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Executive Summary

Brazil is the second largest economy in the hemisphere behind the United States, and the ninth largest economy in the world. The United Nations Conference on Trade and Development (UNCTAD) named Brazil the eighth largest destination for global Foreign Direct Investment (FDI) flows in 2015. In recent years Brazil received more than half of South America’s total incoming FDI and the United States is a major foreign investor in Brazil. The Brazilian Central Bank (BCB) indicated that the United States had the largest single-country stock of FDI (USD 112 billion) in Brazil in 2014, the latest year with available data. The Government of Brazil (GOB) made attracting private investment in infrastructure a top priority for 2017.

Brazil’s recession has been longer and deeper than most economists anticipated. The country’s Gross Domestic Product (GDP) contracted by 3.6 percent in 2016 and is projected to grow only 0.4 percent in 2017. Per capita GDP decreased 4.4 percent in 2016 for a combined drop of almost 10 percent over two years. While unemployment stood at just 6.5 percent as recently as 2014, it ended 2016 at 12 percent and is projected to end 2017 above 13 percent. Brazil was the world’s eighth largest destination for FDI in 2015, with inflows of USD 64.6 billion, according to UNCTAD. The nominal budget deficit stood at nine percent of GDP (USD 161.7 billion) in 2016 and is projected to end 2017 at around 10 percent of GDP (USD 180.1 billion). Brazil’s debt-to-GDP ratio reached 70 percent in 2016 and is projected to reach 77 percent this year. In part due to the slower than anticipated return to growth, annual inflation fell to 6.3 percent by the end of 2016 – inside the Brazilian Central Bank’s (BCB) target range of 4.5 percent +/- two percentage points – for the first time in two years. This allowed the BCB to cut its benchmark interest rate to 11.25 percent (from a high of 14.25 percent in 2016) in April 2017.

President Temer, who took over as president after the impeachment of former President Dilma Rousseff in May 2016, is pursuing corrective macroeconomic policies to stabilize the economy. Congress approved a landmark federal spending cap in December 2016 and is now debating a complementary reform to curb social security spending. If a robust social security reform is approved, financial analysts assert investor confidence in debt sustainability will strengthen. Additional reforms to increase labor market flexibility and to rationalize Brazil’s complex tax system are also on the agenda. International capital markets have recognized Temer administration efforts, lowering risk premiums significantly from 2015 peak levels and boosting the value of the real. 2016 and early 2017 foreign direct investment inflows have been strong. Both portfolio and direct investors, however, remain sensitive to political uncertainties linked to ongoing corruption scandal investigations (please see corruption section) and Brazilian risk premiums fluctuate accordingly.

Notwithstanding the current macroeconomic context, Brazil’s large economy and vast middle class continue to make the country a destination for long-term investment, particularly in consumer products, albeit not without challenges.

With a USD 1.8 trillion economy, a population of over 200 million, and a large middle-class consumer base, Brazil is a top 10 destination for global FDI. The GOB investment promotion strategy prioritizes the automobile, renewable energy, life sciences, oil and gas, and infrastructure sectors. Foreign investors in Brazil receive the same legal treatment as local investors in most economic sectors; however, foreign investment is restricted in the health, mass media, telecommunications, aerospace, rural property, maritime, and air transport sectors. The Brazilian Congress is currently considering legislation to liberalize restrictions on foreign ownership of rural property and airline companies.

In addition to current economic difficulties, since 2014, Brazil’s anti-corruption oversight bodies are investigating allegations of widespread corruption involving state-owned energy firm Petrobras and a number of private construction companies. Analysts contend that high transportation and labor costs, low domestic productivity, and ongoing political uncertainties hamper investment in Brazil. Foreign investors also cite concerns over poor existing infrastructure, rigid labor laws, and complex tax, local content, and regulatory requirements; the so-called “Custo Brasil” (Brazil Cost).

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2016 79 of 175
World Bank’s Doing Business Report “Ease of Doing Business” 2017 123 of 190
Global Innovation Index 2016 69 of 128
U.S. FDI in Partner Country ($M USD, stock positions) 2015 USD 111,715
World Bank GNI Per Capita 2015 USD 9,850

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Brazil was the world’s eighth largest destination for Foreign Direct Investment (FDI) in 2015, with inflows of USD 64.6 billion, according to UNCTAD. The GOB actively encourages FDI – particularly in the automobile, renewable energy, life sciences, oil and gas, and transportation infrastructure sectors – to introduce greater innovation into Brazil’s economy and to generate economic growth. GOB investment incentives include tax exemptions and low-cost financing with no distinction made between domestic and foreign investors. Foreign investment is restricted in the health, mass media, telecommunications, aerospace, rural property, maritime, and air transport sectors.

Limits on Foreign Control and Right to Private Ownership and Establishment

A 1995 constitutional amendment (EC 6/1995) eliminated distinctions between foreign and local capital, ending favorable treatment (e.g. tax incentives, preference for winning bids) for companies using only local capital. However, foreign investment is restricted by Constitutional law in the health (Law 13097/2015), mass media (Law 10610/2002), telecommunications (Law 12485/2011), aerospace (Law 7565/1986, updated by MP 714), rural property (Law 5709/1971), maritime (Law 9432/1997 and Decree 2256/1997), insurance (Law 11371/2006), and air transport sectors (MP 714/2016).

Screening of FDI

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

Foreign investors in Brazil receive the same legal treatment as local investors in most economic sectors. Constitutional amendments passed in 1995 prohibit all forms of discrimination against foreign capital not explicitly set out under law.

To enter Brazil’s insurance and reinsurance market, U.S. companies must establish a subsidiary, enter into a joint venture, or acquire or partner with a local company. Applications for banking licenses are reviewed by the BCB on a case-by-case basis. Of the top 50 banks in Brazil, 20 are owned or controlled by foreign interests. Citibank, the only U.S. retail banking operation in Brazil, sold its Brazilian retail banking assets to Brazilian bank Itau in October 2016. On June 8, 2016, Brazil’s anti-trust authorities approved Bradesco bank’s August 2015 purchase of HSBC’s Brazilian retail banking operation.

Foreign ownership of airlines is limited to 20 percent, although the Brazilian Congress is considering legislation to eliminate the restriction. On March 19, 2011, the United States and Brazil signed an Air Transport Agreement as a step towards an Open Skies relationship that would eliminate numerical limits on passenger and cargo flights between the two countries. The GOB advanced the agreement to Congress in June 2016 for ratification. It was approved by the three requisite lower house committees and is pending lower house plenary approval before moving on to the Senate.

The Brazilian reinsurance market opened to competition in 2007. In December 2010 and March 2011, however, the Brazilian National Council on Private Insurance (CNSP) rolled back market liberalization through the issuance of Resolutions 225 and 232, which disproportionately affects foreign insurers operating in the Brazilian market. Resolution 225 requires that 40 percent of all reinsurance risk be placed with Brazilian companies. Resolution 232 allows insurance companies to place only 20 percent of risk with affiliated reinsurance companies. In December 2011, the CNSP issued Resolution 241, which walked back some of the restrictions of Resolution 225 by allowing the 40 percent requirement to be waived if local reinsurance capacity does not exist. Despite these limitations, Brazil accounts for more than 40 percent of Latin America’s reinsurance market, and the volume of business written in Brazil is expected to grow as the government invests in energy projects and infrastructure upgrades.

In September 2011, Law 12485/2011 removed a 49 percent limit on foreign ownership of cable TV companies and allowed telecom companies to offer television packages with their service. Content quotas require every channel to air at least three and a half hours per week of Brazilian programming during primetime. Additionally, one-third of all channels included in any TV package have to be Brazilian.

The National Land Reform and Settlement Institute (INCRA) administers the purchase and lease of Brazilian agricultural land by foreigners. Under the applicable rules, set by guidelines published in 2013, the area of agricultural land bought or leased by foreigners cannot account for more than 25 percent of the overall land area in a given municipal district. Additionally, no more than 10 percent of agricultural land in any given municipal district may be owned or leased by foreign nationals from the same country. The rules also make it necessary to obtain congressional approval before large plots of agricultural land can be purchased by foreign nationals, foreign companies, or Brazilian companies with majority foreign shareholding. Draft Law 4059/2012, which would lift the limits on foreign ownership of agricultural land, is expected to be voted on by the Brazilian Congress in 2017. The National Land Reform and Settlement Institute (INCRA) administers the purchase and lease of Brazilian agricultural land by foreigners. Under the applicable rules, the area of agricultural land bought or leased by foreigners cannot account for more than 25 percent of the overall land area in a given municipal district. Additionally, no more than 10 percent of agricultural land in any given municipal district may be owned or leased by foreign nationals from the same country. The rules also make it necessary to obtain congressional approval before large plots of agricultural land can be purchased by foreign nationals, foreign companies, or Brazilian companies with majority foreign shareholding. Draft Law 4059/2012, which would lift the limits on foreign ownership of agricultural land, will be up for vote in the Brazilian Congress in 2017.

Brazil is not a signatory to the World Trade Organization (WTO) Agreement on Government Procurement (GPA). U.S. companies seeking to participate in Brazil’s public sector procurement need to partner with a local firm or have operations in Brazil in order to be eligible for “margins of preference” offered to domestic firms to help these firms win government tenders. Foreign companies are often successful in obtaining subcontracting opportunities with large Brazilian firms that win government contracts. Under trade bloc Mercosul’s Government Procurement Protocol, member nations Brazil, Argentina, Paraguay and Uruguay are entitled to non-discriminatory treatment of government-procured goods, services and public works originating from each other’s’ suppliers and providers. The Protocol has only been ratified by Argentina and thus is not yet in force.

Other Investment Policy Reviews

Brazil rose to become one of the world’s top ten economic powers, and its growth and social welfare policies lifted millions out of poverty, notwithstanding some regression during the current economic downturn. The November 2016 the Organization for Economic Co-operation and Development (OECD) Brazil Economic Forecast Summary noted “The economy is emerging from a severe and protracted recession. Political uncertainty has diminished, consumer and business confidence are rising and investment has strengthened…Inflation will gradually return into the target range.” The OECD projects growth to resume progressively during 2017 due to improvements in confidence and investment. OECD highlights that “a new fiscal rule is being implemented and, in combination with a planned reform of pensions and social benefits, it should strengthen fiscal sustainability.” Additionally, the OECD states that a “credible commitment to containing public expenditures will allow further monetary easing going forward, which should give rise to stronger investment.” The OECD forecast can be found at: .

Business Facilitation

A company must register with the Board of Trade to obtain the National Registry of Legal Entities (CNPJ). Brazil’s Export Promotion and Investment Agency (APEX) has a mandate to facilitate foreign investment. The agency’s services are available to all investors, foreign and domestic. Foreign companies interested in investing in Brazil have access to many benefits and tax incentives granted by the Brazilian government at the municipal, state, and federal levels. Most incentives are granted based on project sector, amount to be invested, and potential job generation. Brazil’s business registration website can be found at:

Outward Investment

Brazil does not restrict domestic investors from investing abroad. In fact, Brazil’s Investment Promotion Agency, Apex-Brasil supports Brazilian companies’ efforts to invest abroad. Apex-Brasil frequently highlights the United States as an excellent destination for outbound investment, and Apex-Brasil and SelectUSA. SelectUSA (the U.S. Government’s investment promotion office at the U.S. Department of Commerce) signed a memorandum of cooperation to promote bilateral investment in February 2014. Apex-Brasil has an “internationalization program” to help companies invest abroad: 

2. Bilateral Investment Agreements and Taxation Treaties

Brazil does not have a Bilateral Investment Treaty (BIT) with the United States. In the 1990s Brazil signed BITs with Belgium and Luxembourg, Chile, Cuba, Denmark, Finland, France, Germany, Italy, the Republic of Korea, the Netherlands, Portugal, Switzerland, the United Kingdom and Venezuela. None of these were ratified by Brazil’s Congress. In 2002, an inter-ministerial working group withdrew the agreements from Congress after determining that treaty provisions on international investor state dispute resolution was unconstitutional and thus the agreements could not be ratified.

The GOB signed seven Cooperation and Facilitation Investment Agreements (CFIAs) since 2015 ( ), which are pending Congressional ratification: Mozambique (April, 2015), Angola (May 2015), Mexico (June 2015) Malawi (October 2015), Colombia (October 2015), Chile (November 2015), and Peru (2016).

The signed CFIAs outline progressive steps for the settlement of any “issue of interest to an investor” including 1) an ombudsmen and a Joint Committee appointed by the two governments will act as mediators to amicably settle any dispute; 2) if amicable settlement fails, any of the two governments may bring the dispute to the attention of the Joint Committee; 3) if the dispute is not settled within the Joint Committee, the two governments may resort to interstate arbitration mechanisms.”

Brazil does not have a double taxation treaty with the United States, but it does have such treaties with 36 other countries, including, Japan, France, Italy, the Netherlands, Canada, Spain, Portugal, and Argentina. Brazil signed a Tax Information Exchange Agreement (TIEA) with the United States in March 2007, which entered into force on May 15, 2013 when President Rousseff signed Decree 8003/2013. In September 2014, Brazil and the United States signed an intergovernmental agreement (IGA) to improve international tax compliance and to implement the Foreign Account Tax Compliance Act (FATCA). This agreement went into effect in September 2015.

3. Legal Regime

Transparency of the Regulatory System

In the 2017 World Bank Doing Business report, Brazil ranked 123th out of 190 countries in terms of overall ease of doing business in 2016, a decline of eight positions compared to the 2015 report. According to the World Bank, it takes approximately 101.5 days to start a business in Sao Paulo. Rio de Janeiro was also profiled in the report. The GOB is seeking to streamline the process and decrease the amount to time it takes to open a business to five days through its RedeSimples Program. Similarly, the GOB reduced red-tape through the implementation of the SIMPLES program, which was designed to simplify the collection of up to eight federal, state, and municipal-level taxes into one single payment.

The 2017 World Bank study noted that the annual administrative burden of tax payments to a medium-size business in Brazil is an average of 2,038 hours versus 163.4 hours in the OECD high-income economies, which marks an improvement for Brazil that corresponded with improvements in other OECD high-income economies over recent years. The total tax rate for a medium-sized business in Rio de Janeiro is 69 percent of profits, compared to the average of 40.9 percent in the OECD high-income economies. Business managers often complain of not understanding tax regulations, despite their investments in creating large local tax and accounting departments in their companies.

Tax regulations, while burdensome and numerous, do not generally differentiate between foreign and domestic firms. However, there are instances of complaints that the value-added tax collected by individual states (ICMS) favors local companies. Although the tax is designed to be refunded when goods are exported abroad, exporters in many states had difficulty receiving their ICMS rebates. Taxes on commercial and financial transactions are particularly burdensome, and businesses complain that these taxes hinder the international competitiveness of Brazilian-made products. In addition, the U.S. government has been evaluating and continues to monitor the impact of PIS/Cofins tax rates on imported goods after the passage of Law 13137/2015.

Of Brazil’s ten federal regulatory agencies, the most prominent include: ANVISA, the Brazilian counterpart to the U.S. Food and Drug Administration, which regulatory authority over the production and marketing of food, drugs, and medical devices; ANATEL, the country’s telecommunications agency, which handles licensing and assigning of bandwidth; ANP, the National Petroleum Agency, which regulates oil and gas contracts and oversees the bidding process for oil blocks, including for pre-salt oil; ANAC, the agency that oversees the civil aviation industry; and ANEEL, the country’s electric energy agency. In addition to these federal regulatory agencies, Brazil has at least 27 state-level agencies and 17 municipal-level agencies.

The Office of the Presidency’s Program for the Strengthening of Institutional Capacity for Management in Regulation (PRO-REG), created in 2007 by Decree 6062, has introduced a broad program for improving Brazil’s regulatory framework, including via an ongoing Work Plan launched in 2014 with the U.S. White House Office of Information and Regulatory Affairs (OIRA) to exchange best practices in developing high quality regulations that mandate the least burdensome approach to address policy implementation. Ex-ante Regulatory Impact Analyses (RIAs) are completed on a voluntary basis by regulatory agencies. A bill on Governance and Accountability for Federal Regulatory Agencies (PL 6621/2016) has been approved by the lower house of Congress and presently awaits Senate approval. Among other provisions, the bill would make RIAs mandatory for regulations which affect “the general interest”. Pro-Reg is drafting enabling legislation for implementing this provision.

The general public has online access to both approved and proposed federal legislation via websites for the Chamber of Deputies, Federal Senate, and the Office of the Presidency. Brazil is seeking to improve its public comment and stakeholder input process. In 2004 the GOB instituted a Transparency Portal, a website in which data is available on funds transferred to and from the federal, state and city governments, as well as to and from foreign countries. It also includes information on civil servants’ salaries.

International Regulatory Considerations

Brazil is a member of Mercosul, and routinely implements Mercosul common regulations.

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

Legal System and Judicial Independence

Brazil has a civil legal system structured around courts at the state and federal level. Contract enforcement can be accomplished either through the court system or via mediation, although both processes can be lengthy. Foreign contract enforcement judgments must be accepted by the Brazilian Superior Court of Justice (STJ) to be considered valid in Brazil, and among other considerations must not contradict any prior decisions by a Brazilian court in the same dispute. Commercial disputes are regulated under the Brazilian Civil Code, enacted in 2002, although an older, largely superseded Commercial Code remains applicable solely for commercial cases involving maritime law. Federal judges hear most disputes in which one of the parties is the Brazilian State, and also rule on lawsuits between a foreign state or international organization and a municipality or a person residing in Brazil.

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

Laws and Regulations on Foreign Direct Investment

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

Competition and Anti-Trust Laws

Regulatory review of mergers and acquisitions are carried out by the Administrative Council for Economic Defense (CADE). In October 2012, Brazil performed its first review of a pending merger, bringing Brazil in line with U.S. and European practices. This shift to pre-merger review was a result of 2011 legislation (Law 12529) adopted to modernize Brazil’s antitrust review process and to combine the antitrust functions of the Ministry of Justice and the Ministry of Finance into CADE. This government body is responsible for enforcement of competition laws and consumer defense.

Expropriation and Compensation

Article 5 of the Brazilian constitution assures the property rights of both Brazilians and foreigners that live in Brazil. The Constitution does not address nationalization or expropriation. Brazilian Law does allow the government to exercise eminent domain under certain criteria which include, but are not limited to, national security, public transportation, safety, health, and urbanization projects. Owners are compensated in cash. The rules for eminent domain are laid out in Decree-Law 3365 from 1941, as amended.

There are no known expropriation actions in Brazil against foreign interests in the recent past, nor have there been any signs that the current government is contemplating such actions. Some claims regarding land expropriations by state agencies were judged by Brazilian courts in U.S. citizens’ favor; however, compensation has not always been paid, as states have filed appeals to these decisions.

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

Contract disputes in Brazil can be lengthy and complex. Brazil has both a federal and a state court system, and jurisprudence is based on civil law. Federal judges hear most disputes in which one of the parties is the State, and rule on lawsuits between a foreign State or international organization and a municipality or a person residing in Brazil. Five regional federal courts hear appeals of federal judges’ decisions. The 2017 World Bank Doing Business report found that on average it takes 11 procedures and 731 days to litigate a contract breach.

International Commercial Arbitration and Foreign Courts

Brazil ratified the 1975 Inter-American Convention on International Commercial Arbitration (Panama Convention) and the 1979 Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitration Awards (Montevideo Convention). Law 9307/1996 pertains to advanced legislation on arbitration and anchored in what is most modern about the principles and guarantees of litigants. The GOB developed a new Cooperation and Facilitation Investment Agreement (CFIA) model in 2015 ( internacionais/bilaterais/2015 ) that does not include investor state dispute settlement mechanisms. (See section 13)

Bankruptcy Regulations

Brazil has a commercial code that governs most aspects of commercial association, except for corporations formed for the provision of professional services, which are governed by the civil code. In 2005, bankruptcy legislation (Law 11101) went into effect creating a system modeled on Chapter 11 of the U.S. bankruptcy code, which allows a company in financial trouble to negotiate a restructuring with its creditors outside of the courts. In the event a company does fail despite restructuring efforts, the reforms improved creditors’ ability to recover their debts. In the World Bank’s 2017 Doing Business Report, Brazil is ranked 67th out of 190 countries for ease of “resolving insolvency.”

4. Industrial Policies

Investment Incentives

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

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

While local private sector banks are beginning to offer longer credit terms, state-owned development bank BNDES is the traditional Brazilian source of long-term credit, and also provides export credits. BNDES provides foreign- and domestically-owned companies operating in Brazil financing for the manufacturing and marketing of capital goods and primary infrastructure projects. Much of this financing is provided at subsidized interest rates. As part of its package of fiscal tightening, in December 2014, the GOB announced its intention to scale back the expansionary activities of BNDES and ended direct Treasury support to the bank. In March 2017, Brazil’s National Monetary Council (CMN) lowered BNDES’ long-term subsidized reference interest rate (the TJLP) from 7.5 percent to seven percent. The CMN also announced the creation of a new Long-Term Lending Rate (TLP) which will apply to new loans starting Jan 1, 2018. The TLP will initially be set at the same level as the TJLP and over time be reduced to equal Brazil’s five-year bond yield (a rate which incorporates inflation and is called the NTN-B). The GOB plans to reduce BNDES’s role further as efforts to promote long-term private capital market are made.

In January 2015, the GOB eliminated industrial products tax (IPI) exemptions on vehicles, while keeping all other tax incentives provided by the October 2012 Inovar-Auto program. Through Inovar-Auto, auto manufacturers are able to apply for tax credits based on their ability to meet certain criteria, including manufacturing processes performed in Brazil, enhancing fuel efficiency, committing to investing in research and development in Brazil or using Brazilian engineering services, and agreeing to participate in a fuel-efficiency labeling scheme. The Inovar-Auto program will end on December 31, 2017.

In 2014, the GOB issued Decree 8304 to reinstate the Special Regime for the Reinstatement of Taxes for Exporters, dubbed the Reintegra Program. Under the program, exporters of products covering 8,630 tariff codes receive a subsidy of three percent of the value of their exports. To qualify, the imported content of the exported goods cannot exceed 40 percent, except in the case of high-tech goods, such as pharmaceuticals, electronics, and aircraft and parts, which are permitted to have up to 65 percent of inputs imported. In addition, Reintegra exempts exporters from so-called indirect taxes on capital expenditures, including the PIS/Cofins social contribution taxes and the tax on financial transactions (IOF). On February 27, 2015, Decree 8415 revoked Decree 8304 and determined new regulations for the program. The three percent subsidy on the value of the exports was reduced to one percent for 2015, to 0.1 percent for 2016 ,

In May 2010, the GOB launched a National Broadband Plan, which featured fiscal incentives, private sector participation, and regulatory reform to build out Internet infrastructure under the leadership of state-owned firm Telebras. While the plan provided commercial opportunities for foreign investors, it also sought to boost Brazilian technology by granting domestic IT equipment tax exemptions, favorable BNDES financing, and preference in the procurement process.

Industrial Promotion

In October 2012, via Decree 7819/2012 Inovar-Auto, the GOB approved a program that offers a variety of incentives to encourage vehicle manufacturers to expand investment and production in Brazil. The European Union (EU) and Japan filed separate World Trade Organization (WTO) complaints in 2013 and 2015 that argue that some Inovar-auto tax benefits discriminate against foreign product imports and restricts trade. A final WTO decision on these programs is expected this year. The program will expire in December 2017 and expectations are that it will not be renewed. Meanwhile, the InovAtiva Brasil and Startup Brasil programs support start-ups in the country. The GOB also uses free trade zones to incentivize industrial production. A complete description of the scope and scale of Brazil’s investment promotion programs and regimes can be found at: .

Foreign Trade Zones/Free Ports/Trade Facilitation

The federal government grants tax benefits for certain free trade zones. Most of these free trade zones aim to attract investment to the country’s relatively underdeveloped North and Northeast regions. The most prominent of these is the Manaus Free Trade Zone, in Amazonas State, which has attracted significant foreign investment, including from U.S. companies. In October 2011, then President Rousseff signed a constitutional amendment that extends Manaus’s status as an industrial zone for another 50 years. Constitutional amendment 83/2014 came into force in August 2014 and extended the status of Manaus Free Trade Zone until the year 2073.

Performance and Data Localization Requirements

Investors in certain sectors in Brazil must adhere to the country’s regulated prices, which fall into one of two groups: those regulated at the federal level, or by a federal company or agency, and those set by sub-national governments (states or municipalities). Regulated prices managed at the federal level include telephone services, oil products (gasoline and bottled cooking gas), electricity, and healthcare plans. Regulated prices controlled by sub-national governments include water and sewage fees, vehicle registration fees, and most fees for public transportation, such as local bus and rail services. As part of its fiscal adjustment strategy, the GOB sharply increased administered prices in January 2015.

In firms employing three or more persons, Brazilian nationals must constitute at least two-thirds of all employees and receive at least two-thirds of total payroll, according to Brazilian Labor Law Articles 352 to 354. Foreign specialists in fields where Brazilians are unavailable are not counted in calculating the one-third permitted for non-Brazilians.

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

Brazil’s Marco Civil, an Internet law that determines user rights and company responsibilities, states that data collected or processed in Brazil must respect Brazilian law, even if the data is subsequently stored outside the country. Penalties for non-compliance could include fines of up to 10 percent of gross Brazilian revenues and/or suspension or prohibition of related operations. Under the law, Internet connection and application providers must retain access logs for specified periods or face sanctions. While the Marco Civil does not require data to be stored in Brazil, its provisions – as well provisions of other proposed legislation, including a data privacy bill – should be closely tracked by Internet and other data-related companies investing in Brazil operations.

5. Protection of Property Rights

Real Property

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

Intellectual Property Rights

Rights holders in Brazil continue to face intellectual property rights (IPR) challenges. Brazil has remained on the “Watch List” of the U.S. Trade Representative’s Special 301 report since 2007. For more information, please see: 

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at: 

Resources for Rights Holders

Shannon Brink
U.S. Embassy Brasilia Economic Officer
+55 61 3312-7000

Laura Hammel
U.S. Mission Brazil IP Attache
+55 21 3823-2000

6. Financial Sector

Capital Markets and Portfolio Investment

The Central Bank of Brazil (BCB) embarked in October 2016 on what appears to be a sustained monetary easing cycle, lowering the Selic baseline reference rate from a high of 14.25 percent in October 2016 to 11.25 percent in April 2017. Inflation fell to 6.3 percent by year-end 2016 and is now on course to undershoot the 4.5 percent inflation central target set for 2017-2018, allowing for further monetary policy easing. Financial analysts assert a reduction in the BCB’s target for inflation to four percent in 2019-21 is a growing probability. Because of a heavy public debt burden and other structural factors, the neutral real policy rate will remain higher than those of Brazil’s emerging-market peers (around five percent) over the forecast period.

After a boom in 2004-2012 that more than doubled the lending/GDP ratio (to 55 percent of GDP), the financial services sector was hit hard by the recession and higher interest rates. In real terms, lending turned negative, declining by nearly three percent in December 2016, a slide that would have been worse had it not been for lending by the public banks. This reduced the lending/GDP ratio to 49.3 percent at end-2016. Financial analysts contend that credit will pick up again in the medium term, owing to interest-rate easing and economic recovery.

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

While local private sector banks are beginning to offer longer credit terms, state-owned development bank BNDES is a traditional Brazilian source of long-term credit, and also provides export credits. BNDES’ lending in 2016 reached its lowest level in 20 years. While some of this reflected a reduction in disbursements due to the Car Wash corruption scandal, at least half reflects a new limited focus in BNDES lending. (For more information on BNDES’ lending programs please see investment incentives section.)

All stock trading is performed on the Sao Paulo Stock Exchange (BOVESPA), while trading of public securities is conducted on the Rio de Janeiro market. In 2008, the Brazilian Mercantile & Futures Exchange (BM&F) merged with the BOVESPA to form what is now the fourth largest exchange in the Western Hemisphere, after the NYSE, NASDAQ, and Canadian TSX Group exchanges. BOVESPA launched in 2000 a “New Market” in which the listed companies comply with stricter corporate governance requirements. A majority of initial public offerings (IPOs) are listed on the New Market. At year-end 2016, there were 129 companies listed under the “New Market” program. Their market value reached USD 185 billion in 2016. At year-end, there were 338 companies traded on the BM&F/BOVESPA. Total daily trading average volume increased from R 6.1 billion (USD 1.8 billion) in 2015 to R 6.6 billion (USD 1.9 billion) in 2016.

Foreign investors, both institutions and individuals, can directly invest in equities, securities and derivatives. Foreign investors are limited to trading derivatives and stocks of publicly held companies on established markets. At year-end 2016, foreign investors accounted for 52 percent of the total turnover on the BOVESPA. Domestic institutional investors were the second most active market participants, accounting for 25 percent of activity. Individual investors comprised 17 percent of activity, followed by financial institutions (five percent), and public and private companies (one percent).

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

Money and Banking System

The Brazilian financial sector is large and sophisticated. Banks lend at Brazilian market rates, which remain high. Reasons cited by industry observers include high taxation, repayment risk, and concern over inconsistent judicial enforcement of contracts, high mandatory reserve requirements, and administrative overhead, as well as persistently high real (net of inflation) interest rates.

The financial sector is concentrated, with BCB data indicating that the four largest commercial banks (excluding brokerages) account for approximately 72 percent of the commercial banking sector assets. Three of the five largest banks (in assets) in the country – Banco do Brasil, Caixa Economica Federal, and BNDES – are partially or completely federally owned. Lending by the large banking institutions is focused on the largest companies, while small- and medium-sized banks primarily serve small- and medium-sized companies.

The BCB strengthened bank audits, implemented more stringent internal control requirements, and tightened capital adequacy rules to better reflect risk. It also established loan classification and provisioning requirements. These measures are applied to private and publicly owned banks alike. The Brazilian Securities and Exchange Commission (CVM) independently regulates the stock exchanges, brokers, distributors, pension funds, mutual funds, and leasing companies with penalties against insider trading.

Foreign Exchange and Remittances

Foreign Exchange

Brazil’s foreign exchange market remains small, despite recent growth. The latest Triennial Survey by the Bank for International Settlements, conducted in April 2016, showed that the net daily turnover on Brazil’s market for OTC foreign exchange transactions (spot transactions, outright forwards, foreign-exchange swaps, currency swaps and currency options) was USD19.7 billion, up from USD17.2 billion in 2013. This was equivalent to around 0.3 percent of the global market in both years.

Brazil’s banking system is adequately capitalized and has traditionally been highly profitable, reflecting high interest rates and fees. In September 2016 all banks exceeded the solvency ratios of 4.5 percent of common equity capital, 6.5 percent of Tier 1 capital and 11 percent of total capital, a comfortable buffer.

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

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

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

In March 2014, the Federal Revenue Service of Brazil consolidated the regulations on withholding taxes (IRRF) applicable to earnings and capital gains realized by individuals and legal entities resident or domiciled outside Brazil. The regulation states that the cost of acquisition must be calculated in Brazilian reais. Also, the “technical services” definition was broadened to include administrative support and consulting services rendered by individuals (employees or not) or resulting from automated structures having clear technological content.

Upon registering their investments with the BCB, foreign investors are able to remit dividends, capital (including capital gains), and, if applicable, royalties. Remittances must also be registered with the BCB. Dividends cannot exceed corporate profits. The remittance transaction may be carried out at any bank by documenting the source of the transaction (evidence of profit or sale of assets) and showing that applicable taxes have been paid.

Remittance Policies

Under Law 13259/2016 passed in March 2016, capital gain remittances are subject to a 15-22.5 percent income withholding tax, with the exception of the capital gains and interest payments on tax-exempt domestically issued Brazilian bonds. The tax rate is determined by capital gains: up to USD 1.5 million is taxed at 15 percent; USD 1.5 million to USD 2.9 million is taxed at 17.5 percent; USD 2.9 million to USD 8.9 million is taxed at 20 percent; and more than USD 8.9 million is taxed at 22.5 percent.

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

Sovereign Wealth Funds

The Sovereign Fund of Brazil (FSB) was established in 2008 under Law 11887. It is a non-commodity fund with a mandate to support national companies in their export activities and to offset counter-cyclical development, promoting investment in projects of strategic interest to Brazil both domestically and abroad. The GOB also has the authority to use money from this fund to help meet its fiscal targets when annual revenues are lower than expected, and to invest in state-owned companies. The FSB was worth USD 2.2 billion in 2016. FSB resources are derived from GOB financial revenues.

7. State-Owned Enterprises

The GOB maintains ownership interests in a variety of enterprises at both the federal and state levels. Typically, state-owned enterprise (SOE) corporate governance is led by a board comprised of directors elected by the state or federal government with additional directors elected by any non-government shareholders. Although Brazil, a non-OECD member, has participated in many OECD working groups, it does not follow the OECD Guidelines on Corporate Governance of SOEs. Brazilian SOEs are concentrated in the energy, electricity generation and distribution, transportation, and banking sectors. A number of these firms are also publically traded on the Brazilian and other stock exchanges.

In the 1990s and early 2000s, the GOB privatized state-owned enterprises across a broad spectrum of industries, including mining, steel, aeronautics, banking, energy, and electricity generation and distribution. While the GOB has divested itself from many of its state-owned companies, it maintains partial control (at both the federal and state level) of some previously wholly state-owned enterprises.

Notable examples of majority government owned and controlled firms include national oil and gas giant Petrobras and power conglomerate Eletrobras. Both Petrobras and Eletrobras include non-government shareholders, are listed on both the Brazilian and NYSE stock exchanges, and are subject to the same accounting and audit regulations as all publicly traded Brazilian companies. Brazil previously restricted foreign investment in offshore oil and gas development through 2010 legislation that obligated Petrobras to serve as the sole operator and minimum 30 percent investor in any oil and gas exploration and production in Brazil’s offshore “pre-salt” fields. As a result of the GOB’s desire to increase foreign investment in Brazil’s offshore “pre-salt” hydrocarbon sector, in October 2016 the Brazilian Congress passed a bill that gives Petrobras right-of-first refusal in developing “pre-salt” offshore fields, allows foreign companies to serve as sole operators in “pre-salt” exploration and production activities, and eliminates Petrobras’ obligation to serve as a minority equity holder in “pre-salt” oil and gas operations.

Privatization Program

Given limited public investment funding, the GOB focused on transferring billions of dollars in state –owned airport, road, railway, and port assets to private investors through long term (up to 30 year) infrastructure concession agreements(public-private partnership – PPPs). These privatizations are carried out through public tenders Both domestic and foreign private companies are invited to participate in the privatization auctions.

In June 2016, Brazil launched its newest version of these efforts to promote PPPs for primary infrastructure. The Crescer Investment Partnerships Project (PPI), based in the Presidency, brings together the broad inter-agency to ensure consistency in the request for tenders and the contract awards. PPI covers federal concessions in road, rail, ports, airports, municipal water treatment, electricity transmission and distribution, and oil and gas exploration and production contracts. The estimated value of the concessions is USD 44.2 billion (using minimal tender values). The full list of PPI projects is located here: .

While some subsidized financing through the Brazilian National Development Bank (BNDES) will be available, PPI emphasized that bidders should also use private financing and debentures on these projects. All federal and state-level infrastructure concessions are open to foreign companies with no requirement to work with Brazilian partners.

8. Responsible Business Conduct

Most state-owned and private sector corporations of any significant size in Brazil pursue corporate social responsibility (CSR) activities. Brazil’s new CFIAs (see section on bilateral investment agreements) contain CSR provisions. Some corporations use CSR programs to meet local content requirements, particularly in IT technology manufacturing. Many corporations support local education, health and other programs in the communities where they have a presence. Brazilian consumers, especially the local citizenry where a corporation has or is planning a local presence, expect CSR activity. It is not uncommon for corporate officials to meet with community members prior to building a new plant or factory to review what types of local services the corporation will commit to providing. Foreign and local enterprises in Brazil often advance United Nations Development Program (UNDP) Millennium Development Goals (MDGs) as part of their CSR activity, and will cite their local contributions to MDGs, such as universal primary education and environmental sustainability.

The U.S. diplomatic mission in Brazil supports U.S. business CSR activities through the +Unidos Group (Mais Unidos), a group of more than 100 U.S. companies established in Brazil. Additional information on how the partnership supports public and private alliances in Brazil can be found on its website: .

9. Corruption

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

In 2016, Brazil dropped from 76th (in 2015) to 79th out of 176 countries in Transparency International’s Corruption Perceptions Index. The full report can be found at: 

Since 2014, the criminal investigation, “Operation Carwash” (Lava Jato), uncovered a complex web of public sector corruption, contract fraud, money laundering, and tax evasion stemming from systematic overcharging for government contracts, particularly at parastatal oil company Petrobras. The ongoing investigation led to the arrests of Petrobras executives, oil industry suppliers including executives from Brazil’s largest construction companies, money launderers, former politicians, and political party operatives. Many sitting Brazilian politicians are currently under investigation.

In December 2016, Brazilian construction conglomerate Odebrecht and its chemical manufacturing arm Braskem agreed to pay a penalty and plead guilty to charges filed in the United States, Brazil, and Switzerland that alleged the companies paid hundreds of millions of dollars in bribes to government officials around the world. The U.S. Department of Justice case stemmed directly from the Lava Jato investigation and focused on violations of the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA). Details on the case can be found here: .

In 2015, GOB prosecutors also announced “Operation Zealots” (Operacao Zelotes), in which both domestic and foreign firms are alleged to have bribed tax officials to reduce their assessments.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Brazil is a signatory to the OECD Anti-Bribery Convention and a participating member of the OECD Working Group on bribery. It was one of the founders, along with the United States, of the intergovernmental Open Government Partnership, which seeks to help governments increase transparency.

Resources to Report Corruption

Georgia Diogo
International Affairs Advisor
Brazilian Federal Public Ministry

Transparencia Brasil
R. Bela Cintra, 409; Sao Paulo, Brasil
+55 (11) 3259-6986 

10. Political and Security Environment

Strikes and demonstrations occur occasionally in urban areas and may cause temporary disruption to public transportation. Occasional port strikes also impact commerce.

In 2016, over three million people demonstrated to call for President Dilma Rousseff’s impeachment and protest against corruption, among the largest public protests in Brazil’s history. At the same time, almost one million people demonstrated in support of the Rousseff administration. Non-violent pro- and anti-government demonstrations have occurred regularly over the past few years.

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

11. Labor Policies and Practices

Brazil ratified a number of International Labor Organization (ILO) conventions. Brazil is party to the UN Convention on the Rights of the Child and major ILO conventions concerning the prohibition of child labor, forced labor, and discrimination.

In Brazil’s labor code, formal sector workers are guaranteed 30 days of annual leave and severance pay in the case of dismissal without cause. Brazilian employers are required to pay a “thirteenth month” salary to employees at the end of the year. Brazil also has a system of labor courts that are charged with resolving routine cases involving unfair dismissal, working conditions, salary disputes, and other grievances. Labor courts have the power to impose an agreement on employers and unions if negotiations break down and either side appeals to the court system. As a result, labor courts are routinely called upon to determine wages and working conditions in industries across the country. The system is tantamount to compulsory arbitration and does not encourage collective bargaining. In recent years, however, both labor and management became more flexible, and collective bargaining assumed greater relevance.

The Ministry of Labor estimates there are nearly 11,000 labor unions in Brazil, but officials note these figures are inexact. Labor unions, especially in sectors such as metalworking and banking, tend to be well-organized and aggressive in advocating for wages and working conditions and account for approximately 19 percent of the official workforce according to a recent Brazilian Institute of Applied Economic Research (IBGE) release. Strikes occur periodically, particularly among public sector unions. Unions in various sectors engage in industry-wide collective bargaining negotiations mandated by federal regulation. While some labor organizations and their leadership operate independently of the government and of political parties, others are considered to be closely associated with political parties.

Employer federations, supported by mandatory fees based on payroll, play a significant role in both public policy and labor relations. Each state has its own federation, which reports to the National Confederation of Industry (CNI), headquartered in Brasilia, and the National Confederation of Commerce (CNC), headquartered in Rio de Janeiro.

12. OPIC and Other Investment Insurance Programs

Programs of the Overseas Private Investment Corporation (OPIC) are fully available. Brazil has been a member of the Multilateral Investment Guarantee Agency (MIGA) since 1992.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2016 $1,799,436 2015 $1,774,700

Foreign Direct Investment Host Country Statistical source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2014 $111,714* 2015 $65,272** BEA data available at
U.S. is Historical-Cost Basis
Host country’s FDI in the United States ($M USD, stock positions) 2015 $9,606* 2015 $23,660** BEA data available at
Total inbound stock of FDI as % host GDP 2015 26% N/A N/A IMF CDIS 2015 total inbound investment

*In this year’s report, we are using latest BCB “Historical-Cost Basis” statistics for this chart.

**There is a discrepancy between BCB and IMF calculations for U.S. FDI distribution in Brazil, as well as Brazilian FDI distribution in the United States. According to the BCB, the United States had the highest stock of FDI in Brazil as of 2014.
Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data

(IMF Coordinated Direct Investment Survey, 2015)

From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 460,381 100% Total Outward 145,043 100%
Netherlands 110,210 24% Cayman Islands 52,456 36%
United States* 82,125 18% Austria 30,937 21%
Spain 57,426 12% Brit Virgin Islands 24,523 17%
Luxembourg 34,732 8% The Bahamas 20,730 14%
United Kingdom 23,213 5% Spain 11,403 8%
“0” reflects amounts rounded to +/- USD 500,000.

*There is a discrepancy between BCB and IMF calculations for U.S. FDI distribution in Brazil, as well as Brazilian FDI distribution in the United States. According to the BCB, the United States had the highest stock of FDI in Brazil as of 2014. The BCB calculates FDI distribution by ultimate investing country (for which the United States ranks number one), whereas the IMF calculates FDI distribution by immediate investing country (for which the Netherlands ranks number one). The differences between “immediate” and “ultimate investing country” measures of FDI likely reflect the use by both U.S. and Brazilian multinational corporations of 3rd country affiliates as investment vehicles in order to minimize their consolidated tax liabilities.
Table 4: Sources of Portfolio Investment

Portfolio Investment Assets (IMF Coordinated Portfolio Investment Survey, June 2016)
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 23,595 100% All Countries 71,816 100% All Countries 5,779 100%
United States 10,316 44% United States 6,936 39% United States 3,380 58%
Cayman Islands 2,604 11% Cayman Islands 2,481 13% Spain 713 12%
Spain 1,685 7% Bermuda 1,502 8% Denmark 650 11%
Bermuda 1,503 6% Luxembourg 1,105 6% Republic of Korea 487 8%
Luxembourg 1,135 5% Spain 972 5% Cayman Islands 123 2%

14. Contact for More Information

Economic Section
U.S. Embassy Brasilia


Executive Summary

China has a more restrictive foreign investment climate than its major trading partners, including the United States. While China remains a top destination for foreign direct investment, many sectors of its economy are closed to foreign investors. China continues to rely on an investment catalogue to encourage foreign investment in some sectors of the economy while restricting or prohibiting investment in many others. China’s investment approval regime shields from competition inefficient and monopolistic Chinese enterprises – especially state-owned enterprises (SOEs) and other national champions. Foreign investors are hampered by discriminatory practices, selective regulatory enforcement, licensing barriers, and the lack of an independent judiciary. Other challenges include poor intellectual property rights (IPR) enforcement, forced technology transfer, and a systemic lack of rule of law. Moreover, many of China’s industrial policy goals, including the 13th Five Year Plan and Made in China 2025, inherently discriminate against foreign companies and brands by favoring local products in key high-tech and advanced manufacturing sectors.

U.S. companies and industry associations are increasingly vocal in their criticism of China’s discriminatory investment regime. A 2017 business climate survey by the American Chamber of Commerce in China found over 60 percent of U.S. businesses surveyed felt China would be unlikely in the next three years to carry out needed reforms to provide greater market access to foreign companies; 81 percent felt China’s business climate had deteriorated and become less friendly to U.S. investors in the last year.

In 2016, the Chinese leadership pledged to gradually improve the investment climate through:

  • Intensification of U.S.-China Bilateral Investment Treaty (BIT) negotiations covering “pre-establishment” market access and using a “negative list” approach, with the aim of a high-standard agreement reflecting non-discrimination, transparency, and open and liberalized investment regimes on both sides.
  • Implementation of staggered “negative lists” to govern investment throughout the country, including: a pilot market access negative list applicable to both domestic and foreign investors; an updated draft Catalogue for the Guidance of Foreign Investment in Industries, which proposes new liberalization in 20 investment sectors; and the announced expansion of the Free Trade Zone (FTZ) pilot foreign investment negative list to include seven new FTZs (for a total of eleven) that will go into effect in 2017.

Although Chinese officials continue to promise economic reforms that will provide greater market access and protection to foreign investors, announcements are met with skepticism due to lack of details and timelines. Investors also cite inconsistent regulations, growing labor costs, licensing and registration problems, shortages of qualified employees, insufficient intellectual property protections, and other forms of Chinese protectionism as contributing to China’s deteriorating business climate.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2016 79 of 175
World Bank’s Doing Business Report “Ease of Doing Business” 2016 78 of 190
Global Innovation Index 2016 25 of 128
U.S. FDI in partner country ($M USD, stock positions) 2015 U.S. $74.56 Billion
World Bank GNI per capita 2015 U.S. $7,930

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

China has long relied on foreign investment to develop key sectors of its economy. Although many industries and economic sectors remain restricted or prohibited to foreign investment, government officials recognize the important role that Foreign Direct Investment (FDI) has historically played in China’s economic development. They have therefore continued to promise economic reforms to further open up China’s economy to provide greater market access for foreign investment. According to the Ministry of Commerce (MOFCOM), 2016 saw China’s total inward FDI flows rise 4.1 percent from the year prior, to 813.22 billion renminbi (RMB) (U.S. $126 billion). China’s sustained high economic growth rate, growing middle class, and the expansion of diverse product demand all contribute to China’s attractiveness as an FDI destination.

Foreign investors, however, often temper their optimism regarding potential investment returns with uncertainty about China’s willingness to offer a level playing field vis-à-vis Chinese competitors. Foreign investors report a range of challenges related to China’s current investment climate, including: broad use of industrial policies to protect and promote state-owned and other domestic firms through employing subsidies, preferential financing, and selective enforcement of laws and regulations; restrictions on controlling ownership of foreign entities through equity caps, limited voting rights, limits to foreign participation on companies’ board of directors, etc.; weak protection and enforcement of IPR; corruption; discriminatory and non-transparent anti-monopoly enforcement; excessive national or cyber security requirements; and an unreliable legal system lacking transparency and rule of law. The 2015 Anti-Terrorism Law, the Foreign Non-Governmental Organization (NGO) Law, the Cyber Security Law, and other measures impede local Chinese firms (especially banks) from purchasing foreign technology, raising concerns that China has back-tracked on reforms to further open up to foreign investment.

China promotes inward investment through MOFCOM’s “Invest in China” website, found at . MOFCOM publishes laws and regulations related to foreign investment, economic statistics, lists of investment projects, relevant news articles, and other relevant information about investing in China. In addition, each region has a provincial-level investment promotion agency through local MOFCOM departments.

American Chamber of Commerce China 2016 American Business in China White Paper: 

American Chamber of Commerce China 2017 Business Climate Survey: 

U.S.-China Business Council’s China October 2016 Economic Reform Scorecard: 

MOFCOM’s Investment Promotion Website: 

Limits on Foreign Control and Right to Private Ownership and Establishment

The Catalogue for the Guidance of Foreign Investment in Industries, or Foreign Investment Catalogue (FIC), governs the “pre-establishment,” or market access, phase of investment and establishes whether foreign investment in a particular economic sector or industry is “encouraged,” “restricted,” or “prohibited.” In both the encouraged and restricted categories, the FIC clearly outlines industry sectors that are completely liberalized and those that are open to foreign investment but subject to equity caps, joint ventures requirements, and Chinese national leadership requirements. Encouraged sectors are industries China believes would benefit from foreign investment and technology transfer, often in line with industrial policy goals. Restricted and prohibited sectors are those seen as sensitive, possibly touching on national security concerns, or at odds with the industrial goals of China’s economic development plans.

In December 2016, MOFCOM and the National Development and Reform Commission (NDRC) jointly issued for public comment an updated draft of the FIC that proposed reforms to further liberalize 20 sectors of the economy. Of note, the proposed draft FIC changed the header of the restricted and prohibited section to the “nationwide negative list.” Foreign investors interested in industries not on the negative list will no longer require pre-approval from MOFCOM, but rather, need only register their investment with MOFCOM.

The proposed revisions in the draft FIC may improve market access in some sectors, but are relatively minor, and revisions affecting investments in industries that have traditionally faced heavy restrictions, such as banking, telecommunications, and cultural industries, fall short of the reform expectations of the U.S. business community. In addition, it is unclear how the updated FIC will be prioritized vis-à-vis other, contradictory industry-based regulations or whether other industrial policies will supersede the version of the FIC that is ultimately published. This uncertainty undermines confidence in the stability and predictability of China’s investment climate and impedes foreign investors’ future business planning.

The Chinese language version of the 2015 FIC: 

The Chinese language version of the 2016 draft FIC: 

Ownership Restrictions

In both the “encouraged” and “restricted” categories of the FIC, certain industries require joint ventures and/or requirements that a company be controlled by Chinese nationals.

For example:

  • In the oil and natural gas exploration and development industry, foreign investment is required to take the form of equity joint ventures and cooperative joint ventures.
  • In the accounting and auditing sectors, the Chief Partner of a firm must be a Chinese national.
  • In higher education and pre-school, foreign investment is only permitted in the form of cooperative joint ventures led by a Chinese partner.
  • In some sectors, the Chinese partners individually or as a group must maintain control of the enterprise. Examples include: construction and operation of civilian airports, construction and operation of nuclear power plants, establishment and operation of cinemas, and the design and manufacture of civil-use satellites.

In some sectors, the foreign shareholder’s proportion of the investment may not exceed a certain percentage. For example, foreign equity ownership is limited to:

  • 50 percent in value-added telecom services (excepting e-commerce);
  • 49 percent in basic telecom enterprises;
  • 50 percent in life insurance firms; and
  • 49 percent in security investment fund management companies.

Mandatory joint venture structures and equity caps give Chinese partner firms significant control, often allowing them to benefit from technology transfer. In addition, the relative opacity of the approval process and the broad discretion granted to authorities foster an environment where the Chinese government can impose deal-specific conditions beyond written legal requirements, often with the intent to force technology transfer as a condition of market access or to support industrial policies and the interests of local competitors.

Other Investment Policy Reviews

Organization for Economic Cooperation and Development (OECD)

China is not a member of the OECD. The OECD Council decided to establish a country program of dialogue and co-operation with China in October 1995. The most recent OECD Investment Policy Review for China was completed in 2008. The OECD Investment Policy Review noted that policy changes in China between 2006 and 2008 tightened restrictions on inward direct investment, including cross-border mergers and acquisitions.

OECD 2008 report: 

In 2013, OECD published a working paper entitled “China Investment Policy: An Update,” which provided an update on China’s investment policy since the publication of the 2008 Investment Policy Review. The paper noted that while China’s economic strength buoys foreign investor confidence, fears of investment protectionism are growing.

OECD 2013 Update: 

World Trade Organization (WTO)

China became a member of the World Trade Organization (WTO) in 2001. WTO membership boosted China’s economic growth and advanced its legal and governmental reforms. The most recent WTO Investment Trade Review for China was completed in 2016. The report highlighted key changes between the 2011 and 2015 FIC. In addition, it noted that the foreign investment pilot negative list expanded from the Shanghai FTZ to the FTZs of Tianjin, Fujian, and Guangdong. The trade review also said that China encourages inward FDI, as well as joint ventures between Chinese and foreign companies, particularly in research and development. The report also mentioned that technology transfer, while not a requirement for investment approval, is a practice widely encouraged by Chinese authorities.

WTO Investment Trade Review for China: 
International Monetary Fund (IMF) information on China: 
FDI Statistics from MOFCOM: 

Business Facilitation

Basic business registration procedures in China are difficult. The World Bank ranked China 78th out of 190 economies in terms of ease of doing business and 127th for starting a business. In Shanghai and Beijing, at least 11 procedures are reportedly required to establish a business, with an average timeline of more than 30 days to complete the registration process. Steps to register a business include pre-approval for a company name, a business license approved by the State Administration for Industry and Commerce (SAIC), an organization code certificate with the Quality and Technology Supervision Bureau, registration with the provincial and local tax bureaus, a company seal issued by the police department, registration with the local statistics bureau, a local bank account, the authorization to print or purchase invoices and receipts, and registration with the Ministry of Human Resources and Social Security, as well as with the Social Welfare Insurance Center.

The Government Enterprise Registration (GER), an initiative of the United Nations Conference on Trade and Development (UNCTAD), gave China a score of 1.5 out of 10 on its website for registering and obtaining a business license. SAIC is the main government body that approves business licenses, and according to GER, SAIC’s website lacks even basic information, such as what to do and how to do it.

SAIC’s online business registration information can be found at 

Recently, the State Council – China’s cabinet – has tried to reduce red tape by eliminating hundreds of administrative licenses and delegating administrative approval power across a range of sectors. The number of investment projects subject to central government approval has reportedly dropped more than 75 percent. The State Council also has set up a website in English, which is more user-friendly than SAIC’s website, to help foreign investors looking to do business in China: ( ).

MOFCOM’s Department of Foreign Investment Administration is responsible for foreign investment promotion in China.

Despite efforts to streamline business registration procedures, foreign companies still continue to complain about the many challenges of setting up a business, including the process of registration and obtaining administrative licenses. Numerous companies offer consulting, legal, and accounting services for establishing wholly foreign-owned enterprises, partnership enterprises, joint ventures, and representative offices. The differences among these corporate entities are significant, and investors should review their options carefully with an experienced advisor before choosing a particular corporate entity or investment vehicle.

Outward Investment

In 2001, China initiated a “going-out” investment strategy for SOEs to go abroad to acquire foreign assets and gain greater access to foreign markets. Over time, this policy has evolved to include both state and private Chinese companies in a diversified number of economic sectors. Today, China is one of the largest outbound direct investors in the world and invested over U.S. $200 billion globally in 2016 alone, according to the Rhodium Group, a leading private sector analyst of U.S.-China bilateral investment. China’s preferred investment location is the United States, where China invested over U.S. $45 billion in 2016, almost triple 2015 investment, according to Rhodium reports.

Chinese officials support foreign investment opportunities that help China move up the manufacturing value chain by acquiring advanced manufacturing and high-technology capabilities that can be transferred back to China. This emphasis is stressed in both the 13th Five Year Plan and the Made in China 2025 policy that aims to transform China’s economy to better compete against advanced economies in 10 key high-tech sectors, including: new energy vehicles, next-generation IT, biotechnology, new materials, aerospace, oceans engineering and ships, railway, robotics, power equipment, and agriculture machinery. Chinese government officials provide preferred financing, subsidies, and access to an opaque network of investors to promote and provide incentives for outbound investment in key sectors.

While China continues to push for value-added outbound acquisitions, in November 2016, Chinese officials at the State Administration for Foreign Exchange (SAFE) issued guidelines that regulate foreign currency outflow for investments considered financial in nature or investments deemed “illogical” because the investment falls outside the core business of the acquiring company. In other words, investments made strictly for the purpose of financial returns, like commercial real estate, or investments where a company enters a completely different economic sector than it currently operates, will receive greater scrutiny from Chinese regulators. These guidelines were intended to slow the momentum of China’s shrinking foreign currency reserves, in part brought about by a surge in outbound investment that, starting in Q3 2015, has exceeded capital inflows from foreign direct investment. Experts attribute China’s shrinking foreign currency reserves to two factors. First, as China’s GDP has slowed down, the quality of investment opportunities in China that yield a high return have diminished, making foreign investors less likely to invest in China and causing Chinese investors to look overseas to other markets with better return potential. Second, Chinese investors expect the RMB will continue to depreciate over time, which makes holding RMB-denominated investments less attractive than investments made in U.S. dollars and other foreign currencies. In an attempt to diversify assets into different currencies, Chinese household and company investments have fled to quality destinations like the United States and Europe.

2. Bilateral Investment Agreements and Taxation Treaties

China has bilateral investment agreements with over 100 countries and economies, including: Austria, the Belgium-Luxembourg Economic Union, Canada, France, Germany, Italy, Japan, South Korea, Spain, Thailand, and the United Kingdom. China’s bilateral investment agreements cover expropriation, arbitration, most-favored-nation treatment, and repatriation of investment proceeds. They are generally regarded as weaker than the investment treaties the United States seeks to negotiate.

A list of China’s signed BITs: 

The United States and China were actively engaged in BIT negotiations from October 2012 until January 2017.

In addition to bilateral investment agreements, China also has 14 Free Trade Agreements (FTAs) with its trade and investment partners. It is negotiating an additional nine FTAs and researching six more potential FTAs. China’s FTA partners are ASEAN, Singapore, Pakistan, New Zealand, Chile, Peru, Costa Rica, Iceland, Switzerland, Hong Kong, Macao, and Taiwan. China has also recently signed FTAs with Korea and Australia, both of which include a chapter on investment.

China’s signed FTAs: 

The United States and China concluded a bilateral taxation treaty in 1984.

3. Legal Regime

Transparency of the Regulatory System

In China’s complex legal and regulatory system, regulators and other government authorities inconsistently enforce regulations, rules, and other regulatory guidelines. Foreign investors rank inconsistent and arbitrary regulatory enforcement, along with the lack of transparency, among the major problems they face doing business in China. Government-controlled trade organizations and regulatory bodies set standards that often ignore Chinese transgressors while strictly enforcing regulations against targeted foreign companies. In China’s regulatory system, different agencies at both the central and local levels issue rules and regulations that impact foreign businesses in certain geographical areas and in certain industries. Some of these rules are only guidelines that are not necessarily considered part of the legal code. Because all of these regulations and guidelines could potential impact foreign investors, foreign companies often feel overburdened by a complex regulatory system rife with contradictions and inconsistencies. Knowing how to apply central versus local rules, for example, is a common complaint of U.S. businesses that are both confused and lack confidence in the regulatory system.

In accordance with China’s WTO accession commitments, the State Council’s Legislative Affairs Office (SCLAO) issued instructions to Chinese agencies to publish all foreign trade and investment-related laws, regulations, rules, and policy measures in the MOFCOM Gazette. Chinese agencies rarely meet these commitments. In addition, the State Council has issued Interim Measures on Public Comment Solicitation of Laws and Regulations and a Circular on Public Comment Solicitation of Department Rules, which require government agencies to post proposed trade and economic-related administrative regulations and departmental rules on the official SCLAO website for 30-day public comment period. Officials have publicly confirmed that these documents are legally binding. However, despite these efforts, ministries under the State Council continue to post only some of the draft administrative regulations and departmental rules on the SCLAO website. When drafts are published, they often are available for comment for less than the required 30 days.

While not provided for in China’s Law on Legislation, the State Council and ministries under the State Council also issue “normative documents” (opinions, circulars, notices, etc.), which are a form of quasi-regulation to implement applicable law, regulations, and rules when further specificity is necessary, or when there is no governing law. The U.S. business community reports that Chinese ministries often impose new requirements on companies through the issuance of a normative document, which, unlike the formal rulemaking process, does not necessitate a public comment period.

Proposed regulations are often drafted without using scientific studies or quantitative analysis to assess the regulation’s impact. When an assessment is made, the results and methodology of the study are not made available to the public. Third parties are asked to comment on draft regulations, but it is unclear what impact the comments have on the final regulation. This lack of transparency adds to foreign investor perceptions that industrial policy goals and other anticompetitive factors are driving forces behind China’s regulatory regime.

Chinese state actions are strongly motivated by the perceived need to protect social stability and/or achieve other political goals, many times at the detriment of foreign investors. The opaque relationship between the Chinese government, Chinese companies, and the Communist Party often makes it impossible to know where decisions originate. An example of these blurred lines is the existence of Self-Regulatory Organizations (SROs) that are responsible for certain licensing decisions. In the financial sector, Chinese financial institutions that are members of these same SROs can decide on the license applications of foreign firms. If a license decision might threaten a Chinese firm’s competitive position in the domestic market, there may be incentives to disapprove the license. For this reason, foreign firms are concerned that decisions may be made based on non-transparent and discriminatory licensing procedures.

Access to foreign online resources — including news, cloud-based business services, and virtual private networks (VPNs) – are increasingly restricted without official acknowledgement or explanation. Foreign-invested companies have also reported threats of retaliation by government regulators for actions taken by the United States and other foreign governments at the WTO or other legal forums.

For accounting standards, Chinese companies must use the Chinese Accounting Standards for Business Enterprises (ASBE) for all financial reporting within mainland China. Companies listed overseas (including in Hong Kong) may choose to use ASBE, the International Financial Reporting Standards (IFRS), or Hong Kong Financial Reporting Standards (HKFRS).

International Regulatory Considerations

China has been a member of the WTO since 2001. As part of its ascension agreement, China agreed to notify the WTO Committee on Technical Trade of all draft technical regulations. Compliance with this WTO commitment is something Chinese officials continue to promise in different dialogues with U.S. government officials.

Legal System and Judicial Independence

The Chinese court system is based on a civil law model that borrowed from the legal systems of Germany and France. Modified to account for local characteristics in China, the rules governing commercial activities are present in various laws, regulations, and judicial interpretations, including China’s civil law, contractual law, partnership enterprises law, security law, insurance law, enterprises bankruptcy law, labor law, and Supreme People’s Court (SPC) Interpretation on Several Issues Regarding the Application of the Contract Law. China does not have specialized commercial courts, but in 2014, began a three-year pilot program to establish three IPR courts in Beijing, Guangzhou, and Shanghai; in addition, courts throughout China often have specialized IPR “tribunals” to hear disputes.

China’s Constitution provides a legal basis for courts to independently exercise adjudicative power, and several laws have provisions stating courts are not subject to interference by administrative organs, public organizations, and/or individuals. However, the Constitution also emphasizes the “leadership of the Communist Party.” In practice, China’s court system is not independent of government agencies or the Chinese Communist Party (CCP), which often intervene in disputes. Interference takes place for many reasons, including:

  • Courts fall under the jurisdiction of local governments;
  • Court budgets are appropriated by local administrative authorities;
  • Judges in China have administrative ranks and are managed as administrative officials;
  • The CCP is in charge of the appointment, dismissal, transfer, and promotion of administrative officials;
  • China’s Constitution stipulates local legislatures appoint and supervise the courts; and
  • Corruption may also influence local court decisions.

The U.S. business community consistently reports that Chinese courts, particularly at lower levels, are susceptible to outside political influence (particularly from local governments), lack the sophistication to understand complex commercial disputes, and operate without transparency. U.S. companies often avoid challenging administrative decisions or bringing commercial disputes before a local court for fear of future retaliation.

Reports of business disputes involving violence, death threats, hostage-taking, and travel bans involving Americans continue to be prevalent, although American citizens and foreigners in general do not appear to be more likely than Chinese nationals to be subject to this treatment. Police are often reluctant to intervene in what they consider internal contract disputes.

Laws and Regulations on Foreign Direct Investment

China’s legal and regulatory framework provides discretion to promote investment in specific industries and geographic regions and to restrict foreign investment not considered in China’s national interests. Laws and regulations with undefined key terms and standards allow for inconsistent application by different agencies and localities. As a result, China has in place investment restrictions that are broader than developed countries, including the United States.

Despite repeated calls by Chinese leadership to strengthen the rule of law in China, foreign investors often point out that weaknesses in the legal system allow regulators to inconsistently apply and interpret laws and regulations. This diminishes the predictability of China’s business environment and has created a feeling among U.S. investors that the Chinese legal system discriminates against them.

China’s current foreign investment regime is based on three central laws: the China-Foreign Equity Joint Venture Enterprise Law, the China-Foreign Cooperative Joint Venture Enterprise Law, and the Foreign-Invested Enterprise (FIE) Law. Multiple administrative regulations and regulatory documents issued by the State Council are derived from these three laws, including:

  • Implementation Regulations of the China-Foreign Equity Joint Venture Enterprises Law;
  • Implementation Regulations of the China-Foreign Cooperative Joint Venture Enterprise Law;
  • Implementation Regulations of the FIE Law;
  • State Council Provisions on Encouraging Foreign Investment;
  • Provisions on Guiding the Direction of Foreign Investment; and
  • Administrative Provisions on Foreign Investment to Telecom Enterprises.

There are also over 1,000 rules and regulatory documents related to foreign investment in China and issued by government ministries, including:

  • the FIC;
  • Provisions on Mergers & Acquisition of Domestic Enterprises by Foreign Investors;
  • Administrative Provisions on Foreign Investment in Road Transportation Industry;
  • Interim Provisions on Foreign Investment in Cinemas;
  • Administrative Measures on Foreign Investment in Commercial Areas;
  • Administrative Measures on Ratification of Foreign Invested Projects;
  • Administrative Measures on Foreign Investment in Distribution Enterprises of Books, Newspapers and Periodicals;
  • Provision on the Establishment of Investment Companies by Foreign Investors; and
  • Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors.

Local legislatures and governments also enact their own regulations, rules, and guidelines that directly impact foreign investment in their geographical area. Examples of local regulations include the Wuhan Administration Regulation on Foreign-Invested Enterprises and Shanghai’s Municipal Administration Measures on Land Usage of Foreign-Invested Enterprises.

A list of Chinese laws and regulations, at both the central and local levels: 

FDI Laws on Investment Approvals

China approves foreign investments on a case-by-case basis. China claims to provide foreign investors with “national treatment,” or treatment no less favorable than the treatment it gives to domestic investors, after an investment has been established. The process varies based on industry and investment type, with overall low transparency.

Foreign investors are required to obtain approvals for establishing an enterprise and undertaking an investment project. MOFCOM pre-approval is not required for an investment not listed in the “restricted” or “prohibited” sections of the FIC, but foreign investors still need to register the investment with MOFCOM. That being said, the mere fact that an investment category is not on the FIC negative list does not guarantee approval, as other steps and approvals may be required. In some industries, such as telecommunications, foreign investors are also required to get approval from industry regulators like the Ministry of Industry and Information Technology.

In July 2004, the State Council issued the Decision on Investment Regime Reform and the Catalogue of Investment Projects subject to Government Ratification (Ratification Catalogue). According to the Ratification Catalogue, all proposed foreign investment projects in China must be submitted for “review and ratification” by the NDRC, or provincial or local Development and Reform Commissions, depending on the sector and value of the investment. In 2013, however, the government issued a new catalogue to narrow the scope of foreign investment projects subject to NDRC ratification. An “encouraged” investment under the FIC that does not require a Chinese controlling interest, and is in a sector not listed on the Ratification Catalogue, only needs to be “filed for record” with the local NDRC office. This policy shift marked a positive step toward easing bureaucratic barriers to foreign investment.

In November 2014, China released an updated edition of the Ratification Catalogue, which eliminated NDRC ratification requirements for 15 new sectors and delegated ratification authority to local governments in 23 additional sectors. In several new sectors, the new Ratification Catalogue also raised the threshold of foreign ownership that would trigger the requirement for NDRC approval. When announcing the reforms, NDRC stated the goal of the latest revision to the Ratification Catalogue was to limit ratification to projects relating to “national and ecological security, geographic and resource development,” and the “public interest.” NDRC estimates that revisions made to the Ratification Catalogue over the past several years would reduce the number of projects requiring ratification from central government authorities by 76 percent.

Ratification Catalogue: 

The NDRC approval process for foreign investment projects also includes assessing the project’s compliance with China’s laws and regulations; its compliance with the FIC and industrial policy; its national security, environmental safety, and public interest implications; its use of resources and energy; and its economic development ramifications. In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and “consulting agencies,” which may include industry associations that represent Chinese domestic firms. This presents potential conflicts of interest that can disadvantage foreign investors seeking to receive project approval. The State Council may also weigh in on high-value projects in “restricted” sectors.

After receiving NDRC approval for the investment project and either notifying or applying for approval for an investment from MOFCOM, investors next apply for a business license with the SAIC. Once a license is obtained, the investor registers with China’s tax and foreign exchange agencies. Greenfield investment projects must also seek approval from China’s Environmental Protection Ministry and its Ministry of Land Resources. The specific approvals process may vary from case to case, depending on the details of a particular investment proposal and local rules and practices.

U.S. Chamber of Commerce report on Approval Process for Inbound Foreign Direct Investment:

Antitrust Review

For investments made via merger or acquisition with a Chinese domestic enterprise, an antimonopoly review and national security review may be required by MOFCOM if there are concerns about the foreign transaction. The anti-monopoly review is detailed in a later section on competition policy.

Article 12 of MOFCOM’s Rules on Mergers and Acquisitions of Domestic Enterprises by Foreign Investment stipulates that parties are required to report a transaction to MOFCOM if:

Foreign investors obtain actual control, via merger or acquisition, of a domestic enterprise in a key industry;

  • The merger or acquisition affects or may affect “national economic security”; or
  • The merger or acquisition would cause the transfer of actual control of a domestic enterprise with a famous trademark or a Chinese time-honored brand.

If MOFCOM determines that the parties did not report a merger or acquisition that affects or could affect national economic security, it may, together with other government agencies, require the parties to terminate the transaction or adopt other measures to eliminate the impact on national economic security.

National Security Review

In February 2011, China released the State Council Notice Regarding the Establishment of a Security Review Mechanism for Foreign Investors Acquiring Domestic Enterprises. The notice established an interagency Joint Conference, led by NDRC and MOFCOM, with the authority to block foreign mergers and acquisitions of domestic firms that it believes may impact national security. The Joint Conference is instructed to consider not just national security, but also “national economic security” and “social order” when reviewing transactions. China has not disclosed any instances in which it invoked this formal review mechanism.

Local commerce departments are responsible for flagging transactions that require a national security review when they review them in an early stage of China’s foreign investment approval process. Some provincial and municipal departments of commerce have published online a Security Review Industry Table listing non-defense industries where transactions may trigger a national security review, but MOFCOM has declined to confirm whether these lists reflect official policy. In addition, third parties such as other governmental agencies, industry associations, and companies in the same industry can seek MOFCOM’s review of transactions, which can pose conflicts of interest that disadvantage foreign investors. Investors may also voluntarily file for a national security review.

Foreign Investment Law

In January 2015, MOFCOM proposed for public comment a new Foreign Investment Law. This law, if enacted, would unify and supersede the three governing foreign investment laws established by the State Council. It also would abolish the case-by-case approval system for foreign investment and replace it with a system that treats foreign investment the same as domestic investments, except in the limited number of industries enumerated on the “negative list.” The draft law calls for streamlining the approval process for foreign investment in some sectors, but contains a number of troubling provisions – e.g., broadening the definition of foreign investor, expanding the role of the national security review mechanism, increasing reporting requirements, and threatening the structure of variable interest entities (VIEs) – that could facilitate discriminatory treatment against foreign investment. To date, there have been no new announcements about a future release of the Foreign Investment Law or a timeline for its implementation.

In addition to transforming the current foreign investment regime, the aforementioned MOFCOM draft Foreign Investment Law would also establish a broad and potentially intrusive national security review mechanism. As it is currently envisaged, the national security review could be used to hinder market access and increase the financial burden of foreign investment in China.

Free Trade Zones – Negative List Approach

In April 2015, the State Council issued a General Plan for the FTZs in Tianjin, Guangdong, and Fujian that offers national treatment for the “pre-establishment,” or market access, phase of investment, except as otherwise provided under a negative list. The State Council-issued negative list for these FTZs contains 85 measures restricting foreign investment and 37 measures forbidding foreign investment. Together, this negative list has 17 fewer measures than the negative list adopted in the Shanghai FTZ in 2014 and 68 fewer measures than Shanghai FTZ’s 2013 negative list. Nevertheless, while the number of discriminatory measures declined, the most recent negative list includes no commercially significant openings for foreign investment.

China also issued in 2015 the Interim Measures on the National Security Review of Foreign Investment in Free Trade Zones. The definition of “national security” is broad, implicating investments in military, national defense, agriculture, energy, infrastructure, transportation, culture, information technology products and services, key technology, and manufacturing.

In addition, MOFCOM issued the Administrative Measures for the Record-Filing of Foreign Investment in Free Trade Zones, outlining the streamlined process that foreign investors need to follow to register investments in the FTZs.

Competition and Anti-Trust Laws

China uses a complex system of laws, regulations, and agency specific guidelines at both the central and provincial level that impacts an economic sector’s makeup, sometimes as a monopoly, near-monopoly, or authorized oligopoly. These measures are particularly common in resource-intensive sectors such as electricity and transportation, as well as in industries seeking unified national coverage like fixed-line telephony and postal services. The measures also target sectors the government deems vital to national security and economic stability, including defense, energy, and banking. Examples of such laws and regulations include the Law on Electricity (1996), Civil Aviation Law (1995), Regulations on Telecommunication (2000), Postal Law (1986), Railroad Law (1991), and Commercial Bank Law (amended in 2003), among others.

Anti-Monopoly Law

China’s Anti-Monopoly Law (AML) went into effect on August 1, 2008. The AML delegates antitrust enforcement to three agencies: MOFCOM to review concentrations (mergers and acquisitions); the NDRC to review cartel agreements, abuse of dominant position, and abuse of administrative powers centered on product pricing; and the SAIC to review the same types of activities as NDRC when those activities are not directly price-related. In addition, the AML established the Anti-Monopoly Commission to provide oversight, expertise, and coordination among different stakeholders and enforcement agencies. After the AML was enacted, the need to clarify parts of the law became apparent, leading MOFCOM, NDRC, SAIC, and other Chinese government ministries and agencies to formulate implementing guidelines, departmental rules, and other measures. Generally, the AML enforcement agencies have sought public comment on proposed measures and guidelines, although comment periods can be less than 30 days.

In 2015, the CCP Central Committee and State Council declared that all future economic policies would reflect China’s competition policy. In 2016, the three AML enforcement agencies drafted guidelines on six enforcement areas: anti-monopoly guidelines for the automobile industry, guidelines on determining illegal incomes and fines, guidelines on the “leniency” system in horizontal monopoly agreements, guidelines on AML settlement cases, guidelines for intellectual property abuse, and guidelines on monopolistic agreement exemptions. In addition, the State Council in June 2016 introduced guidelines on the Fair Competition Review Mechanism that targets administrative monopolies at the local level and requires agencies to first conduct a fair competition review to certify that new measures do not inhibit competition, prior to issuing new policies, laws, and guidelines. While it is too early to tell the extent to which the Fair Competition Review Mechanism will break down China’s pervasive administrative monopolies, Chinese academics in particular are optimistic that this development signals a more prominent role for competition in future economic decisions.

While China’s antitrust law developments are seen as generally positive, China’s actual enforcement of competition laws and regulations is uneven. Inconsistent central and provincial enforcement often will exacerbate local protectionism by restricting inter-provincial trade, limiting market access for certain imported products, using measures that raise production costs, and limiting opportunities for foreign investment. Government authorities at all levels in China may also restrict competition to insulate favored firms from competition through various forms of regulations and industrial policies. The ultimate benefactor of such policies is often unclear; however, foreign companies have expressed concern that the central government’s use of AML enforcement is often selectively used to target foreign companies, becoming an extension of other industrial policies that favor SOEs and Chinese companies deemed potential “national champions.”

Since the AML went into effect, the number of merger and acquisition transactions MOFCOM has reviewed each year has continued to grow. According to MOFCOM statistics, in 2016 alone, MOFCOM completed an AML review for 395 cases (a 19 percent year-on-year increase), with the majority of cases coming from manufacturing industries like semi-conductors, telecommunications, and other high-end manufacturing. Of these reviewed cases, 82 percent were finished in the initial 30-day review period. Since AML’s inception, the vast majority (over 80 percent) of cases “conditionally” approved have involved offshore transactions between foreign parties. The other “conditional” cases involved foreign companies merging with Chinese enterprises. Observers have expressed concerns about the speed and inconsistent application of the review process, along with suspicions that Chinese regulators rarely approve “on condition” transactions involving two Chinese companies, thus signaling an inherent AML bias against foreign enterprises. MOFCOM has stated it will enforce the requirement that Chinese firms, in addition to foreign firms, notify regulators of proposed mergers and acquisitions for review.

In 2016, foreign companies expressed fewer complaints than in previous years about NDRC’s AML investigations. Some experts said leadership changes at NDRC improved enforcement practices, including introduction of a more balanced approach to investigations, which looks into Chinese companies more often than foreign enterprises. NDRC has also made progress in AML enforcement transparency by releasing aggregate data on investigations and publicizing case decisions. That said, many foreign companies still worry about future “dawn raids” and express concerns that NDRC regulators, along with SAIC and MOFCOM, can at any time use competition law to promote China’s industrial policy goals by targeting foreign firms to limit competition.

In bilateral dialogues, China continues to express its commitment to protect and enforce IPR across a range of industry sectors. Chinese officials are also in the process of clarifying AML guidelines that address areas where IPR and AML intersect, such as forcing foreign companies to license IPR technology to local companies at a “fair” price that does not violate a company’s “dominant market position.” Chinese officials also reiterated the need for AML agencies to be free from intervention from other government agencies. Lastly, Chinese officials committed to protecting commercial secrets obtained during AML proceedings. Despite the dialogues, U.S. companies remain concerned about IPR protections, along with the lack of independence of AML agencies from outside influences.

How the AML applies to SOEs and government monopolies in certain industries also is unclear. While language in the AML protects the lawful operations of SOEs and government monopolies in industries deemed nationally important, all three AML enforcement agencies have publicly stated the law does apply to SOEs. All three additionally claim to have pursued some enforcement action, albeit small, against SOEs. Given the prominent role of SOEs in China’s economic structure, along with the CCP’s proactive orchestration of mergers in key industries like rail, marine shipping, metals, and other strategic sectors, concerns persist that enforcement against SOEs will remain limited. These mergers in key industries have been criticized for further insulating SOEs from both domestic and foreign competition, leading to higher prices for Chinese consumers and more concentrated market power post-merger.

Expropriation and Compensation

Chinese law prohibits nationalization of FIEs, except under “special” circumstances. Chinese officials have said these circumstances include national security and when an investment presents an obstacle to achieving a large civil engineering project, but the law does not define these special circumstances. Chinese law requires compensation of expropriated foreign investments, but does not explain what method to use or the formula to calculate the value of the foreign investment. The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, although the Department has notified Congress through the annual 527 Investment Dispute Report of several cases of concern.

Dispute Settlement

ICSID Convention and New York Convention

China is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). The domestic legislation that provides for enforcement of foreign arbitral awards related to these two Conventions include the Arbitration Law adopted in 1994, the Civil Procedure Law adopted in 1991 (later amended in 2012), the Law on Chinese-Foreign Equity Joint Ventures adopted in 1979 (amended most recently in 2001), and a number of other laws with similar provisions. China’s Arbitration Law has embraced many of the fundamental principles of The United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration.

Investment and Commercial Disputes in the Chinese Legal System

Chinese officials typically urge firms to resolve disputes through informal conciliation. If formal mediation is necessary, Chinese parties and the authorities typically promote arbitration over litigation. Many contract disputes require arbitration by the China International Economic and Trade Arbitration Commission (CIETAC). Established by the State Council in 1956 under the auspices of the China Council for the Promotion of International Trade (CCPIT), CIETAC is China’s most widely-utilized arbitral body for foreign-related disputes. Some foreign parties have obtained favorable rulings from CIETAC, while others question CIETAC’s fairness and effectiveness.

CIETAC is based in Beijing and has four sub-commissions in Shanghai, Shenzhen, Tianjin, and Chongqing. In 2012, CCPIT, under the authority of the State Council, issued new arbitration rules that granted CIETAC headquarters significantly more authority to hear cases than the sub-commissions. Expecting a loss in revenue, CIETAC Shanghai and CIETAC Shenzhen declared their independence, issued their own rules, and changed their names. As a result, CIETAC disqualified its former Shanghai and Shenzhen affiliates from administering arbitration disputes.

This jurisdictional dispute between CIETAC in Beijing and the former sub-commissions raised serious concerns among the U.S. business and legal communities, particularly regarding the validity of arbitration agreements specifying particular arbitration procedures and the enforceability of arbitral awards issued by the sub-commissions. In 2013, the SPC issued a notice clarifying that any lower court that hears a case arising out of the CIETAC split must report the case to the SPC before making a decision. However, the SPC notice is brief and lacks detail on certain issues, including the timeframe for the lower court’s decision to reach the SPC and for the SPC to issue its opinion.

Other arbitration commissions exist and are usually affiliated with the government at the provincial or municipal level. The Beijing Arbitration Commission and the Shanghai Arbitration Commission have emerged as serious domestic competitors to CIETAC. For contracts involving at least one foreign party, offshore arbitration may be adopted. Foreign companies often encounter challenges in enforcing arbitration decisions issued by Chinese and foreign arbitration bodies. Investors may appeal to higher courts in such cases.

The Chinese government and judicial bodies do not maintain a public record of investment disputes. The SPC maintains a count of the annual number of cases involving foreigners tried throughout China, but does not specify the types of cases, identify civil or commercial disputes, or note foreign investment disputes. Rulings in some cases are open to the public.

Although it has not concluded a BIT with the United States, China has bilateral investment agreements with over 100 countries and economies. The majority of these agreements set mediation, domestic remedies, and international arbitration as the means to settle disputes. However, investor-state disputes leading to arbitration are rare in China.

International Commercial Arbitration and Foreign Courts

There are few precedents where Chinese courts have recognized and enforced foreign court judgments. Articles 281 and 282 of China’s Civil Procedure Law cover the recognition and enforcement of the effective judgments of foreign courts by the court system in China. According to these laws, if the Chinese courts determine validity of a claim, after reviewing the foreign courts’ judgments, China’s treaty obligations, reciprocity principles, basic principles of Chinese laws, China’s sovereignty, security, and social public interests, the Chinese courts shall issue verdicts to recognize the effectiveness of foreign court judgments and issue enforcement orders if enforcement is needed. China has concluded 27 bilateral agreements on the recognition and enforcement of foreign court judgments, but none with the United States. China’s recognition of judgments by U.S. courts can be inconsistent, according to anecdotal reports.

Article 270 of China’s Civil Procedure Law states that time limits in civil cases do not apply to cases involving foreign investment. According to the 2012 CIETAC Arbitration Rules, in an ordinary procedure case, the arbitral tribunal shall render an arbitral award within six months (in foreign-related cases) from the date on which the arbitral tribunal is formed. In a summary procedure case, the arbitral tribunal shall make an award within three months from the date on which the arbitral tribunal is formed.

Bankruptcy Regulations

China’s primary bankruptcy legislation is the Enterprise Bankruptcy Law, which was promulgated on August 27, 2006 and took effect on June 1, 2007. The 2007 law applies to all companies incorporated under Chinese laws and regulations, including private companies, public companies, SOEs, FIEs, and financial institutions. It is commensurate with developed countries’ bankruptcies laws and provides for potential reorganization or restructuring rather than liquidation. Due to uncertainty about authorities and procedures, lack of implementation guidelines, and the limited number of cases providing precedent, the law has never been fully enforced, and most corporate debt disputes are settled through negotiations led by local governments. The potential for local government interference, along with corporate fears of losing control, disincentivize companies from pursuing bankruptcy proceedings. Chinese courts lack capacity to handle bankruptcy cases, and bankruptcy administrators, clerks, and judges all lack experience.

In the October 2016 State Council Guiding Opinion on Reducing Enterprises’ Leverage Ratio, bankruptcy was identified as a tool to manage China’s corporate debt problems. This was consistent with increased government rhetoric throughout the year in support of bankruptcy. For example, in June 2016, the SPC issued a notice to establish bankruptcy divisions at intermediate courts and to increase the number of judges and support staff to handle liquidation and bankruptcy issues. On August 1, the SPC also launched a new bankruptcy and reorganization electronic information platform: .

Although still relatively small, the number of bankruptcy cases began to pick up starting in 2015, with the government announcing in 2016 several high-profile SOE bankruptcies. The SPC reported that in 2016, 5,665 bankruptcy cases were accepted by the Chinese courts and 3,602 cases were closed, representing a 53.8 percent year-on-year increase from 2015, when only 3568 cases were accepted. Most bankruptcy cases are still resolved through liquidation due to long delays, but 1,041 cases were resolved through reorganization, an 85 percent increase from 2015. Since the fall of 2016, 73 new specialized bankruptcy tribunals were founded, along with the SPC issuing several implementing measures to improve bankruptcy procedures.

4. Industrial Policies

Investment Incentives

Different localities court foreign investors by providing preferential packages like reduced income taxes, resources and land use benefits, reduced import/export duties, special treatment in obtaining basic infrastructure services, streamlined government approvals, and funding for initial startup. These packages may stipulate export, local content, technology transfer, and other requirements as part of the preferred investment package. These localities offer preferential treatment in special economic zones (like Shanghai, Tianjin, Fujian, and Guangdong), development zones, and science parks. China in 2016 announced seven additional FTZs (Chongqing, Zhejiang, Hubei, Henan, Sichuan, Shaanxi, and Liaoning), to begin operating in 2017. These new economic zones are a shift from prior FTZs because they target inland areas in need of economic development and areas that are consistent with Chinese officials’ call for greater foreign investment in Central and Western China. China also uses the Catalogue of Priority Industries for Foreign Investment in Central and Western China to provide greater market access to foreign investors in inland areas of mainland China, so as to spur investment.

There are no expressed prohibitions against foreign firms participating in research and development programs financed by the Chinese government. In fact, for certain sectors where China lacks the capacity and expertise to conduct advanced research or supply advanced technology in a given field, foreign participation is generally encouraged and solicited. This is part of China’s stated goal of moving up the manufacturing value chain and transforming China’s economy to a model driven by innovative growth. However, there are a large number of sectors that China deems sensitive due to broadly defined national security concerns, including “economic security,” which can effectively close off foreign investment to those sectors.

Foreign Trade Zones/Free Ports/Trade Facilitation

China’s principal customs-bonded areas include Shanghai, Tianjin, Shantou, three districts within Shenzhen (Futian, Yantian, and Shatoujiao), Guangzhou, Dalian, Xiamen, Ningbo, Zhuhai, and Fuzhou. Besides these official duty-free zones identified by China’s State Council, numerous economic development zones and open cities offer similar privileges and benefits to foreign investors.

In September 2013, the Shanghai Municipal government and the State Council announced the establishment of the Shanghai Pilot FTZ, which condensed four previously existing bonded areas into a single FTZ. In April 2015, the State Council expanded the number of FTZs to include Tianjin, Guangdong, and Fujian, although the Shanghai FTZ remains the largest of the four. The goal of the FTZs is to provide a trial ground for trade and investment liberalization measures and to introduce service sector reforms, especially in financial services, that China expects to eventually introduce in other parts of the domestic economy.

In particular, Chinese officials tout the use of a “negative list” – that is, a list expressly identifying sectors where national treatment does not apply – as a key reform introduced in the FTZs. On April 20, 2015, the State Council published a revised negative list to supersede the 2014 list. The 2015 list  regulates trade and investment in all four FTZs, reducing the number of excluded items to 122 (down from a high of 190 items when the list was first rolled out in 2013). Major sectors in which restrictions have been lifted include manufacturing, construction, wholesale and retail, information technology services, financial services, real estate, and business services.

In 2016, the State Council announced the establishment of seven additional FTZs in Chongqing, Zhejiang, Hubei, Henan, Sichuan, Shaanxi, and Liaoning. The foreign investment negative list used in the existing four FTZs will also apply to the seven new FTZs. The stated purpose of the new FTZs is to integrate more closely with the “One Belt, One Road” plan – the Chinese government’s initiative to enhance global economic interconnectivity through joint infrastructure and investment projects that connect China’s inland and border regions to countries in Southeast Asia, Central Asia, Africa, and Europe. These new FTZs will be operational beginning in 2017.

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

Performance and Data Localization Requirements

Shortly after China’s WTO ascension, China revised its FDI laws regarding export performance requirements, requirements to include local content, requirements to balance foreign exchange through trade, technology transfer requirements, and requirements to create research and development centers. As part of these revisions, China committed to only enforce technology transfer requirements that do not violate WTO standards on intellectual property and trade-related investment measures. In practice, however, some local officials and regulators prefer investments with “voluntary” performance requirements that develop favored industries and support the local job market. Provincial and municipal governments will sometimes restrict access to local markets, government procurement, and public works projects even for firms that have already invested in the province or municipality. In addition, Chinese regulators have reportedly pressured foreign firms in some sectors to disclose intellectual property content or provide intellectual property licenses to Chinese firms, often at below market rates.

Regulatory restrictions, including in the Cyber Security Law, limits the ability of domestic and foreign operators of “critical information infrastructure” to transfer business and personal data outside of China, while requiring those same operators to store such data in China. Restrictions on cross-border data flows and unclear requirements on the use of domestic encryption algorithms have prompted many firms to review how their China systems interact with their global corporate networks. In order to comply with emerging requirements that technology used by business be “secure and controllable,” foreign firms are facing pressure to disclose source code and other intellectual property disclosures during testing and certification related to government procurement; adhere to prescriptive technology adoption requirements, often in the form of domestic standards that diverge from global standards, which give preference to domestic firms; and to comply with operational restrictions such as privacy measures, data center location, and cross-border data flow restrictions.

5. Protection of Property Rights

Real Property

The Chinese legal system mediates acquisition and disposition of property. Foreign companies have complained that Chinese courts have inconsistently protected the legal real property rights of foreigners.

Land is entirely owned by the State. The State can issue long-term land leases to individuals and companies, including foreigners, subject to many restrictions. China’s Property Law stipulates that residential property rights will renew automatically, while commercial and industrial grants shall be renewed if the renewal does not conflict with other public interest claims. A number of foreign investors have reported that their land use rights were revoked and given to developers to build neighborhoods slated for building by government officials. Investors often complain that compensation in these cases has been nominal.

In rural China, land use rights are more complicated. The registration system chronically suffers from unclear ownership lines and disputed border claims, often at the expense of local farmers who are excluded from the process by village leaders making “handshake deals” with commercial interests. In 2016, the central government announced plans to reform the rural land registration system so as to put more control in the hands of farmers, but some experts remain skeptical that changes will be properly implemented and enforced.

China’s Securities Law defines debtor and guarantor rights, including rights to mortgage certain types of property and other tangible assets, including long-term leases. Chinese law does not prohibit foreigners from buying non-performing debt, which can only be acquired through state-owned asset management firms. However, in practice, Chinese official often use bureaucratic hurdles that limit foreigners’ ability to liquidate assets, further discouraging foreign purchase of non-performing debt.

Intellectual Property Rights

Following WTO accession, China updated many of its laws and regulations to comply with the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and other international agreements. However, there are still aspects of China’s IPR legal and regulatory regime that the U.S. government believes fall short of international best practices and, if improved, would provide greater protection to IPR. Furthermore, effective enforcement of China’s IPR laws and regulations remains a significant challenge.

Generally speaking, criminal penalties imposed by Chinese courts for IPR infringement are not applied on a frequent and consistent enough basis to significantly deter ongoing infringement. Furthermore, when administrative sanctions are issued, the basis for the sanctions is inconsistent and non-transparent, and penalties applied are insignificant, further weakening any deterrent effect. In addition, the award for IPR damage is very low, making civil litigation against IPR infringements an option with limited effect. For detailed information on China’s environment for IPR protection and enforcement, please see the following reports:

Office of the U.S. Trade Representative’s (USTR) 2017 Special 301 Report (see section on China): 

USTR’s 2016 National Trade Estimate Report on Foreign Trade Barriers in China (see section on China): 

USTR’s 2016 Report to Congress on China’s WTO Compliance: 

6. Financial Sector

Capital Markets and Portfolio Investment

China’s leadership has stated that it seeks to build a modern, highly developed, and multi-tiered capital market. Bank loans continue to provide the majority of credit options (reportedly around 70 percent) for Chinese companies, although other sources of capital, such as corporate bonds, trust loans, equity financing, and private equity are quickly expanding their scope, reach, and sophistication. Chinese regulators regularly use administrative methods to control credit growth, although market-based tools such as interest rate policy play an increasingly important role.

The People’s Bank of China (PBOC), China’s central bank, has gradually increased flexibility for banks in setting interest rates, formally removing the floor on the lending rate in 2013 and the deposit rate cap in 2015 – although is understood to still influence bank’s interest rates through “window guidance”. Favored borrowers, particularly SOEs, benefit from greater access to capital and lower financing costs, as they can use political influence to secure bank loans, and lenders perceive these entities to have an implicit government guarantee. Small- and medium-sized enterprises, by contrast, have the most difficulty obtaining financing, often forced to rely on retained earnings or informal investment channels for financing.

In recent years, China’s “shadow banking” sector, which includes vehicles such as wealth management and trust products, has grown rapidly. Chinese authorities have taken steps to increase the transparency requirements and strengthen supervision of these banking activities, while also permitting these vehicles to continue to develop. These vehicles often provide private firms additional channels to obtain capital, though at higher than benchmark rates. In 2016, worried about increasingly interconnected leverage across China’s corporate sector, the government introduced a new macro prudential assessment tool to take a more comprehensive approach to managing financial risks. Regulators also issued informal “window guidance” to domestic and foreign banks to reduce lending and currency operations.

Direct financing has expanded over the last few years, including through public listings on stock exchanges, both inside and outside of China, and issuing more corporate and local government bonds. The majority of foreign portfolio investment in Chinese companies occurs on foreign exchanges, primarily in United States and Hong Kong. In addition, China has significantly expanded quotas for certain foreign institutional investors to invest in domestic stock markets, has opened up direct access for foreign investors into China’s interbank bond market, and has approved a two-way, cross-border equity direct investment scheme between Shanghai and Hong Kong that allows Chinese investors to trade designated Hong Kong-listed stocks through the Shanghai Exchange and vice versa. Direct investment by private equity and venture capital firms is also rising, although from a small base, and has faced setbacks due to China’s increased capital controls that complicate the repatriation of returns.

Money and Banking System

After several years of rapid credit growth, China’s banking sector faces asset quality concerns. For 2016, the China Banking Regulatory Commission reported a rise in the non-performing loans (NPL) ratio to 1.74 percent, up from 1.67 percent at the end of 2015. The outstanding balance of commercial bank NPLs in 2016 reached 1.5 trillion RMB (approximately U.S. $230 billion). China’s total banking assets surpassed 228 trillion RMB (approximately U.S. $35 trillion) in December 2016, a 14.4 percent year-on-year increase. Experts estimate Chinese banking assets account for over 20 percent of global banking assets. China’s credit and broad money supply continue to post low double-digit growth, outpacing GDP growth nearly two-to-one.

Foreign Exchange and Remittances

Foreign Exchange

In 2016, several foreign companies complained about administrative delays in remitting large sums of money from China, even after completing all of the documentation requirements. Such incidents come amid announcements that SAFE had issued guidance to tighten scrutiny of foreign currency outflows due to China’s rapidly decreasing foreign currency exchange.

Under Chinese law, FIEs do not need pre-approval to open foreign exchange accounts and are allowed to retain income as foreign exchange or to convert it into RMB without quota requirements. Foreign exchange transactions related to China’s capital account activities do not require review by SAFE, but designated foreign exchange banks review and directly conduct foreign exchange settlements. Chinese officials register all commercial foreign debt and will limit foreign firms’ accumulated medium- and long-term debt from abroad to the difference between total investment and registered capital. China issued guidelines in February 2015 that allow, on a pilot basis, a more flexible approach to foreign debt within several specific geographic areas, including the Shanghai Pilot FTZ. The main change under this new approach is to allow FIEs to expand their foreign debt above the difference between total investment and registered capital, so long as they have sufficient net assets.

Chinese foreign exchange rules cap the maximum amount of RMB individuals are allowed to convert into other currencies at approximately U.S. $50,000 each year and restrict them from directly transferring RMB abroad without prior approval from SAFE. While SAFE has not reduced this quota, banks are reportedly being instructed by SAFE to increase scrutiny over individuals’ request for foreign currency and to require additional paperwork clarifying the intended use of the funds.

In 2016, facing significant capital outflow pressure, the government tightened capital controls, including through informal guidance to banks and the introduction of reserve requirements for institutions conducting foreign currency transactions. While the central bank’s official position is that companies with proper documentation should be able to freely conduct business, in practice, companies have reported facing challenges and delays in getting foreign currency transactions approved by sub-national regulatory branches.

China’s exchange rate regime is managed within a band that allows the currency to rise or fall by 2 percent per day from the “reference rate” set each morning. In August 2015, China announced that the reference rate would more closely reflect the previous day’s closing spot rate. Since that change, daily volatility of the RMB has at times been higher than in recent years, but for the most part, remains below what is typical for other currencies.

Remittance Policies

The following operations do not require SAFE approval: purchase and remittance of foreign exchange as a result of capital reduction, liquidation, or early repatriation of an investment in a foreign-owned enterprise, or as a result of the transfer of equity in an FIE to a Chinese domestic entity or individual where lawful income derived in China is reinvested.

The remittance of profits and dividends by FIEs is not subject to time limitations, but FIEs need to submit a series of documents to designated banks for review and approval. The review period is not fixed, and is frequently completed within one or two working days of the submission of complete documents.

Remittance policies have not changed substantially since SAFE simplified some regulations in January 2014, devolving many review and approval procedures to banks. Firms that remit profits at or below USD $50,000 dollars can do so without submitting documents to the banks for review. For remittances above USD $50,000, the firm must submit tax documents, as well as the formal decision by its management to distribute profits. However, in 2016, some companies reported increased delays in receiving approval.

For remittance of interest and principle on private foreign debt, firms must submit an application form, a foreign debt agreement, and the notice on repayment of the principle and interest. Banks will then check if the repayment volume is within the repayable principle.

The remittance of financial lease payments falls under foreign debt management rules. There are no specific rules on the remittance of royalties and management fees. However, beginning in 2016, SAFE began requiring banks to hold 20 percent reserves against foreign currency transactions, significantly increasing the cost of foreign exchange operations.

The Financial Action Task Force has identified China as a country of primary concern. Global Financial Integrity (GFI) estimates that over U.S. $1 trillion of illicit money left China between 2003 and 2012, making China the world leader in illicit capital flows. In 2013, GFI estimates that another U.S. $260 billion left the country.

Sovereign Wealth Funds

China officially has only one sovereign wealth fund (SWF), the China Investment Corporation (CIC). Established in 2007, CIC manages an estimated U.S. $813.8 billion in assets (as of November 2016) and invests on a 10-year time horizon. China’s sovereign wealth is also invested by a subsidiary of SAFE, the government agency that manages China’s foreign currency reserves, and reports directly to the PBOC. The SAFE Administrator also serves concurrently as a PBOC Deputy Governor.

CIC publishes an annual report containing information on its structure, investments, and returns. CIC invests in diverse sectors like financial, consumer products, information technology, high-end manufacturing, healthcare, energy, telecommunication services, and utilities.

China also operates other funds that function in part like sovereign wealth funds, including: China’s National Social Security Fund, with an estimate U.S. $295 billion in assets; the China-Africa Development Fund (solely funded by the China Development Bank), with an estimated U.S. $5 billion; the SAFE Investment Company, with an estimated U.S. $474 billion; and China’s state-owned Silk Road Fund, established in December 2014 with $40 billion to foster investment in countries along the “One Belt, One Road.” Chinese SWFs do not report the percentage of their assets that are invested domestically.

Chinese SWFs follow the voluntary code of good practices known as the Santiago Principles and participates in the IMF-hosted International Working Group on SWFs. The Chinese government does not have any formal policies specifying that CIC invest funds consistent with industrial policies or in government-designated projects, although CIC is expected to pursue government objectives. The SWF generally adopts a “passive” role as a portfolio investor.

7. State-Owned Enterprises

China has approximately 150,000 SOEs, of which around 50,000 (33 percent) are owned by the central government, and the remainder by local governments. The central government directly controls and manages 102 strategic SOEs through the State Assets Supervision and Administration Commission (SASAC), of which 66 are listed on stock exchanges domestically and/or internationally. SOEs, both central and local, account for 30 to 40 percent of total GDP and about 20 percent of China’s total employment. The percentage of SOE revenue spent on research and development is unknown. SOEs can be found in all sectors of the economy, from tourism to heavy industries.

SASAC regulated SOEs: 

China’s leading SOEs benefit from preferential government policies aimed at developing bigger and stronger “national champions.” SOEs enjoy favored access to essential economic inputs (land, hydrocarbons, finance, telecoms, and electricity) and exercise considerable power in markets like steel and minerals. SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt. SOEs also are not subject to the same tax burdens as their private sector competitors. According to some Chinese academics, provincial governments have used their power to manipulate industrial policies and deny operating licenses to domestic and foreign investors in order to persuade reluctant owners to sell out to bigger, state-owned suitors.

During the November 2013 Third Plenum of the 18th Party Congress – a hallmark session that announced economic reforms, including calling for the market to play a more decisive role in the allocation of resources – President Xi Jinping called for broad SOE reforms. Cautioning that SOEs still will remain a key part of China’s economic system, Xi emphasized improved SOE operational transparency and legal reforms that would subject SOEs to greater competition by opening up more industry sectors to domestic and foreign competitors and by reducing provincial and central government preferential treatment of SOEs. The Third Plenum also called for “mixed ownership” economic structures, providing greater economic balance between private and state-owned businesses in certain industries, including equal access to factors of production, competition on a level playing field, and equal legal protection.

OECD Guidelines on Corporate Governance

SASAC participates in the OECD Working Party on State Ownership and Privatization Practices (WPSOPP). Chinese officials have indicated China intends to utilize OECD SOE guidelines to improve the professionalism and independence of SOEs, including relying on Boards of Directors that are independent from political influence. However, despite China’s Third Plenum commitments – to foster “market-oriented” reforms in China’s state sectors – Chinese officials and SASAC have made minimal progress in fundamentally changing the regulation and business conduct of SOEs. China has also committed to implement the G-20/OECD Principles of Corporate Governance, which apply to all publicly-listed companies, including listed SOEs.

Chinese law lacks unified guidelines or a governance code for SOEs, especially among provincial or locally-controlled SOEs. Among larger SOEs that are primarily managed by SASAC, senior management positions are filled by senior CCP members who report directly to the CCP. SASAC Chairman Xiao Yaqing reemphasized this point during a March 9, 2017 press conference at the National People’s Congress, where he stated newly implemented rules required the chairman of any SOE under his ministry’s control to also be the secretary of the SOE’s CCP committee, as a way of strengthening the Party’s control.

The lack of management independence and the controlling ownership interest of the State make SOEs de facto arms of the government, subject to government direction and interference. SOEs are rarely the defendant in legal disputes, and when they are, they almost always prevail due to the close relationship with the CCP. U.S. companies often complain about the lack of transparency and objectivity in commercial disputes with SOEs. In addition, SOEs enjoy preferential access to a disproportionate share of available capital, whether in the form of loans or equity.

In its September 2015 Guiding Opinions on Deepening the Reform of State-Owned Enterprises, the State Council instituted a system for classifying SOEs as “public service” or “commercial enterprises.” Some commercial enterprise SOEs were further sub-classified into “strategic” or “critically important” sectors (i.e., with strong national economic or security importance). SASAC has said the new classification system would allow the government to reduce support for commercial enterprises competing with private firms and instead channel resources toward public service SOEs.

Other recent reforms have included salary caps, limits on employee benefits, and attempts to create stock incentive programs for managers that have produced mixed results. However, analysts believe minor reforms will be ineffective as long as SOE administration and government policy are intertwined.

A major stumbling block of SOE reform is that SOE regulators are outranked in the CCP party structure by SOE executives, which minimizes SASAC and other government regulators’ effectiveness at implementing reforms. In addition, SOE executives are often promoted to high-ranking positions in the CCP or local government, further complicating the work of regulators.

The Third Plenum Decision emphasizes that SOEs need to focus resources in areas that “serve state strategic objectives.” However, experts point out that despite these new SOE distinctions, SOEs continue to hold dominant shares in their respective industries, regardless of whether they are strategic, which may further restrain private investment in the economy. Moreover, the application of China’s Anti-Monopoly Law, together with other industrial policies and practices that are selectively enforced by the authorities, protect SOEs from private sector competition.

China is not a party to the Government Procurement Agreement (GPA) within the framework of the WTO, although Hong Kong is listed.

Investment Restrictions in “Vital Industries and Key Fields”

The intended purpose of China’s State Assets Law is to safeguard and protect China’s economic system, promoting “socialist market economy” principles that fortify and develop a strong, state-owned economy. A key component of the State Asset Law is enabling SOEs to play the leading role in China’s economic development, especially in “vital industries and key fields.” To accomplish this, the law encourages Chinese regulators to adopt policies that consolidate SOE concentrations to ensure dominance in industries deemed vital to “national security” and “national economic security.” This principle is further reinforced by the December 2006 announcement of the Guiding Opinions Concerning the Advancement of Adjustments of State Capital and the Restructuring of State-Owned Enterprises, which called for more SOE consolidation to advance the development of the state-owned economy, including enhancing and expanding the role of the State in controlling and influencing “vital industries and key fields relating to national security and national economic lifelines.” These guidelines defined “vital industries and key fields” as “industries concerning national security, major infrastructure and important mineral resources, industries that provide essential public goods and services, and key enterprises in pillar industries and high-tech industries.”

Around the time the guidelines were published, the SASAC Chairman also listed industries where the State should maintain “absolute control” (e.g., aviation, coal, defense, electric power and the state grid, oil and petrochemicals, shipping, and telecommunications) and “relative control” (e.g., automotive, chemical, construction, exploration and design, electronic information, equipment manufacturing, iron and steel, nonferrous metal, and science and technology). China has said these lists do not reflect its official policy on SOEs. In fact, in some cases, regulators have allowed for more than 50 percent private ownership in some of the listed industries on a case-by-case basis, especially in industries where Chinese firms lack expertise and capabilities in a given technology Chinese officials deemed important at the time.

A key SOE-dominant industry that is insulated from competition is agricultural products. Current agriculture trade rules, regulations, and limitations placed on foreign investment severely restrict the contributions of U.S. agricultural companies, depriving China’s consumers of the many potential benefits additional foreign investment could provide. These investment restrictions in the agricultural sectors are at odds with China’s 12th Five Year Plan objective of shifting more resources to agriculture and food production in order to improve Chinese lives, food security, and food safety.

Privatization Program

At the November 2013 Third Plenum, the Chinese government announced reforms to SOEs that included selling shares of SOEs to outside investors. This gradual approach to privatization is an effort to improve SOE management structures, emphasize the use of financial benchmarks, and gradually take steps that will bring private capital into some sectors traditionally monopolized by SOEs like energy, telecommunications, and finance. In practice, these reforms have been gradual as the Chinese government has struggled to implement its SOE reform vision and often opted to utilize a preferred SOE consolidation approach. In the past few years, the Chinese government has listed several large SOEs and their assets on the Hong Kong stock exchange, subjecting SOEs to greater transparency requirements and heightened regulatory scrutiny. This approach is a possible mechanism to improve SOE corporate governance and transparency. The government also committed at the Third Plenum to raise the portion of earnings that SOEs pay out as dividends to the public budget, although here, too, the pace and method of implementation remain uncertain.

8. Responsible Business Conduct

For Chinese companies, Responsible Business Conduct (RBC) is a relatively new concept. The degree of understanding and general awareness of RBC standards (including environmental, social, and governance issues) by Chinese firms is extremely low, especially with Chinese companies operating exclusively in the domestic market. Chinese laws regulating business conduct are limited in scope, often voluntary, and frequently ignored when other economic imperatives compete with RBC priorities. In general, China suffers from the lack of independent NGOs, investment funds, worker organizations/unions, or other business associations that actively promote or monitor RBC issues.

The recently implemented Foreign NGO Law restricts certain NGO activities and remains a concern to U.S. organizations, especially with respect to its limiting influence on the promotion, development, and implementation of RBC and corporate social responsibility (CSR) practices. It is especially challenging for U.S. investors looking to partner with Chinese companies, or to expand operations with Chinese suppliers, when few Chinese firms meet internationally recognized standards in areas like labor and environmental protection and manufacturing best practices.

Despite these restrictions, Chinese officials increasingly place emphasis on protecting the environment. This priority was highlighted in the 13th Five Year Plan, which highlighted sustainability as a key priority and area for Chinese companies to enact CSR initiatives.

In 2014, China also signed a memorandum of understanding (MOU) with the OECD to cooperate on RBC initiatives. However, the MOU does not require or necessarily mean that Chinese companies will adhere to the OECD Guidelines for Multinational Enterprises. Industry leaders have pushed to establish a national contact point or RBC center, a key initiative of the OECD guidelines, and China’s Ministry of Commerce in 2016 launched the RBC Platform to raise awareness of RBC issues.

China participated in the OECD’s Global Forum on RBC in 2014 and 2015, including hosting a workshop in Beijing in May 2015. Policy developments from the workshops included incorporation of human rights into social responsibility guidelines for the electronics industry, referencing the United Nations Guiding Principles on Business and Human Rights; mandating social impact assessments for large footprint projects; and agreeing to draft a new law on public participation in environmental protection and impact assessments.

The MOFCOM-affiliated Chinese Chamber of Commerce of Metals, Minerals, and Chemical Importers and Exporters (CCCMC) also signed a separate MOU with the OECD in October 2014, to help Chinese companies implement RBC policies in global mineral supply chains. In December 2015, CCCMC released Due Diligence Guidelines for Responsible Mineral Supply Chains, which draw heavily from the OECD Due Diligence Guidelines. China is currently drafting legislation to regulate the sourcing of minerals, including tin, tungsten, tantalum, and gold, from conflict areas. China is not a member of the Extractive Industries Transparency Initiative (EITI), but Chinese investors participate in EITI schemes where these are mandated by the host country.

9. Corruption

Corruption remains endemic in China. The lack of an independent press, along with the lack of independence of corruption investigators, who answer to and are managed by the CCP, all hamper the transparent and consistent application of anti-corruption efforts.

Chinese anti-corruption laws have strict penalties for bribes, including accepting a bribe, which is a criminal offense punishable up to life imprisonment or death in “especially serious” circumstances. Offering a bribe carries a maximum punishment of up to five years in prison, except in cases with “especially serious” circumstances, when punishment can extend up to life in prison.

In August 2015, the National People’s Congress amended several corruption-related parts of China’s Criminal Law. For instance, bribing civil servants’ relatives or other close relationships is a crime with monetary fines imposed on both the bribe-givers and the bribe-takers; bribe-givers, mainly in minor cases, who aid authorities can be given more lenient punishments; and instead of basing punishments solely on the specific amount of money involved in a bribe, authorities now have more discretion to impose punishments based on other factors.

In February 2011, an amendment was made to the Criminal Law, criminalizing the bribing of foreign officials or officials of international organizations. However, to date, there have not been any known cases where someone was successfully prosecuted for offering this type of bribe.

The Supreme People’s Procuratorate (SPP) and the Ministry of Public Security investigate criminal violations of laws related to anti-corruption, while the Ministry of Supervision (MOS) and the Discipline Inspection Commission (CCDI) enforce ethics guidelines and party discipline. China’s National Audit Office also inspects the accounts of SOEs and government entities. The National Bureau of Corruption Prevention (NBCP) is under the direct administration of the State Council and is responsible for improving government transparency and coordinating anti-corruption efforts among different government organizations. In January 2017, China announced plans for a National Supervision Commission, which will absorb the current functions carried out by MOS, anti-corruption units of the SPP, and those of the NBCP, and also pass a corresponding National Supervision Law by as early as March 2018.

President Xi Jinping’s Anti-Corruption Efforts

Since President Xi’s rise to power in 2012, China has undergone an intensive and large-scale anti-corruption campaign, with investigations reaching into all sectors of the government, military, and economy. President Xi labeled endemic corruption as an existential threat to the very survival of the CCP that must be addressed. Since then, each CCP annual plenum has touched on judicial, administrative, and Party discipline reforms needed to thoroughly root out corruption. Judicial reforms are viewed as necessary to institutionalize the fight against corruption and reduce the arbitrary power of Party investigators, but concrete measures have emerged slowly. To enhance regional anti-corruption cooperation, the 26th Asia-Pacific Economic Cooperation (APEC) Ministers Meeting adopted the Beijing Declaration on Fighting Corruption in November 2014.

According to Wang Qishan, head of the CCDI and also a member of China’s ruling seven-member Politburo Standing Committee, the CCP disciplined around 415,000 officials in 2016, almost a 25 percent increase compared to the previous year. However, over 75 percent of those disciplined received only “light discipline.” Of the officials disciplined, about 11,000 officials were expelled from the CCP and handed over to Chinese courts for prosecution. One group heavily disciplined has been the discipline inspectors, with the CCP punishing more than 7,900 inspectors since late 2012. This led to new regulations being implemented in 2016 by CCDI that increased overall supervision of investigators. Authorities also noted an increase in SOE officials being investigated, including 43 total investigations conducted in 2015, in comparison to 10 in 2014 and just two in 2013. Around 40 percent of SOE corruption investigations were of SOEs in the energy sector.

China’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of around 2,500 fugitives suspected of corruption. In 2016 alone, CCDI reported that 1,032 fugitives suspected of official crimes were reprehended. The Chinese government reports that in the first 11 months of 2016, China recovered 2.3 billion RMB (U.S. $334.47 million) in losses from graft, from over 70 countries and regions, through this campaign.

Anecdotal information suggests that China’s anti-corruption crackdown oftentimes is inconsistently and discretionarily applied, raising concerns among foreign companies in China. For example, to fight rampant commercial corruption in the medical/pharmaceutical sector, China’s health authority issued “black lists” of firms and agents involved in commercial bribery. Several of these blacklisted firms were foreign companies. Additionally, anecdotal information suggests many Chinese government officials responsible for approving foreign investment projects are slowing approvals to not arouse corruption suspicions.

While central government leadership has welcomed increased public participation in reporting suspected corruption at lower levels, direct criticism of central government leadership or policies remains off-limits and is seen as an existential threat to China’s political and social stability. Some citizens who have called for officials to provide transparency and public accountability by disclosing public and personal assets, or who have campaigned against officials’ misuse of public resources, have been subject to criminal prosecution.

United Nations Anticorruption Convention, OECD Convention on Combatting Bribery

China ratified the United Nations Convention against Corruption in 2005 and participates in APEC and OECD anti-corruption initiatives. China has not signed the OECD Convention on Combating Bribery, although Chinese officials have expressed interest in participating in the OECD Working Group on Bribery meetings as an observer.

Resources to Report Corruption

The following government organization receives public reports of corruption:

Anti-Corruption Reporting Center of the CCP Central Commission for Discipline Inspection and the Ministry of Supervision, Telephone Number: +86 10 12388

10. Political and Security Environment

The risk of political violence directed at foreign companies operating in China remains minimal. Every year, different watchdog organizations report tens of thousands of protests throughout China. The government is adept at handling protests without violence, but given the volume of protests annually, the potential for violent flare-ups is real. Violent protests, while rare, have generally involved ethnic tensions, local residents protesting corrupt officials, environmental and food safety concerns, confiscated property, and disputes over unpaid wages.

In recent years, the growing number of protests over corporate mergers and acquisitions has increased, often with workers and mid-level managers of an acquired firm protesting because they were not included or consulted in the process. There have also been a small number of cases of foreign businesspeople being trapped in China during a business contract dispute.

In the past few years, Chinese authorities have detained or arrested several foreign nationals, including American citizens, and have refused to notify the U.S. Embassy or allow access to the American citizens detained for consular officers to visit. These trends are in direct contravention of recognized international agreements and conventions.

11. Labor Policies and Practices

For U.S. companies operating in China, adequate human resources remain a major challenge. Finding, developing, and retaining domestic talent, particularly at the management and highly-skilled technical staff levels, remain a difficult challenge often cited by foreign firms. In addition, labor costs continue to be a concern, as salary and other inputs of production have continued to rise. In addition, foreign companies continue to cite air pollution concerns as a major hurdle in attracting and retaining qualified foreign talent to relocate to China. These labor concerns contribute to a small, but growing, number of foreign companies relocating to the United States, Canada, Mexico, or other parts of Asia.

Chinese labor law does not protect rights such as freedom of association and the right of workers to strike. China to date has not ratified the United Nations International Labor Organization conventions on freedom of association and collective bargaining, but it has ratified conventions prohibiting child labor and employment discrimination. Foreign companies often complain of the difficulty of navigating the ever-evolving labor laws, social insurance laws, and different agencies’ implementation guidelines on labor issues. Compounding the complexity, local characteristics and the application by different localities of national labor laws often vary.

Although required by national law, labor contracts are often not used by domestic employers with local employees. Without written contracts, employees struggle to prove employment, thus losing basic labor rights like claiming severance and unemployment compensation if terminated, as well as access to publicly-provided labor dispute settlement mechanisms. Similarly, regulations on dispatch agencies that provide temporary labor (referred to as “labor dispatch” in China) have tightened, and some domestic employers have switched to hiring independent service provider contractors in order to skirt the protective intent of these regulations. These loopholes incentivize employers to skirt the law because compliance leads to substantially higher labor costs.

Establishing independent trade unions is illegal in China. The law allows for worker “collective bargaining”; however, in practice, collective bargaining focuses solely on collective wage negotiations—and even this practice is uncommon. The Trade Union Law gives the All-China Federation of Trade Unions (ACFTU), a CCP organ chaired by a member of the Politburo, control over all union organizations and activities, including enterprise-level unions. The ACFTU’s priority task is to “uphold the leadership of the Communist Party.” The ACFTU and its provincial and local branches aggressively organize new constituent unions and add new members, especially in large multinational enterprises, but in general, these enterprise-level unions do not actively participate in employee-employer relations.

ACFTU enterprise unions issue a mandatory employer-borne cost of 2 percent of payroll for membership. While labor laws do not protect the right to strike, “spontaneous” worker protests and work stoppages occur with increasing regularity, especially in labor intensive and “sunset” industries (i.e., old and declining industries such as low-end manufacturing). Official forums for mediation, arbitration, and other similar mechanisms of alternative dispute resolution have generally been ineffective in resolving labor disputes in China. Some localities actively discourage acceptance of labor disputes for arbitration or legal resolution. Even when an arbitration award or legal judgement is obtained, getting local authorities to enforce judgments is problematic.

12. OPIC and Other Investment Insurance Programs

The United States suspended Overseas Private Investment Corporation (OPIC) programs in China, in the aftermath of China’s crackdown on Tiananmen Square demonstrators in June 1989. OPIC honors outstanding political risk insurance contracts. The Multilateral Investment Guarantee Agency, an organization affiliated with the World Bank, provides political risk insurance for investors in China. Some foreign commercial insurance companies also offer political risk insurance, as does the People’s Insurance Company of China.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy



Executive Summary

India’s investment climate continues to send mixed signals, as the Bhartiya Janata Party (BJP), led by Prime Minister Narendra Modi, actively courts investment, but implementation of economic reforms to attract investors does not meet rhetoric. The economy as a whole performed well in 2016, growing over 7% with a stable rupee and political stability throughout the country. Non-performing assets continue to hold back banks’ profits and limit their lending. However, stable, relatively low inflation, weak credit demand, and strong management from India’s central bank, the Reserve Bank of India, have mitigated the negative impact on credit. Employment, while difficult to measure given the large informal economy, appears to lag growth, while a demographic boom means India must generate over ten million new jobs every year.

India has opened foreign direct investment (FDI) by particular sector, sometimes all at once and sometimes gradually reducing the FDI limitations. In 2016 the government opened FDI in private security and approved pharmaceutical projects to 74%, and increased investment in defense to 49% under the automatic route. With government clearance, defense and pharmaceutical investments can exceed the capped limit. It also allowed 100% FDI in food products, marketplace model e-commerce, broadcasting, airports on land already zoned for that use, and air transport services. In 2016, FDI into India jumped 18% to a record $46.4 billion, though Foreign Portfolio Investments (FPI) saw a net outflow of $2 billion. Multinational companies made large investment into the electronics, solar energy, automobile, defense, and railways sectors. Finance Minister Arun Jaitley, in his annual budget speech, formally proposed abolishing the Foreign Investment Promotion Board, which screens FDI, in an effort to ease investment.

On the legislative front, Parliament passed a constitutional amendment to replace the fractured, state-level tax code with a nationwide goods and services tax (GST). It also replaced myriad existing laws on the reorganization of companies, insolvency, and asset restructuring into one unified law via the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. These steps should reduce the time taken to dissolve a company, and speed up the process of debt recovery for investors.

The Modi government undertook further reforms in 2016 to formalize the large informal economy, and digitize the economy. In addition to the GST overhaul, which will result in greater tax registration and digital tax reporting, the government demonetized its INR 500 and INR 1000 notes, worth 86% of the currency in circulation, causing a shock to the economy in November-December 2016. Through demonetization, the government aimed to better track undeclared earnings (known as “black money” in India) for tax purposes, and increase the usage of digital payments which lags other major emerging economies.

India announced its intention to abrogate all bilateral investment treaties (BITs) negotiated on the basis of its 1993 model BIT. Some BITs have already lapsed and the rest will do so in 2017. India intends to renegotiate them on the basis of its new December 2015 model BIT which requires that foreign investors exhaust all domestic judicial remedies for up to five years, before entering into international arbitration, unless the claim is not judicable by Indian courts. This shift is an attempt to see investment disputes are resolved in domestic courts, as India has lost a number of recent disputes in international arbitration. The United States currently does not have a BIT with India.

In 2017, the government expects to implement its GST on July 1, which will transform the tax code and could lead to significant structural changes in the economy. Investors will also monitor how the government screens FDI following the abolition of the Foreign Investment Promotion Board (FIPB). Investors will also pay close attention to further liberalization of FDI – the government has discussed expansions of the food and insurance investment policies, while industry awaits changes to FDI policy in multi-brand retail.

Table 1

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD; Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) (in US$) 2016 $11.39 trillion 2015 $11.01 trillion 
Foreign Direct Investment Host Country Statistical Source*
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2016 79 of 175
World Bank’s Doing Business Report “Ease of Doing Business” 2016 130 of 190
Global Innovation Index 2016 66 of 128
U.S. FDI in partner country ($M USD, stock positions) 2015 28.335
World Bank GNI per capita 2015 $1600

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

During this period India has continued to open its economy to FDI on a sector-by-sector basis. The government has the authority to raise FDI limits up to 100% without Parliamentary approval, outside of pensions, insurance, and defense. However, FDI remains restricted in several sectors, including multi-brand retail. The government continues to take steps to ease FDI restrictions in the defense, civil aviation, railways, construction, and medical devices sectors. During his 2017 Budget Speech, Finance Minister Jaitley announced the government’s intent to liberalize FDI policy by abolishing the FIPB, which would speed up the FDI application review process. On May 24, the Indian Cabinet approved the decision to abolish the FIPB and announced that relevant ministries will give the necessary approvals for the 11 sectors that previously required FIPB clearance. Many sectors still require a multi-step process for central and state government approval.

The Department of Industrial Policy and Promotion (DIPP), under the Ministry of Commerce and Industry, is the nodal investment promotion agency, responsible for the formulation of FDI policy and the facilitation of FDI inflows. DIPP plays a pro-active role in solving the problems faced by foreign investors in the implementation of their projects, through the Foreign Investment Implementation Authority (FIIA), which interacts directly with the concerned ministry or state government. DIPP disseminates information about the Indian investment climate to promote investments. The Department also encourages and facilitates foreign technology collaborations among Indian companies and bilateral economic cooperation agreements in the region. DIPP oftentimes consults with relevant ministries and stakeholders, but some relevant stakeholders report being left out of consultations.

Limits on Foreign Control and Right to Private Ownership and Establishment

In most sectors, foreign and domestic private entities can establish and own businesses, and engage in remunerative activities. Many sectors of the economy continue to retain equity limits for foreign capital as well as management and control restrictions, which deter investment. For example, in the insurance sector The Insurance Act 2015 raised FDI caps from 26% to 49%, but also mandated that insurance companies retain “Indian management and control.” Similarly, in 2016, India allowed up to 100% FDI in domestic airlines, however the issue of substantial ownership and effective control (SOEC) rules which mandate majority control by Indian nationals have not yet been clarified. A list of investment caps can be accessed at 

Screening of FDI

The FIPB, a government entity that provides single window clearance for FDI proposals, used to conduct India’s FDI screening. In pursuance with the announcement in 2017 Budget, the government abolished the FIPB in May 2017, arguing that 90% of FDI is automatically approved. The screening of the approvals will now be undertaken by relevant ministries. The Home Ministry will also review some sensitive investments.

Other Investment Policy Reviews

Business Facilitation

DIPP is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view national priorities and socio-economic objectives. While individual lead ministries look after the production, distribution, development and planning aspects of specific industries allocated to them, DIPP is responsible for the overall industrial policy. It is also responsible for facilitating and increasing the FDI flows to the country.

Invest India  is the official Investment Promotion and Facilitation Agency of the Government of India, which is managed in partnership with DIPP, state governments, and the Federation of Indian Chambers of Commerce & Industry (FICCI). Invest India maintains a web portal with links to current investment policies as well as resources for doing business in India.

Businesses can register online through the Ministry of Corporate Affairs website: . After the registration, all new investments require industrial approvals and clearances from relevant authorities, including regulatory bodies and local governments. To fast-track the approval process, especially in case of major projects, Prime Minister Modi has started the Pro-Active Governance and Timely Implementation (PRAGATI initiative) – a digital, multi-modal platform to speed the government’s approval process. As per the Prime Minister’s Office (PMO), 136 projects with investments of around $126 billion have been cleared as of March 25, 2016, with varying target completion times. Prime Minister Modi personally monitors the process to ensure compliance in meeting PRAGATI project deadlines. In December 2014, the Modi government also approved the formation of an Inter-Ministerial Committee led by DIPP to help in tracking investment proposals that require inter-ministerial approvals. Business and government sources report this committee meets informally and on an ad hoc basis as they receive reports from business chambers and affected companies of stalled projects.

Outward Investment

According to the Reserve Bank of India (RBI) the growth in magnitude and spread (in terms of geography, nature and types of business activities) of overseas direct investment (ODI) from India reflects the increasing appetite and capacity of Indian investors. While the total Financial Commitments (FC) under ODI for 2015 decreased to $30 billion from $40 billion the preceding year, the outlook and potential for growth in outward FDI from India remain positive. According to the U.S. Bureau of Economic Analysis, Indian direct investment into the U.S. was $11.3 billion in 2015.

2. Bilateral Investment Agreements and Taxation Treaties

India made public a new model Bilateral Investment Treaty (BIT) in December 2015. This followed a string of rulings against it in international arbitration. The new model BIT requires foreign investors to first exhaust all local judicial and administrative remedies before entering into international arbitration, unless the claim is non judicable in Indian courts. The Indian government also announced its intention to abrogate all BITs negotiated on the earlier 1993 BIT model. The government has served termination notices to roughly 58 countries, including EU countries and Australia. The Ministry of Finance said the revised model BIT will be used for the renegotiation of existing and any future BITs, and will form the investment chapter in any Comprehensive Economic Cooperation Agreements (CECAs)/Comprehensive Economic Partnership Agreements (CEPAs)/Free Trade Agreements (FTAs). The complete list of agreements can be found at: . India signed a BIT agreement with Cambodia in August 2016 with no changes to the new model text, while Brazil has concluded a BIT framework but has not signed a new BIT.

India has a bilateral taxation treaty with the United States, available at: 

3. Legal Regime

Transparency of the Regulatory System

Some government policies are written in a way that can be discriminatory to foreign investors or favor domestic industry; for example, approval for higher FDI in the insurance sector came with a new requirement for “Indian management and control.” On most occasions the rules are promulgated after thorough discussions by the competent government authorities and require the approval of the cabinet and, in some cases, the Parliament as well. Policies pertaining to foreign investments are promulgated by DIPP and the implementation is undertaken by lead federal ministries and sub-national counterparts. The Indian Accounting Standards were issued under the supervision and control of the Accounting Standards Board, a committee under the Institute of Chartered Accountants of India (ICAI), and has government, academic, and professional representatives. The Indian Accounting Standards are named and numbered in the same way as the corresponding International Financial Reporting Standards. The National Advisory Committee on Accounting Standards recommends these standards to the Ministry of Corporate Affairs, which all listed companies must then adopt. These can be accessed at: 

International Regulatory Considerations

India is a member of the South Asia Association for Regional Cooperation (SAARC), an eight-member regional block in South Asia. India’s regulatory systems are aligned with SAARC economic agreements, visa regimes, and investment rules. India’s regulatory system traditionally follows the European system; however, since the new government came to power to May 2014 the practice has moved to resolving disputes through tribunals. In the 2017 budget, Jaitley announced the merger of all tribunals. This is expected to fast track dispute resolution. India has been a member of the WTO since 1994, and generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade; however, at times there are delays in publishing the notifications. The Governments of India and the United States cooperate in areas such as standards, trade facilitation, competition, and antidumping practices.

Legal System and Judicial Independence

India adopted its legal system from English law and the basic principles of the Common Law as applied in the UK are largely prevalent in India. However, foreign companies need to make adaptations per Indian Law and the Indian business culture when negotiating and drafting contracts in India to ensure adequate protection in case of breach of contract. The Indian Judicial Structure provides for an integrated system of courts to administer both central and state laws. The legal system has a pyramidal structure, with the Supreme Court at the apex, and a High Court in each state or a group of states which covers a hierarchy of subordinate courts. Article 141 of the Constitution of India provides that a decision declared by the Supreme Court shall be binding on all courts within the territory of India. Apart from courts, tribunals are also vested with judicial or quasi-judicial powers by special statutes to decide controversies or disputes relating to specified areas.

Courts have maintained that the independence of the judiciary is a basic feature of the Constitution, which provides the judiciary institutional independence from the executive and legislative branches.

Laws and Regulations on Foreign Direct Investment

The government has a policy framework on FDI, which is updated every year and formally notified as the Consolidated FDI Policy ( ). DIPP makes policy pronouncements on FDI through Press Notes/Press Releases, which are notified by the RBI as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB dated May 3, 2000). These notifications are effective on the date of the issued press release, unless otherwise specified. The judiciary does not influence FDI policy measures.

The government has introduced a “Make in India” program as well as investment policies designed to promote manufacturing and attract foreign investment. “Digital India” aims to open up new avenues for the growth of the information technology sector. The “Start-up India” program created incentives to enable start-ups to commercialize and grow. The “Smart Cities” project intends to open up new avenues for industrial technological investment opportunities in select urban areas. The U.S. Government continues to urge the Government of India to foster an attractive and reliable investment climate by reducing barriers to investment and minimizing bureaucratic hurdles for businesses.

Competition and Anti-Trust Laws

The central government has been successful in establishing independent and effective regulators in telecommunications, banking, securities, insurance, and pensions. The Competition Commission of India (CCI), India’s antitrust body, is now taking cases against cartelization and abuse of dominance as well as conducting capacity-building programs for bureaucrats and business officials. Currently the Commission’s investigations wing is required to seek the approval of the local chief metropolitan magistrate for any search and seizure operations. The Securities and Exchange Bureau of India (SEBI) enforces corporate governance standards, and is well-regarded by foreign institutional investors. The RBI, which regulates the Indian banking sector, is also held in high regard. Some Indian regulators, including SEBI and the RBI, engage with industry stakeholders through periods of public comment, but the practice is not consistent across the government.

Expropriation and Compensation

In 2010 and 2011, high-profile graft cases in the construction and telecom sectors exacerbated existing private sector concerns about the government’s uneven application of its policies. For example, in 2014, the Supreme Court cancelled 214 out of the 218 coal blocks that had been allocated since 1993. Apart from the cancellations, the Supreme Court ordered that operational mines pay a penalty of INR 295 ($5) for every ton of coal previously extracted.

The government has taken steps to provide greater clarity in regulation. In 2016 the government successfully carried out the largest spectrum auction in the country’s history, and has also stated its intent to eliminate retroactive taxation proposals. India also has transfer pricing rules that apply to related party transactions. The government passed a constitutional amendment in August 2016 to establish a comprehensive Goods and Services Tax (GST), which could reduce the complexity of tax codes and eliminate multiple taxation policies. Parliament approved the enabling GST bills in March 2017, and the Finance Minister has said that the government is targeting a July 1, 2017 date to begin implementation.

Land acquisition continues to be a complicated process due to the lack of an effective legal framework, but is governed by the Land Acquisition Act (2013), which entered into force in 2014. In 2015, an amendment was introduced in Parliament which proposed that five land categories (national security and defense production, rural infrastructure, affordable housing, industrial corridors, and PPP projects on government-vested land) should receive various exemptions, including consent for acquisition; the bill has since been withdrawn.

Land sales require adequate compensation, resettlement of displaced citizens, and 70% approval from landowners. The displacement of poorer citizens is politically challenging for local governments.

Dispute Settlement

According to the World Bank’s Ease of Doing Business Report, it takes on average nearly four years to resolve a commercial dispute in India, the third longest rate in the world. Indian courts are understaffed and lack the technology necessary to resolve an enormous backlog of pending cases—estimated by the UN at 30-40 million cases nationwide ( ).

India enacted the Arbitration and Conciliation Act in 1996, based on the United Nations Commission on International Trade Law model, as an attempt to align its adjudication of commercial contract dispute resolution mechanisms with most of the world. Judgments of foreign courts are enforceable under multilateral conventions, including the Geneva Convention. The government established the International Center for Alternative Dispute Resolution (ICADR) as an autonomous organization under the Ministry of Law and Justice to promote the settlement of domestic and international disputes through alternate dispute resolution. The World Bank has also funded ICADR to conduct training for mediators in commercial dispute settlement.

India is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). It is not unusual for Indian firms to file lawsuits in domestic courts in order to delay paying any arbitral award. Seven cases are currently pending, the oldest of which dates to 1983. India is not a member state to the International Centre for the Settlement of Investment Disputes (ICSID).

The Permanent Court of Arbitration (PCA) at The Hague and the Indian Law Ministry agreed in 2007 to establish a regional PCA office in New Delhi, although no progress has been made in establishing the office. The office would provide an arbitration forum to match the facilities offered at The Hague but at a lower cost.

In November 2009, the Department of Revenue’s Central Board of Direct Taxes established eight dispute resolution panels across the country to settle the transfer-pricing tax disputes of domestic and foreign companies. In 2016 the government also presented amendments to the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act to establish specialized commercial divisions within domestic courts to settle long-pending commercial disputes.

Investor-State Dispute Settlement

According to the United Nations Conference on Trade and Development, India has been a respondent state for 21 investment dispute settlement cases, of which 11 remain pending ( ).

Though India is not a signatory to the ICSID Convention, current claims by foreign investors against India can be pursued through the ICSID Additional Facility Rules, the UN Commission on International Trade Law (UNCITRAL Model Law) rules, or through the use of ad hoc proceedings.

International Commercial Arbitration and Foreign Courts

Alternate Dispute Resolution (ADR)

Since formal dispute resolution is expensive and time consuming, many businesses choose methods, including ADR, for resolving disputes. The most commonly used ADRs are arbitration and mediation. India has enacted the Arbitration and Conciliation Act based on the UNCITRAL Model Laws of Arbitration. Experts agree that the ADR techniques are extra-judicial in character and emphasize that ADR cannot displace litigation. In cases that involve constitutional or criminal law, traditional litigation remains necessary.

Dispute Resolutions Pending

An increasing backlog of cases at all levels reflects the need for reform of the dispute resolution system, whose infrastructure is characterized by an inadequate number of courts, benches and judges, inordinate delays in filling judicial vacancies, and only 14 judges per one million people. Almost 25% of judicial vacancies can be attributed to procedural delays.

Bankruptcy Regulations

According to the World Bank, it takes an average of 4.3 years to recover funds from an insolvent company in India, compared to 2.7 years in Pakistan, 1.8 years in China and 1.7 years in OECD countries. Recognizing that reforms in the bankruptcy and insolvency regime are critical for improving the business environment and alleviating distressed credit markets, the government introduced the Insolvency and Bankruptcy Code (IBC) Bill in November 2015, drafted by a specially-constituted Bankruptcy Law Reforms Committee under the Ministry of Finance. The IBC passed Parliament on May 11, 2016 and came into effect after receiving Presidential assent on May 28, 2016. It overhauled the previous framework on insolvency of corporations, individuals, partnerships and other entities, and paved the way for much-needed reforms. It also focused on creditor-driven insolvency resolution. The IBC offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms). The government is proposing a separate framework for bankruptcy resolution in failing banks and financial sector entities. Supplementary legislation would create a new institutional framework, consisting of a regulator, insolvency professionals, information utilities and adjudicatory mechanisms that would facilitate formal and time-bound insolvency resolution process and liquidation. The new law, however, does not provide for U.S. style Chapter 11 bankruptcy provisions.

In August 2016, the Indian Parliament passed amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and the Debt Recovery Tribunals Act. These would amend debt recovery laws and make them more time-bound and effective while helping address the problem of rising bad loans for domestic and multilateral banks. It will also help banks and financial institutions recover loans more effectively, encourage the establishment of more asset reconstruction companies (ARCs) and revamp debt recovery tribunals.

4. Industrial Policies

Foreign Trade Zones/Free Ports/Trade Facilitation

The government established several foreign trade zone initiatives to encourage export-oriented production. These include Special Economic Zones (SEZs), Export Processing Zones (EPZs), Software Technology Parks (STPs), and Export Oriented Units (EOUs). The newest category is the National Industrial and Manufacturing Zones (NIMZs), of which 14 are being established across India. These initiatives are governed by separate rules and granted different benefits, details of which can be found at:  and  .

SEZs are treated as foreign territory; therefore businesses operating within SEZs are not subject to customs regulations, nor FDI equity caps. They also receive exemptions from industrial licensing requirements, and enjoy tax holidays and other tax breaks. EPZs are industrial parks with incentives for foreign investors in export-oriented businesses. STPs are special zones with similar incentives for software exports. EOUs are industrial companies, established anywhere in India, that export their entire production and are granted the following: duty-free import of intermediate goods; income tax holidays; exemption from excise tax on capital goods, components, and raw materials; and a waiver on sales taxes.

The current government established NIMZs as new integrated industrial townships with a minimum area of 5,000 hectares, to be managed by a special purpose vehicle and headed by a government official. Publicly available information suggests that foreign and domestic companies will be able to seek all state and central government authorizations for operating with NIMZs via single window. The government has planned the establishment of eight NIMZs on the Delhi-Mumbai Industrial Corridor (DMIC) route and six NIMZs outside the DMIC.

Performance and Data Localization Requirements

Preferential Market Access (PMA) for government procurement has created substantial challenges for foreign firms operating in India, as Public Sector Companies and the government accord a 20% price preference to vendors utilizing more than 50% local content. However, PMA for government procurement limits access to the most cost effective and advanced ICT products available. In December 2014, PMA guidelines were revised and reflect the following updates:

  1. Current guidelines emphasize that the promotion of domestic manufacturing is the objective of PMA, while the original premise focused on the linkages between equipment procurement and national security.
  2. Current guidelines on PMA implementation are limited to hardware procurement only. Former guidelines were applicable to both products and services.
  3. Current guidelines widen the pool of eligible PMA bidders, to include authorized distributors, sole selling agents, authorized dealers or authorized supply houses of the domestic manufacturers of electronic products, in addition to OEMs, provided they comply with the following terms:
    1. The bidder shall furnish the authorization certificate by the domestic manufacturer for selling domestically manufactured electronic products.
    2. The bidder shall furnish the affidavit of self-certification issued by the domestic manufacturer to the procuring agency declaring that the electronic product is domestically manufactured in terms of the domestic value addition prescribed.
    3. It shall be the responsibility of the bidder to furnish other requisite documents required to be issued by the domestic manufacturer to the procuring agency as per the policy.
  4. The current guidelines establish a ceiling on fees linked with the complaint procedure. There would be a complaint fee of INR 200,000 ($3000) or one percent of the value of the Domestically Manufactured Electronic Product being procured, subject to a maximum of INR 500,000 ($7500), whichever is higher.

The Union Cabinet further approved a new procurement policy providing preference to domestically manufactured goods for government procurement in May 2017. The policy mandates that only local suppliers will be eligible for procurement of goods and services above INR 500,000 ($7,500), provided the specific ministry determines there is sufficient local capacity and competition. The order covers government entities, autonomous bodies, government companies, or entities under the government’s control, including the armed and paramilitary forces.

In 2010, India initiated the Jawaharlal Nehru National Solar Mission (JNNSM), which aimed to bring 100,000 megawatts (MW) of solar-based power generation online by 2022, as well as promote solar module manufacturing in India. Under the JNNSM, India imposed certain local content requirements for solar cells and modules. Specifically, under the JNNSM, participating solar power developers must use solar cells and modules made in India in order to enter into long-term power supply contracts and receive other benefits from the Indian government. The United States challenged India’s position at the WTO and, in September 2016, the WTO Appellate Body report sustained that India’s local content requirements are inconsistent with WTO non- discrimination obligations.

In January 2017 the Ministry of Electronics & Information Technology (MeitY) issued a draft notification under the PMA policy, stating a preference for domestically manufactured servers in government procurement.

A current list of PMA guidelines, notified products, and tendering templates can be found on MeitY’s website: 

Research and Development

The Government of India allows for 100% FDI in research and development through the automatic route.

Data Storage

The National Telecom Machine-to-Machine (M2M) Roadmap, released on May 25, 2015, states that all M2M gateways and application servers serving customers in India, must be physically located in India. The Roadmap proposes that foreign SIM cards not be permitted in devices used in India. India does not require foreign providers to turn over source code or provide access to encryption. The Telecom Regulatory Authority (TRAI) has issued a consultation paper to examine policy issues concerning cloud computing services and cross-border data flows.

5. Protection of Property Rights

Real Property

Several cities, including the metropolitan cities of Delhi, Kolkata, Mumbai, and Chennai have grown according to a master plan registered with the central government’s Ministry of Urban Development. Property rights are generally well-enforced in such places, and district magistrates—normally senior local government officials—notify land and property registrations. Banks and financial institutions provide mortgages and liens against such registered property.

In other urban areas, and in areas where illegal settlements have been built up, titling often remains unclear. As per the Department of Land Resources, in 2008 the government launched the National Land Records Modernization Program (NLRMP) to clarify land records and provide landholders with legal titles. The program requires the government to survey an area of approximately 2.16 million square miles, including over 430 million rural households, 55 million urban households, and 430 million land records. Initially scheduled for completion in 2016, the program is now scheduled to conclude in 2021. Traditional land use rights, including communal rights to forests, pastures, and agricultural land, are sanctioned according to various laws, depending on the land category and community residing on it. Relevant legislation includes the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act 2006, the Tribal Rights Act, and the Tribal Land Act.

Foreign and domestic private entities are permitted to establish and own businesses in trading companies, subsidiaries, joint ventures, branch offices, project offices, and liaison offices, subject to certain sector-specific restrictions. The government does not permit foreign investment in real estate, other than company property used to conduct business and for the development of most types of new commercial and residential properties. Foreign Institutional Investors (FIIs) can now invest in initial public offerings (IPOs) of companies engaged in real estate. They can also participate in pre-IPO placements undertaken by such real estate companies without regard to FDI stipulations.

To establish a business, various government approvals and clearances are required, including incorporation of the company and registration under the State Sales Tax Act and Central and State Excise Acts. Businesses that intend to build facilities on land they own are also required to take the following steps: register the land; seek land use permission if the industry is located outside an industrially zoned area; obtain environmental site approval; seek authorization for electricity and financing; and obtain appropriate approvals for construction plans from the respective state and municipal authorities. Promoters must also obtain industry-specific environmental approvals in compliance with the Water and Air Pollution Control Acts. Petrochemical complexes, petroleum refineries, thermal power plants, bulk drug makers, and manufacturers of fertilizers, dyes, and paper, among others, must obtain clearance from the Ministry of Environment and Forests.

The Foreign Exchange Management Regulations and the Foreign Exchange Management Act set forth the rules that allow foreign entities to own immoveable property in India and convert foreign currencies for the purposes of investing in India. These regulations can be found at: . Foreign investors operating under the automatic route are allowed the same rights as an Indian citizen for the purchase of immovable property in India in connection with an approved business activity. India ranks 138 out of 189 for ease of registering property in the World Bank’s Doing Business Report ( ).

In India, a registered sales deed does not confer title ownership and is merely a record of the sales transaction. It only confers presumptive ownership, which can still be disputed. The actual title is established through a chain of historical transfer documents that originate from the land’s original established owner. Accordingly, before purchasing land, buyers should examine all the link documents that establish title from the original owner. Many owners, particularly in urban areas, do not have access to the necessary chain of documents. This increases uncertainty and risks in land transactions.

Intellectual Property Rights

Engagement with India on Intellectual Property Rights (IPR) continues, primarily through the Trade Policy Forum’s High Level Working Group on Intellectual Property. Despite the release of the National IPR Policy and the establishment of India’s first intellectual property (IP) crime unit in Telangana in 2016, India’s IP regime continues to fall short of global best practices and standards. A number of “Notorious Markets” across the country continue to operate, while many smaller stores sell or deal with pirated content across the country.

India made some progress in fulfilling its mandate to build a more market-oriented and competitive India in 2016, but Prime Minister Modi’s courtship of multinationals to invest and “Make in India” has not yet addressed longstanding hesitations over India’s lack of effective IPR enforcement. U.S. government representatives continued to meet the government officials and industry stakeholders on IPR in 2016, including visits to India by officials from the U.S. Trade Representative (USTR), the U.S. Patent and Trademark Office (USPTO), and the Departments of State, Commerce, and Agriculture. The two governments held two IP-related workshops in 2016, one on copyrights and another on trade secrets. India has made efforts to streamline its IP framework through administrative actions and awareness programs, and it is notable that it is the process of reducing its patent and trademark application backlog by adding 458 new examiners.

Parliament passed the Commercial Courts, Commercial Division, and Commercial Appellate Division of High Courts Act in 2016, which enables the creation of Commercial Courts, Commercial Divisions, and Commercial Appellate Divisions within India’s High Courts. These measures are aimed at improving the ease of doing business and facilitating the smooth and prompt resolution of commercial disputes, including IPR. The U.S. government continues to advocate for the passage of anti-camcording legislation, which would have a significant impact on stopping digital piracy in India and subsequent global distribution. This legislation would also improve India’s ease of doing business rankings, and send a signal to investors and entrepreneurs that the government values transparency, predictability, and the rule of law. As of early 2017, the anti-camcording bill remains stalled in parliamentary committees.

India’s copyright laws were amended in 2012, although these amendments have not been fully implemented. Without a copyright board to determine royalty rates for authors, with enforcement being weak, and piracy of copyrighted materials widespread, India requires greater emphasis on enforcement of copyright law. Industry hopes the recent shift of the copyright office from the Ministry of Human Resource Development to DIPP will enable more effective implementation of the law.

In the software field, India in 2016 released new Computer Related Invention patent guidelines, which require computer programs to be claimed in conjunction with novel hardware, rather than acknowledging technical improvements created by the computer program regardless of the associated hardware, as is the international standard. Industry has rallied the government and a final decision is still pending.

The agriculture sector in 2016 saw some troubling IPR related developments. The Ministry of Agriculture and Farmers Welfare (MAFW) filed an application with DIPP to revoke Monsanto’s patents for BT cotton, and sought to force companies to license their technology and impose unprecedented up-front terms and conditions on private party transactions covering a broad range of genetically-modified agricultural products. The government’s refusal to strongly repudiate MAFW’s overly prescriptive GM licensing guidelines has resulted in the withdrawal of next-generation innovative biotechnology from the Indian marketplace and has given pause to many other companies who seek to protect their technology.

Indian law still does not provide any statutory protection for trade secrets. After the workshop conducted in October 2016, India agreed to provide guidance to start-ups on trade secret protection through existing contract laws. The Designs Act allows for the registration of industrial designs, and affords a 15 year term of protection. India’s Semiconductor Integrated Circuits Layout Designs Act is based on standards developed by the World Intellectual Property Organization (WIPO); however, this law remains inactive due to the lack of implementing regulations. To date, only one application has been granted.

In the past few years, with regular training, customs and police enforcement of IPR laws has marginally increased. The new customs recording system allows trademark owners to record their brands and trademarks with the Ministry of Commerce and Industry and seek affirmative action in case of any counterfeit issue at the ports. In 2016, as a result of a state-level initiative taken by Telangana, India established its first IP Crime Unit. The unit’s intent is to focus on IP crimes and in particular on online crimes. In early 2017, Maharashtra state also approved a new IP unit. The U.S. government is encouraged by this, and hopes that other states will follow suit. However, these represent only two state out of 32, and IP remains a low priority. The nine most vulnerable sectors for IP crime include media and entertainment, pharmaceuticals, automotive parts, alcohol, computer hardware, consumer goods, packaged foods, mobile phones, and tobacco products.

India also actively engages at multilateral negotiations, including the WTO TRIPS Council. It has strongly supported, and sometimes led the charge, in calling for open technology transfer, liberal use of compulsory licensing across sectors, and protection of traditional knowledge. These negotiations will have an impact on innovation, trade, and investment in IP-intensive products and services.

6. Financial Sector

Capital Markets and Portfolio Investment

The S&P BSE SENSEX index – India’s benchmark 30-share index – ended 2016 marginally higher by 1.78% at 26,626. The SENSEX began the year with a low of 22,951 on February 11, 2016 largely due to weak quarterly earnings, as banks recognized non-performing assets (NPAs) after pressure from the RBI. The stock markets managed to keep investors on edge with reactions to the Brexit vote results in June, announcement of surgical strikes across the Line of Control in Kashmir in September, the demonetization of high value rupee notes, and the results of the U.S. elections in November. Market capitalization of the BSE stood at USD $1.6 trillion as of December 30, 2016.

The Securities and Exchange Board of India (SEBI) is considered one of the most progressive and well-run of India’s regulatory bodies. It regulates India’s securities markets, including enforcement activities, and is India’s direct counterpart to the U.S. Securities and Exchange Commission (SEC). SEBI oversees three national exchanges: the BSE Ltd. (formerly the Bombay Stock Exchange), the National Stock Exchange, and the Metropolitan Stock Exchange. Since its September 2015 merger with the Forwards Market Commission, the then commodities market regulator, SEBI is tasked to deal with three national commodity exchanges: the Multi Commodity Exchange, the National Commodity & Derivatives Exchange Limited, and the National Multi-Commodity Exchange.

Unlike Indian equity markets, local debt and currency markets remain underdeveloped, with limited participation from foreign investors. Indian businesses receive the majority of their financing through the banking system, not capital markets. Although private placements of corporate debt have increased (95% of corporate debt is privately placed), the corporate bond market is around 14% of GDP, compared to bank assets of 89% of GDP and equity markets of 80% of GDP. There were 2,636 corporate bond issuances for $62 billion in 2014-15. The Reserve Bank of India (RBI) announced several measures intended to further market development, enhance participation, facilitate greater market liquidity and improve communication on August 25, 2016: .

Foreign investment in India can be made through various routes, including FDI, Foreign Portfolio Investor (FPI), and venture capital investment: . FPIs include investment groups of FIIs, Qualified Foreign Investors (QFIs) and sub-accounts. Non-Resident Indians do not come under FPI. Investment by an FPI cannot exceed 10% of the paid up capital of the Indian company. All FPIs together cannot acquire more than 24% of the paid up capital of any Indian company. As per SEBI regulations, FPIs are not allowed to invest in unlisted shares, and investment in unlisted entities will be treated as FDI.

Foreign investors withdrew $3.47 billion from the Indian capital markets in 2016, the worst year in terms of overseas investment since 2008. Surprisingly, debt instruments took the biggest hit, after remaining a preferred investment avenue for foreign funds in recent years, while equities continued to attract net inflows – but not enough to compensate the huge outflows from the bond market. FPIs purchased $3.09 billion in equities, but sold $6.56 billion of bonds in 2016. FII bank deposits are fully convertible, and their capital, capital gains, dividends, interest income, and any compensation from the sale of rights offerings post tax, may be repatriated without prior approval. Non Resident Indians (NRI) are subject to separate investment limitations. They can repatriate dividends, rents, and interest earned in India, and specially designated NRI bank deposits are fully convertible.

India’s growing importance in the global economy has led to increased interest in the rupee. Yet, the persistence of capital controls in the onshore market has led to the development of an offshore INR market called Non Deliverable Forward (NDF), particularly in Singapore, Dubai, London, and New York. The RBI has taken a number of steps in the recent past to bring these offshore activities onshore, in order to deepen the domestic markets, enhance downstream benefits, and generally obviate the need for an NDF market. In addition, FPIs with access to currency futures or exchange traded currency options market, can hedge onshore currency risks in India and may directly trade in corporate bonds.

BSE, Asia’s oldest stock exchange, established the country’s first international exchange, called the India International Exchange at International Financial Services Centre (IFSC) GIFT city in Gujarat. SEBI has allowed trading in commodity derivatives at stock exchanges operating in IFSC. Under the IFSC regime, any recognized domestic or foreign stock exchange can set up a subsidiary in the financial services center, provided they hold at least a 51% stake in the venture. These norms aim to ease the establishment of stock exchanges and capital market infrastructure in such centers. SEBI has announced that they would introduce new products and allow more participants to deepen the commodity derivatives market.

Foreign venture capital investors (FVCIs) must register with SEBI to invest in Indian firms. They can also set up domestic asset management companies to manage funds. All such investments are allowed under the automatic route, subject to SEBI and RBI regulations, and the FDI policy. FVCIs can invest in many sectors, including software, information technology, pharmaceuticals and drugs, biotechnology, nanotechnology, biofuels, agriculture, and infrastructure. Companies incorporated outside India can raise capital in India’s capital markets through the issuance of Indian Depository Receipts (IDRs). SEBI allows FVCIs to register as a foreign portfolio investor if they meet certain guidelines.

Companies planning to issue an IDR are required to maintain pre-issued, paid-up capital, and free reserves of at least $100 million, as well as demonstrate an average turnover of $500 million during the three financial years preceding issuance. The company must be profitable for at least five years preceding the issuance, declaring dividends of no less than 10% each year and maintaining a pre-issue debt-equity ratio of no more than 2:1. Standard Chartered Bank, a British bank which was the first foreign entity to list in India in June 2010, remains the only foreign firm to have issued IDRs.

External commercial borrowing (ECB), or direct lending to Indian entities by foreign institutions, is allowed if funds are used for outward FDI, or for domestic investment in industry, infrastructure, hotels, hospitals, software, self-help groups or microfinance activities, or to buy shares in the disinvestment of public sector entities: . ECBs cannot be used for on-lending, investments in financial assets, acquisition of real estate or a domestic firm, meeting of working capital requirements or repayment of existing INR loans. An infrastructure or manufacturing company can raise a maximum of $750 million in a financial year under ECB. Companies in software development sector can raise ECB up to $200 million. Companies engaged in micro-finance activities and microfinance institutions can raise ECB up to $100 million in a financial year, and must hedge 100% of their currency risk exposure. A Non-banking Finance Company – Infrastructure Finance Company (NBFC-IFC) can raise ECB up to 75% of its owned funds, and must hedge 75% of its currency risk exposure. The all-in cost ceilings for ECBs with an average maturity period of three-to-five years is capped at 300 basis points over the six-month LIBOR, and 450 basis points for loans maturing after five years. Indian companies borrowed close to USD $17.15 billion through ECBs in 2016.

Money and Banking System

The banking sector remained predominantly in the public sector, with public sector banks (PSBs) accounting for 72% of total banking sector assets, notwithstanding a gradual decline in their share in recent years. PSBs are not technically subject to any extra regulations relative to commercial banks, either in terms of lending practice nor deposits. They do, however, have their CEOs, upper management, and a number of their board of directors appointed by the government, meaning that the government can be quite influential in credit decisions.

Public sector banks (PSBs) face two significant hurdles: capital constraints and poor asset quality. Under the Indradhanush roadmap, which Jaitley announced in the 2016 budget to revive Public Sector Banks, the government will infuse $10.52 billion in PSBs over four years, while these banks will have to raise a further $16.53 billion from the markets to meet their capital requirements in line with global capital norms under Basel-III. PSBs are to get $3.76 billion in each fiscal year, 2015-16 and 2016-17, and $1.5 billion each in 2017-18 and 2018-19. In July 2016, the government infused 75% of the earmarked fund for fiscal 2016-17 and said the remaining amount would be linked to the banks’ performance.

The consolidated balance sheets of the banking sector continued to grow at a modest pace during 2015-16 with the ratio of assets to liabilities expanding at 7.7%, compared to 9.7% in 2014-15. Bad loans continue to be a challenge for banks, with the gross NPA for at 8.4% for banks as of March 31, 2016. Improved recognition of NPAs led to a more than 60% drop in net profits for the banking sector as a whole, though it remained in positive. In addition to regulatory provisions, including strategic debt restructuring (SDR) and scheme for sustainable structuring of stressed assets (S4A), banks are selling NPAs to ARCs. Under RBI norms announced on September 1, 2016, if security receipts make more than 50% of the value of the asset under consideration, banks then have to provide for these loans as if the loans continued on the books of the bank. This norm ensures stressed asset sales by banks are classified as “true sales.” Security receipts are issued by ARCs to banks pending recovery from an account.

Under the government’s 2014 Jan Dhan program, to provide universal access to banking facilities, as of March 22, 2017, 280 million accounts had been opened and 219 million RuPay debit cards issued. The program provides no-fee basic banking accounts and RuPay debit cards to all households, conducts financial literacy programs, guarantees credit, and offers micro-insurance and unorganized sector pension schemes. Though the number of accounts opened is immense, some of these still maintain a zero-balance, and six months of “satisfactory transactions” are necessary before the account-holder qualifies for benefits including overdrafts and life insurance.

Takeover regulation in India applies equally to domestic and foreign companies. The regulations do not recognize, however, any distinct category of hostile takeovers. RBI and lead ministry clearances are required to acquire a controlling stake in Indian companies. Takeover regulations require disclosure on acquisition of shares exceeding 5% of total capitalization. As per SEBI’s Substantial Acquisition of Shares and Takeovers (Amendment) Regulations, released in 2013, acquisition of 25% or more of the voting rights in a listed company triggers a public offering of an additional 26% stake at least. Under the creeping acquisition limit, an acquirer holding 25% or more voting rights in the target company can acquire additional shares or voting rights up to 5% of the total voting rights in any financial year, up to a maximum permissible non-public shareholding limit of 75% generally. Acquisition of control over the target company, irrespective of shares or voting rights held by the acquirer, will trigger a mandatory open offer.

Foreign Exchange and Remittances

Foreign Exchange

The Indian rupee extended its 2015 losses by falling a further 2.7% against the dollar in 2016. According to market experts, demonetization of INR 500 and INR 1000 notes, as well as U.S. Federal Reserve rate hike worries, dampened sentiment towards the currency.

The RBI, under the Liberalised Remittance Scheme, allows individuals to remit up to $250,000 per fiscal year (April-March) out of the country for permitted current account transactions (private visit, gift/donation, going abroad on employment, emigration, maintenance of close relatives abroad, business trip, medical treatment abroad, studies abroad) and certain capital account transactions (opening of foreign currency account abroad with a bank, purchase of property abroad, making investments abroad, setting up Wholly Owned Subsidiaries and Joint Ventures outside of India, extending loans). The INR is fully convertible only in current account transactions, as regulated under the Foreign Exchange Management Act regulations of 2000 ( .

Foreign exchange withdrawal is prohibited for remittance of lottery winnings; income from racing, riding or any other hobby; purchase of lottery tickets, banned or proscribed magazines; football pools and sweepstakes; payment of commission on exports made towards equity investment in Joint Ventures or Wholly Owned Subsidiaries of Indian companies abroad; and remittance of interest income on funds held in a Non-Resident Special Rupee Scheme Account ( ). Furthermore, the following transactions require the approval of the Central Government: cultural tours; remittance of hiring charges for transponders for television channels under the Ministry of Information and Broadcasting, and Internet Service Providers under the Ministry of Communication and Information Technology; remittance of prize money and sponsorship of sports activity abroad if the amount involved exceeds $100,000; advertisement in foreign print media for purposes other than promotion of tourism, foreign investments and international bidding (over $10,000) by a state government and its public sector undertakings (PSUs); and multi-modal transport operators paying remittances to their agents abroad. RBI approval is required for acquiring foreign currency above certain limits for specific purposes including remittances for: maintenance of close relatives abroad; any consultancy services; funds exceeding 5% of investment brought into India or USD $100,000, whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.

Capital account transactions are open to foreign investors, though subject to various clearances. NRI investment in real estate, remittance of proceeds from the sale of assets, and remittance of proceeds from the sale of shares may be subject to approval by the RBI or the lead ministry.

FIIs may transfer funds from INR to foreign currency accounts and back at market exchange rates. They may also repatriate capital, capital gains, dividends, interest income, and compensation from the sale of rights offerings without RBI approval. The RBI also authorizes automatic approval to Indian industry for payments associated with foreign collaboration agreements, royalties, and lump sum fees for technology transfer, and payments for the use of trademarks and brand names. Royalties and lump sum payments are taxed at 10%.

The RBI has periodically released guidelines to all banks, financial institutions, NBFCs, and payment system providers regarding Know Your Customer (KYC) and reporting requirements under Foreign Account Tax Compliance Act (FATCA)/Common Reporting Standards (CRS). The government’s July 7, 2015 notification

( ) amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, (Rules), for setting up of the Central KYC Records Registry (CKYCR)—a registry to receive, store, safeguard and retrieve the KYC records in digital form of clients.

Remittance Policies

Remittances are permitted on all investments and profits earned by foreign companies in India once taxes have been paid. Nonetheless, certain sectors are subject to special conditions, including construction, development projects, and defense, wherein the foreign investment is subject to a lock-in period. Profits and dividend remittances as current account transactions are permitted without RBI approval following payment of a dividend distribution tax.

Foreign banks may remit profits and surpluses to their headquarters, subject to compliance with the Banking Regulation Act, 1949. Banks are permitted to offer foreign currency-INR swaps without limits for the purpose of hedging customers’ foreign currency liabilities. They may also offer forward coverage to non-resident entities on FDI deployed since 1993.

Sovereign Wealth Funds

India does not have a sovereign wealth fund. In 2015 the Government of India created a fund – the National Investment and Infrastructure Fund (NIIF) for enhancing infrastructure financing in India. Finance Ministry officials said that the “NIIF will be a commercially run organization and will operate at arm’s length from the government.” Looking to attract larger inflows from sovereign wealth funds and foreign pension funds, government and financial sector regulators have renewed their efforts to make Indian markets, especially government bonds, much more appealing to such investors. Policymakers view overseas investments by sovereign wealth funds, multilateral agencies, endowment funds, pension funds, insurers, and foreign central banks as much more stable in nature, as compared to institutional investors and hedge funds. Finance Minister Arun Jaitley visited Australia last year and pitched for investments from sovereign wealth funds in the NIIF and pension and insurance funds in India. Media reports suggest that the $100 billion Australian Government Future Fund is looking to invest in the Indian infrastructure space, including roads, telecommunications and clean energy through the NIIF. The UAE has committed to invest $75 billion in the NIIF, and in April 2017 the UK agreed to invest $300 million in a fund for green energy under the NIIF.

7. State-Owned Enterprises

The government owns or controls interests in key sectors with significant economic impact, including infrastructure, oil, gas, mining, and manufacturing. The Department of Public Enterprises ( ), controls and formulates all the policies pertaining to SOEs, and is headed by a minister to whom the senior management reports. The Comptroller and Auditor General audits the SOEs. The government has taken a number of steps to improve the performance of SOEs, also called the Central Public Sector Enterprises (CPSEs), including improvements to corporate governance. Reforms carried out in the 1990s focused on liberalization and deregulation of most sectors and disinvestment of government shares. These and other steps to strengthen CPSE boards and enhance transparency evolved into a more comprehensive governance approach, culminating in the Guidelines on Corporate Governance of State-Owned Enterprises issued in 2007 and their mandatory implementation beginning in 2010. Governance reforms gained prominence for several reasons: the important role that CPSEs continue to play in the Indian economy; increased pressure on CPSEs to improve their competitiveness as a result of exposure to competition and hard budget constraints; and new listings of CPSEs on capital markets. According to the government’s most recent published data from March 2015, there were 298 CPSEs, of which 235 were in operation – 63 CPSEs have yet to commence business. 206 of the 298 CPSEs showed a profit during 2014-15 and did not require government support. The loss-making entities (e.g. Air India) and the state-run telecom company Bharat Sanchar Nigam Limited continue to be supported by the government through allocations in the general budget. The manufacturing sector constitutes the largest component of investment in CPSEs (45%), followed by services (35%), energy (12%), and mining (8%).

Foreign investments are allowed in the CPSEs in all sectors. The Master List of CPSEs can be accessed at . While the CPSEs face the same tax burden as the private sector, on issues like procurement of land, they receive streamlined licensing that private sector enterprises do not.

Privatization Program

Despite the financial upside to disinvestment in loss-making PSUs, the government has not generally privatized its assets as they have led to job losses in the past, and therefore engender political risks. Instead, the government has adopted a gradual disinvestment policy that dilutes government stakes in public enterprises without sacrificing control. Such disinvestment has been undertaken both as fiscal support and as a means of improving PSU efficiency.

In recent years, the government has begun to look to disinvestment proceeds as a major source of revenue to finance its fiscal deficit. The government has budgeted $10.5 billion in disinvestment for the April 2017-March 2018 fiscal year. However, it has missed its disinvestment targets for each of the past four years. FIIs can participate in these disinvestment programs subject to these limits: 24% of the paid up capital of the Indian company and 10% for NRIs/PIOs. The limit is 20% of the paid up capital in the case of public sector banks. There is no bidding process. The shares of the PSUs being disinvested are sold in the open market. Detailed policy procedures relating to disinvestment in India can be accessed at: .

8. Responsible Business Conduct

Among the companies there is a general awareness of standards for responsible business conduct. The Companies Act of 2013 established the framework for India’s corporate social responsibility (CSR) laws. The India Responsible Business Index (IRBI) notes, for example, that in 2015 there were only nine firms that had held public hearings regarding project impact with communities, but there were 13 in 2016. Similarly, there were only 27 firms with a provision for conducting impact assessments in 2015; this number increased to 31 in 2016. A CRISIL study reported that only 30% of 5,500 companies listed on the Bombay Stock Exchange met the criteria for mandatory spending and reporting under the CSR.

The Ministry of Corporate Affairs (MCA) administers the Companies Act of 2013, and is responsible for regulating the corporate sector in accordance with the law. MCA is also responsible for protecting the interests of consumers by ensuring competitive markets. While the CSR obligations are mandated by law, non-government organizations (NGOs) in India also track activities under the CSR and in some cases provide recommendations for effective use of CSR funds.

India does not adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. There are provisions to promote responsible business conduct throughout the supply chain.

India is not a member of Extractive Industries Transparency Initiative (EITI) nor is it a member of Voluntary Principles on Security and Human Rights.

9. Corruption

India is a signatory to the United Nation’s Conventions Against Corruption and is a member of the G20 Working Group against corruption. India ranks 79 out of 176 countries surveyed in Transparency International’s 2016 Corruption Perception Index, and was ranked 76 out of 168 in 2015.

Corruption is addressed by the following laws: the Companies Act, 2013; the Prevention of Money Laundering Act, 2002; the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Indian Contract Act, 1872; and the Indian Penal Code of 1860. Anti-corruption laws amended since 2004 have granted additional powers to vigilance departments in government ministries at the central and state levels. The amendments also elevated the Central Vigilance Commission (CVC) to being a statutory body. In addition, the Comptroller and Auditor General is charged with performing audits on public-private-partnership contracts in the infrastructure sector on the basis of allegations of revenue loss to the exchequer.

In November 2016, the Modi government ordered INR 1000 and 500 notes, comprising approximately 86% of cash in circulation, be demonetized to curb “black money,” corruption, and the financing of terrorism.

The Benami Transactions (Prohibition) Amendment Act of 2016 entered into effect in November 2016, and strengthened the legal and administrative procedures of the Benami Transactions Act 1988, which was ultimately never notified. (Note: A benami property is held by one person, but paid for by another, often with illicit funds.) Analysts expect the government to issue a roadmap in 2017-2018 to begin implementing the Act.

In November 2016 India and Switzerland signed a joint declaration to enter into an Agreement on the Exchange of Information (AEOI) to automatically share financial information on accounts held by Indian residents, beginning in 2018. India also amended its Double Taxation Avoidance Agreement with Singapore, Cyprus, and Mauritius in 2016 to prevent income tax evasion. The move follows the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which replaced the Income Tax (IT) Act of 1961 regarding the taxation of foreign income. The new Act penalizes the concealment of foreign income, as well as provides criminal liability for foreign income tax evasion.

In February 2014, the government enacted the Whistleblower Act, intended to protect anti-corruption activists, but it has yet to be implemented. Experts believe that the prosecution of corruption has been effective only among the lower levels of the bureaucracy; senior bureaucrats have generally been spared. Businesses consistently cite corruption as a significant obstacle to FDI in India and identify government procurement as a process particularly vulnerable to corruption. To make the Whistle Blowers Protection Act, 2014 more effective, the government proposed an amendment bill in 2015. This bill is still pending with the Upper House of Parliament; however anti-corruption activists have expressed concern that the bill will dilute the Act by creating exemptions for state authorities, allowing them to stay out of reach of whistleblowers.

The Companies Act of 2013 established rules related to corruption in the private sector by mandating mechanisms for the protection of whistle blowers, industry codes of conduct, and the appointment of independent directors to company boards. As yet, the government has established no monitoring mechanism, and it is unclear the extent to which these protections have been instituted. No legislation focuses particularly on the protection of NGOs working on corruption issues, though the Whistleblowers Protection Act, 2011, may afford some protection once it has been fully implemented.

In 2013, Parliament enacted the Lokpal and Lokayuktas Act 2013, which created a national anti-corruption ombudsman and requires states to create state-level ombudsmen within one year of the law’s passage. The government has yet to implement the law, however, and as of yet, no ombudsmen have been appointed.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

India is a signatory to the United Nations Conventions against Corruption and is a member of the G20 Working Group against Corruption.

India is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

Christopher Elms
Economic Growth Unit Chief
U.S. Embassy New Delhi
Shantipath, Chanakyapuri, New Delhi
+91 11 2419 8000

Ashutosh Kumar Mishra
Executive Director
Transparency International, India
Lajpat Bhawan, Room no.4
Lajpat Nagar, New Delhi – 110024
+91 11 2646 0826

10. Political and Security Environment

There have been no significant major incidents involving political violence. However, outbursts of violence between the state and insurgent movements continued in Jammu and Kashmir and some northeastern states. Maoist/Naxalite insurgent groups also remain active in some eastern and central states, including the rural areas of southern Bihar, Jharkhand, Chhattisgarh, and Orissa. The country also continues to experience conflict related to caste, linguistic identity, socio-economic and communal tensions.

Travelers to India are invited to visit the U.S. Department of State travel advisory website at: for the latest information and travel resources.

11. Labor Policies and Practices

Although there are more than 20 million unionized workers in India, unions still represent less than 5% of the total work force. Most of these unions are linked to political parties. According to provisional figures from the Ministry of Labor and Employment (MOLE), over 2.9 million workdays were lost to strikes and lockouts in 2015, as opposed to 11 million workdays lost in 2014.

Labor unrest occurs throughout India, though the reasons and affected sectors vary widely. A majority of the labor problems are the result of workplace disagreements over pay, working conditions, and union representation. According to government statistics, in 2015 the state of Kerala had the most strikes, followed by Tamil Nadu and Assam.

India’s labor regulations are very stringent and complex, and over time have limited the growth of the formal manufacturing sector. The rules governing the payment of wages and salaries are set forth in the Payment of Wages Act, 1936, and the Minimum Wages Act, 1948. Minimum industrial wages vary by state, ranging from about $2.80 per day for unskilled laborers to over $7.70 per day for skilled production workers. Retrenchment, closure, and layoffs are governed by the Industrial Disputes Act of 1947, which requires prior government permission to lay off workers or close businesses employing more than 100 people. Foreign banks also require RBI approval to close branches. Permission is generally difficult to obtain, which has resulted in the increasing use of contract workers (i.e. non-permanent employees) to circumvent the law. Private firms successfully downsize through voluntary retirement schemes.

Since the current government assumed office in 2014, much of the movement on labor laws has taken place at the state level, particularly in Rajasthan, where the government has passed major amendments to allow for quicker hiring, firing, laying off, and shutting down of businesses. The Ministry of Labor and Employment launched a web portal in 2014 to assist companies in filing a single online report on compliance with 16 labor-related laws. In 2015, the Ministry also tabled legislation to amend India’s Factories Act that would encourage voluntary compliance of occupational safety and health standards and reduce government inspections. India’s major labor unions have opposed the labor reforms, arguing that they compromise workers’ safety and job security.

On September 2, major trade unions led country-wide protests against the government’s attempt to reform labor laws. The strike evoked mixed response as major cities like Delhi and Mumbai did not see any disruptions and the affect was restricted to states like Kerala, which is ruled by the Left parties and Karnataka, because the Congress party also supported the strike.

In August, the Child Labor Act was amended establishing a minimum age of 14 years for work and 18 years as the minimum age for hazardous work. In December, the government promulgated legislation enabling employers to pay worker salaries through checks or e-payment in addition to the prevailing practice of cash payment.

There are no reliable unemployment statistics for India due to the informal nature of most employment. The government nonetheless acknowledges a shortage of skilled labor in high-growth sectors of the economy, including information technology and manufacturing. The current government has established a Ministry of Skill Development, and has embarked on a national program to increase skilled labor.

12. OPIC and Other Investment Insurance Programs

The United States and India signed an Investment Incentive Agreement in 1987. This agreement covers the Overseas Private Investment Corporation (OPIC), which is the development finance institution of the U.S. Government. Since 1974 OPIC has committed more than $3.5 billion in loans, investment funds, and political risk insurance to 162 projects in India. As of December 31, 2016 OPIC’s current portfolio in India comprises more than $1.5 billion outstanding across 32 projects. These are concentrated in the utilities and financial services sectors, including microfinance.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) 2015 $2.1 trillion 2015 $2.095 trillion 
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country (stock positions) 2015 $19.280* billion 2015 $28.335 billion BEA data available at
Host country’s FDI in the United States (stock positions) 2012 $2.052* billion 2014 $9.3 billion BEA data available at
Total inbound stock of FDI as % host GDP 2014 1.8% 2015 2.1%

* The Indian government source for FDI statistics is:  and the figure is the cumulative FDI for April 2000 to September 2016. Outward FDI data has been sourced from:

Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 312,152 100% Total Outward 84,826 100%
Mauritius 63,077 20% Singapore 17,721 21%
United States 50,152 16% Mauritius 15,322 18%
United Kingdom 45,802 15% Netherlands 12,259 14%
Germany 33,112 11% United States 8,889 10%
Singapore 32,909 11% UAE 4,449 5%
“0” reflects amounts rounded to +/- USD 500,000.

Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 1,650 100% All Countries 1,640 100% All Countries 10 100%
United States 496 30% United States 494 30% Singapore 6 60%
United Kingdom 292 18% United Kingdom 290 18% United States 2 40%
Luxembourg 273 17% Luxembourg 273 17% United Kingdom 2 40%
China P.R. Mainland 236 14% China P.R. Mainland 236 14%
Mauritius 77 5% Mauritius 77 5%

14. Contact for More Information

Christopher Elms
Economic Growth Unit Chief
U.S. Embassy New Delhi
Shantipath, Chanakyapuri
New Delhi
+91 11 2419 8000


Executive Summary

While the Russian Federation made substantial advances in 2016 to decrease the regulatory burden on businesses at the regional level, fundamental structural problems in governance of the economy continue to stifle foreign direct investment throughout the country. In particular, Russia’s judicial system remains heavily biased in favor of the state, leaving investors often with little recourse in the event of a legal dispute with the government. High levels of corruption among government officials compound this risk. The Russia government frequently adopts rules with little to no transparency or without incorporating public comments, creating significant business uncertainty. Moreover, Russia’s import substitution program often gives local producers a sizeable advantage over foreign competitors that do not meet Russia’s localization requirements. Additionally, Russia’s actions in eastern Ukraine and Crimea have led to the imposition of sanctions on targeted Russian entities by the United States and European Union – increasing the cost of legal compliance for U.S. companies and placing restrictions on the types of business activities permitted in Russia.

U.S. investors in Russia must ensure they are in full compliance with U.S. sanctions stemming from Russia’s annexation of Crimea in March 2014. These measures include a prohibition on the refinancing of debt beyond 30 days for sanctioned entities, restrictions on the export to Russia of certain kinds of equipment for the energy sector, and a complete ban on dealings with those entities or individuals identified by the U.S. Treasury Department as “specially designated nationals.” Further information on the U.S. sanctions program is available at the U.S. Treasury’s website:

The Agency for Strategic Initiatives has played an important role in improving Russia’s investment climate. Its system of ranking Russian regions, available at, has spurred many local authorities to improve the investment climate in their regions relative to others. As different regions compete for foreign investment, local authorities have substantially reduced local regulations, which account for the bulk of foreign investors’ regulatory burden.

A new law on public-private-partnerships (224-FZ) took effect January 1, 2016. The legislation allows an investor to acquire ownership rights over a property; in previous approaches to public-private-partnerships, the public authority retained ownership rights

Russia’s Special Investment Contract program, launched in 2015, aims to increase investment in Russia by offering tax incentives and simplified procedures for dealings with the government. These contracts, generally negotiated with and signed by the Ministry of Industry and Trade, ostensibly allow for the inclusion of foreign companies in Russia’s import substitution programs by providing access to certain subsidies for foreign producers if local production is established. In principle, these contracts may also aid in expediting customs procedures. In practice, however, reports suggest even companies that sign such contacts find their business hampered by policies biased in favor of local producers.

Russia’s Strategic Sectors Law (SSL) establishes a list of 45 “strategic” sectors or activities in which purchases of controlling interests by foreign investors must be pre-approved by Russia’s Commission on Control of Foreign Investment. In 2014, the Russian government expanded the list to include companies, investments, and transactions.

In 2015 Russian law was amended to give the Russian Constitutional Court authority to disregard verdicts by international bodies, including investment arbitration bodies, if it determines the ruling contradicts the Russian constitution.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2016 131 of 176
World Bank’s Doing Business Report “Ease of Doing Business” 2016 40 of 190
Global Innovation Index 2016 43 of 128
U.S. FDI in partner country ($M USD, stock positions) 2015 $9.201 billion
World Bank GNI per capita 2015 $11,450

1. Openness To, and Restrictions Upon, Foreign Investment

Policies toward Foreign Direct Investment

The Ministry of Economic Development (MED) is responsible for overseeing investment policy in Russia. The Foreign Investment Advisory Council (FIAC), which is chaired by the Prime Minister and includes over 50 international companies and banks, allows select foreign investors to directly present their views on improving the investment climate in Russia. FIAC also advises the government regarding regulatory rule-making.

Russia’s basic legal framework governing investment includes Law 160-FZ of July 9, 1999, “On Foreign Investment in the Russian Federation”; Law No. 39-FZ of February 25, 1999, “On Investment Activity in the Russian Federation in the Form of Capital Investment”; Law No. 57-FZ of April 29, 2008, “Order of Investing by Foreign Persons in Companies Having Strategic Importance for Ensuring the Defense of the Country and Security of the States”; and the Law of the RSFS No. 1488-1 of June 26, 1991, “On Investment Activity in the Russian Soviet Federative Socialist Republic (RSFSR).” This framework nominally attempts to guarantee equal rights for foreign and local investors in Russia. However, exemptions are permitted when it is deemed necessary to protect the Russian constitution, morality, health, human rights, and national security or defense, as well as for promoting the socioeconomic development of Russia. Foreign investors may freely use their revenues and profits obtained from Russia-based investments for any purpose as long as they do not violate Russian law.

Limits on Foreign Control and Right to Private Ownership and Establishment

Russian law places two primary restrictions on land ownership by foreigners. First, land located in border areas or other specifically assigned sensitive territories is restricted from foreign ownership. Second, foreign citizens and foreign legal entities cannot own more than 50 percent of a plot of agricultural land. As an alternative to agricultural land ownership, foreign companies typically lease land for up to 49 years, the maximum legally allowed.

President Vladimir Putin signed in October 2014 the law “On Mass Media,” which took effect on January 1, 2015 and restricts foreign ownership of any Russian media company to 20 percent (the previous law applied a 50 percent limit only to Russia’s broadcast sector). U.S. stakeholders have also raised concerns about similar limits on foreign direct investments in the mining and mineral extraction sectors; they describe the licensing regime as non-transparent and unpredictable as well.

Russia’s Strategic Sectors Law (SSL) establishes a list of 45 “strategic” sectors or activities, such as national defense and state security, in which the establishment of companies, investments, and transactions or purchases of controlling interests by foreign investors must be pre-approved by Russia’s Commission on Control of Foreign Investment, which was established in 2008 to monitor foreign investment in strategic sectors. The Commission received approximately 395 applications for foreign investment between 2008 and 2015, of which 195 were reviewed, according to the Federal Antimonopoly Service (FAS). Of those, the Commission granted preliminary approval for 183 cases, rejected 12 cases, and found that 150 applications did not require approval (see ). International organizations, foreign states, and the companies they control are treated as a single entity under this law, with their participation in a strategic business subject to restrictions applicable to a single foreign entity.

Other Investment Policy Reviews

The WTO conducted the first Trade Policy Review of the Russian Federation in September 2016. Reports relating to the review are available at: .

Business Facilitation

The Agency for Strategic Initiatives, created by President Putin in 2011 to increase innovation and reduce bureaucracy, has released since 2014 a yearly ranking of Russia’s regions in terms of the competitiveness of their investment climates. This initiative provides potential investors with important information about which regions are most open to foreign investment. By providing a benchmark to compare regions, known as the “Regional Investment Standard,” this initiative has also stimulated competition between regions, resulting in an overall improved investment climate in Russia. See  (in Russian) for more information.

The Federal Tax Service (FTS) operates Russia’s business registration website,  (in Russian). A company must register with a local FTS Office within 30 days of launching a new business. The business registration process must not take more than five days, according to Law 129-FZ of 2001. Foreign companies may be required to notarize the originals of incorporation documents included in the application package. To establish a business in Russia, a company must pay a registration fee of RUB 4,000 and register with the Federal Tax Service. See  for more details.

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

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

Outward Investment

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

2. Bilateral Investment Agreements and Taxation Treaties

Russia is party to some 69 treaties in force which contain investment provisions; for a full list, see . Russia is a signatory but never ratified and ultimately terminated its application to the European Energy Charter Treaty, which includes a mechanism for investor-State dispute settlement.

Four regional integration agreements include the Eurasian Economic Union (EAEU) treaty (with Armenia, Belarus Kazakhstan , and Kyrgyzstan ), the Belarus-Kazakhstan-Russia agreement on services and investment, the Common Economic Zone Agreement (with Belarus, Kazakhstan, Ukraine), and the European Union-Russia Partnership and Cooperation Agreement (PCA). As a member of the EAEU, Russia is party to the EAEU-Vietnam Tree Trade Agreement (FTA), which contains investment provisions; individual member countries of the EAEU generally retain authority to enter into their own bilateral investment treaties.

The United States and Russia signed a bilateral investment treaty (BIT) in 1992, however, it was never ratified by Russia and is not in force. A U.S.-Russian dialogue to explore prospects for negotiating a new BIT ceased upon Russia’s annexation of Crimea in 2014. As such, investors from the two countries have no protections beyond domestic laws.

The U.S.-Russia Income Tax Convention, in effect since 1994, was designed to address the issue of double taxation and fiscal evasion with respect to taxes on income and capital. The treaty is available at . In total, Russia is party to 82 double taxation treaties; the Russian Ministry of Finance’s list (in Russian) is available at .

3. Legal Regime

Transparency of the Regulatory System

While the Russian government at all levels offers moderately transparent policies, actual implementation can be inconsistent. Moreover, Russia’s import substitution program often leads to burdensome regulations that can give domestic producers a financial advantage over foreign competitors. Draft bills and regulations are made available for public comments in accordance with disclosure rules set forth in the Government Resolution 851 of 2012.

Key regulatory actions are published on a centralized web site and can be accessed at . The web site maintains regulatory documents that are enacted or about to be enacted. Draft regulatory laws are published on the web site . Draft laws that do not fall under Resolution 851 can be found on the State Duma (Russia’s parliament) legal database ( ).

The President’s office has the authority to take major decisions affecting businesses without a formal comment period. In practice, this has meant that major decisions affecting businesses are often take without industry input. This has led to an unpredictable regulatory environment.

Accounting procedures are generally transparent and consistent. Documents compliant with Generally Accepted Accounting Principles (GAAP), however, are usually provided only by businesses that interface with foreign markets or borrow from foreign lenders. Russian Accounting Standards, which are largely based on international best practices, otherwise apply.

International Regulatory Considerations

As a member of the Eurasian Economic Union (EAEU: Armenia, Belarus Kazakhstan Kyrgyzstan , and Russia  ), Russia has delegated certain decision-making authority to the supra-national Eurasian Economic Commission (EEC), the EAEU’s executive body. In particular, the EEC has the lead on concluding trade agreements with third countries, customs tariffs (on imports), and technical regulations. EAEU agreements and the EEC decisions establish basic principles that are implemented by the member states at the national level through domestic laws, regulations, and other measures involving goods. EAEU agreements and EEC decisions also cover trade remedy determinations, establishment and administration of special economic and industrial zones, and the development of technical regulations. The EAEU Treaty establishes the priority of WTO rules in the EAEU legal framework. Authority to set sanitary and phytosanitary standards remains at the individual country level.

U.S. companies cite technical regulations and related product-testing and certification requirements as major obstacles to U.S. exports of industrial and agricultural goods to Russia. Russian authorities require product testing and certification as a key element of the approval process for a variety of products, and, in many cases, only an entity registered and residing in Russia can apply for the necessary documentation for product approvals. Consequently, opportunities for testing and certification performed by competent bodies outside Russia are limited. Manufacturers of telecommunications equipment, oil and gas equipment, and construction materials and equipment, in particular, have reported serious difficulties in obtaining product approvals within Russia. Technical Barriers to Trade (TBT) issues have also arisen with alcoholic beverages, pharmaceuticals, and medical devices.

Russia joined the WTO in 2012. Although Russia has notified the WTO of numerous technical regulations, it appears to be taking a narrow view regarding the types of measures that require notification. Consequently, Russia’s notifications in 2016 may not reflect the full set of technical regulations that require notification under the WTO TBT Agreement.

Legal System and Judicial Independence

The U.S. Embassy advises any foreign company operating in Russia to have competent legal counsel and create a comprehensive plan on steps to take in case the police carry out an unexpected raid. Russian authorities have exhibited a pattern of transforming civil cases into criminal matters, resulting in significantly more severe penalties. In short, unfounded lawsuits or arbitrary enforcement actions remain an ever-present possibility for any company operating in Russia.

Critics contend that Russian courts in general lack independent authority and, in criminal cases, have a bias toward conviction. In practice, the presumption of innocence tends to be ignored by Russia’s courts, and less than one percent of criminal cases end in acquittal. In cases that are appealed when the lower court decision resulted in a conviction, less than one percent are overturned. In contrast, when the lower court decision is “not guilty,” 37 percent of the appeals result in a finding of guilt.

Russia has a civil law system, and the Civil Code of Russia governs Russian contracts. Specialized commercial courts (also called arbitrage courts) handle a wide variety of commercial disputes. Russia was ranked by the World Bank’s 2017 “Doing Business” Index as 12th in terms of contract enforcement, based upon “the time and cost for resolving a commercial dispute through a local first-instance court,” as well as the extent to which it had “adopted a series of good practices that promote quality and efficiency in the court system.”

Commercial courts are required by law to decide business disputes efficiently, and many cases are decided on the basis of written evidence, with little or no live testimony by witnesses. The courts’ workload is dominated by relatively simple cases involving the collection of debts and firms’ disputes with the taxation and customs authorities, pension fund, and other state organs. Tax-paying firms often prevail in their disputes with the government in court. The volume of routine cases limits the time available for the courts to decide more complex cases. The court system has special procedures for the seizure of property before trial to prevent its disposal before the court has heard the claim, as well as procedures for the enforcement of financial awards through the banks. As with some international arbitral procedures, the weakness in the Russian arbitration system lies in the enforcement of decisions; few firms pay judgments against them voluntarily.

A specialized court for intellectual property (IP) disputes was established in 2013. The IP Court hears matters pertaining to the review of decisions made by the Russian Federal Service for Intellectual Property (Rospatent) and determines issues of IP ownership, authorship, and the cancellation of trademark registrations. It also serves as the court of second appeal for IP infringement cases decided in commercial courts and courts of appeal.

Laws and Regulations on Foreign Direct Investment

The 1991 Investment Code and 1999 Law on Foreign Investment (160-FZ) guarantee that foreign investors enjoy rights equal to those of Russian investors, although some industries have limits on foreign ownership (see separate section on “Limits on Foreign Control and Right to Private Ownership and Establishment”). Russia’s Special Investment Contract program, launched in 2015, aims to increase investment in Russia by offering tax incentives and simplified procedures for dealings with the government. In addition, a new law on public-private-partnerships (224-FZ) took effect January 1, 2016. The legislation allows an investor to acquire ownership rights over a property; in previous approaches to public-private-partnerships, the public authority retained ownership rights.

Competition and Anti-Trust Laws

The Federal Antimonopoly Service (FAS) implements antimonopoly laws and is responsible for overseeing matters related to the protection of competition. Russia’s fourth and most recent anti-monopoly legislative package, which took effect January 2016, introduced a number of changes, including limiting the criteria under which an entity could be considered “dominant,” broadening the scope of transactions subject to FAS approval, and reducing government control over transactions involving natural monopolies. Over the past several years, FAS has opened a number of cases involving American companies.

In addition, FAS has claimed the authority to regulate intellectual property, arguing that monopoly rights conferred by ownership of intellectual property should not extend to the “circulation of goods,” a point supported by the Russian Supreme Court.

Expropriation and Compensation

The 1991 Investment Code prohibits the nationalization of foreign investments, except following legislative action and when such action is deemed to be in the public interest. Acts of nationalization may be appealed to Russian courts, and the investor must be adequately and promptly compensated for the taking. At the sub-federal level, expropriation has occasionally been a problem, as well as local government interference and a lack of enforcement of court rulings protecting investors.

Despite legislation prohibiting the nationalization of foreign investments, investors in Russia – particularly minority-share investors in domestically-owned energy companies – should exercise caution. Russia has a history of indirectly expropriating companies through “creeping” and informal means, often related to domestic political disputes. Some examples: the privately owned oil company Bashneft was nationalized and then “privatized” in 2016 through its sale to the government-owned oil giant Rosneft without a public tender; and in the Yukos case, the Russian government used questionable tax and legal proceedings to ultimately gain control of the assets of a large Russian energy company. Other examples include foreign companies being pressured into selling their Russia-based assets at below-market prices. Foreign investors, particularly minority investors, have little legal recourse in such instances.

Dispute Settlement

ICSID Convention and New York Convention

Russia is party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. While Russia does not have specific legislation providing for enforcement of the New York Convention, Article 15 of the Constitution specifies that “the universally recognized norms of international law and international treaties and agreements of the Russian Federation shall be a component part of [Russia’s] legal system. If an international treaty or agreement of the Russian Federation fixes other rules than those envisaged by law, the rules of the international agreement shall be applied.” Russia is a signatory but not a party/never ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID).

Investor-State Dispute Settlement

Available information indicates that at least 13 investment disputes have involved a U.S. person and the Russian Government since 2006. Some attorneys refer international clients who have investment or trade disputes in Russia to international arbitration centers, such as Paris, Stockholm, London, or The Hague. A 1997 Russian law allows foreign arbitration awards to be enforced in Russia, even if there is no reciprocal treaty between Russia and the country where the order was issued, in accordance with the New York Convention. Russian law was amended in 2015 to give the Russian Constitutional Court authority to disregard verdicts by international bodies if it determines the ruling contradicts the Russian constitution.

Bankruptcy Regulations

Russia has had a law providing for bankruptcy of enterprises since the early 1990s. A law on personal bankruptcy came into force in 2015. Russia’s ranking in the World Bank’s “Doing Business” Index for “Resolving Insolvency” is 51 out of 190 economies.

In accordance with Art. 9 of the Law on Insolvency (Bankruptcy), the management of an insolvent firm must petition the court to declare the company bankrupt within 1 month of failing to pay the Bank’s claims. The court will institute a supervisory procedure and will appoint a temporary administrator, which will convene the first creditors’ meeting, where the creditors will decide whether to petition the court for liquidation or reorganization.

In accordance with Article 51 of the Law on Insolvency (Bankruptcy), a bankruptcy case must be considered within 7 months of the day the petition was received by the arbitral court.

Liquidation proceedings by law are limited to 6 months and can be extended by 6 more months (art. 124 of the Law on Insolvency (Bankruptcy)). Therefore, the time dictated by law is 19 months. However, in practice, liquidation proceedings are extended several times and for longer periods.

Total cost of the insolvency proceedings can be approximately 9% of the value of the estate, including: fees of attorneys, fees of the temporary insolvency representative for the supervisory period, fees of an insolvency representative during liquidation proceedings, payments for services of professionals hired by insolvency representatives (accountants, assessors), and other (publication of announcements, mailing fees, etc.).

4. Industrial Policies

Investment Incentives

Since 2005, Russia’s industrial investment incentive regime has granted tax breaks and other government incentives to foreign companies in certain sectors in exchange for producing locally. As part of its WTO Protocol, Russia agreed to eliminate the elements of this regime that are inconsistent with the Trade-Related Investment Measures TRIMS Agreement by July 2018 and to begin consultations in July 2016 with the United States and other WTO members on WTO-consistent measures. The government also introduced Special Investment Contracts as an alternative incentive program in 2015.

The Russian Direct Investment Fund (RDIF) was established in 2011 as a state-backed private equity fund to operate with long term financial and strategic investors and by offering co-financing for foreign investments directed at the modernization of the Russian economy. RDIF participates in projects estimated from USD 50 to 500 million, with a share in the project not exceeding 50 percent. RDIF has participated in over 52 projects in the following sectors: energy, energy saving technologies, telecommunications, healthcare and other areas, with a total amount of investments of about USD 11 billion and with expected foreign co-financing of USD 25-30 billion. RDIF has also developed a system for foreign co-investment in its projects that allows foreign investors to participate automatically in each RDIF project.

Foreign Trade Zones/Free Ports/Trade Facilitation

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

Russia has 23 special economic zones (SEZs), which fall in one of four categories: industrial and production zones; technology and innovation zones; tourist and recreation zones; and port zones. An Audit Chamber investigation of SEZs in April 2016 found the zones have had no measurable impact on the Russian economy since they were founded in 2005. “Territories of Advanced Development,” a separate but similar program, was launched in 2015 with plans to create areas with preferential tax treatment and simplified government procedures in Siberia, Kaliningrad, and the Russian Far East. In May 2016, President Putin ordered work on 10 existing SEZ’s to cease and suspended the creation of any new SEZs, at least until a more integrated approach to SEZ’s and “Territories of Advanced Development” was put in place.

Performance and Data Localization Requirements

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

In certain sectors, the Russian government has pressed for localization and increasing local content. Russia is currently considering local content requirements for industries that have high percentages of government procurement, such as medical devices or pharmaceuticals. Russia is not a signatory to the WTO’s Government Procurement Agreement. Consequently, restrictions on public procurement have been a major avenue for Russia to implement localization requirements without running afoul of international commitments.

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

5. Protection of Property Rights

Real Property

Russia placed ninth overall in the 2017 World Bank “Doing Business Index” for “registering a property,” which analyzes the “steps, time and cost involved in registering property, assuming a standardized case of an entrepreneur who wants to purchase land and a building that is already registered and free of title dispute,” as well as the “the quality of the land administration system.”

The Russian Constitution, along with a 1993 presidential decree, gives Russian citizens the right to own, inherit, lease, mortgage, and sell real property. The state owns the majority of Russian land, although the structures on the land are typically privately owned. Mortgage legislation enacted in 2004 facilitates the process for lenders to evict homeowners who do not stay current in their mortgage payments. To date, this law has been successfully implemented and is generally effective.

Intellectual Property Rights

Russia remained on both the 2017 U.S. Special 301 Priority Watch List and the 2016 Notorious Markets report, as a result of continued and significant chal­lenges to intellectual property right (IPR) protection and enforcement, particularly in the areas of copyright infringement, trademark counterfeiting/hard goods piracy, and non-trans­parent collecting society procedures. Stakeholders reported in 2017 that IPR enforcement continued to decline overall in 2016, following similar declines in the prior several years and a reduction in resources for enforcement personnel. There were also reports that IPR protection and enforcement were not priorities for government officials.

Online piracy continues to pose a significant problem in Russia. Some progress has been made in the field of copyright protection, most notably with the 2015 antipiracy law and site-blocking implementation, as well as a licensing agreement the three major music labels reached with vKontakte (vK). The film and publishing industries, however, have made no progress with notorious market/social networking site vK. The Russian government has developed amendments to its anti-piracy law to facilitate the permanent blocking of “mirror” websites, which passed the first reading in the Duma in March 2017. At present, obtaining a permanent injunction for site blocking takes from three to four months – including derivative “mirrors” of a site previously blocked. Because these “mirrors” can appear within hours or days of a site being blocked, expediting the legal process remains important. Industry sources estimate that obtaining a final writ of execution from a court to block permanently a “mirror” site will take around two weeks.

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

Resources for Rights Holders

Edward Eichler

Trade and Investment Officer
Bolshoy Deviatinsky Pereulok No. 8
Moscow 121099, Russian Federation
+7 (495) 728-5000 (Economic Section)

American Chamber of Commerce Russia

Ulitsa Lesnaya 7
Block A, 11th floor
Moscow 125047
Telephone: +7 (495) 961-2141 

6. Financial Sector

Capital Markets and Portfolio Investment

Russia is open to portfolio investment and has no restrictions on foreign investments. Russia’s two main stock exchanges – the Russian Trading System (RTS) and the Moscow Interbank Currency Exchange (MICEX) – merged in December 2011. The MICEX-RTS bourse conducted an initial public offering on February 15, 2013, auctioning an 11.82 percent share.

The Russian Law on the Securities Market includes definitions of corporate bonds, mutual funds, options, futures, and forwards. Companies offering public shares are required to disclose specific information during the placement process as well as on a quarterly basis. In addition, the law defines the responsibilities of financial consultants assisting companies with stock offerings and holds them liable for the accuracy of the data presented to shareholders. In general, the Russian government respects IMF Article VIII, which it accepted in 1996.

Credit in Russia is allocated generally on market terms, and the private sector has access to a variety of credit instruments. Foreign investors can get credit on the Russian market, but interest rate differentials tend to prompt investors from developed economies to borrow on their own domestic markets when investing in Russia.

Money and Banking System

Banks make up a large share of Russia’s financial system. Although Russia had 616 licensed banks as of February 1, 2017, state-owned banks, particularly Sberbank and VTB Group, dominate the sector. Five of Russia’s largest banks are state-controlled (with private banks Otkritie and Alfa Bank ranked fifth and eighth, respectively). The top five banks held 55.4 percent of all bank assets in Russia as of March 1, 2017. The role of the state in the banking sector continues to distort the competitive environment, impeding Russia’s financial sector development. At the beginning of 2017, the aggregate assets of the banking sector amounted to 93 percent of GDP, and aggregate capital was 10.9 percent of GDP. Russian banks reportedly operate on short time horizons, limiting capital available for long-term investments. Overall, non-performing loans (NPLs) account for 9.5 percent of total banking assets as of February 2017. Foreign banks are allowed to establish subsidiaries, but not branches within Russia.

Foreign businesses operating within Russia must register as a business entity in Russia.

Foreign Exchange and Remittances

Foreign Exchange

While the ruble is the only legal tender in Russia, companies and individuals generally face no significant difficulty in obtaining foreign exchange. Only authorized banks may carry out foreign currency transactions, but finding a licensed bank is not difficult. The Central Bank of Russia (CBR) retains the right to impose restrictions on the purchase of foreign currency, including the requirement that the transaction be completed through a special account, according to Russia’s currency control laws. The CBR does not require security deposits on foreign exchange purchases. Otherwise, there are no barriers to remitting investment returns abroad, including dividends, interest, and returns of capital, apart from the fact that reporting requirements exist and failure to report in a timely fashion will result in fines. To navigate these requirements, investors should seek legal expert advice at the time of making an investment.

Currency controls also exist on all transactions that require customs clearance, which, in Russia, applies to both import and export transactions, and certain loans. A business must open a “deal passport” with the authorized Russian bank through which it will receive and service the transaction or loan. A “deal passport” is a set of documents that importers and exporters provide to an authorized bank, which enables the bank to monitor payments with respect to the transaction or loan and to report the corporation’s compliance with currency control regulations to the CBR. Russia’s regulations regarding deal passports are prescribed under Instructions of the Central Bank of Russia No. 117-I of June 15, 2004.

Effective 2016, the CBR introduced tighter regulations for cash currency exchanges: a client must provide his full name, passport details, registration place, date of birth, and taxpayer number, if the transaction value exceeds 15,000 rubles (approximately $200). In July 2016, this amount was increased to 40,000 rubles (approximately $680). The declared purpose of this regulation is to combat money laundering and terrorist financing.

Remittance Policies

The Central Bank of Russia (CBR) retains the right to impose restrictions on the purchase of foreign currency, including the requirement that the transaction be completed through a special account, according to Russia’s currency control laws. The CBR does not require security deposits on foreign exchange purchases. Otherwise, there are no barriers to remitting investment returns abroad, including dividends, interest, and returns of capital, apart from the fact that reporting requirements exist and failure to report in a timely fashion will result in fines. To navigate these requirements, investors should seek legal expert advice at the time of making an investment. Banking contacts confirm that investors have not had issues with remittances and in particular with repatriation of dividends.

Sovereign Wealth Funds

There are two sovereign wealth funds in Russia: the Reserve Fund ($16.02 billion and 1.1 percent of GDP as of March 1, 2017) and the National Wealth Fund ($72.6 billion and 4.8 percent of GDP on March 1, 2017). It was expected that the Reserve Fund would be depleted under the 2017-2019 budget passed in December 2016. However, if global oil prices remain above the budgetary estimate of $40 per barrel for 2017 it is possible the Reserve Fund will be replenished over time. The Ministry of Finance oversees both funds’ assets, while the CBR acts as the operational manager. Both funds are audited by Russia’s Accounts Chamber (the standing body of state financial control established by Russia’s parliament), and the results are reported to the State Duma. The two funds have different charters. The Reserve Fund is designed to supplement federal budget deficits due to a fall in oil revenues. The National Wealth Fund provides support for the pension system. The two funds are maintained in foreign currencies, and are included in Russia’s foreign currency reserves, which amounted to $395.7 billion as of March 17, 2016.

7. State-Owned Enterprises

Russia defines a state-owned enterprise as a business in which the government owns at least 25 percent. State-owned enterprises could be subdivided into four main categoriesunitary enterprises (federal or municipal, that are fully owned by the government), of which there are 3,719; other state-owned enterprises where government holds a majority stake – such as Sberbank, the biggest Russian retail bank (over 50 percent is owned by the government); natural monopolies, such as Russian Railways; and state corporations (usually a giant conglomerate of companies) such as Rostec and Vnesheconombank (VEB). There are currently eight state corporations.

FAS announced in October 2016 that the Russian government and state-owned enterprises (SOEs) accounted for 70 percent of Russia’s economy. The number of government-owned “unitary enterprises” has tripled in the past three years. The total number of SOEs exceeded 24,000 as of 2016.

SOE procurement rules are non-transparent and use informal pressure by government officials to discriminate against foreign goods and services. The current Russian government policy of import substitution mandates numerous requirements for localization of production of certain types of machinery, equipment, and goods.

Privatization Program

The Russian government and its SOEs dominate the economy. Due to federal budget constraints in 2016, privatization plans became a higher priority. In 2016, the Russian government sold 10.9 percent of diamond company Alrosa in July, 50.08 percent of Bashneft in October, and 19.5 percent of Rosneft in December. The government approved in early 2017 a new 2017-19 plan identifying state-controlled assets of Sovcomflot, Alrosa, Novorossiysk Commercial Seaport, and United Grain Company for privatization. The plan would also reduce the state’s share in VTB, one of Russia’s largest banks, from over 60 percent to 25 percent plus one share within three years.

8. Responsible Business Conduct

While not standard practice, Russian companies are beginning to show an increased level of interest in their reputation as good corporate citizens. When seeking to acquire companies in Western countries or raise capital on international financial markets, Russian companies face international competition and scrutiny, including with respect to corporate social responsibility (CSR) standards. Consequently, most large Russian companies currently have a CSR policy in place, or are developing one, despite the lack of pressure from Russian consumers and shareholders to do so. CSR policies of Russian firms are usually published on corporate websites and detailed in annual reports, but do not involve a comprehensive “due diligence” approach of risk mitigation that the OECD Guidelines for Multinational Enterprises promotes. Most companies choose to create their own non-government organization (NGO) or advocacy outreach rather than contribute to an already existing organization. The Russian government is a powerful stakeholder in the development of certain companies’ CSR agendas; some companies view CSR as merely financial support of social causes and choose to support local health, educational, and social welfare organizations favored by the government. One association, the Russian Union of Industrialists and Entrepreneurs, developed a Social Charter of Russian Business in 2004 in which over 200 Russian companies and organizations have since joined.

9. Corruption

Despite some government efforts to combat it, the level of corruption in Russia remains high. Endemic corruption at the highest levels of government was the focus of nationwide protests in March 2017. Transparency International’s 2016 Corruption Perception Index, ranked Russia in 131st place out of 176. Russia adopted a law in 2012 requiring individuals holding public office, state officials, municipal officials, and employees of state organizations to submit information on the funds spent by them and members of their families (spouses and underage children) to acquire certain types of property, including real estate, securities, stock, and vehicles. The law also required public servants to disclose the source of the funds for these purchases and to confirm the legality of the acquisitions. Recent anti-corruption campaigns include guidance for government employees and establishment of a legal framework for lobbying. In 2014, government plans called for an education campaign for employees and students in tertiary education on bribery and the law. In 2015, federal legislation provided a clear definition of conflict of interest as a situation in which the personal interest (direct or indirect) of an official affects or may affect the proper, objective, and impartial performance of official duties.

The 2016 anti-corruption plan, typically adopted for two years, called for anti-corruption activity in the judiciary, investigations into conflicts of interest, and increased practical cooperation between the NGO/expert community and government officials. Legislative amendments were introduced in 2016 to improve the anti-corruption climate: (1) the new Criminal Code established a punishment for individuals who were acting as middlemen in corrupt business practices, and (2) the Federal Law on anti-corruption established reporting requirements for municipal deputies and officials. The Constitutional Court gave clear guidance to law enforcement bodies on the issue of asset confiscation due to the illicit enrichment of officials. Russia has ratified the UN Convention against Corruption, but its ratification did not include article 20, which deals with illicit enrichment. The Council of Europe’s Group of States against Corruption reported in 2016 that Russia fully complied with 11 recommendations – and partially complied with 10 – provided by this organization during the previous periodic review.

Nonetheless, the Russian government acknowledged difficulty enforcing the law effectively, and Russian officials often engaged in corrupt practices with impunity. Some analysts have expressed concern that a lack of depth in the compliance culture in Russia will render Russia’s adherence to international treaties a formality that does not function in reality. The implementation and enforcement of the many measures required by these conventions have not yet been fully tested. In recent years, there appear to have been a greater number of prosecutions and convictions of mid-level bureaucrats for corruption, although real numbers were difficult to obtain. The areas of government spending that ranked highest in corruption were public procurement, media, national defense, and public utilities.

Russia’s Investigative Committee estimated annual damages of 40 billion rubles ($615 million) caused by corruption, although independent estimates put the figure much higher. The Russian Prosecutor General Yuri Chaika said that Russian law enforcement registered in 2016 close to 33,000 crimes of this category. Most regular categories of corruption crimes were acts of bribery, kickbacks in government procurement, embezzlement, and incorrect obligation of federal and local budget funds. Vladimir Kolokoltsev, the Russian Minister of Interior (MVD), said that more than 1,300 officials were charged in 2016 on various corruption crimes by his Ministry and other law-enforcement agencies.

Corruption in the past was mostly associated with large construction or infrastructure projects. Russia’s Federal Security Service stated in February 2016 that 5 billion rubles ($77 million) of defense spending was lost to corruption in 2014. In 2016, authorities brought corruption charges against three governors, one federal minister, one deputy minister, the head of Federal Customs (charges were later dropped), and the deputy head of the Federal Investigative Committee. Not one law-enforcement agency managed to avoid high-level corruption investigations in their ranks, including the newly-formed National Guard. In September of 2016, Russian authorities arrested a MVD colonel who allegedly had stashed more than U.S. $120 million in cash in a Moscow apartment.

It is important for U.S. companies, irrespective of size, to assess the business climate in the relevant market in which they will be operating or investing and to have effective compliance programs or measures to prevent and detect corruption, including foreign bribery. U.S. individuals and firms operating or investing in Russia should take time to become familiar with the relevant anticorruption laws of both Russia and the United States in order to comply fully with them. They should also seek, when appropriate, the advice of legal counsel.

Additional country information related to corruption can be found in the U.S. State Department’s annual Human Rights Report available at

Resources to Report Corruption

Vladimir Tarabrina
Ambassador at Large for International Anti-Corruption Cooperation
Ministry of Foreign Affairs
32/34 Smolenskaya-Sennaya pl, Moscow, Russia
+7 499 244-16-06

Anton Pominov
Director General
Transparency International – Russia
Rozhdestvenskiy Bulvar, 10, Moscow

10. Political and Security Environment

Political freedom has been significantly curtailed during the past year, including rising government hostility toward almost all opposition media outlets and increasing harassment of NGOs. In the aftermath of Russia’s attempted annexation of Crimea in March 2014, nationalist rhetoric increased markedly. New laws give the government the authority to label NGOs “foreign agents” if they receive foreign funding, greatly restricting the activities of these organizations. As of March 2016, more than 150 NGOs have been labelled foreign agents. A law enacted in May 2015 authorizes the government to designate a foreign organization as “undesirable” if it is deemed to pose a threat to national security or national interests. Seven foreign organizations currently have this designation and are banned from operations in Russia.

Although the use of strong-arm tactics is not unknown in Russian commercial disputes, the U.S. Embassy is not currently aware of cases where foreign investments have been attacked or damaged for purely political reasons. In Chechnya, Ingushetia, and Dagestan in the northern Caucasus region, Russia continues to battle resilient separatists who increasingly ally themselves with ISIS. These jurisdictions and neighboring regions in the northern Caucasus have a high risk of violence and kidnapping. Since December 2016, the number of terror attacks in Chechnya claimed by ISIS has increased markedly, as have counterterror military operations. Chechens and other North Caucasus natives have joined the ranks of ISIS fighters by the thousands, and the group has issued threats against Chechen and Russian targets. In the past, ISIS affiliated cells have carried out attacks in major Russian cities, including Moscow and St. Petersburg. In 2016, Russian law enforcement reportedly thwarted planned ISIS cell attacks in both cities.

Public protests continue to occur sporadically in Moscow and other cities. Authorities frequently refuse to grant permits for opposition protests, and there is usually a heavy police presence at demonstrations. The most recent large-scale protest took place on March 26, 2017, when an estimated 60,000 people took to the streets in coordinated demonstrations in Moscow, St. Petersburg, and dozens of other cities across Russia to protest government corruption. Police arrested more than 1,000 people. Official counts of participants at demonstrations tend to overestimate numbers at pro-government events and underestimate those at anti-government events.

11. Labor Policies and Practices

The Russian labor market remains fragmented, characterized by limited labor mobility across regions and substantial differences in wages and employment conditions. Earning inequalities are significant, enforcement of labor standards remains relatively weak, and collective bargaining is underdeveloped. Employers regularly complain about shortages of qualified skilled labor. This phenomenon is due, in part, to weak linkages between the education system and the labor market. In addition, the economy suffers from a general shortage of highly skilled labor. Meanwhile, a large number of inefficient enterprises, with high vacancy levels offer workers unattractive, uncompetitive salaries and benefits. The minimum wage is currently set below the government’s official poverty line. Employers are required to make severance payments when laying off employees in light of worsening market conditions.

The rate of actual unemployment (calculated according to International Labor Organization (ILO) methodology) averaged 5.5 percent in 2016. Average unemployment in urban districts (4.5 percent) was much lower than in rural districts (8.1 percent). As of the end of 2016, St. Petersburg and the Republic of Ingushetia had the lowest and highest unemployment rates in the country – 1.6 percent and 28.8 percent, respectively. Real wages increased slightly in 2016 by 0.6 percent year-on-year, but retail sales remained negative, dropping to 5.9 percent year-on-year in December 2016. Private businesses must compete with SOEs, which dominate the economy. Recent surveys indicate Russians would prefer to work for SOEs because they offer better salaries and benefits. SOEs and the public sector employ 33 percent of Russia’s 65 million economically active persons. The public sector, which maintains inefficient and unproductive positions, directly accounts for about 24.5 percent of the workforce.

The 2002 Labor Code governs labor standards in Russia. Normal labor inspections identify labor abuses and health and safety standards in Russia. The government generally complies with ILO conventions protecting worker rights, though enforcement is often insufficient, as the Russian government employs a limited number of labor inspectors.

Official statistics show 1.69 million registered migrant workers (down from 1.83 million in 2015) who have valid work permits from visa countries or work “patents” from visa-free Central Asian countries. Workers from EAEU countries (Armenia, Belarus, Kazakhstan, and Kyrgyzstan) are eligible to work in Russia without work authorization documents. Russia’s Federal Migration Service, which is part of the Ministry of Internal Affairs, has estimated the number of unregistered migrants at as many as 1.55 million people. Migrant workers are concentrated in the construction, retail, housing, and utilities sectors. The Russian government enacted sectoral restrictions for foreign workers in 2016 that cap the percentage of foreign workers allowed in different industries.

12. OPIC and Other Investment Insurance Programs

The U.S. Overseas Private Investment Corporation (OPIC) announced in the wake of Russia’s actions in Ukraine in 2014 that it had suspended consideration of any new financing and insurance transactions in Russia. Prior to this decision, OPIC had been authorized to provide loans, loan guarantees (financing), and investment insurance against political risks to U.S. companies investing in Russia since 1992. OPIC currently has 15 active projects in Russia totaling $501,986,655 (10 projects covered by OPIC finance and five projects by OPIC insurance). See  for more information.

The OPIC agreement (Investment Incentive Agreement) between the United States and Russia can be found at .

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($T USD) 2016 $1.232 2015 $1.331
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or international Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2016 $2.95 billion 2015 $9.2 billion
Host country’s FDI in the United States ($M USD, stock positions) 2016 $8.09 billion 2015 $4.6 billion
Total inbound stock of FDI as % host GDP 2016 0.2% 2015 0.7% N/A

*Host Country Source Data: FDI data – Central Bank of Russia; GDP data – Rosstat (GDP) (Russia’s GDP was 85,880.6 billion rubles in 2016, according to Rosstat. The yearly average ruble-dollar exchange rate in 2016, according to the IRS, was 69.685 rubles to the dollar.)
Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment (2015) Outward Direct Investment (2015)
Total Inward 257,287 100% Total Outward 286,583 100%
Cyprus 86,281 34% Cyprus 104,446 36%
Netherlands 32,368 13% Netherlands 57,461 20%
Bahamas 21,297 8% British Virgin Islands 33,501 12%
Bermuda 13,562 5% Austria 21,054 7%
Germany 13,523 5% Switzerland 16,456 6%

Table 4: Sources of Portfolio Investment

Portfolio Investment Assets (as of December 2015)
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 68,119 100% All Countries 2,814 100% All Countries 65,304 100%
Luxembourg 24,612 36% United States 546 19% Luxembourg 24,257 37%
Ireland 19,379 28% Cyprus 437 16% Ireland 19,377 30%
Netherlands 4,420 6% Luxembourg 355 13% Netherlands 4,179 6%
United States 3,514 5% Netherlands 241 9% United States 2,968 5%
Cyprus 2,468 4% Ireland 42 1% Cyprus 2,031 3%

14. Contact for More Information

Embassy of the United States of America
Economic Section
Bolshoy Deviatinsky Pereulok No. 8
Moscow 121099, Russian Federation
+7 (495) 728-5000, ext. 5179 (Economic Section)