corruption allegations and refers completed cases to the Iraqi judiciary.  In 2004, the COR abrogated CPA Order 57, which had established Inspectors General (IGs) for each of Iraq’s ministries.  Similar to the role of IGs in the U.S. government, these offices had been responsible for inspections, audits, and investigations within their ministries, although detractors claimed they in fact added another layer of bureaucracy and corruption.  In 2019, the GOI dismantled the IG offices in all of the ministries after a parliamentary decision citing their lack of effectiveness.  In August 2020, PM Kadhimi announced the formation of a new higher committee on anti-corruption staffed with new judges and a force from MOI that reportedly led to several senior officials’ arrests.

The Board of Supreme Audit, established in 1927, is an analogue to the U.S. government’s General Accountability Office.  It is a financially and administratively independent body that derives its authority from Law 31 of 2011, the Law of the Board of Supreme Audit.  It is charged with fiscal and regulatory oversight of all publicly funded bodies in Iraq and auditing all federal revenues, including any revenues received from the IKR.

None of these organizations have provided an effective check on public corruption.  Neither the Commission of Integrity nor the IGs has effective jurisdiction within the IKR.  The Kurdistan Board of Supreme Audit is responsible for auditing regional revenues with IKP and GOI oversight.  The IKP established a regional Commission of Integrity in late 2013 and increased its jurisdiction the next year to include other branches of the KRG and money laundering.  In 2021, the IKP ordered the establishment of a Kurdistan Anti-Corruption Court.

Iraq is a party but not a signatory to the UN Anticorruption Convention.  Iraq is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

According to Iraqi law, any person or legal entity has the right to submit corruption-related complaints to the Commission for Integrity and the inspector general of a GOI ministry or body.

Commission for Integrity
Department of Complaints and Reports
Mobile: 07901988559
Landline: 07600000030
Hotline@nazaha.iq

Iraqi forces continue to carry out counter-terrorism operations against ISIS cells throughout the country.  Terrorist attacks within the IKR occur less frequently than in other parts of Iraq, although the KRG, U.S. government facilities, and Western interests remain possible targets.  In addition, Iran-aligned militias may threaten U.S. citizens and companies throughout Iraq.

As of its latest Travel Advisory on January 25, the Department of State maintains a Level Four Travel Advisory for Iraq and advises travelers not to travel to Iraq due to COVID-19, terrorism, kidnapping, and armed conflict.  U.S. government personnel in Iraq are required to live and work under strict security guidelines.  Travelers should review the embassy’s official COVID-19 page, which is updated weekly, before traveling:  https://iq.usembassy.gov/covid-19-information/.

State Department guidance to U.S. businesses in Iraq advises the use of protective security details.  Detailed security information is available on the U.S. Embassy website: http://iraq.usembassy.gov/.  Some U.S. and third country businesspeople travel throughout much of Iraq; however, in general their movement is restricted and most travel with security advisors and protective security teams.

Iraq continues to face high unemployment, a large informal sector, lack of satisfactory work standards, and a large unskilled labor force.  Domestic and foreign investors often cite the lack of skilled Iraqi labor as one of the major impediments to investing in Iraq, as political instability and violence led many highly educated Iraqis to leave the country in recent years.  More than 1.7 million Iraqis remained displaced as of April, with most unable to find jobs or pursue livelihood activities to support their families.

Foreign investors tend to rely on foreign workers, although at least 50% of an investment project’s workers must be Iraqi nationals.  International companies have noted that it can be a challenge to meet this requirement.

In the IKR, hiring locally is encouraged but not mandated.  Foreign employees must obtain a security clearance and a work permit before applying for the residency permit required for legal employment.  Some companies have reported prolonged delays in obtaining necessary residency permits for foreign workers.

The Iraqi constitution states that citizens have the right to form and join unions and professional associations.  Iraq is a party to both International Labor Organization conventions related to youth employment, including child labor.  Iraqi labor laws also regulate working conditions and prohibit all forms of forced or compulsory labor, including by children.  However, the GOI has not effectively monitored or enforced the law, which has resulted in unacceptable working conditions for many workers.

Iraqi’s labor law, revised in 2016, is more consistent with current international standards than previous laws and allows for collective bargaining, further limits child labor, and provides improved protections against discrimination at work.  The law addresses sexual harassment at work and provides protection against it and enshrines the right to strike, which had been banned since 1987.  The GOI no longer limits workers’ affiliation with more than one union or federation, and coverage has been expanded to include all workers not covered by Iraq’s civil service law.  The IKR did not implement the new labor law and continues to operate under the 1987 statute.

MOLSA sets a minimum monthly wage for unskilled workers.  The private sector sets wages by contract, and the GOI sets wages for those working in the public sector.  The COM last approved changes to the public sector pay scale in January 2015, reducing the pay gap between low- and high-ranking employees.  In addition, all employers must provide some level of transport, accommodation, and food allowances for each employee, but the law does not fix these allowance amounts.  In December 2013, the GOI launched a Social Safety Net program to assist the unemployed and persons with disabilities in gaining access to financial aid and benefits from the government; as of April 2018, MOLSA’s Directorate of People with Disabilities and Special Needs reported the program covers approximately 4 million individuals.

The U.S. International DFC provides debt and equity financing, political risk insurance, and technical development to mobilize private sector investment to advance development in emerging economies. DFC’s current investments in Iraq surpass $280 million across sectors such as energy and financial services.

During the 2020 U.S.-Iraq Strategic Dialogue, the DFC signed a $1 billion MOU with the MOF to enable private sector investment in Iraq.

Iraq is a signatory to the Riyadh Convention and took steps towards ratification of the New York Convention on Arbitration in March 2021, which is typically a requirement for DFC political risk insurance.

The GOI collects and publishes limited statistics with which to compare international and U.S. investment data.  The NIC and PICs granted 1067 licenses between 2008 and 2015 (latest statistics available) with a total potential value of $53.9 billion.

In the IKR, the KBOI granted licenses to 166 projects from the period of January 2019 to March 2021, with a total potential value of $5.11 billion.  This represented a capital increase of $1.98 billion (163 percent) compared to 2018.

* Source for Host Country Data: http://cosit.gov.iq/en/

Table 3: Sources and Destination of FDI
Data not available.

Table 4: Sources of Portfolio Investment
Data not available.

Embassy Baghdad Economic Section
Al-Kindi Street, International Zone, Baghdad
Office: +1-301-985-8841 x3013
USIraqTrade@state.gov
https://iq.usembassy.gov/business/getting-started-iraq/

Policies Towards Foreign Direct Investment

One of the poorest countries in Europe, Moldova relies heavily on foreign trade and remittances from abroad for its economic growth.  Under Moldovan law, foreign companies enjoy national treatment in most respects.  In principle, the government views FDI as vital for sustainable economic growth and poverty reduction.  In 2020, a lack of qualified labor and the continued emigration of qualified, working-age Moldovans undermined official efforts to attract foreign investment.

Moldova ratified its Association Agreement with the EU in 2016, with the intent of bringing closer political association and economic integration with the EU.  The DCFTA, a component of the Association Agreement, provides for mutual elimination of customs duties on industrial and most agricultural products and for further liberalization of the services market.  It also addresses other barriers to trade and reforms in economic governance, with the goal of strengthening transparency and competition and adopting EU product standards.  Given its small economy, Moldova has relied on a liberalized trade and investment strategy to increase the export of its goods and services to the EU.

A member of the WTO since 2001, Moldova has signed bilateral and multilateral free trade agreements, including:

• Commonwealth of Independent States (CIS) Free Trade Agreement
• Central European Free Trade Agreement
• EU DCFTA
• Turkey

After Moldova signed the Association Agreement and DCFTA in 2014, Russia sought to pressure Chisinau through a series of politically motivated trade bans on Moldova’s exports of fruit, canned products, and fresh and processed meat.  These embargos drove Moldova to expand and diversify its exports outside Russia and the former Soviet Union; despite the COVID-19 pandemic, the EU continues to be the country’s largest export destination, absorbing more than half of all Moldovan exports.  Nonetheless, Moldova’s Socialist-led government renewed efforts to expand trade with Russia.  In 2020, Moldova joined the Eurasian Economic Union meeting as an observer.

In addition to priority sectors, the government has identified in its national development strategy “Moldova 2020” seven priority public sector areas for development and reform:  education; access to financing; road infrastructure; business regulation; energy efficiency; justice system; and social insurance.  The government has made a formal commitment to accelerate the country’s development by making the economy more capital-intensive, sustainable, and knowledge-based.  The government has so far not completed its commitments under the Plan.  In fall 2019, the government published an overall Action Plan for 2020-2021 and committed to implement outstanding AA/DCFTA requirements.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are no formal limits on foreign control of property and land, with the significant exception that foreigners are expressly prohibited from owning agricultural or forest land, even via a locally domiciled corporation or business. However, foreigners are permitted to buy all other forms of property in Moldova, including land plots under privatized enterprises and land designated for construction. Foreigners may become owners of such land only through inheritance and may only transfer the land to Moldovan citizens. In 2006, Parliament further restricted the right of sale and purchase of agricultural land to the state, Moldovan citizens, and legal entities without foreign capital. There are reportedly Moldova-registered companies with foreign capital known to own agricultural land through loopholes in the previous law. The only straightforward option available to foreigners who wish to use agricultural land in Moldova is to lease the land.

Moldova does not have a formal investment screening mechanism for inbound foreign investment but is working on putting in place a mechanism to screen for risks to national security. Under Moldovan law, foreign companies enjoy national treatment in most respects. The Law on Investment in Entrepreneurship prohibits discrimination against investments based on citizenship, domicile, residence, place of registration, place of activity, state of origin, or any other grounds. The law provides for equitable conditions for all investors and rules out discriminatory measures hindering management, operation, maintenance, utilization, acquisition, extension, or disposal of investments. The law mandates equitable treatment for local companies and foreigners regarding licensing, approval, and procurement. Companies registered in questionable tax havens are technically prohibited from holding shares in commercial banks.

By statute, special forms of legal organizations and certain activities require a minimum of capital to be invested (e.g., MDL 20,000 (USD 1,125) for joint stock companies, MDL 15 million (USD 844,000) for insurance companies, and MDL 100 million (USD 5.6 million) for banks).

Other Investment Policy Reviews

The latest Investment Policy Review of Moldova was conducted by the United Nations Conference on Trade and Development (UNCTAD) as part of a broader South-East Europe Review in 2017 and can be accessed at: https://unctad.org/en/PublicationsLibrary/diaepcb2017d6_en.pdf

https://unctad.org/en/PublicationsLibrary/diaepcb2017d6_en.pdf

Moldova underwent a trade policy review by the World Trade Organization (WTO) in October 2015: https://www.wto.org/english/tratop_e/tpr_e/tp423_e.htm 

Business Facilitation

Moldova has an investment promotion agency to assist prospective investors with information about business registration or industrial sectors, facilitate contact with relevant authorities, and organize study visits. The Investment Agency has an investment guide available on its website: invest.gov.md .

The government has established a special council to promote investment projects of national importance and tackle bureaucratic impediments to larger investment. It has also taken steps over the years to simplify and streamline business registration and licensing, lower tax rates, strengthen tax administration, and increase transparency.

The Public Services Agency, created in 2017, oversees business registrations. By law, registration should take three days for a standard procedure or four hours for an expedited procedure and is done in two stages. The first stage involves submission of an application and a set of documents, the range of which may vary depending on the legal form of the business (LLC, joint-stock company, sole proprietorship, etc.). At the second stage, the Agency issues a registration certificate and a unique identification number for the business, conferring full legal capacity to the entity. In 2010, the government introduced the “one-stop-shop” principle, under which businesses are relieved of the requirement to register separately with fiscal, statistical, social security, or health insurance authorities. There are currently no procedures for online business registration. Certain types of activity listed in the law on licensing require businesses to be first licensed by public authorities.

In 2006, the Moldovan Parliament ratified the 1961 Hague Convention on Abolishing the Requirement for Legalization for Foreign Public Documents. Acceptance of U.S. apostilles applied on official documents simplifies the legalization of official documents issued in the United States that are required in the process of business registration.

Outward Investment

Moldova does not have an official policy or mechanism for promoting or incentivizing outward investment.

Transparency of the Regulatory System

The Prime Minister chairs an Economic Council, which liaises with the Moldovan business community to discuss government proposals and gather ideas to improve Moldova’s economy, especially in response to the COVID-19 crisis. Laws and regulations are published in the official gazette called Monitorul Oficial, while a database of laws and regulations is available online at http://www.legis.md .

The Foreign Investors Association (FIA) was established in 2004 with the support of the OECD. FIA engages in a dialogue with the government on topics related to the investment climate and produces an annual publication of concerns and recommendations to improve the investment climate. In 2006, the American Chamber of Commerce (AmCham) registered in Moldova, presenting another voice for the business community. In 2011, a group of ten large EU investors founded the European Business Association (EBA). These are the three largest foreign business associations, and they regularly engage in policy discussions with the government.

All regulations and governmental decisions related to business activity have been published in a special business registry, “Register of Regulations on Business Activity,” to raise the awareness of businesspeople about their rights, increase the transparency of business regulations, and help fight corruption. The government has an approved list of business permits and authorizations. Government agencies and inspectors cannot issue any form of documents not included in the list.

The Moldovan government generally publishes significant laws in draft form for public comment. Draft laws are also available on-line, on the website of Moldovan Parliament. Business and trade associations provide other opportunities for comment. A significant exception to this norm is a mechanism that allows Parliament to also propose draft laws. The working group of the State Commission for Regulation of Entrepreneurial Activity, which was established as a filter to eliminate excessive business regulations, meets to vet draft governmental regulations dealing with entrepreneurship.

Nevertheless, bureaucratic procedures are not always transparent, and red tape often makes processing registrations, ownership, and other procedures unnecessarily long, costly, and burdensome. Discretionary decisions by government officials provide room for abuse and corruption. While the government adopted laws to improve the business climate and reduce excessive state controls and regulation, effective implementation is insufficient.  This inconsistent application of laws and regulations undermines fair competition and adds uncertainty for less politically connected businesses, particularly small- and medium-sized businesses as well as new entrants.

Moldova committed to implementing International Financial Reporting Standards (IFRS) in 2008. Use of IFRS is required by law for all public interest entities (financial entities, investment funds, insurance companies, private pension funds, and publicly listed entities) and national accounting standards (which approximate IFRS in many ways) are used by other firms, although many use IFRS as well due to foreign ownership.

Moldova has a “one stop window” which provides clear and uniform rules for the release of information and standardized documents for business registration.

A law simplifying the system of inspectorates and various inspection bodies was adopted in 2017 to increase efficiency and reduce regulatory burden. Through the reformation of inspection bodies, the government intends to reorganize the state inspection agencies for better planning and monitoring of inspectors’ activity. By reducing the number of inspection agencies and introducing risk-based criteria for inspections, the government seeks to improve the business climate by reducing the opportunity for inspections to be used for political purposes.

International Regulatory Considerations

The EU Association Agreement (AA), including a Deep Comprehensive Free Trade Area (DCFTA), has binding regulatory provisions committing Moldova to a reform agenda and to approximating domestic legislation to EU standards in a range of areas, including corporate law, labor, consumer protection, competition and market surveillance, general product safety, tax, energy, customs duties, public procurement, intellectual property rights, and others. Under the DCFTA, Moldova will gradually abolish duties and quotas in mutual trade in goods and services. It will also eliminate non-tariff barriers by adopting EU rules on health and safety standards, intellectual property rights, and other fields. The agreement contains a timeframe for implementation, with phase-ins up to ten years.

Moldova has been a member of the World Trade Organization (WTO) since 2001 and, as such, is a signatory to the General Agreement on Trade in Services (GATS), the Agreement on Trade Related Investment Measures (TRIMs) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). These agreements contain major investment-related commitments, such as opening to the establishment of foreign service providers, prohibiting local content, trade-balancing, domestic sales requirements (TRIMs), and protection of intellectual property (TRIPS). No major WTO TRIMs inconsistencies have been reported.

As a WTO member, Moldova must notify draft technical regulations to the WTO Committee on Technical Barriers to Trade. In 2016, Moldova ratified the WTO Trade Facilitation Agreement and adopted several measures to conform to WTO requirements.

The government has undertaken incremental steps since 2017 on a draft Customs Code, which would merge existing separate laws on customs procedures and goods crossing national borders and approximate national customs rules to the EU Customs Code. In 2017, the government changed customs rules to align with the EU Authorized Economic Operator requirements and Approved Exporter conditions.

Moldova’s commercial litigation rules comply with WTO requirements. The main challenges to the business climate remain the lack of effective and equitable implementation of laws and regulations, and arbitrary, non-transparent decisions by government officials to give domestic producers an edge over foreign competitors in certain areas. For example, an environmental tax is applied on bottles and other packaging of imported goods, but not levied on bottles and packaging produced in Moldova. Additionally, the government may liberally cite public security or general social welfare as reasons to intervene in the economy in contravention of its declared respect for market principles. There are reports of problems with customs valuation of goods, specifically that the Customs Service has been applying the maximum possible values to imported goods, even if their actual purchase value was far lower. This has increased customs revenues but disadvantaged importers.

Legal System and Judicial Independence

Moldova has a civil law legal system with codified laws that govern different aspects of life, including business, trade, and economy. The country’s legal framework consists of its constitution, organic and ordinary laws passed by the Parliament, and administrative acts issued by the government and other public authorities. Although Moldovan courts are constitutionally independent, their structures have facilitated government and political interference; the courts suffer from inefficiency and low public trust.

The court system consists of lower courts (i.e., trial courts), four courts of appeal, the Supreme Court of Justice, and a separate Constitutional Court.

Moldova has prepared a new justice reform strategy for 2021-2024 approved by its Parliament in November 2020. Although the President has not promulgated the strategy, the Ministry of Justice began implementing some of its provisions.

The new strategy continues the 2016 parliamentary initiative to “optimize” the country’s court system as part of broader justice sector reforms intended to reduce the number of trial courts in Moldova from 40 to 15. Specialized courts such as the Commercial Circumscription Court and Military Court were eliminated. Five trial courts from Chisinau were conceptually merged into one – the Chisinau trial court – although in 2018 the merged Chisinau trial court was further reorganized to specialize across five districts (investigative and contravention; criminal; administrative; bankruptcy; and civil, which includes adjudication of commercial disputes). The government’s court optimization plan is scheduled to be fully implemented by 2027.

The 2016 reforms created two specialized quasi-independent prosecution offices. The Anticorruption Prosecution Office is responsible for investigating and prosecuting corruption, bribery, abuse of power by public officials, and money laundering. The Prosecution Office on Combating Organized Crime and Special Cases investigates and prosecutes organized, transnational and particular complex crimes, including tax evasion, smuggling, intellectual property offenses, trafficking in persons, and narcotics. In 2017-2019, the Moldovan Prosecution Service continued the implementation of reforms under a law on the prosecution service passed in 2016. The Prosecutor General’s Office (PGO) led the drafting of new regulations for the specialized prosecution offices, regional, district and municipal offices. As of January 1, 2021, the State Tax Service is authorized to investigate economic crimes.

Laws and Regulations on Foreign Direct Investment

In addition to its international agreements, Moldovan laws affecting FDI include the Civil Code, the Law on Property, the Law on Investment in Entrepreneurship, the Law on Entrepreneurship and Enterprises, the Law on Joint Stock Companies, the Law on Small Business Support, the Law on Financial Institutions, the Law on Franchising, the Tax Code, the Customs Code, the Law on Licensing Certain Activities, and the Law on Insolvency.

The current Law on Investment in Entrepreneurship came into effect in 2004. It was designed to be compatible with European standards in its definitions of types of local and foreign investment. It provides guarantees of investors’ rights, prohibitions against expropriation or similar actions, and for payment of damages if investors’ rights are violated. The law permits FDI in all sectors of the economy, while certain activities require a business license.

Competition and Antitrust Laws

In 2012, Parliament passed a law on competition in line with EU practice and legislation. The National Competition Agency was subsequently renamed the Competition Council. The Competition Council oversees compliance with competition and state-aid provisions and initiates examination of alleged violation of competition laws. The Competition Council may request cessation of action, prescribe behavioral or structural remedies, and apply fines.

Expropriation and Compensation

The government has had a history of depriving investors, both national and foreign, of their businesses in various forms. Many of them have sued the government at the European Court for Human Rights for violation of the right to fair trial and of the respect for property, or in international arbitral tribunals.

The Law on Investment in Entrepreneurship states that investments cannot be subject to expropriation or to measures with a similar effect. However, an investment may be expropriated for purposes of public utility if it is not discriminatory and just compensation is provided. If a public authority violates an investor’s rights, the investor is entitled to compensation equivalent to the actual damages at the time of occurrence, including any lost profits.

The government has given no indication of intent to discriminate against U.S. investments, companies, or representatives by expropriation, or of intent to expropriate property owned by citizens of other countries. No particular sectors are at greater risk of expropriation or similar actions in Moldova.

Since 2001, the government has cancelled several privatizations, citing the failure of investors to meet investment schedules or irregularities committed during the privatization process. While the government agreed to repay investors in such disputes, investors have had to apply to the European Court of Human Rights (ECHR) to enforce compensation payments. The government has complied with the ECHR rulings in these instances.

Dispute Settlement

ICSID Convention and New York Convention

In 2011, Moldova ratified the Convention on the International Center for the Settlement of Investment Disputes (ICSID – Washington Convention). The country also ratified the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Domestic courts recognize and enforce foreign arbitral awards. Moldova is also a party to the Geneva European Convention on International Commercial Arbitration of April 21, 1961, and the Paris Agreement relating to the application of the European Convention on International Commercial Arbitration of December 17, 1962.

Investor-State Dispute Settlement

Moldova is signatory to a number of bilateral investment treaties (see chapter 3 above), including the U.S.-Moldovan Treaty Concerning the Encouragement and Reciprocal Protection of Investment, which includes access to international arbitration for investment disputes.

Local courts recognize and enforce foreign arbitral awards against the government. There are no known cases when the Moldovan government denied voluntary payment under an arbitral award rendered against it.

International Commercial Arbitration and Foreign Courts

Private parties may choose alternative dispute resolution mechanisms instead of going to courts. Moldovan law provides the options of mediation and arbitration. The arbitration legislation is modeled after UNCITRAL rules. There are a number of arbitration bodies available in Moldova, including the arbitration court of the Moldovan Chamber of Commerce and Industry. AmCham Moldova has established the Chisinau Court of International Commercial Arbitration (CACIC) under its auspices.

Recognition and enforcement of foreign judgments are regulated by a complex framework of documents, including the Code for Civil Procedures, international conventions and bilateral treaties. Therefore, depending on the nationality of the court, Moldovan courts may apply different legal norms in examining the enforcement of foreign judgments. However, as a rule, foreign judgments are enforceable in Moldova on the basis of reciprocity and subject to New York Convention obligations.

Moldova’s court system generally enjoys a low level of public trust and is perceived to be vulnerable to acts of corruption, while court processes lack transparency. The overall expectation in court hearings involving representatives of public authorities, including economic entities, is that final court rulings will be in favor of state representatives. While arbitration is often seen as a preferable option to the courts, the courts must still enforce the arbitral decision. Investors have at times been discouraged by the slow pace of court enforcement of arbitral awards and the judge’s perceived discretion over the arbitral decision.

Bankruptcy Regulations

In terms of resolving insolvency, the World Bank ranks Moldova 67th out of 190 economies in the 2020 Doing Business Index; it takes creditors on average 2.8 years to recover their credit. This is below the regional average and trails EU members in Central and Eastern Europe. The country has changed its insolvency law to introduce expedited insolvency proceedings, including by granting priority to secured creditors, introducing new restructuring mechanisms, reducing opportunities for appeals, adding moratorium provisions, establishing strict statutory periods in the proceedings, and enhancing the role of insolvency administrators.

Investment Incentives

Investment incentives are applicable for all Moldovan-registered businesses, irrespective of the country of origin of the investment. Certain incentives apply only in specially designated areas such as free economic zones and industrial parks. Until 2024, Moldovan legislation allows employees of IT companies to benefit from incentives on personal income tax and social security contributions. Also, a 2017 law on information technology parks established a single tax for residents of the digital IT parks, calculated as the maximum between seven percent from sales and 30 percent from the national average forecasted salary multiplied by the number of employees. There is also a range of tax incentives applicable if businesses meet certain requirements. Among those incentives are the following: value-added tax (VAT) and customs exemptions on long-term assets included in share capital; deferment of VAT liabilities on imports of materials used in manufacturing export-bound products; lower VAT rates for the hospitality and restaurant businesses; and lower social contributions and VAT rates for agricultural businesses.

Foreign Trade Zones/Free Ports/Trade Facilitation

At present, seven free economic zones (FEZs), one international free port – Giurgiulesti – and one international free airport – Marculesti – are registered in Moldova. According to Moldovan law, these zones support job creation, attraction of foreign and domestic investments, and export-oriented production. The Law on Free Economic Zones regulates FEZ activity. Foreigners have the same investment opportunities as local entities. FEZ commercial entities enjoy the following advantages: 25 percent exemption from income tax; 50 percent exemption from tax on income from exports; for investments of more than USD 1 million, a three-year exemption from tax on income resulting from exports; and for investments of more than USD 5 million, a five-year exemption from tax on income from exports; zero value-added tax; exemption from excises; and a stand-still guarantee against any new changes in the law for ten years. In addition, residents investing at least USD 200 million in the FEZ are afforded a stand-still guarantee regarding new regulatory changes for the entire period of operation in the FEZ, but such protection cannot extend beyond 20 years.

The government also passed a 2008 law creating ten industrial parks with the aim of attracting investments in industrial projects. Businesses operating in those parks do not receive any special tax treatment, but typically have access to ready-to-use production facilities, offices and lower office rents for 25 to 30 years. Typically, these are idle premises of former industrial State-owned enterprises.

Similar to the FEZs, the Giurgiulesti Free International Port, Moldova’s only port accessible to sea-going vessels, was established in 2005. Commercial residents of the port enjoy the following advantages: 25 percent exemption from income tax for the first ten years following the first year when taxable income is reported; 50 percent exemption from tax on income for the remaining years; exemption from value-added tax and excises on imports and exports outside Moldova’s customs territory; zero valued-added tax on imports from Moldova; and a stand-still guarantee for commercial residents regarding any regulatory changes until February 17, 2030.

The Marculesti International Free Airport, a former military air base, was established in 2008 as a free enterprise zone for a 25-year period to develop cargo air transport. Airport management is also interested in turning Marculesti into a regional hub for low-cost passenger airlines.

Performance and Data Localization Requirements

All incentives are applied uniformly to domestic and foreign investors. The Law on Investment in Entrepreneurship, in effect since 2004, does not protect new investors from legislative changes.

No requirements exist for investors to purchase from local sources or to export a certain percentage of their output.

The Embassy is not aware of any reports of forced data localization or special requirements targeting foreign IT providers. However, companies maintaining servers with customer databases outside Moldova must comply with cumbersome domestic procedures related to protection of personally identifiable information. Cross-border transfer of personal data requires prior authorization by the supervisory body for personal data processing. The Ministry of Economy and Infrastructure is responsible for developing strategies and policies on electronic communication. The National Regulatory Agency for Electronic Communications and Information Technology (ANRCETI) is responsible for regulations and oversight. The National Center for Personal Data Protection (NCPDP) is the supervisory body for personal data processing.

No limitations exist on access to foreign exchange in relation to a company’s exports. There are no special requirements that Moldovan nationals own shares of a company. Both joint ventures and wholly foreign-owned companies may be set up in Moldova.

In fact, while not an official policy, in sectors of the economy that require large investments, experienced management, and technical expertise such as energy or telecommunications, the government has shown preference for experienced foreign investors over local investors. In other sectors, foreign and local investors formally receive equal treatment.

Moldovan law allows investments in any area of the country, in any sector, provided that national security interests, anti-monopoly legislation, environmental protection, public health, and public order are respected.

Some performance requirements are connected to tax incentives but are enforced equitably and described in the Tax Code and related governmental decisions and instructions. Foreign investors are required to disclose the same information as local investors. Moldova has no discriminatory visa, residence, or work-permit requirements inhibiting foreign investors’ mobility in Moldova. The government has set up a one-stop shop for foreigners applying for Moldovan residence and work permits in an effort to streamline a complicated procedure.

Moldova has a liberal commercial regime with more than 100 countries. According to the Tax Code, Moldovan exports are exempt from value added tax. Although there are no formal import price controls, there are reports that Moldovan Customs Service may make arbitrary price assessments on certain types of imported goods for revenue-enhancing purposes.

Real Property

Moldova’s laws protect all property rights. There is a national cadastral office, which registers all ownership titles in the real estate registry. However, the mortgage market is still underdeveloped. In addition, the judicial sector remains weak and does not always fully guarantee the property rights of citizens and foreign investors.

In the World Bank’s Doing Business Index Moldova ranks 22nd among 190 economies on the ease of registering property.

Intellectual Property Rights

Despite efforts to improve its intellectual property rights (IPR) regime and set up relevant executive structures in the government, Moldova does not fully enforce its IPR laws due to conflicts of interest, lack of resources, and a low level of awareness and training among law enforcement agencies. The concept of IPR is largely unrecognized by the population. The country has an agency for the protection of IPR, the State Agency on Intellectual Property (AGEPI), which continues working on improving the legal framework and adjusting it to EU norms, increasing public awareness, and building capacity in law enforcement. Under the AA/DCFTA, the government is working to bring Moldova’s practices in line with the EU.

Moldova is party to the majority of international treaties on IPR, including the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and 26 World Intellectual Property (WIPO) treaties, including the Berne Convention, the Paris Convention, the Patent Cooperation Treaty (PCT), the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty.

Along with other public institutions, AGEPI works on fulfilling Moldova’s IPR obligations as provided by the 2017-2019 National Action Plan for the implementation of the Association Agreement. In 2018, Moldova adopted the third Action Plan on the implementation of the National Strategy on Intellectual Property through 2020.  While some progress is being reported, there are still many outstanding issues related to geographical indications (GIs) that need to be addressed in national GI certification and control system.

In 2018, AGEPI was reorganized and consolidated. AGEPI created a free and publicly available online IPR database, which can be found at www.db.agepi.md . AGEPI continued to integrate its legal services and data into the international and regional platforms. In 2020, AGEPI signed a new Memorandum of Understanding on Electronic Communication of the Madrid System with the International Bureau of WIPO (BI) and integrated into the Madrid e-Filing platform. The government elaborated “A Guideline on Design Examination,” which is applicable for AGEPI examiners and third parties. Moldova began implementing the European common practices to harmonize trademark and design protocols with the EU Intellectual Property Office.

Moldova’s criminal code prohibits the unauthorized disclosure of trade secrets. A new law for the protection of pharmaceutical and medicinal product data came into force on January 1, 2020, the aim of which is to guarantee the confidentiality, non-disclosure, and non-reliance of data submitted while obtaining regulatory and market approval of the products.

Moldovan authorities, including Customs, the Ministry of Interior, and the General Prosecutor’s Office, track statistics for IPR violations annually, but such reports are not readily available online. To improve IPR enforcement, in 2020 Moldovan authorities developed, with EU support, an IPR Information System to track the exchange of IPR data between agencies, including AGEPI, Customs, Prosecution, Police, the Agency for Consumer Protection and Market Surveillance, and the Agency for Court Administration.

A report containing statistical and analytical data on IPR enforcement collected from all relevant stakeholders is released annually by the IPR Enforcement Observatory established by AGEPI. The 2020 Report is available in English and Romanian languages on the Observatory website: http://observatorpi.md/raport-national/ .

Moldova is not listed in the U.S. Trade Representative (USTR) Special 301 Report, nor is it included on the Notorious Markets List.

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

Capital Markets and Portfolio Investment

Moldova’s securities market is underdeveloped. Official National Bank of Moldova (NBM) statistics include data on portfolio investments, yet there is a lack of open-source information fully reflect the trends and relevance of these investments. NBM data shows that most portfolio investments target banks, while the National Statistics Bureau does not differentiate between foreign direct investment and portfolio investments of less than 10 percent in a company.

Laws, governmental decisions, NBM regulations, and Stock Exchange regulations provide the framework for capital markets and portfolio investment in Moldova. The government began regulatory reform in this area in 2007 with a view to spurring the development of the weak non-banking financial market. Since 2008, two bodies in particular – the NBM and the National Commission for Financial Markets – have regulated financial and capital markets.

Foreign investors are not restricted from obtaining credit from local banks, the main source of business financing. However, stringent lending practices limit access to credit for Moldovan companies, especially SMEs. The government has eased some lending regulations to assist SMEs to obtain credit during the COVID-19 pandemic. Local commercial banks provide mostly short-term, high-interest loans and require large amounts of collateral, reflecting the country’s perceived high economic risk. Progress in lending activity suffered a sharp reversal in 2015 after the late-2014 banking crisis, triggered by a massive bank fraud, which severely weakened the banking system. Extreme monetary tightening by the NBM following significant currency flight connected to the resulting bank bailouts led to prohibitively high interest rates. In recent years, lending conditions improved as interest rates continued to hover around nine percent.

Large investments can rarely be financed through a single bank and require a bank consortium. Recent years have seen growth in leasing and micro-financing, leading to calls for clear regulation of the non-bank financial sector. As a result, Parliament passed a new law on the non-bank financial sector, which entered into effect on October 1, 2018. Raiffeisen Leasing remains the only international leasing company which has opened a representative office in Moldova.

Even prior to the COVID-19 pandemic, the private sector’s access to credit instruments has been limited by the insufficiency of long-term funding, high interest rates, and unrealistic lending forecasts by banks. Financing through local private investment funds is virtually non-existent. A few U.S. investment funds have been active on the Moldovan market. The government adopted a 2018-2022 strategy for the development of the non-banking financial sector aimed at bolstering the capital markets combined with prudential supervision. A new Central Securities Depository was established under the supervision of the National Bank of Moldova to bring greater transparency and integrity to ownership and the recordkeeping associated with it.

Acting as an independent regulatory agency, the National Commission for Financial Markets (NCFM) supervises the securities market, insurance sector and non-bank financial institutions. A new capital markets law adopting EU regulations came into effect in 2013. It was designed to open up capital markets to foreign investors, strengthen NCFM’s powers of independent regulator, and set higher capital requirements on capital market participants.

Money and Banking System

In 2014, a crisis at three Moldovan banks (which resulted in their closure and the loss of USD 1.2 billion), two of them among the country’s largest, undermined confidence in the banking system. The role of a Moldovan bank in the “Russian Laundromat” case, estimated to have laundered from USD 20 to 80 billion, further underscored these challenges. The crisis shook Moldova’s banking system, causing some foreign correspondent banks to terminate ties with Moldovan banks and others to significantly tighten their lending.

In March 2020, Moldova successfully completed its IMF program after implementing reforms in financial and banking sectors. As a result of these reforms, the financial sector is better prepared to withstand the economic impact of the COVID-19 crisis. There is a high degree of capital and liquidity, and an overall reduction of non-performing loans to below eight percent. Moldovan banks remain the main, albeit currently limited, source of business financing. The non-bank financial institutions however have been gaining sizable market share, especially in individual and SME lending, where banks have been encumbered by prudential banking rules. Bank assets account for about 52 percent of GDP. Banks are also the largest loan providers, with loans amounting to approximately USD 2.6 billion. The COVID-19 crisis slowed down bank lending in 2020.

Moldova currently has 11 commercial banks. The NBM regulates the commercial bank sector and reports to Parliament. Foreign bank subsidiaries must register in Moldova and operate under the local banking legislation. Although the integrity of true bank ownership records is questionable, foreign investors’ share in Moldovan banks’ capital is approximately 87 percent of total capital, and includes such major foreign investors as OTP Bank (Hungary), Erste Bank (Austria), Banca Transilvania (Romania) and Doverie Holding (Bulgaria).

As of December 31, 2020, total bank assets were MDL 103.9 billion (USD 6 billion) and 90 percent of total assets in the financial sector. Moldova’s three largest commercial banks account for roughly 65 percent of the total bank assets, as follows: Moldova Agroindbank – MDL 30.4 billion (USD 1.75 billion); Moldindconbank – MDL 21.3 billion (USD 1.2 billion); and Victoriabank – MDL 15.4 billion (USD 887.7 million). To prevent another crisis, the NBM instituted special monitoring of these top three banks over concerns about the transparency of bank shareholders; this monitoring was lifted in April 2020.

After 2016, the Moldovan Parliament adopted legislation that would strengthen the independence of decision making at the NCFM and NBM – to help address systemic supervisory problems that had a negative effect on Moldova’s financial sector. To strengthen the system of tracking shares and shareholders, with USAID assistance, authorities put in place a law establishing the aforementioned Centralized Securities Depository. In addition, all bank shares must be sold and purchased on the Moldovan Stock Exchange. These measures have improved the transparency and reliability of the financial sector.

NBM’s Banking Law of 2018 and the Bank Recovery and Resolution Law from 2016 bring the financial sector closer to harmonization with EU standards, including through the application of stronger risk-based supervision to banks, increased enforcement powers and monetary penalties applied to banks, structures to address problem banks, and strengthening the NBM’s ability to conduct risk assessments. Also, NBM required banks to increase their credit loss provisioning and take urgent action to reinforce internal risk management as well as procedures on related-party financing. In addition, the NBM developed a methodology to better identify the related parties at banks.

Foreign Exchange and Remittances

Foreign Exchange

Moldova accepted Article VIII of the IMF Charter in 1995, which required liberalization of foreign exchange operations. There are no restrictions on the conversion or transfer of funds associated with foreign investment in Moldova. After the payment of taxes, foreign investors are permitted to repatriate residual funds. Residual fund transfers are not subject to any other duties or taxes and do not require special permissions. Moldova’s central bank uses a floating exchange rate regime and intervenes only to smooth sharp fluctuations.

Between late 2014 and early 2016, the national currency, the leu (plural lei), depreciated following challenges in the political environment, Russian bans on Moldovan food exports, and falling remittances from Russia, which impacted Moldova’s balance of payments. A massive banking fraud and a subsequent bailout program further undermined the leu, which depreciated by 36 percent. Since 2016, the National Bank has been pursuing a tight monetary policy that has contributed to a strengthening of the leu. In 2020, the national currency exchange rate fluctuated, but stabilized in the second half of the year.

Remittance Policies

No significant delays in the remittances of investment returns have been reported. Domestic commercial banks have accounts in leading multinational banks, and foreign investors enjoy the right to repatriate their earnings.

The Moldovan leu is the only accepted legal tender in the retail and service sectors in Moldova. Foreign exchange regulation of the NBM allows foreigners and residents to use foreign currencies in some current and capital transactions in the territory of Moldova. Generally, there are no difficulties associated with the exchange of foreign or local currency in Moldova.

Sovereign Wealth Funds

The embassy is not aware of any sovereign wealth funds run by the government of Moldova.

Since gaining independence in 1992, Moldova has privatized most State-owned enterprises (SOEs), and most sectors of the economy are almost entirely in private hands. However, the government still fully or partially controls some enterprises operating in a variety of economic sectors. The major SOEs are northern electricity grids, Chisinau heating companies, fixed-line telephone operator Moldtelecom, and the state railway company. The government keeps a registry of state-owned assets, which is available on the website on the Public Property Agency http://www.app.gov.md/registrul-patrimoniului-public-3-384 .

SOEs are governed by the law on stock companies and the law on state enterprises as well as a number of governmental decisions. SOEs have boards of directors usually comprised of representatives of the line ministry, the Ministry of Economy and Infrastructure, and the Ministry of Finance. As a rule, SOEs report to the respective ministries, with those registered as joint stock companies being required to make their financial reports public. Moldova does not incorporate references to the OECD Guidelines on Corporate Governance for SOEs in its normative acts.

Moldovan legislation does not formally discriminate between SOEs and private-run businesses. By law, governmental authorities must provide a level legal and economic playing field to all enterprises. However, SOEs are generally seen as better positioned to influence decision-makers than private sector competitors. In some cases, SOEs have allegedly used these advantages to prevent open competition in individual sectors.

The Law on Entrepreneurship and Enterprises has a list of activities restricted solely to SOEs, which includes, among others, human and animal medical research, manufacture of orders and medals, postal services (except express mail), sale and production of combat equipment and weapons, minting, and real estate registration.

Privatization Program

Moldova launched the first of several waves of privatization in 1994. In 2007, Parliament passed a new law governing management and privatization of SOEs. Two major privatizations in 2013 – of the then-largest bank, Banca de Economii, and the 49-year concession of the Chisinau Airport – subsequently proved highly controversial. Privatization efforts in 2014 and 2015 emphasized public-private partnerships as means for companies to gain access to SOEs in infrastructure-related projects. In 2018, the government held several rounds of privatization, selling its stake in 19 companies, including airline Air Moldova and gas interconnector Vestmoldtransgaz. In 2019, the government finished privatizing state tobacco company Tutun CTC, then announced a moratorium on all further privatizations, following controversies over past sales. The government resumed privatization in 2020, selling off MDL 420 million (USD 24.3 million) worth of state-owned assets in open outcry auctions.

To date, Moldova has conducted privatizations through open tenders organized at the stock exchange, open to interested investors. The government may also use open outcry auctions for some properties, so-called investment or commercial tenders to sell entire companies to buyers taking on investment commitments, or to the highest bidders or public-private partnerships for infrastructure related projects. The government publishes privatization announcements on the website of the Public Property Agency app.gov.md  and in the official journal Monitorul Oficial.

While Moldovan legislation deals with issues pertaining to environment, workers’ rights, social fairness or governance, there is little awareness of the concept of the due diligence approach to ensuring responsible business conduct. The country’s corporate culture and private sector are still at an early stage of development and still seeking to define the nature of interactions between private business, government authorities, broader stakeholders, and the public at large. There is no governmental policy to encourage enterprises to follow OECD or UN Guidelines in this area.

Foreign companies operating in Moldova are gradually introducing the concept of corporate social responsibility as an aspect of responsible business conduct. AmCham Moldova has set a leading example, with its corporate members engaging in a forestation project, in the rehabilitation of medical facilities, and in Christmas collection projects for orphanages. The COVID pandemic prompted many businesses to make donations of personal protection equipment and meals to frontline workers.

Moldova is among countries where children engage in the worst forms of child labor, including commercial sexual exploitation, sometimes as a result of human trafficking. Children also engage in child labor in agriculture. Moldova is not a signatory of the Montreux Document of the Private Military and Security Companies.

Additional Resources

Department of State

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

Department of Labor

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

While Moldova has taken steps to adopt European and international standards to combat corruption and organized crime, corruption remains a major problem.

In 2012-13, the government enacted a series of anti-corruption amendments. This package included new legislation on “integrity testing” related to a disciplinary liability law for judges. It also extended confiscation and illicit enrichment statutes in the Moldovan Criminal Code as per the United Nations Convention against Corruption (UNCAC). The Constitutional Court subsequently restricted integrity testing (e.g., excluding random testing as “entrapment”), but enactment of these reforms substantially augmented Moldova’s corruption-fighting toolkit.

The National Anticorruption Center (NAC), created in 2012, focuses on investigating public corruption and bribery crimes, and is subordinated to the Parliament (the CCECC had been organized under the executive branch). Moldovan judges, who had previously enjoyed full immunity from corruption investigations, can now be prosecuted for crimes of corruption without prior permission from their self-governing body, although the Superior Council of Magistrates still must approve any search or arrest warrant against a judge.

The government has developed and enacted a series of laws designed to address legislative gaps such as the Law on Preventing and Combating Corruption, the Law on Conflict of Interests, and the Law on the Code of Conduct for Public Servants. The Criminal Code criminalizes two forms of public sector corruption: passive and active. These statutes apply only to corrupt acts and bribery committed by public officials. In 2016, part of the reform of the prosecution system, Moldova adopted the Law on the Prosecution Service, and created two specialized prosecution agencies – the Anticorruption Prosecution Office (APO) and the Prosecution Office for Combating Organized Crime and Special Cases (PCCOCS). Beginning in 2015, specialized prosecution offices began to investigate and prosecute individuals allegedly involved in the “billion dollar” banking theft and a series of high-profile bribery, corruption, and tax evasion cases, though with only limited progress. These offices face multiple challenges, including lack of independent budgets, high workload, external interference, and serious questions about their independence, transparency and impartiality.

In 2018, APO and PCCOCS started recruitment for seconding investigators to their offices. According to the 2016 prosecution reform law, these investigators are responsible for supporting prosecutors to investigate complex corruption cases. However, even with a nearly-full complement of seconded investigators, APO still relies on NAC investigators to conduct many corruption-related investigations and prosecutions. Also in 2018, a new statutorily-created agency, the Criminal Assets Recovery Agency (CARA), began operating as a specialized unit within NAC. The selection and appointment of the agency’s leadership is coordinated through a competitive process by the NAC. The agency continues to grow and has demonstrated increased capacity to detect, track, seize and recover criminal proceeds throughout 2019.

In 2016, Parliament passed the Law on the National Integrity Authority (NIA) and the Law on Disclosure of Assets and Conflict of Interest by public officials. The NIA became operational in 2018. The director, deputy director, and all inspectors are hired in competitive processes, but the agency has not yet hired a full complement of inspectors. NIA continues to lack staff and sufficient resources to fulfill its mission. The issuance of “integrity certificates” to individuals with well-known ties to the billion dollar heist further degraded the organization’s reputation. In 2020, Parliament amended the law undermining NIA’s activity. The Constitutional Court suspended the amendments and is yet to rule on their constitutionality.

Moldova’s 2017-2020 National Integrity and Anticorruption Strategy was drafted and passed following public consultations, and is structured along the “integrity pillars” concept that aims to strengthen the integrity climate among civil servants at all levels. It includes a role for civil society organizations (CSOs) through alternative monitoring reports and promoting integrity standards in the private sector. The strategy addresses the complexity of corruption by employing sector-based experts to evaluate specific integrity problems encountered by different vulnerable sectors of public administration. The deadline for the strategy had to be extended as many actions were not implemented.

Moldovan law requires private companies to establish internal codes of conduct that prohibit corruption and corrupt behavior. Moldova’s Criminal Code also includes articles addressing private sector corruption, combatting economic crime, criminal responsibility of public officials, active and passive corruption, and trading of influence. This largely aligns Moldovan statutory law with international anti-bribery standards by criminalizing the acts of promising, offering, or giving a bribe to a public official. Anticorruption laws also extend culpability to family members. A new illicit enrichment law was added in 2013, but its potential as an effective anticorruption tool is severely constricted by the Constitutional Court’s interpretation of a constitutional provision creating a presumption in the law that assets possessed by a person were lawfully acquired. In 2017, the Anticorruption Prosecution Office started the only illicit enrichment case initiated in Moldova to date, against a prominent chief judge involved in the construction of private apartments. The criminal case remains unresolved, as the judge has resigned from the judiciary.

The country has laws regulating conflicts of interest in awarding contracts and the government procurement process; however these laws are not assessed as widely or effectively enforced. In 2016, Parliament added two new statutes to the Criminal Code criminalizing the misuse of international assistance funds. These provisions provide a statutory basis for prosecutors to investigate and prosecute misuse of international donor assistance by Moldovan public officials in public acquisitions, technical assistance programs, and grants

Despite the established anticorruption framework, the number of anticorruption prosecutions has not met international expectations (given corruption perceptions), and enforcement of existing legislation is widely deemed insufficient. In 2020, Moldova ranked 115 out of 180 (from 120 the prior year) among countries evaluated in the Transparency International Corruption Perceptions Index.

A Transparency International Global Corruption Barometer (GCB) survey published in 2017 showed that 84 percent of Moldovans thought the government was doing badly in fighting corruption. Globally, Moldova is among the top countries where people perceive public authorities to be most corrupt; almost 70 percent say people working in public sector institutions (the President’s office, Parliament, central government, tax inspection, police, the judiciary, and local government) are assessed by those polled as highly corrupt. Almost 50 percent of Moldovans say they had to pay bribes over the past 12 months when coming in contact with public authorities. The latest GCB survey concluded that Moldova needs genuine and urgent measures to address corruption. Negative ratings of official efforts to curb corruption suggest that more must be done to reduce public sector graft and clean up institutions to act in the public interest.

The Freedom House Moldova “Nations in Transit Report” 2018 concluded the government has focused more on improving the legal framework than on implementing it. The report found anticorruption initiatives did not contribute to tackling endemic corruption or the de-politicization of public institutions and regulatory agencies. Public competitions have been mostly non-transparent and based on controversial regulations or political loyalty to, or membership in, the ruling political group, rather than on the basis of merit. The investigation into the “billion-dollar” banking sector theft has yielded few results. Official data reported that by the end of 2018, only USD 100 million has been recovered, mainly from taxes, credits, and the sale of assets belonging to the three banks liquidated following the theft. The stolen assets have not been recovered, there remains no assurance that significant remaining funds will be recovered.

Freedom House’s most recent report, Democracy in Retreat: Freedom in the World 2020, found Moldova continues to be only “partially free,” earning 60/100 points for political rights/civil liberties, two points more than the prior year. The “partially free” label was due largely to perceptions of ongoing corruption. According to the 2020 Heritage Foundation’s Economic Freedom Index, Moldova’s economic freedom score was 62.0, making its economy 87th, just ahead of Belarus (88) and behind Samoa (86). Its overall score increased by 2.9 points, with improvements in government integrity and government spending. Regionally, Moldova is ranked 40 of 45 countries in Europe, and its overall score is well below the regional average and approximately equal to the world average. In the rule of law area, Heritage indicated property rights are undermined by a weak and corrupt judiciary.

Opinion surveys conducted by reputable pollsters like the International Republican Institute (IRI) consistently show over 95 percent of Moldovans see corruption as a big problem for the country. Moldovans name the top corrupt institutions as: 1) Parliament; 2) public servants, including the police; 3) the judiciary; 4) top government officials; 5) political parties and their leaders.

In 2007, Moldova ratified the United Nations Convention Against Corruption, subsequently adopting amendments to its domestic anticorruption legislation. Moldova does not adhere to the Organization for Economic Cooperation and Development (OECD) Convention on Combating Bribery. However, Moldova is part of two regional anticorruption initiatives: the Stability Pact Anticorruption Initiative for South East Europe (SPAI), and the Group of States against Corruption (GRECO) of the Council of Europe. Moldova cooperates closely with the OECD through SPAI and with GRECO, especially on country evaluations. In 1999, Moldova signed the Council of Europe’s Criminal Law Convention on Corruption and Civil Law Convention on Corruption. Moldova ratified both conventions in 2003. In 2020, Moldova joined OECD’s Istanbul Anticorruption Action Plan.

Moldova is one of the participating countries in the Anti-Corruption Network for Eastern Europe and Central Asia (ACN), a driver of anticorruption reforms in the region. Moldova will be among four other countries where anticorruption performance indicators will be piloted in 2021 before the 5th round of ACN monitoring.

In October 2020, Moldova’s second Compliance Report, adopted by the Group of States against Corruption (GRECO) in the fourth round of evaluation, concluded the current level of compliance of Moldova with the GRECO recommendations is generally insufficient. Following the evaluation, 18 recommendations were addressed to Moldova. Subsequently, out of 18 recommendations, four were rated as satisfactorily treated or implemented, and 10 were partially implemented, and four remain unimplemented.

Resources to Report Corruption

Ruslan Flocea
Director
National Anti-Corruption Center
Bul. Stefan cel Mare si Sfant 168, Chisinau MD2004, Moldova
Tel. +373 22-257 257 (secretariat)/800-55555 (hotline)/22-257 333 (special line)
secretariat@cna.md

Lilia Carasciuc
Executive Director
Transparency International Moldova
Strada 31August 1989 nr. 98, of.205, Chisinau MD2004, Moldova
Tel. +373-22 203-484(office)/800-10 000 (hotline)
office@transparency.md 

Levels of street crime and other types of violent crime are equal or lower in Moldova than in neighboring countries and businesses typically only employ the most basic security procedures to safeguard their personnel.  Moldova has not had significant instances of transnational terrorism.  While there have been occasional instances of political violence in the past decade, these cases have typically been directed against Moldovan state institutions and have not generally impacted the international business community in Moldova.  There have been no significant instances of political violence in the last four years and all recent large demonstrations have been peaceful.

The embassy has received no reports over the past ten years of politically motivated damage to business projects or installations in Moldova. In 2015 and early 2016, there was public outcry over the political class’ failure to prevent (or even facilitate) massive bank fraud where nearly 15 percent of GDP disappeared from the country’s then-three largest banks. Round-the-clock anti-government protests culminated in January 2016 in clashes with riot police when protesters tried to prevent Parliament from voting in a new government. The clashes were limited and did not turn into full-blown violence or cause extensive damage that would affect businesses in any way, and the government remained in power.

In 2020, protesters held rallies in front of Parliament without causing significant damages or clashing violently with police.

Separatists control the Transnistria region of Moldova, located between the Nistru River and the eastern border with Ukraine. Although a brief armed conflict took place in 1991-1992, the sides signed a cease-fire in July 1992. Local authorities in Transnistria maintain a separate monetary unit, the Transnistrian ruble and a separate customs system. Despite the political separation, economic cooperation takes place in various sectors. The government has implemented measures requiring businesses in Transnistria to register with Moldovan authorities. The Organization for Security and Cooperation in Europe (OSCE), with Russia, and Ukraine acting as guarantors/mediators and the United States and EU as observers, supports negotiations between Moldova and the separatist region Transnistria (known as the “5+2” format). Throughout the years, progress has been inconsistent, with talks stalling in 2006 and formally resuming in late November 2011. Important achievements in the past few years include the resumption of rail freight traffic through Transnistria, the opening of a bridge across the Nistru river, Transnistrian-registered vehicles gaining access to international traffic, issuance of Moldovan apostilles on Transnistrian-issued higher education diplomas, and the operation of Latin Script schools in Transnistria.

For years, Moldova prided itself on its skilled labor force, including numerous workers with specialized and technical skills. However, many skilled workers have left Moldova for better paying jobs in other countries. This has led to shortages of skilled workers in Moldova. There are imbalances in the labor market arising from a general lack of workers with vocational training that employers need, on one hand, and lack of job opportunities for academically educated people, on the other. Labor shortages are reported in manufacturing, engineering, and IT. Low birth rates, emigration, and an aging population, coupled with a lack of immigration, represent a challenge to Moldova’s labor pool more generally. Around a fifth of the labor force is estimated to work abroad (around 800,000). According to World Bank population projections, if current emigration trends continue, Moldova will lose another 20 percent of its population by 2050.

Official unemployment was 3.8 percent in 2020, which is misleading given the low labor participation rate of 40.3 percent, owing to large numbers of Moldovans migrating abroad, which reduces the number of job seekers at home. Youth unemployment is more than double the national average at 10.9 percent. Employment in Moldova is largely based on agriculture, low productivity sectors, and crafts. Approximately 17 percent of the working population is employed in the informal economy; the non-agricultural workforce in the informal economy is 10.8 percent.

Moldova’s Constitution guarantees the right to establish or join a trade union. Trade unions have influence in the large and mostly State-owned enterprises and have historically negotiated for strong labor relations, minimum wage, and basic worker rights. Unions also have a say in negotiating collective labor agreements in various industries. Unions are less active and effective in small private companies. Moldova is a signatory to numerous conventions on the protection of workers’ rights. The country has moved toward adopting international standards in labor laws and regulations. In recent years, the government made changes to labor legislation in favor of employers and somewhat reducing unions’ input on issues related to hiring and firing personnel. Nevertheless, labor legislation is stringent in matters dealing with severance payments or leave, regulations that some foreign investors view as an impediment to labor flexibility and as putting a heavy burden on employers.

The government has drafted legislation to modernize the labor market, with a focus on skills development and vocational education training reform.

The Moldovan General Federation of Trade Unions has been a member of the ILO since 1992 and has been affiliated with the International Confederation of Free Unions (ICFU) since 1997. The Federation split into two separate unions in 2000, but merged in 2007, forming the National Trade Union Confederation (CNSM), which obtained membership in the International Trade Union Confederation in 2010.

*National Bureau of Statistics and National Bank of Moldova are the primary source of the information. The FDI figure is preliminary.

Table 4: Sources of Portfolio Investment
Data not available.

Note: Moldova does not submit data for the IMF’s Coordinated Portfolio Investment Survey (CPIS). However, according to the National Bank of Moldova, the preliminary figure for total foreign portfolio investment amounted to USD 26.51 million in 2020. A breakdown by country for all portfolio investments is not available.

U.S. Embassy Chisinau, Moldova
Str. Alexei Mateevici 103
Chisinau MD 2009, Moldova
Main switchboard +373 (22) 40 83 00
Fax: +373 (22) 23 30 74/40 84 10
chisinaucommerce@state.gov 

Policies Towards Foreign Direct Investment

Mongolia generally does not discriminate against foreign investors with two major exceptions.  First, foreign investors must invest a minimum of $100,000 to establish a venture; in contrast, Mongolian investors face no investment minimums.  Second, only Mongolian adult citizens may own real estate.  Additionally, while foreign investors may obtain use rights for the underlying land, these rights last for five years with a one-time, five-year renewal.  The government imposes no such restriction on its nationals.  Investors may also avail themselves of the Mongolian National Development Agency’s “One-Stop-Shop for Investors,” which provides services on visas, taxation, notarization, business registration (see  http://nda.gov.mn/ ).  The Agency has said that in some cases municipal, provincial, and central government officials may waive land-use rights limits and recommends that investors contact it for more information on how to apply for these waivers.  Investors have also encouraged the government to develop a policy aimed at retaining existing foreign direct investment in country.

Limits on Foreign Control and Right to Private Ownership and Establishment

Except for real estate, foreign and domestic investors have the same rights to establish, sell, transfer, or securitize structures, shares, use rights, companies, and movable property.  Mongolia generally imposes no statutory or regulatory limits on foreign ownership and control of investments.  The Mining Law allows the government to acquire up to 50 percent of mineral deposits deemed of “strategic” value to the state by parliament.  Article 6.2 of Mongolia’s Constitution also requires the state to take a “majority” share of the “benefits” of strategic mining projects.  Investors are waiting for the government to clarify the meaning of “benefits” derived from mining activities, which in the Mongolian language is the same word as “profit,” but, according to government officials, may include such non-cash contributions as development programs, employment, or technology transfers.  Investors also observe that excessive regulatory discretion allows bureaucrats de facto control over the use of legally granted rights, corporate governance decisions, and ownership stakes, stating that in some cases regulators make up rules beyond their actual statutory remit.  Finally, Mongolia has no formal or informal investment-screening mechanism, although the National Security Council has barred investments from some foreign state-owned entities.

Other Investment Policy Reviews

The Mongolian Government has undergone several third-party investment policy reviews over the last three years by the OECD ( http://www.oecd.org/investment/countryreviews.htm ) and the WTO ( WTO | Mongolia ).

Business Facilitation

Consistent with the World Bank’s Doing Business Report, investors report Mongolia’s business registration process is reasonably clear.  All foreign and domestic enterprises must register with the State Registration Office ( https://burtgel.gov.mn/ ).  Registrants can obtain required forms online and submit them by email.  The State Registration Office aims at a two-day turnaround for the review and approval process.  Investors report bureaucratic discretion often adds weeks or even months to the process and state more transparent adherence to the relevant laws and regulations would yield a consistent, streamlined process.  Once approved by the State Registration Office, a company must register with the General Tax Authority ( http://en.mta.mn/ ).  Upon hiring its first employees, a company must register with the Social Insurance Agency ( http://www.ndaatgal.mn/v1/ ).  The State Registration Office reports that notarization is not required for its registration process.

The same ease of opening a business does not apply to closing a business, however.  Foreign investors and legal contacts report the onerous bureaucratic and judicial process of shutting down a firm takes no less than 18-24 months.

Outward Investment

While the Mongolian Government neither promotes nor incentivizes outward investment, it does not restrict domestic investors from investing abroad.

In force since 1997, the United States and Mongolia Bilateral Investment Treaty (BIT) protects U.S. investors and assists Mongolia’s development by creating conditions more favorable for U.S. and Mongolian investment.  BIT details are available from the U.S. Department of State at  US-Mongolia BIT .

While Mongolia has ratified the U.S.-Mongolia Agreement on Transparency in Matters Related to International Trade and Investment between the United States of America and Mongolia (Transparency Agreement), the government is more than four years behind in its commitment to implement public-notice and comment periods for new laws and regulations affecting international trade and investment.  A copy of the Transparency Agreement is available:   US-Mongolia Transparency Agreement .

Mongolia and the United States have no bilateral tax or free-trade agreements.  For Mongolia’s other agreements see UNCTAD:   Mongolia Trade and Tax Agreements .  The Economic Partnership Agreement between Japan and Mongolia entered into force in 2016.  Mongolia is negotiating a free-trade agreement with the Eurasian Economic Union.

Mongolia’s Taxation Regime

Mongolia imposes a license-transfer tax for resource-use rights of 10 percent on the gross value of the transfer of rights involving land possession or usage, including exploration and mining licenses and rights for water, timber, pasturage, and land use in urban areas.  Some investors believe the tax discourages investment in the resource sector.  Inconsistent and nontransparent enforcement, coupled with an onerous dispute resolution process particularly concern investors. The amendments also impose a tax of 5 percent on the interest income of commercial Mongolian banks to be paid on loans and debt instruments obtained from local and foreign stock markets; decrease the withholding tax on income provided to non-residents to 15 percent; lower from 20 percent to 5 percent the tax on dividends for foreign investors; and lower from 10 percent to 5 percent the tax on financing obtained through debt instruments from initial and secondary markets.  They also simplify reporting procedures and provide relief for companies experiencing financial difficulties.

While the Ministry of Finance has reached out to the private sector to seek their input in drafting implementing regulations for the new tax laws, investors report a need for greater and more regular input into the final rules.  Using a formal public notice and comment system – as outlined under the Transparency Agreement – would create an institutionalized framework that would improve the government’s ad hoc approach.

Transparency of the Regulatory System

The Law on Legislation sets out who may draft and submit legislation; the format of these bills; the respective roles of the Mongolian parliament, government, and president; and the procedures for obtaining and employing public comment on pending legislation.  The Law on Legislation states that law initiators – members of parliament, the president of Mongolia, or cabinet ministers – must fulfill these criteria:  (1) provide a clear process for developing and justifying the need for the draft legislation; (2) set out methodologies for estimating costs to the government related to the bill’s implementation; (3) evaluate the impact of the legislation on the public if implemented; and (4) conduct public outreach before submitting legislation to the parliament.

Law initiators must post draft legislation for public comment and publish reports evaluating costs and impacts on parliament’s official website ( Parliament of Mongolia/Projects ) at least 30 days prior to submitting bills to parliament.  Posts must explicitly state the time for public comment and review.  Initiators must solicit comments in writing, organize public meetings, seek comments through social media, and carry out public surveys.  No more than 30 days after the public comment period ends, initiators must prepare a matrix of all comments, including those used to revise the bill as well as those not used, which must be posted on parliament’s official web site.  After a law’s passage, parliament must monitor and evaluate its implementation and impacts.  Investors report that while legislators have not implemented all these requirements, most relevant legislation is posted on parliament’s website before passage.  Ministries and agencies lag in fulfilling these statutory requirements, according to businesses.

While General Administrative Law Article 6 aligns Mongolia’s regulatory drafting process with Transparency Agreement obligations, investors report the government is not generally enforcing it.  Under the Transparency Agreement, originators of regulations must seek public comment by posting draft regulations in a single journal of national circulation, which Mongolia has designated as LegalInfo.mn ( LegalInfo ).  Drafters must record, report, and respond to significant public comments.  Under Mongolian law, the Ministry of Justice and Home Affairs must certify that each regulatory drafting process complies with the General Administrative Law before a regulation enters force.  After approval, the statutorily responsible government agency monitors implementation and impacts.

Businesses also complain about a high regulatory burden at the local, or province and county, levels.  They note inconsistent application of regulations and statutes among central, provincial, and municipal jurisdictions; and a lack of knowledge among local inspectors.  Regional tax, health, and safety inspectors are cited as particularly problematic.  The Economic Policy and Competitiveness Research Center of Mongolia annually ranks local regulatory burdens:  http://en.aimagindex.mn/competitiveness .

Mongolia’s so-called Glass Budget Law requires all levels of government publicly post proposed and actual budget expenditures; and the law, according to businesses and transparency experts, has generally been followed.

International Regulatory Considerations

Mongolia, not part of any regional economic bloc, often seeks to adapt European standards and norms in such areas as construction materials, food, and environmental regulations; looks to U.S. standards in the hydrocarbon sector; and adopts a combination of Australian and Canadian standards and norms in the mining sector.  Mongolia also tends to employ World Organization for Animal Health standards for its animal health regulations.  Mongolia, a member of the WTO, asserts it will notify the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations.

Legal System and Judicial Independence

Investors state that judges frequently avoid controversial decisions in business disputes, preferring to delay judgment for as long as possible – sometimes years.  If a decision is made, businesses face similarly long delays in obtaining and enforcing court orders.  In some instances, cases have taken so long that by the time an enforcement order is executed, the counterparty has liquidated assets and vanished.  Investors note similarly long delays with respect to inspection agencies, such as the Tax Dispute Settlement Resolution Council as well as with other inspection agency panels, especially those related to mineral licenses and health matters.

Investors have praised recent reforms they say could help to restore judicial independence severely compromised by a 2019 parliamentary resolution that vested the president, parliamentary speaker, and prime minister with the power to remove judges and prosecutors.  In November 2019 parliament amended the constitution to include reforms to strengthen judicial independence and accountability, effectively rendering the 2019 resolution invalid.  Parliament, in 2021 revised the Law of the Judiciary to bring it into line with the amended constitution.  The amended law, which entered into force March 1, limits the powers of the government, parliament, and the president to influence the selection and removal of judges and relegates discipline of jurists to a newly created Judicial Disciplinary Council, except in matters involving criminal acts.

Under Mongolia’s hybrid civil law-common law system, trial judges may use prior rulings to adjudicate similar cases but have no obligation to follow legal precedent as such.  Mongolian laws, and even their implementing regulations, often lack the specificity needed for consistent judicial and prosecutorial interpretation and application.  All courts may rule on matters of fact as well as matters of law at any point in the judicial process.

Mongolia has specialized laws for contracts but no dedicated courts for commercial activities. Contractual disputes are usually adjudicated through the Civil Court division of the district court system.  Criminal Courts adjudicate crime cases brought by the General Prosecutors Office. Disputants may appeal to the City Court of Ulaanbaatar and ultimately to the Supreme Court of Mongolia.  Mongolia has several specialized administrative courts adjudicating cases brought by citizens, foreign residents, and businesses against official administrative acts.  Mongolia’s Constitutional Court, the Tsets, rules on constitutional issues.  The General Executive Agency for Court Decisions enforces judgments and orders.

Investors and legal sector experts say that the Administrative Court is procedurally competent, fair, and reliable but that the Civil Courts deliver highly inconsistent judgments, reflecting ignorance of judicial best practices in civil and criminal matters as well as potential corruption, especially in civil commercial cases.

Laws and Regulations on Foreign Direct Investment

The 2013 Investment Law sets the general statutory and regulatory frame for all investors in Mongolia.  Under the law, foreign investors may access the same investment opportunities as Mongolian citizens and receive the same protections as domestic investors.  Investment domicile, not investor nationality, determines if an investment is foreign or domestic.  The law provides for a more stable tax environment and offers tax and other incentives for investors; and authorizes a single point of registration, the State Registration Office ( www.burtgel.gov.mn ), for all investors.  The Investment Law offers tax incentives in the form of transferable tax-stabilization certificates, giving qualifying projects favorable tax treatment for up to 27 years.  Affected taxes may include the corporate-income tax, customs duties, value-added tax, and royalties.

Investors cite two primary national-treatment issues with respect to investment rules.  First, foreign nationals and companies may not own real estate; only Mongolian adult citizens may own real estate.  While foreign investors may obtain use rights for the underlying land, these rights expire after a set number of years with limited rights of renewal.  The National Development Agency ( http://nda.gov.mn/ ), responsible for assisting foreign investors has said that in some cases municipal, provincial, and central government officials may waive land-use rights limits and recommends that investors contact it for more information on how to apply for these waivers.  Foreign investors also object to the regulatory requirement that each foreign investor in any given venture must invest a minimum of $100,000.  Although the Investment Law has no such requirement, Mongolian regulators impose it on all foreign investors without requiring the same minimum from Mongolian investors.

The Mongolian National Development Agency’s “One-Stop-Shop for Investors” provides services on investment data, visas, taxation, notarization, business registration, and government-business dispute resolution ( http://nda.gov.mn/ ).

Competition and Antitrust Laws

Mongolia’s Agency for Fair Competition and Consumer Protection reviews domestic transactions for competition-related concerns.  For a description of the Agency go to  AFCCP .  The Agency for Fair Competition and Consumer Protection launched no 2020 competition cases affecting FDI.

Expropriation and Compensation

State entities at all levels may confiscate or modify land-use rights for purposes of economic development, national security, historical preservation, or environmental protection.  Mongolia’s constitution recognizes private real-property rights and derivative rights, and Mongolian law specifically bars the government from expropriating assets without payment of adequate, market-based compensation.  Investors express little disagreement with such takings in principle but worry a lack of clear lines of authority among the central, provincial, and municipal governments has led to loss of property and use rights.  For example, the Minerals Law provides no clear division of local, regional, and national jurisdictions for issuances of land-use permits and special-use rights.  Faced with unclear lines of authority and frequent differences in practices and interpretation of rules and regulations by different levels of government, investors may find themselves unable to fully exercise legally conferred rights.

Some expropriation cases involve court expropriations after third-party criminal trials at which investors are compelled to appear as “civil defendants” – but are not allowed to fully participate in the proceedings.  In these cases, government officials are convicted of corruption, and the court then orders the civil defendant to surrender a license or property, or pay a tax penalty or fine, for having received an alleged favor from the criminal defendant with no judicial proceedings to determine if property or licenses were obtained illegally.

Dispute Settlement

ICSID Convention and New York Convention

Mongolia ratified the Washington Convention and joined the International Centre for Settlement of Investment Disputes (ICSID) in 1991 and the New York Convention in 1994; and has accepted international arbitration in several disputes.  Mongolian law allows for domestic enforcement of awards under the ICSID and New York Conventions.

Investor-State Dispute Settlement

Under the 1997 U.S.-Mongolia Bilateral Investment Treaty ( US-Mongolia BIT ), both countries agree to respect international legal standards for state-facilitated property expropriation and compensation matters involving nationals of either country, providing U.S. investors in Mongolia with an extra measure of protection against financial loss.

In disputes involving the government, investors report some government officials and politicians interfere in administrative and judicial dispute resolution processes.  Foreign investors describe three general categories of disputes eliciting interference.  First, in disputes between private parties before judicial tribunals, investors warn that Mongolian private parties may exploit contacts in the government, the judiciary, law enforcement, the media, or the prosecutor’s office to coerce foreign private parties to accede to demands.  Second, in disputes between investors and the Mongolian government directly, the government may claim a sovereign right to intervene in the business venture, often because the Mongolian government itself operates or seeks to operate a competing state-owned enterprise (SOE); because officials have undisclosed business interests; or from ignorance of the relevant statutes and regulations.  Third are disputes with Mongolian tax officials or prosecutors levying highly inflated, statutorily deficient tax assessments against a foreign entity and demanding immediate payment on threat of civil or criminal prosecution.

Investors report local courts recognize and enforce court decisions – but problems exist with enforcement.  The thinly staffed General Executive Agency for Court Decisions (GEACD) implements civil and criminal court orders.  Its employees, often living in the jurisdictions in which they work, are subject to pressure from friends and professional acquaintances.  A complicated chain-of-command and opportunities for conflicts of interest may weaken GEACD’s resolve to execute court judgments on behalf of foreign and domestic investors.

Mongolia has been both plaintiff and defendant in several past and ongoing international arbitration suits over the expropriation of private sector mining rights or the imposition of excessive tax assessments.  Whenever the government has lost arbitration claims, it has satisfied each and every judgment after some negotiation with foreign investors.

Investors have reported no extrajudicial actions against their interests.

The Oyu Tolgoi copper and gold mine has resurfaced as a bellwether of Mongolia’s investment climate.  Upon reaching full production, the mine may produce as much as 25 percent of Mongolia’s GDP.  Resolving an ongoing investment dispute related to the mine between the government and multi-national shareholders is seen by many investors as essential to improving Mongolia’s investment climate image internationally.

International Commercial Arbitration and Foreign Courts

The Mongolian government has consistently honored international arbitral awards against it.

Mongolia’s Arbitration Law, based on the United Nations Commission on International Trade Law (UNCITRAL), provides a clear set of rules and protections for Mongolia-based arbitration. Any organization that satisfies the laws’ requirements can provide arbitral services.

Bankruptcy Regulations

Bankruptcy Law treats bankruptcy as a civil matter requiring judicial adjudication.  Mongolia allows registration of mortgages and other debt instruments backed by real estate, structures, immovable collateral (mining and exploration licenses, intellectual property rights, and other use rights) and movable property (cars, equipment, livestock, receivables, and other items of value).  Although investors may securitize movable and immovable assets, local law firms hold that the bankruptcy process remains too vague, onerous, and time consuming for practical use.  Mongolia’s constitution and statutes allow foreclosure and bankruptcy only through judicial proceedings.  Reporting that proceedings usually require no less than 18 months, with 36 months not uncommon, investors and legal advisors state that a lengthy appeals process, perceived corruption, and government interference may create years of delay.  Moreover, while in court, creditors face suspended interest payments and limited access to the asset.

Investment Incentives

The government generally offers the same tax preferences to foreign and domestic investors; and occasionally waives tariffs for imports of essential fuel and food products or for imports in such targeted sectors as agriculture or energy.  Exemptions may apply to Mongolia’s 5-percent import duty and 10-percent value-added tax (VAT).  The government may also extend tax credits on a case-by-case basis to investments in such sectors as minerals processing, agriculture, and infrastructure.  Under the Investment Law, foreign-invested companies, properly registered and paying taxes in Mongolia, qualify as domestic Mongolian entities for investment incentive packages that, among other benefits, offer tax stabilization for a period of years.  While in theory the government can issue guarantees or jointly finance foreign direct investment projects, it seldom does so in practice.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Mongolian government has had a free-trade zone program since 2004.  Two free-trade zones are along the Mongolian spurs of the Trans-Siberian Highway and Railroad:  (1) the northern Mongolia-Russia border town of Altanbulag; and (2) the southern Mongolia-China border town of Zamiin-Uud.  Both free-trade zones are relatively inactive, requiring development.  A third free-trade zone is located at the port-of-entry of Tsagaannuur in the far western province of Bayan-Olgii bordering Russia.  Mongolian officials also suggest that the long-delayed new Ulaanbaatar International Airport may host a free-trade zone.

Performance and Data Localization Requirements

Mongolia does not generally require foreign investors to use local goods, services, or equity, or to engage in import substitution.  Neither foreign nor domestic businesses need to export a certain percentage of output or use foreign exchange to cover exports.  The government applies the same geographical restrictions to foreign and domestic investors, involving border security, environmental concerns, and local-use rights.  The government does not impose onerous or discriminatory visa, residence, or work permit requirements on U.S. investors – although foreign and domestic firms must meet certain industry-specific, local-hire requirements.

Investors may locate and hire workers without using hiring agencies so long as hiring practices follow the Labor Law.  This law requires companies to employ Mongolian workers in certain labor categories where the government determines Mongolians can perform the task as well as foreigners.  This law generally applies to unskilled-labor categories and not fields in which a high degree of technical expertise not existing in Mongolia is required.

The Mongolian government strongly encourages but does not legally compel domestic sourcing of inputs, especially for firms engaged in natural-resource extraction.  The Minerals Law states that holders of exploration and mining licenses should preferentially supply extracted minerals at market prices to Mongolian processing facilities and should procure goods and services and hire subcontractors from business entities registered in Mongolia.  Although facing no legal requirement to source locally, investors occasionally report that central, provincial, or municipal governments slow permitting and licensing until domestic and foreign enterprises make some effort to source locally.  Hiring Mongolians is often a de facto necessity because the government sometimes issues work visas for foreign employees only if employers have attempted to hire domestically.  The government had allowed companies to pay for waivers for domestic hiring requirements for expatriate expert labor and senior management staff but since 2019 has suspended the waiver process and imposed a requirement that companies hire five Mongolians for every non-Mongolian.  This requirement does not apply to members of boards of directors.

Despite pressure to source locally, foreign investors generally set their own export and production targets without concern for government-imposed quotas or requirements.  Mongolia does not require (but often encourages) technology transfers.  The government generally imposes no offset requirements for major procurements.  Investors, not the government, generally decide on technology, intellectual property, and finance as they see fit.  Except for an unenforced provision of the Minerals Law requiring mining companies to list 10 percent of the shares of the Mongolian-registered mining company on the Mongolian Stock Exchange, foreign-invested businesses are not required to sell shares into the Mongolian market.  Equity stakes are generally at the discretion of investors, Mongolian or foreign.  In cases where investments may have national economic, political, security, or social impacts, the government has, without a clear statutory basis, restricted the type of financing foreign investors may use, their choice of partners, or to whom they sell shares or equity stakes.

The government does not require localized data storage; nor legally compels IT providers to turn over source code or provide access for surveillance, except for criminal investigations.  Businesses may freely transmit customer or other business-related data abroad.

Real Property

The Mongolian Constitution, per the 2019 amendments, provides that “the State shall recognize any forms of public and private properties.”  Statute limits real-estate ownership to adult citizens of Mongolia.  Mongolian civil law allows private Mongolian citizens or government agencies to assume property ownership or use rights if the current owner or holder of use rights does not use that property or those rights.  In the case of use rights, revocation and assumption is almost always written into the formal agreements covering the rights.  Squatters may, under certain circumstances, claim effective property ownership of unused structures.

Foreign investors may own permanent physical structures and obtain use rights to land and resources, but only Mongolian citizens may own real estate, and only in municipalities.  Land ownership does not convey ownership of, or necessarily access to, surface or subsurface resource rights, which remain with the state.  Outside municipalities, the state owns the land and resources in perpetuity and may lease those resources to public and private entities.

Ownership of a structure may vest the owner with control over the use rights of the land upon which the structure sits.  Use rights are granted from periods of 3 to 60 years, depending on the particular use right.  However, foreign nationals and foreign companies can lease land-use rights for no more than 10 years:  a five-year term and a single five-year renewal.

Although Mongolia has a well-established register for immovable property – structures and real estate – it lacks a central register for use rights; consequently, investors, particularly those investing in rural Mongolia, have no easy way to learn who might have conflicting rights.  Complicating matters, Mongolia’s civil-law system is still developing a formal process for apportioning multiple use rights on adjacent lands or adjudicating disputes arising from conflicting use rights.

Creditors may seize and dispose of property offered as collateral, although this process is often subject to lengthy legal delays.  Debt instruments backed by real estate, fixed structures, and other immovable collateral may be registered with the Immovable Property Office of the State Registration Office ( www.burtgel.gov.mn ).  Movable property (cars, equipment, livestock, receivables, and other items of value) may also be registered with the State Registration Office as collateral.  Investors report that the movable-property registration system, while generally reliable, experiences occasional technical capacity issues.

As of 2021, the Mongolian government has no accurate figure for land with clear titles.

Intellectual Property Rights

Film, television, and digital content from the United States enjoy strong copyright protection in Mongolia, while the music and publishing industry is steadily signing licensing agreements with organizations using U.S. and Mongolian content.  Mongolia’s Internet Service Providers (ISPs) will quickly block access to internet addresses of offending sites once listed by the Intellectual Property Office of Mongolia.  However, use of pirated software by Mongolian government ministries, home-use consumers, and businesses is rampant.  Patent protection for pharmaceutical and medical device importers is virtually non-existent, with trademark law generally the only recourse for rightsholders.  While enforcement agencies will seize trademark-infringing drugs, simply removing the infringing trademark still allows the importer to bring the drug despite it being patent-infringingt.  Medical devices encounter similar problems.  Trademarkinfringement also includes stores distributing counterfeit apparel and fake spare parts for heavy equipment.  However, the Intellectual Property Office of Mongolia has not focused on these areas because rightsholders have not filed complaints.

IPR violations below MNT 50 million ($18,000) are subject to administrative enforcement; those above MNT 50 million are subject to criminal enforcement.  Enforcement agencies do pursue criminal and civil intellectual property (IP) cases, highlighting a willingness by Mongolian prosecutors, administrative investigators, and police to attack the problem.

The new Law of Mongolia on Intellectual Property sets a framework for public and private enforcement of IP, which had previously been left to ad hoc administrative decrees and private sector efforts.  The law grants: (1) the Intellectual Property Office of Mongolia exclusive authority to administer IPR under the Minister of Justice and Home Affairs; (2) expands the human and material capacity of the Intellectual Property Office of Mongolia to cover all of Mongolia; (3) creates a Dispute Resolution Council to handle complaints arising from Intellectual Property Office of Mongolia administrative acts; and (4) lets the Intellectual Property Office of Mongolia authorize private-sector IP-related associations to assist members with copyright, trademark, and patent registrations and royalty collection as well with disputes.

For additional information about laws and points of contact at local IP offices, please see WIPO’s country profiles at  WIPO  or  IPOM .

Capital Markets and Portfolio Investment

Mongolia imposes few restrictions on capital flows and has respected IMF Article VIII by not restricting international payments and transfers.  However, capital markets remain underdeveloped, with little ability to trade futures or derivatives.  The state-owned Mongolian Stock Exchange ( MSE ) is the primary venue for domestic capital and portfolio investments.

Money and Banking System

Mongolia’s four-largest commercial banks – Khan, Trade and Development Bank (TDB), Khas, and Golomt – are majority owned by a combination of both Mongolian and foreign investors and collectively hold 83 percent of all banking assets, or about $10.6 billion (as of December 2020).  Mongolian commercial banks had rates of non-performing loans averaging 11.8 percent in December 2020, an increase from December 2019’s 9.9 percent.  Ongoing COVID-19 rules enabling the postponement of consumer-loan and mortgage payments may create some additional forbearance risk in the banking sector.  The Bank of Mongolia, Mongolia’s central bank, regulates banking operations.  The Bank of Mongolia allows foreigners to establish domestic accounts so long as they can prove lawful residence in Mongolia.

Parliament amended Mongolia’s Law on Banking in January 2021.  The amended law states that ownership by a shareholder and their related parties collectively and as certified by the Bank of Mongolia shall not exceed 20 percent. Banks have until December 31, 2023 to comply with this divestment requirement.  In addition, Mongolia’s four systemically important commercial banks – Khan, TDB, Khas, and Golomt – and the state-owned State Bank must list themselves on the Mongolian Stock Exchange through an IPO by June 30, 2022.  The new rules should improve bank governance by creating accountability to a broader group of shareholders.

The IMF has reported unaddressed macroprudential concerns regarding the relatively large banking system, resulting in the Extended Fund Facility’s unsuccessful completion in May 2020.  Mongolia’s banking system remains broadly undercapitalized, while commercial banking practices and regulatory supervision remain inadequate for ensuring macroeconomic stability.  Mongolia also has a significant number of illiquid banks.  Potential investors in Mongolia’s banking sector are advised to conduct careful due diligence as sector participants and regulators have expressed concerns that the balance sheets of certain systemically important banks may have been inflated or misreported to create the perception of higher capital-adequacy ratios than is accurate.

International and domestic sector participants observe that the Bank of Mongolia does not exercise adequate macroprudential oversight over banks, enabling these banks to misreport their assets.  It has also allowed insolvent smaller banks to continue operating despite not having enough assets to cover liabilities.  Investors contemplating IPO participation should carefully factor in the additional systemic risk associated with these regulatory concerns.

Mongolia’s 2020 removal from the Financial Action Task Force can give confidence to investors that the country takes seriously anti-money laundering and countering the financing of terrorism concerns.

Foreign Exchange and Remittances

Foreign Exchange

The government employs a liberal foreign exchange regime; its national currency, the tugrik (denoted as MNT), is fully convertible into a wide array of international currencies.  Foreign and domestic businesses have reported no problems converting or transferring funds aside from occasional, market-driven shortages of foreign reserves.

Mongolia’s Currency Law requires domestic transactions use MNT, unless exempted by the Bank of Mongolia.  Regulation prohibits listing of wholesale or retail prices in any way – including as an internal accounting practice – that effectively denominates or otherwise indexes prices to currencies other than MNT.  Hedging mechanisms available elsewhere to mitigate exchange risk are generally unavailable given the small size of the market.  Letters of credit in a variety of currencies are available for trade facilitation.  The government sometimes pays for goods and services with promissory notes that cannot be directly exchanged for other currencies.

Remittance Policies

Businesses report no chronic, government-induced delays remitting investment returns or receiving inbound funds, although challenges with correspondent-banking relationships sometimes slow remittances.  Most transfers are completed within a few days to a week; however, occasional currency shortages, most often of U.S. dollars, may cause commercial banks and the central bank to limit transfers temporarily.  Remittances sent abroad are subject to a 10-percent withholding tax to cover potential tax liabilities.

Sovereign Wealth Funds

Mongolia’s Ministry of Finance manages two sovereign wealth funds (SWF) funded through diversion of mining sector revenues: The Fiscal Stabilization Fund and the Future Heritage Fund.  The Fiscal Stabilization Fund diverts revenues that might promote boom and bust cycles of spending; however, Mongolia’s recent fiscal crises have depleted this fund.  The Future Heritage Fund, resembling Norway’s Global Pension Fund, accumulates mining revenues for the future and invests the proceeds exclusively outside Mongolia.  The Ministry of Finance and the IMF project the Future Heritage Fund should start accumulating $104-125 million annually in 2022, coinciding with increased revenues from the Oyu Tolgoi copper and gold mine.  These SWFs are not meaningfully funded as 2021, however.

Mongolia has state-owned enterprises (SOEs) in the banking and finance, energy production, mining, and transport sectors.  The Ministry of Finance manages the State Bank of Mongolia and the Mongolian Stock Exchange, and the SOE Erdenes Mongol holds most of the government’s mining assets.  The Ministry of Roads and Transport Development manages the Mongolian Railway Authority.  The Government Agency for Policy Coordination on State Property ( http://www.pcsp.gov.mn/en ) manages non-mining and non-financial assets.  The Agency for Policy Coordination on State Property does not provide a complete list of its SOEs.

Investors are concerned SOEs crowd out more efficient private-sector investment.  Investors can compete with SOEs, but an opaque regulatory framework limits competition.  Foreign and domestic private investors have observed that government regulators favor SOEs, such as streamlining the process for environmental-permit approvals or ignoring health and safety issues at SOEs.

Mongolian SOEs do not adhere to the OECD Corporate Governance Guidelines for SOEs.  Although technically required to follow the same international best practices on disclosure, accounting, and reporting used by private companies, SOEs tend to follow these rules only when seeking international investment and financing.  Many international best practices are not institutionalized in Mongolian law, and SOEs tend to follow existing Mongolian rules.  At the same time, foreign-invested firms follow the international rules, causing inconsistencies in corporate governance, management, disclosure, minority-shareholder rights, and finance.

Privatization Program

The government routinely floats privatization for such state-held assets as the Mongolian Stock Exchange, the national air carrier MIAT, the Mongol Post Office, and the Tavan Tolgoi coal mine through sales of shares or equity but has not identified how or when it would do so.

The practice of responsible business conduct in Mongolia has improved.  Most international companies make good-faith efforts to work with local communities.  Larger domestic firms tend to follow accepted international responsible business conduct practices and underwrite a range of related activities, while smaller companies, lacking resources, often limit responsible business conduct actions to the locales in which they work.  Locally, firms adopting responsible business conduct are perceived favorably by the communities in which they operate.  Nationally, responses range from praise from politicians to condemnation by certain civil-society groups alleging responsible business conduct nothing more than a cynical attempt to buy public approval.  Public awareness of responsible business conduct remains limited, with only a few NGOs involved in responsible business conduct promotion or monitoring, and those concentrated on such large projects as the Oyu Tolgoi mega-mine.

Given Mongolia’s high social-media penetration, businesses should be aware that discussions regarding their activities could be ongoing on international and domestic social media sites; and should monitor social media discussions to ensure their activities are portrayed accurately.

The government makes a good-faith effort to enforce legislation on human rights, labor rights, consumer protection, environmental protection, and other laws protecting individuals from adverse business impacts.  While the Company Law articulates rules of corporate governance, accounting requirements, and shareholder rights, it has no rules for executive compensation.

Mongolia has no official position on OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas and no domestic legislation on due diligence for companies sourcing minerals originating from conflict-affected areas.  The government has not adopted a requirement regarding Organization for Economic Co-operation and Development and UN principles on responsible business conduct (OECD:   http://www.oecd.org/about/ ).  Mongolia is a member in good standing of the Extractive Industries Transparency Initiative ( EITI ).

There have been no alleged/reported human or labor rights concerns relating to RBC of which foreign businesses should be aware.

Mongolia has a private security industry, and many public and private entities avail themselves of private security services.  However, Mongolia has not signed the Montreux Document on Private Military and Security Companies.  It is neither a supporter of the International Code of Conduct or Private Security Service Providers nor a participant in the International Code of Conduct for Private Security Service Providers’ Association (ICoCA).

Additional Resources 

Department of State

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

Department of Labor

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

Investors have acknowledged that corruption is widespread in Mongolia, leading some to exit Mongolia or decide against investing in it when less corrupt jurisdictions offer similar investment opportunities.  Given the level of corruption, U.S. businesses are advised to be especially diligent in complying with the U.S. Foreign Corrupt Practices Act.  Although Mongolian law penalizes corrupt officials, the government does not always implement the law effectively or evenhandedly.  Private enterprises report instances where officials and political operatives demand bribes to transfer-use rights, settle disputes, clear customs, ease tax obligations, act on applications, obtain permits, and complete registrations.  NGOs and private businesses report judicial corruption is also present.  Factors contributing to corruption include conflicts of interest, lack of transparency, limited access to information, an underfunded civil-service system, low salaries, and limited government control of key institutions.

Mongolia does not require companies to establish internal codes of conduct that, among other things, prohibit bribery of public officials.  U.S. and other foreign businesses have reported that they accept the need for and have adopted internal controls, ethics, and compliance programs to detect and prevent bribery of government officials.  (For Mongolia anti-corruption efforts:   https://www.state.gov/reports/2020-country-reports-on-human-rights-practices/mongolia/.

The Independent Agency Against Corruption (IAAC) has primary responsibility for investigating corruption, assisted at times by the National Police Agency’s Organized Crime Division.

Mongolia has signed and ratified the UN Anticorruption Convention ( UNAC ) but not the OECD Anti-Bribery Convention.

Resources to Report Corruption

Independent Agency Against Corruption (IAAC)
District 5, Seoul Street 41
Ulaanbaatar, Mongolia 14250
Telephone:  +976-70110251; 976-11-311919
Email:   contact@iaac.mn 
Web:     http://www.iaac.mn/home?lang=en 

Transparency International Mongolia
O. Batbayar, Executive Director, Mongolia Chapter
Office 803, 8th floor, Dalai Tower, Unesco Street,
Sukhbaatar District – Khoroo 1, Ulaanbaatar 14230
Web:    https://www.transparency.org/country/MNG 

Mongolia’s political and security environment is peaceful and stable.  Crime is low in the capital Ulaanbaatar but fluctuates from season to season.  Street-level petty theft and assault occur with some regularity, while more complex financial and fraud-based crimes are on the rise.  U.S. investors are generally welcomed by the Mongolian people; however, in small numbers and in specific areas, anti-foreign sentiment fueled by fringe nationalist groups has been observed. These sentiments do not focus on U.S. investors exclusively and are subject to current events.   Mining sector investors have reported that unlicensed, artisanal gold miners – locally know as ninja miners – may seek to mine gold on a legally licensed mine sites or sites where the ninja miners believe precious metals lie.  These intrusions can become disorderly and in rare cases lead to violence.

The National Statistics Office of Mongolia reports as of December 2020 official unemployment was 7.6 percent of Mongolia’s 1.22-million-person labor pool (92.100 people).  Youth unemployment hovers around 54 percent of total unemployed.  Approximately 4,039 foreign workers from 97 countries are officially registered with the Ministry of Labor, of whom two-thirds work in construction, mining, and manufacturing.  More than a half of the foreign workers come from China (51.2 percent), although COVID-19-related travel restrictions have likely diminished this total.  Out the 1.2 million labor pool, 45 percent (548,277) live in Ulaanbaatar and 55 percent (668,323) in rural areas.  Unskilled labor is abundant, but shortages persist in most professional categories requiring advanced degrees or vocational training, including all types of engineers and professional tradespeople in the construction, mining, and services sectors.  Foreign-invested companies address shortages by providing in-country training, increasing salaries and benefits to retain employees, or hiring expatriate workers with expertise unavailable in Mongolia.

The Labor Law requires companies to employ Mongolian workers in all labor categories where the Ministry of Labor and Social Protection determines a Mongolian can perform the task as well as a foreigner.  This provision primarily applies to unskilled labor categories.  Investors can locate and hire workers without hiring agencies, if hiring practices follow the Labor Law.  If employers want to hire expatriate laborers and cannot obtain a waiver from the Ministry of Labor and Social Protection for that employee, the employer can pay a monthly waiver fee.  Depending on a project’s importance, the Ministry of Labor and Social Protection can exempt employers from 50 percent of the waiver fees per worker.  However, employers report difficulty in obtaining waivers.  (For details on Mongolian labor laws:   https://www.state.gov/reports/2020-country-reports-on-human-rights-practices/mongolia/)

Because Mongolia’s winters limit operations in infrastructure development, construction, and mining, employers tend to use a higher degree of temporary contract labor than companies operating year-round.  The law allows employers and employees to use short-term contracts.

The Labor Law allows most workers to form or join independent unions and professional organizations and protects rights to strike; but denies these rights to foreign workers, certain public servants, and workers without formal employment contracts.  However, all groups have the right to organize.  The law protects the right to participate in trade union activities without retaliation, and the government has protected this right in practice.  The law provides for reinstatement of workers fired for union activity, but this provision is not always enforced.  Some employees occasionally face obstacles to forming or joining unions, and some employers have taken steps to weaken existing unions.  For example, some employers have prohibited workers from participating in union activities during working hours or refused to conclude collective bargaining agreements in contracts.

The Labor Law allows employers to fire or lay off workers for cause.  Depending on the circumstances, however, severance may be required, and workers may seek judicial review of their dismissal.  Employers and legal experts report that Mongolia’s courts usually support employee claims, especially if the plaintiff or defendant is a foreign business.  The severance laws requires employers to pay laid off workers one month of the contracted salary, but fired workers receive no severance.  Laid off or fired workers are entitled to three months of unemployment insurance from the Social Insurance Agency.

The Law on Collective Bargaining regulates relations among employers, employees, trade unions, and the government.  Wages and other conditions of employment are set between employers (whether public or private) and employees, with trade union input in some cases. Laws protecting the rights to collective bargaining and freedom of association are generally enforced.  The Mongolian Confederation of Trade Unions represents most workers in the resource extraction and construction-related sectors but not government and agricultural sector employees in collective bargaining activities.  The Confederation of Trade Unions also mediates specific grievances through the government-sanctioned Tripartite Labor Dispute Settlement Committees.  The Tripartite Labor Dispute Settlement Committees resolve most disputes between workers and management and consist of representatives Confederation of Trade Unions, employers, and the government.  Cases not resolved by these Committees may go to court.

Proposed amendments to the Labor Law would mandate employers, the government, and the Confederation of Mongolian Trade Unions to form committees to set work hours and conditions, rather than employers and employees contracting directly based on actual labor needs.  The bill also authorizes ministries to set sectoral quotas for foreign labor and imposes a more elaborate permitting requirements for foreign labor.

The International Labor Organization (ILO) is concerned about child-labor practices and variations between Mongolian law and international labor standards.  Authorities report employers often require minors to work more than weekly permitted hours, paying them less than the minimum wage.  The General Agency for Specialized Inspections ( GASI ) enforces all labor regulations but is understaffed.  For ILO conventions ratified by Mongolia:

The United States Development Finance Corporation, formally OPIC, ( USDFC ) offers loans, grants, and political risk insurance to U.S. investors active in most sectors of the Mongolian economy.  DFC and Mongolia have an Investment Incentive Agreement that allows DFC-financed projects to receive national treatment.  The agreement is available:  OPIC/Mongolia Agreement .   The U.S. Export-Import Bank ( EXIM ) offers programs in Mongolia for short-, medium-, and long-term transactions in the public sector and for short- and medium-term transactions in the private sector.  Mongolia is also a member of the Multilateral Investment Guarantee Agency ( MIGA ).  South Korea, Canada, the Russian Federation, Japan, China, Poland, Hungary, and Austria have provided investment and trade financing for their firms in Mongolia.  In addition, the European Bank for Reconstruction and Development (EBRD:   EBRD/Mongolia ) and the International Finance Corporation (IFC:   IFC/Mongolia ) also support Mongolia-based investments.

Note:  The Government of Mongolia does not track where beneficial ownership of a given investment terminates.  The government only records where the company claims its domicile.  The U.S. Embassy in Mongolia knows of numerous cases where foreign entities active in Mongolia do not incorporate in their countries of origin but rather in third countries for tax mitigation purposes.  Consequently, although Mongolia’s data and the IMF’s, respectively, suggest that much of Mongolia’s investment originates from such places as the Netherlands or Singapore, much of the investment comes from other jurisdictions, including but not limited to the United States, Australia, Canada, Russia, and PRC China.

The Economic and Commercial Section
U.S. Embassy
P.O. Box 341
Ulaanbaatar 14192, Mongolia
Telephone:  +976-7007-6001
Email:  Ulaanbaatar-Commercial 

Policies Towards Foreign Direct Investment

Over the past decade, the GOR has undertaken a series of policy reforms intended to improve the investment climate, wean Rwanda’s economy off foreign assistance, and increase FDI levels. Rwanda enjoyed strong economic growth until the start of the COVID-19 pandemic in March 2020, averaging over seven percent annual GPD growth over the prior decade. Rwanda also enjoys high rankings in the World Bank’s Doing Business report (38 out of 190 economies in 2020 worldwide, and second best in Africa) and a reputation for low corruption. In 2020, Rwanda experienced a 3.4 percent GDP contraction, marking its first recession since the 1994 genocide.

The RDB ( https://rdb.rw ) was established in 2006 to fast-track investment projects by integrating all government agencies responsible for the entire investor experience under one roof. This includes key agencies responsible for business registration, investment promotion, environmental compliance clearances, export promotion, and other necessary approvals. New investors can register online at the RDB’s website (https://rdb.rw/e-services) and receive a certificate in as few as six hours, and the agency’s “one-stop shop” helps investors secure required approvals, certificates, and work permits. RDB states its investment priorities are: 1) export; 2) manufacturing including -textiles and apparel, electronics, information communication and technology equipment, large scale agricultural operations excluding coffee and tea, pharmaceuticals, processing in wood, glass and ceramics, processing and value addition in mining, agricultural equipment and other related industries that fall in these categories; 3) energy generation, transmission and distribution; 4) information and communication technologies, business process outsourcing and financial services; 5) mining activities relating to mineral exploration; 6) transport, logistics and electric mobility; 7) construction or operations of specialized innovation parks or specialized industrial parks; 8) affordable housing; 9) tourism, which includes hotels, adventure tourism and agro-tourism; 10) horticulture and cultivation of other high-value plants; 11) creative arts in the subsector of the film industry; 12) skills development in areas where the country has limited skills and capacity.

In February 2021, Rwanda made significant changes to the Investment Code to address previous investor complaints and included new incentives to attract investments in strategic growth sectors. The GOR created the Rwanda Financial Intelligence Centre (FIC), passed a law on Anti-Money Laundering and Counter-Terrorism Financing, and passed a law on Mutual Legal Assistance in Criminal Matters to fully criminalize money laundering and terrorism financing and align the country with OECD rules. The GOR amended the Company Act and passed a law on partnerships to allow professional service providers to register as partners rather than limited liability companies.

In 2020, The World Bank Ease of Doing Business report indicated that Rwanda made doing business easier by exempting newly formed small and medium businesses from paying for a trading license during their first two years of operation. In addition, the GOR reduced the time needed to obtain water and sewage connections to facilitate construction permits. It also began requiring construction professionals to obtain liability insurance. The country also upgraded its power grid infrastructure and improved its regulations on weekly rest, working hours, severance pay, and reemployment priority rules.

Several investors have said a top concern affecting their operations in Rwanda is that tax incentives included in deals negotiated or signed by the RDB are not fully honored by the Rwanda Revenue Authority (RRA). Investors further cite the inconsistent application of tax incentives and import duties as a significant challenge to doing business in Rwanda. For example, a few investors have said that customs officials have attempted to charge them duties based on their perception of the value of an import regardless of the actual purchase price.

Under Rwandan law, foreign firms should receive equal treatment regarding taxes and equal access to licenses, approvals, and procurement. Foreign firms should receive value added tax (VAT) rebates within 15 days of receipt by the RRA, but firms complain that the process for reimbursement can take months and occasionally years. Refunds can be further held up pending the results of RRA audits. A few investors cited punitive retroactive fines following audits that were concluded after many years. RRA aggressively enforces tax requirements and imposes penalties for errors – deliberate or not – in tax payments. Investors cited lack of coordination among ministries, agencies, and local government (districts) leading to inconsistencies in implementation of promised incentives. Others pointed to a lack of clarity on who the regulator is on certain matters. The U.S. Treasury Department’s Office of Technical Assistance (OTA) provided tax consultants to RRA to review auditing practices in Rwanda. The OTA program concluded in 2020 and produced a standardized tax audit handbook for RRA’s auditors to use. RRA has also instituted improvements to its systems that will automate certain processes and make many more processes digitized. Per RRA, it is now able to handle VAT claims in real time due to these changes.

Limits on Foreign Control and Right to Private Ownership and Establishment

Rwanda has neither statutory limits on foreign ownership or control nor any official economic or industrial strategy that discriminates against foreign investors. Local and foreign investors have the right to own and establish business enterprises in all forms of remunerative activity.

Foreign nationals may hold shares in locally incorporated companies. The GOR has continued to privatize state holdings with the government, ruling party, and military continuing to play a dominant role in Rwanda’s private sector. Foreign investors can acquire real estate but with a general limit on land ownership according to the 2013 land law. While local investors can acquire land through leasehold agreements that extend to a maximum of 99 years, foreign investors can be restricted to leases of 49 to 99 years with the possibility of renewal. Freehold is granted only to Rwandan citizens for properties of at least five hectares but may also be granted to foreigners for properties in designated Special Economic Zones, on a reciprocal basis, or for land co-owned with Rwandan citizens (if Rwandan citizens own at least 51 percent). However, according to an October 2020 draft law, freehold tenure would continue for Rwandan citizens on lands of at least two hectares and freehold tenure for foreigners could be approved by a Presidential Order for exceptional circumstances of strategic national interests. Long-term leases (emphyteutic leases) in residential and commercial areas for both citizens and foreigners acquiring land through private means would be increased to 99 years compared to the current 20 and 30 years, respectively. As of April 2021, this draft law had not yet been finalized. The Investment Code includes equal treatment for foreigners and nationals regarding certain operations, free transfer of funds, and compensation against expropriation. In April 2018, Rwanda introduced new laws to curb capital flight. Management, loyalty, and technical fees a local subsidiary can remit to its related non-residential companies (parent company) are capped at two percent of turnover. Companies resolving to go beyond the cap are subject to a 30 percent corporate tax on turnover in addition to a 15 percent withholding tax and an 18 percent reserve charge.

Other Investment Policy Reviews

In February 2019, The World Trade Organization (WTO) published a Trade Policy Review for the East African Community (EAC) covering Burundi, Kenya, Rwanda, Tanzania and Uganda. The report is available at: https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=(@Symbol=%20wt/tpr/s/*)%20and%20((%20@Title=%20rwanda%20)%20or%20(@CountryConcerned=%20rwanda))&Language=ENGLISH&Context=FomerScriptedSearch&languageUIChanged=true# 

The Rwanda annex to the report is available at: https://docs.wto.org/dol2fe/Pages/FE_Search/ExportFile.aspx?Id=251521&filename=q/WT/TPR/S384-04.pdf

https://docs.wto.org/dol2fe/Pages/FE_Search/ExportFile.aspx?Id=251521&filename=q/WT/TPR/S384-04.pdf

Business Facilitation

RDB offers one of the fastest business registration processes in Africa. New investors can register online at RDB’s website ( http://org.rdb.rw/busregonline ) or register in person at RDB offices in Kigali. Once RDB generates a certificate of registration, company tax identification and employer social security contribution numbers are automatically created. The RDB “One Stop Center” assists firms in acquiring visas and work permits, connections to electricity and water, and support in conducting required environmental impact assessments.

RDB is prioritizing additional reforms to improve the investment climate. In October 2020, RDB launched electronic auctioning to reduce fraud by increasing transparency. The new system reduces the time needed to enforce judgments, reducing court fees and allowing payments electronically. RDB hopes to amend the land policy to merge issuance of freehold titles and occupancy permits; introduce online notarization of property transfers; implement small claims procedure to allow self-representation in court and reduce attorney costs; and establish a commercial division at the Court of Appeal to fast-track commercial dispute resolution.

Rwanda promotes gender equality and has pioneered several projects to promote women entrepreneurs, including the creation of the Chamber of Women Entrepreneurs within the Rwanda Private Sector Federation (PSF). Both men and women have equal access to investment facilitation and protections.

Outward Investment

The Investment Code provides incentives for internationalization. A small and medium registered investor or emerging investor with an investment project involved in export is entitled to a 150 percent tax deduction of all qualifying expenditures relating to internationalization including: 1) overseas marketing and public relations activities including launch of in-store promotions, road shows, overseas business or trade conferences; 2) participation in overseas trade fairs not supported by another existing initiative; 3) overseas business development costs; 4) market entry and research costs such as costs of establishing a legal entity in a foreign market, salary costs of employees stationed in foreign market, and cost of analysis of market opportunities, supply chain and entry requirements. The Commissioner General of RRA approves qualifying expenditures in consultation with the CEO of RDB. Eligible registered investors receive pre-approval of qualifying expenditures through a joint review process administered by the RRA, RDB and the Ministry of Trade and Industry (MINICOM). An eligible registered investor may claim the tax deduction on a maximum of USD 100,000 of qualifying expenditures in each year. There are no restrictions in place limiting domestic firms seeking to invest abroad.

Rwanda is a member of the WTO, the East African Community (EAC), Economic Community of the Great Lakes, the Economic Community of Central African States, and the Common Market for Eastern and Southern Africa (COMESA). Rwanda ratified the African Continental Free Trade Area agreement in March 2018, and the agreement entered into force in 2019, but its implications for the region remain unclear.

The United States and Rwanda signed a Trade and Investment Framework Agreement (TIFA) in 2006 and a bilateral investment treaty (BIT) in 2008. Rwanda has active BITs with Germany (1969), the Belgium-Luxemburg Economic Union (1985), and the Republic of Korea (2013). Rwanda signed BITs with Mauritius (2001), South Africa (2000), Turkey (2016), Morocco (2016), the United Arab Emirates (2016), and Qatar (2018), but these treaties have yet to enter into force. Rwanda signed the Economic Partnership Agreement between the EAC and the European Union; this agreement has not yet entered into force.

Rwanda does not have a bilateral taxation treaty with the United States. Rwanda has double taxation agreements with Barbados, Mauritius, the Belgium-Luxembourg Economic Union, the Bailiwick of Jersey, Singapore, South Africa, Morocco, Turkey, United Arab Emirates, and Qatar.

After Rwanda implemented higher tariffs on imports of secondhand clothing and footwear in 2016, the U.S. government partially suspended African Growth and Opportunities Act (AGOA) benefits for apparel products from Rwanda, effective May 2018. Many other Rwandan exports to the United States are still eligible for trade preferences under the Generalized System of Preferences and AGOA. In 2020, Rwanda enjoyed a trade surplus of $24 million with the United States due in large part to AGOA-qualified exports of coffee, tea, and tree nuts.

Transparency of the Regulatory System

The GOR generally employs transparent policies and effective laws largely consistent with international norms. Rwanda is a member of the UN Conference on Trade and Development’s international network of transparent investment procedures. The Rwanda eRegulations system is an online database designed to bring transparency to investment procedures in Rwanda. Investors can find further information on administrative procedures at: https://businessprocedures.rdb.rw/.

The GOR publishes Rwandan laws and regulations in the Official Gazette and online at https://www.minijust.gov.rw/index.php?id=133 . Government institutions generally have clear rules and procedures, but implementation can sometimes be uneven. Investors have cited breaches of contracts and incentive promises and the short time given to comply with changes in government policies as hurdles to complying with regulations. For example, in 2019 the Parliament passed a law banning single use plastic containers. Investors in the beverage and agro-processing sectors expressed concern that the law would have a serious impact on their operations, that alternative packaging was not available in some cases, and that the GOR did not consult effectively with stakeholders before submitting it. The law built on a ban on the manufacture and use of polyethylene bags introduced in 2008. Enforcement has not taken full effect as of April 2021.

There is no formal mechanism to publish draft laws for public comment, although civil society sometimes has the opportunity to review them. There is no informal regulatory process managed by nongovernmental organizations. Regulations are usually developed rapidly to achieve policy goals and sometimes lack a basis in scientific or data-driven assessments. Scientific studies and quantitative analysis (if any) conducted on the impact of regulations are not generally made publicly available for comment. Regulators do not publicize comments they receive. Public finances and debt obligations are generally made available to the public before budget enactment. Finances for State Owned Enterprises (SOEs) are not publicly available. Civil society organizations may request them with a legitimate reason, but these requests are not routinely granted.

There is no government effort to restrict foreign participation in industry standards-setting consortia or organizations. Legal, regulatory, and accounting systems are generally transparent and consistent with international norms but are not always enforced. The Rwanda Utility Regulation Agency (RURA), the Office of the Auditor General (OAG), the Anticorruption Division of the RRA, the Rwanda Standards Board (RSB), the National Tender Board, and the Rwanda Environment Management Authority also enforce regulations. Consumer protection associations exist but are largely ineffective. The business community has been able to lobby the government and provide feedback on some draft government policies through the PSF, a business association with strong ties to the government. In some cases, the PSF has welcomed foreign investors’ efforts to positively influence government policies. However, some investors have criticized the PSF for advocating for the government’s positions more so than conveying business concerns to the government.

The American Chamber of Commerce launched in November 2019, and a European Business Chamber of Commerce launched in March 2020. Both are coordinating policy advocacy efforts to improve the business environment for American, European, and other foreign firms in Rwanda. The Chinese also have a Chamber of Commerce registered in China that is active in Rwanda.

International Regulatory Considerations

Rwanda is a member of the EAC Standards Technical Management Committee. Approved EAC measures are generally incorporated into the Rwandan regulatory system within six months and are published in the Official Gazette like other domestic laws and regulations. Rwanda is also a member of the Standards Technical Committee for the International Standardization Organization, the African Organization for Standardization, and the International Electrotechnical Commission. Rwanda is a member of the International Organization for Legal Metrology and the International Metrology Confederation. The Rwanda Standards Board represents Rwanda at the African Electrotechnical Commission. Rwanda has been a member of the WTO since May 22, 1996 and notifies the WTO Committee on Technical Barriers to Trade on draft technical regulations.

Legal System and Judicial Independence

The Rwandan legal system was originally based on the Belgian civil law system. However, since the renovation of the legal framework in 2002, the introduction of a new constitution in 2003, and the country’s entrance to the Commonwealth in 2009, there is now a mixture of civil law and common law. Rwanda’s courts address commercial disputes and facilitate enforcement of property and contract rights. Rwanda’s judicial system suffers from a lack of resources and capacity but continues to improve. Investors occasionally state that the government takes a casual approach to contract sanctity and sometimes fails to enforce court judgments in a timely fashion. The government generally respects judicial independence, though domestic and international observers have noted that outcomes in high-profile politically sensitive cases appeared predetermined.

In August 2018, the GOR created a Court of Appeals to reduce backlogs and expedite the appeal process without going to the Supreme Court. The new Court of Appeals arbitrates cases handled by the High Court, Commercial High Court, and Military High Court. The Supreme Court continues to decide on cases of injustice filed from the Office of the Ombudsman and on constitutional interpretation. Based on Article 15 of Law nº 76/2013 of 11/09/2013, the Office of the Ombudsman has the authority to request that the Supreme Court reconsider and review judgments rendered at the last instance by ordinary, commercial, and military courts. More information on the review process can be found at https://ombudsman.gov.rw/en/?Court-Judgement-Review-Unit-1375 . A tax court is yet to be established in Rwanda. In 2019, the RDB announced the government’s intent to create a commercial division at the Court of Appeal to fast-track resolution of commercial disputes.

Laws and Regulations on Foreign Direct Investment

National laws governing commercial establishments, investments, privatization and public investments, land, and environmental protection are the primary directives governing investments in Rwanda. Since 2011, the government has reformed tax payment processes and enacted additional laws on insolvency and arbitration. The Investment Code establishes policies on FDI, including dispute settlement (Article 13). The RDB publishes investment-related regulations and procedures at: http://businessprocedures.rdb.rw .

According to a WTO policy review report dated January 2019, Rwanda is not a party to any countertrade and offsetting arrangements or agreements limiting exports to Rwanda.

A new property tax law was passed in August 2018. The new law removes the provision that taxpayers must have freehold land titles to pay property taxes. Small and medium enterprises (SMEs) will receive a two-year tax trading license exemption upon establishment.

In April 2018, the GOR passed a new law to streamline income tax administration and to clarify the law. The new law can be accessed here: http://www.primature.gov.rw/media-publication/publication/latest-offical-gazettes.html?no_cache=1&tx_drblob_pi1%5BdownloadUid%5D=464 .

The most recent laws (passed between 2020-21) on FDI are below:

• Amended law on Investment Promotion and Facilitation:

https://www.minijust.gov.rw/fileadmin/user_upload/Minijust/Publications/Official_Gazette/2021_Official_Gazettes/_February/Official_Gazette_N___04_bis_of_08.02.2021_Ubufatanye_Mpanabyaha___Korohereza_Ishoramari.pdf

• Amended Company Act:

https://www.minijust.gov.rw/fileadmin/user_upload/Minijust/Publications/Official_Gazette/2021_Official_Gazettes/_February/Official_Gazette_N___04_ter_of_08-02-2021_Companies_ACT_2021.pdf

• Law on Mutual Assistance in Criminal Matters:

https://www.minijust.gov.rw/fileadmin/user_upload/Minijust/Publications/Official_Gazette/2021_Official_Gazettes/_February/Official_Gazette_N___04_bis_of_08.02.2021_Ubufatanye_Mpanabyaha___Korohereza_Ishoramari.pdf

• Law on Anti-Money Laundering and Terrorism Finance:

https://gazettes.africa/archive/rw/2020/rw-government-gazette-dated-2020-02-24-no-7.pdf

• Law on Partnerships:

https://www.minijust.gov.rw/fileadmin/user_upload/Minijust/Publications/Official_Gazette/2021_Official_Gazettes/_February/Official_Gazette_N___Special_of_17.02.2021_Partnershiip_Ubufatanye___RSSB.pdf

• Law on Transfer Pricing:

https://www.minijust.gov.rw/fileadmin/user_upload/Minijust/Publications/Official_Gazette/_2020_Official_Gazettes/December/Official_Gazette__N___40_of_14.12.2020_Transfer_Pricing___Ubworozi_bwo_mu_mazi_Aquacultre_Uburobyi___Erratum___BNR___Amazina___Cooperative___Imiryango.pdf

Competition and Antitrust Laws

The GOR created the Competition and Consumer Protection Unit at the Ministry of Trade and Industry (MINICOM) in 2010 to address competition and consumer protection issues. The government is setting up the Rwanda Inspectorate, Competition and Consumer Protection Authority (RICA), a new independent body with the mandate to promote fair competition among producers. The body will reportedly aim to ensure consumer protection and enforcement of standards. To read more on competition laws in Rwanda, please visit: https://www.minicom.gov.rw/fileadmin/user_upload/Minicom/Publications/Laws/Official_Gazette_no_46_of_12-11-2012_competition_law.pdf https://www.minicom.gov.rw/fileadmin/user_upload/Minicom/Publications/Policies/CompetitionPolicy_September_2010-3.pdf 

Market forces determine most prices in Rwanda, but in some cases, the GOR intervenes to fix prices for items considered sensitive. RURA, in consultation with relevant ministries, sets prices for petroleum products, water, electricity, and public transport. MINICOM and the Ministry of Agriculture have fixed farm gate prices (or the market value of a cultivated product minus the selling costs) for agricultural products like coffee, maize, and Irish potatoes from time to time. On international tenders, a 10 percent price preference is available for local bidders, including those from regional economic integration bodies in which Rwanda is a member.

Some U.S. companies have expressed frustration that while authorities require them to operate as a formal enterprise that meets all Rwandan regulatory requirements, some local competitors are allowed to operate informally without complying fully with all regulatory requirements. Other investors have claimed SOEs, ruling party-aligned, and politically connected business competitors receive preferential treatment in securing public incentives and contracts.

More information on specific types of agreements, decisions and practices considered to be anti-competitive in Rwanda can be found here: https://rura.rw/fileadmin/Documents/docs/ml08.pdf

Expropriation and Compensation

The Investment Code forbids the expropriation of investors’ property in the public interest unless the investor is fairly compensated. An expropriation law came into force in 2015, which included more explicit protections for property owners.

A 2017 study by Rwanda Civil Society Platform argues that the government conducts expropriations on short notice and does not provide sufficient time or support to help landowners fairly negotiate compensation. The report includes a survey that found only 27 percent of respondents received information about planned expropriation well in advance of action. While mechanisms exist to challenge the government’s offer, the report notes that landowners are required to pay all expenses for the second valuation, a prohibitive cost for rural farmers or the urban poor. Media have reported that wealthier landowners have the ability to challenge valuations and have received higher amounts. Political exiles and other embattled opposition figures have been involved in taxation lawsuits that resulted in their “abandoned properties” being sold at auction, allegedly at below market values.

Dispute Settlement

ICSID Convention and New York Convention

The Investment Code states that “a dispute that arises between an investor and a State organ in connection with a registered investment should be amicably settled. If an amicable settlement cannot be reached, parties must refer the dispute to an agreed arbitration institution or to any other dispute settlement procedure provided for under an agreement between both parties. If no dispute settlement procedure is provided under a written agreement, both parties must refer the dispute to the competent court.”

Rwanda is signatory to the International Center for Settlement of Investment Disputes (ICSID) and the African Trade Insurance Agency (ATI). ICSID seeks to remove impediments to private investment posed by non-commercial risks, while ATI covers risk against restrictions on import and export activities, inconvertibility, expropriation, war, and civil disturbances.

Rwanda ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 2008.

Investor-State Dispute Settlement

Rwanda is a member of the East African Court of Justice for the settlement of disputes arising from or pertaining to the EAC. Rwanda has also acceded to the 1958 New York Arbitration Convention and the Multilateral Investment Guarantee Agency convention. Under the U.S.-Rwanda BIT, U.S. investors have the right to bring investment disputes before neutral, international arbitration panels. Disputes between U.S. investors and the GOR in recent years have been resolved through international arbitration, court judgments, or out of court settlements. Judgments by foreign courts and contract clauses that abide by foreign law are accepted and enforced by local courts, though these lack capacity and experience to adjudicate cases governed by non-Rwandan law. There have been a number of private investment disputes in Rwanda, though the government has yet to stand as complainant, respondent, or third party in a WTO dispute settlement. Rwanda has been a party to two cases at ICSID since Rwanda became a member in 1963; one of these cases is an ongoing case brought by an American investor against Rwanda. SOEs are also subject to domestic and international disputes. SOEs and ruling party-owned companies party to suits have both won and lost judgments in the past.

International Commercial Arbitration and Foreign Courts

In 2012, the GOR launched the Kigali International Arbitration Center (KIAC). KIAC case handling rules are modeled on the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules. According to the KIAC’s 2020 activity report, KIAC had reviewed 160 cases by June 2020. Close to 40 percent of those cases were international with parties from more than 20 nationalities (Burundi, China, Ethiopia, Egypt, France, India, Italy, Kenya, Korea, Pakistan, South Africa, South Korea, Singapore, Rwanda, Spain, Switzerland, Turkey, Uganda, the United States, and Zambia). Arbitrators appointed were from Rwanda, Kenya, Malaysia, Nigeria, Canada, the United States, and Singapore. Of the 89 KIAC-approved international arbitrators, only four are of Rwandan nationality, suggesting that KIAC draws from a large pool of professionals in alternative dispute resolutions from all over the world. All 38 domestic arbitrators are Rwandan nationals.

Some businesses report being pressured to use the Rwanda-based KIAC for the seat of arbitration in contracts signed with the GOR. Some of these companies have indicated that they would prefer arbitration take place in a third country, noting that KIAC has a short track record and is domiciled in Rwanda. Moreover, some companies have reported difficulty in securing international financing due to the KIAC provision in their contracts.

Bankruptcy Regulations

Rwanda ranks 38 out of 190 economies for resolving insolvency in the World Bank’s 2020 Doing Business Report and is number two in Africa. It takes an average of two and a half years to conclude bankruptcy proceedings in Rwanda. Per the World Bank 2020 Doing Business Report, the recovery rate for creditors on insolvent firms was reported at 19.3 cents on the dollar, with judgments typically made in local currency.

In April 2018, the GOR instituted a new Insolvency and Bankruptcy Law. One major change is the introduction of an article on “pooling of assets” allowing creditors to pursue parent companies and other members of the group, in case a subsidiary is in liquidation. The new law can be accessed here: https://org.rdb.rw/wp-content/uploads/2020/06/Insolvency-Law-OGNoSpecialbisdu29April2018.pdf

On February 8, 2021, Rwanda passed a new Company Act, with several bankruptcy and insolvency provisions. The new law can be found here: https://www.minijust.gov.rw/fileadmin/user_upload/Minijust/Publications/Official_Gazette/2021_Official_Gazettes/_February/Official_Gazette_N___04_ter_of_08-02-2021_Companies_ACT_2021.pdf

On February 17, 2021, Rwanda published a new law on partnerships with several provisions on partnerships’ insolvency. The new law can be accessed here: https://www.minijust.gov.rw/fileadmin/user_upload/Minijust/Publications/Official_Gazette/2021_Official_Gazettes/_February/Official_Gazette_N___Special_of_17.02.2021_Partnershiip_Ubufatanye___RSSB.pdf

Investment Incentives

The Investment Code offers a package of benefits and incentives for registered investors in priority and strategic growth sectors. Under certain conditions, these can include:

Preferential corporate income tax rate of zero percent for 1) an international company that has its headquarters or regional office in Rwanda; or 2) an entity registered in Rwanda by a philanthropic investor.

Preferential corporate income tax rate of three percent for 1) an investor licensed to operate as a pure holding company; 2) a special purpose vehicle registered for investment purposes; 3) a Collective Investment Scheme; 4) a global trading or paper trading company (on foreign sourced trading income); or 5) an intellectual property company (on foreign sourced royalties).

Preferential tax incentives for a philanthropic investors: An entity established by a philanthropic investor is granted the following incentives: 1) grants and funds transferred to the entity for the purposes of financing its social impact activities are not deemed revenues and are therefore exempted from value added tax and corporate income tax charges; 2) goods and services procured locally by the entity are value added tax zero- rated; 3) an exemption of employment income tax is applied to foreign nationals recruited by the entity who ordinarily reside in Rwanda, provided that foreign employees do not exceed thirty percent of the professional staff of the entity. Foreign employees of the entity are entitled to a refund of social security contributions paid, upon their permanent departure from Rwanda.

Preferential corporate income tax rate of fifteen percent for registered investors undertaking one of the following operations: 1) energy generation, transmission and distribution from peat, solar, geothermal, hydro, biomass, methane and wind (excluding investors having engineering procurement contracts executed on behalf of the Government of Rwanda); 2) mass transportation of passengers and goods; 3) manufacturing; 4) information and communication technology; 5) innovation research and development facilities; 6) fund management entities, collective investment schemes, wealth management services, financial advisory entities, family office services, fund administrators, financial technology entities, captive insurance schemes, private banks, mortgage finance institution, finance lease entities, asset backed securities, reinsurance companies, trust and corporate service providers; 7) construction of affordable houses; 8) electric mobility; 9) adventure tourism and agriculture tourism.

Preferential corporate income tax rate for export investments: 1) twenty-five percent corporate income tax is applied to a registered investor with at least thirty percent of total turnover of goods and services coming from exports; 2) fifteen percent corporate income tax is applied to a registered investor with at least fifty percent of total turnover coming from export of goods and services.

1. Exemption from custom taxes and duties for products used in export processing zones: In addition to incentives for export investments, registered investors in products used in export processing zones are exempted from customs taxes and duties.
2. Incentives for internationalization: Small, medium or emerging involved in exports are entitled to a one hundred and fifty percent tax deduction of all qualifying expenditures relating to internationalization.

Corporate income tax holiday of up to seven years: Investors (except those in private equity and venture capital) investing an equivalent of at least fifty million U.S. dollars and contributing at least thirty percent of the invested amount in form of equity in specific priority sectors are granted a maximum of a seven-year corporate income tax holiday.

Corporate income tax holiday of up to five years for 1) specialized innovation and industrial park developers from the first year that the project makes a positive net income; and 2) licensed microfinance institutions from the date of their licensing.

1. Preferential withholding tax of zero percent is applicable to dividends, interest and royalties paid by investors benefiting from preferential corporate income tax of fifteen percent and three percent.
2. Preferential withholding tax of five percent is applicable to dividends and interest income paid to investors in companies listed on the Rwanda Stock Exchange.
3. Preferential withholding tax of ten percent is applicable to specialized innovation and industrial park developers on interest on foreign loans, dividends, royalties and service fees.

More information on additional incentives and benefits for the mining sector, the film industry, industrial and innovation parks, angel investors, start-ups, immigration, accelerated depreciation and capital gain tax exemption, can be found in the annex of the Investment Code here: https://www.minijust.gov.rw/fileadmin/user_upload/Minijust/Publications/Official_Gazette/2021_Official_Gazettes/_February/Official_Gazette_N___04_bis_of_08.02.2021_Ubufatanye_Mpanabyaha___Korohereza_Ishoramari.pdf

https://www.minijust.gov.rw/fileadmin/user_upload/Minijust/Publications/Official_Gazette/2021_Official_Gazettes/_February/Official_Gazette_N___04_bis_of_08.02.2021_Ubufatanye_Mpanabyaha___Korohereza_Ishoramari.pdf

In addition, the Ministry of Finance and Economic Planning (MINECOFIN), upon recommendation by RDB’s Private Investment Committee, can issue a Ministerial Order offering more incentives for investments deemed of strategic importance.

In the past, poorly coordinated efforts between the RDB, RRA, MINICOM, and the Directorate of Immigration and Emigration led to inconsistent application of incentives, according to investors. Investors reported that tax incentives included in deals signed by the RDB were not honored by the RRA in a timely manner or sometimes were not honored at all. Additionally, investors continue to face challenges receiving payment for services rendered for GOR projects, VAT refund delays, and/or expatriation of profits. In 2016, the GOR instituted a law governing public-private partnership (PPPs) as a step toward courting investments in key development projects. The law provides a legal framework concerning establishment, implementation, and management of PPPs. Detailed guidelines for the law can be accessed here: http://rdb.rw/wp-content/uploads/2018/08/PPP-Guidelines.pdf

Foreign Trade Zones/Free Ports/Trade Facilitation

Rwanda has established the Kigali Special Economic Zone (KSEZ), which was set up through the merger of the former Kigali Free Trade Zone and the Kigali Industrial Park projects. SEZs in Rwanda are regulated by the SEZ Authority of Rwanda (SEZAR), based at the RDB. Land in KSEZ is acquired through the Prime Economic Zone Secretariat, a private developer, under the regulations of SEZAR. The price per square meter is $62, and the minimum size that can be acquired is one hectare (2.5 acres). Bonded warehouse facilities are now available both in and outside of Kigali for use by businesses importing duty-free materials. The GOR has established a number of benefits for investors operating in the SEZs, including tax and land ownership advantages. A company basing itself in the SEZ can also opt to be a part of the Economic Processing Zone. A number of criteria must be satisfied in order to qualify. These include requirements to maintain extensive records on equipment, materials and goods, suitable offices, and security provisions.

Holding an Export Processing Zone (EPZ) license allows a company to operate in the KSEZ and will exempt a company from VAT, import duties, and corporate tax. The company is then obliged to export a minimum of 80 percent of production. Even after considering savings due to these government incentives, a few investors reported that land in the SEZs was significantly more expensive than land outside the zones. The GOR has stated that there are no fiscal, immigration, or customs incentives beyond those provided in the Investment Code, though media has occasionally speculated that certain investors received additional incentives. The negative list of goods prohibited under the EAC Customs Management Act applies in SEZs. In November 2018, the GOR approved the Bugesera Special Economic Zone (BSEZ), located 45 minutes from Kigali. A new airport is under construction near the BSEZ as well. Procedural information and cost involved in operating in SEZs can be accessed here: https://businessprocedures.rdb.rw/procedure/238/189?l=en . The SEZ policy was revised in 2018. Under the new policy, foreigners and locals may only lease land (formerly, foreign investors were able to purchase land outright in SEZs). To read more on the new policy, please see: https://www.minicom.gov.rw/fileadmin/user_upload/Minicom/Publications/Policies/SEZ_Policy_-_January_2018_v2.pdf

For a quick survey of companies currently operating in Rwandan special economic zones, please visit: Economic Zone catalogue at https://rdb.rw/wp-content/uploads/2020/09/SEZAR-Catalogue.pdf .

Rwanda created the Export Growth Facility (EGF) in 2015 with an initial capital of RWF 500 million ($500,000) administered by the Development Bank of Rwanda (BRD). German KfW Development Bank injected $10 million in support of the fund. The pilot program targets SMEs with export sales below $1 million. Priority sectors include horticulture, agro-processing, and manufacturing. The facility has three windows: an investment catalyst fund, a matching grant fund for market entry costs, and an export guarantee facility. Investment catalyst funds support private sector investments in export-orientated production through a 6.5 percent subsidy on market interest rates (normally between 16-20 percent). The matching grant fund provides grants (50 percent of the need) for expenditure on specific market entry costs (export strategy elaboration, export promotion, compliance with standards, etc.). The export guarantee fund provides short-term guarantees to commercial banks financing exporters’ pre- and post-shipment operations. The export guarantee component is not yet operational. The facility supports both locally- and foreign-owned companies in Rwanda; at least one American company has already received a loan. Rwanda created the Business Development Fund (BDF) in 2011 to provide support to SMEs in credit guarantees, matching grants, asset leasing, and advisory services. BDF works with banks to provide guarantees between 50-75 percent of required collaterals. The maximum guarantee is RWF 500 million ($500,000) for agriculture projects and RWF 300 million ($300,000) for other sectors, for a maturity period of up to 10 years.

The GOR also manages the Rwanda Green Fund (FONERWA) to spur investment in green innovation. UK Aid and other donors have invested in the fund. FONERWA claims projects it supports have created more than 137,000 green jobs.

The GOR’s cabinet resolution of April 30, 2020, established the Economic Recovery Fund (ERF) to support businesses severely affected by COVID-19, and the National Bank of Rwanda (BNR) was designated to manage the initial $100 million in funds. This $100 million was structured in four financing windows: 1) the hotel financing window, 2) the working capital window for large corporations, 3) working capital window for small and medium enterprises (SMEs) and 4) working capital for micro-businesses. Lending under the first three windows is through banks, while the fourth one is through Microfinance Institutions (MFIs). According to the January 2021 International Monetary Fund (IMF) report, “the ERF comprises a debt restructuring window for hotels ($50 million), working capital financing windows for large corporates, SMEs, and microbusinesses ($47 million), and a guarantee scheme for up to 75 percent of ERF loans to SMEs ($3 million). ERF funds are lent to banks, MFIs, and Savings and Credit Cooperative Organizations (SACCOs), at zero or low interest, who in turn use it to provide loan restructuring for hotels or working-capital financing, at reduced rates, to firms deemed viable.” On March 31, 2021 the GOR announced the ERF would receive an additional $350 million to support the same activities as the original $100 million. The monies were not made immediately available, and sources of the funding have not been disclosed.

Performance and Data Localization Requirements

There is no legal obligation for nationals to own shares in foreign investments and no requirement that shares of foreign equity be reduced over time. However, the government strongly encourages local participation in foreign investments. There is no requirement for private companies to store their proprietary data in Rwanda. There is also no requirement for foreign IT providers to turn over source code and/or provide access to encryption technology. IT companies dealing with government data cannot store it outside Rwanda or transfer it without GOR approval. Rwandans’ private data must be stored in Rwanda. There is no formal requirement that a certain number of senior officials or board members be citizens of Rwanda unless as a pre-condition to benefits from increased investment incentives. For example, the Investment Code specifies that for an international company that moves its headquarters or regional office to Rwanda to be able to recruit any number of required managerial, professional, and technical foreign employees, at least 30 percent of professional staff must be Rwandan. A preferential corporate income tax rate of three percent is granted to collective investment schemes, special purpose vehicles and pure holding companies if at least 30 percent of their professional staff are Rwandans and at least two professional or qualified Rwandan residents are members of their board of directors.

While the government does not impose conditions on the transfer of technology, it does encourage foreign investors, without legal obligation, to transfer technology and expertise to local staff to help develop Rwanda’s human capital. There is no legal requirement that investors must purchase from local sources or export a certain percentage of their output, though the government offers tax incentives for the latter. Unless stipulated in a contract or memorandum of understanding characterizing the purchase of privatized enterprises, performance requirements are not imposed as a condition for establishing, maintaining, or expanding other investments. Such requirements are imposed chiefly as a condition to tax and investment incentives. The GOR is not involved in assessing the type and source of raw materials for performance, but the RSB determines quality standards for some product categories.

Real Property

The law protects and facilitates acquisition and disposition of all property rights. Investors involved in commercial agriculture have leasehold titles and can secure property titles, if necessary. The Investment Code states that investors shall have the right to own private property, whether individually or collectively. According to the 2013 land law, foreign investors can acquire real estate, though there is a general limit on land ownership. Freehold is granted only to Rwandan citizens for at least five hectares (12.5 acres) and to foreigners for 1) properties located in designated Special Economic Zones, 2) on reciprocal basis or 3) on land co-owned with Rwandan citizens (if Rwandan citizens own at least 51 percent). However, according to the October 2020 draft law, freehold tenure will continue for Rwandan citizens on lands of at least two hectares (five acres) and, under a Presidential Order, freehold tenure for foreigners will be approved for exceptional circumstances (strategic national interest investments). The GOR will increase long-term leases (emphyteutic lease) in residential and commercial areas for both citizens and foreigners acquiring land through private means to 99 years compared to the current 20 and 30 years, respectively. While local investors can acquire land through leasehold agreements that extend to 99 years, the GOR has limited the lease period for foreigners to 49 years, in some cases. Such leases are theoretically renewable, but the law is new enough that foreigners generally have not yet attempted to renew a lease. Mortgages are a nascent but growing financial product in Rwanda, increasing from 770 properties in 2008 to 13,394 in 2017, according to the RDB. In 2020, RDB reported registering 16,624 mortgages in 2019.

Intellectual Property Rights

The Investment Code guarantees protection of investors’ intellectual property (IP) rights, and legitimate rights related to technology transfer. The GOR approved IP legislation covering patents, trademarks, and copyrights in 2009. A registration service agency, which is part of the RDB, was established in 2008 and has improved IP right protection by making the registering of all commercial entities and facilitating businesses identification and branding possible.

The RDB and the Rwanda Standards Board (RSB) are the main regulatory bodies for Rwanda’s intellectual property rights law. The RDB registers intellectual property rights, providing a certificate and ownership title. Every registered IP title is published in the Official Gazette. The fees payable for substance examination and registration of IP apply equally for domestic and foreign applicants. From 2016, any power of attorney granted by a non-resident to a Rwandan-based industrial property agent must be notarized (previously, a signature would have been sufficient).

Registration of patents and trademarks is on a first time, first right basis so companies should consider applying for trademark and patent protection in a timely manner. It is the responsibility of the copyright holders to register, protect, and enforce their rights where relevant, including by retaining their own counsel and advisors. Through the RSB and the RRA, Rwanda has worked to increase protection of IP rights, but many goods that violate patents, especially pharmaceutical products, make it to market nonetheless. As many products available in Rwanda are re-exports from other EAC countries, it may be difficult to prevent counterfeit goods without regional cooperation. Also, investors reported difficulties in registering patents and having rules against infringement of their property rights enforced in a timely manner. The GOR is proposing a new IP law that will organize a patent and trade office for Rwanda.

As a COMESA member, Rwanda is automatically a member of the African Regional Intellectual Property Organization. Rwanda is also a member of the World Intellectual Property Organization (WIPO) and is working toward harmonizing its legislation with WTO trade-related aspects of IP. Rwanda has yet to ratify WIPO internet treaties, though the government has taken steps to implement and enforce the WTO TRIPS agreements. Rwanda is not listed in USTR’s 2019 Special 301 report or the 2019 Notorious Markets List. In July 2020, Rwanda acceded to the Marrakesh Treaty to facilitate access to published works for persons who are blind, visually impaired, or otherwise print disabled. For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Rwanda conducts anti-counterfeit goods campaigns on a regular basis, but statistics on IP enforcement are not publicly available. A few companies have expressed concern over inappropriate use of their IP. While the government has offered rhetorical support, enforcement has been mixed. In some cases, infringement has stopped, but in other cases, companies have been frustrated with the slow pace of receiving judgment or in receiving compensation after successful legal cases.

Capital Markets and Portfolio Investment

In February 2021, the GOR introduced new incentives to support the Rwanda Stock Exchange and the Capital Market Authority through the Investment Code. A preferential withholding tax of five percent is applicable to dividends and interest income paid to investors in companies listed on the Rwanda Stock Exchange. A preferential corporate income tax rate of three percent applies to collective investment schemes. A preferential corporate income tax rate of fifteen percent applies to fund management entities, wealth management services, financial advisory entities, financial technology entities, captive insurance schemes, mortgage finance institutions, fund administrators, finance lease entities, and asset backed securities.

In December 2017, the GOR established Rwanda Finance Limited (RFL), a state-owned enterprise charged with creating the Kigali International Financial Centre (KIFC). The goal is to create a conducive ecosystem to entice pan-African and international financial service providers and investment funds to Rwanda. KIFC is scheduled to be launched on the sidelines of Commonwealth Heads Of Governments Meeting (CHOGM) taking place in Kigali in June 2021. RFL has successfully pushed the GOR to change many Rwandan investment, banking, and commercial laws to in order to align with OECD/EU and AML/CFT requirements. In November 2019, BNR introduced a multiple bond issuance program. In the 2019-2020 financial year, seven bonds were reopened, eight new bonds were issued, and three multiple issuances were performed. Oversubscription reached 138% on average. BNR implemented reforms in recent years that are helping to create a secondary market for Rwandan treasury bonds.

In November 2019, BNR introduced a multiple bond issuance program. In the 2019-2020 financial year, seven bonds were reopened, eight new bonds were issued, and three multiple issuances were performed. Oversubscription reached 138% on average. BNR implemented reforms in recent years that are helping to create a secondary market for Rwandan treasury bonds.

In January 2021, the IMF completed its third review of Rwanda’s economic performance under a Policy Coordination Instrument, which can be found here: https://www.imf.org/en/Publications/CR/Issues/2021/01/04/Rwanda-Third-Review-Under-the-Policy-Coordination-Instrument-Press-Release-Staff-Report-and-49984

https://www.imf.org/en/Publications/CR/Issues/2021/01/04/Rwanda-Third-Review-Under-the-Policy-Coordination-Instrument-Press-Release-Staff-Report-and-49984

Money and Banking System

Many U.S. investors express concern that local access to affordable credit is a serious challenge in Rwanda. Interest rates are high for the region, banks offer predominantly short-term loans, collateral requirements can be higher than 100 percent of the value of the loan, and Rwandan commercial banks rarely issue significant loan values. The prime interest rate is 16-18 percent. Large international transfers are subject to authorization. Investors who seek to borrow more than $1 million must often engage in multi-party loan transactions, usually by leveraging support from larger regional banks. Credit terms generally reflect market rates, and foreign investors can negotiate credit facilities from local lending institutions if they have collateral and “bankable” projects. In some cases, preferred financing options may be available through specialized funds including the Export Growth Fund, BRD, or FONERWA.

The banking sector holds more than 67 percent of total financial sector assets in Rwanda. In total, Rwanda’s banks have assets of around $3.8 billion, which increased 18.5 percent between June 2018 and June 2020, according to BNR. Rwanda’s financial sector remains highly concentrated. The share of the three largest banks’ assets increased from 46.5 percent in December 2018 to 48.4 percent in December 2019. The largest, the partially state-owned Bank of Kigali (BoK), holds more than 30 percent of all assets. The total number of bank and micro-finance institution (MFI) accounts increased from 7.1 million to 7.7 million between 2018-2019.

Local banks often generate significant revenue from holding government debt and from charging a variety of fees to banking customers. The capital adequacy ratio decreased to 23.7 percent in June 2020 from 24.1 percent over the year but was still well above the prudential minimum of 15 percent, suggesting the Rwandan banking sector continues to be generally risk averse. Non-performing loans increased from 4.9 in December 2019 to 5.5 percent in June 2020 due to the COVID-19 pandemic’s disruption of economic activities.

The IMF gives BNR high marks for its effective monetary policy. BNR introduced a new monetary policy framework in 2019, which shifted toward an inflation-targeting monetary framework in place of a quantity-of-money framework. In April 2020, the BNR arranged a 50 billion RWF ($53.4 Million) liquidity fund for local banks facing challenges from COVID-19. The BNR allowed banks to restructure loans affected by the pandemic by authorizing an average of four months in loan holidays. Additionally, in March 2020, the BNR took a decision to suspend distribution of dividends from profits generated in 2019.

Foreign banks are permitted to establish operations in Rwanda, with several Kenyan-based banks in the country. Atlas Mara Limited acquired a majority equity stake in Banque Populaire du Rwanda (BPR) in 2016. BPR/Atlas Mara has the largest number of branch locations and is Rwanda’s second largest bank after BoK. Atlas Mara was, in turn, acquired by Kenyan based KCB bank. Moroccan-based Bank of Africa, a minority bank in Rwanda, actively discourages American account holders due to requirements imposed by the Foreign Account Tax Compliance Act (FACTA), which charges foreign banks for expenses incurred while auditing an American.

In November 2020, the GOR signed an MOU with the African Export-Import Bank (Afreximbank) to host the permanent headquarters of Afrexim Fund for Export Development in Africa (FEDA) in Kigali. FEDA will operate as an equity investment fund that provides seed capital to companies in Africa, emphasizing projects that promote intra-African trade, trade-related infrastructure, and value-added exports. According to RDB, the fund will have an initial commitment of $350 million from Afreximbank and is expected to grow to over $1 billion in the future.

Rwandans primarily rely on cash or mobile money to conduct transactions, though use of debit and credit cards is expanding. By December 2019, the number of debit cards in the country grew eight percent year over year to 945,000, and the number of mobile banking customers grew 22 percent to 1,266,000. Credit cards are becoming more common in major cities, especially at locations frequented by foreigners, but are not used in rural areas. In the financial year 2019-20, the number of retail point of sale (POS) using cards increased by 29 percent compared to 2018-19. ATM terminals decreased by 15 percent due to the adoption of other channels such as agency, internet, and mobile banking. Use of mobile money has grown by more than 500 percent since March 2020 due to changes brought about by COVID-19 and business closures.

Foreign Exchange and Remittances

Foreign Exchange

In 1995, the government abandoned a dollar peg and established a floating exchange rate regime under which all lending and deposit interest rates were liberalized. On a daily basis, the BNR publishes an official exchange rate, which is typically within a two percent range of rates seen in the local market. Some investors report occasional difficulty in obtaining foreign exchange. Rwanda generally runs a large trade deficit, estimated at more than ten percent of GDP in 2019. In the 2019-2020 fiscal year, BNR reported that Rwanda’s trade deficit widened by 23.7 percent. Transacting locally in foreign currency is prohibited in Rwanda. Regulations set a ceiling on the amount of foreign currency that can leave the country per day. In addition, regulations specify limits for sending money outside the country; the BNR must approve any transaction that exceed these limits.

Most local loans are in local currency. In December 2018, BNR issued a new directive on lending in foreign currency which requires the borrower to have a turnover of at least RWF 50 million ($50,000) or equivalent in foreign currency and have a known income stream in foreign currency not below 150 percent of the total installment repayments. Moreover, the repayments must be in foreign currency. The collateral pledged by non-resident borrowers must be valued at 150 percent of the value of the loan. In addition, BNR requires banks to report regularly on loans granted in foreign currency.

Remittance Policies

Investors can remit payments from Rwanda only through authorized commercial banks. There is no limit on the inflow of funds, although local banks are required to notify BNR of all transfers over $10,000 to mitigate the risk of potential money laundering. Additionally, there are some restrictions on the outflow of export earnings. Companies generally must repatriate export earnings within three months after the goods cross the border. Tea exporters must deposit sales proceeds shortly after auction in Mombasa, Kenya. Repatriated export earnings deposited in commercial banks must match the exact declaration the exporter used crossing the border.

Rwandans working overseas can make remittances to their home country without impediment. It usually takes up to three days to transfer money using SWIFT financial services. The concentrated nature of the Rwandan banking sector limits choice, and some U.S. investors have expressed frustration with the high fees charged for exchanging Rwandan francs to dollars.

Sovereign Wealth Funds

In 2012, the Rwandan government launched the Agaciro Development Fund (ADF), a sovereign wealth fund that includes investments from Rwandan citizens and the international diaspora. By September 30, 2019, the fund was worth 194.3 billion RWF in assets ($204 million). The ADF operates under the custodianship of the BNR and reports quarterly and annually to MINECOFIN. ADF is a member of the International Forum of Sovereign Wealth Funds and is committed to the Santiago Principles. ADF only operates in Rwanda. In addition to returns on investments, voluntary contributions from citizens and the private sector, and other donations, ADF receives RWF 5 billion ($5 million) every year from tax revenues and five percent of proceeds from every public asset that the GOR has privatized. The fund also receives five percent of royalties from minerals and other natural resources each year. The government has transferred a number of its shares in private enterprises to the management of ADF including those in the BoK, Broadband Systems Corporation (BSC), Gasabo 3D Ltd, Africa Olleh Services (AoS), Korea Telecom Rwanda Networks (KTRN), and the One and Only Nyungwe Lodge. ADF invests mainly in Rwanda. While the fund can invest in foreign non-fixed income investments, such as publicly listed equity, private equity, and joint ventures, the AGDF Corporate Trust Ltd (the fund’s investment arm) held no financial assets and liabilities in foreign currency, according to the 2018 annual report (the most recent report available).

Rwandan law allows private enterprises to compete with public enterprises under the same terms and conditions with respect to access to markets, credit, and other business operations. Since 2006, the GOR has made efforts to privatize SOEs; reduce the government’s non-controlling shares in private enterprises; and attract FDI, especially in the ICT, tourism, banking, and agriculture sectors, but progress has been slow. Current SOEs include water and electricity utilities, as well as companies in construction, ICT, aviation, mining, insurance, agriculture, finance, and other sectors. Some investors complain about competition from state-owned and ruling party-aligned businesses. SOEs and utilities appear in the national budget, but the financial performance of most SOEs is only detailed in an annex that is not publicly available. The most recent state finances audit report of the OAG also covers SOEs and has sections criticizing the management of some of the organizations. SOEs are governed by boards with most members having other government positions.

State-owned non-financial corporations include Ngali Holdings, Horizon Group Ltd, Rwanda Energy Group, Water and Sanitation Corporation, RwandAir, National Post Office, Rwanda Printery Company Ltd, King Faisal Hospital, Muhabura Multichoice Ltd, Prime Holdings, Rwanda Grain and Cereals Corporation, Kinazi Cassava Plant, and the Rwanda Inter-Link Transport Company. State-owned financial corporations include the National Bank of Rwanda, Development Bank of Rwanda, Special Guarantee Fund, Rwanda National Investment Trust Ltd, Agaciro Development Fund, BDF and the Rwanda Social Security Board. The GOR has interests in the BoK, Ultimate Concepts Limited (UCL), New Horizon Limited, Rwanda Convention Bureau, BSC, CIMERWA, Gasabo 3D Ltd, AoS, Korea Telecom Rwanda Network, Dubai World, Nyungwe Lodge, and Akagera Management Company, among others.

Privatization Program

Rwanda continues to carry out a privatization program that has attracted foreign investors in strategic areas ranging from telecommunications and banking to tea production and tourism. As of 2017 (the latest data available), 56 companies have been fully privatized, seven were liquidated, and 20 more were in the process of privatization. RDB’s Strategic Investment Department is responsible for implementing and monitoring the privatization program. Some observers have questioned the transparency of certain transactions, as a number of transactions were undertaken not through public offerings but through mutual agreements directly between the government and the private investor, some of whom have personal relationships with senior government officials.

There is a growing awareness of corporate social responsibility (CSR) within Rwanda, and several foreign-owned companies operating locally implement CSR programs. Rwanda implements the OECD’s Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. Rwanda also implements the International Tin Supply Chain Initiative tracing scheme. In 2016, the Better Sourcing Program (currently RCS Global Group) began an alternative mineral tracing scheme in Rwanda. Rwanda also has guidelines on corporate governance by publicly listed companies. In recognition of the firm’s strong commitment to CSR, the U.S. Department of State awarded Sorwathe, a U.S.-owned tea producer in Kinihira, Rwanda, the Secretary of State’s 2012 Award for Corporate Excellence (ACE) for Small and Medium Enterprises. In 2015, the U.S. firm Gigawatt Global was also a finalist for the Secretary of State’s ACE award in the environmental sustainability category. In January 2021, Illinois-based Abbot laboratories was given the ACE award in recognition of its work to expand preventative health care in rural areas of Rwanda. Rwanda is not a member of the Extractive Industries Transparency Initiative.

Additional Resources 

Department of State

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

Department of Labor

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

Rwanda is ranked among the least corrupt countries in Africa, with Transparency International’s 2020 Corruption Perception Index putting the country among Africa’s four least corrupt nations and 49th in the world. The GOR maintains a high-profile anti-corruption effort, and senior leaders articulate a consistent message emphasizing that combating corruption is a key national goal. The government investigates corruption allegations and generally punishes those found guilty. High-ranking officials accused of corruption often resign during the investigation period, and the GOR has prosecuted many of them. Rwanda has ratified the UN Anticorruption Convention, is a signatory to the OECD Convention on Combating Bribery and is a signatory to the African Union Anticorruption Convention. U.S. firms have identified the perceived lack of government corruption in Rwanda as a key incentive for investing in the country. There are no local industry or non-profit groups offering services for vetting potential local investment partners, but the Ministry of Justice keeps judgments online, maintaining a source of information on companies and individuals in Rwanda at www.judiciary.gov.rw/home/ . The Rwanda National Public Prosecution Authority issues criminal records on demand to applicants at www.nppa.gov.rw .

Resources to Report Corruption

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

Ms. Madeleine Nirere, Chief Ombudsman , Ombudsman (Umuvunyi)
P.O Box 6269, Kigali, Rwanda
Telephone: +250 252587308
omb1@ombudsman.gov.rw  / sec.permanent@ombudsman.gov.rw 

Mr. Felicien Mwumvaneza, Commissioner for Quality Assurance Department (Anti-Corruption Unit) Rwanda Revenue Authority
Avenue du Lac Muhazi, P.O. Box 3987, Kigali, Rwanda
Telephone: +250 252595504 or +250 788309563
mwumvaneza@rra.gov.rw / commissioner.quality@rra.gov.rw

Mr. Obadiah Biraro, Auditor General, Office of the Auditor General
Avenue du Lac Muhazi, P.O. Box 1020, Kigali, Rwanda
Telephone: +250 78818980 , oag@oag.gov.rw

Contact at “watchdog” organization

Mr. Apollinaire Mupiganyi , Executive Director , Transparency International Rwanda
P.O: Box 6252 Kigali, Rwanda
Telephone: +250 788309563, amupiganyi@transparencyrwanda.org / mupiganyi@yahoo.fr

Rwanda is a stable country with relatively little violence. According to a 2017 report by the World Economic Forum, Rwanda is the ninth safest country in the world. Gallup’s Global Law and Order Index report of 2018 ranked Rwanda as the second safest place in Africa. Investors have cited the stable political and security environment as an important driver of investments. A strong police and military provide a security umbrella that minimizes potential criminal activity.

The U.S. Department of State recommends that U.S. citizens exercise caution when traveling near the Rwanda-Democratic Republic of Congo border, given the possibility of fighting and cross-border attacks involving armed rebel and militia groups. Relations between Burundi and Rwanda are tense, and there is a risk of cross-border incursions and armed clashes. Since 2018, there have been a few incidents of sporadic fighting in districts bordering Burundi and in Nyungwe National Park.

Grenade attacks aimed at the local populace occurred repeatedly between 2008 and 2014 in Rwanda. There have been several reported cross-border attacks in Western Rwanda on Rwandan police and military posts since 2016. Despite occasional violence along Rwanda’s borders with the DRC and Burundi, there have been no incidents involving politically motivated damage to investment projects or installations since the late 1990s. Relations with Uganda are also tense, but leaders continue to emphasize they are seeking a political solution. Rwanda has not allowed commercial traffic originating from Uganda to cross the Rwandan-Ugandan border since February 2019. Transit from/to Kenya through Uganda is allowed. Because of political tensions between Rwanda and Uganda, most of the commercial traffic to Rwanda goes through the Tanzanian border. In May 2020, the Rwanda-Tanzania border crossings were negatively impacted due to an influx of Tanzanian truck drivers infected with COVID-19.

Please see the following link for State Department Country Specific Information: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Rwanda.html

https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Rwanda.html

General labor is available, but Rwanda suffers from a shortage of skilled labor, including accountants, lawyers, engineers, tradespeople, and technicians. Higher institutes of technology, private universities, and vocational institutes are improving and producing more highly trained graduates each year. The Rwanda Workforce Development Authority sponsors programs to support both short and long-term professional trainings targeting key industries in Rwanda. Carnegie Mellon University opened a campus in Kigali in 2012–its first in sub-Saharan Africa–and currently offers a Master of Science in Electrical and Computer Engineering and Master of Science in Information Technology. In 2013, Kepler established a nonprofit university program for students to work toward a U.S.-accredited degree through online learning and in-person seminars through a relationship with Southern New Hampshire University. Oklahoma Christian University offers an online Master of Business Administration program with on-site support in Kigali. The African Institute of Mathematics, University of Global Health Equity, and African Leadership University campuses in Rwanda offer college level and advanced degrees in many fields. Investors are strongly encouraged to hire Rwandan nationals whenever possible. According to the Investment Code, a registered investor who invests an equivalent of at least $250,000 may recruit three foreign employees. However, a number of foreign investors reported difficulties importing qualified staff in accordance with the Investment Code due to Rwandan immigration rules and practices. In some cases, these problems occurred even though investors had signed agreements with the government regarding the number of foreign employees.

Investors are strongly encouraged to hire Rwandan nationals whenever possible. According to the Investment Code, a registered investor who invests an equivalent of at least $250,000 may recruit three foreign employees. However, a number of foreign investors reported difficulties importing qualified staff in accordance with the Investment Code due to Rwandan immigration rules and practices. In some cases, these problems occurred even though investors had signed agreements with the government regarding the number of foreign employees.

Rwanda has ratified all the International Labor Organization’s eight core conventions. Policies to protect workers in special labor conditions exist, but enforcement remains inconsistent. The government encourages, but does not require, on-the-job training and technology transfer to local employees. The law restricts voluntary collective bargaining by requiring prior authorization or approval by authorities and requiring binding arbitration in cases of non-conciliation. The law provides some workers the right to conduct strikes, but due to numerous restrictions, workers rarely engage in strikes. In 2020, the government published additional specifications for labor representatives, regulations against strikes, and guidelines providing labor inspectors greater authority to access to workplaces and assess fines. The GOR has been known to take swift action against foreign companies with poor labor practices upon initial complaints from workers. The legal framework for employment rights for disabled persons is not as strong as in the United States, but the government and some employers are making efforts to offer reasonable accommodations. In 2000, the government revised the national labor code to eliminate gender discrimination, restrictions on the mobility of labor, and wage controls. There is no unemployment insurance or other social safety net programs for workers laid off for economic reasons. Private firms are responsible for their local employees’ income tax payments and Rwanda Social Security Board pension contributions. For full-time workers, these payments amount to more than 30 percent of take-home pay, which can be a disadvantage if competing firms are in the informal economy and not compliant with these requirements. Labor laws are not waived to attract or retain investment. There are no labor law provisions specific to SEZs or industrial parks. Collective bargaining is a relatively new concept in Rwanda and is not common. Few professional associations fix minimum salaries for their members and some investors have expressed concern that labor law enforcement is uneven or opaque. The official minimum wage has not changed since 1974 and is 100 Rwandan francs ($0.10) per day.

The legal framework for employment rights for disabled persons is not as strong as in the United States, but the government and some employers are making efforts to offer reasonable accommodations. In 2000, the government revised the national labor code to eliminate gender discrimination, restrictions on the mobility of labor, and wage controls. There is no unemployment insurance or other social safety net programs for workers laid off for economic reasons. Private firms are responsible for their local employees’ income tax payments and Rwanda Social Security Board pension contributions. For full-time workers, these payments amount to more than 30 percent of take-home pay, which can be a disadvantage if competing firms are in the informal economy and not compliant with these requirements. Labor laws are not waived to attract or retain investment. There are no labor law provisions specific to SEZs or industrial parks. Collective bargaining is a relatively new concept in Rwanda and is not common. Few professional associations fix minimum salaries for their members and some investors have expressed concern that labor law enforcement is uneven or opaque. The official minimum wage has not changed since 1974 and is 100 Rwandan francs ($0.10) per day.

Inward Direct Investment according to IMF’s Coordinated Direct Investment Survey (http://data.imf.org/CDIS). Data on Rwandan outward FDI is not available.

Data on Rwanda equity security holdings by nationality is not available.  According to a 2019 BNR report, portfolio investment remains the lowest component of foreign investment in Rwanda mainly due to the low level of financial market development.  Portfolio investment stock amounted to $109.3 million in 2018, a 5 percent increase from 2017 levels.  In 2018, Rwanda recorded foreign portfolio inflows of $5.9 million compared to $0.3 million in 2017.

Jonathan Scott, Economic and Commercial Officer, United States Embassy
2657 Avenue de la Gendarmerie, P.O. Box 28 Kigali, Rwanda
+250-252-596-538, KigaliEcon@state.gov