The Colombian legal, accounting, and regulatory systems are generally transparent and consistent with international norms. The written commercial code and other laws cover broad areas, including banking and credit, bankruptcy/reorganization, business establishment/conduct, commercial contracts, credit, corporate organization, fiduciary obligations, insurance, industrial property, and real property law. The civil code contains provisions relating to contracts, mortgages, liens, notary functions, and registries. There are no identified private-sector associations or non-governmental organizations leading informal regulatory processes. The ministries generally consult with relevant actors, both foreign and national, when drafting regulations. Proposed laws are typically published as drafts for public comment, although sometimes with limited notice. Information on Colombia’s public finances and debt obligations is readily available and is published in a timely manner.
Enforcement mechanisms exist, but historically the judicial system has not taken an active role in adjudicating commercial cases. The Constitution establishes the principle of free competition as a national right for all citizens and provides the judiciary with administrative and financial independence from the executive branch. Colombia has transitioned to an oral accusatory system to make criminal investigations and trials more efficient. The new system separates the investigative functions assigned to the Office of the Attorney General from trial functions. Lack of coordination among government entities, clear lines of responsibility, as well as insufficient resources complicate timely resolution of cases.
Colombia is a member of UNCTAD’s international network of transparent investment procedures (see http://www.businessfacilitation.org and Colombia’s websites http://colombia.eregulations.org and https://www.colombiacompra.gov.co). Foreign and national investors can find detailed information on administrative procedures for investment and income generating operations, including the number of steps, name, and contact details of the entities and people in charge of procedures, required documents and conditions, costs, processing time, and legal bases justifying the procedures. In general, Colombia does not promote or require environmental, social, and governance disclosure to help investors and consumers distinguish between high- and low-quality investments.
Colombia became the 37th member of the OECD in April 2020. Colombia is part of the World Trade Organization (WTO). The government generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade. In August 2020, Colombia fully joined the WTO Trade Facilitation Agreement (TFA). Regionally, Colombia is a member of organizations such as the Inter-American Development Bank (IADB), the Pacific Alliance, and the Andean Community of Nations (CAN).
Colombia has a comprehensive, civil law-based legal system. Colombia’s judicial system defines the legal rights of commercial entities, reviews regulatory enforcement procedures, and adjudicates contract disputes in the business community. The judicial framework includes the Council of State, the Constitutional Court, the Supreme Court of Justice, and various departmental and district courts, which collectively are overseen administratively by the Superior Judicial Council. The 1991 Constitution provided the judiciary with greater administrative and financial independence from the executive branch. Regulations and enforcement actions are appealable through the different stages of legal court processes in Colombia. The judicial system in general remains hampered by time-consuming bureaucratic requirements.
Colombia has a comprehensive legal framework for business and FDI that incorporates binding norms resulting from its membership in the Andean Community of Nations and the WTO, as well as other free trade agreements and bilateral investment treaties.
The Superintendence of Industry and Commerce (SIC), Colombia’s independent national competition authority, monitors and protects free economic competition, consumer rights, compliance with legal requirements and regulations, and protection of personal data. It also manages the national chambers of commerce. The SIC has been strengthened in recent years with the addition of personnel, including economists and lawyers. The SIC has recently investigated companies, including U.S.-based technology firms and Colombian banks, for failing to protect customer data. Other investigations include those related to pharmaceutical pricing, “business cartelization” among companies supplying public entities, and misleading advertising by a major brewing company. One U.S. gig-economy platform was temporarily barred from operating in Colombia in early 2020, although other similarly-situated companies remained; a court overturned the prohibition on appeal. U.S. companies have expressed concern about limited ability to appeal SIC orders and the SIC’s increasing reliance on orders to remedy perceived problems. Other U.S. companies have noted that SIC investigations can be drawn-out and opaque, similar to the judicial system. In general Stakeholders continue to express concern that some regulatory rulings in Colombia target specific companies, resulting in an uneven playing field and regulatory inconsistency. Investors also note concern that the SIC has ruled differently on similar issues for different companies, leading to different results.
Article 58 of the Constitution governs indemnifications and expropriations and guarantees owners’ rights for legally-acquired property. For assets taken by eminent domain, Colombian law provides a right of appeal both on the basis of the decision itself and on the level of compensation. The Constitution does not specify how to proceed in compensation cases, which remains a concern for foreign investors. The Colombian government has sought to resolve such concerns through the negotiation of bilateral investment treaties and strong investment chapters in free trade agreements, such as the CTPA.
Colombia’s 1991 Constitution grants the government the authority to intervene directly in financial or economic affairs, and this authority provides solutions similar to U.S. Chapter 11 filings for companies facing liquidation or bankruptcy. Colombia’s bankruptcy regulations have two major objectives: to regulate proceedings to ensure creditors’ protection, and to monitor the efficient recovery and preservation of still-viable companies. This was revised in 2006 to allow creditors to request judicial liquidation, which replaces the previous forced auctioning option. Now, inventories are valued, creditors’ rights are considered, and either a direct sale takes place within two months or all assets are assigned to creditors based on their share of the company’s liabilities. The insolvency regime for companies was further revised in 2010 to make proceedings more flexible and allow debtors to enter into a long-term payment agreement with creditors, giving the company a chance to recover and continue operating. Bankruptcy is not criminalized in Colombia. In 2013, a bankruptcy law for individuals whose debts surpass 50 percent of their assets value entered into force.
Restructuring proceedings aim to protect the debtors from bankruptcy. Once reorganization has begun, creditors cannot use collection proceedings to collect on debts owed prior to the beginning of the reorganization proceedings. All existing creditors at the moment of the reorganization are recognized during the proceedings if they present their credit. Foreign creditors, equity shareholders (including foreign equity shareholders), and holders of other financial contracts (including foreign contract holders) are recognized during the proceeding. Established creditors are guaranteed a vote in the final decision. According to the Doing Business 2020 report Colombia ranked 32nd for resolving insolvency and it takes an average of 1.7 years – the same as OECD high-income countries – to resolve insolvency; the average time in Latin America is 2.9 years.
4. Industrial Policies
The Colombian government offers investment incentives such as income tax exemptions and deductions in specific priority sectors, including the so-called “orange economy” (creative industries), agriculture, and entrepreneurship. In 2020, the government announced additional incentive schemes that aim to attract large investments exceeding USD 350 million and create at least 250 local jobs, facilitate COVID-19 recovery, and generate investments in former conflict municipalities. Investment incentives through free trade agreements between Colombia and other nations include national treatment and most-favored-nation treatment of investors; establishment of liability standards assumed by countries regarding the other nation’s investors, including the minimum standard of treatment and establishment of rules for investor compensation from expropriation; establishment of rules for transfer of capital relating to investment; and specific tax treatment.
The government offers tax incentives to all investors, such as preferential import tariffs, tax exemptions, and credit or risk capital. Some fiscal incentives are available for investments that generate new employment or production in areas impacted by natural disasters and former conflict-affected municipalities. Companies can apply for these directly with participating agencies. Tax and fiscal incentives are often based on regional, sector, or business size considerations. Border areas have special protections due to currency fluctuations in neighboring countries which can impact local economies. National and local governments also offer special incentives, such as tax holidays, to attract specific industries.
The Colombian government introduced a variety of incentives for specific sectors as part of the 2019 tax reform. Among the incentives are:
Income from hotels built, renovated, or extended through January 1, 2029 in municipalities of less than 200,000 inhabitants will be taxed at nine percent for 20 years. The same facilities in larger municipalities will be taxed at nine percent for 10 years.
Income normally taxed at 33 percent that is invested in agricultural projects or orange (creative) economy initiatives will be tax free.
Income from the sale of electric power generated by wind, biomass, solar, geothermal, or tidal movement will be tax free, provided carbon dioxide emission certificates are sold in accordance with the Kyoto Protocol and 50 percent of the income from the certificate sale is invested in social projects benefiting the region where the power was generated.
Foreign investors can participate without discrimination in government-subsidized research programs, and most Colombian government research has been conducted with foreign institutions. Investments or grants to technological research and development projects are fully tax deductible in the year the investment was made. R&D incentives include Value-Added Tax (VAT) exemptions for imported equipment or materials used in scientific, technology, or innovation projects, and qualified investments may receive tax credits.
In a tax reform passed in 2016, the Colombian government created two tax incentives to support investment in the 344 municipalities most affected by the armed conflict (ZOMAC). Small and microbusinesses that invest in ZOMACs and meet a series of other criteria will be exempt from paying any taxes through 2021, pay 25 percent of the general rate through 2024, and 50 percent through 2027. Medium and large-sized businesses will pay 50 percent of their normal taxes through 2021 and 75 percent through 2024. The second component is entitled “works for taxes” (“Obras por Impuestos”), a program through which the private sector can directly fund social investments and infrastructure projects in lieu of paying taxes.
To attract foreign investment and promote the importation of capital goods, the Colombian government uses a number of duty deferral programs. One example is free trade zones (FTZs). While DIAN oversees requests to establish FTZs, the Colombian government is not involved in their operations. Benefits under the FTZ regime include a single 20 percent tax rate (compared to 31 percent normally) and no customs value-added taxes or duties on raw material imports for use in the FTZ. Each FTZ must meet specific investment and direct job creation requirements, depending on their total assets, during the first three years. These incentives were maintained in the 2021 tax reform.
Colombia also has initiated Special Economic Zones for Exports in the municipalities of Buenaventura, Cucuta, Valledupar, and Ipiales to encourage investment. These zones receive the same import benefits of FTZs, and operators are exempt from some payroll taxes and surcharges. Infrastructure projects in the zones are also exempt from some income taxes.
Performance requirements are not imposed on foreigners as a condition for establishing, maintaining, or expanding investments. The Colombian government does not have performance requirements, local employment requirements, or require excessively difficult visa, residency, permission, or work permit requirements for investors. Under the f, Colombia grants substantial market access across its entire services sector.
The SIC, under the Deputy Office for Personal Data Protection, is the Data Protection Authority (DPA) and has the legal mandate to ensure proper data protection. It has defined adequate data protection and responsibilities with respect to international data transfers. The SIC requires data storage facilities that hold personal data to comply with government security and privacy requirements, and data storage companies have one year to register. The SIC enforces the rules on local data storage within the country through audits/investigations and imposed sanctions.
Software and hardware are protected by IPR. There is no obligation to submit source code for registered software.
5. Protection of Property Rights
The 1991 Constitution explicitly protects individual rights against state actions and upholds the right to private property. Secured interests in real property, and to a lesser degree movable property, are recognized and generally enforced after the property is properly registered. In terms of protecting third-party purchasers, existing law is inadequate. The concepts of a mortgage, trust, deed, and other types of liens exist, as does a reliable system of recording such secured interests. Deeds, however, present some legal risk due to the prevalence of transactions that have never been registered with the Public Instruments Registry. According to a survey made shortly before the signing of the FARC peace accord, some eight million hectares of land – 14 percent of the country – had been abandoned or acquired illegally. The government is working to title these plots and has started a formalization program for land restitution. The 2020 Doing Business report ranked Colombia 62nd for ease of registering property.
In Colombia, the granting, registration, and administration of intellectual property rights (IPR) are carried out by four primary government entities. The SIC acts as the Colombian patent and trademark office. The Colombian Agricultural Institute (ICA) is in charge of issuing plant variety protections and data protections for agricultural products. The Ministry of Interior administers copyrights through the National Copyright Directorate (DNDA). The Ministry of Health and Social Protection handles data protection for products registered through INVIMA. Primary responsibility for enforcement resides with the Fiscalia General de la Republica (FGR), DIAN, and the Fiscal and Customs Police (POLFA).
The Intersectoral Intellectual Property Commission (CIPI) serves as the interagency technical body for IPR issues. On June 22, 2021 the Colombian Congress approved the Law 2090 known as the Marrakech Treaty to facilitate access to published works for blind, visually impaired or otherwise disabled persons. On the Beijing Treaty, the Ministry of Interior and Foreign Affairs presented to the Colombian Congress the draft bill 461 of 2021 which seeks to ratify this treaty. As of February 2022 it has been approved in first debate and three other debates remain pending for its final approval. In December 2021 Colombia’s NPD approved Conpes 4066, also known as the “Conpes on IP,” Colombia’s roadmap for leveraging IP rights and facilitating policies for IP protection. Colombia is subject to Andean Community Decision 486 on trade secret protection, which is fully implemented domestically by the Unfair Competition Law of 1996.
Colombia grants utility patents that confer twenty years of protection for inventions, ten years of protection for process and design patents, and five years of protection for data collected during clinical trials. Colombia has been on the U.S. Trade Representative’s Special 301 Watch List every year since 1991, and in 2019 was upgraded from “Priority Watch List” to “Watch List” status.
The CTPA improved standards for the protection and enforcement of a broad range of IPR. Improvements include state-of-the-art protections for digital products such as software, music, text, and videos; stronger protection for U.S. patents, trademarks, and test data; and prevention of piracy and counterfeiting by criminalizing end-use piracy. However, Colombia has outstanding CTPA commitments related to IPR. Colombian officials continue discussing with the United States draft legislation regulating internet service providers on issues such as compulsory takedown of online content and the protection of intermediaries with “safe harbor” provisions for unintentional copyright infringement. The legislation has not yet been introduced to Congress. Colombia has not yet signed the International Union for the Protection of New Varieties of Plants (UPOV 91). Colombia maintains that the existing Andean Community Decision 345 is in effect and equivalent to UPOV 91, but this is not an interpretation shared by the United States. Colombia is a member of the Inter-American Convention for Trademark and Commercial Protection.
Colombia reformed its copyright law under Decree 1915 of July 2018. The bill extends the term of copyright protection, imposes civil liability for circumvention of technological protection measures, and strengthens enforcement of copyright and related rights. On July 31, 2019 the Colombian Constitutional Court issued ruling C-345-19 that recognizes the constitutionality of statutory damages for copyright infringement.
Colombia’s success combating counterfeiting and IPR violations, and enforcement in the digital space, remains limited. In March 2021, DNDA imposed an order requiring internet providers to block IP addresses used to transmit pirated digital content, the first such order in Colombia. Industry advocates called this an important precedent for combatting IP theft. A 2015 law increased penalties for those involved in running contraband, but more effective implementation is needed. Colombian authorities coordinate with the United States on investigations, but key agencies often do not have the requisite authorities or sufficient numbers of trained personnel to effectively inspect and seize merchandise and to investigate smugglers and counterfeiters. Despite high-profile seizures of counterfeit goods, such goods remain widely available in Colombia’s “San Andresitos” markets. No Colombian markets are listed in the U.S. Trade Representative’s (USTR) Review of Notorious Markets for Counterfeiting and Piracy.
U.S. stakeholders continue to raise concerns about Colombia’s regulation of the pharmaceutical sector, where regulatory barriers, a focus by the government on cost containment over health outcomes, delays in processing pharmaceutical registrations at INVIMA, and Congressional proposals to limit pharmaceutical IP restrict market entry and reduce the attractiveness of Colombia as a place to invest and do business.
Colombia is on the Watch List in USTR’s 2021 Special 301 Report.
For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.
6. Financial Sector
The Colombian Securities Exchange (BVC after its acronym in Spanish) is the main forum for trading and securities transactions in Colombia. The BVC is a private company listed on the stock market. The BVC, as a multi-product and multi-market exchange, offers trading platforms for the stock market, along with fixed income and standard derivatives. The BVC also provides listing services for issuers.
Foreign investors can participate in capital markets by negotiating and acquiring shares, bonds, and other securities listed by the Foreign Investment Statute. These activities must be conducted by a local administrator, such as trust companies or Financial Superintendence-authorized stock brokerage firms. Direct and portfolio foreign investments must be registered with the Central Bank. Foreigners can establish a bank account in Colombia as long as they have a valid visa and Colombian government identification.
The market has sufficient liquidity for investors to enter and exit sizeable positions. The central bank respects IMF Article VIII and does not restrict payments and transfers for current international transactions. The financial sector in Colombia offers credit to nationals and foreigners that comply with the requisite legal requirements.
In 2005, Colombia consolidated supervision of all aspects of the banking, financial, securities, and insurance sectors under the Financial Superintendence. Colombia has an effective regulatory system that encourages portfolio investment, and the country’s financial system is strong by regional standards. Commercial banks are the principal source of long-term corporate and project finance in Colombia. Loans rarely have a maturity in excess of five years. Unofficial private lenders play a major role in meeting the working capital needs of small and medium-sized companies. Only the largest of Colombia’s companies participate in the local stock or bond markets, with the majority meeting their financing needs either through the banking system, by reinvesting their profits, or through credit from suppliers.
Colombia’s central bank is charged with managing inflation and unemployment through monetary policy. Foreign banks are allowed to establish operations in the country and must set up a Colombian subsidiary in order to do so. The Colombian central bank has a variety of correspondent banks abroad.
In 2012, Colombia began operating a sovereign wealth fund called the Savings and Stabilization Fund (FAE), which is administered by the central bank with the objective of promoting savings and economic stability in the country. Colombia is not a member of the International Forum of Sovereign Wealth Funds. The fund can administer up to 30 percent of annual royalties from the extractives industry. Its primary investments are in fixed securities, sovereign and quasi-sovereign debt (both domestic and international), and corporate securities, with just eight percent invested in stocks. The government transfers royalties not dedicated to the fund to other internal funds to boost national economic productivity through strategic projects, technological investments, and innovation. In 2020, the government authorized up to 80 percent of the FAE’s USD 3.9 billion in assets to be lent to the Fund for the Mitigation of Emergencies (FOME) created in response to the pandemic.
11. Labor Policies and Practices
An OECD economic survey of Colombia was published in February 2022. The report mentions Colombia’s economy has recovered well from the COVID-19 crisis, but that the labor market remains weak. Colombia has one of the highest levels of poverty, income inequality, and labor market informality in Latin America. At the end of 2021, 46.8 percent of the urban workforce was working in the informal economy, with the national average hovering around 60 percent. The overall unemployment rate was 13.7 percent. The Colombian workforce has a wide range of skills, including managerial-level employees who are often bilingual, but faces large skills gaps and challenges in labor productivity. Colombia has made strong efforts to incorporate Venezuelan migrants into the formal economy, most notably the February 2021 announcement of ten-year Temporary Protected Status for the country’s estimated 1.8 million Venezuelan migrants.
Labor rights in Colombia are set forth in its Constitution, the Labor Code, the Procedural Code of Labor and Social Security, sector-specific legislation, and ratified international conventions, which are incorporated into national legislation. Colombia’s Constitution guarantees freedom of association and provides for collective bargaining and the right to strike (with some exceptions). It also addresses forced labor, child labor, trafficking, discrimination, protections for women and children in the workplace, minimum wages, working hours, skills training, and social security. Colombia has ratified all eight of the International Labor Organization’s (ILO’s) fundamental labor conventions, and all are in force. Colombia has also ratified conventions related to hours of work, occupational health and safety, and minimum wage.
The 1991 Constitution protects the right to constitute labor unions. Pursuant to Colombia’s labor law, any group of 25 or more workers, regardless of whether they are employees of the same company or not, may form a labor union. Employees of companies with fewer than 25 employees may affiliate themselves with other labor unions. Colombia has a low trade union density (9.5 percent). Where unions are present, multiple affiliation sometimes poses challenges for collective bargaining. The largest and most influential unions are composed mostly of public-sector employees, particularly of the majority state-owned oil company and the state-run education sector. Only 6.2 percent of all salaried workers are covered by collective bargaining agreements (CBAs), according to the OECD. The Ministry of Labor has expressed commitment to working on decrees to incentivize sectoral collective bargaining and to strengthen union representation within companies and regulate strikes in the essential public services sector. Strikes, when held in accordance with the law, are recognized as legal instruments to obtain better working conditions, and employers are prohibited from using strike-breakers at any time during the course of a strike. After 60 days of strike action, the parties are subject to compulsory arbitration. Strikes are prohibited in certain “essential public services,” as defined by law, although Colombia has been criticized for having an overly-broad interpretation of “essential.”
Foreign companies operating in Colombia must follow the same hiring rules as national companies, regardless of the origin of the employer and the place of execution of the contract. No labor laws are waived to attract or retain investment. In 2010, Law 1429 eliminated the mandatory proportion requirement for foreign and national personnel; 100 percent of the workforce, including the board of directors, can be foreign nationals. Labor permits are not required in Colombia, except for minors of the minimum working age. Foreign employees have the same rights as Colombian employees. Employers may use temporary service agencies to subcontract additional workers for peaks of production. Employers must receive advance permission from the Ministry of Labor before undertaking permanent layoffs. The Ministry of Labor typically does not grant permission to lay off workers who have enhanced legal protections (for example, those with work-related injuries or union leaders). The Ministry of Labor has committed to address using temporary or contract workers for jobs that are not temporary in nature, although significant challenges remain in this area.
Reputational risks to investors come with a lack of effective and systematic enforcement of labor law, especially in rural sectors. Homicides of unionists (social leaders) remain an ongoing concern. In January 2017, the U.S. Department of Labor issued a public report of review in response to a submission filed under Chapter 17 (the Labor Chapter) of the CTPA by the American Federation of Labor and Congress of Industrial Organizations and five Colombian workers’ organizations that alleged failures on the part of the government to protect labor rights in line with CTPA commitments. In October 2021, the Department of Labor published the second periodic review of progress to address issues identified in the submission report. For these reports and additional information on labor law enforcement see:
The Egyptian government has made efforts to improve the transparency of government policy and to support a fair, competitive marketplace. Nevertheless, improving government transparency and consistency has proven difficult, and reformers have faced strong resistance from entrenched bureaucratic and private interests. Significant obstacles continue to hinder private investment, including the reportedly arbitrary imposition of bureaucratic impediments and the length of time needed to resolve them. Nevertheless, the impetus for positive change driven by the government reform agenda augurs well for improvement in policy implementation and transparency.
Enactment of laws is the purview of the Parliament, while executive regulations are the domain of line ministries. Under the Constitution, the president, the cabinet, and any member of parliament can present draft legislation. After submission, parliamentary committees review and approve legislation, including any amendments. Upon parliamentary approval, a judicial body reviews the constitutionality of any legislation before referring it to the president for his approval.
Although notice and full drafts of legislation are typically printed in the Official Gazette (similar to the Federal Register in the United States), there is no centralized online location where the government publishes comprehensive details about regulatory decisions or their summaries, and in practice consultation with the public is limited. In recent years, the Ministry of Trade and other government bodies have circulated draft legislation among concerned parties, including business associations and labor unions. This has been a welcome change from previous practice, but is not yet institutionalized across the government.
Accounting, legal, and regulatory procedures are transparent and consistent with international norms. The Financial Regulatory Authority (FRA) supervises and regulates all non-banking financial markets and instruments, including capital markets, futures exchanges, insurance activities, mortgage finance, financial leasing, factoring, securitization, and microfinance. It issues rules that facilitate market efficiency and transparency. FRA has issued legislation and regulatory decisions on non-banking financial laws, which govern FRA’s work and the entities under its supervision. (http://www.fra.gov.eg/jtags/efsa_en/index_en.jsp )
The criteria for awarding government contracts and licenses are made available when bid rounds are announced. The process actually used to award contracts is broadly consistent with the procedural requirements set forth by law. Further, set-aside requirements for small and medium-sized enterprise (SME) participation in GoE procurement are increasingly highlighted. The FRA publishes key laws and regulations to the following website:
The Parliament and the independent “Administrative Control Authority” both ensure the government’s commitment to follow administrative processes at all levels of government.
The cabinet develops and submits proposed regulations to the president following discussion and consultation with the relevant ministry and informal consultation with other interest groups. Based on the recommendations provided in the proposal, including recommendations by the presidential advisors, the president issues “Presidential Decrees” that function as implementing regulations. Presidential decrees are published in the Official Gazette for enforcement.
The degree to which ministries and government agencies responsible for drafting, implementing, or enforcing a given regulation coordinate with other stakeholders varies widely. Although some government entities may attempt to analyze and debate proposed legislation or rules, there are no laws requiring scientific studies or quantitative regulatory impact analyses prior to finalizing or implementing new laws or regulations. Not all issued regulations are announced online, and not all public comments received by regulators are made public.
The government made its budget documents widely and easily accessible to the general public, including online. Budget documents did not include allocations to military state-owned enterprises, nor allocations to and earnings from state-owned enterprises. Information on government debt obligations was publicly available online, but up-to-date and clear information on state-owned enterprise debt guaranteed by the government was not available. According to information the Central Bank has provided to the World Bank, the lack of information available about publicly guaranteed private-sector debt meant that this debt was generally recorded as private-sector non-guaranteed debt, thus potentially obscuring some contingent debt liabilities.
In general, international standards are the main reference for Egyptian standards. According to the Egyptian Organization for Standardization and Quality Control, approximately 7,000 national standards are aligned with international standards in various sectors. In the absence of international standards, Egypt uses other references referred to in Ministerial Decrees No. 180/1996 and No. 291/2003, which stipulate that in the absence of Egyptian standards, the producers and importers may use European standards (EN), U.S. standards (ANSI), or Japanese standards (JIS).
Egypt is a member of the WTO, participates actively in various committees, and notifies technical regulations to the WTO Committee on Technical Barriers to Trade. Egypt ratified the Trade Facilitation Agreement (TFA) in June 2017 (Presidential decree No. 149/2017) and deposited its formal notification to the WTO on June 24, 2019. Egypt notified indicative and definitive dates for implementing Category B and C commitments on June 20, 2019, but to date has not notified dates for implementing Category A commitments. In August 2020, the Egyptian Parliament passed a new Customs Law, Law 207 of 2020, that includes provisions for key TFA reforms, including advance rulings, separation of release, a single-window system, expedited customs procedures for authorized economic operators, post-clearance audits, and e-payments.
Egypt’s legal system is a civil codified law system based on the French model. If contractual disputes arise, claimants can sue for remedies through the court system or seek resolution through arbitration. Egypt has written commercial and contractual laws. The country has a system of economic courts, specializing in private-sector disputes, which have jurisdiction over cases related to economic and commercial matters, including intellectual property disputes. The judiciary is set up as an independent branch of the government.
Regulations and enforcement actions can be appealed through Egypt’s courts, though appellants often complain about the lengthy judicial process, which can often take years. To enforce judgments of foreign courts in Egypt, the party seeking to enforce the judgment must obtain an exequatur (a legal document issued by governments allowing judgements to be enforced). To apply for an exequatur, the normal procedures for initiating a lawsuit in Egypt must be satisfied. Moreover, several other conditions must be satisfied, including ensuring reciprocity between the Egyptian and foreign country’s courts, and verifying the competence of the court rendering the judgment.
Judges in Egypt enjoy a high degree of public trust, according to Egyptian lawyers and opinion polls, and are the designated monitors for general elections. The Judiciary is proud of its independence and can point to a number of cases where a judge has made surprising decisions that run counter to the desires of the regime. The judge’s ability to interpret the law can sometimes lead to an uneven application of justice.
No specialized court exists for foreign investments.
In 2017, the Parliament also passed the Industrial Permits Act, which reduced the time it takes to license a new factory by mandating that the Industrial Development Authority (IDA) respond to a request for a license within 30 days of the request being filed. As of February 2020, new regulations allow IDA regional branch directors or their designees to grant conditional licenses to industrial investors until other registration requirements are complete.
In 2016, the Import-Export Law was revised to allow companies wishing to register in the Import Registry to be 51 percent owned and managed by Egyptians; formerly the law required 100 percent Egyptian ownership and management. Later in 2016, the inter-ministerial Supreme Investment Council also announced seventeen presidential decrees designed to spur investment or resolve longstanding issues. These include:
Forming a “National Payments Council” that will work to restrict the handling of FX outside the banking sector;
Producers of agricultural crops that Egypt imports or exports will get tax exemptions;
Five-year tax exemptions for manufacturers of “strategic” goods that Egypt imports or exports;
Five-year tax exemptions for agriculture and industrial investments in Upper Egypt; and
Begin tendering land with utilities for industry in Upper Egypt for free as outlined by the Industrial Development Authority.
The Egyptian Competition Law (ECL), Law 3 of 2005, provides the framework for the government’s competition rules and anti-trust policies. The ECL prohibits the abuse of dominant market positions, which it defines as a situation in which a company’s market share exceeds 25 percent and in which the company is able to influence market prices or volumes regardless of competitors’ actions. The ECL prohibits vertical agreements or contracts between purchasers and suppliers that are intended to restrict competition, and also forbids agreements among competitors such as price collusion, production-restriction agreements, market sharing, and anti-competitive arrangements in the tendering process. The ECL applies to all types of persons or enterprises carrying out economic activities, but includes exemptions for some government-controlled public utilities. In early 2019, the Egyptian Parliament endorsed a number of amendments to the ECL, including controls on price hikes and prices of essential products and higher penalties for violations.
In addition to the ECL, other laws cover various aspects of competition policy. The Companies Law (Law 159/1981) contains provisions on mergers and acquisitions; the Law of Supplies and Commerce (Law 17 of 1999) forbids competition-reducing activities such as collusion and hoarding; and the Telecommunications Law (Law 10 of 2003), the Intellectual Property Law (Law 82 of 2002), and the Insurance Supervision and Control Law (Law 10 of 1981) also include provisions on competition.
The Egyptian Competition Authority (ECA) is responsible for protecting competition and prohibiting the monopolistic practices defined within the ECL. The ECA has the authority to receive and investigate complaints, initiate its own investigations, and take decisions and necessary steps to stop anti-competitive practices. The ECA’s enforcement powers include conducting raids; using search warrants; requesting data and documentation; and imposing “cease and desist orders” on violators of the ECL. The ECA’s enforcement activities against government entities are limited to requesting data and documentation, as well as advocacy.
Egypt’s Investment Incentives Law provides guarantees against nationalization or confiscation of investment projects under the law’s domain. The law also provides guarantees against seizure, requisition, blocking, and placing of assets under custody or sequestration. It offers guarantees against full or partial expropriation of real estate and investment project property. The U.S.-Egypt Bilateral Investment Treaty also provides protection against expropriation. Private firms are able to take cases of alleged expropriation to court, but the judicial system can take several years to resolve a case.
Egypt passed a Bankruptcy Law (Law 11 of 2018) in January 2018, which was designed to speed up the restructuring of troubled companies and settlement of their accounts. It also replaced the threat of imprisonment with fines in cases of bankruptcy. As of July 2020, the Egyptian government was considering but had not yet implemented amendments to the 2018 law that would allow debtors to file for bankruptcy protection, and would give creditors the ability to determine whether debtors could continue operating, be placed under administrative control, or be forced to liquidate their assets.
In practice, the paperwork involved in liquidating a business remains convoluted and protracted; starting a business is much easier than shutting one down. Bankruptcy is frowned upon in Egyptian culture, and many businesspeople still believe they may be found criminally liable if they declare bankruptcy.
4. Industrial Policies
Green economy and climate change incentives:
In March 2022, the GoE announced in March 2022 a series of incentives for companies undertaking green projects and investments, including:
The ability to deduct between 30 and 50 percent of investment costs from taxes for green hydrogen and green ammonia production, storage, and export, and for manufacturing plastics-alternatives;
Projects in the Suez Canal Economic Zone, the New Administrative Capital, and Upper Egypt are eligible for the largest tax breaks;
Companies involved in other green and renewable energy projects are eligible for other non-tax incentives that the 2017 Investment Law authorizes, but did not provide further details; and
Projects in green hydrogen, green ammonia, electric vehicle manufacturing and charging, plastics alternatives, and waste management will be fast-tracked through the approvals and permit process, with a 20 working day window for making decisions on new investment and project proposals.
The 2017 Investment Law
The Investment Law (Law 72 of 2017) gives multiple incentives to investors as described below. In August 2019, President Sisi ratified amendments to the Investment Law that allow its incentive programs to apply to expansions of existing investment projects in addition to new investments.
General Incentives:
All investment projects subject to the provisions of the new law enjoy the general incentives provided by it.
Investors are exempted from the stamp tax, notary fees, registration of the Memorandum of Incorporation of the companies, credit facilities, and mortgage contracts associated with their business for five years from the date of registration in the Commercial Registry, in addition to the registration contracts of the lands required for a company’s establishment.
If the establishment is under the provisions of the new investment law, it will benefit from a two-percent unified custom tax over all imported machinery, equipment, and devices required for the set-up of such a company.
Special Incentive Programs:
Investment projects established within three years of the date of the issuance of the Investment Law (Law 72 of 2017) will enjoy a perpetual deduction from their net profit subject to the income tax;
Fifty percent deduction of depreciated investment costs from taxes, infrastructure fees, and cost of lands for projects in regions the government has identified as most in need of development, as well as designated projects in Suez Canal Special Economic Zone and the “Golden Triangle” along the Red Sea between the cities of Safaga, Qena, and El Quseer; or
Thirty percent deduction of depreciated investment costs from taxes, infrastructure fees, and land costs for projects elsewhere in Egypt; and
Provided that such deduction shall not exceed 80 percent of the paid-up capital of the company, the incentive could be utilized over a maximum of seven years.
Additional Incentive Program:
The Cabinet of Ministers may decide to grant additional incentives for investment projects in accordance with specific rules and regulations as follows:
The establishment of special customs ports for exports and imports of the investment projects.
The state may incur part of the costs of the technical training for workers.
Free allocation of land for a few strategic activities may apply.
The government may bear in full or in part the costs incurred by the investor to invest in utility connections for the investment project.
The government may refund half the price of the land allocated to industrial projects in the event of starting production within two years from receiving the land.
Other Incentives related to Free Zones according to Investment Law 72of 2017:
Exemption from all taxes and customs duties.
Exemption from all import/export regulations.
The option to sell a certain percentage of production domestically if customs duties are paid.
Limited exemptions from labor provisions.
All equipment, machinery, and essential means of transport (excluding sedan cars) necessary for business operations are exempted from all customs, import duties, and sales taxes.
All licensing procedures are handled by GAFI. To remain eligible for benefits, investors operating inside the free zones must export more than 50 percent of their total production.
Manufacturing or assembly projects pay an annual charge of one percent of the total value of their products excluding all raw materials. Storage facilities are to pay one percent of the value of goods entering the free zones, while service projects pay one percent of total annual revenue.
Goods in transit to specific destinations are exempt from any charges.
Other Incentives related to the Suez Canal Economic Zone (SCZone):
100 percent foreign ownership of companies allowed.
100 percent foreign control of import/export activities allowed.
Imports are exempted from customs duties and sales tax.
Customs duties on exports to Egypt imposed on imported components only, not the final product.
Fast-track visa services.
A full service one-stop shop for registration and licensing.
Allowing enterprises access to the domestic market; duties on sales to domestic market will be assessed on the value of imported inputs only.
The Tenders Law (Law 89 of 1998) requires the government to consider both price and best value in awarding contracts and to issue an explanation for refusal of a bid. However, the law contains preferences for Egyptian domestic contractors, who are accorded priority if their bids do not exceed the lowest foreign bid by more than 15 percent.
The Ministry of Industry & Foreign Trade and the Ministry of Finance’s Decree 719 of 2007 provides incentives for industrial projects in the governorates of Upper Egypt (Upper Egypt refers to governorates in southern Egypt). The decree provides an incentive of 15,000 EGP (approx. $940) for each job opportunity created by the project, on the condition that the investment costs of the project exceed 15 million EGP (approx. $940,000). The decree can be implemented on both new and ongoing projects.
Public and private free-trade zones are authorized under GAFI’s Investment Incentive Law 72 of 2017. Free zones are located within the national territory, but are considered to be outside Egypt’s customs boundaries, granting firms doing business within them more freedom on transactions and exchanges. Companies producing largely for export (normally 80 percent or more of total production) may be established in free-trade zones and operate using foreign currency. Free-trade zones are open to investment by foreign or domestic investors. Companies operating in free-trade zones are exempted from sales taxes or taxes and fees on capital assets and intermediate goods. The Legislative Package for the Stimulation of Investment, issued in 2015, stipulated a one-percent duty paid on the value of commodities upon entry for storage projects and a one-percent duty upon exit for manufacturing and assembly projects.
There are currently nine public free trade zones in operation in the following locations: Alexandria; Damietta; Ismailia; Qeft; Media Production City; Nasr City; Port Said; Shebin el Kom; and Suez. Private free-trade zones may also be established with a decree by GAFI but are usually limited to a single project. Export-oriented industrial projects are given priority. There is no restriction on foreign ownership of capital in private free zones.
The Special Economic Zones (SEZ) Law (Law 83 of 2002) allows establishment of special zones for industrial, agricultural, or service activities designed specifically with the export market in mind. The law allows firms operating in these zones to import capital equipment, raw materials, and intermediate goods duty free. Companies established in the SEZs are also exempt from sales and indirect taxes and can operate under more flexible labor regulations. The first SEZ was established in the northwest Gulf of Suez.
Investment Law (Law 72 of 2017) authorized creation of investment zones with Prime Ministerial approval. The government regulates these zones through a board of directors, but the zones are established, built, and operated by the private sector. The government does not provide any infrastructure or utilities in these zones. Investment zones enjoy the same benefits as free zones in terms of facilitation of license-issuance, ease of dealing with other agencies, etc., but are not granted the incentives and tax/custom exemptions enjoyed in free zones. Projects in investment zones pay the same tax/customs duties applied throughout Egypt. The aim of the law is to assist the private sector in diversifying its economic activities. There are currently five investment zones located in Cairo, Giza, and Ismailia, and in 2019 GAFI approved the development of an additional 12 investment zones in the Alexandria, Dakhalia, Damietta, Fayoum, Giza, Qalyubia, and Sharkia governorates.
The Suez Canal Economic Zone (http://www.sczone.com.eg/English/Pages/default.aspx), a major industrial and logistics services hub announced in 2014, includes upgrades and renovations to ports located along the Suez Canal corridor, including West and East Port Said, Ismailia, Suez, Adabiya, and Ain Sokhna. The Egyptian government has invited foreign investors to take part in the projects, which are expected to be built in several stages, the first of which was scheduled to be completed by mid-2020. Reported areas for investment include maritime services like ship repair services, bunkering, vessel scrapping and recycling; industrial projects, including pharmaceuticals, food processing, automotive production, consumer electronics, textiles, and petrochemicals; IT services such as research and development and software development; renewable energy; and mixed use, residential, logistics, and commercial developments.
Egypt has rules on national percentages of employment and difficult visa and work permit procedures. The government plans to phase out visas for unskilled workers, but as yet has not done so. For most other jobs, employers may hire foreign workers on a temporary six-month basis, but must also hire two Egyptians to be trained to do the job during that period. Only jobs where it is not possible for Egyptians to acquire the requisite skills will remain open to foreign workers. The application of these regulations is inconsistent. The Labor Law allows Ministers to set the maximum percentage of foreign workers that may work in companies in a given sector. There are no such sector-wide maximums for the oil and gas industry, but individual concession agreements may contain language establishing limits or procedures regarding the proportion of foreign and local employees.
No performance requirements are specified in the Investment Incentives Law, and the ability to fulfill local content requirements is not a prerequisite for approval to set up assembly projects. In many cases, however, assembly industries still must meet a minimum local content requirement in order to benefit from customs tariff reductions on imported industrial inputs.
Decree 184 of 2013 allows for the reduction of customs tariffs on intermediate goods if the final product has a certain percentage of input from local manufacturers, beginning at 30 percent local content. As the percentage of local content rises, so does the tariff reduction, reaching up to 90 percent if the amount of local input is 60 percent or above. Exporters receive additional subsidies if they use a greater portion of local raw materials. In certain cases, a minister can grant tariff reductions of up to 40 percent in advance.
Prime Minister issued Decision 3053 of 2019 regarding the formation of joint committees in the inspection yards at each customs port. These committees include representatives of the customs authority and the concerned authorities and bodies according to type of goods. The committees are responsible for completing inspection and control procedures for imported or exported goods within a period not exceeding three working days from the date of the customs declaration was registered.
Manufacturers wishing to export under trade agreements between Egypt and other countries must complete certificates of origin and satisfy the local content requirements contained therein. Oil and gas exploration concessions, which do not fall under the Investment Incentives Law, have performance standards specified in each individual agreement, which generally include the drilling of a specific number of wells in each phase of the exploration period stipulated in the agreement.
Egypt does not impose localization barriers on ICT firms. Egypt’s Personal Data Protection Act (Law 151 of 2020), signed into law in July 2020, will require licenses for cross-border data transfers once the law’s executive regulations are finalized, but it will not impose any data localization requirements. Similarly, Egypt does not make local production a requirement for market access, does not have local content requirements, and does not impose forced technology or intellectual property transfers as a condition of market access. But there are exceptions where the government has attempted to impose controls by requesting access to a company’s servers located offshore, or requested servers to be located in Egypt and thus under the government’s control.
5. Protection of Property Rights
The Egyptian legal system provides protection for real and personal property. Laws on real estate ownership are complex and titles to real property may be difficult to establish and trace.
The National Title Registration Program introduced by the Ministry of State for Administrative Development has been implemented in nine areas within Cairo. This program is intended to simplify property registration and facilitate easier mortgage financing. Real estate registration fees, long considered a major impediment to development of the real estate sector, are capped at no more than 2,000 EGP (approximately $120), irrespective of the property value.
Foreigners are limited to ownership of two residences in Egypt, and specific procedures are required for purchasing real estate in certain geographical areas.
The mortgage market is still undeveloped in Egypt, and in practice most purchases are still conducted in cash. Real Estate Finance Law 148/2001 authorized both banks and non-bank mortgage companies to issue mortgages. The law provides procedures for foreclosure on property of defaulting debtors, and amendments passed in 2004 allow for the issuance of mortgage-backed securities. According to the regulations, banks can offer financing in foreign currency of up to 80 percent of the value of a property.
Presidential Decree 17 of 2015 permitted the government to provide land free of charge, in certain regions only, to investors meeting certain technical and financial requirements. In order to take advantage of this provision companies must provide cash collateral for five years following commencement of either production (for industrial projects) or operation (for all other projects).
The ownership of land by foreigners is governed by three laws: Law 15 of 1963, Law 143 of 1981, and Law 230 of 1996. Law 15 of 1963 stipulates that no foreigners, whether natural or juristic persons, may acquire agricultural land. Law 143 of 1981 governs the acquisition and ownership of desert land. Certain limits are placed on the number of feddans (one feddan is approximately equal to one acre) that may be owned by individuals, families, cooperatives, partnerships and corporations. Partnerships are permitted to own up to 10,000 feddans. Joint stock companies are permitted to own up to 50,000 feddans.
Partnerships and joint stock companies may own desert land within these limits, even if foreign partners or shareholders are involved, provided that at least 51 percent of the capital is owned by Egyptians. Upon liquidation of the company, however, the land must revert to Egyptian ownership. Law 143 defines desert land as the land lying two kilometers outside city borders. Furthermore, non-Egyptians owning non-improved real estate in Egypt must build within a period of five years from the date their ownership is registered by a notary public. Non-Egyptians may only sell their real estate five years after registration of ownership unless the Prime Minister consents to an exemption.
Egypt remains on the Special 301 Watch List in 2022. Egypt’s intellectual property rights (IPR) legislation generally meets international standards, and the government has made progress enforcing those laws and reducing patent application backlogs. In 2020 and 2021, Egypt shut down a number of online illegal streaming websites. Stakeholders note continued challenges with widespread counterfeiting, opaque patent and trademark examination criteria, and the lack of an effective mechanism for the early resolution of potential patent disputes.
Multinational pharmaceutical companies in the past have complained that local generic drug-producing companies infringe on their patents. The government has not yet established a system linking pharmaceutical marketing applications with patent licenses, and as a result permits for the sale of pharmaceuticals are generally issued without first cross-checking patent filings.
Decree 251 of 2020, issued in January 2020, established a ministerial committee to review petitions for compulsory patent licenses. As of March 2022, the committee has not received any compulsory patent petitions, and the committee has not met or taken any actions. According to Egypt’s 2002 IPR Law (Law 82 of 2002), which allows for compulsory patent licenses in some cases, the committee has the power to issue compulsory patent licenses according to a number of criteria set forth in the law; to determine financial remuneration for the original patent owners; and to approve the expropriation of the patents.
Book, music, and entertainment software piracy is prevalent in Egypt, and a significant portion of the piracy takes place online. American film studios represented by the Motion Pictures Association of America are concerned about the illegal distribution of American movies on regional satellite channels.
Eight GoE ministries have the responsibility to oversee IPR concerns: Supply and Internal Trade for trademarks; Higher Education and Research for patents; Culture for copyrights; Agriculture for plants; Communications and Information Technology for copyright of computer programs; Interior for combatting IPR violations; Customs for border enforcement; and Trade and Industry for standards and technical regulations. Article 69 of Egypt’s 2014 Constitution mandates the establishment of a “specialized agency to uphold [IPR] rights and their legal protection.” A National Committee on IPR was established to address IPR matters until a permanent body is established. All IPR stakeholders are represented in the committee, and members meet every two months to discuss issues. The National Committee on IPR is chaired by the Ministry of Foreign Affairs and reports directly to the Prime Minister.
The Egyptian Customs Authority (ECA) handles IPR enforcement at the national border and the Ministry of Interior’s Department of Investigation handles domestic cases of illegal production. The ECA cannot act unless the trademark owner files a complaint. ECA’s customs enforcement also tends to focus on protecting Egyptian goods and trademarks. The ECA is taking steps to adopt the World Customs Organization’s (WCO) Interface Public-Members platform, which allows customs officers to detect counterfeit goods by scanning a product’s barcode and checking the WCO trademark database system.
For additional information about treaty obligations and points of contact at local offices, please see WIPO’s country profiles at http://wipo.int/directory/en/.
IPR Contact at Embassy Cairo:
Elizabeth Stratton
Trade & Investment Officer
20-2-2797-2735 StrattonEC@state.gov
6. Financial Sector
To date, high returns on Egyptian government debt have crowded out Egyptian investment in productive capacity. As of February 2022, loans to the government and government-related entities accounted for 67 percent of banks’ assets, and Egypt’s debt-to-GDP ratio was 91.4 percent at the end of 2021. Meanwhile, consistently positive and relatively high real interest rates have attracted large foreign capital inflows since 2017, most of which has been volatile portfolio capital. Foreign investors sold $1.19 billion of Egyptian treasury bonds following Russia’s full-scale invasion of Ukraine in February 2022.
The Egyptian Stock Exchange (EGX) is Egypt’s registered securities exchange. Some 246 companies were listed on the EGX, including Nilex, as of February 2022. There were more than 3.3 million investors registered to trade on the exchange in July 2021. Stock ownership is open to foreign and domestic individuals and entities. The Government of Egypt issues dollar-denominated and Egyptian Pound-denominated debt instruments, for which ownership is open to foreign and domestic individuals and entities. Foreign investors conducted 18.3 percent of sales on the EGX in 2021. In September 2020, the GoE issued the region’s first sovereign green bonds with a value of $750 million. The GoE issued Eurobonds worth $11.75 billion in 2020 and 2021, and issued its first $500 million Japanese Yen-dominated bond in March 2022. The government has announced its intention to issue its first sovereign sukuk bonds and additional green bonds during the remainder of 2022.
The Capital Market Law 95 of 1992, along with Banking Law 94 that President Sisi ratified in September 2020, constitute the primary regulatory frameworks for the financial sector. The law grants foreigners full access to capital markets, and authorizes establishment of Egyptian and foreign companies to provide underwriting of subscriptions, brokerage services, securities and mutual funds management, clearance and settlement of security transactions, and venture capital activities. The law specifies mechanisms for arbitration and legal dispute resolution and prohibits unfair market practices. Law 10 of 2009 created the Egyptian Financial Supervisory Authority (EFSA) and brought the regulation of all non-banking financial services under its authority. In 2017, EFSA became the Financial Regulatory Authority (FRA).
Settlement of transactions takes one day for treasury bonds and two days for stocks. Although Egyptian law and regulations allow companies to adopt bylaws limiting or prohibiting foreign ownership of shares, virtually no listed stocks have such restrictions. A significant number of the companies listed on the exchange are family-owned or -dominated conglomerates, and free trading of shares in many of these ventures, while increasing, remains limited. Companies are de-listed from the exchange if not traded for six months.
Prior to November 2020, foreign companies listing on the EGX had to possess minimum capital of $100 million. With the FRA’s passage of new rules, foreign companies joining the EGX must now meet lesser requirements matching those for Egyptian companies: $6.4 million (100 million EGP) for large companies and between $63,000 and $6.4 million (1-100 million EGP) for smaller companies, depending on their size. Foreign businesses are only eligible for these lower minimum capital requirements if the EGX is their first exchange and if they attribute more than 50 percent of their shareholders’ equites, revenues, and assets to Egyptian subsidiary companies.
A capital gains tax of 10 percent on Egyptian tax residents came into force in January 2022 after more than 6 years of suspension, then it was decreased in March to 5 percent for two years. The rate will rise to 7.5 percent once this period ends. Capital increases and share-swaps between listed and unlisted companies will not be taxed. Non-tax residents and foreigners are permanently tax-exempt. The government also set the stamp tax on stock market transactions by non-tax residents at 0.125 percent and at 0.05 percent for tax residents on unlisted securities. Tax residents are exempted from stamp tax on listed securities.
Foreign investors can access Egypt’s banking system by opening accounts with local banks and buying and selling all marketable securities with brokerages. The government has repeatedly emphasized its commitment to maintaining the profit repatriation system to encourage foreign investment in Egypt, especially since the pound flotation and implementation of the IMF loan program in November 2016. The current system for profit repatriation by foreign firms requires sub-custodian banks to open foreign and local currency accounts for foreign investors (global custodians), which are exclusively maintained for stock exchange transactions. The two accounts serve as a channel through which foreign investors process their sales, purchases, dividend collections, and profit repatriation transactions using the bank’s posted daily exchange rates. The system is designed to allow for settlement of transactions in fewer than two days, though in practice some firms have reported significant delays in repatriating profits due to problems with availability. Foreign firms and individuals continue to report delays in repatriating funds and problems accessing hard currency for the purpose of repatriating profits.
The Egyptian credit market, open to foreigners, is vibrant and active. Repatriation of investment profits has become much easier, as there is enough available hard currency to execute foreign exchange (FX) trades. Since the flotation of the Egyptian Pound in November 2016, FX trading is considered straightforward, given the re-establishment of the interbank foreign currency trading system. There have been no reports of difficulties executing FX transactions following the CBE’s interest rate hike and currency devaluation in March, 2022.
Thirty-eight banks operate in Egypt, including several foreign banks. The CBE has not issued a new commercial banking license since 1979. The only way for a new commercial bank, whether foreign or domestic, to enter the market (except as a representative office) is to purchase shares in an existing bank. According to the CBE, banks operating in Egypt held nearly $448 billion (8.6 trillion EGP) in total assets as of December 2021, generating a total profit of $6.8 billion with the five largest banks generating 74 percent, or $5 billion (79 billion EGP).
Egypt’s banking sector is generally regarded as well-capitalized, due in part to its deposit-based funding structure and ample liquidity, especially since the flotation and restoration of the interbank market. The CBE declared that 3.5 percent of the banking sector’s loans were non-performing by December 2021. However, since 2011, a high level of exposure to government debt, accounting for two-thirds of banks’ assets as of February 2022, has reduced the diversity of bank balance sheets and crowded out domestic investment. Moody’s and S&P consider Egypt’s banking system to be stable, although S&P classifies it as facing high levels of economic and financial system risk due to its high exposure to sovereign debt and the government’s external funding vulnerabilities. In February 2022, S&P affirmed Egypt’s government issuer rating of B stable due to the government’s relatively low issuance of foreign currency loans and relatively low external government debt.
Benefitting from the nation’s increasing economic stability, Egypt’s banks have enjoyed both ratings upgrades and continued profitability. Banking competition is serving a largely untapped retail segment and the nation’s challenging, but potentially rewarding, small and medium-sized enterprise (SME) segment.
The Central Bank of Egypt (CBE) requires that banks direct 25 percent of their lending to SMEs. Over the past two years, the Central Bank has launched a subsidized loan program worth $16 billion (253 billion EGP) to spur domestic manufacturing, agriculture, and real state development. Also, with only one-third of Egypt’s adult population owning or sharing an account at a formal financial institution (according press and comments from contacts), the banking sector has potential for growth and higher inclusion, which the government and banks discuss frequently. A low median income plays a part in modest banking penetration.
The CBE has taken steps to work with banks and technology companies to expand financial inclusion. The employees of the government, one of the largest employers, must now have bank accounts because salary payment is through direct deposit. The CBE approved new procedures in October 2020 to allow deposits and the opening of new bank accounts with only a government-issued ID, rather than additional documents. The maximum limits for withdrawals and account balances also increased. In July 2020, President Sisi ratified a new Micro, Small and Medium Enterprises (MSMEs) Development Law (Law 152 of 2020) that will provide incentives, tax breaks, and discounts for small, informal businesses willing to register their businesses and begin paying taxes.
As an attempt to keep pace with best practices and international norms, President Sisi ratified a new Banking Law, Law 94 of 2020, in September 2020. The law establishes a National Payment Council headed by the President to move Egypt away from cash and toward electronic payments; establishes a committee headed by the Prime Minister to resolve disputes between the CBE and the Ministry of Finance; establishes a CBE unit to handle complaints of monopolistic behaviors; requires banks to increase their cash holdings to $320 million (5 billion EGP), up from the prior minimum of $32 million (500 million EGP); and requires banks to report deficiencies in their own audits to the CBE.
The chairman of the EGX stated that Egypt is exploring the use of blockchain technologies across the banking community. The FRA will regulate how the banking system adopts the fast-developing blockchain systems into banks’ back-end and customer-facing processing and transactions. The Central Bank developed a national fintech and innovation strategy in March 2019, and the government has issued regulations to incentivize mobile and electronic payments. The Central Bank launched in March 2022 a new mobile application, InstaPay, which allows Egyptian banking customers to perform instant bank and payments transactions. At the end of 2021 Egypt was among the top four African countries for fintech investment, with investments in fintech startups quadrupling between 2020 and 2021, reaching $159 million. According to research firm Magnitt, Egyptian startups received $509 million in venture capital investments in 2021, with a 100 percent year-on-year compound annual growth rate between 2017 and 2021.
Since 2020, the Central Bank has prohibited all dealings with cryptocurrencies: the issuance of them, trading in them, promoting them, and establishing or operating platforms for their trading.
Alternative financial services in Egypt are extensive, given the large informal economy, estimated to account for between 30 and 50 percent of GDP. Informal lending is prevalent, but the total capitalization, number of loans, and types of terms in private finance is less well known.
The 1992 U.S.-Egypt Bilateral Investment Treaty provides for free transfer of dividends, royalties, compensation for expropriation, payments arising out of an investment dispute, contract payments, and proceeds from sales. Prior to reform implementation throughout 2016 and 2017, large corporations had been unable to repatriate local earnings for months at a time, but repatriation of funds is no longer restricted.
The Investment Incentives Law (Law 72 of 2017) stipulates that non-Egyptian employees hired by projects established under the law are entitled to transfer their earnings abroad. Conversion and transfer of royalty payments are permitted when a patent, trademark, or other licensing agreement has been approved under the Investment Law.
Banking Law 94 of 2020 regulates the repatriation of profits and capital. The current system for profit repatriation by foreign firms requires sub-custodian banks to open foreign and local currency accounts for foreign investors (global custodians), which are exclusively maintained for stock-exchange transactions. The two accounts serve as a channel through which foreign investors process their sales, purchases, dividend collections, and profit-repatriation transactions using the bank’s posted daily exchange rates. The system is designed to allow for settlement of transactions in less than two days, though in practice some firms have reported short delays in repatriating profits due to the steps involved in processing.
Egypt’s sovereign wealth fund (SWF), approved by the Cabinet and launched in late 2018, holds 200 billion EGP ($12.5 billion) in authorized capital as of July 2021. The SWF aims to invest state funds locally and abroad across asset classes and manage underutilized government assets. The sovereign wealth fund focuses on sectors considered vital to the Egyptian economy, particularly industry, energy, and tourism, and has established four new sub-funds covering healthcare, financial services, real estate, and infrastructure while plans to establish another two sub-funds for education and technology. The SWF participates in the International Forum of Sovereign Wealth Funds.
11. Labor Policies and Practices
Official statistics put Egypt’s labor force at approximately 29 million, with an official unemployment rate of 7.3 percent at the end of 2020. Women make up 23.8 percent of the Egyptian labor force and have an unemployment rate of 17.8 percent as of late 2021. Accurate figures are difficult to determine and verify given Egypt’s large informal economy, in which some 62 percent of the non-agricultural workforce is engaged, according to International Labor Organization (ILO) estimates.
The government bureaucracy and public sector enterprises are substantially over-staffed compared to the private sector and international norms. According to the World Bank, Egypt has the highest number of government workers per capita in the world, although state statistics agency CAPMAS announced in March 2022 that public sector employment dropped 8.6 percent in 2021 from 2020, or 15 percent from 2017. Businesses highlight a mismatch between labor skills and market demand, despite high numbers of university graduates in a variety of fields. Foreign companies frequently pay internationally competitive salaries to attract workers with valuable skills.
The Unified Labor Law 12/2003 provides comprehensive guidelines on labor relations, including hiring, working hours, termination of employees, training, health, and safety. The law grants a qualified right for employees to strike and stipulates rules and guidelines governing mediation, arbitration, and collective bargaining between employees and employers. Non-discrimination clauses are included, and the law complies with labor-related ILO conventions regulating the employment and training of women and eligible children. Egypt ratified ILO Convention 182 on combating the Worst Forms of Child Labor in 2002. In 2018, Egypt launched the first National Action Plan on combating the Worst Forms of Child Labor. The law also created a national committee to formulate general labor policies and the National Council of Wages, whose mandate is to discuss wage-related issues and national minimum-wage policy, but it has rarely convened, and a minimum wage has rarely been enforced in the private sector.
Parliament adopted a new Trade Unions Law (Law 213 of 2017) in late 2017, replacing a 1976 law, which experts said was out of compliance with Egypt’s commitments to ILO conventions. After a 2016 Ministry of Manpower and Migration (MOMM) directive not to recognize documentation from any trade union without a stamp from the government-affiliated Egyptian Trade Union Federation, the new law established procedures for registering independent trade unions, but some of the unions noted that the directorates of the MOMM did not implement the law and placed restrictions on freedoms of association and organizing for trade union elections. Executive regulations for trade union elections stipulate a very tight deadline of three months for trade union organizations to legalize their status, and one month to hold elections, which, critics said, restricted the ability of unions to legalize their status or to campaign. The GoE registered two new independent labor unions in 2018, and a further seven in 2020 and 2021 as part of a cooperative program with the International Labor Organization.
In July 2019, the Egyptian Parliament passed a series of amendments (Law 142 of 2019) to the 2017 Trade Unions Law that reduced the minimum membership required to form a trade union and abolished prison sentences for violations of the law. The amendments reduced the minimum number of workers required to form a trade union committee from 150 to 50, the number of trade union committees to form a general union from 15 to 10 committees, and the number of workers in a general union from 20,000 to 15,000. The amendments also decreased the number of unions necessary to establish a trade union federation from 10 to 7 and the number of workers in a trade union from 200,000 to 150,000. Under the new law, a trade union or workers’ committee may be formed if 150 employees in an entity express a desire to organize.
Based on the new amendments to the Trade Unions Law and a request from the Egyptian government for assistance implementing them and meeting international labor standards, the International Labor Organization’s and International Finance Corporation’s joint Better Work Program launched in Egypt in March 2020.
The Trade Unions law explicitly bans compulsory membership or the collection of union dues without written consent of the worker and allows members to quit unions. Each union, general union, or federation is registered as an independent legal entity, thereby enabling any such entity to exit any higher-level entity.
The 2014 Constitution stipulated in Article 76 that “establishing unions and federations is a right that is guaranteed by the law.” Only courts are allowed to dissolve unions. The 2014 Constitution maintained past practice in stipulating that “one syndicate is allowed per profession.” The Egyptian constitutional legislation differentiates between white-collar syndicates (e.g., doctors, lawyers, journalists) and blue-collar workers (e.g., transportation, food, mining workers). Workers in Egypt have the right to strike peacefully, but strikers are legally obliged to notify the employer and concerned administrative officials of the reasons and time frame of the strike 10 days in advance. In addition, strike actions are not permitted to take place outside the property of businesses. The law prohibits strikes in strategic or vital establishments in which the interruption of work could result in disturbing national security or basic services provided to citizens. In practice, however, workers strike in all sectors, without following these procedures, but at risk of prosecution by the government.
Collective negotiation is allowed between trade union organizations and private sector employers or their organizations. Agreements reached through negotiations are recorded in collective agreements regulated by the Unified Labor law and usually registered at MOMM. Collective bargaining is technically not permitted in the public sector, though it exists in practice. The government often intervenes to limit or manage collective bargaining negotiations in all sectors.
MOMM sets worker health and safety standards, which also apply in public and private free zones and the Special Economic Zones (see below). Enforcement and inspection, however, are uneven. The Unified Labor Law prohibits employers from maintaining hazardous working conditions, and workers have the right to remove themselves from hazardous conditions without risking loss of employment.
Egyptian labor laws allow employers to close or downsize operations for economic reasons. The government, however, has taken steps to halt downsizing in specific cases. The Unemployment Insurance Law, also known as the Emergency Subsidy Fund Law 156 of 2002, sets a fund to compensate employees whose wages are suspended due to partial or complete closure of their firm or due to its downsizing. The Fund allocates financial resources that will come from a one percent deduction from the base salaries of public and private sector employees. According to foreign investors, certain aspects of Egypt’s labor laws and policies are significant business impediments, particularly the difficulty of dismissing employees. To overcome these difficulties, companies often hire workers on temporary contracts; some employees remain on a series of one-year contracts for more than 10 years. Employers sometimes also require applicants to sign a “Form 6,” an undated voluntary resignation form which the employer can use at any time, as a condition of their employment. Negotiations on drafting a new Labor Law, which has been under consideration in the Parliament for two years, have included discussion of requiring employers to offer permanent employee status after a certain number of years with the company and declaring Form 6 or any letter of resignation null and void if signed prior to the date of termination.
Egypt has a dispute resolution mechanism for workers. If a dispute concerning work conditions, terms, or employment provisions arises, both the employer and the worker have the right to ask the competent administrative authorities to initiate informal negotiations to settle the dispute. This right can be exercised only within seven days of the beginning of the dispute. If a solution is not found within 10 days from the time administrative authorities were requested, both the employer and the worker can resort to a judicial committee within 45 days of the dispute. This committee comprises two judges, a representative of MOMM, and representatives from the trade union and one of the employers’ associations. The decision of this committee is provided within 60 days. If the decision of the judicial committee concerns discharging a permanent employee, the sentence is delivered within 15 days. When the committee decides against an employer’s decision to fire, the employer must reintegrate the latter in his/her job and pay all due salaries. If the employer does not respect the sentence, the employee is entitled to receive compensation for unlawful dismissal.
Labor Law 12 of 2003 sought to make it easier to terminate an employment contract in the event of “difficult economic conditions.” The Law allows an employer to close his establishment totally or partially or to reduce its size of activity for economic reasons, following approval from a committee designated by the Prime Minister. In addition, the employer must pay former employees a sum equal to one month of the employee’s total salary for each of his first five years of service and one and a half months of salary for each year of service over and above the first five years. Workers who have been dismissed have the right to appeal. Workers in the public sector enjoy lifelong job security as contracts cannot be terminated in this fashion; however, government salaries have eroded as inflation has outpaced increases.
Egypt has regulations restricting access for foreigners to Egyptian worker visas, though application of these provisions has been inconsistent. The government plans to phase out visas for unskilled workers, but as yet has not done so. For most other jobs, employers may hire foreign workers on a temporary six-month basis but must also hire two Egyptians to be trained to do the job during that period. Only jobs where it is not possible for Egyptians to acquire the requisite skills will remain open to foreign workers. Application of these regulations is inconsistent.
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)
* Sources for Host Country Data: Central Bank of Egypt; CAPMAS; GAFI
Table 3: Sources and Destination of FDI
Data not available.
Elizabeth Stratton, Economic Officer, U.S. Embassy Cairo
02-2797-2735
StrattonEC@state.gov
Mexico
3. Legal Regime
The National Commission on Regulatory Improvement (CONAMER), within the Secretariat of Economy, is the agency responsible for streamlining federal and sub-national regulation and reducing the regulatory burden on business. Mexican law requires secretariats and regulatory agencies to conduct impact assessments of proposed regulations and engage in notice and comment rule making, which CONAMER carries out. Impact assessments are made available for public comment via CONAMER’s website: https://www.gob.mx/conamer. The official gazette of state and federal laws currently in force in Mexico is publicly available via: http://www.ordenjuridico.gob.mx/. Mexican law provides for a 20-day public consultation period for most proposed regulations. Any interested stakeholder can comment on draft regulations and the supporting justification, including regulatory impact assessments. Certain measures are not subject to a mandatory public consultation period. These include measures concerning taxation, responsibilities of public servants, the public prosecutor’s office executing its constitutional functions, and the Secretariats of National Defense (SEDENA) and the Navy (SEMAR). In 2021, there was a rise in rule making with waiver of full notice and public comment processes as President Lopez Obrador rushed regulations through “in the national interest.”
Given SAT’s mandate to collect taxes and revenue from international trade, many of its regulations circumvent the notice and public comment process. In 2021, SAT proposed a new requirement for a “digital waybill complement” or “complemento de carta porte” for nearly all goods shipments within Mexican territory effective January 1, 2022. Mexican and U.S. private sector representatives called the digital document “onerous” as it requires 180 data points for shipments across all modalities—rail, truck, air, and maritime shipping—many of which are unknown at the onset of a shipment. Despite the domestic nature of the new requirement, U.S. companies raised concerns about the “carta porte” as a technical barrier to trade given the potential delays it could cause for shipments to and from ports of entry. The U.S. government has pushed for better SAT coordination with the private sector to address compliance challenges with the new requirement. This advocacy led to the postponement of “carta porte’s” entry into force to October 1, 2022 and public-private working groups to discuss implementation in the interim.
The National Quality Infrastructure Program (PNIC) is the official document used to plan, inform, and coordinate standardization activities, both public and private. The PNIC is published annually by the Secretariat of Economy in Mexico’s Official Gazette. The PNIC describes Mexico’s plans for new voluntary standards (Normas Mexicanas; NMXs) and mandatory technical regulations (Normas Oficiales Mexicanas; NOMs) as well as proposed changes to existing standards and technical regulations. Interested stakeholders can request the creation, modification, or cancelation of NMXs and NOMs as well as participate in the working groups that develop and modify these standards and technical regulations. Mexico’s antitrust agency, the Federal Commission for Economic Competition (COFECE), plays a key role in protecting, promoting, and ensuring a competitive free market in Mexico as well as protecting consumers. COFECE is responsible for eliminating barriers both to competition and free market entry across the economy (except for the telecommunications sector, which is governed by its own competition authority) and for identifying and regulating access to essential production inputs. In September 2021, COFECE Commissioner President Alejandra Palacios stepped down following several months of public disagreements with President Lopez Obrador’s statist energy policy. Lopez Obrador has not named substitutions for COFECE’s Commissioners since November 2020, leaving the institution without a quorum for resolutions related to barriers to competition or the issuance of regulatory provisions.
In addition to COFECE, the Energy Regulatory Commission (CRE) and National Hydrocarbon Commission (CNH) are both technical-oriented independent agencies that play important roles in regulating the energy and hydrocarbons sectors. CRE regulates national electricity generation, coverage, distribution, and commercialization, as well as the transportation, distribution, and storage of oil, gas, and biofuels. CNH supervises and regulates oil and gas exploration and production and issues oil and gas upstream (exploration/production) concessions. In addition, the National Center for Energy Control (CENACE) is the independent electricity grid operator. Energy experts assert that these agencies, particularly CRE, are no longer fully independent as they have favored Pemex and CFE with regulations and permits over private participants.
Mexico has seen a shift in the public procurement process since the onset of the COVID-19 pandemic. Government entities are increasingly awarding contracts either as direct awards or by invitation-only procurements. In addition, there have been recent tenders that favor European standards over North American standards.
Generally speaking, the Mexican government has established legal, regulatory, and accounting systems that are transparent and consistent with international norms. Still, Mexico’s current executive administration has eroded the autonomy and publicly questioned the value of specific antitrust and energy regulators and has proposed dissolving some of them to cut costs. Furthermore, corruption continues to affect equal enforcement of some regulations. The administration rolled out an ambitious plan to centralize government procurement in an effort to root out corruption and generate efficiencies. The administration estimated it could save up to USD 25 billion annually by consolidating government purchases in the Secretariat of Finance. Still, the expedited rollout and lack of planning for supply chain contingencies led to several sole-source purchases. The Mexican government’s budget is published online and readily available. The Bank of Mexico also publishes and maintains data about the country’s finances and debt obligations.
Investors are increasingly concerned the administration is undermining confidence in the “rules of the game,” particularly in the energy sector, by weakening the political autonomy of COFECE, CNH, CENACE, and CRE. Still, COFECE has successfully challenged regulatory changes in the electricity sector that favor state-owned enterprises over private companies. The administration has appointed five of seven CRE commissioners over the Senate’s objections, which voted twice to reject the nominees in part due to concerns their appointments would erode the CRE’s autonomy. The administration’s budget cuts resulted in significant government layoffs, which has reportedly hampered agencies’ ability to carry out their work, a key factor in investment decisions. The independence of the CRE and CNH was further undermined by a memo from the government to both bodies instructing them to use their regulatory powers to favor state-owned Pemex and CFE. Investors expressed concern over the current executive administration setting a fee ceiling for AFORES, or private pensions management firms, starting in 2022 using a fast-tracked regulatory process with little industry consultation.
Beginning with the Spanish conquest in the 1500s, Mexico had an inquisitorial criminal justice system adopted from Europe in which proceedings were largely carried out in writing and sealed from public view. Mexico amended its Constitution in 2008 to facilitate change to an oral accusatorial criminal justice system to better combat corruption, encourage transparency and efficiency, and ensure respect for the fundamental rights of both the victim and the accused. An ensuing National Code of Criminal Procedure passed in 2014 and is applicable to all 32 states. The national procedural code is coupled with each state’s criminal code to provide the legal framework for the new accusatorial system, which allows for oral, public trials with the right of the defendant to face his/her accuser and challenge evidence presented against him/her, right to counsel, due process, and other guarantees. Mexico fully adopted the new accusatorial criminal justice system at the state and federal levels in June 2016.
Mexico’s Commercial Code, which dates to 1889, was most recently updated in 2014. All commercial activities must abide by this code and other applicable mercantile laws, including commercial contracts and commercial dispute settlement measures. Mexico has multiple specialized courts regarding fiscal, labor, economic competition, broadcasting, telecommunications, and agrarian law.
The judicial branch and Prosecutor General’s office (FGR) are constitutionally independent from each other and the executive. The Prosecutor General is nominated by the president and approved by a two-thirds majority in the Senate for a nine-year term, effectively de-coupling the Prosecutor General from the political cycle of elections every six years. With the historic 2019 labor reform, Mexico also created an independent labor court system run by the judicial branch (formerly this was an executive branch function). The labor courts are being brought online in a phased process by state with the final phase completed on May 1, 2022.
Mexico’s Foreign Investment Law sets the rules governing foreign investment into the country. The National Commission for Foreign Investments, formed by several cabinet-level ministries including Interior (SEGOB), Foreign Relations (SRE), Finance (Hacienda), and Economy (SE) establishes the criteria for administering investment rules.
Mexico has two constitutionally autonomous regulators to govern matters of competition – the Federal Telecommunications Institute (IFT) and the Federal Commission for Economic Competition (COFECE). IFT governs broadcasting and telecommunications, while COFECE regulates all other sectors. For more information on competition issues in Mexico, please visit COFECE’s bilingual website at: www.cofece.mx. As mentioned above, Lopez Obrador has publicly questioned the value of COFECE and his party unsuccessfully introduced a proposal last year which would have dramatically reduced its resources and merged COFECE and other regulators into a less-independent structure. COFECE currently has the minimum quorum required of at least four commissioners in order to operate, out of a seven-members full board. However, COFECE lacks the required quorum of five commissioners in order to issue final resolutions determining competition barriers as well as anti-competitive practices. President Lopez Obrador has not appointed the remaining commissioners as required by law.
USMCA (and NAFTA) contain clauses stating Mexico may neither directly nor indirectly expropriate property, except for public purpose and on a non-discriminatory basis. Expropriations are governed by international law and require rapid fair market value compensation, including accrued interest. Investors have the right to international arbitration. The USMCA contains an annex regarding U.S.-Mexico investment disputes and those related to covered government contracts.
Mexico’s Reorganization and Bankruptcy Law (Ley de Concursos Mercantiles) governs bankruptcy and insolvency. Congress approved modifications in 2014 to shorten procedural filing times and convey greater juridical certainty to all parties, including creditors. Declaring bankruptcy is legal in Mexico and it may be granted to a private citizen, a business, or an individual business partner. Debtors, creditors, or the Attorney General can file a bankruptcy claim. Mexico ranked 33 out of 190 countries for resolving insolvency in the World Bank’s 2020 Doing Business report (that last it produced). The average bankruptcy filing takes 1.8 years to be resolved and recovers 63.9 cents per USD, which compares favorably to average recovery in Latin America and the Caribbean of just 31.2 cents per USD. The “Buró de Crédito” is Mexico’s main credit bureau. More information on credit reports and ratings can be found at: http://www.burodecredito.com.mx/.
4. Industrial Policies
Land grants or discounts, tax deductions, and technology, innovation, and workforce development funding are commonly used incentives. Additional federal foreign trade incentives include: (1) IMMEX: a promotion which allows manufacturing sector companies to temporarily import inputs without paying general import tax and value added tax (VAT); (2) Import tax rebates on goods incorporated into products destined for export; and (3) Sectoral promotion programs allowing for preferential ad-valorem tariffs on imports of selected inputs. Industries typically receiving sectoral promotion benefits are footwear, mining, chemicals, steel, textiles, apparel, and electronics. Manufacturing and other companies report it is becoming increasingly difficult to request and receive reimbursements from SAT of the VAT paid on inputs for the export sector, with significant reimbursement delays and arrears reaching tens of millions USD for some companies.
The administration renewed until December 31, 2024 a program launched in January 2019 that established a border economic zone (BEZ) in 43 municipalities in six northern border states within 15.5 miles from the U.S. border. The BEZ program entails: 1) a fiscal stimulus decree reducing the Value Added Tax (VAT) from 16 percent to 8 percent and the Income Tax (ISR) from 30 percent to 20 percent; 2) a minimum wage increase to MXN 176.72 (USD 8.75) per day; and 3) the gradual harmonization of gasoline, diesel, natural gas, and electricity rates with neighboring U.S. states. The purpose of the BEZ program was to boost investment, promote productivity, and create more jobs in the region. Sectors excluded from the preferential ISR rate include financial institutions, the agricultural sector, and export manufacturing companies (maquilas).
On December 30, 2020, President Lopez Obrador launched a similar program for 22 municipalities in Mexico’s southern states of Campeche, Tabasco, and Chiapas, reducing VAT from 16 to 8 percent and ISR from 30 to 20 percent and harmonizing excise taxes on fuel with neighboring states in Central America. Chetumal in Quintana Roo will also enjoy duty-free status. The benefits extend from January 1, 2021 to December 31, 2024.
Mexico does not follow a “forced localization” policy—foreign investors are not required by law to use domestic content in goods or technology. However, investors intending to produce goods in Mexico for export to the United States should take note of the rules of origin prescriptions contained within USMCA if they wish to benefit from USMCA treatment. Chapter four of the USMCA introduced new rules of origin and labor content rules, which entered into force on July 1, 2020.
In 2020, the Central Bank of Mexico (or Banxico) and the National Banking and Securities Commissions (CNBV – Mexico’s principal bank regulator) drafted regulations mandating the largest financial technology companies operating in Mexico to either host data on a back-up server outside of the United States—if their primary is in the United States—or on physical servers in Mexico. As of March 2022, the draft regulations remain pending public comment. The financial services industry is concerned they could violate provisions of the USMCA financial services chapter prohibiting data localization.
Mexico’s government is increasingly choosing its military for the construction and management of economic infrastructure. In the past two years, the government entrusted the Army (SEDENA) with building the new airport in Mexico City, and sections 6, 7, and part of section 5 of the Maya Train railway project in Yucatan state. SEDENA created a state-owned company to operate and manage the newly completed Mexico City airport. SEDENA is also issuing contracts for the construction of over 300 social development bank branches throughout Mexico. The government announced plans to give to the Navy (SEMAR) the rights for construction, management, and operations of the Trans-Isthmic Train project to connect the ports of Coatzacoalcos in Veracruz state with the Salina Cruz port in Oaxaca state. The government is in the process of transferring administration of land and sea ports from the Secretariat of Communications and Transportation (SCT) to SEDENA and SEMAR respectively and has appointed retired military personnel to port administrator positions at most ports.
5. Protection of Property Rights
Mexico ranked 105 out of 190 countries for ease of registering property in the World Bank’s 2020 Doing Business report, falling two places from its 2019 report. Article 27 of the Mexican Constitution guarantees the inviolable right to private property. Expropriation can only occur for public use and with due compensation. Mexico has four categories of land tenure: private ownership, communal tenure (ejido), publicly owned, and ineligible for sale or transfer.
Mexico prohibits foreigners from acquiring title to residential real estate in so-called “restricted zones” within 50 kilometers (approximately 30 miles) of the nation’s coast and 100 kilometers (approximately 60 miles) of the borders. “Restricted zones” cover roughly 40 percent of Mexico’s territory. Foreigners may acquire the effective use of residential property in “restricted zones” through the establishment of an extendable trust (fideicomiso) arranged through a Mexican financial institution. Under this trust, the foreign investor obtains all property use rights, including the right to develop, sell, and transfer the property. Real estate investors should be careful in performing due diligence to ensure that there are no other claimants to the property being purchased. In some cases, fideicomiso arrangements have led to legal challenges. U.S.-issued title insurance is available in Mexico and U.S. title insurers operate here.
Additionally, U.S. lending institutions have begun issuing mortgages to U.S. citizens purchasing real estate in Mexico. The Public Register for Business and Property (Registro Publico de la Propiedad y de Comercio) maintains publicly available information online regarding land ownership, liens, mortgages, restrictions, etc.
Tenants and squatters are protected under Mexican law. Property owners who encounter problems with tenants or squatters are advised to seek professional legal advice, as the legal process of eviction is complex.
Mexico has a nascent but growing financial securitization market for real estate and infrastructure investments, which investors can access via the purchase/sale of Fideicomisos de Infraestructura y Bienes Raíces (FIBRAs) and Certificates of Capital Development (CKDs) listed on Mexico’s BMV stock exchange.
Intellectual Property Rights (IPR) in Mexico are covered by the Mexican Federal Law for Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial) and the Federal Copyright Law (Ley Federal del Derecho de Autor). Responsibility for the protection of IPR is spread across several government authorities. The Prosecutor General’s Office (Fiscalia General de la Republica or FGR) oversees a specialized unit that prosecutes intellectual property (IP) crimes. The Mexican Institute of Industrial Property (IMPI), the equivalent to the U.S. Patent and Trademark Office, administers patent and trademark registrations, and handles administrative enforcement cases of IPR infringement. The National Institute of Copyright (INDAUTOR) handles copyright registrations and mediates certain types of copyright disputes, while the Federal Commission for the Prevention from Sanitary Risks (COFEPRIS) regulates pharmaceuticals, medical devices, and processed foods. The National Customs Agency of Mexico (ANAM) is responsible for ensuring illegal goods do not cross Mexico’s borders.
The process for trademark registration in Mexico normally takes six to eight months. The registration process begins by filing an application with IMPI, which is published in IMPI’s Gazette for opposition by a third party. If no opposition is filed, IMPI undertakes a formalities examination, followed by a substantive examination to determine if the application and supporting documentation fulfills the requirements established by law and regulation to grant the trademark registration. Once the determination is made, IMPI then issues the registration. A trademark registration in Mexico is valid for 10 years from the date of registration and is renewable for 10-year periods. Any party with standing can challenge a trademark registration through a cancellation proceeding. IMPI employs the following administrative procedures: nullity, expiration or lapsing, opposition, cancellation, trademark, patent, and copyright infringement. Once IMPI issues a decision, the affected party may challenge it through an internal reconsideration process or go directly to the Specialized IP Court for a nullity trial. An aggrieved party can then file an appeal with a Federal Appeal Court based on the Specialized IP Court’s decision. In cases with an identifiable constitutional challenge, the plaintiff may file an appeal before the Supreme Court.
To improve efficiency, in 2020 IMPI partnered with the United States Patent and Trademark Office (USPTO) to launch the Parallel Patent Grant (PPG) initiative. Under this new work-sharing arrangement, IMPI will expedite the grant of a Mexican patent for businesses and individuals already granted a corresponding U.S. patent. This arrangement allows for the efficient reutilization of USPTO work by IMPI. The USPTO also has a Patent Prosecution Highway (PPH) agreement with IMPI. Under the PPH, an applicant receiving a ruling from either IMPI or the USPTO that at least one claim in an application is patentable may request that the other office expedite examination of the corresponding application. The PPH leverages fast-track patent examination procedures already available in both offices to allow applicants in both countries to obtain corresponding patents faster and more efficiently.
Mexico undertook significant legislative reform to comply with the USMCA. The Mexican Federal Law for Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial) went into effect November 5, 2020. The decree issuing this law was published in the Official Gazette on July 1, 2020, in response to the USMCA and the CPTPP. This new law replaced the Mexican Industrial Property Law (Ley de la Propiedad Industrial), substantially strengthening IPR across a variety of disciplines. Mexico amended its Federal Copyright Law and its Federal Criminal Code to comply with the USMCA. The amendments went into effect July 2, 2020. These amendments should significantly strengthen copyright law in Mexico. Still, there are concerns that constitutional challenges filed against notice and takedown provisions as well as TPMs in the amendments may weaken these. provisions.
Still, Mexico has widespread commercial-scale infringement that results in significant losses to Mexican, U.S., and other IPR owners. There are many issues that have made it difficult to improve IPR enforcement in Mexico, including legislative loopholes; lack of coordination between federal, state, and municipal authorities; a cumbersome and lengthy judicial process; relatively widespread acceptance of piracy and counterfeiting, and lack of resources dedicated to enforcement. In addition, the involvement of transnational criminal organizations (TCOs), which control the piracy and counterfeiting markets in parts of Mexico and engage in trade-based money laundering by importing counterfeit goods, continue to impede federal government efforts to improve IPR enforcement. TCO involvement has further illustrated the link between IPR crimes and illicit trafficking of other contraband, including arms and drugs.
Mexico remained on the Watch List in the 2021 Special 301 report published by the U.S. Trade Representative (USTR). Obstacles to U.S. trade include the wide availability of pirated and counterfeit goods in both physical and virtual notorious markets. The 2021 USTR Out-of-Cycle Review of Notorious Markets for Counterfeiting and Piracy listed these Mexican markets: Tepito in Mexico City, La Pulga Rio in Monterrey, and Mercado San Juan de Dios in Guadalajara. Mexico is a signatory to numerous international IP treaties, including the Paris Convention for the Protection of Industrial Property, the Berne Convention for the Protection of Literary and Artistic Works, and the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights.
Intellectual Property Rights Attaché for Mexico, Central America and the Caribbean
U.S. Trade Center Liverpool No. 31 Col. Juárez
C.P. 06600 Mexico City
Tel: (52) 55 5080 2189
National Institute of Copyright (INDAUTOR)
Puebla No. 143
Col. Roma, Del. Cuauhtémoc
06700 México, D.F.
Tel: (52) 55 3601 8270
Fax: (52) 55 3601 8214
Web: http://www.indautor.gob.mx/
For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.
6. Financial Sector
The Mexican government is generally open to foreign portfolio investments, and foreign investors trade actively in various public and private asset classes. Foreign entities may freely invest in federal government securities. The Foreign Investment Law establishes foreign investors may hold 100 percent of the capital stock of any Mexican corporation or partnership, except in those few areas expressly subject to limitations under that law. Foreign investors may also purchase non-voting shares through mutual funds, trusts, offshore funds, and American Depositary Receipts.
They also have the right to buy directly limited or nonvoting shares as well as free subscription shares, or “B” shares, which carry voting rights. Foreigners may purchase an interest in “A” shares, which are normally reserved for Mexican citizens, through a neutral fund operated by one of Mexico’s six development banks. Finally, Mexico offers federal, state, and local governments bonds that are rated by international credit rating agencies. The market for these securities has expanded rapidly in past years and foreign investors hold a significant stake of total federal issuances. However, foreigners are limited in their ability to purchase sub-sovereign state and municipal debt. Liquidity across asset classes is relatively deep.
Mexico established a fiscally transparent trust structure known as a FICAP in 2006 to allow venture and private equity funds to incorporate locally. The Securities Market Law (Ley de Mercado de Valores) established the creation of three special investment vehicles which can provide more corporate and economic rights to shareholders than a normal corporation. These categories are: (1) Investment Promotion Corporation (Sociedad Anonima de Promotora de Inversion or SAPI); (2) Stock Exchange Investment Promotion Corporation (Sociedad Anonima Promotora de Inversion Bursatil or SAPIB); and (3) Stock Exchange Corporation (Sociedad Anonima Bursatil or SAB). Mexico also has a growing real estate investment trust market, locally referred to as Fideicomisos de Infraestructura y Bienes Raíces (FIBRAS) as well as FIBRAS-E, which allow for investment in non-real estate investment projects. FIBRAS are regulated under Articles 187 and 188 of Mexican Federal Income Tax Law.
Financial sector reforms signed into law in 2014 have improved regulation and supervision of financial intermediaries and have fostered greater competition between financial services providers. While access to financial services – particularly personal credit for formal sector workers – has expanded in the past four years, bank and credit penetration in Mexico remains low compared to OECD and emerging market peers. Coupled with sound macroeconomic fundamentals, reforms have created a positive environment for the financial sector and capital markets. According to the National Banking and Stock Commission (CNBV), the banking system remains healthy and well capitalized.
Mexico’s banking sector is heavily concentrated and majority foreign-owned: the seven largest banks control 85 percent of system assets and foreign-owned institutions control 70 percent of total assets. The USMCA maintains national treatment guarantees. U.S. securities firms and investment funds, acting through local subsidiaries, have the right to engage in the full range of activities permitted in Mexico.
Banxico maintains independence in operations and management by constitutional mandate. Its main function is to provide domestic currency to the Mexican economy and to safeguard the Mexican Peso’s purchasing power by gearing monetary policy toward meeting a 3 percent inflation target over the medium term.
Mexico’s Financial Technology (FinTech) law came into effect in March 2018 and administration released secondary regulations in 2019, creating a broad rubric for the development and regulation of innovative financial technologies. The law covers both cryptocurrencies and a regulatory “sandbox” for start-ups to test the viability of products, placing Mexico among the FinTech policy vanguard. The reforms have already attracted significant investment to lending fintech companies and mobile payment companies. However, industry stakeholders suggest insufficient clarity in the authorities’ implementation of the secondary regulations may be eroding the legal certainty the FinTech Law brought to the sector. The CNBV has authorized fourteen fintechs under the FinTech Law to operate in the Mexican market and it is reviewing other applications.
The Mexican Petroleum Fund for Stability and Development (FMP) was created as part of 2013 budgetary reforms. Housed in Banxico, the fund distributes oil revenues to the national budget and a long-term savings account. The FMP incorporates the Santiago Principles for transparency, placing it among the most transparent Sovereign Wealth Funds in the world. Both Banxico and Mexico’s Supreme Federal Auditor regularly audit the fund. Mexico is also a member of the International Working Group of Sovereign Wealth Funds. The Fund resources totaled MXN 23.4 billion (approximately USD 1.2 billion) in 2021. The FMP is required to publish quarterly and annual reports, which can be found at www.fmped.org.mx.
11. Labor Policies and Practices
Mexican labor law requires at least 90 percent of a company’s employees be Mexican nationals. Employers can hire foreign workers in specialized positions as long as foreigners do not exceed 10 percent of all workers in that specialized category. Mexico’s 56 percent rate of informality remains higher than countries with similar GDP per capita levels. High informality, defined as those working in unregistered firms or without social security protection, distorts labor market dynamics, contributes to persistent wage depression, drags overall productivity, and slows economic growth. In the formal economy, there exist large labor shortages due to a system that incentivizes informality. Manufacturing companies, particularly along the U.S.-Mexico border and in the states of Aguascalientes, Guanajuato, Jalisco, and Querétaro, report labor shortages and an inability to retain staff due to wages sometimes being less that what can be earned in the informal economy, although the recent increases in the minimum wage are leading to increases in entry level wages which are attracting more workers. Shortages of skilled workers and engineers continue due to a mismatch between industry needs and what schools teach. Mexico has one of the lowest female labor participation rates in the OECD, 45 percent to a 76 percent male participation rate among people legally allowed to work (15 years or older). Barriers for female workers include the culturally assigned role for them as caretakers of children and the elderly. Most Mexican workers work for a micro business (41 percent) and 59 percent earn between USD 8.6 and USD 17 per day. The unemployment rate in Mexico has maintained a stable path ranging from 3.5 percent to 4.9 percent (its highest peak during the pandemic). This rate, however, masks the high level of underemployment (14.8 percent) in Mexico (those working part time or in the informal sector when they want full time, formal sector jobs). For 2020 the informal economy accounted for 22 percent of total Mexican GDP according to the National Institute of Statistics and Geography. Informal businesses span across all economic activities from agriculture to manufacturing. In Mexico labor informality also spans across all economic activities with formal businesses employing both formal and informal workers to reduce their labor costs.
On May 1, 2019, Lopez Obrador signed into law a sweeping reform of Mexico’s labor law, implementing a constitutional change and focusing on the labor justice system. The reform replaces tripartite dispute resolution entities (Conciliation and Arbitration Boards) with independent judicial bodies and conciliation centers. In terms of labor dispute resolution mechanisms, the Conciliation and Arbitration Boards (CABs) previously adjudicated all individual and collective labor conflicts. Under the reform, collective bargaining agreements will now be adjudicated by federal labor conciliation centers and federal labor courts.
Labor experts predict the labor reform will result in a greater level of labor action stemming from more inter-union and intra-union competition. The Secretariat of Labor, working closely with Mexico’s federal judiciary, as well as state governments and courts, created an ambitious state-by-state implementation agenda for the reforms, which started November 18, 2020, and will end during the second semester of 2022. On November 18, 2020 the first phase of the labor reform implementation began in eight states: Durango, State of Mexico, San Luis Potosi, Zacatecas, Campeche, Chiapas, Tabasco, and Hidalgo. On November 3, 2021 the second phase started in 13 additional states, and the third phase will start during 2022 in 11 states. Further details on labor reform implementation can be found at: www.reformalaboral.stps.gob.mx.
Mexico’s labor relations system has been widely criticized as skewed to represent the interests of employers and the government at the expense of workers. Mexico’s legal framework governing collective bargaining created the possibility of negotiation and registration of initial collective bargaining agreements without the support or knowledge of the covered workers. These agreements are commonly known as protection contracts and constitute a gap in practice with international labor standards regarding freedom of association. The percentage of the economy covered by collective bargaining agreements is between five and 10 percent, of which more than half are believed to be protection contracts. As of March 7, 2022, 3,267 collective bargaining contracts have been legitimized (reviewed and voted on by the workers covered by them), according to the Secretariat of Labor. The reform requires all collective bargaining agreements to be submitted to a free, fair, and secret vote every two years with the objective of getting existing protectionist contracts voted out. The increasingly permissive political and legal environment for independent unions is already changing the way established unions manage disputes with employers, prompting more authentic collective bargaining. As independent unions compete with corporatist unions to represent worker interests, workers are likely to be further emboldened in demanding higher wages.
The USMCA’s labor chapter (Chapter 23) contains specific commitments on union democracy and labor justice which relate directly to Mexico’s 2019 labor reform and its implementation. In addition, the USMCA’s dispute settlement chapter (Chapter 31) includes a facility-specific labor rapid response mechanism to address labor rights issues and creates the ability to impose facility specific remedies to ensure remediation of such situations.
According to the International Labor Organization (ILO), government enforcement was reasonably effective in enforcing labor laws in large and medium-sized companies, especially in factories run by U.S. companies and in other industries under federal jurisdiction. Enforcement was inadequate in many small companies and in the agriculture and construction sectors, and it was nearly absent in the informal sector. Workers organizations have made numerous complaints of poor working conditions in maquiladoras and in the agricultural production industry. Low wages, poor labor conditions, long work hours, unjustified dismissals, lack of social security benefits and safety in the workplace, and lack of freedom of association were among the most common complaints.
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)
2. Bilateral Investment Agreements and Taxation Treaties
Nigeria belongs to the Economic Community of West African States (ECOWAS), a free trade area comprising 15 countries located in West Africa. Nigeria signed the African Continental Free Trade Agreement (AfCFTA) – a free trade agreement consisting of 54 African countries, which became operational on January 1, 2021 – but its legislature has yet to ratify it and implementation of the agreement remains nascent. Nigeria has bilateral investment agreements with: Algeria, Austria, Bulgaria, Canada, China, Egypt, Ethiopia, France, Finland, Germany, Italy, Jamaica, the Republic of Korea, Kuwait, Morocco, the Netherlands, Romania, Russia, Serbia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Turkey, Uganda, and the United Kingdom. Fifteen of these treaties (those with China, France, Finland, Germany, Italy, the Republic of Korea, the Netherlands, Romania, Serbia, South Africa, Spain, Sweden, Switzerland, Taiwan, and the United Kingdom) have been ratified by both parties.
The government signed a Trade and Investment Framework Agreement (TIFA) with the United States in 2000. U.S. and Nigerian officials held their latest round of TIFA talks in 2016. In 2017, Nigeria and the United States signed a memorandum of understanding to formally establish the U.S.–Nigeria Commercial and Investment Dialogue (CID). The ministerial-level meeting with private sector representatives was last held in February 2020. The CID coordinates bilateral private sector-to-private sector, government-to-government, and private sector-to-government discussions on policy and regulatory reforms to promote increased, diverse, and sustained trade and investment between the United States and Nigeria, with an initial focus on infrastructure, agriculture, digital economy, investment, and regulatory reform.
Nigeria has 14 ratified double taxation agreements, including: Belgium, Canada, China, Czech Republic, France, Italy, the Netherlands, Pakistan, Philippines, Romania, Singapore, Slovakia, South Africa, and the United Kingdom. Nigeria does not have such an agreement with the United States. Nigeria’s Finance Act of 2021 empowered the FIRS to collect corporate taxes from digital firms at a “fair and reasonable turnover” rate, which translates to 6% of turnover generated in Nigeria. This will address the profit attribution issues raised following the ambiguity of the Finance Act of 2019 which subjected non-resident companies with significant economic presence to corporate and sales taxes. Most of the affected companies are digital firms, many with U.S. headquarters. Nigeria enacted the Petroleum Industry Act (2021) which overhauled the institutional, regulatory, administrative, and fiscal arrangements for the oil and gas industry. While the legislation provides long-awaited additional clarity and updates Nigeria’s governance structures and fiscal terms for the traditional energy sector, U.S. oil companies contend that it has not increased Nigeria’s competitiveness relative to other oil producing countries and may fail to attract significant new investments in the sector.
Nigeria is a member of the OECD Inclusive Framework on Base Erosion and Profit Sharing but declined to sign the two-pillar solution to global tax challenges in October 2021.
3. Legal Regime
Nigeria’s legal, accounting, and regulatory systems comply with international norms, but application and enforcement remain uneven. Opportunities for public comment and input into proposed regulations rarely occur. Professional organizations set standards for the provision of professional services, such as accounting, law, medicine, engineering, and advertising. These standards usually comply with international norms. No legal barriers prevent entry into these sectors.
Ministries and regulatory agencies are meant to develop and make public anticipated regulatory changes or proposals and publish proposed regulations before their application. The general public should have the opportunity to comment through targeted outreach, including business groups and stakeholders, and during the public hearing process before a bill becomes law, but this is not always the case. There is no specialized agency tasked with publicizing proposed changes and the time period for comment may vary. Ministries and agencies do conduct impact assessments, including environmental, but assessment methodologies may vary. The National Bureau of Statistics reviews regulatory impact assessments conducted by other agencies. Laws and regulations are publicly available.
Fiscal management occurs at all three tiers of government: federal, 36 state governments and Federal Capital Territory (FCT) Abuja, and 774 local government areas (LGAs). Revenues from oil and non-oil sources are collected into the federation account and then shared among the different tiers of government by the Federal Account Allocation Committee (FAAC) in line with a statutory sharing formula. All state governments can collect internally generated revenues, which vary from state to state. The fiscal federalism structure does not compel states to be accountable to the federal government or transparent about revenues generated or received from the federation account. However, the federal government can demand states meet predefined minimum fiscal transparency requirements as prerequisites for obtaining federal loans. For instance, compliance with the 22-point Fiscal Sustainability Plan, which focused on ensuring better state financial performance, more sustainable debt management, and improved accountability and transparency, was a prerequisite for obtaining a federal government bailout in 2016. The federal government’s finances are more transparent as budgets are made public and the financial data are published by the Central Bank of Nigeria (CBN), Debt Management Office (DMO), the Budget Office of the Federation, and the National Bureau of Statistics. The state-owned oil company (Nigerian National Petroleum Corporation (NNPC)) began publishing audited financial data in 2020.
Foreign companies operate successfully in Nigeria’s service sectors, including telecommunications, accounting, insurance, banking, and advertising. The Investment and Securities Act of 2007 forbids monopolies, insider trading, and unfair practices in securities dealings. Nigeria is not a party to the WTO’s Government Procurement Agreement (GPA). Nigeria generally regulates investment in line with the WTO’s Trade-Related Investment Measures (TRIMS) Agreement, but the government’s local content requirements in the oil and gas sector and the Information and Communication Technology (ICT) sector may conflict with Nigeria’s commitments under TRIMS.
ECOWAS implemented a Common External Tariff (CET) beginning in 2015 with a five-year phase in period. An internal CET implementation committee headed by the Fiscal Policy/Budget Monitoring and Evaluation Department of the Nigerian Customs Service (NCS) was set up to develop the implementation work plans that were consistent with national and ECOWAS regulations. The CET was slated to be fully harmonized by 2020, but in practice some ECOWAS Member States have maintained deviations from the CET beyond the January 1, 2020, deadline. The country has put in place a CET monitoring committee domiciled at the Ministry of Finance, consisting of several ministries, departments, and agencies related to the CET. The country applies five tariff bands under the CET: zero duty on capital goods, machinery, and essential drugs not produced locally; 5% duty on imported raw materials; 10% duty on intermediate goods; 20% duty on finished goods; and 35% duty on goods in certain sectors that the Nigerian government seeks to protect including palm oil, meat products, dairy, and poultry. The CET permits ECOWAS member governments to calculate import duties higher than the maximum allowed in the tariff bands (but not to exceed a total effective duty of 70%) for up to 3% of the 5,899 tariff lines included in the ECOWAS CET.
Nigeria has a complex, three-tiered legal system comprised of English common law, Islamic law, and Nigerian customary law. Most business transactions are governed by common law modified by statutes to meet local demands and conditions. The Supreme Court is the pinnacle of the judicial system and has original and appellate jurisdiction in specific constitutional, civil, and criminal matters as prescribed by Nigeria’s constitution. The Federal High Court has jurisdiction over revenue matters, admiralty law, banking, foreign exchange, other currency and monetary or fiscal matters, and lawsuits to which the federal government or any of its agencies are party. The Nigerian court system is generally slow and inefficient, lacks adequate court facilities and computerized document-processing systems, and poorly remunerates judges and other court officials, all of which encourages corruption and undermines enforcement. Judges frequently fail to appear for trials and court officials lack proper equipment and training.
The constitution and law provide for an independent judiciary; however, the judicial branch remains susceptible to pressure from the executive and legislative branches. Political leaders have influenced the judiciary, particularly at the state and local levels.
The Doing Business report credited business reforms for improving contract enforcement by issuing new rules of civil procedure for small claims courts, which limit adjournments to unforeseen and exceptional circumstances but noted that there can be variation in performance indicators between cities in Nigeria (as in other developing countries). For example, resolving a commercial dispute takes 476 days in Kano but 376 days in Lagos. In the case of Lagos, the 376 days includes 40 days for filing and service, 194 days for trial and judgment, and 142 days for enforcement of the judgment with total costs averaging 42% of the claim. In Kano, however, filing and service only takes 21 days with enforcement of judgement only taking 90 days, but trial and judgment accounts for 365 days with total costs averaging lower at 28% of the claim. In comparison, in OECD countries the corresponding figures are an average of 589.6 days and averaging 21.5% of the claim and in sub-Saharan countries an average of 654.9 days and averaging 41.6% of the claim.
The Nigerian Investment Promotion Commission (NIPC) Act allows 100 percent foreign ownership of firms. Foreign investors must register with the NIPC after incorporation under the Companies and Allied Matters Act of 2020. The NIPC Act prohibits the nationalization or expropriation of foreign enterprises except in case of national interest, but the Embassy is unaware of specific instances of such interference by the government. The NIPC website (nipc.gov.ng) provides information on investing in Nigeria, and its One-Stop Investment Center co-locates 27 government agencies with equities in the foreign company registration process.
The Nigerian government enacted the Federal Competition and Consumer Protection (FCCPC) Act in 2019. The Actrepealed the Consumer Protection Act of 2004 and replaced the previous Consumer Protection Council with a Federal Competition and Consumer Protection Commission while also creating a Competition and Consumer Protection Tribunal to handle issues and disputes arising from the operations of the Act. Under the terms of the Act, businesses will be able to lodge anti-competitive practices complaints against other firms in the Tribunal. TheAct prohibits agreements made to restrain competition, such as price fixing, price rigging, collusive tendering, etc. (with specific exemptions for collective bargaining agreements and employment, among other items). The Act empowers the President of Nigeria to regulate prices of certain goods and services on the recommendation of the Commission.
The law prescribes stringent fines for non-compliance. The law mandates a fine of up to 10% of the company’s annual turnover in the preceding business year for offences. The law harmonizes oversight for consumer protection, consolidating it under the FCCPC.
An entity may seek redress from a court of law if it is not satisfied with the ruling of the FCCPC.
The federal government has not expropriated or nationalized foreign assets recently, and the NIPC Act forbids nationalization of a business or assets unless the acquisition is in the national interest or for a public purpose. In such cases, investors are entitled to fair compensation and legal redress.
The federal government’s drive to domesticate foreign investments has led to a number of seemingly discriminatory actions against a prominent South African firm. Nigeria’s attorney general demanded the payment of $2 billion which he alleged the company owed in taxes over ten years, a suit which was later dropped in 2020 in favor of negotiations with the FIRS. In 2018, the company paid $53 million to settle a CBN case in which it was accused of illegally repatriating $8.1 billion. Another South African company is involved in a $4.7 billion tax dispute with the FIRS.
Reflecting Nigeria’s business culture, entrepreneurs generally do not seek bankruptcy protection. Claims often go unpaid, even in cases where creditors obtain judgments against defendants. Under Nigerian law, the term bankruptcy generally refers to individuals whereas corporate bankruptcy is referred to as insolvency. The former is regulated by the Bankruptcy Act of 1990, as amended by Bankruptcy Decree 109 of 1992. The latter is regulated by the Companies and Allied Matters Act (CAMA) revised in 2020. Insolvency solutions in CAMA 2020 focus on rescuing insolvent corporates, where debt recovery options are feasible, instead of the former objective which focused largely on the wind-up process. Once determined insolvent, company shareholders are allowed to enter into a binding agreement with creditors or apply to a court to appoint an administrator thereby obviating the need for claims by creditors. The debt threshold required for triggering compulsory liquidation is 200,000 naira ($480). The Act also ranks the claims of secured creditors above all other claims and forbids shareholders or administrators from favoring a creditor above another within the same creditor class. The Embassy is not aware of U.S. companies that have had to avail themselves of the insolvency provisions under Nigerian law.
4. Industrial Policies
The Nigerian government maintains different and overlapping incentive programs. The Industrial Development/Income Tax Relief Act provides incentives to pioneer industries deemed beneficial to Nigeria’s economic development and to labor-intensive industries, such as apparel. There are currently 99 industries and products that qualify for the pioneer status incentive through the NIPC, following the addition of 27 industries and products to the list in 2017. The government has added a stipulation calling for a review of the qualifying industries and products to occur every two years. Companies that receive pioneer status may benefit from a tax holiday from payment of company income tax for an initial period of three years, extendable for one or two additional years. A pioneer industry sited in an economically disadvantaged area is entitled to a 100% tax holiday for seven years and an additional 5% depreciation allowance over and above the initial capital depreciation allowance. Additional tax incentives are available for investments in domestic research and development, for companies that invest in local government areas deemed disadvantaged, for local value-added processing, for investments in solid minerals and oil and gas, and for several other investment scenarios. The NIPC in conjunction with FIRS published a compendium of investment which houses all fiscal incentives backed by Nigerian law as well as sectoral fiscal concessions approved by the government. The compendium is available at https://www.nipc.gov.ng/compendium/preface/.
The Nigerian Export Promotion Council (NEPC) administers an Export Expansion Grant (EEG) scheme to improve non-oil export performance. The program was suspended in 2014 due to concerns about corruption on the part of companies that collected grants but did not actually export. It was revised and relaunched in 2018. The NEXIM Bank provides commercial bank guarantees and direct lending to facilitate export sector growth, although these services are underused. NEXIM’s Foreign Input Facility provides normal commercial terms for the importation of machinery and raw materials used for generating exports. Repayment terms are typically up to seven years, including a moratorium period of up to two years depending on the loan amount and the project being finance. Agencies created to promote industrial exports remain burdened by uneven management, vaguely defined policy guidelines, and corruption.
The NIPC states that up to 120% of expenses on research and development (R&D) are tax deductible, provided that such R&D activities are carried out in Nigeria and relate to the business from which income or profits are derived. Also, for the purpose of R&D on local raw materials, 140% of expenses are allowed. Long-term research will be regarded as a capital expenditure and written off against profit.
The government similarly offers incentives for the importation of equipment, parts, and machinery used in renewable energy generation, transmission, and/or storage. Solar cells in modules or panels attract zero import duty and are exempt from paying value added tax (VAT). Solar-powered coolers, solar-powered generators, wind-powered generators, battery-manufacturing inputs, and nuclear reactors are subject to a relatively low duty rate of 5% and are exempt from paying VAT.
The Nigerian Export Processing Zone Authority (NEPZA) allows duty-free import of all equipment and raw materials into its export processing zones. Up to 100% of production in an export processing zone may be sold domestically based on valid permits and upon payment of applicable duties. Investors in the zones are exempt from foreign exchange regulations and taxes and may freely repatriate capital. Foreign investors still face challenges with unreliable implementation of the regulations applied to export processing zones and are sometimes asked to pay import duties or restricted from accessing foreign exchange. The Nigerian government also encourages private sector participation and partnership with state and local governments under the free trade zones (FTZ) program. There are three types of FTZs in Nigeria: federal or state government-owned, private sector-owned, and public-private partnerships. NEPZA regulates Nigeria’s FTZs regardless of the ownership structure. Workers in FTZs may unionize but may not strike for an initial ten-year period.
Nigeria ratified the WTO Trade Facilitation Agreement (TFA) in 2016 and the Agreement entered into force in 2017. Nigeria already implements items in Category A under the TFA and has identified, but not yet implemented, its Category B and C commitments. In 2016, Nigeria requested additional technical assistance to implement and enforce its Category C commitments. (See https://www.wto.org/english/tratop_e/tradfa_e/tradfa_e.htm)
Foreign investors must register with the NIPC, incorporate as a limited liability company (private or public) with the CAC, procure appropriate business permits, and register with the Securities and Exchange Commission (when applicable) to conduct business in Nigeria. Manufacturing companies sometimes must meet local content requirements. Long-term expatriate personnel do not require work permits but are subject to needs quotas requiring them to obtain residence permits that allow salary remittances abroad. Expatriates looking to work in Nigeria on a short-term basis can either request a temporary work permit, which is usually granted for a two-month period and extendable to six months, or a business visa, if only traveling to Nigeria for the purpose of meetings, conferences, seminars, trainings, or other brief business activities. Authorities permit larger quotas for professions deemed in short supply, such as deep-water oilfield divers. U.S. companies often report problems in obtaining quota permits. The Nigerian government’s Immigration Regulations 2017 introduced additional means by which foreigners can obtain residence in Nigeria. Foreign nationals who have imported an annual minimum threshold of capital over a certain period may be issued a permanent residence permit if the investment is not withdrawn. The Nigerian Oil and Gas Content Development Act of 2010 restricts the number of expatriate managers to 5% of the total number of personnel for companies in the oil and gas sector.
The National Office of Industrial Property Act of 1979 established the National Office for Technology Acquisition and Promotion (NOTAP) to regulate the international acquisition of technology while creating an environment conducive to developing local technology. NOTAP recommends local technical partners to Nigerian users in a bid to reduce the level of imported technology, which currently accounts for over 90% of technology in use in Nigeria. NOTAP reviews the Technology Transfer Agreements (TTAs) required to import technology into Nigeria and for companies operating in Nigeria to access foreign currency. NOTAP reviews three major aspects prior to approval of TTAs and subsequent issuance of a certificate:
Legal – ensuring that the clauses in the agreement are in accordance with Nigerian laws and legal frameworks within which NOTAP operates;
Economic – ensuring prices are fair for the technology offered; and
Technical – ensuring transfer of technical knowledge.
U.S. firms complain that the TTA approval process is lengthy and can routinely take three months or more. NOTAP took steps to automate the TTA process to reduce processing time to one month or less; however, from the date of filing the application to the issuance of confirmation of reasonableness, TTA processing still requires 60 business days.
The Nigerian Oil and Gas Content Development Act of 2010 contains certain technology-transfer requirements that may violate a company’s intellectual property rights.
In 2013, the National Information Technology Development Agency (NITDA), under the auspices of the Ministry of Communication, issued the Guidelines for Nigerian Content Development in the ICT sector. NITDA re-issued an updated version of the Guidelines in 2019. The Guidelines require telecommunications companies to ensure that at least 80% of network infrastructure value and volume be locally sourced, use indigenous companies to build network infrastructure, and use locally developed or manufactured software components. The Guidelines also require multinational ICT equipment manufacturers operating in Nigeria to provide a detailed local content development plan for the creation of jobs, recruitment of Nigerians, human capital development, use of indigenous ICT products and services for value creation; all government agencies to procure at least 40% computer hardware and associated devices from NITDA-approved original equipment manufacturers; and ICT companies to host all consumer and subscriber data locally. Enforcement of the Guidelines is largely inconsistent. The government generally lacks capacity and resources to monitor labor practices, technology compliancy, and digital data flows. There are reports that individual Nigerian companies periodically lobby the National Assembly and/or NITDA to address allegations (warranted or not) against foreign firms that they are in non-compliance with the guidelines.
The goal of the Guidelines is to promote development of domestic production of ICT products and services for the Nigerian and global markets, but some assessments indicate they pose risks to foreign investment and U.S. companies by interrupting their global supply chain, increasing costs, disrupting global flow of data, and stifling innovative products and services. Industry representatives remain concerned about whether the guidelines would be implemented in a fair and transparent way toward all Nigerian and foreign companies. All ICT companies, including Nigerian companies, use foreign manufactured equipment as Nigeria does not have the capacity to supply ICT hardware that meets international standards.
The Nigerian Customs Service (NCS) and the Nigerian Ports Authority (NPA) exercise exclusive jurisdiction over customs services and port operations respectively. Nigerian law allows importers to clear goods on their own, but most importers employ clearing and forwarding agents to minimize tariffs and lower landed costs. The Nigerian government closed land borders to trade in August 2019, purportedly to stem the tide of smuggled goods entering from neighboring countries. Nigeria reopened land borders to trade in December 2020, but it continues to restrict the import of items such as rice and vehicles through its land borders. The NCS maintains a wider import prohibition list available at https://customs.gov.ng/?page_id=3075, while the CBN continues to restrict access to foreign exchange for the importation of 44 classes of goods. The initial list that contained 41 items (https://www.cbn.gov.ng/out/2015/ted/ted.fem.fpc.gen.01.011.pdf) has since been expanded to include fertilizer, maize, dairy products, and sugar (except for three companies that the CBN exempts from the lack of access to foreign exchange for sugar imports) with the CBN adding items in an ongoing basis as part of its “backward integration” strategy.
The Nigerian government implements a destination inspection scheme whereby all inspections occur upon arrival into Nigeria, rather than at the ports of origin. In 2013, the NCS regained the authority to conduct destination inspections, which had previously been contracted to private companies. NCS also introduced the Nigeria Integrated Customs Information System (NICIS) platform and an online system for filing customs documentation via a Pre-Arrival Assessment Report (PAAR) process. The NCS still carries out 100% cargo examinations, and shipments take more (sometimes significantly more) than 20 days to clear through the process. In addition to creating significant delays and additional fees for security and storage for items awaiting customs clearance, NCS’s continued reliance on largely manual customs processes creates opportunities for significant variation, individual discretion, and corruption in the application of customs regulations. At the time of this report, a growing number of companies were engaged in disputes with the customs agency due to NCS arbitrarily reclassifying their imports into new classification categories with higher import tariffs.
Shippers report that efforts to modernize and professionalize the NCS and the NPA have largely been unsuccessful – port congestion persists and clearance times are long. A presidential directive in 2017 for the Apapa Port, which handles over 40% of Nigeria’s legal trade, to run a 24-hour operation and achieve 48-hour cargo clearance has not met its stated goals. The port is congested, inefficient and the proliferation of customs units incentivizes corruption from official and unofficial middlemen who complicate and extend the clearance process. Delays for goods entering the country via the Apapa Port were exacerbated under COVID; U.S. companies have reported wait times to berth ships at the port of up to 90 days. Freight forwarders usually resort to bribery of customs agents and port officials to avoid long delays clearing imported goods through the NPA and NCS. The NPA set up an Electronic Truck Call-up System in January 2021 to increase efficiency in the management of cargo movement across the Apapa Port. However, the impact made by this initiative remains to be felt. Other ports face logistical and security challenges leaving most operating well below capacity. Nigeria does not currently have a true deep-sea port although one is under construction near Lagos and expected to be operational by 2023.
Investors sometimes encounter difficulties acquiring entry visas and residency permits. Foreigners must obtain entry visas from Nigerian embassies or consulates abroad, seek expatriate position authorization from the NIPC, and request residency permits from the Nigerian Immigration Service. In 2018, Nigeria instituted a visa-on-arrival system, which works relatively well but still requires lengthy processing at an embassy or consulate abroad before an authorization is issued. Some U.S. businesses have reported being solicited for bribes in the visa-on-arrival program. The visa-on-arrival system is not an option for employment or residence. Investors report that the residency permit process is cumbersome and can take from two to 24 months and cost $1,000 to $3,000 in facilitation fees. The Nigerian government announced a visa rule in 2011 to encourage foreign investment, under which legitimate investors can obtain multiple-entry visas at points of entry. Obtaining a visa prior to traveling to Nigeria is strongly encouraged.
5. Protection of Property Rights
The Nigerian government recognizes secured interests in property, such as mortgages. The recording of security instruments and their enforcement remain subject to the same inefficiencies as those in the judicial system. In the World Bank Doing Business 2020 Report, Nigeria ranked 183 out of the 190 countries surveyed for registering property, a decline of one point over its 2019 ranking. Property registration in Lagos required an average of 12 steps over 105 days at a cost of 11.1% of the property value while in Kano registering property averages 11 steps over 47 days at a cost of 11.8% of the property value.
Owners transfer most property through long-term leases, with certificates of occupancy acting as title deeds. Property transfers are complex and must usually go through state governors’ offices, or the Minister of the Federal Capital Territory for lands located in the federal capital, as state governments have jurisdiction over land ownership. Authorities have often compelled owners to demolish buildings deemed to be in contravention of building codes or urban masterplans, including government buildings, commercial buildings, residences, and churches, even in the face of court injunctions. Acquiring and maintaining rights to real property can be problematic.
Clarity of title and registration of land ownership remain significant challenges throughout rural Nigeria, where many smallholder farmers have only ancestral or traditional use claims to their land. Nigeria’s land reforms have attempted to address this barrier to development but with limited success. Proof of ownership in the absence of land titles may be established through traditional history of ownership, proving possession over a sufficient length of time, and showing sustained enjoyment of the land. The government may acquire land for an overriding public purpose which may be excised to an individual or entity if the land has not been committed.
Enforcement of intellectual property rights (IPR) in Nigeria faces challenges in three areas: (1) limited capacity within the judicial and law enforcement systems, (2) weak regulatory and statutory regimes, (3) and poor funding and resource allocation. Nigeria’s legal and institutional infrastructure for protecting IPR remains in need of further development, even though laws on the books can enforce most IPR. The areas in which the legislation is deficient include online piracy, geographical indications, and animal breeders’ rights. In 2021, Nigeria enacted a new law giving plant breeders IPR over new and improved seeds for increased crop production. Draft copyright bills, one sponsored by a Senator and the other approved by the Federal Executive Council, were harmonized into one earlier this year. The harmonized bill defines technological protection measures (known as TPMs), remuneration rights, and broadcasting. It also provides anti-piracy penalties and prohibits the circumvention of TPMs as well as the falsification, alteration, or removal of electronic rights management information (RMI).
The International Anti-Counterfeiting Coalition (IACC) has long noted that the Copyright Act should be amended to provide stiffer penalties for violators. Statutory penalties for copyright offenses remain relatively low and rights-holders note that offenses are typically met with non-deterrent, modest fines. The harmonized bill proposes stricter penalties for IPR infractions. However, a firm timeline for passage of a new copyright law remains elusive.
Existing copyright protection in Nigeria is governed by the Copyright Act Chapter C28, Laws of the Federation 2004, which provides an adequate basis for enforcing copyright and combating piracy. The Nigerian Copyright Commission (NCC), an agency supervised by the Ministry of Justice, administers the Act. Nigeria is a member of the World Intellectual Property Organization (WIPO) and in 2017 it ratified two WIPO treaties that it signed in 1997: the WIPO Copyright Treaty (WCT) and WIPO Performances and Phonograms Treaty (WPPT), as well as the Beijing Treaty on Audiovisual Performances, and the Marrakesh Treaty to Facilitate Access to Published Works for persons who are Blind, Visually impaired persons, or otherwise Print disabled. These treaties address important digital communication, broadcast, and online infringement issues that have become increasingly relevant in the globalized economy. The pending Copyright Bill of 2021 would domesticate the ratified treaties. The NCC has primary responsibility for copyright enforcement but is understaffed and underfunded relative to the magnitude of the copyright challenges in Nigeria. Nevertheless, the NCC continues to carry out enforcement actions on a regular basis.
Violations of IPRs continue to be widespread. Anti-counterfeiting groups such as the IACC report that the Nigerian police work to combat counterfeiting and readily engage with trademark owners but lacks the capacity to fully enforce these laws. Authorized penalties for counterfeiting and trademark infringements remain relatively low and rightsholders note that offenses are typically met with non-deterrent, modest fines. A Senator has introduced legislation, the Trademarks Bill 2019, which remains pending and may address some of these issues. Depending on the scale and type of counterfeiting involved, the National Agency for Food and Drug Administration and Control (NAFDAC) and the Federal Competition and Consumer Protection Commission (FCCPC) would be responsible for enforcing counterfeiting and trademark infringement offenses.
The Nigerian Customs Service (NCS) has general authority to seize and destroy contraband. If NCS suspects unauthorized importation of copyright protected works, it will require the presumed copyright owner to issue a notice for NCS to treat such works as infringing. The implementing procedures for this practice have not been developed as it is handled on a case-by-case basis between the NCS and the NCC. Once seizures are made, the NCS invites the NCC to inspect and subsequently take delivery of the consignment of fake goods for purposes of further investigation because the NCC has the statutory responsibility to investigate and prosecute copyright violations. The NCC bears the costs of moving and storing infringing goods. If, after investigations, any persons are identified with the infringing materials, a decision to prosecute may be made. Where no persons are identified or could be traced, the NCC may obtain an order of court to enable it to destroy such works. The NCC works in cooperation with rights owners’ associations and stakeholders in the copyright industries on such matters. Similarly, NAFDAC and FCCPC work in cooperation with rights owners’ associations and stakeholders in the counterfeiting and trademark industries.
Nigeria is not listed in the United States Trade Representative (USTR) Special 301 Report or the Notorious Markets List. For additional information about treaty obligations and points of contact at local IP offices, please see the WIPO country profiles at http://www.wipo.int/directory/en/.
6. Financial Sector
The NIPC Act of 1995, amended in 2004, liberalized Nigeria’s foreign investment regime, which has facilitated access to credit from domestic financial institutions. The government, and the CBN in particular, has sought to diversify foreign exchange inflows by encouraging foreign portfolio investments (FPI). High returns on the CBN’s open market operation (OMO) bills as well as the exclusion of certain classes of domestic investors from the market yielded high levels of FPI. However, a tightening of monetary policy, foreign exchange shortages, revised CBN guidelines on OMO bills, and capital restrictions amidst COVID-19 disruptions have led to a decline in FPI. CBN officials indicate that OMO offerings to foreigners will be phased out – a departure from its strategy of attracting hard currency investments to shore up foreign exchange supply – once current obligations have been redeemed due to the large interest repayment burden placed on the CBN.
Foreign investors who have incorporated their companies in Nigeria have equal access to all financial instruments. Some investors consider the capital market, specifically the Nigerian Exchange Group (NXG), a financing option, given commercial banks’ high interest rates and the short maturities of local debt instruments. Financial institutions provide credit on market terms, but rates are relatively high due to high inflation and a high benchmark interest rate. The NXG completed a demutualization process in 2021 which transformed the company, previously privately held and called the Nigerian Stock Exchange, to a public company limited by shares. The NXG all-share index closed 2021 with over 42,000 points, a 4% increase from the end of 2020. As of December 2021, the NXG had 157 listed companies with an equity market capitalization of 22.3 trillion naira ($53.5 billion), an increase of 6% from 2020. The share of foreign investment in equity trading declined to 22% in 2021 from 35% in 2020 and over 50% in 2018. This decline is indicative of foreign investors’ diminishing appetite for Nigerian securities especially as repatriation concerns continue to mount. The NXG sovereign bond index declined year-on-year by 14% in 2021.
The Securities and Exchange Commission (SEC) is the government agency tasked with regulating and developing the capital market. SEC creates operational guidelines and licenses securities and market intermediaries. The Nigerian government has considered requiring companies in certain sectors such as telecoms, oil, and gas, or over a certain size to list on the NXG as a means to encourage greater corporate participation and sectoral balance in the Nigerian stock exchange, but those proposals have not been enacted.
The government employs debt instruments, issuing treasury bills of one year or less, and bonds of various maturities ranging from two to 30 years. Nigeria is increasingly relying on the bond market to finance its widening deficit, especially as domestic bond rates fell well below Nigeria’s Eurobond rates in 2021. In addition, Nigeria continues its reluctance or refusal to accept certain conditionalities attached to multilateral borrowing, and has increasingly forgone World Bank and Africa Development Bank loans that have required it to free the exchange rate, eliminate subsidies, create an agricultural exchange, easing trade restrictions, amont other macro/fiscal reforms. The government’s preferred option in recent times has been the capital market, foreign or domestic. It has also made increased use of Export–Import Bank of China loans, as these conditions are not as rigorous as is the case with multilateral institutions.
Domestic borrowing accounted for 76% of new government borrowings in the first eleven months of 2021. Some state governments have issued bonds to finance development projects, while some domestic banks have used the bond market to raise additional capital. Nigeria’s SEC has issued stringent guidelines for states wishing to raise funds on capital markets, such as requiring credit assessments conducted by recognized credit rating agencies.
The CBN is the apex monetary authority of Nigeria; it was established by the CBN Act of 1958 and commenced operations on July 1, 1959. It has oversight of all banks and other financial institutions and is designed to be operationally independent of political interference although the CBN governor is appointed by the president and confirmed by the Senate. The amended CBN Act of 2007 mandates the CBN to have the overall control and administration of the monetary and financial sector policies of the government. The new Banking and Other Financial Institutions Act (BOFIA) of 2020 broadens CBN’s regulatory oversight function to include financial technology companies as it prohibits the operations of unlicensed financial institutions. The revised BOFIA also grants partial immunity to the CBN and its officials from judicial intervention on actions arising from activities undertaken to implement the Act. Furthermore, the Act forbids restorative orders and limits remedies sought against the CBN where it has revoked a license to monetary compensation.
Foreign banks and investors are allowed to establish banking business in Nigeria provided they meet the current minimum capital requirement of 25 billion naira ($60 million) and other applicable regulatory requirements for banking license as prescribed by the CBN. The CBN regulations for foreign banks regarding mergers with or acquisitions of existing local banks in the country stipulate that the foreign institutions’ aggregate investment must not be more than 10% of the latter’s total capital.
Any foreign-owned bank in Nigeria that wishes to acquire or merge with a local bank must have operated in Nigeria for a minimum of five years. To qualify for merger or acquisition of any of Nigeria’s local banks, the foreign bank must have achieved a penetration of two-thirds of the states of the federation, that is, to have branches in at least 24 out of the 36 states in Nigeria. The CBN also stipulates that the foreign bank or investors’ shareholding arising from the merger or acquisition should not exceed 40% of the total capital of the resultant entity.
The CBN currently licenses 24 deposit-taking commercial banks in Nigeria. Following a 2009 banking crisis, CBN officials intervened in eight commercial banks and worked to stabilize the sector through reforms, including the adoption of uniform year-end International Financial Reporting Standards to increase transparency, a stronger emphasis on risk management and corporate governance, and the nationalization of three distressed banks. The CBN has since intervened in the sector using bridge banks and capital injections to avoid bank failures. The CBN has licensed three non-interest banks since it released operational guidelines in 2011. There are six licensed merchant banks which provide asset management and capital market activities, the latter through a subsidiary registered by SEC, and 882 microfinance banks licensed by the CBN to provide services largely to those not served by conventional banks.
The CBN reiterated its commitment to increasing the level of financial inclusion in the country from 60% in 2020 to 95% by 2024. The CBN plans to achieve this goal by leveraging technology and relaxing its criteria for financial services market entry. Most notably, telecom companies previously excluded from providing financial services are now eligible for payment service banking and digital financial services licenses. The CBN also licenses agents to provide financial services on behalf of commercial banks and other licensed financial services providers in underserved areas. According to the IMF’s Financial Access Survey for 2021, there were 5,158 bank branches in Nigeria in 2020 which amounted to 4.5 branches per 100,000 adults; the number of automated teller machines per 100,000 adults was to 16.1; there were 142 mobile money agents per thousand square kilometers; and the number of registered mobile money agents per thousand adults fell by more than half to 61.
The banking sector remained resilient in 2021 despite the risks and challenges posed by the COVID-19 pandemic. The five largest banks recorded 3%, 9% and 6% increases in revenues, profits, and assets, respectively, in the first half of the year. The CBN reported that non-performing loans (NPLs) declined to 4.9% in December 2021, breaching the 5% prudential threshold for the first time in over a decade. This is a significant decline from 6.4% and 9.4% in June of 2020 and 2021, respectively. The steady fall in NPLs is attributable to the CBN’s post-COVID forbearance measures as well as increased banking sector recoveries, disposals, and write-offs. The industry average capital adequacy ratio (CAR) was 14.5% as of December 2021, compared to a minimum regulatory threshold of 10% for ordinary banks and 15% for domestically systemically important banks (D-SIBS) and banks with international authorization. According to the CBN’s 2019 Financial Stability Report, seven D-SIBs account for 64% of banking assets, 65% of industry deposits, and 66% of industry loans, hence their failure could disrupt the entire financial system and the country’s economy. D-SIBS usually record higher CARs while smaller banks pull down the industry average. D-SIBS recorded an average CAR of 19.8% compared to the then average of 15.2%. Weaker banks thereby pose a risk to Nigeria’s financial system stability. In its first monetary policy meeting of 2022, the CBN noted downside risks to the sector were associated with sluggish post-COVID growth and resolved to “closely monitor” and “swiftly respond to emerging challenges.”
Total banking sector assets rose from 51 trillion naira ($122.3 billion) in 2020 to 59 trillion naira ($141.4 billion) while deposits increased to 38.4 trillion naira ($92 billion) in 2021. Nigeria’s five largest banks by assets, considered Tier 1 banks by the CBN, recorded combined total assets of 40 trillion naira ($96 billion) – about two-thirds of the industry total – in the first half of 2021. Access Bank leads the pack with 10.1 trillion naira ($24.2 billion) in assets, followed by Zenith Bank with 8.5 trillion naira (20.4 billion), UBA with 8.3 trillion naira ($20 billion), First Bank with 8 trillion naira ($19.2 billion), and GTB with 5 trillion naira ($12 billion).
The CBN has continued its system of liquidity management using unorthodox monetary policies. The measures included an increase in the cash reserve ratio (CRR) to 27.5% – among the highest globally – to absorb the excess liquidity within the system which was a direct consequence of the lack of investment opportunities. The CBN arbitrarily debited banks for carrying excess loanable deposits on their books resulting in the effective CRR for some banks rising as high as 50%, which limited banks’ capacity to lend. The CBN also enforced a 65% minimum loan to deposit ratio in order to increase private sector credit and boost productivity. In December 2020, the CBN released some of the excess CRR back to banks by selling them special bills in an attempt to improve liquidity and support economic recovery.
Under Nigerian laws and banking regulations, one of the conditions any foreigner seeking to open a bank account in Nigeria must fulfill is to be a legal resident in Nigeria. The foreigner must have obtained the Nigerian resident permit, known as the Combined Expatriate Residence Permit and Aliens Card which can only be processed by a foreigner that has been employed by a Nigerian company through an expatriate quota. Another requirement is the biometric BVN, which every account holder in Nigeria must have according CBN regulations.
Only a company duly registered in Nigeria can open a bank account in the country. Therefore, a foreign company is not entitled to open a bank account in Nigeria unless its subsidiary has been registered in Nigeria.
The Nigeria Sovereign Investment Authority (NSIA) manages Nigeria’s sovereign wealth fund. It was created by the NSIA Act in 2011 to harness Nigeria’s robust oil revenues toward economic stability, wealth creation, and infrastructure development. The NSIAreceived $1 billion seed capital in 2013 which grew to $2.1 billion in 2020 as a result of additional investments and retained earnings. The NSIA manages an additional $1.5 billion from third-party-managed funds for a total assets under management of $3.6 billion.
The NSIA is a public agency that subscribes to the Santiago Principles, which are a set of 24 guidelines that assign “best practices” for the operations of Sovereign Wealth Funds globally. The NSIA invests through three ring-fenced funds:
the Future Generations Fund is assigned 30% of NSIA’s assets with the objective of preserving and growing the value of said assets for the benefit of future Nigerians. The minimum investment horizon is 20 years, the investment base currency is the U.S. dollar, and the minimum target return is U.S. inflation + 4%. The Fund invests primarily in “growth assets,” “deflation hedges,” and “inflation hedges.”
the Nigeria Infrastructure Fund aims to plug Nigeria’s infrastructure gap by investing in, and catalyzing foreign investments for, domestic infrastructure projects. The Fund is assigned 50% of NSIA’s assets. Investments are in naira and U.S. dollars and the return-on-investment target is U.S. inflation plus 5%. The Fund cannot allocate more than 50% of its assets to investment managers (not more than 25% to a single manager) or more than 35% to a single infrastructure sector. The Fund may also invest not more than 10% of its assets in “development projects’ in underserved regions or sectors. Priority sectors are power, healthcare, real estate, technology and communications infrastructure, aviation assets, agriculture, water and sewage treatment and delivery, roads, port, and rail.
the Stabilization Fund was created to act as a buffer against short-term economic instability and is assigned 20% of NSIA’s assets. The Fund invests in conservative, short-term, and liquid assets since it may be drawn down to augment government revenue shortages. The base currency is the U.S. dollar. Investment options range from global sovereign and corporate debt, credit focused debt, cash, and to an extent, derivatives. The minimum credit quality rating is “A” over a 12-month period.
At least 50% of the NSIA’s assets are invested domestically in infrastructure projects. The NSIA does not take an active role in the management of companies. The Embassy has not received any report or indication that NSIA activities limit private competition.
11. Labor Policies and Practices
Nigeria’s skilled labor pool has declined over the past decade due to inadequate educational systems, limited employment opportunities, and the migration of educated Nigerians to other countries, including the United Kingdom, the United States, Canada, and South Africa. The low employment capacity of Nigeria’s formal sector means that almost three-quarters of all Nigerians work in the informal and agricultural sectors or are unemployed. Companies involved in formal sector businesses, such as banking and insurance, possess an adequately skilled workforce. Manufacturing and construction sector workers often require on-the-job training. The result is that while individual wages are low, individual productivity is also low, which means overall relative labor costs can be high. The Buhari Administration is pushing reforms in the education sector to improve the supply of skilled workers but this and other efforts run by state governments are in their initial stages.
The labor movement has long been active and influential in Nigeria. Labor organizations remain politically active and are prone to call for strikes on a regular basis against the national and state governments. Since 2000, unions have successfully called eight general strikes. While most labor actions are peaceful, difficult economic conditions fuel the risk that these actions could become violent.
Nigeria’s constitution guarantees the rights of free assembly and association and protects workers’ rights to form or belong to trade unions. Several statutory laws, nonetheless, restrict the rights of workers to associate or disassociate with labor organizations. Nigerian unions belong to one of three trade union federations: the Nigeria Labor Congress (NLC), which tends to represent junior (i.e., blue collar) workers; the United Labor Congress of Nigeria (ULC), which represents a group of unions that separated from the NLC in 2015; and the Trade Union Congress of Nigeria (TUC), which represents the “senior” (i.e., white collar) workers.
According to figures provided by the Ministry of Labor and Employment, total union membership stands at roughly seven million. A majority of these union members work in the public sector, although unions exist across the private sector. The Trade Union Amendment Act of 2005 allowed non-management senior staff to join unions.
Collective bargaining in the oil and gas industry is relatively efficient compared to other sectors. Issues pertaining to salaries, benefits, health and safety, and working conditions tend to be resolved quickly through negotiations. Workers under collective bargaining agreements cannot participate in strikes unless their unions comply with the requirements of the law, which includes provisions for mandatory mediation and referral of disputes to the Nigerian government. Despite these restrictions on staging strikes, unions occasionally conduct strikes in the private and public sectors without warning. In 2021, localized strikes occurred in the education, government, energy, power, and healthcare sectors. The law forbids employers from granting general wage increases to workers without prior government approval, but the law is not often enforced.
In April 2019, President Buhari signed into law a new minimum wage, increasing it from 18,000 naira ($50 at the 2019 official exchange rate) to 30,000 naira ($73 at the 2021 official exchange rate) per month. More than 15 state governments have yet to commence with the implementation of the new minimum wage. [Note: The federal government has even threatened to sanction the management of the National Assembly over its breach of the provisions of the National Minimum Wage Act, 2019, for failing to pay its employees at the new minimum rate as of April 18, 2019.] Nigeria’s Labor Act provides for a 40-hour work week, two to four weeks of annual leave, and overtime and holiday pay for all workers except agricultural and domestic workers. No law prohibits compulsory overtime. The Act establishes general health and safety provisions, some of which specifically apply to young or female workers and requires the Ministry of Labor and Employment to inspect factories for compliance with health and safety standards. Under-funding and limited resources undermine the Ministry’s oversight capacity, and construction sites and other non-factory work sites are often ignored. Nigeria’s labor law requires employers to compensate injured workers and dependent survivors of workers killed in industrial accidents.
The Nigerian Minister of Labor and Employment may refer unresolved disputes to the Industrial Arbitration Panel (IAP) and the National Industrial Court (NIC). In 2015, the NIC launched an Alternative Dispute Resolution Center. Union officials question the effectiveness and independence of the NIC, believing it unable to resolve disputes stemming from Nigerian government failure to fulfill contract provisions for public sector employees. Union leaders criticize the arbitration system’s dependence on the Minister of Labor and Employment’s referrals to the IAP.
The issue of child labor remains of great concern in Nigeria, where an estimated 15 million children under the age of 14 are working, and about half this population being exploited as workers in hazardous situations according to the International Labor Organization (ILO). Nigeria’s laws regarding minimum age for child labor and hazardous work are inconsistent. Article 59 of the Labor Act of 1974 sets the minimum age of employment at 12, and it is in force throughout Nigeria. The Act also permits children of any age to do light work alongside a family member in agriculture, horticulture, or domestic service.
The Federal 2003 Child Rights Act (CRA) codifies the rights of children in Nigeria and must be ratified by each State to become law in its territory. To date, 28 states and the Federal Capital Territory have ratified the CRA, with all eight of the remaining states located in northern Nigeria. [Note: The legislatures in Kebbi and Yobe States tentatively approved the law and are only awaiting their governors’ signatures to ratify the bills.]
The CRA states that the provisions related to young people in the Labor Act apply to children under the CRA, but also that the CRA supersedes any other legislation related to children. The CRA restricts children under the age of 18 from any work aside from light work for family members; however, Article 59 of the Labor Act applies these restrictions only to children under the age of 12. This language makes it unclear what minimum ages apply for certain types of work in the country.
While the Labor Act forbids the employment of youth under age 18 in work that is dangerous to their health, safety, or morals, it allows children to participate in certain types of work that may be dangerous by setting different age thresholds for various activities. For example, the Labor Act allows children age 16 and older to work at night in gold mining and the manufacturing of iron, steel, paper, raw sugar, and glass. Furthermore, the Labor Act does not extend to children employed in domestic service. Thus, children are vulnerable to dangerous work in industrial undertakings, underground, with machines, and in domestic service. In addition, the prohibitions established by the Labor Act and CRA are not comprehensive or specific enough to facilitate enforcement. In 2013, the National Steering Committee (NSC) for the Elimination of the Worst Forms of Child Labor in Nigeria validated the Report on the Identification of Hazardous Child Labor in Nigeria. The report has languished with the Ministry of Labor and Employment and still awaits the promulgation of guidelines for operationalizing the report.
The Nigerian government adopted the Trafficking in Persons (Prohibition), Enforcement, and Administration Act of 2015. While not specifically directed against child labor, many sections of the law support anti-child labor efforts. The Violence against Persons Prohibition Act was signed into law in 2015 and, while not specifically focused on child labor, it covers related elements such as “depriving a person of his/her liberty,” “forced financial dependence/economic abuse,” and “forced isolation/separation from family and friends” and is applicable to minors.
Draft legislation, such as a new Labor Standards Act which includes provisions on child labor, and an Occupational Safety and Health Act that would regulate hazardous work, have remained under consideration in the National Assembly since 2006.
Admission of foreign workers is overseen by the Ministry of the Interior. Employers must seek the consent of the Ministry in order to employ foreign workers by applying for an “expatriate quota.” The quota allows a company to employ foreign nationals in specifically approved job designations as well as specifying the validity period of the designations provided on the quota.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data
Year
Amount
Year
Amount
Host Country Gross Domestic Product (GDP) ($M USD)
* Source for Host Country Data: Nigerian Bureau of Statistics
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
$74,256
100%
Total Outward
$13,213
100%
Netherlands, The
$13,640
18%
United Kingdom
$2,380
18%
United States
$9,405
13%
Netherlands, The
$1,217
9%
France
$8,798
12%
Bermuda
$1,014
8%
United Kingdom
$8,132
11%
Ghana
$917
7%
Bermuda
$7,696
10%
Norway
$808
6%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment Data not available.
Sri Lanka
3. Legal Regime
Many foreign and domestic investors view the regulatory system as unpredictable with outdated regulations, rigid administrative procedures, and excessive leeway for bureaucratic discretion. BOI is responsible for informing potential investors about laws and regulations affecting operations in Sri Lanka, including new regulations and policies that are frequently developed to protect specific sectors or stakeholders. Effective enforcement mechanisms are sometimes lacking, and investors cite coordination problems between BOI and relevant line agencies. Lack of sufficient technical capacity within the government to review financial proposals for private infrastructure projects also creates problems during the tender process.
Corporate financial reporting requirements in Sri Lanka are covered in a number of laws, and the Institute of Chartered Accountants of Sri Lanka (ICASL) is responsible for setting and updating accounting standards to comply with current accounting and audit standards adopted by the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB). Sri Lanka follows International Financial Reporting Standards (IFRS) for financial reporting purposes set by the IASB. Sri Lankan accounting standards are applicable for all banks, companies listed on the stock exchange, and all other large and medium-sized companies in Sri Lanka. Accounts must be audited by professionally qualified auditors holding ICASL membership. ICASL also has published accounting standards for small companies. The Accounting Standards Monitoring Board (ASMB) is responsible for monitoring compliance with Sri Lankan accounting and auditing standards.
Overall legislative authority lies with Parliament. Line ministries draft bills and, together with regulatory authorities, are responsible for crafting draft regulations, which may require approval from the National Economic Council, the Cabinet, and/or Parliament. Bills are published in the government gazette http://documents.gov.lk/en/home.php at least seven days before being placed on the Order Paper of the Parliament (the first occasion the public is officially informed of proposed laws) with drafts being treated as confidential prior to this. Any member of the public can challenge a bill in the Supreme Court if they do so within one week of its placement on the Order Paper of the Parliament. If the Supreme Court orders amendments to a bill, such amendments must be incorporated before the bill can be debated and passed. Regulations are made by administrative agencies and are published in a government gazette, similar to a U.S. Federal Notice. In addition to regulations, some rules are made through internal circulars, which may be difficult to locate.
The Central Bank and the Finance Ministry published information on Central Government debt including contingent liabilities and government finance. Central Bank publishes information on debt of major SOE’s. Debt obligations are available online in the Central Bank Annual Report; Fiscal Management Report of the Finance Ministry; Annual Report of the Ministry of Finance. Information on contingent liabilities is available in the Annual Report of the Ministry of Finance. Since 2018, the Central Bank published guaranteed debt and central government debt annually. The government does not promote or require companies’ environmental, social, and governance (ESG) disclosures, however most large companies listed on the Colombo Stock Exchange disclose these.
Sri Lanka is a member of the World Trade Organization (WTO) and has made WTO notifications on customs valuation, agriculture, import licensing, sanitary and phytosanitary measures, the Agreement on Technical Barriers to Trade, the Agreement on Trade-Related Investment Measures, and the Agreement on Trade-Related Aspects of Intellectual Property Rights. Sri Lanka ratified the WTO Trade Facilitation Agreement (TFA) in 2016 and a National Trade Facilitation Committee was tasked with undertaking reforms needed to operationalize the TFA. The WTO conducted a review of the TFA in June 2019 in which Sri Lankan officials noted challenges related to accessing technical assistance and capacity building support for implementation of TFA recommendations. In September 2021 Sri Lanka requested for extension of its definitive implementation dates on certain provisions based on Article 17 of the Trade Facilitation Agreement.
Sri Lanka’s legal system reflects diverse cultural influences. Criminal law is fundamentally British-based while civil law is Roman-Dutch. Laws on marriage, divorce, inheritance, and other issues can also vary based on religious affiliation. Sri Lankan commercial law is almost entirely statutory, reflecting British colonial law, although amendments have largely kept pace with subsequent legal changes in the United Kingdom. Several important legislative enactments regulate commercial issues: the BOI Law; the Intellectual Property Act; the Companies Act; the Securities and Exchange Commission Act; the Banking Act; the Inland Revenue Act; the Industrial Promotion Act; and the Consumer Affairs Authority Act.
Sri Lanka’s court system consists of the Supreme Court, the Court of Appeal, provincial High Courts, and the Courts of First Instance (district courts with general civil jurisdiction) and Magistrate Courts (with criminal jurisdiction). Provincial High Courts have original, appellate, and reversionary criminal jurisdiction. The Court of Appeal is an intermediate appellate court with a limited right of appeal to the Supreme Court. The Supreme Court exercises final appellate jurisdiction for all criminal and civil cases. Citizens may apply directly to the Supreme Court for protection if they believe any government or administrative action has violated their fundamental human rights.
The principal law governing foreign investment is Law No. 4 (known as the BOI Act), created in 1978 and amended in 1980, 1983, 1992, 2002, 2009 and 2012. The BOI Act and implementing regulations provide for two types of investment approvals, one for concessions and one without concessions. Under Section 17 of the Act, the BOI is empowered to approve companies satisfying minimum investment criteria with such companies eligible for duty-free import concessions. The BOI acts as the “one-stop-shop” to facilitate all the requirements of the foreign investors to Sri Lanka. Investment approval under Section 16 of the BOI Act permits companies to operate under the “normal” laws and applies to investments that do not satisfy eligibility incentive criteria. From April 1, 2017, Inland Revenue Act No. 24 of 2017 created an investment incentive regime granting a concessionary tax rate (for specific sectors) and capital allowances (depreciation) based on capital investments. Commercial Hub Regulation No 1 of 2013 applies to transshipment trade, offshore businesses, and logistic services. The Strategic Development Project Act of 2008 (SDPA) provides tax incentives for large projects that the Cabinet identifies as “strategic development projects.” https://investsrilanka.com/
Sri Lanka does not have a specific competition law. Instead, the BOI or respective regulatory authorities may review transactions for competition-related concerns. In March of 2017, Parliament approved the “Anti-Dumping and Countervailing” and “Safeguard Measures” Acts. These laws provide a framework against unfair trade practices and import surges and allow government trade agencies to initiate investigations relating to unfair business practices to impose additional and/or countervailing duties.
Since economic liberalization policies began in 1978, the government has not expropriated a foreign investment, with the last expropriation dispute resolved in 1998. The land acquisition law (Land Acquisition Act of 1950) empowers the government to take private land for public purposes with compensation based on a government valuation.
The Companies Act and the Insolvency Ordinance provide for dissolution of insolvent companies, but there is no mechanism to facilitate the reorganization of financially troubled companies. Other laws make it difficult to keep a struggling company solvent. The Termination of Employment of Workmen Special Provisions Act (TEWA), for example, makes it difficult to fire or lay off workers who have been employed for more than six months for any reason other than serious, well-documented disciplinary problems. In the absence of comprehensive bankruptcy laws, extra-judicial powers granted by law to financial institutions protect the rights of creditors. A creditor may petition the court to dissolve the company if the company cannot make payments on debts in excess of LKR 50,000 ($320.00). Lenders are also empowered to foreclose on collateral without court intervention. However, loans below LKR 5 million ($32,000) are exempt, and lenders cannot foreclose on collateral provided by guarantors to a loan.
Sri Lanka ranked 94 out of 190 countries in the resolving insolvency index in the World Bank’s Doing Business Report 2020. Resolving insolvency takes, on average, 1.7 years at a cost equivalent to 10 percent of the estate’s value.
4. Industrial Policies
The Inland Revenue Act of 2017, implemented April 1, 2018, includes concessionary corporate tax rates for investments in certain sectors and increased capital allowances (depreciation) on capital investments.
As per the 2021 budget revisions, which still apply, the standard rate of corporate tax is 14 percent for: a) small and medium companies (with an annual income of less than LKR 500 million or $3.2 million); b) companies exporting goods and services; and c) companies engaged in education services; promotion of tourism; d) companies engaged in construction and e) companies engaged in healthcare services. Companies engaged in information technology services and agricultural business are exempt from taxes. A 40 percent corporate tax rate applies to companies engaged in gaming, liquor, and tobacco related businesses. An 18 percent tax on manufacturing and 24 percent tax on Trading, banking, finance, insurance, and similar businesses. The 2022 budget introduced a retroactive surcharge Tax at 25 percent on persons and entities with taxable income exceeding Rs. 2 billion for the financial year 2020/21.
The Women Entrepreneur Development Program of the Sri Lanka Export Development Board (EDB) seeks to engage more women participation in agriculture and manufacturing-based exporter sectors. https://www.srilankabusiness.com/exporters/assisting-women-in-business.html. EDB launched SheTrades (www.Shetrades.com) in 2016 in partnership with the International Trade Center (ITC) as a platform for women-owned businesses, organizations, companies and ITC SheTrades partner institutions to showcase their businesses, build strong networks, strike business deals, increase their credibility and connect to markets. Companies and individual buyers can use shetrades.com to include more women entrepreneurs in their supply chains, by sourcing specific products & services from women-owned businesses.
Sri Lanka has 15 free trade zones, also called “export processing zones,” which are administered by the BOI. Foreign investors have the same investment opportunities as local entities in these zones. Export-oriented companies located within and outside the zones are eligible to import project-related material and inputs free of customs import duties although such imports may be subject to other taxes.
In the past, firms preferred to locate their factories near the Colombo harbor or airport to reduce transportation time and cost. However, excessive concentration of industries around Colombo has caused heavy traffic, higher real estate prices, environmental pollution, and a scarcity of labor. The BOI and the government now encourage export-oriented factories to locate in industrial zones farther from Colombo, although Sri Lanka’s limited road network create other challenges for outlying zones.
In 2019, the China Harbor Engineering Company (CHEC) completed the reclamation of 269 hectares of land adjacent to Colombo’s port and historic downtown to form the Colombo Port City Special Economic Zone (SEZ), which government officials describe as a future “international commercial and financial hub.” CHEC invested $1.4 billion in the land reclamation and basic infrastructure of the Port City, in return for which it will have control, via lease, of 116 of the 178 total hectares of marketable land on the site, the balance of which the government will control. Parliament approved on May 20, 2021, legislation to govern the SEZ and establish a commission to act as promoter, manager, regulator, and “single window investment facilitator” to attract foreign direct investment to the project. The legislation also includes tax exemptions and other incentives for potential investors. The legislation was amended prior to approval by a simple majority in Parliament following a Supreme Court ruling on multiple legal challenges to the bill’s constitutionality, though concerns remain about the potential risk of illicit financial flows.
Sri Lanka’s State Pharmaceutical Corporation (SPC), a state-owned enterprise established a dedicated pharmaceutical manufacturing zone in Hambantota. The Sri Lankan government has earmarked some 400 acres of land in the Hambantota-Arabokka area and announced tax exemptions for foreign companies ready to set up manufacturing units. The SPC has also approached Indian manufacturers about the possibility of establishing manufacturing centers in the dedicated pharmaceutical manufacturing zone in Hambantota. The goal being to produce at least 40 percent of pharmaceuticals for domestic needs and up to $1 billion in annual pharmaceutical exports. In addition to favorable taxation benefits, all infrastructure facilities will be supplied by the Sri Lanka Board of Investment.
Employment of foreign personnel is permitted when there is a demonstrated shortage of qualified local labor. Technical and managerial personnel are in short supply, and this shortage is likely to continue in the near future. Foreign laborers do not experience significant problems in obtaining work or residence permits. Sri Lanka has seen a rise in foreign laborers, mainly in construction sites, with some reportedly working without proper work visas. Foreign investors who remit at least $250,000 can qualify for a five-year resident visa under the Resident Guest Scheme Visa Program: (http://www.immigration.gov.lk/web/index.php?option=com_content&view=article&id=154&Itemid=200&lang=en). Sri Lanka offers dual citizenship status to Sri Lankans who have obtained foreign citizenship in seven designated countries, including the United States. Tourist and business visas are granted for one month with possible extensions.
Sri Lanka has no specific requirements for foreign information technology providers to turn over source code or provide access to surveillance. Provisions relating to interception of communications for cybercrime issues are subject to court supervision under the Computer Crimes Act (CCA) of 2007. Sri Lanka became a party to the Budapest Cybercrime Convention in 2015, and safeguards based on the convention are in force. Although there is no comprehensive legislative protection of electronic data, the CCA has a provision to protect data and information. The government is currently formulating data protection legislation. There is no ban on the sale of electronic data for marketing purposes.
5. Protection of Property Rights
Secured interests in real property in Sri Lanka are generally recognized and enforced, https://www.hg.org/legal-articles/intellectual-property-law-in-sri-lanka-21205 but many investors claim protection can be flimsy. A reliable registration system exists for recording private property including land, buildings, and mortgages, although problems reportedly exist due to fraud and forged documents. In 1998 the government introduced Bim Saviya Program (Title Registration) to provide stronger and clear Land ownership with the view of improving Land Utilization with the aid of new technology. This program aims to avoid unnecessary disputes due to land ownership or boundaries. Property registration required, on average, completion of eight procedures lasting 39 days. Sri Lanka prohibits the sale of land to foreign nationals and to enterprises with foreign equity exceeding 50 percent. Foreign investors are eligible to lease lands in Sri Lanka to establish their projects and plants under the BOI. Foreigners can freely buy properties as long as they are willing to pay the Land Tax for foreigners at 100 percent of the property value. An alternative is to lease the land for 99 years, bringing the tax down to 7 percent.
Under current law, the Prescription Ordinance stipulates that a person holding continuous “adverse possession” of real property for ten years without challenge is entitled to ownership of that property. (Prescription, Cap. 81, No. 22 of 1871, § 3, COMMONLII.)
Sri Lanka is a party to major intellectual property agreements. The country adopted an intellectual property law in 2003 intended to meet U.S.-Sri Lanka bilateral IPR agreements and trade-related aspects of intellectual property rights (TRIPS) agreement obligations. The law governs copyrights and related rights; industrial designs; patents, trademarks, and service marks; trade names; layout designs of integrated circuits; geographical indications; unfair competition; databases; computer programs; and undisclosed information (e.g., trade secrets). While it is not compulsory to register a trademark, it is recommended to register a trademark for easy and effective enforcement. For registration and grant of industrial designs and patents, an applicant must file formal applications with the Director-General of Intellectual Property. Copyright protection is accorded without any formality of registration in Sri Lanka. While trade secrets infringement is considered under the umbrella of unfair competition in the Sri Lankan IP framework, Sri Lanka lacks a separate substantive piece of legislation governing trade secrets.
The Government of Sri Lanka has taken concrete steps to strengthen its IP regime. The National Intellectual Property Office (NIPO) has shown its intention to accede to the Madrid Protocol, and the Sri Lankan Parliament approved the proposal to accede to the Madrid Protocol in 2020. The necessary amendments in the existing IP Act have been initiated to facilitate Sri Lanka’s entry into the Madrid protocol. In 2019, the Sri Lankan Government amended its Information Technology (IT) policy. The amended policy requires government agencies only to use licensed or open-source software. However, the Government has yet to put systems to monitor compliance with the policy. In February 2022, the Sri Lankan cabinet approved parliamentary discussion on possible amendments to the IP Act. The objective of the proposed amendment is to incorporate changes to include a fair use exemption for copyrighted audio works to be copied and edited into an accessible format (for disabled persons) and provide protection to Geographical Indications products.
The Sri Lankan Government has also made attempts to improve the NIPO by upgrading and modernizing its infrastructure and recruiting new examiners for both trademark and patents, which has led to a decrease in backlogs of trademark and patent examinations.
Along with a comprehensive IPR law, Sri Lanka also has good enforcement practices. In 2010, the Sri Lankan government established special anti-piracy and counterfeit unit in the Criminal Investigation Division (CID) of the police to address IPR concerns specifically. The CID is the primary investigation arm of Sri Lanka and was established in 1870. The Sri Lankan Government has also established an IPR unit in the Social Protection Unit of Sri Lankan Customs to focus on IPR related issues (https://www.customs.gov.lk/). Sri Lanka Customs Department is also working towards developing a trademark database to advance IPR protection and enforcement, though it is yet to be implemented.
The overall IP ecosystem in Sri Lanka has improved in recent years. However, the lack of effective strategic policy coordination among entities involved in the implementation and execution of laws and judicial redressal being time-consuming and challenging has led to freely available counterfeit products in Sri Lanka. Counterfeit goods, particularly imports, are still widely available, and music and software piracy are reportedly widespread. Foreign and U.S. companies in the recording, software, movie, clothing, and consumer product industries claim that inadequate IPR protection and enforcement weaken their businesses in Sri Lanka. Local agents of well-known U.S. and other international companies representing recording, software, movie, clothing, and consumer products industries continue to complain that the lack of adequate IPR protection damages their business interests in Sri Lanka.
Better coordination among enforcement authorities and government institutions – such as the NIPO, Sri Lankan Customs, Sri Lankan Police, and more trained staff and resources – is needed to strengthen Sri Lanka’s IPR regime. Although infringement of intellectual property rights is a punishable offense under the IP law with criminal and civil penalties, Sri Lanka does not track and report on seizures of counterfeit goods.
Sri Lanka is currently not on the Special 301 report Watch List or the Notorious Markets List. Sri Lanka does not track and report on its seizures of counterfeit goods.
Resources for Intellectual Property Rights Holders:
The Securities and Exchange Commission (SEC) governs the CSE, unit trusts, stockbrokers, listed public companies, margin traders, underwriters, investment managers, credit rating agencies, and securities depositories. https://cse.lk/ Foreign portfolio investment is encouraged. Foreign investors can purchase up to 100 percent of equity in Sri Lankan companies in permitted sectors. Investors may open an Inward Investment Account (IIA) with any commercial bank in Sri Lanka to bring in investments. As of January 31, 2022, 297 companies representing 20 business sectors are listed on the CSE. As stock market liquidity is limited, investors need to manage exit strategies carefully.
In accordance with its IMF Article VIII obligations, the government and the Central Bank of Sri Lanka (CBSL) generally refrain from restrictions on current international transfers. When the government experiences balance of payments difficulties, it tends to impose controls on foreign exchange transactions. Due to pressures on the balance of payments caused by the COVID-19 and the subsequent economic crisis, Sri Lanka took several measures to restrict imports and limit outward capital transactions in 2020, these limits are still in place as of March 2022. Further, import restrictions
The state consumes over 50 percent of the country’s domestic financial resources and has a virtual monopoly on the management and use of long-term savings. This inhibits the free flow of financial resources to product and factor markets. High budget deficits have caused interest rates to rise and resulted in higher inflation. On a year-to-year basis, inflation was approximately 17.5 percent in February of 2022, and the average prime lending rate was 9.91 percent. Retained profits finance a significant portion of private investment in Sri Lanka with commercial banks as the principal source of bank finance and bank loans as the most widely used credit instrument for the private sector. Large companies also raise funds through corporate debentures. Credit ratings are mandatory for all deposit-taking institutions and all varieties of debt instruments. Local companies can borrow from foreign sources. FDI finances about 6 percent of overall investment. Foreign investors can access credit on the local market and are free to raise foreign currency loans.
Sri Lanka has a diversified banking system. In terms of physical access to outlets, Sri Lanka also enjoys high levels of banking penetration, with bank branch density at 17 per 100,000 adults, compared to the South Asia regional average of 10.2. There are 25 commercial banks: 13 local and 12 foreign. In addition, there are seven specialized local banks. Citibank N.A. is the only U.S. bank operating in Sri Lanka. Several domestic private commercial banks have substantial government equity acquired through investment agencies controlled by the government. Banking has expanded to rural areas, and by end of 2020 there were over 3,619 commercial bank branches and over 6,176 Automated Teller Machines throughout the country. Both resident and non-resident foreign nationals can open foreign currency banking accounts. However, non-resident foreign nationals are not eligible to open Sri Lankan Rupee accounts. A foreign individual can open a Personal Foreign Currency Account or (PFC account). This is a special type of account that can be opened in foreign currencies carried by the overseas client. Just like an ordinary bank account, this type of account gives interests against the deposits.
CBSL https://www.cbsl.gov.lk/ is responsible for supervision of all banking institutions and has driven improvements in banking regulations, provisioning, and public disclosure of banking sector performance as well as setting exchange rates, which have shifted regularly with the ongoing economic crisis. Credit ratings are mandatory for all banks. CBSL introduced accounting standards corresponding to International Financial Reporting Standards for banks on January 1, 2018, and the application of the standards substantially increased impairment provisions on loans. The migration to the Basel III capital standards began in July of 2017 on a staggered basis, with full implementation was kicking in on January 1, 2019 and some banks having had to boost capital to meet full implementation of Basel III requirements. In addition, banks must increase capital to meet CBSL’s new minimum capital requirements deadline, which is set for December 31, 2022. A staggered application of capital provisions for smaller banks unable to meet capital requirements immediately will likely be allowed.
Total assets of the banking industry stood at LKR 16,923 billion ($64 billion) as of December 31, 2020. The two fully state-owned commercial banks – Bank of Ceylon and People’s Bank – are significant players, accounting for about 33 percent of all banking assets. The Bank of Ceylon currently holds a non-performing loan (NPL) ratio of 6 percent (up from 4.89 percent in 2020). The People’s Bank currently holds a NPL ratio of 3.85 percent (up from 3.68 percent in 2019). Both banks have significant exposure to SOEs but, these banks are implicitly guaranteed by the state. The debt moratorium issued by the CBSL for distressed borrowers will expired in 2022, the impact of this is yet to be reflected on the banking sector NPLs.
In October 2019, Sri Lanka was removed from the Financial Action Task Force (FATF) gray list after making significant changes to its Anti-Money Laundering/Countering the Finance of Terrorism (AML/CFT) laws. CBSL is exploring the adoption of blockchain technologies in its financial transactions and appointed two committees to investigate the possible adoption of blockchain and cryptocurrencies.
Sri Lanka has a rapidly growing alternative financial services industry that includes finance companies, leasing companies, and microfinance institutes. In response, CBSL has established an enforcement unit to strengthen the regulatory and supervisory framework of non-banking financial institutions. Credit ratings are mandatory for finance companies as of October 1, 2018. The government also directed banks to register with the U.S. Internal Revenue Service (IRS) to comply with the U.S. Foreign Accounts Tax Compliance Act (FATCA). Almost all commercial banks have registered with the IRS.
Sri Lanka does not have a sovereign wealth fund. The government manages and controls large retirement funds from private sector employees and uses these funds for budgetary purposes (through investments in government securities), stock market investments, and corporate debenture investments.
11. Labor Policies and Practices
Both local and international businesses have cited labor shortages as a major problem in Sri Lanka.In 2020, 8.1 million Sri Lankans were employed: 46 percent in services, 27 percent in industry and 26 percent in agriculture. Approximately 70 percent of the employed are in the informal sector. The government sector also employs over 1.4 million people.
Sri Lanka’s labor laws afford many employee protections. Many investors consider this legal framework somewhat rigid, making it difficult for companies to reduce their workforce even when market conditions warrant doing so. The cost of dismissing an employee in Sri Lanka is calculated based upon a percentage of wages averaged over 54 salary weeks, one of the highest in the world. There is no unemployment insurance or social safety net for laid off workers.
Labor is available at relatively low cost, though higher than in other South Asian countries. Sri Lanka’s labor force is largely literate (particularly in local languages), although weak in certain technical skills and English. The average worker has eight years of schooling, and two-thirds of the labor force is male. The government has initiated educational reforms to better prepare students for the labor market, including revamping technical and vocational education and training. While the number of students pursuing computer, accounting, business skills, and English language training programs is increasing, the demand for these skills still outpaces supply with many top graduates seeking employment outside of the country.
Youth are increasingly uninterested in labor-intensive manual jobs, and the construction, plantation, apparel, and other manufacturing industries report a severe shortage of workers. The garment industry reports up to a 40 percent staff turnover rate. Lack of labor mobility in the North and East is also a problem, with workers reluctant to leave their families and villages for employment elsewhere
A significant proportion of the unemployed seek “white collar” employment, often preferring stable government jobs. Most sectors seeking employees offer manual or semi-skilled jobs or require technical or professional skills such as management, marketing, information technology, accountancy and finance, and English language proficiency. Investors often struggle to find employees with the requisite skills, a situation particularly noticeable as the tourism industry opens new hotels.
Many service sector companies rely on Sri Lankan engineers, researchers, technicians, and analysts to deliver high-quality, high-precision products and retention is reasonably good in the information technology sector. Foreign and local companies report a strong worker commitment to excellence in Sri Lanka, with rapid adaptation to quality standards.
Women face workforce restrictions such as caps on overtime work, limits on nighttime shifts and restrictions from certain jobs. In 2021 the labor market was characterized by high female unemployment and low female labor force participation: an estimated 55 percent of public sector employees were men and 45 percent women while 70 percent of employees outside the public sector were men and only 30 percent women.
As of 2021 due the covid pandemic a total of 807,800 Sri Lankan registered as migrant workers working abroad with the respective Sri Lankan embassies overseas. Remittances from migrant workers, averaged about $5.49 billion in 2021, making up Sri Lanka’s second largest source of foreign exchange. Most of this labor force is unskilled (i.e., housemaids and factory laborers) and located primarily in the Middle East. Sri Lanka is also losing many of its skilled workers to more lucrative jobs abroad. Approximately 6,000 Sri Lankans work in Bangladeshi garment factories.
Sri Lanka has seen a gradual rise in foreign workers. Most foreign workers are from India, Bangladesh, and the PRC, many reportedly without proper work visas or other documentation.
Approximately 9.5 percent of the workforce is unionized, and union membership is declining. There are more than 2,000 registered trade unions (many of which have 50 or fewer members), and several federations. About 18 percent of labor in the industry and service sector is unionized. Most of the major trade unions are affiliated with political parties, creating a highly politicized labor environment. This is not the case for private companies, which typically only have one union or workers’ council to represent employees. There are also some independent unions. All workers, other than police, armed forces, prison service, and those in essential services, have the right to strike. The President can designate any industry an essential service. Workers may lodge complaints to protect their rights with the Commissioner of Labor, a labor tribunal, or the Supreme Court.
Unions represent workers in many large private firms, but workers in small-scale agriculture and small businesses typically do not belong to unions. The tea industry, however, is highly unionized, and public sector employees are unionized at high rates. Labor in the export processing zone (EPZ) enterprises tend to be represented by non-union worker councils, although unions also exist within the EPZs. The International Labor Organization’s (ILO) Freedom of Association Committee observed that Sri Lankan trade unions and worker councils can co-exist but advises that there should not be any discrimination against those employees choosing to join a union. The right of worker councils to engage in collective bargaining has been recognized by the ILO.
Collective bargaining exists but is not universal. The Employers’ Federation of Ceylon, the main employers’ association in Sri Lanka, assists member companies in negotiating with unions and signing collective bargaining agreements. While about a quarter of the 660 members of the Employers’ Federation of Ceylon are unionized, approximately 90 of these companies (including a number of foreign-owned firms) are bound by collective agreements. Several other companies have signed memorandums of understanding with trade unions. However, there are only a few collective bargaining agreements signed with companies located in EPZs.
All forms of forced and compulsory labor are prohibited. In March of 2016, the government introduced a national minimum wage set at LKR 10,000 ($36) per month or LKR 400 ($1.45) per day. The National Minimum Wage of Workers Act was amended in 2021, increasing the minimum wage to LKR 12,500 ($45) monthly and LKR 500 ($1.81) per day. Forty-four “wage boards” established by the Ministry of Labor set minimum wages and working conditions by sector and industry in consultation with unions and employers. The minimum wages established by these sector-specific wage boards tend to be higher than the minimum wage.
Sri Lankan law does not require equal pay for equal work for women. The law prohibits most full-time workers from regularly working more than 45 hours per week without receiving overtime (premium pay). In addition, the law stipulates a rest period of one hour per day. Regulations limit the maximum overtime hours to 15 per week. The law provides for paid annual holidays, sick leave, and maternity leave. Occupational health and safety regulations do not fully meet international standards.
Child labor is prohibited and virtually nonexistent in the organized sectors, although child labor occurs in informal sectors. The minimum legal age for employment is set at 16 years of age. The minimum age for employment in hazardous work is 18 years of age.
Sri Lanka is a member of the ILO and has ratified 31 international labor conventions, including all eight of the ILO’s core labor conventions. The ILO and the Employers’ Federation of Ceylon are working to improve awareness of core labor standards and the ILO also promotes its “Decent Work Agenda” program in Sri Lanka.
A 2019 Labor Survey estimated that 62 percent of the country’s workforce was employed informally. Most working in the informal economy are reportedly self-employed, and the informal sector accounts for an estimated 87.5 percent of total employment in agriculture. Those working in the informal economy lack job protections and entitlements.