Policies Towards Foreign Direct Investment

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

Other Investment Policy Reviews

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

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

Business Facilitation

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

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

Outward Investment

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

Australia is a party to bilateral investment treaties with Argentina, China, Czech Republic, Egypt, Hong Kong, Hungary, India, Indonesia, Laos, Lithuania, Mexico, Pakistan, Papua New Guinea, Peru, Philippines, Poland, Romania, Sri Lanka, Turkey, Uruguay and Vietnam.

In addition to the AUSFTA free trade agreement (FTA) with the United States, Australia has bilateral FTAs in force with Chile, China, Japan, Korea, Malaysia, Singapore, and Thailand, and a multilateral FTA with New Zealand and the countries of the Association of Southeast Asian States (ASEAN), all of which contain chapters on investment.  Australia signed the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP) in March 2018, and it entered into force in December 2018. Australia has signed, but not yet ratified, bilateral FTAs with Hong Kong, Indonesia, and Peru, and the multilateral Pacific trade and economic agreement known as“PACER Plus”.

Australia is currently engaged in bilateral FTA negotiations with the EU and India, and in the following plurilateral FTA negotiations: the Regional Comprehensive Economic Partnership (RCEP, consisting of the ASEAN + Six group of nations); the Gulf Cooperation Council (GCC); and the Pacific Alliance (comprising Chile, Peru, Mexico and Colombia.

The U.S.-Australia Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes has been in place since 1982, with amendments made in 2001.  In addition to the United States, Australia has income tax treaties with 44 other countries and Taiwan.

In 2014, Australia signed an Intergovernmental Agreement with the United States to implement the Foreign Account Tax Compliance Act (FATCA) and improve tax cooperation. Under FATCA, Australian financial institutions are required to submit information on accounts held by U.S. citizens.  The Intergovernmental Agreement allows financial institutions to report the information via the Australian Tax Office under the existing Australia–US tax treaty arrangements.

The Australian government has moved aggressively in efforts to fight tax avoidance schemes by multinational corporations.  Australia ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting in September 2018, and it entered into force on January 1, 2019.  Australia has used this instrument to modify its tax treaties with several countries, but not with the United States. Australia has actively participated in the OECD Base Erosion Profit Shifting (BEPS) recommendations but has also moved further than the BEPS recommendations.  Multinational anti-avoidance legislation targets companies that do business in Australia without establishing a permanent establishment, and Australia’s diverted profits tax legislation targets tax schemes that recognize income in lower tax jurisdictions. Australia has implemented the OECD’s hybrid mismatch rules (as of January 2019) and limits interest deductions through a Safe Harbor Debt Limit of 60 percent (further legislation dealing with thin capitalization is before parliament at the time of writing.).

Transparency of the Regulatory System

The Australian Government utilizes transparent policies and effective laws to foster national competition and is consultative in its policy making process.  The government generally allows for public comment of draft legislation and publishes legislation once it enters into force.

Regulations drafted by Australian Government agencies must be accompanied by a Regulation Impact Statement when submitted to the final decision maker (which may be the Cabinet, a Minister, or another decision maker appointed by legislation.)  All Regulation Impact Statements must first be approved by the Office of Best Practice Regulation (OBPR) which sits within the Department of Prime Minister and Cabinet, prior to being provided to the relevant decision maker. They are required to demonstrate the need for regulation, the alternative options available (including non-regulatory options), feedback from stakeholders, and a full cost-benefit analysis.  Regulations are subsequently required to be reviewed periodically. All Regulation Impact Statements, second reading speeches, explanatory memoranda, and associated legislation are made publicly available on Government websites. Australia’s state and territory governments have similar processes when making new regulations.

The Australian Government has tended to prefer self-regulatory options where industry can demonstrate that the size of the risks are manageable and that there are mechanisms for industry to agree on, and comply with, self-regulatory options that will resolve the identified problem.  This manifests in various ways across industries, including voluntary codes of conduct and similar agreements between industry players.

The Australian Government has recognized the impost of regulations and has undertaken a range of initiatives to reduce red tape.  This has included specific red tape reduction targets for government agencies, and various deregulatory groups within government agencies.

Australian accounting, legal, and regulatory procedures are transparent and consistent with international standards.  Accounting standards are formulated by the Australian Accounting Standards Board (AASB), an Australian Government agency under the Australian Securities and Investments Commission Act 2001.  Under that Act, the statutory functions of the AASB are to develop a conceptual framework for the purpose of evaluating proposed standards; make accounting standards under section 334 of the Corporations Act 2001, and advance and promote the main objects of Part 12 of the ASIC Act, which include reducing the cost of capital, enabling Australian entities to compete effectively overseas and maintaining investor confidence in the Australian economy.  The Australian Government conducts regular reviews of proposed measures and legislative changes and holds public hearings into such matters.

Australian government financing arrangements are transparent and well governed.  Legislation governing the type of financial arrangements the government and its agencies may enter into is publicly available and adhered to.  Updates on the Government’s financial position are regularly posted on the Department of Finance and the Treasury websites. Issuance of government debt is managed by the Australian Office of Financial Management, which holds regular tenders for the sale of government debt and the outcomes of these tenders are publicly available.  The Australian government also publishes and adheres to strict procurement guidelines. Australia completed negotiations to join the WTO Agreement on Government Procurement in February 2019.

International Regulatory Considerations

Australia is a member of the WTO and the Asia-Pacific Economic Cooperation (APEC), and became the first Association of Southeast Nations (ASEAN) Dialogue Partner in 1974.  While not a regional economic block, Australia’s free trade agreement with New Zealand provides for a high level of integration between the two economies with the ultimate goal of a single economic market.

Australia is a signatory to the WTO Trade Facilitation Agreement (TFA) and performs at, or close to, the frontier for all eleven OECD Trade Facilitation Indicators.  For the eight indicators where it is not located at the frontier, it has significantly improved on six between 2015 and 2017. While no new legislation has been required to progress Australia’s implementation of the TFA, Australia has created a National Committee on Trade Facilitation to oversee development of new trade facilitation initiatives.  Two important initiatives to date have been the creation of an Authorized Economic Operator scheme to allow approved companies to streamline imports through Australian Customs, and the creation of a “single window” portal for traders seeking information on importation and permit requirements.

Legal System and Judicial Independence

The Australian legal system is firmly grounded on the principles of equal treatment before the law, procedural fairness, judicial precedent, and the independence of the judiciary.  Strong safeguards exist to ensure that people are not treated arbitrarily or unfairly by governments or officials. Property and contractual rights are enforced through the Australian court system, which is based on English Common Law.

Laws and Regulations on Foreign Direct Investment

Information regarding investing in Australia can be found in Austrade’s “Guide to Investing” at http://www.austrade.gov.au/International/Invest/Investor-guide  .  The guide is designed to help international investors and businesses navigate investing and operating in Australia.  It is an online guide to the regulations, considerations and assistance relevant to investing in, establishing and running a business in Australia, with direct links to relevant regulators and government agencies that relate to Australian Government regulation and available assistance.

Foreign investment in Australia is regulated by the Foreign Acquisitions and Takeovers Act 1975 and Australia’s Foreign Investment Policy.  The Foreign Investment Review Board (FIRB), a division of Australia’s Treasury, is a non-statutory body established to advise the Treasurer and the Commonwealth Government on Australia’s foreign investment policy and its administration.  The FIRB screens potential foreign investments in Australia above threshold values, and based on advice from the FIRB, the Treasurer may deny or place conditions on the approval of particular investments above that threshold on national interest grounds.  Following a number of recent investments made by foreign companies in key sectors of Australia’s economy, the laws and regulations governing foreign direct investment have been subject to a wide ranging and ongoing review.

The Australian Government has a “national interest” consideration in reviewing foreign investment applications.  Further information on foreign investment screening, including screening thresholds for certain sectors and countries, can be found at the FIRB’s website: https://firb.gov.au/  .  Under the AUSFTA agreement, all U.S. greenfield investments are exempt from FIRB screening. U.S. investors require prior approval if acquiring a substantial interest in a primary production business valued above AUD 1.154 billion (USD808 million).

Australia has recently taken steps to increase the analysis of national security implications of foreign investment in certain sectors.  In January 2017, the Government established the Critical Infrastructure Centre (CIC) to better manage the risks to Australia’s critical infrastructure assets.  A key role of the CIC is to advise the FIRB on risks associated with foreign investment in infrastructure assets, particularly telecommunications, electricity, water, and port assets.  While the CIC’s role in the foreign investment process signals the Government’s focus on these assets, its role is limited to providing advice to the Government and the approval framework itself was not changed when the CIC was established.   Further changes to investments in electricity assets and agricultural land were announced in early 2018. Under these changes, electricity infrastructure is formally viewed as “critical infrastructure”, and foreign purchases will face additional scrutiny and conditions, while agricultural land is now required to be “marketed widely” to Australian buyers before being sold to a foreign buyer.

There have been very few instances of foreign investment applications being rejected by the Treasurer.  Of the 11,855 applications considered between July 1, 2017 and June 30, 2018 (the 2018 Australian financial year), only two were rejected. [Note: Both related to residential real estate investment.  End note.] In November 2018, the Treasurer rejected the buyout of APA, a major gas pipeline owner in Australia, by the Hong Kong-based CKI Group, citing concerns that the purchase would create “undue concentration of foreign ownership by a single company group in our most significant gas transmission business.”  Analysis justifying rejections is typically not published.

Competition and Anti-Trust Laws

The Australian Competition and Consumer Commission (ACCC) enforces the Competition and Consumer Act 2010 and a range of additional legislation, promotes competition, fair trading and regulates national infrastructure for the benefit of all Australians.  The ACCC plays a key role in assessing mergers to determine whether they will lead to a substantial lessening of competition in any market. ACCC also engages in consumer protection enforcement and has recently been given expanded responsibilities to monitor digital industries and the “sharing economy.”

Expropriation and Compensation

Private property can be expropriated for public purposes in accordance with Australia’s constitution and established principles of international law.  Property owners are entitled to compensation based on “just terms” for expropriated property. There is little history of expropriation in Australia.

Dispute Settlement

ICSID Convention and New York Convention

Australia is a member of the International Centre for the Settlement of Investment Disputes (ICSID Convention) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.  The International Arbitration Act 1974 governs international arbitration and the enforcement of awards.

Investor-State Dispute Settlement

Investor-State Dispute Settlement (ISDS) is included in seven of Australia’s nine FTAs and 18 of its 21 BITs.  AUSFTA establishes a dispute settlement mechanism for investment disputes arising under the Agreement. However, AUSFTA does not contain an investor-state dispute settlement (ISDS) mechanism that would allow individual investors to bring a case against the Australian government.  Regardless of the presence or absence of ISDS mechanisms, there is no history of extrajudicial action against foreign investors in Australia.

International Commercial Arbitration and Foreign Courts

Australia has an established legal and court system for the conduct or supervision of litigation and arbitration, as well as alternate dispute resolutions.  Australia is a leader in the development and provision of non-court dispute resolution mechanisms. It is a signatory to all the major international dispute resolution conventions and has organizations that provide international dispute resolution processes.

Bankruptcy Regulations

Bankruptcy is a legal status conferred under the Bankruptcy Act 1966 and operates in all of Australia’s States and Territories.  Only individuals can be made bankrupt, not businesses or companies. Where there is a partnership or person trading under a business name, it is the individual or individuals who make up that firm that are made bankrupt.  Companies cannot become bankrupt under the Bankruptcy Act though similar provisions (called “administration and winding up”) exist under the Corporations Act 2001. Bankruptcy is not a criminal offense in Australia.

Creditor rights are established under the Bankruptcy Act 1966, the Corporations Act 2001, and the more recent Insolvency Law Reform Act 2016.  The latter legislation commenced in two tranches over 2017 and aims to increase the efficiency of insolvency administrations, improve communications between parties, increase the corporate regulator’s oversight of the insolvency market, and “improve overall consumer confidence in the professionalism and competence of insolvency practitioners.”  Under the combined legislation, creditors have the right to: request information during the administration process; give direction to a liquidator or trustee; appoint a liquidator to review the current appointee’s remuneration; and remove a liquidator and appoint a replacement.

Investment Incentives

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

Performance and Data Localization Requirements

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

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

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

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

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

Real Property

Strong legal frameworks protect property rights in Australia and operate to police corruption.  Mortgages are commercially available, and foreigners are allowed to buy real property subject to certain registration and approval requirements.  Property lending may be securitized, and Australia has one of the most highly developed securitization sectors in the world. Beyond the private sector property market, securitization products are being developed to assist local and state government financing.  Australia has no legislation specifically relating to securitization, although issuers are governed by a range of other financial sector legislation and disclosure requirements.

Intellectual Property Rights

Australia generally provides strong intellectual property rights (IPR) protection and enforcement through legislation that, among other things, criminalizes copyright piracy and trademark counterfeiting.  Australia is not listed in USTR’s Special 301 report or on USTR’s notorious market report.

Enforcement of counterfeit goods is overseen by the Australian Department of Home Affairs through the Notice of Objection Scheme, which allows the Australian Border Force to seize goods suspected of being counterfeit.  Penalties for sale or importation of counterfeit goods include fines and up to five years imprisonment. The Australia Border Force reported seizing 190,000 individual items of counterfeit and pirated goods, worth approximately AUD 16.9 million (USD 11.8 million), during the fiscal year ending June 30, 2016, the last available year for which this data is provided.

IP Australia is the responsible agency for administering Australia’s responsibilities and treaties under the World Intellectual Property Organization (WIPO).  Australia is a member of a range of international treaties developed through WIPO. Australia does not have specific legislation relating to trade secrets, however common law governs information protected through such means as confidentiality agreements or other means of illegally obtaining confidential or proprietary information.

Australia was an active participant in the Anti-Counterfeiting Trade Agreement (ACTA) negotiations and signed ACTA in October 2011.  It has not yet ratified the agreement. ACTA would establish an international framework to assist Parties in their efforts to effectively combat the infringement of intellectual property rights, in particular the proliferation of counterfeiting and piracy.

Under the AUSFTA, Australia must notify the holder of a pharmaceutical patent of a request for marketing approval by a third party for a product claimed by that patent.  U.S. and Australian pharmaceutical companies have raised concerns that unnecessary delays in this notification process restrict their options for action against third parties that would infringe their patents if granted marketing approval by the Australian Therapeutic Goods Administration.

The Australian Parliament introduced two amendments to the Copyright Act in 2018.  In June 2018, the Australian Parliament passed the Copyright Amendment (Service Providers) Bill 2017.  This amendment extends safe harbor provisions in the Act to the disability, education, library, archive, and cultural sectors, protecting organizations in these sectors from legal liability where they can demonstrate that they have taken reasonable steps to deal with copyright infringement by users of their online platforms.  However, the legislation specifically excludes online platforms such as Google and Facebook from safe harbor provisions. Prior to this extension, the safe harbor provisions, set out in Division 2AA of Part V of the Copyright Act, applied only to carriage service providers. Carriage service providers were broadly defined as telecommunications network providers, but do not include online platforms such as Google and Facebook.  Having passed the amendment, the Australian Government has indicated it will not revisit legislation to extend the safe harbor provisions to cover service providers in the near future. In November 2018, the Australian Parliament passed the Copyright Amendment (Online Infringement) Bill 2018. This legislation reduces the threshold for capturing overseas online locations under the Copyright Act and makes it easier for individuals to seek injunctions against material distributed online, including against online search engines making that material publicly available.  The legislation allows the Communications Minister to exempt certain search engines or classes of search engines.

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

Capital Markets and Portfolio Investment

The Australian Government takes a favorable stance towards foreign portfolio investment with no restrictions on inward flows of debt or equity.  Indeed, access to foreign capital markets is crucial to the Australian economy given its relatively small domestic fixed income markets. Australian capital markets are generally efficient and are able to provide financing options to businesses.  While the Australian equity market is one of the largest and most liquid in the world, non-financial firms do face a number of barriers in accessing the corporate bond market. Large firms are more likely to use public equity and smaller firms more likely to use retained earnings and debt from banks and intermediaries.  Australia’s corporate bond market is relatively small, driving many Australian companies to issue debt instruments in the U.S. market. Foreign investors are able to get credit from domestic institutions on market terms.

Money and Banking System

Australia’s banking system is robust, highly evolved, and international in focus.  Bank profitability is strong and has been supported by further improvements in asset performance.

Total assets of the four largest banks is USD 2.6 trillion, 21 percent of the market value of all listed Australian companies.  According to Australia’s central bank, the Reserve Bank of Australia or RBA, the ratio of non-performing assets to total loans was just under 1 percent at the end of 2017, having remained at around that level for the last four years after falling from highs of nearly 2 percent following the Global Financial Crisis.  The RBA is responsible for monitoring and reporting on the stability of the financial sector, while the Australian Prudential Regulatory Authority (APRA) monitors individual institutions. Foreign banks are allowed to operate as a branch or a subsidiary in Australia. Australia has generally taken an open approach to allowing foreign companies to operate in the financial sector, largely to ensure sufficient competition in an otherwise small domestic market.

The RBA is responsible for monitoring and regulating payments systems in Australia.  It has recently overseen the creation of the New Payments Platform that came on line in early 2018, allowing fast processing of low value transactions.

Foreign Exchange and Remittances

Foreign Exchange

The Commonwealth Government formulates exchange control policies with the advice of the Reserve Bank of Australia (RBA) and the Treasury.  The RBA, charged with protecting the national currency, has the authority to implement exchange controls, although there are currently none in place.

The Australian dollar is a fully convertible and floating currency.  The Commonwealth Government does not maintain currency controls or limit remittances.  Such payments are processed through standard commercial channels, without governmental interference or delay.

Remittance Policies

Australia does not limit investment remittances.

Sovereign Wealth Funds

Australia’s sovereign wealth fund, the Future Fund, is a financial asset investment fund owned by the Australian Government.  The Fund’s objective is to enhance the ability of future Australian Governments to discharge unfunded superannuation (pension) liabilities expected after 2020, when an ageing population is likely to place significant pressures on Government finances.  As a founding member of the International Forum of Sovereign Wealth Fund (IFSWF), the Future Fund’s structure, governance and investment approach is in full alignment with the Generally Accepted Principles and Practices for Sovereign Wealth Funds (the “Santiago principles”).

In addition to the Future Fund, the Australian government has a number of “nation-building funds”, the DisabilityCare Fund, and the Medical Research Future Fund.  The Building Australia Fund enhances the Commonwealth’s ability to make payments towards the creation or development of transport, communications, energy, and water infrastructure and in relation to eligible national broadband matters.  The Education Investment Fund makes payments towards the creation or development of higher education infrastructure, research infrastructure, vocational education and training infrastructure, and eligible education infrastructure. The DisablityCare Australia Fund aims to reimburse States, Territories and the Commonwealth for expenditure incurred in relation to the National Disability Insurance Scheme Act 2013 and to fund implementation of that Act in its initial period of operation.  The Medical Research Future Fund provides grants of financial assistance to support medical research and medical innovation.

As of December 31, 2018, the value of the Future Fund totaled AUD 147 billion (USD 103 billion).  The value of the Education Investment Fund totaled AUD 3.9 billion (USD 2.7 billion); the Building Australia Fund totaled AUD 3.9 billion (USD 2.7 billion); the DisabilityCare Australia Fund totaled AUD 14.4 billion (USD 10.1 billion), and the Medical Research Future Fund totaled AUD 9.4 billion (USD 6.6 billion).

In Australia, the term used for a Commonwealth Government State-Owned Enterprise (SOE) is “government business enterprise” (GBE).  According to the Department of Finance, there are nine GBEs: two corporate Commonwealth entities and seven Commonwealth companies.  (See https://www.finance.gov.au/resource-management/governance/gbe/  )  Private enterprises are generally allowed to compete with public enterprises under the same terms and conditions with respect to markets, credit, and other business operations, such as licenses and supplies.  Public enterprises are not generally accorded material advantages in Australia. Remaining GBEs do not exercise power in a manner that discriminates against or unfairly burdens foreign investors or foreign-owned enterprises.

Privatization Program

Australia does not have a formal and explicit national privatization program.  Individual state and territory governments may have their own privatization programs.  Foreign investors are welcome to participate in any privatization programs subject to the rules and approvals governing foreign investment.

There is general business awareness and promotion of responsible business conduct (RBC) in Australia.  The Commonwealth Government states that companies operating in Australia and Australian companies operating overseas are expected to act in accordance with the principles set out in the OECD Guidelines for Multinational Enterprises and to perform to the standards they suggest.  In seeking to promote the OECD Guidelines, the Commonwealth Government maintains a National Contact Point (NCP), the current NCP being currently the General Manager of the Foreign Investment and Trade Policy Division at the Commonwealth Treasury, who is able to draw on expertise from other government agencies through an informal inter-governmental network.  An ANCP Web site links to the “OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas” noting that the objective is to help companies respect human rights and avoid contributing to conflict through their mineral sourcing practices. The Commonwealth Government’s export credit agency, Efic, also promotes the OECD Guidelines as the key set of recommendations on responsible business conduct addressed by governments to multinational enterprises operating in or from adhering countries.

Australia began implementing the principles of the Extractive Industries Transparency Initiative (EITI) in 2016.

Australia maintains a comprehensive system of laws and regulations designed to counter corruption.  In addition, the government procurement system is generally transparent and well regulated. Corruption has not been a factor cited by U.S. businesses as a disincentive to investing in Australia, nor to exporting goods and services to Australia.  Non-governmental organizations interested in monitoring the global development or anti-corruption measures, including Transparency International, operate freely in Australia, and Australia is perceived internationally as having low corruption levels.

Australia is an active participant in international efforts to end the bribery of foreign officials.  Legislation exists to give effect to the anti-bribery convention stemming from the OECD 1996 Ministerial Commitment to Criminalize Transnational Bribery.  Legislation explicitly disallows tax deductions for bribes of foreign officials. At the Commonwealth level, enforcement of anti-corruption laws and regulations is the responsibility of the Attorney General’s Department.

The Attorney-General’s Department plays an active role in combating corruption through developing domestic policy on anti-corruption and engagement in a range of international anti-corruption forums.  These include the G20 Anti-Corruption Working Group, APEC Anti-Corruption and Transparency Working Group, and the United Nations Convention against Corruption Working Groups. Australia is a member of the OECD Working Group on Bribery and a party to the key international conventions concerned with combating foreign bribery, including the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Anti-Bribery Convention).

Under Australian law, it is an offense to bribe a foreign public official, even if a bribe may be seen to be customary, necessary or required.  The maximum penalty for an individual is 10 years imprisonment and/or a fine of AUD 2.1 million (approximately USD 1.5 million). For a corporate entity, the maximum penalty is the greatest of: 1) AUD 21 million  (approximately USD 14.7 million); 2) three times the value of the benefits obtained; or 3) 10 percent of the previous 12-month turnover of the company concerned.

A number of national and state-level agencies exist to combat corruption of public officials and ensure transparency and probity in government systems.  The Australian Commission for Law Enforcement Integrity (ACLEI) has the mandate to prevent, detect and investigate serious and systemic corruption issues in the Australian Crime Commission, the Australian Customs and Border Protection Service, the Australian Federal Police, the Australian Transaction Reports and Analysis Center, the CrimTrac Agency, and prescribed aspects of the Department of Agriculture.

Various independent commissions exist at the state level to investigate instances of corruption. Details of these bodies are provided below.  

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Australia has signed and ratified the United Nations Convention against Corruption, and is a signatory to the OECD Anti-Bribery Convention.

Resources to Report Corruption

Western Australia – Corruption and Crime Commission
86 St Georges Terrace
Perth, Western Australia
Tel. (08) 9215 4888
https://www.ccc.wa.gov.au/  

Queensland – Corruption and Crime Commission
Level 2, North Tower Green Square
515 St Pauls Terrace
Fortitude Valley, Queensland
Tel. (07) 3360 6060
https://www.ccc.qld.gov.au/  

Victoria – Independent Broad-based Anti-corruption Commission
Level 1, North Tower, 459 Collins Street
Melbourne, Victoria
Tel. 1300 735 135
https://ibac.vic.gov.au  

New South Wales – Independent Commission against Corruption
Level 7, 255 Elizabeth Street
Sydney NSW 2000
Australia
02 8281 5999
https://www.icac.nsw.gov.au/  

South Australia – Independent Commission against Corruption NSW
Level 1, 55 Currie Street
Adelaide, South Australia
Tel. 08 8463 5173
https://icac.sa.gov.au  

Political protests (e.g., rallies, demonstrations, marches, public conflicts between competing interests) form an integral, though generally minor, part of Australian cultural life.  Such protests rarely degenerate into violence.

Australia’s strong economy has seen unemployment fall to relatively low levels, albeit remaining above levels associated with full employment.  As of March 2019 the employment rate in Australia is at 5.0 percent. Average weekly earnings for full time workers in Australia were AUD 1,670 (approximately USD 1,170) as of November 2018.  The minimum wage is set annually and is significantly higher than that of the United States (approximately twice the U.S. minimum wage). Overall wage growth has been low in recent years, growing only slightly above the rate of inflation.

The Australian Government and its state counterparts are active in assessing and forecasting labor skills gaps across industries.  Tertiary education is subsidized by both levels of governments and these subsidies are based in part on an assessment of the skills needed by industry.  These assessments also inform immigration policy through the various working visas and associated skilled occupation lists. Occupations on these lists are updated annually based on assessment of the skills most needed by industry.

Immigration has always been an important source for skilled labor in Australia.  The Department of Home Affairs publishes an annual list of occupations with skill shortages to be used by potential applicants seeking to work in Australia.  The visas available to applicants, and length of stay allowed for, differ by occupation. The main working visa is the Temporary Skills Shortage visa (subclass 482) which replaced the former subclass 457 visa in March 2018.  Applicants must have a nominated occupation when they apply which is applicable to their circumstances, and applications are subject to local labor market testing rules. These rules preference the hiring of Australian labor over foreign workers so long as local workers can be found to fill the advertised job.

In March 2018, the Government announced a one-year trial of a new visa category aimed to provide companies access to highly skilled international professionals.  This visa is eligible to listed companies, companies with turnover greater than AUD4 million (USD 2.76 million), or recognized startup companies, paying the foreign worker AUD180,000 (USD 124,398) or more.

Most Australian workplaces are governed by a system created by the Fair Work Act 2009.  Enterprise bargaining takes place through collective agreements made at an enterprise level covering terms and conditions of employment.  Such agreements are widely used in Australia. A Fair Work Ombudsman assists employees, employers, contractors and the community to understand and comply with the system.  The Fair Work Act 2009 establishes a set of clear rules and obligations about how this process is to occur, including rules about bargaining, the content of enterprise agreements, and how an agreement is made and approved.  Unfair dismissal laws also exist to protect workers who have been unfairly fired from a job. Australia is a founding member of the International Labour Organization and has ratified 58 of the ILO’s conventions.

Chapter 18 of the AUSFTA agreement deals with labor market issues.  The chapter sets out the responsibilities of each party, including the commitment of each country to uphold its obligations as a member of the International Labor Organization (ILO) and the associated ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up (1998).

There were 158 industrial disputes nationwide in 2017.  This was a slight increase on the 154 disputes recorded in 2017, although there was a 26 percent reduction in the number of working days lost due to these disputes.

The Overseas Private Investment Corporation excludes Australia, as it is not a developing country.  The U.S. Export-Import Bank (EXIM) can provide financing and other services for major resource sector and energy projects in Australia which support U.S. jobs and exports.

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

*Australian Bureau of Statistics, based on most recently available data.  Year-end foreign investment data is published in May of the following year.

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Deputy Economic Counsellor Steven Dyokas
U.S. Embassy
21 Moonah Place, Yarralumla, ACT
61 2 6214 5810
DyokasSM@state.gov

Policies Towards Foreign Direct Investment

Brunei has an open economy favorable to foreign trade and foreign direct investment (FDI) as the government continues its economic diversification efforts to limit its long reliance on oil and gas exports.

FDI is important to Brunei as it plays a key role in the country’s economic and technological development. Brunei encourages FDI in the domestic economy through various investment incentives offered by the Ministry of Finance and Economy.

Improving Brunei’s Ease of Doing Business ranking has been a focus for the government. The World Bank Ease of Doing Business report indicated that Brunei’s ranking rose 17 spots from 72 in 2017 to 55 out of 190 world economies in 2019.  The significant gain was largely due to removing post-incorporation procedures for starting a business, increasing transparency of the land administration system for property registration, and strengthening minority investor protections.

Brunei amended its laws to make it easier and quicker for entrepreneurs and investors to establish businesses.  The Business License Act (Amendment) of 2016 exempts several business activities (eateries, boarding and lodging houses or other places of public resort; street vendors and stalls; motor vehicle dealers; petrol stations, including places for storing petrol and inflammable material; timber store and furniture factories; and retail shops and workshops) from needing to obtain a business license.  The Miscellaneous License Act (Amendment) of 2015 reduced the wait times for new business registrants to start operations, with low-risk businesses like eateries and shops able to start operations immediately.

Limits on Foreign Control and Right to Private Ownership and Establishment

There is no restriction on foreign ownership of companies incorporated in Brunei.  The Companies Act requires locally incorporated companies to have at least one of the two directors—or if more than two directors, at least two of them—to be ordinarily resident in Brunei, but exemptions may be obtained in some circumstances.  The rate of corporate income tax is the same whether the company is locally or foreign owned and managed.

All businesses in Brunei must be registered with the Registry of Companies and Business Names at the Ministry of Finance.  Foreign investors can fully own incorporated companies, foreign company branches, or representative offices, but not sole proprietorships and partnerships.

More information on incorporation of companies can be found here on the Ministry of Finance: https://www.mofe.gov.bn  .

Other Investment Policy Reviews

The World Trade Organization (WTO) Secretariat prepared a Trade Policy Review of Brunei in December 2014 and a revision in April 2015.

Business Facilitation

As part of Brunei’s effort to attract foreign investment, the government established several facilitating agents including: the Brunei Economic Development Board (BEDB), FDI Action and Support Center (FAST), and Darussalam Enterprise (DARe). These organizations work together to smooth the process of obtaining permits, approvals and licenses. Facilitating services are now consolidated into one government: http://business.gov.bn  .

BEDB, the frontline agency that promotes and facilitates foreign investment into the country, works with FAST to evaluate investment proposals, liaise with government agencies and obtain project approval from the government’s Foreign Direct Investment and Downstream Industry Committee.

Outward Investment

A major share of outward investment is made by the government through its sovereign wealth funds, which are managed by the Brunei Investment Agency (BIA) under the Ministry of Finance.  No data is available on the total investment amount due to a strict policy of secrecy. It is believed that the majority of sovereign wealth funds are invested in foreign portfolio investments and real estate.  The state-owned Brunei National Petroleum Company has also evolved into an outward foreign investor, winning tenders to explore and develop onshore blocks in Myanmar. Despite the limited availability of public information regarding the amount, the funds are generally viewed positively and managed well by BIA.

Brunei is a member of the Association of Southeast Asian Nations (ASEAN), as association of ten Southeast Asian nations, which has Free Trade Agreements (FTA) with Australia, New Zealand, China, India, and South Korea, and a Comprehensive Economic Partnership Agreement with Japan.

Brunei currently has Bilateral Investment Treaties with Bahrain, China, Germany, India, the Republic of Korea, Kuwait, Oman, and Ukraine.  Brunei does not currently have a Bilateral Investment Treaty with the United States.

Brunei served as the ASEAN Coordinator in negotiations for the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA), which was signed February 2009 in Thailand and entered into force January 2010.  Brunei is also a negotiating party to the Regional Comprehensive Economic Partnership (RCEP) and a signatory to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Brunei does not have a Bilateral Taxation Treaty with the United States.  Brunei has signed Tax Information Exchange Agreements with Canada, Iceland, Norway, Finland, Greenland, Sweden, Australia, Denmark and Faroes.  Information on Brunei’s tax exchange agreements and treaties can be found on the Ministry of Finance and Economy: http://www.mofe.gov.bn  .  In 2017, Brunei became a signatory to the Organisation for Economic Co-operation and Development (OECD) multilateral Convention on Mutual Administrative Assistance in Tax Matters.

Transparency of the Regulatory System

Brunei’s regulatory system is generally seen as lacking in transparency.  There is little to no transparency in lawmaking processes, nor is there any available information on whether impact assessments are made prior to proposing regulations.  Each ministry is responsible for coordinating with the Attorney General’s Chambers to draft proposed legislation. Legislation does not receive broad reviews and few outside of the originating ministry are able to provide their input.  The Sultan has final authority to approve proposed legislation. Laws and regulations that are in effect are readily accessible on the Attorney General’s Chambers: http://www.agc.gov.bn  .

International Regulatory Considerations

Brunei is an active member of ASEAN, through which it has concluded FTAs with Australia and New Zealand, China, India, Japan and South Korea.  Brunei became a WTO member in 1995 and a signatory to the General Agreement on Tariffs and Trade (GATT) in 1993.

Legal System and Judicial Independence

Brunei’s constitution does not specifically provide for judicial independence, but in practice the court system operates without government interference.  Brunei’s legal system includes two parallel systems: one based on common law and the other based on Islamic law. In 2016, recognizing the importance of protecting investors’ rights and contract enforcement, Brunei established a Commercial Court.

In 2014, Brunei implemented the first phase of its Sharia Penal Code (SPC), which expanded existing restrictions on minor offenses—such as eating during Ramadan—that are punishable by fines or imprisonment.  On April 3, 2019, Brunei commenced full implementation of its Sharia Penal Code, introducing the possibility of barbaric punishments in certain situations such as stoning to death for rape, adultery, or sodomy, and execution for apostasy, contempt of the Prophet Muhammad, or insult of the Quran.  The punishments require different standards of proof from the common law-based penal code. For example, four pious men must personally witness an act of fornication to support a sentence of stoning.

Laws and Regulations on Foreign Direct Investment

The basic legislation on investment includes the Investment Incentive Order 2001 and the Income Tax (As Amended) Order 2001.  Investment Order 2001 supports economic development in strategically important industrial and economic enterprises and, through the Ministry of Finance and Economy, offers investment incentives through a favorable tax regime.  Although Brunei does not have a stock exchange, government plans to establish a securities market are reportedly under way.

Foreign ownership of companies is not restricted, although under the Companies Act, at least one of two directors of a locally incorporated company must be a resident of Brunei, unless granted an exemption from the appropriate authorities.

Business Registration

All businesses in Brunei must be registered with the Registry of Companies and Business Names at the Ministry of Finance and Economy.  Except for sole proprietorships and partnerships, foreign investors can fully own incorporated companies, foreign company branches, or representative offices.  Foreign direct investments by multinational corporations may not require local partnership in setting up a subsidiary of their parent company in Brunei. However, at least one company director must be a Brunei citizen or permanent resident of Brunei.  Brunei’s “one-stop-shop” website for investments and business start-ups can be found here: http://business.gov.bn  .

The Business License Act (Amendment) of 2016 exempts several business activities (eateries, boarding and lodging houses or other places of public resort; street vendors and stalls; motor vehicle dealers; petrol stations including places for storing petrol and inflammable materials; timber stores and furniture factories; and retail shops and workshops) from needing to obtain a business license.

Competition and Anti-Trust Laws

Brunei does not have any legislation pertaining to the regulation of competition issues.  In 2015, Brunei enacted the Competition Order, to promote and maintain fair and healthy competition to enhance market efficiency and consumer welfare.  The Sultan also announced the establishment of the Competition Commission in 2017 to oversee and act on competition issues that include adjudicating anti-competitive cases and imposing penalties on companies that violate the 2015 Competition Order.  The Order is scheduled to be enforced in phases, starting with the prohibition of anti-competitive agreements and practices.

Expropriation and Compensation

There is no history of expropriation of foreign-owned property in Brunei.  There have been cases of domestically owned private property being expropriated for infrastructure development. Compensation was provided in such cases, and claimants were provided with due process regarding their disputes.

Dispute Settlement

ICSID Convention and New York Convention

Brunei is a member state to the convention on the International Center for Settlement of Investment Disputes (ICSID Convention) and a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).  Legislation related to dispute settlement is covered under Brunei’s Arbitration Order 2009.

Investor-State Dispute Settlement

In 2016, Brunei’s Supreme Court announced the establishment of a commercial court to deal with business-related cases.  More information about Brunei’s judiciary system is available through the judiciary: http://www.judiciary.gov.bn  .

International Commercial Arbitration and Foreign Courts

In May 2016, Brunei’s Attorney General’s Chambers announced the establishment of the Brunei Darussalam Arbitration Center (BDAC).  BDAC delivers services and administration for arbitration and mediation to fulfill the needs of domestic and international users in relation to commercial disputes, as a resolution alternative to court proceedings.

The International Arbitration Order (IAO) which regulates international and domestic arbitrations came into effect in February 2010.  More information about Brunei’s Attorney General’s Chambers is available here: http://www.agc.gov.bn   .

Bankruptcy Regulations

In 2012, amendments to Brunei’s Bankruptcy Act increased the minimum threshold for declaring bankruptcy from BND 500 to BND 10,000 (USD $368 to USD $7,379) and enabled the trustee to direct the Controller of Immigration to impound and retain the debtor’s passport, certificate of identity, or travel document to prevent the debtor from leaving the country.  The amendment also requires the debtor to deliver all property under the debtor’s possession to the trustee. Information about Brunei’s bankruptcy laws is available on the judiciary’s website: http://www.judiciary.gov.bn  .

Investment Incentives

Companies involved in the exportation of agriculture, forestry, and fishery products can apply for tax relief on export profits.  Tax exemption may be available for pioneer industry companies. For non-pioneer enterprises, the tax relief period is eight years and up to 11 years for pioneer enterprises.

Since 2015, the corporate income tax rate in Brunei has been 18.5 percent.

Sole proprietorships and partnerships are not subject to tax.  Individuals do not pay any capital gains tax, and profits arising from the sale of capital assets are not taxable.  Brunei has double-taxation agreements with the United Kingdom, Indonesia, China, Singapore, Vietnam, Bahrain, Oman, Japan, Pakistan, Malaysia, Hong Kong, Laos, Kuwait, Tajikistan, Qatar, and United Arab Emirates.  Under the Income Tax (Petroleum) Act, a company is subject to taxes of up to 55 percent for any petroleum operation pursuant to production sharing agreements.

Darussalam Assets is a private limited company established in December 2012, under the purview of the Ministry of Finance and Economy to spur the growth of government-linked companies (GLC) through active ownership and management of its GLC portfolio based on commercial principles, in line with Brunei’s 2035 development vision.

Foreign Trade Zones/Free Ports/Trade Facilitation

Muara Port is Brunei’s main seaport with an established free trade zone called the Muara Export Zone (MEZ), which was established to promote and develop Brunei as a trade hub of the region. The establishment of the MEZ was an initial step towards developing other free trade zones in the country.  In Brunei’s 2017 Legislative Council session, the government announced that a 96 hectare area near Muara Port will be designated a free trade zone.

Performance and Data Localization Requirements

The Brunei government seeks to increase the number of Bruneians working in the private sector. Brunei’s Local Business Development Framework seeks to increase the use of local goods and services, train a domestic workforce, and develop Bruneian businesses by placing requirements on all companies operating in the oil and gas industry in Brunei to meet local hiring and contracting targets.  These requirements also apply to information and communication technology firms that work on government projects. The Framework sets local content targets based on the difficulty of the project and the value of the contract, with more flexible local content requirements for projects requiring highly specialized technologies or with a high contract value. In 2019, senior officials stated an intent to extend local hiring targets to additional sectors of the economy.

Expatriate employment is controlled by a labor quota system administered by the Labor Department and the issuance of employment passes by the Immigration Department.  Brunei allows new companies to apply for special approval to expedite the recruitment of expatriate workers in select positions. According to the Ministry of Home Affairs, the special approval is only available to new companies for up to six months, and covers businesses such as restaurants and shops.  The special approval cuts the waiting time for a quota to seven days instead of 21.

Brunei has not announced any specific legislation pertaining to data storage and data localization requirements.

Real Property

Mortgages are recognized and enforced in Brunei; however, only Bruneian citizens can own land property in Brunei.  Foreigners and permanent residents can only hold properties under long-term leases. Most banks are reluctant to grant housing loans to foreigners and permanent residents.  According to the International Monetary Fund (IMF) Brunei country report, Brunei did not attract any foreign direct investment for real estate, rentals, and business activity in 2011 (latest data available).  Brunei’s Department of Economic Planning and Development does not publish FDI data for real estate. Every transfer of ownership in Brunei requires the approval of “His Majesty in Council” which is a council of officials representing the Sultan.  This process can be lengthy and at times opaque.

As of September 2016, the Brunei government announced land code amendments that allowed non-citizens to own properties under the Land Strata Act title for a maximum of 99 years without the means of powers of attorney.  Amendments to the Land Code are being considered to ban past practices of proxy land sales to foreigners and permanent residents using power of attorney and trust deeds. The amendments to the Land Code have made powers of attorney and trust deeds no longer recognized as mechanisms in land transactions involving non-citizens.  The government may grant temporary occupation permits over state land to applicants, for licenses to occupy land for agricultural, commercial, housing or industrial purposes. These licenses are not registered, and are granted for renewable annual terms.

Intellectual Property Rights

Brunei’s intellectual property rights (IPR) protection and enforcement regime is still in development but is increasingly strong and effective.  The country was removed from the U.S. Trade Representative’s Special 301 report in 2013, and has stayed off in recognition of its improving IPR protections, increasing enforcement, and efforts to educate the public about the importance of IPR.

Brunei finalized and adopted the Copyright (Amendment) Order 2013 in December 2013, a development long requested by the U.S. government.  The amendment enhanced enforcement provisions for copyright infringement by increasing the penalties for IP offenses; adding new offenses; strengthening the enforcement powers of the Royal Brunei Police Force and the Ministry of Finance Customs and Excise Department; and allowing for sanctioned private prosecution.  The amendments are designed to deter copyright infringements with fines of BND 10,000 (USD $7,400) to BND 20,000 (USD $14,800) per infringing copy, imprisonment for a term up to five years, or both. The new penalty is up to four times more severe than the previously existing penalty. Enforcement agencies are authorized to enter premises and arrest without warrant, to stop, search, and board vehicles and also to access computerized and digitized data.  The amendments further allow for admissibility of evidence obtained covertly and protect the identity of informants. Statistics on seizures of counterfeit goods are unavailable.

Brunei transferred its Registry of Trademarks from the Attorney General’s Chambers (AGC) to the Brunei Intellectual Property Office in 2013.  The transfer expanded the country’s Patents Registry Office’s (PRO) ability to accept applications for trademarks registration, in addition to patents and industrial designs.

In September 2013, Brunei acceded to the Geneva (1999) Act of the Hague Agreement Concerning the International Registration of Industrial Designs to protect IP from industrial designs, making it the second ASEAN Member country, following Singapore, to accede.  The accession emphasized Brunei’s commitment under the ASEAN Intellectual Property Rights Action Plan 2011 – 2015. Brunei also plans and has publicly committed to acceding to other World Intellectual Property Organization’s (WIPO) treaties including the Madrid Protocol for the International Registration of Marks, the WIPO Performances and Phonograms Treaty

(WPPT), and the UPOV Convention 1991 for the protection of New Varieties of Plants (PV).

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

Resources for Rights Holders

Contact at Mission:

Paul R. Estrada
Political/Economic/Consular Officer
Telephone: +673 238-4616 ext. 2172
Email: EstradaPR@state.gov

Capital Markets and Portfolio Investment

In 2013, Brunei signed a Memorandum of Understanding (MOU) with the Securities

Commission Malaysia (SCM) to boost cooperation in the capital markets.  The MOU was designed to strengthen collaboration in the development of fair and efficient capital markets in the two countries.  It also provided a framework to facilitate greater cross-border capital market activities and cooperation in the areas of regulation as well as capacity building and human capital development, particularly in the area of Islamic capital markets.  In March 2019, the Minister of Finance II budgeted USD 15 million of the 2019/2020 fiscal budget to help launch Brunei’s stock exchange once all preconditions for such a market are met.

Money and Banking System

Brunei has a small banking sector which includes both conventional and Islamic banking.  The Monetary Authority of Brunei Darussalam (AMBD) is the sole central authority for the banking sector, in addition to being the country’s central bank.  Banks in the country have high levels of liquidity, good capital adequacy ratios, and well-managed levels of non-performing loans. A handful of foreign banks have established operations in the country such as Standard Chartered and Bank of China (Hong Kong).  In March 2018, HSBC officially ended its operations in Brunei, after announcing its planned departure from Brunei in late 2016. All banks are under the supervision of AMBD, which has also established a credit bureau that centralizes information on applicants’ credit worthiness.

The Brunei dollar (BND) is pegged to the Singapore dollar, and each currency is accepted in both countries.

Foreign Exchange and Remittances

Foreign Exchange

In June 2013, the Financial Action Task Force (FATF) announced that Brunei is no longer subject to FATF’s monitoring process under its global Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) compliance process.  Brunei’s Mutual Evaluation Report cited Brunei’s significant progress in improving its AML/CFT regime and noted that Brunei had established the legal and regulatory framework to meet its commitments in its Action Plan regarding strategic deficiencies that the FATF identified in June 2011.

Remittance Policies

Any person or company providing services for the transmission of money must be licensed by the Brunei government.  Only Brunei citizens may hold remittance licenses. Local financial institutions, including banks such as Bank Islam Brunei Darussalam (BIBD) and Standard Chartered Bank provide remittance services.  Remittance companies require the customer’s full name, identification number, address, and purpose of the remittance. They are also required to file suspicious transaction reports with the AMBD.

Sovereign Wealth Funds

The Brunei Investment Agency (BIA) manages Brunei’s General Reserve Fund and their external assets.  Established in 1983, BIA’s assets are estimated to be USD 170 billion. BIA’s activities are not publicly disclosed and are ranked the lowest in transparency ratings by the Sovereign Wealth Fund Institute.

Brunei’s state-owned enterprises (SOEs), managed by Darussalam Assets under the Ministry of Finance and Economy, lead key sectors of the economy including oil and gas, telecommunications, transport, and energy generation and distribution.  These enterprises also receive preferential treatment when responding to government tenders. Some of the largest SOE’s include the following:

The telecommunications industry is dominated by government-linked companies Telekom Brunei (TelBru), Data Stream Technologies (DST) Communications, and Progresif Cellular.  Telbru is the sole provider of fixed line telephone and internet services. DST, founded in 1995, and Progresif, which took over from failed telecom company B-Mobile in 2014 and is owned by a government investment fund, provides mobile phone and internet services.  In 2019, the government announced the consolidation of all telecommunications infrastructure in Brunei under a state-owned wholesale network operator called Unified National Networks (UNN).

Royal Brunei Technical Services (RBTS), established in 1988 as a government owned corporation, is responsible for managing the acquisition of a wide range of systems and equipment and maintaining those acquired systems and equipment.

Brunei National Petroleum (PB) is the national oil company owned by the Brunei government.  The company was granted all the mineral rights in eight prime onshore and offshore petroleum blocks, totaling 20,552 sq. km. Currently, the company manages contractors, including Shell, Total, and Petronas, which are exploring the onshore and deep water offshore blocks.

Royal Brunei Airlines started operations in 1974 and is the country’s national carrier.  The airline flies a combination of Boeing and Airbus aircraft.

Privatization Program

Brunei’s Ministry of Transportation and Info-Communication has made corporatization and privatization part of its Strategic Plan, which calls for the Ministry to shift its role from a service provider to a regulatory body with policy-setting responsibilities.  In that role, the Ministry will develop specific policies through corporatization and privatization; establish a regulatory framework and business facilitation. Currently, the Ministry is studying initiatives to privatize a number of state-owned agencies: the Postal Services Department and public transportation services.  These services are not yet completely privatized and there is no timeline for privatization, as the Ministry is still in the process of considering the initiative. Guidelines regarding the role of foreign investors and the bidding process are not yet available.

Responsible business conduct is a relatively new concept in Brunei, and there are no specific government programs encouraging foreign and local enterprises to follow generally accepted corporate social responsibility (CSR) principles.  However, there is broad awareness of CSR among producers and consumers, and individual private and public sector organizations have formalized CSR programs and policies. There are no reporting requirements and no independent nongovernmental organizations (NGOs) in Brunei that promote or monitor CSR.

Since 1982, Brunei has enforced the Emergency (Prevention of Corruption) Act.  In 1984, the Act was renamed the Prevention of Corruption Act (Chapter 131). The Anti-Corruption Bureau (ACB) was established in 1982 for the purpose of enforcing the Act.  The Prevention of Corruption Act provides specific powers to the ACB for the purpose of investigating accusations of corruption. The Act authorizes ACB to investigate certain offences under other written laws, provided such offences were disclosed during the course of ACB investigation.  Corrupt practices are punishable under the Prevention of Corruption Act, which also applies to Brunei citizens abroad. Brunei is a member of the International Association of Anti-Corruption Authorities.

In 2018, Brunei was ranked the 31st of 180 countries worldwide in Transparency International’s corruption perception index.  The ranking is an improvement from its 2016 ranking (41st). U.S. companies do not generally identify corruption as an obstacle to conducting business in Brunei. The level and extent of reported corruption in Brunei is generally low.  In 2018, however, the government charged two former judges with embezzling large sums from the court system. The Sultan has made repeated statements to the effect that corruption is unacceptable.

Apart from the Anti-Corruption Bureau, there are no international, regional, local or NGOs operating in Brunei that monitor corruption.

Brunei has signed and ratified the United Nations Convention against Corruption.

Resources to Report Corruption

Government Point of Contact:

Datin Hajah Elinda Haji C.A. Mohamed
Director
Anti-Corruption Bureau Brunei Darussalam
Old Airport Berakas, BB 3510 Brunei Darussalam
Telephone: +673 238-3575
Fax: +673 238-3193
Email: info.bmr@acb.gov.bn

Brunei is an absolute monarchy and has no recent history of political violence. Sultan Hassanal Bolkiah is an experienced and popular monarch who rules the country as Prime Minister while also retaining the titles of Minister of Finance and Economy, Minister of Defense, and Minister of Foreign Affairs.  The country experienced an uprising in 1962, when it was a British protectorate, which ended through the intervention of British troops. The country has been ruled peacefully under emergency law ever since. Brunei has managed to avoid demands for political reform by making use of its hydrocarbon revenues to provide its citizens with generous welfares and subsidies.

Brunei relies heavily on foreign labor in lower-skill and lower-paying positions, with approximately 25 percent of the labor force coming in from abroad to fulfill specific contracts. The largest percentage of foreign workers work in construction, followed by wholesale and retail trade, and then professional, technical, administrative and support services.  Most unskilled laborers in Brunei are from Bangladesh, Indonesia, and the Philippines, and enter the country on renewable two-year contracts.

The skilled labor pool includes both foreign laborers on short-term visas and Bruneian citizens and permanent residents, who often are well-educated but who generally prefer to work for the government due to generous benefits such as bonuses, education allowances, interest-free loans, and housing allowances.  In 2017, the Labor Force Survey stated that approximately 40.4 percent of the labor force was employed in the public sector. In 2016, the Department of Labor under the Ministry of Home Affairs introduced an improved Foreign Workers License process with stricter policies in an effort to create more employment opportunities for Brunei citizens.     

While Brunei law permits the formation of trade union federations, it forbids affiliation with international labor organizations unless there is consent from the Minister of Home Affairs and the Department of Labor.  Under the Trade Unions Act of 1961, unions must be registered with the government. The government prohibits strikes, and the law makes no explicit provision for the right to collective bargaining. The law prohibits employers from discriminating against workers in connection with union activities, but it does not provide for re-instatement for dismissal related to union activity.

All workers, including civil servants other than those serving in the military and those working as prison guards or police officers, may form and join trade unions of their choice without previous authorization or excessive requirements.  The only active union in the country, which is composed of Brunei Shell Petroleum workers, appears to have had minimal activity in recent years. There are no other active unions or worker organizations.

Various domestic laws prohibit the employment of children under age 16.  Parental consent and approval by the Labor Commission are required for those under age 18.  Female workers under age 18 may not work at night or on offshore oil platforms. The Department of Labor effectively enforces laws related to the employment of children.  There were no reports of violations of child labor laws.

The law does not set a minimum wage, but most employed citizens receive good salaries.  The public sector pay scale covers all workers in government jobs. Wages for employed foreign residents are wide ranging.  Some foreign embassies set minimum wage requirements for their nationals working in the country.

Government data from 2016, the latest data available, indicated approximately 64,390 foreigners lived in the country temporarily, although government officials have publicly stated the number as over 100,000.  Foreign workers receive a mandatory brief on labor rights from the Department of Labor when they sign their contract. The government also inspects workplaces and maintains a telephone hotline for worker complaints.  Immigration law allows prison sentences and caning for workers who overstay their work permits and for workers who fall into irregular status due to their employers’ negligence.

There are no Overseas Private Investment Corporation (OPIC) programs in Brunei.

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

* Host country data available at depd.gov.bn  

Table 3: Sources and Destination of FDI

Brunei’s Department of Economic Planning and Development and IMF Coordinated Direct Investment Survey data are not available.

Table 4: Sources of Portfolio Investment

Brunei’s Department of Economic Planning and Development and IMF Coordinated Portfolio Investment Survey data are not available.

U.S. Embassy Commercial Section
Simpang 336-52-16-9
Jalan Duta BC 4115
(+673) 238-4616
+637 238-4616 ext. 2232
Email: BSBCommercial@state.gov

Policies Toward Foreign Direct Investment

Burma recognizes the value of investment to boost economic growth and development, and it is open to foreign investors.  That said, implementation of liberal investment laws and policies are often slowed and sometimes blocked by local rent-seeking economic actors who benefit from the status quo.  In 2016, Burma passed the Myanmar Investment Law (MIL) to attract more investment from both foreign and domestic businesses. The MIL simplified the rules and regulations for investment to bring Burma more in line with international standards.  The MIL includes a “negative list” of prohibited, restricted, and special sectors. Burma also has three Special Economic Zones (SEZs) in Thilawa, Dawei, and Kyauk Phyu with preferential policies for businesses that locate there, including one-stop-shop service.

The new Companies Law went into effect on August 1, 2018.  Under the new law, foreign investment of up to 35 percent is allowed in domestic companies— which also opens the stock exchange to limited foreign participation.  It also updates and streamlines business regulations.  In tandem with the Companies Law’s entry into force, the government instituted online company registration through “MyCo” (https://www.myco.dica.gov.mm  ).  MyCo also includes a searchable company registry, which should improve transparency on corporate data and ease due diligence research.  The Companies Law makes it easier to start and operate small businesses, and provides the government with tools to enforce corporate governance rules and regulations.

In April 2019, the government awarded licenses to five international insurance firms to offer wholly-foreign-owned life insurance options in the country.

In November 2018, the government created the Ministry for Foreign Investment and Economic Relations (MIFER) to facilitate investment.  The Directorate for Investment and Company Administration (DICA), Burma’s investment promotion agency, was moved from the Ministry of Planning and Finance to MIFER.  One of DICA’s roles is to encourage and facilitate both foreign and local investment by providing information, fostering coordination and networks between investors and continually exploring new opportunities in Burma that would benefit both the nation and the business community.  In addition to DICA, MIFER also oversees the Foreign Economic Relations Department (FERD), which was transferred to MIFER from the Ministry of Planning and Finance.

In May 2018, the Ministry of Commerce issued Notification 25/2018, which opened up the wholesale and retail sector to direct foreign investment.

There is no evidence that the Myanmar Investment Commission (MIC) discriminates against foreign investors.  In June 2017, the MIC announced ten prioritized sectors for foreign and Burmese investors: agriculture and livestock, power, education, health care, logistics, construction for affordable housing, export promotion industries, import substitution industries, aircraft and airports, and establishment of industrial estates and urban areas.

The government engages with chambers of commerce and foreign companies on investment.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Myanmar Investment Law (MIL) went into effect in April 2017 and applies to all investment in Burma, both domestic and foreign.  According to the MIL, some investments require a permit while others do not. The MIL also lists specific sectors where tax incentives are available.  Under the MIL, foreign investors are now able to enter into long-term leases. The MIL revised restrictions on investment to liberalize investment. Section 42 of the MIL lists types of investment activities that only the Union government can undertake; that are not permitted for foreign investors; that are permitted only as a joint-venture with resident citizens or citizen-owned entities; and that are subject to specifically prescribed conditions (e.g. approval from relevant ministries).

When forming or registering a business in Burma, generally two options exist: (i) registration under the new Companies Law or (ii) registration as an MIC-company under the MIL (with registration under the 2014 Special Economic Zone Law for businesses located in a Special Economic Zone as a third option).  Under the MIL, investors involved in the following businesses must still submit a proposal to the MIC and apply for a permit: businesses/investment activities that are strategic for the Union; large, capital-intensive investment projects; projects which have large potential impacts on the environment and local communities; businesses/investment activities that use state-owned land and buildings; and/or businesses/investment activities that the government designates as requiring the submission of a proposal to the MIC.

The State-Owned Economic Enterprises Law, enacted in March 1989, is still in effect today.  It regulates certain investments and economic activities. While the 1989 law stipulated that state-owned enterprises (SOE) have the sole right to carry out a range of economic activities, including teak extraction, oil and gas, banking and insurance, and electricity generation, in practice many of these areas are now open to private sector investment.  For instance, the 2016 Rail Transportation Enterprise Law allows foreign and local businesses to make certain investments in railways, including in the form of public-private partnerships.

More broadly, the MIC, “in the interest of the State,” can make exceptions to the State-Owned Economic Enterprise Law.  The MIC has routinely granted numerous exceptions including through joint ventures or special licenses in the areas of insurance, banking (for domestic investors only), mining, petroleum and natural gas extraction, telecommunications, radio and television broadcasting, and air transport services.

The Burmese military is associated with the Union of Myanmar Economic Holdings, Ltd. (UMEHL) and runs the Myanmar Economic Corporation (MEC), two large conglomerates with many commercial interests. 

Other Investment Policy Reviews

The World Bank’s Doing Business 2019 report includes an analysis of Burma’s investment sectors and business environment, and can be found at:  http://www.doingbusiness.org/data/exploreeconomies/myanmar/  

The World Bank also conducted an enterprise survey of Burma in 2016, the results of which can be found at: http://www.enterprisesurveys.org/data/exploreeconomies/2016/myanmar  

The OECD conducted an investment policy review of Burma in March 2014.  The entire report can be found at: http://www.oecd.org/daf/inv/investment-policy/Myanmar-IPR-2014.pdf .

The World Trade Organization (WTO) conducted a trade policy review of Burma in March 2014.  The entire report can be found at: https://www.wto.org/english/tratop_e/tpr_e/tp393_e.htm  .

Business Facilitation

The Directorate of Investment and Company Administration (DICA) website (http://www.dica.gov.mm/  ) provides information on how to register a business in Burma, which can be done online as of August 2018, or in person at DICA’s offices.  Registration is the first step a businessperson must take before incorporating a company or making an investment in Burma, whether that person is a citizen of Burma or a foreigner.  In accordance with the Companies Law and the Special Companies Act of 1950, a company may register in one of the following forms: as a private or public company by Burmese citizens, as a foreign company or branch of a foreign company, as a joint venture company, or as an association/nonprofit organization.  First steps include checking availability of the company name at DICA or on the online registry, obtaining company registration forms in person or online from DICA, submitting the forms, and paying a company registration fee. The new Companies Law eliminated the need for companies to get a “permit to trade,” removing an obstacle to businesses under the previous version of the law.

The Myanmar Investment Commission (MIC) is responsible for verifying and approving certain investment proposals and regularly issues notifications about sector-specific developments.  The MIC is comprised of representatives and experts from government ministries, departments and governmental and non-governmental bodies. Companies can use the DICA website to retrieve information on requirements for MIC permit applications and submit a proposal to the MIC.  If the proposal meets the criteria, it will be accepted within 15 days. If accepted, the MIC will review the proposal and reach a decision within 90 days. The MIC issued a March 2016 statement granting authority to state and regional investment committees to approve any investment with capital of under USD 5 million.  Such investments no longer require approval from the MIC.

To attract foreign and domestic investors, the MIC has released lists of townships that fall under three different zones: underdeveloped, moderately developed, and adequately developed.  Investors will receive a tax break of seven years, five years, or three years when they make investments in these respective zones. A total of 166 townships fall under the least-developed-zone category.  In 2017, DICA expanded its presence throughout Burma to support companies and promote investment in of all the country’s states and regions.

Outward Investment

Burma does not promote outward investment, but it does not restrict domestic investors from investing abroad.

Burma has signed and ratified bilateral investment agreements with China, India, Japan, South Korea, Laos, Philippines, and Thailand.  It has also signed bilateral investment agreements with Israel and Vietnam although these have not yet entered into force. Burma has engaged in investment treaty negotiations with Bangladesh, China, Hong Kong, Iran, Mongolia, Russia, and Serbia.  Texts of the agreements or treaties that have come into force are available on the UNCTAD website at: http://investmentpolicyhub.unctad.org/IIA/CountryBits/144  .

In 2013, the United States and Burma signed a Trade and Investment Framework Agreement.

Burma does not have a bilateral investment treaty or a free trade agreement with the United States.

Through its membership in ASEAN, Burma is also a party to the ASEAN Comprehensive Investment Agreement, as well as to the ASEAN-Australia-New Zealand Free Trade Agreement, the ASEAN-Korea Free Trade Agreement, and the China-ASEAN Free Trade Agreement, all of which contain an investment chapter that provides protection standards to qualifying foreign investors.

Burma has border trade agreements with Bangladesh, India, China, Laos, and Thailand.

Burma has Avoidance of Double Taxation Agreements with the United Kingdom, Singapore, India, Malaysia, Vietnam and South Korea.

Burma does not have a bilateral taxation treaty with the United States.

Transparency of the Regulatory System

Burma lacks regulatory and legal transparency.  In the past, all regulations were subject to change with no advance or written notice, and without opportunity for public comment.  Some ministries now engage in public consultation before finalizing bills for parliamentary consideration or issuing new regulations and this practice is becoming more widespread.  For instance, the government solicited public comments on the 2016 Investment Law, including the drafting of the rules and regulations, which went through three rounds of public consultations.  While there is no legal requirement to have public consultation, 75 percent of parliamentarians are elected representatives of their constituencies and are expected to respond to public engagement.  An active and vocal civil society also results in more public discourse about proposed legislation and regulations than in the past.

The government of Burma publishes information online on government websites and has established websites through which businesses can access trade information.  The Ministry of Commerce publishes a weekly Commerce Journal and a monthly Trade News booklet, providing trade-related information, and in 2016, launched the National Trade Portal (https://myanmartradeportal.gov.mm/en  ).  The government of Burma publishes new regulations and laws in government-run newspapers and “The State Gazette.”  Burma has issued the annual Citizen Budget in the Burmese language since FY 2015-16. The Ministry of Planning and Finance has published quarterly budget execution reports, six-month-overview-of-budget-execution reports and annual budget execution reports on its website since FY 2015-16.  The Burmese government also publishes its debt obligation report on the Treasury Department’s Facebook page. (See https://www.facebook.com/pages/biz/Treasury-Department-of-Myanmar-777018172438019/  ).  For more information on Burma’s regulatory transparency see http://rulemaking.worldbank.org/data/explorecountries/myanmar  .

As part of the government’s commitment to transparency of its regulatory system, Burma became a candidate country in the Extractive Industries Transparency Initiative in 2014, and in January 2016 Burma’s Extractive Industries Transparency Initiative (EITI) National Coordination Office, a global standard for the promotion of revenue transparency, submitted the country’s first EITI report.  The government announced its new EITI authority, the administrative body for the EITI process, in December 2016. In 2018, the government published its second and third reports for FY 2014/15 and FY 2015/16 FY, and in March 2019 it published its fourth sector report. A forestry sector report is expected in 2019. (See https://eiti.org/myanmar  .)

International Regulatory Considerations

The Ministry of Commerce’s National Trade Portal and Repository contains all of Burma’s laws, processes, forms, and points of contact for trade.  This portal increases transparency in Burma and also meets Burma’s requirements under Articles 12 and 13 of the ASEAN Trade in Goods Agreement.  While Burma is not in compliance with WTO notification requirements, the government developed a WTO notification strategy that should increase the number and quality of notifications. The Trade Portal can be found at: http://www.myanmartradeportal.gov.mm/index.php  .

Legal System and Judicial Independence

Burma’s legal system is a unique combination of customary law, English common law and statutes introduced through the pre-independence India Code, and post-independence Burmese legislation.  Where there is no statute regulating a particular matter, courts are to apply Burma’s general law, which is based on English common law as adopted and modified by Burmese case law.  Every state and region has a High Court, with lower courts in each district and township.   High Court judges are appointed by the President while district and township judges are appointed by the Chief Justice through the Office of the Supreme Court of the Union. The Union Attorney General’s Office law officers (prosecutors) operate sub-national offices in each state, region, district, and township.

The Attorney General enforces standards of due process in the criminal justice system and provides the government’s law officers with a mandate to act as an independent check in the criminal justice system.  The Ministry of Home Affairs, led by a minister appointed by the Commander-in-Chief but reporting to the President, retains oversight of the Myanmar Police Force, which files cases directly with the courts. While foreign companies have the right to bring cases to and defend themselves in local courts, there are concerns about the impartiality and lack of independence of the courts.

In order to address the concerns of foreign investors regarding dispute settlement, the government acceded in 2013 to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”).  In 2016, Burma’s parliament enacted the much-anticipated Arbitration Law, putting the New York Convention into effect and replacing arbitration legislation that was more than 70 years old. Since April 2016, foreign companies can pursue arbitration in a third country.  However, the Arbitration Law does not eliminate all risks. There is still a limited track record of enforcing foreign awards in Burma and inherent jurisdictional risks remain in any recourse to the local legal system. The Arbitration Law however brings Burma’s legislation more in line with internationally accepted standards in arbitration.

Laws and Regulations on Foreign Direct Investment

The MIC plays a leading role in the regulation of foreign investment, and approves all investment projects receiving incentives except those in special economic zones, which are handled by the Central Working Body, set up under the existing Special Economic Zone Law.  Joint ventures between foreign investors and SOEs are the responsibility of the relevant line ministries. There is no evidence that the MIC discriminates against foreign investors.

The MIL outlines the procedures the MIC must take when considering foreign investments.  Investment approvals are made on a case-by-case basis. The MIC evaluates foreign investment proposals and stipulates the terms and conditions of investment permits.  To obtain an investment permit, the investor must submit a proposal in the prescribed form to the MIC, together with supporting documentation, including details of intended activities and the financial credibility of the company/individual; an undertaking not to engage in trading activities; and annual reports for the last two financial years, or copies of the company’s head office’s balance sheet and profit-and-loss account for the last two financial years, notarized by the Burmese Embassy in the country where the company is incorporated.  The MIC accepts or rejects an application within 15 days, and decides whether to approve the proposal within 60 days. The Chairman of the MIC gives the final approval.

The MIC does not record foreign investments that do not require MIC approval.  Joint ventures with military-controlled enterprises require MIC approval and abide by the same rules as other investments.  Many smaller investments may go unrecorded. Once licensed, foreign firms may register their companies locally, use their permits to obtain resident visas, lease cars and real estate, and obtain import and export licenses from the Ministry of Commerce.  Foreign companies may register locally without an MIC license, in which case they are not entitled to receive the benefits and incentives provided for in the MIL. Many import and export licenses requirements have been removed since 2014; for more information see https://www.myanmartradeportal.gov.mm/en/guide-to-import-export  . 

More information on the MIC can be found at: http://www.dica.gov.mm/en/apply-mic-permit  .

Competition and Anti-Trust Laws

A Competition Law was passed on February 24, 2015, and went into effect on February 24, 2017.  The objective of the law is to protect public interest from monopolistic acts, limit unfair competition, and prevent abuse of dominant position and economic concentration that weakens competition.

The law classifies four types of behavior as sanctionable violations: acts restricting competition (applicable to all persons); acts leading to monopolies (applicable only to entrepreneurs); unfair competitive acts (applicable only to entrepreneurs); and business combinations such as mergers.  The law also restricts the production of goods, market penetration, technological development, and investment, although the government may exempt restrictive agreements “if they are aimed at reducing production costs and benefit consumers,” such as reshaping the organizational structure and business model of a business so as to improve its efficiency; enhancing technology and technological advances for the improvement of the quality of goods and service; and promoting competitiveness of small- and medium-sized enterprises.

Burma is not party to any bilateral or regional agreement on anti-trust cooperation.

Expropriation and Compensation

The 2016 MIL prohibits nationalization and states that foreign investments approved by the MIC will not be nationalized during the term of their investment.  In addition, the law guarantees that the government of Burma will not terminate an enterprise without reasonable cause, and upon expiration of the contract, the government of Burma guarantees an investor the withdrawal of foreign capital in the foreign currency in which the investment was made.  Finally, the law states that “the Union government guarantees that it shall not cease an investment enterprise operating under a Permit of the Commission before the expiry of the permitted term without any sufficient reason.”

Dispute Settlement

ICSID Convention and New York Convention

Burma is not a party to the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID).  In 2016, the Burmese parliament enacted the Arbitration Law, putting the 1958 New York Convention into effect (see international arbitration below).

Investor-State Dispute Settlement

To date, Burma has not been party to any investment dispute.  In addition, Burma has not been party to any dispute settlement proceeding at the WTO.

Under the 2016 Arbitration Law, local courts should recognize and enforce foreign arbitral awards against the government unless a valid ground for refusal to enforce exists.  Valid grounds for refusal include: one or more parties’ inability to conclude an arbitration agreement; the invalidity of the arbitration agreement, lack of due process, the award falls outside the scope of the arbitration agreement; the arbitration was not in compliance with the applicable laws; or the award is not in force or has been set aside.

International Commercial Arbitration and Foreign Courts

The 2016 Arbitration Law is based on the UNCITRAL Model Law (Model Law), addressing arbitration in Burma as well as the enforcement of a foreign award in Burma.  For example, the provisions relating to the definition of an arbitration agreement, the procedure of appointing arbitrator(s) and the grounds for setting aside an award are mirrored in the Arbitration Law and the Model Law; however there are some differences between these two laws.  For instance, while parties are free to decide on the substantive law in an international commercial arbitration, the Arbitration Law provides that arbitrations seated in Burma must adopt Burmese law as the substantive law.  This may create uncertainty as to what can be defined as an international commercial dispute, since parties are allowed to adopt any foreign law as substantive law.  According to the Arbitration Law, foreign arbitral awards can be enforced if they are the result of a commercial dispute and were made at a place covered by international conventions connected to Burma and as notified in the State Gazette by the President.  If the Burmese court is satisfied with the award, it has to enforce it as if it were a decree of a Burmese court. While observers note that there are still issues to be resolved, the Arbitration Law brings Burma’s legislation much closer to international arbitration standards and legislation.

Bankruptcy Regulations

There is no bankruptcy law in Burma.  Existing, antiquated insolvency laws – such as the Insolvency Act of 1910 and the Insolvency Act of 1920 – are rarely used.

Investment Incentives

According to the MIL, investors may enjoy corporate tax exemption for seven, five or three years depending on whether investment takes place in underdeveloped, moderately developed or adequately developed regions, although income tax exemptions shall be granted only to investments in promoted sectors such as agriculture, manufacturing, power generation, etc.  The promoted sectors can be found at the DICA website: https://www.dica.gov.mm/en/investment-promotion  .

MIC permit holders are entitled to tax incentives and the right to use land. With a MIC permit, foreign companies can lease regional government approved land for initial periods of up to 50 years, and with the possibility of two consecutive ten-year extensions.

DICA is officially mandated to coordinate investment promotion under the MIC, although different ministries and agencies promote investment in different sectors (e.g. the Ministry of Tourism promotes responsible tourism investment).  DICA is responsible for encouraging and facilitating foreign investment by providing information, fostering coordination and networks between investors, and continually exploring new opportunities in Burma that would benefit both the nation and the business communities.  DICA’s head office is in Yangon and it has 14 branches throughout the country including Naypyitaw, Mandalay, Taunggyi, Mawlamyaing, Pathein, Monyaw, Dawei, Hpa-an, Bago, Magway, Loikaw, Myitkyina, Sittwe and Hakha. DICA uses seminars, workshops, investment fairs and other events to promote investment, as well as its website: http://www.dica.gov.mm/en  .

Foreign Trade Zones/Free Ports/Trade Facilitation

The Myanmar Economic Zones Law also contains specific investment incentives.  Under the law, investors located in an SEZ may apply for income tax exemption for the first five years from the date of commencement of commercial operations, followed by a reduction of the income tax rate by 50 percent for the succeeding five-year period.  Under the law, if profits during the third five-year period are re‐invested within one year, investors can apply for a 50 percent reduction of the income tax rate for profits derived from such re‐investment.  In August 2015, the Ministry of National Planning and Economic Development issued new rules governing the SEZs, including the establishment of a One-Stop Service Department to ease the approval and permitting of investments in SEZs, incorporate companies, issue entry visas, issue the relevant certificates of origin, collect taxes and duties, and approve employment permits and/or permissions for factory construction and other investments.

Performance and Data Localization Requirements

Foreign investors must recruit at least 25 percent of their skilled employees from the local labor force in the first two years of their investment.  The local employment ratio increases to 50 percent for the third and fourth years, and 75 percent for the fifth and sixth years. The investors are also required to submit a report to MIC with details of the practices and training methods that have been adopted to improve the skills of Burmese nationals.

Foreign investors are not required to use domestic content in goods or technology.  Burma is currently developing laws, rules and regulations on information technology (IT).  It does not have in place requirements for foreign IT providers to turn over source code and/or provide access to surveillance.

Real Property

The MIL provides that any foreign investor may enter into long-term leases with private landlords or – in the case of state-owned land – the relevant government departments or government organizations, if the investor has obtained a Permit or Endorsement issued by the MIC.  Upon issuance of a Permit or an Endorsement, a foreign investor may enter into leases with an initial term of up to 50 years (with the possibility to extend for two additional terms of ten years each). Longer periods of land utilization or land leases may be allowed by the MIC to promote the development of difficult-to-access regions with lower development.

In September 2018, Burma amended the Vacant, Fallow, and Virgin Lands Management Law and required occupants of land considered vacant, fallow or virgin to go to the nearest land records office and register within a six-month period.  The six-month deadline was intended to offer clear title to lands for investment and infrastructure construction. However, controversy exists over which lands were designated as vacant, fallow or virgin and whether the notification or registration period was sufficient.

In January 2016, the government published the approved National Land Use Policy.  The policy includes provisions on ensuring the use of effective environmental and social safeguard mechanisms; improving public participation in decision-making processes related to land use planning; improving public access to accurate information related to land use management; and developing independent dispute resolution mechanisms.  The policy is to be updated every five years as necessary and stipulates that a new national land law will be drafted and enacted using this policy.  The policy also establishes the National Land Use Council. Chaired by the Vice President, the council constitutes the highest authority within the government presiding over land issues, and is intended to ensure the policy and new national land law are implemented and used as a guide for the harmonization of all existing laws relating to land in the country.

A continuing area of concern for foreigners involves investment in large-scale land projects.  Property rights for large plots of land for investment commonly are disputed because ownership is not well established, particularly following a half-century of military expropriations.  It is not uncommon for foreign firms to face complaints from local communities about inadequate consultation and compensation regarding land.

Burma’s parliament passed the Condominium Law in 2016.  The law states that up to 40 percent of condominium units of “saleable floor area” can be sold to foreign buyers.  Condominium owners shall also have the shared ownership of both the land and apartment.  In 2017 the Ministry of Construction pasted the Condominium Rules, implementing and clarifying provisions of the Condominium law.  One clarification per the rules is that state-owned land may be registered as condominium land (Rules 20 and 21).

In accordance with the Transfer of Immovable Property Restriction Law of 1987, mortgages of immovable property are prohibited if the mortgage holder is a foreigner, foreign company or foreign bank.

Intellectual Property Rights

Burma improved its intellectual property rights protection in 2019 by enacting three laws on intellectual property: the Trademark Law, the Industrial Design Law, and the Patent Law.  A fourth law on copyrights has been passed by Parliament but has not yet been signed by the President. The laws improve protections for intellectual property owners by offering legal protections and implementing fines or legal actions in case of infringement.

The Trademark Law introduces a “first-to-file” system from the previous “first-to-use” system.  Trademark holders who previously registered their trademark will need to re-register their marks.  The new law also includes protections for “well-known” trademarks. Geographical indications will also be protected through registration.  In anticipation of passage of the trademark bill, Burma established a single national Intellectual Property Office that will monitor compliance with intellectual property laws and be responsible for developing IPR policy rules and regulations.  In addition, the WTO has delayed required implementation of the Trade-Related Aspects of Intellectual Property (TRIPs) Agreement for Least Developed Nations – including Burma – until 2021.

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

Resources for Rights Holders

For Intellectual Property Rights issues in Burma, please contact:

Kitisri Sukhapinda, Regional IP Attache
U.S. Patent and Trademark Office
American Embassy Bangkok, Thailand
Tel: (662) 205-5913
Email: kitisri.sukhapinda@trade.gov

Information on the American Chamber of Commerce (AmCham) Burma Chapter can be found at: http://www.amchammyanmar.com/  

Information on legal service providers available in Burma can be found at: https://mm.usembassy.gov/u-s-citizen-services/attorneys/

Capital Markets and Portfolio Investment

Burma has very small publicly traded equity and debt markets.  Banks have been the primary buyers of government bonds issued by Burma’s Central Bank, which has established a nascent bond market auction system.  The Central Bank issues government treasury bonds with maturities of two, three, and five years.

The Burmese government opened the Yangon Stock Exchange in 2015, and the first company was listed on March 25, 2016.  As of April 2018, five companies are listed on the exchange. Japan Exchange Group and Japan-based Daiwa Securities Group helped launched the stock exchange, owning a combined 49 percent of the stock exchange, with the remaining 51 percent owned by state-owned Myanma Economic Bank.  In 2013, the Securities Exchange Law came into effect, establishing a securities and exchange commission and helping clarify licensing for securities businesses (such as dealing, brokerage, underwriting, investment advisory and company representation). The Companies Law allows foreign investment of up to 35 percent in domestic companies and allows foreign investment in the stock market.

Money and Banking System

In October 2014, the government awarded limited banking licenses to nine foreign banks – all from the Asia-Pacific region – allowing each bank to set up one branch and provide loans to foreign companies.  All nine banks began operations by the end of October 2015. In mid-December 2015, the Burmese government announced a second round of foreign bank licensing, designed to increase the presence of banks headquartered in a wider variety of countries, and in early March 2016 the Central Bank granted new licenses to banks headquartered in India, South Korea, Taiwan, and Vietnam.  In November 2018, the Central Bank published new guidelines that permit locally licensed foreign banks to offer “any financing services and other banking services” to local corporations. Previously, the thirteen foreign banks in Burma were only allowed to offer export financing and related banking services to foreign corporations. No domestic banks currently have a correspondent bank account with a U.S.-based bank.

The Financial Institution Law was enacted in January 2016 and in July 2017 the Central Bank issued four regulations on capital adequacy ratio, asset classification and provisioning, large exposures and liquidity ratio requirements, aiming to align Burma’s banking standards with international Basel II standards.  Since then Burmese banks have pushed back against the timeline of implementation of these regulations, arguing that special circumstances in Burma’s banking industry warrant special treatment.

Insufficient access to formal sources of credit is one of the most frequently identified obstacles to doing business in Burma, according to numerous business surveys.

Foreign Exchange and Remittances

Foreign Exchange

The Burmese kyat has a free-floating exchange rate.  Starting from February 5, 2019, the Central Bank calculates a market-based reference exchange rate from the volume-weighted average exchange rate of interbank and bank-customer deals during the day.

Remittance Policies

According to the MIL, foreign investors have the right of remittance of foreign currency.  Foreign investors are allowed to remit foreign currency overseas through banks authorized to conduct foreign banking business at the prevailing exchange rate.  Banks began introducing remittance services during 2012 and the volume of such formal transfer is low but growing, according to local bank managers.

Nevertheless, in practice, the transfer of money in or out of Burma has been difficult, as many international banks have been slow to update their internal prohibitions on conducting business in Burma, given the long history of U.S. and European sanctions that had isolated the country.  The majority of foreign currency transactions are conducted through banks in Singapore.

The difficulties presented by the formal banking system are reflected in the continued use of informal sources of finance for loans and remittances by both the public and businesses.  Although these informal sources tend to have higher interest charges, they offer an alternative to the limited loan services offered by banks, which generally provide only short-term credit for trade on a limited basis and require collateral.  Remittances are also often made through a well-developed informal financial network (commonly known as the “Hundi system”).

Burma is a “country of primary money laundering concern” according to the 2017 International Narcotics Control Strategy Report.  According to the report, Burma is not a regional or offshore financial center, and its historically isolated banking sector is just beginning to reconnect to the international financial system.  However, the report notes that Burma’s prolific drug production and lack of financial transparency make it attractive for money laundering. Burma enacted anti-money-laundering laws in 2014 and issued relevant rules in 2015.  Burma’s Financial Intelligence Unit (FIU) is the agency responsible for undertaking investigation and legal action. The FIU is now a part of Burma’s police force under the Ministry of Home Affairs.

The FIU is building its capacity to become an independent unit in line with the recommendations of the Financial Action Task Force.  In July 2016, Burma was delisted from the Financial Action Task Force list. While Burma is still designated as a jurisdiction of “primary money laundering concern” under Section 311 of the USA PATRIOT Act, the U.S. Department of the Treasury issued an administrative exception to this finding in October 2016, similar to waivers issued for certain banks since 2012, thereby allowing corresponding banking relationships with the United States.  For more information on the Department of Treasury exception, please see: https://www.fincen.gov/news/news-releases/fincen-issues-exception-prohibition-imposed-section-311-action-against-burma  

Burma does not engage in currency manipulation tactics.

Sovereign Wealth Funds

Burma does not have a sovereign wealth fund.

Revenue from SOEs contributes about 42 percent of the total revenue of Burma, while SOEs costs amount to 36 percent of expenditures.  In July 2016, the NLD announced 12 economic policies including to reform SOEs and privatize SOEs to enable the private sector to create employment opportunities.  The disaggregate figures of each SOE under the respective ministries are made public in the Burmese language.

Starting in 2012, the government of Burma began taking steps to reduce SOEs’ reliance on government support and to make them more competitive through joint ventures.  This included reducing budget subsidies for financing the raw material requirements of SOEs. The government of Burma has moved in the direction of public private partnerships, corporatization, and privatization.  Burma is not party to the Government Procurement Agreement (GPA) within the framework of the WTO.

SOEs can secure loans at four percent interest rates from state-owned banks, with approval from the cabinet.  Private enterprises, unlike SOEs, are forced to provide land or other real estate as collateral in order to be considered for a loan.  However, SOEs are now subject to stricter financial discipline, as the government has sharply cut direct subsidies to the SOEs while opening markets for competition with the private sector.  Furthermore, the government is removing the easy credit from state banks. SOEs historically had an advantage over private entities in terms of land access since, according to the Constitution, the State owns all the land.

Privatization Program

According to the government of Burma, the private sector accounts for a majority of the country’s GDP, with the State participating in telecommunication services, social and public administration, energy, forestry, construction, and electricity.  The activities of the two military-owned conglomerates of MEHL and MEC are not included in the budget data; while a common sense understanding of “state-owned” would likely include them, these companies are not considered SOEs under Burmese law.

The NLD government has prioritized the privatization of SOEs, largely because many of these entities cost the government money.  In May 2016, the NLD appointed the new members of the Privatization Commission headed by a Vice-President. The Minister of Planning and Finance is the secretary of the commission.  Privatization can take the form of system-sharing, public-private partnership, private-private partnership, franchise, joint-venture, and sales of assets in line with international standards.

Burma’s awareness of corporate social responsibility (CSR) is growing.  However, many local companies (and some international firms) still equate CSR with in-kind donations or charitable contributions.  In recent years the Union of Myanmar Chambers of Commerce and Industry (UMFCCI), Burma’s largest private sector association, has been promoting the United Nations Global Compact and CSR principles in general.

Burma has implemented the OECD Guidelines for Multinational Enterprises.

The elected government has continued to prioritize fighting corruption, and resources have been allocated to facilitate the growth of the Anti-Corruption Commission (ACC) into an institution vested with the authority to lead that fight.  In 2018, the government amended its anti-corruption law to give the ACC greater authority to scrutinize government procurements, and the ACC has used that authority to initiate criminal cases against a few high-ranking and some mid-ranking officials for financial impropriety and abuse of office.  The ACC opened a branch office in Yangon in April 2019, and intends to open a branch in Mandalay in May 2019, as it continues to increase its investigative capacity.

The country, however, still lacks a framework that would effectively support a sustained and systematic fight against corruption.  While there have been efforts to reduce some opportunities for higher-level corruption, the lack of transparency regarding military budgets and expenditures remains a substantial impediment to reforms.  In addition, a large swath of the economy is engaged in illegal activities beyond the control of the government. These include the production, transportation and distribution of narcotics, and the smuggling of jade, gemstones, timber, wildlife, and wildlife products.  There are efforts to promote accountability for government officials, but lack of resources for key government functions, including law enforcement, remains a driver for low-level corruption. In its 2018 Corruption Perceptions Index, Transparency International rated Burma 132 out of 180 countries, a slight decline in ranking from the previous year.  Investors might face corruption when seeking investment permits, during the taxation process, when applying for import and export licenses, and when negotiating land and real estate leases.

The Government of Burma, however, recognizes the importance of fighting corruption as a quintessential part of efforts to improve democratic governance.

Resources to Report Corruption

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Burma signed the UN Anticorruption Convention in 2005, and ratified it December 20, 2012.

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

Resources to Report Corruption

Anti Corruption Commission
Cluster (1), Sports’ Village, Wunna Theikdi Ward
Nay Pyi Taw
Phone : + 95 67 810 334 7
Email : myanmaracc2014@gmail.com
http://www.accm.gov.mm/acc/index.php?route=common/home  

The government is sensitive to the threat of terrorism and is engaged with international partners on this issue.  There is no evidence to suggest that international terrorist organizations have operational capacity in Burma or are actively targeting Western interests.  Although both Al-Qaeda in the Indian Subcontinent (AQIS) and ISIS in the Philippines (ISIS-P) have called for attacks in Burma as a result of the Rakhine crisis involving the Rohingya people, these calls are so far largely seen as aspirational in nature.  Additionally, crime in Burma is low compared to other countries within the region. While violence or demonstrations rarely target U.S. or other Western interests in Burma, several ethnic armed groups are engaged in ongoing civil conflict with the government of Burma, which occurs almost exclusively in the ethnic states.  On October 15, 2015, the government of Burma and eight ethnic armed groups (EAGs) signed a Nationwide Ceasefire Agreement (NCA).  Two additional armed ethnic groups joined the NCA in February 2018. However, several ethnic armed groups, including the most powerful ones, have not signed the NCA and some signatories continue to fight with the military and other EAGs.

While most of the major cities are quite safe, several areas of the country, particularly the ethnic states, routinely see conflict between the government and EAGs, as well as inter-ethnic violence between EAGs.  One of the ways these conflicts manifest is in the use of landmines and attacks involving improvised explosive devices. These incidents generally target government security forces, but there have been collateral casualties among the civilian population.  The continued use of landmines by the Burmese military and EAGs in the north, northeast, and southeast continue to routinely result in civilian casualties. Civilians have also been killed as a result of clashes between the military and the EAGs, as well as inter-ethnic conflicts.

On August 25, 2017, a Rohingya insurgent group attacked about 30 security outposts in northern Rakhine State.  The government characterized this event as a terrorist attack, and Burmese security forces launched clearance operations throughout northern Rakhine State.  Hundreds of Rohingya villages were burned, and there were widespread, credible allegations of abuses by security forces. An estimated 730,000 Rohingya fled to Bangladesh, and tens of thousands of non-Rohingya are displaced inside Rakhine State.  In November 2017, the U.S. Secretary of State determined that the situation constituted ethnic cleansing. Violence has not spread to other areas of Burma as a result of the crisis in Rakhine State although, as noted above, certain states in Burma continue to experience ethnic or religious violence.  Burma has a minority Muslim population, and violence between Buddhists and Muslims did occur in other parts of the country in 2013 and 2014 following intercommunal violence in Rakhine State in 2012. Since late 2018, there has been a marked increase in violence as a result of the ongoing conflict between the Burmese security forces and fighters from the Arakan Army (AA), an ethnic Rakhine, largely Buddhist, EAG.  A number of townships in northern Rakhine and southern Chin are currently off limits for U.S. government travel due to the violence from this conflict.

In October 2011, the Government of Burma passed the Labor Organization Law, which legalized the formation of trade unions and allows workers to strike.  As of April 2019 roughly 2,900 enterprise level unions had been formed in a variety of industries ranging from garments and textiles to agriculture to heavy industry.  The passage of the Labor Organization Law has engendered a nascent labor movement in Burma, and there is a low, yet increasing, level of awareness of labor issues among workers, employers, and even government officials.

Burma’s labor costs are low, even when compared to most of its Southeast Asian neighbors.  Skilled labor and managerial staff are in high demand and short supply, leading to high turnover.  The military’s nationalization of schools in 1964, its discouragement of English language classes in favor of Burmese, the lack of investment in education by the previous governments of Burma, and the repeated closing of Burmese universities from 1988 to the mid-2000’s have taken a toll on the country’s work force.  Most people in the 15-39-year-old demographic group lack technical skills and English proficiency. In order to address this gap, the government of Burma’s Employment and Skill Development Law entered into effect in December 2013 and is being revised. The law provides for compulsory contributions on the part of employers to a “skill development fund,” although this provision has not been implemented.  According to the government, 70 percent of Burma’s population is employed in agriculture.

According to the World Bank’s 2014 “Ending Poverty and Boosting Prosperity in a Time of Transition” report on Burma, 73 percent of the total labor force in Burma was employed in the informal sector in 2010, or 57 percent excluding agricultural workers.  Casual laborers represented another 18 percent, mainly from the rural areas. Unpaid family workers represent another 15 percent. According to the government’s labor force survey, the informal sector accounts for 75.6 percent.

A new national minimum wage went into effect in May 2018, raising the minimum daily wage from 3,600 kyat (USD 2.40) to 4,800 kyat (USD 3.20).  The minimum wage covers a standard eight-hour work day across all sectors and industries, and applies to all workers except for those in businesses with less than 15 employees.  While the previous minimum wage has been widely implemented, compensation for overtime work is still unclear.

The Burmese government, in an effort to align Burma’s labor regulations with international standards and increase trade and investment in the country, set out to abolish all antiquated labor laws and to introduce new labor laws and regulations.  The government passed a number of labor reforms and amended a range of labor-related laws, such as the 2016 Shops and Establishment Law and the Payment of Wages Law. Parliament passed a new Occupational Safety and Health Law in March 2019 and a Settlement of Labor Disputes Law in May 2019.

In November 2016, the U.S. government reinstated Burma’s Generalized System of Preferences (GSP) trade benefit in recognition of the progress that the government had made in protecting workers’ rights.  The U.S. government reauthorized the GSP program globally in March 2018 through December 31, 2020.

In September 2016, a National Tripartite Dialogue Forum (NTDF) was created to provide a venue for the Ministry of Labor, Immigration and Population to engage with employers and workers, especially in drafting legislation.  The NTDF meets regularly and is currently reviewing a draft of the Labor Organization Law as well as the Employment and Skill Development Law.

In November 2014, the governments of the United States, Burma, Japan, Denmark, and the ILO formally launched the Initiative to Promote Fundamental Labor Rights and Practices in Myanmar (Initiative) and held the third Stakeholder’s Forum in January 2018.  The overarching goal of the Initiative is to promote a culture of compliance with fundamental labor rights. The Initiative is intended to cultivate relationships between business, labor, and civil society stakeholders and the government of Burma.

In May 2013, the Overseas Private Investment Corporation (OPIC) signed an Investment Incentive Agreement with Burma.   OPIC provides political risk insurance, debt financing, and private equity capital to support U.S. investors and their investments. OPIC can provide political risk insurance for currency inconvertibility, expropriation, and political violence for U.S. investments including equity, loans and loan guarantees, technical assistance, leases, and consigned inventory or equipment.  Most recently, in April 2019, OPIC signed an agreement providing USD 8 million in support for a microfinance enterprise in Burma.

In 2014, the Export-Import Bank of the United States (EXIM Bank) announced that it would open for sovereign-backed business in Burma to help finance short-term and medium-term U.S. export sales.  In July 2017 EXIM Bank also authorized long-term transactions in the public sector.

In December 2013, Burma became a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA), which means that direct foreign investment into the country is eligible for the agency’s investment guarantees.

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

* https://www.dica.gov.mm/sites/dica.gov.mm/files/document-files/yearly_country.pdf  . In 2018, Burma changed its fiscal reporting period from an April to March reporting period to an October to September period.  This amount only represents U.S. FDI between April and September 2018
**Accurate statistical data is limited in Burma, although this capacity is also being developed.

Table 3: Sources and Destination of FDI

* According to http://data.imf.org/CDIS  

Table 4: Sources of Portfolio Investment

Data not available.

Amy E. Roth, Economic Officer
U.S. Embassy/110 University Avenue
Kamayut Township 11041, Rangoon, Burma
Telephone:  95 (0)1 536 509
Email Address: BurmaBusiness@state.gov

As mentioned above, Cambodia has an open and liberal foreign investment regime and actively courts FDI. The primary law governing investment is the 1994 Law on Investment. The government permits 100 percent foreign ownership of companies in most sectors. In a few sectors, such as cigarette manufacturing, movie production, rice milling, gemstone mining and processing, publishing and printing, radio and television, wood and stone carving production, and silk weaving, foreign investment is subject to local equity participation or prior authorization from authorities. There is little or no official discrimination against foreign investors either at the time of initial investment or after investment. Some foreign businesses, however, have reported that they are at disadvantaged vis-a-vis Cambodian or other foreign rivals that engage in acts of corruption or tax evasion or take advantage of Cambodia’s poor regulatory enforcement.

The Council for the Development of Cambodia’s (CDC) is the lead investment promotion agency in Cambodia and is the principal government agency responsible for providing incentives to stimulate investment. Investors are required to submit an investment proposal to either the CDC or the Provincial-Municipal Investment Sub-committee to obtain a Qualified Investment Project (QIP) status depending on capital level and location of the investment question. This agency also facilitates public-private consultation mechanism that is considered to improve investment climate in Cambodia.  The forum acts as a platform for the private sector to raise concerns for the government to solve. More information about investment and investment incentives in Cambodia may be found on the website at: www.cambodiainvestment.gov.kh  .

To facilitate foreign investment, Cambodia has created special economic zones (SEZs). These zones provide companies with ready access to land, infrastructure, and services to facilitate the set-up and operation of businesses. Services provided include utilities, tax services, customs facilitation, and other administrative services designed to support import-export processes. Projects within the SEZs are also offered with incentives such as tax holidays; zero rate value-added tax; and import duty exemption for raw materials, machinery and equipment. The primary authority responsible for SEZs is the Cambodia Special Economic Zone Board (CSEZB).  The largest of these SEZs is located in Sihanoukville and hosts primarily Chinese companies.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are few limitations on foreign control and ownership in Cambodia. Foreign investors may own 100 percent of their investment projects except in the sectors mentioned above. According to Cambodia’s 2003 Amended Law on Investment and related sub-decrees, there are no limitations based on shareholder nationality or discrimination against foreign investors, except in relation to investments in real property or state-owned enterprises. Both the Law on Investment and the Amended Law on Investment state that the majority of interest in land, however, must be held by one or more Cambodian citizens. Pursuant to the Law on Public Enterprise, the Cambodian government must directly or indirectly hold more than 51 percent of the capital or the right to vote in state-owned enterprises. In addition, the Cambodian Bar has periodically taken actions to restrict or impede the work of foreign lawyers or foreign law firms.

Other Investment Policy Reviews

In compliance with World Trade Organization (WTO) requirements, Cambodia conducted its first review of trade policies and practices in November 2011. The second review was conducted on November 21-23, 2017. Cambodia’s full trade policy review report can be found on the WTO website: https://www.wto.org/english/tratop_e/tpr_e/tp464_e.htm  . Cambodia also conducted an Organization for Economic Co-operation and Development investment policy review in 2017.

In response to the WTO trade policy review recommendations, Cambodia completed the following reforms:

• Elimination of the Certificate of Origin requirement for exports to countries where a certificate is not required;
• Implementation of online business registration;
• Adoption of a competitive hiring process for Ministry of Commerce staff;
• Implementation of risk evaluation measures for the Cambodia Import-Export Inspection and Fraud Repression Directorate General (CamControl) and creation of a CamControl risk management unit;
• Enactment of the Law on Public Procurement;
• Enactment of three judicial system laws: the Law on Court Structures, the Law on the Duties and Discipline of Judges and Prosecutors, and the Law on the Organization and Functioning of the Supreme Council of Magistracy;
• Creation of the Commercial Court as a specialized Court of First Instance;
• The creation of a credit bureau;
• Establishment of a Telecom Regulator of Cambodia (TRC); in 2012, the Ministry of Posts and Telecommunication transferred its regulatory role to the TRC;
• Enactment of the Law on Telecommunications in December 2015; and
• Enactment of the Law on Animal Health and Production in February 2016.

Areas of ongoing or planned reforms include a law on Special Economic Zones, amending the Standards Law, and enacting laws on competition, cyber security, food safety, and e-commerce.

Business Facilitation

All businesses are required to register with the Ministry of Commerce (MoC) and the General Department of Taxation (GDT). In January 2016, the Ministry of Commerce launched an online business registration portal that allows all existing and new businesses to register their companies at www.businessregistration.moc.gov.kh  . The link also provides sources of information for various types of business registration documents. Depending on the types of business activities, new businesses are also required to register with other relevant ministries. In addition to registering with the MoC and the GDT, for example, travel agencies must register with the Ministry of Tourism, and private universities must register with the Ministry of Education, Youth and Sport. The GDT also established their E-tax registration that can be found at owp.tax.gov.kh:50005/epaymentowpweb  . The World Bank’s 2019 Ease of Doing Business Report ranks Cambodia 138 of 190 countries globally for the ease of starting a business. The report notes that it includes nine separate procedures and can take up to three months to complete all business, tax, and employment registration processes.

Cambodia’s 1994 Law on Investment created an investment licensing system to regulate the approval process for foreign direct investment and provide incentives to potential investors. The website of the Council for the Development of Cambodia (CDC) provides a list of laws, rules, procedures and regulations, which could be useful for foreign investors. CDC’s website is found here: www.cambodiainvestment.gov.kh  .

Outward Investment

There are no restrictions on domestic citizens investing abroad. A number of local companies have already invested in neighboring countries, particularly Laos and Myanmar, in various sectors including banking, IT services, legal and consulting services, and the entertainment industry.

BITs or FTAs

Cambodia has signed bilateral investment treaties (BITs) with 27 countries: Austria, Bangladesh, Belarus, China, Croatia, Cuba, Czech Republic, Democratic People’s Republic of Korea, France, Germany, Hungary, India, Indonesia (later terminated), Japan, Kuwait, Laos, Malaysia, the Netherlands, Pakistan, the Philippines, the Republic of Korea, Russia, Singapore, Switzerland, Thailand, Turkey, the United Arab Emirates, and Vietnam.  Cambodia does not have a BIT with the United States.

As a member of the Association of Southeast Asian Nations (ASEAN), Cambodia has signed regional investment agreements including the ASEAN Comprehensive Investment Agreement, the ASEAN-Hong Kong Investment Agreement, the ASEAN-India Investment Agreement, the ASEAN-China Investment Agreement, and the ASEAN-Korea Investment Agreement.

Cambodia is also a party to several regional free trade agreements that include provisions to liberalize trade as well as investment.  They include the ASEAN-Australia-New Zealand Free Trade Agreement, the ASEAN-Japan EPA, and ASEAN Framework Agreements with Korea, India, China, and the EU, that include investment provisions.  ASEAN is also a party to the Regional Comprehensive Economic Partnership Agreement (RCEP) that is currently under negotiation.

In July 2006, Cambodia signed a Trade and Investment Framework Agreement (TIFA) with the United States to promote greater trade and investment in both countries and provide a forum to address bilateral trade and investment issues. In January 2019, the fifth TIFA meeting took place in Siem Reap, Cambodia.

Bilateral Taxation Treaties

Cambodia does not have a bilateral taxation treaty with the United States, but has entered into six double taxation agreements with Brunei, China, Indonesia, Singapore, Thailand, and Vietnam. Details of those agreements are available on Cambodia’s General Department of Taxation (GDT) website: www.tax.gov.kh/en/ir.php  .

In the past, Cambodia’s GDT has lacked the capacity to collect taxes on a large scale. As a result, many companies evaded paying salary taxes, value-added taxes, and real estate taxes, despite being required to do so under Cambodian laws. The GDT has taken steps, however, to increase tax revenue both by building capacity within the organization and through better implementation of existing tax laws.

Application of Cambodia’s tax laws, while improving, remains inconsistent. In some cases, foreign investors face greater scrutiny to pay taxes than their domestic counterparts.  In others, the GDT has been criticized for employing audits and assessing large tax obligations for political purposes.

Transparency of the Regulatory System

Numerous issues related to the general lack of transparency in the regulatory regime arise from the lack of legislation and limited capacity of key institutions, further exacerbated by weakness of the court system.  Investors often complain that the decisions of Cambodian regulatory agencies are inconsistent, arbitrary, or motivated by corruption. For example, in May 2016 in what was perceived as a populist move, the government set caps on retail fuel prices, with little consultation with petroleum companies.  Following this development, in April 2017, the National Bank of Cambodia introduced the interest rate cap on loans provided by the microfinance industry with no consultation with the relevant stakeholders at all. Some investors have expressed concern over draft cyber legislation that has not been subject to stakeholder consultations.   

Cambodian ministries and regulatory agencies are not legally obligated to publish the text of proposed regulations before their enactment.  Draft regulations are only selectively available for public consultation with relevant non-governmental organizations (NGOs), private sector or other parties before their enactment.  Approved or passed laws are available on websites of some line Ministries but are not always up to date. The Council of Jurists, the government body reviewing law and regulation, publishes a list of updated laws and regulations on its website at www.coj.gov.kh  .

Under Prakas (sub-decree) 643 of the Ministry of Economy and Finance, enterprises must submit their annual financial statements to be audited by an independent auditor registered with the Kampuchea Institute of Certified Public Accountants and Auditors (KICPAA) provided those enterprises meet two of the following three criteria: (1) annual turnover above KHR 3 billion (approximately USD 750,000); (2) total assets above KHR 2 billion (approximately USD 500,000); and (3) more than 100 employees. QIPs registered with the CDC are also obligated to submit their annual financial statement to be audited by an independent auditor registered with the KICPAA.

International Regulatory Considerations

As a member of the ASEAN since 1999, Cambodia is required to comply with certain rules and regulations with regard to free trade agreements with the 10 ASEAN member states. These include tariff-free importation of information and communication technology (ICT) equipment, harmonizing custom coding, harmonizing the medical device market, as well as compliance with tax regulations on multi-activity businesses, among others.

As a member of the WTO, Cambodia has been drafting new laws and amending existing laws and regulations to comply with WTO rules. Relevant laws and regulations are notified to the WTO legal committee after their adoption. A list of Cambodian legal updates in compliance with the WTO is described in the above section regarding Investment Policy Reviews.

Legal System and Judicial Independence

The Cambodian legal system is primarily based on French civil law. Under the 1993 Constitution, the King is the head of state and the elected Prime Minister is the head of government. Legislative power is vested in a bicameral parliament, while the judiciary makes up the third branch of government. Contractual enforcement is governed by Decree Number 38 D Referring to Contract and Other Liabilities. More information on this decree can be found at www.cambodiainvestment.gov.kh/decree-38-referring-to-contract-and-other-liabilities_881028-2.html  .

Although the Cambodian Constitution calls for an independent judiciary, most investors are generally reluctant to use the Cambodian judicial system because the courts are perceived as unreliable and susceptible to external political influence or bribery. Both local and foreign businesses report problems with inconsistent judicial rulings, corruption, and difficulty enforcing judgments. For these reasons, most commercial disputes are currently resolved through negotiations facilitated by the Ministry of Commerce, the Council for the Development of Cambodia, the Cambodian Chamber of Commerce, or other institutions.

Cambodia adopted a Commercial Arbitration Law in 2006. In 2010, the government provided for the establishment of the National Commercial Arbitration Center (NCAC), the country’s first alternative dispute resolution mechanism, to enable companies to resolve commercial disputes more quickly and inexpensively than through the court system. The NCAC was officially launched in March 2013, but has limited capacity.

Laws and Regulations on Foreign Direct Investment

Cambodia’s 1994 Law on Investment created an investment licensing system to regulate the approval process for foreign direct investment and provide incentives to potential investors. In March 2003, the government simplified licensing and increased transparency and predictability by enacting the Law on the Amendment to the Law on Investment (Amended Law on Investment). Sub-decree No. 111 on the Implementation of the Law on the Amendment to the Law on Investment, issued in September 2005, lays out detailed procedures for registering a QIP, which is entitled to certain taxation incentives, with the CDC and provincial/municipal investment subcommittees.

Information about investment and investment incentives in Cambodia may be found on the CDC’s website: www.cambodiainvestment.gov.kh  .

Competition and Anti-Trust Laws

The government has announced plans to draft a competition law but the law has yet to be enacted. A competition department was established under the Directorate General of CamControl in 2016. The department aims to work on drafting laws and regulations on competition, study, and coordinate with various relevant agencies on local and international competition. The draft law is now reportedly being considered in a technical working group at the Council of Ministers and Council of Jurists.

Expropriation and Compensation

Land rights are a contentious issue in Cambodia, complicated by the fact that most property holders do not have legal documentation of their ownership because of official policies and social upheaval during Khmer Rouge era in the 1970s. Numerous cases have been reported of influential individuals or groups acquiring land titles or concessions through political and/or financial connections and then using force to displace communities to make way for commercial enterprises.

In late 2009, the National Assembly approved the Law on Expropriation, which sets broad guidelines on land-taking procedures for public interest purposes. It defines public interest activities to include construction, rehabilitation, preservation, or expansion of infrastructure projects, and development of buildings for national defense and civil security. These provisions include construction of border crossing posts, facilities for research and exploitation of natural resources, and oil pipeline and gas networks. Property can also be expropriated for natural disasters and emergencies, as determined by the government. Legal procedures regarding compensation and appeals are expected to be established in a forthcoming sub-decree, which is under internal discussion within the technical team of the Ministry of Economy and Finance.

The government has shown willingness to use tax issues for political purposes.  For instance, in 2017, a U.S.-owned independent newspaper had its bank account frozen purportedly for failure to pay taxes. It is believed that, while the company may have had some tax liability, the action taken by Cambodia’s General Department of Taxation, notably an inflated tax assessment, was politically motivated and intended to halt operations. These actions took place at the same time the government took steps to reduce the role of press and independent media in the country as part of a wider anti-democratic crackdown.

Dispute Settlement

ICSID Convention and New York Convention

Cambodia has been a member of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention – also known as the Washington Convention) since 2005. Cambodia is also a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) since 1960.

Investor-State Dispute Settlement

International arbitration is available for Cambodian commercial disputes. In March 2014, the Supreme Court of Cambodia upheld the decision of the Cambodian Court of Appeal, which had ruled in favor of the recognition and enforcement of an arbitral award issued by the Korean Commercial Arbitration Board of Seoul, South Korea. Cambodia became a member of the World Bank’s International Center for Settlement of Investment Disputes in January 2005.

In 2009, the International Center approved a U.S. investor’s request for arbitration in a case against the Cambodian government, and in 2013, the tribunal rendered an award in favor of Cambodia.

International Commercial Arbitration and Foreign Courts

Commercial disputes can also be resolved through the National Commercial Arbitration Center (NCAC), Cambodia’s first alternative dispute resolution mechanism, which was officially launched in March 2013.  Arbitral awards issued by foreign arbitrations are admissible in the Cambodian court system. An example can be drawn from its recognition and enforcement of arbitral award issued by the Korean Commercial Arbitration Board in 2014. 

Bankruptcy Regulations

Cambodia’s 2007 Law on Insolvency was intended to provide collective, orderly, and fair satisfaction of creditor claims from debtor properties and, where appropriate, the rehabilitation of the debtor’s business. The Law on Insolvency applies to the assets of all business people and legal entities in Cambodia. The World Bank’s 2018 Doing Business Report ranks Cambodia 79 out of 190 in terms of the “ease of resolving insolvency.”

In 2012, Credit Bureau Cambodia (CBC) was established in an effort to create a more transparent credit market in the country. CBC’s main role is to provide credit scores to banks and financial institutions and to improve access to credit information.

Investment Incentives

All investments must be registered with the Ministry of Commerce. The Cambodian Law on Investment and the Amended Law on Investment offers varying types of investment incentives for projects that meet specified criteria. Investors seeking an incentive must submit an application to the CDC. Investors who wish to apply are required to pay an application fee of KHR 7 million (approximately USD 1,750), which covers securing necessary approvals, authorizations, licenses, or registrations from all relevant ministries and entities, including stamp duties. Under a 2008 sub-decree, the CDC is required to seek approval from the Council of Ministers for investment proposals that involve capital of USD 50 million or more, politically sensitive issues, the exploration and exploitation of mineral or natural resources, or infrastructure concessions. The CDC is also required to seek approval from the Council of Ministers for investment proposals that will have a negative impact on the environment or the government’s long-term strategy.

Since 2011, tax incentives have been provided for rice farming, paddy rice purchase, and the export of milled rice. Meanwhile QIPs are entitled to receive different incentives such as corporate tax holiday; special depreciation allowance; and import taxes exemption on production equipment, construction materials, and production inputs used to produce exports. Investment projects located in designated special promotion zones or export-processing zones are also entitled to the same incentives. Industry-specific investment incentives, such as a three-year profit tax exemption, may be available in the agriculture and agro-industry sectors. More information about the criteria and investment areas eligible for incentives can be found at the following link: www.cambodiainvestment.gov.kh/investment-scheme/investment-incentives.html  .

Investment activities excluded from incentives are detailed in the September 2005 Sub-Decree on the Implementation of the Amendment to the Law on Investment. These include the following sectors: retail, wholesale, and duty-free stores; entertainment establishments (including restaurants, bars, nightclubs, massage parlors, and casinos); tourism service providers; currency and financial services; press and media-related activities; professional services; and production and processing of tobacco and wood products. Incentives also may not be applied to investments in the production of certain products if the investment is less than USD 500,000. This includes food and beverages; textiles, garments, and footwear; and plastic, rubber, and paper products. Investors are not required to place a deposit guaranteeing their investment except in cases involving a concession contract or real estate development project.

Foreign Trade Zones/Free Ports/Trade Facilitation

To facilitate the country’s development, the Cambodian government has shown great interest in increasing exports via geographically defined special economic zones (SEZs). In December 2005, the government adopted the Sub-Decree on Special Economic Zones to speed up the creation of the zones by detailing the procedures, conditions, and incentives for investors. The Government is also drafting the law on Special Economic Zones, which is now undergoing technical review within the CDC. There are currently 13 special SEZs, which are located in Phnom Penh, Koh Kong, Kandal, Kampot, Sihanoukville, and near the borders of Thailand and Vietnam. The main investment sectors in these zones include garments, shoes, bicycles, food processing, auto parts, motorcycle assembly, and electrical equipment manufacturing. Twelve more SEZs are either planned or now under construction.

Performance and Data Localization Requirements

The Law on Investment permits investors to hire foreign nationals for employment as managers, technicians, or skilled workers if the qualifications and/or expertise are not available in Cambodia. According to the Cambodian Labor Law, the number of foreign employees should not exceed ten percent of the total number of Cambodian employees. In practice, companies can request an increase in this ratio from the Ministry of Labor.

Under Cambodian law, most foreign investments and foreign investors are subject to the following taxes: corporate profits tax (20 percent), tax on individual salaries (0 to 20 percent), withholding taxes (4 to 15 percent), value-added taxes (0 to ten percent), and import duties (0 to 35 percent).

Cambodia does not have any forced localization policy that obligates foreign investors to use domestic contents in goods or technology. Cambodia also does not currently require foreign Information Technology providers to turn over source code. The General Department of Information and Communications Technology (ICT) in the Ministry of Post and Telecommunications oversees ICT-related policy in Cambodia.  As mentioned above, as of early 2019, both cyber and e-commerce legislation were still in draft form. These laws, when finalized, could change data localization requirements.

Real Property

Mortgages exist in Cambodia, and Cambodian banks often require certificates of property ownership as collateral before approving loans. The mortgages recording system, which is handled by private banks, is generally considered reliable.

Cambodia’s 2001 Land Law provides a framework for real property security and a system for recording titles and ownership. Land titles issued prior to the end of the Khmer Rouge regime (1975-79) are not recognized due to the severe dislocations that occurred during that time period. The government is making efforts to accelerate the issuance of land titles, but in practice, the titling system is reported to be cumbersome, expensive, and subject to corruption. The majority of property owners lack documentation proving ownership. Even where title records exist, recognition of legal titles to land has not been uniform, and there are reports of court cases in which judges have sought additional proof of ownership.

Foreigners are constitutionally forbidden to own land in Cambodia; however, the 2001 Land Law allows long and short-term leases to foreigners. Cambodia also allows foreign ownership in multi-story buildings, such as condominiums, from the second floor up. 

Cambodia was ranked 124 out of 190 economies for ease of registering property in the 2019 World Bank Doing Business Report.

Intellectual Property Rights

Infringement of IPR is prevalent in Cambodia. Counterfeit and pirated goods are readily available in local markets and stores, and the enforcement  is weak. IP-infringing goods include counterfeit apparel, footwear, cigarettes, alcohol, pharmaceuticals, consumer goods, and pirated media such as software, music, and books. Although Cambodia is not a major center for the production and export of counterfeit or pirated materials, local businesses report that the problem is growing because of the lack of enforcement. To date, however, Cambodia has not been listed by the Office of the U.S. Trade Representative (USTR) in its annual Special 301 Report, which identifies trading partners that do not adequately protect and enforce IPR.

Cambodia has enacted several laws pursuant to its WTO commitments on intellectual property. Its key IP laws include the Law on Marks, Trade Names and Acts of Unfair Competition (2002), the Law on Copyrights and Related Rights (2003), the Law on Patents, Utility Models and Industrial Designs (2003), the Law on Management of Seed and Plant Breeder’s Rights (2008), the Law on Geographical Indications (2014), and the Law on Compulsory Licensing for Public Health (2018).Cambodia joined WIPO in 1995 and has acceded to a number of international IPR protocols, including the Paris Convention (1998), the Madrid Protocol (2015), the WIPO Patent Cooperation Treaty (2016), The Hague Agreement Concerning the International Registration of Industrial Design (2017), and the Lisbon Agreement on Appellations of Origin and Geographical Indications (2018). Despite this, many of the commitments included in these treaties remain unfulfilled due to Cambodia’s lack of institutional capacity.

To combat the trade in counterfeit goods, the Cambodian Counter Counterfeit Committee (CCCC) was established in 2014 under the Ministry of Interior to investigate claims, seize illegal goods, and prosecute counterfeiters. The Economic Police, Customs, the Cambodia Import-Export Inspection and Fraud Repression Directorate General, and the Ministry of Commerce also have IPR enforcement responsibilities; however, the division of responsibility among each agency is not clearly defined. This causes confusion to rights owners and muddles the overall IPR environment. Although in recent years seizure of counterfeit goods has increased, seizure usually does not occur unless a formal complaint has been made.

For additional information about treaty obligations and points of contact at local IP offices, please see the World Intellectual Property Organization’s country profiles at www.wipo.int/directory/en/details.jsp?country_code=KH  

Capital Markets and Portfolio Investment

In a move designed to address the need for capital markets in Cambodia, the Cambodia Securities Exchange (CSX) was founded in 2011 and started trading in 2012. Though the CSX is one of the world’s smallest securities markets, it has taken steps to increase the number of listed companies, including attracting SMEs. It currently has five listed companies, including the Phnom Penh Water Supply Authority, the Sihanoukville Autonomous Port, and Taiwanese garment manufacturer Grand Twins International.

In September 2017, the National Bank of Cambodia (NBC) adopted a Prakas on Conditions for Banking and Financial Institutions to be listed on the Cambodia Securities Exchange. The Prakas sets additional requirements for banks and financial institutions that intend to issue securities to the public. This includes prior approval from the NBC and minimum equity of KHR 60 billion (approximately USD 15 million).

Cambodia’s bond market is at the beginning stages of development. The regulatory framework for corporate bonds was bolstered in 2017 through the publication of the Prakas on Public Offering of Debt Securities, the Prakas on Accreditation of Bondholders Representative, and the Prakas on Accreditation of Credit Rating Agency.  The country’s first corporate bond was issued in 2018, and a second is expected in 2019. There is currently no sovereign bond market, but the government has stated its intention of making government securities available to investors by 2022.

Money and Banking System

The National Bank of Cambodia (NBC) regulates the operations of banking systems in Cambodia. Foreign banks and branches are freely allowed to register and operate in the country. There are 39 commercial banks, 15 specialized banks (set up to finance specific turn-key projects such as real estate development), 54 licensed microfinance institutions, and seven licensed microfinance deposit taking institutions in Cambodia. NBC has also granted licenses to 11 financial leasing companies and one credit bureau company to improve transparency and credit risk management and encourage more lending to small-and medium-sized enterprise customers.

In November 2018, Moody’s Investor Services affirmed Cambodia’s issuer rating at B2 with a stable outlook. The overall B2 rating was based on Cambodia’s robust GDP growth prospects, macroeconomic stability, and efforts to strengthen government revenue. However, Moody’s cited several potential threats such as a weak institutional framework, low incomes, and the high dollarization of loans and deposits that make Cambodia vulnerable to negative shocks.

Cambodia’s banking sector continues to experience strong growth. The banking sector’s assets, including those of micro-finance institutions (MFIs), rose 20.2 percent year-over-year in 2017 to 135.1 trillion riel (USD 33.8 billion), while capital grew 23.6 percent to 25.7 trillion riel (USD 6.4 billion). Loans and deposits grew 18.3 percent and 24.5 percent respectively, which resulted in a decrease of the loan-to-deposit ration from 114 percent to 110 percent.  The ratio of non-performing loans remained steady at 2.4 percent in 2017.

The government does not use the regulation of capital markets to restrict foreign investment. Banks have been free to set their own interest rates since 1995, and increased competition between local institutions has led to a gradual lowering of interest rates from year to year. However, in April 2017, at the direction of Prime Minister Hun Sen, the NBC capped interest rates on loans offered by MFIs at 18 percent per annum. The move was designed to protect borrowers, many of whom are poor and uneducated, from excessive interest rates.

In March 2016, the NBC doubled the minimum capital reserve requirement for banks to USD 75 million for commercial banks and USD 15 million for specialized banks. Based on the new regulations, deposit-taking microfinance institutions now have a USD 30 million reserve requirement, while traditional microfinance institutions have a USD 1.5 million reserve requirement.

The Cambodian banking system is gradually shifting from a cash-based economy to an electronic payment culture as more financial institutions launch internet or mobile banking and expand their ATM networks. Evidence of the maturation of the financial sector includes the greater number of financial products and services offered, as well as the numbers of people of use them. In 2017, the National Bank of Cambodia measured financial inclusion at 55 percent. In addition, it said the number of depositors increased by 15 percent to 3.5 million, 42 percent of which are female, and the number of borrowers rose 1 percent to 755,000.

In February 2019, the Financial Action Task Force (FATF), an intergovernmental organization whose purpose is to develop policies to combat money laundering, cited Cambodia for being “deficient”  with regard to its anti-money laundering and countering financing of terrorism (AML/CFT) controls and policies. The government has committed to working with FATF to address these deficiencies through a jointly-developed action plan.  Should Cambodia not address the deficiencies, it could risk landing on the FATF “black list,” something that could negatively impact the banking sector and the country’s ability to access the international capital markets.

Foreign Exchange and Remittances

Foreign Exchange

Though Cambodia has its own currency, the riel (denoted as KHR), U.S. dollars are widely in circulation in Cambodia and remain the primary currency for most large transactions. There are no restrictions on the conversion of capital for investors.

Cambodia’s 1997 Law on Foreign Exchange states that there shall be no restrictions on foreign exchange operations through authorized banks. Authorized banks are required, however, to report the amount of any transfer equaling or exceeding USD 100,000 to the NBC on a regular basis.

Loans and borrowings, including trade credits, are freely contracted between residents and nonresidents, provided that loan disbursements and repayments are made through an authorized intermediary. There are no restrictions on the establishment of foreign currency bank accounts in Cambodia for residents.

The exchange rate between the riel and U.S. dollar is governed by a managed float and has been stable at around one USD to KHR 4,000. Daily fluctuations of the exchange rate are low, typically under three percent. The Embassy is not aware of any cases in which investors have encountered obstacles in converting local currency to foreign currency or in sending capital out of the country. In the past several years, the Cambodian government has taken steps to increase general usage of the riel but, as noted above, the country’s economy remains largely dollarized.

Remittance Policies

Article 11 of the Law on the Amendment to the Law on Investment of 2003 states that QIPs can freely remit abroad foreign currencies purchased through authorized banks for the discharge of financial obligations incurred in connection with investments. These financial obligations include:

• Payment for imports and repayment of principal and interest on international loans;
• Payment of royalties and management fees;
• Remittance of profits; and
• Repatriation of invested capital in case of dissolution.

Sovereign Wealth Funds

Cambodia does not have a Sovereign Wealth Fund.

Cambodia currently has 15 state-owned enterprises (SOEs). Cambodian SOEs include Electricite du Cambodge, Sihanoukville Autonomous Port, Telecom Cambodia, Cambodia Shipping Agency, Cambodia Postal Services, Rural Development Bank, Green Trade Company, Printing House, Siem Reap Water Supply Authority, Construction and Public Work Lab, Phnom Penh Water Supply Authority, Phnom Penh Autonomous Port, Kampcheary Insurance, Cambodia Life Insurance, Cambodia Securities Exchange.

In accordance with the Law on General Stature of Public Enterprises, there are two types of commercial SOEs in Cambodia. One type is that the state company’s capital is 100 percent owned by the Government, and another type is a joint-venture in which a majority of capital is owned by the state and a minority by private investors.

Each SOE is under the supervision of a line ministry or government institution and is overseen by a board of directors drawn from among senior government officials. Private enterprises are generally allowed to compete with state-owned enterprises under equal terms and conditions. These entities are also subject to the same taxes and value-added tax rebate policies as private-sector enterprises. SOEs are covered under the law on public procurement, which was promulgated in January 2012, and their financial reports are audited by the appropriate line ministry, the Ministry of Economy and Finance, and the National Audit Authority.

Privatization Program

There are no ongoing privatization programs, nor has the government announced any plans to privatize existing SOEs.

The government does not have policies to promote responsible business conduct (RBC) or corporate social responsibility (CSR). However, there is strong awareness of RBC among larger and multinational companies in the country. U.S. companies, for example, have implemented a wide range of CSR activities to promote skills training, the environment, general health and well-being, and financial education. These programs have been warmly received by both the general public and the government.

A number of economic land concessions in Cambodia have led to high profile land rights cases. The Cambodian government has recognized the problem, but in general, has not effectively and fairly resolved land rights claims. The Cambodian government does not have a national contact point for Organization for Economic Cooperation and Development (OECD) multinational enterprises guidelines and does not participate in the Extractive Industries Transparency Initiative.

Corruption remains a significant issue in Cambodia for investors.  An increase in foreign investment from investors willing to engage in corrupt practices, combined with sometimes opaque official and unofficial investment processes, has served to facilitate an overall rise in corruption, which is reported to already be at high levels.  In its Global Competitiveness Report 2018, the World Economic Forum ranked Cambodia 134th out of 140 countries for incidence of corruption.  Transparency International’s 2018 Corruption Perception index ranked Cambodia 161 of 180 countries globally, the lowest ranking of all ten ASEAN member states.

Those engaged in business have identified corruption, particularly within the judiciary, customs services, and tax authorities, as one of the greatest deterrents to investment in Cambodia. Foreign investors from countries that overlook or encourage bribery have significant advantages over foreign investors from countries that criminalize such activity.

Cambodia adopted an Anti-Corruption Law in 2010 to combat corruption by criminalizing bribery, abuse of office, extortion, facilitation payments, and accepting bribes in the form of donations or promises. Under the law, all civil servants must also declare their financial assets to the government every two years. Cambodia’s Anti-Corruption Unit (ACU), established the same year, has investigative powers and a mandate to provide education and training to government institutions and the public on anti-corruption compliance. Since its formation, the ACU has launched a few high-profile prosecutions against public officials, including members of the police and judiciary. The ACU has also tackled the issue of ghost workers in the government, in which non-existent employees collect salaries. 

The ACU, in collaboration with the private sector, has also established guidelines encouraging companies to create internal codes of conduct prohibiting bribery and corrupt practices. Companies can sign a Memorandum of Understanding (MOU) with the ACU pledging to operate corruption-free and to cooperate on anti-corruption efforts. Since the program started in 2015, more than 80 private companies have signed a MOU with the ACU. In 2018, the ACU completed a first draft of a code of conduct for public officials, which has not yet been finalized.

Despite the passage of the Anti-Corruption Law and the creation of the ACU, enforcement remains weak. Local and foreign businesses report that they must often make informal payments to expedite business transactions. Since 2013, Cambodia has published the official fees for public services, but the practice of paying additional fees remains common. Despite a pay raise in 2016, the minimum salary for administrative civil servants remain below the level required to maintain a suitable quality of life in Cambodia, so public employees remain susceptible to bribes. Furthermore, the process for awarding government contracts is not transparent and is susceptible to corruption.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Cambodia ratified the UN Convention against Corruption in 2007 and endorsed the Action Plan of the Asian Development Bank / OECD Anti-Corruption Initiative for Asia and the Pacific in 2003. Cambodia is not a party to the OECD Convention on Combating Bribery.

Resources to Report Corruption

Om Yentieng
President, Anti-Corruption Unit
No. 54, Preah Norodom Blvd, Sangkat Phsar Thmey 3, Khan Daun Penh, Phnom Penh
Telephone: +855-23-223-954
Email: info@acu.gov.kh

Preap Kol
Executive Director, Transparency International Cambodia
#13 Street 554, Phnom Penh
Telephone: +855-23-214430
Email: info@ticambodia.org

Foreign companies have been the targets of violent protests in the past, such as the 2003 anti-Thai riots against the Embassy of Thailand and Thai-owned commercial establishments. More recently, there were reports that Vietnamese-owned establishments were looted during a January 2014 labor protest. Authorities have also used force, including truncheons, electric cattle prods, fire hoses, and even gunfire, to disperse protestors. Incidents of violence directed at businesses, however, are rare. The Embassy is unaware of any incidents of political violence directed at U.S. or other non-regional interests.

Nevertheless, political tensions remain. After relatively competitive communal elections in June 2017, where Cambodia’s opposition party won nearly 50 percent of available seats, the government took steps to strengthen its grip on power and eliminated meaningful political activity.  In September 2017, the head of the country’s leading opposition party was arrested and charged with treason, and in November 2017, the same opposition party was banned. In July 2018, Prime Minister Hun Sen won a landslide victory, and his ruling party swept all 125 parliamentary seats, in a national election that was criticized by the United States as being neither free nor fair. The government has also taken steps to limit free speech and stifle independent media, including forcing independent news outlets and radio stations to cease operations. While there are few overt signs the country is growing less secure today, the possibility for insecurity exists going forward, particularly if a large percentage of the population remains disenfranchised.

Cambodia’s economy is primarily focused on four sectors: agriculture, garment production, tourism, and construction. The agricultural sector employees some 60 to 65 percent of the labor force. There are over one million people working in the garment and footwear sector, the majority of whom are women; around 620,000 are employed in the tourism sector; and a further 200,000 people in construction according to Government of Cambodia statistics. Around 1.5 to 2 million Cambodians work abroad – the official statistic is 1.2 million, but most experts estimate the figure far higher. Around 55 percent of the population is under the age of 25. The United Nations has estimated that around 300,000 new job seekers enter the labor market each year.

Given the severe disruption to the Cambodian education system and loss of skilled Cambodians during the 1975-1979 Khmer Rouge period, workers with higher education or specialized skills are few and in high demand. The Cambodia Socio-Economic Survey conducted in 2014 (the latest report available) found that about 36 percent of the labor force had completed a primary education. Only seven percent of the labor force had completed secondary education. The 2015-2016 Global Competitiveness Report of the World Economic Forum (WEF) identified an inadequately educated workforce as one of the most serious problems to doing business in Cambodia. Cambodia ranked 48 out of 137 on labor market efficiency of the WEF 2017-2018. Many middle management positions in the formal garment sector are filled by foreign nationals.

Cambodia’s 2016 Trade Union Law (TUL) erects barriers to the right of association and the rights to organize and bargain freely. The ILO has stated publicly that the law could hinder Cambodia’s obligations to international labor conventions 87 and 98, and has suggested substantial revisions to the law both during the 2017 meeting of the Committee on Application of Standards, and through a Direct Mission sent by the ILO to investigate the law’s implementation. The government has not made any public commitment to amend the law.

Unresolved labor disputes are mediated first on the shop-room floor, after which they are brought to the MOLVT for conciliation. If conciliation fails, then the cases may be brought to the Arbitration Council (AC), an independent state body that interprets labor regulations in collective disputes, such as when multiple employees are dismissed. Since the TUL went into force, AC cases have decreased from over 30 per month to fewer than five, although that number began to increase again in 2019 due to regulatory changes.

The labor code prohibits forced or compulsory labor; establishes 15 as the minimum allowable age for paid work; and sets 18 as the minimum age for anyone engaged in work that is hazardous, unhealthy, or unsafe. The statute also guarantees an eight-hour workday and 48-hour workweek and provides for time-and-a-half pay for overtime or work on an employee’s day off. Enforcement of all labor laws, however, is lax. The labor inspectorate focuses primarily on export-oriented factories in the garment and footwear sector. 

In 2018, Cambodia amended its Labor Law to eliminate severance packages in favor of a “seniority” bonus paid to workers every six months. The amendment was intended to solve the problem of foreign factory owners absconding, leaving behind unpaid salaries and severances. The law and its implementing regulation did not, however, provide clear guidance on how to compensate workers for seniority they had already accrued prior to amendment’s passage.  This remains a point of dispute between workers and company owners, and the precise legal requirements for the timing of seniority payments on back wages remains unclear. 

Cambodia maintains a minimum wage for workers in the garment and footwear sector. The minimum wage for garment workers was set at USD 182 per month in 2019 by the Labor Advisory Committee (LAC), a tripartite group comprised of representatives from the government, labor, and manufacturers. Since 2010, the wage rate for workers in the sector has increased from USD 61 to USD 182. In 2018, the government passed a new Minimum Wage Law, which will for the first time allow minimum wages outside of the garment and footwear sector.  The law has not yet been put into effect.

Cambodia has an agreement with the Overseas Private Investment Corporation (OPIC) to encourage investment. A number of companies in Cambodia have received approval for OPIC financing, including loans to financial institutions for the purposes of microfinance. The BUILD Act, signed into law in October 2018, will consolidate OPIC with USAID’s Development Credit Authority into a new agency: the United States International Development Finance Corporation (DFC). The DFC will maintain many aspects of OPIC’s programs, but with additional tools and flexibility, it is intended to substantially increase the U.S. government’s support for private-sector led development in the world’s least developed countries. The DFC is expected to be operationalized by the end of 2019.

The Export-Import Bank of the United States (Ex-Im Bank) provides financing and insurance for purchases of U.S. exports by private-sector buyers in Cambodia on repayment terms of up to seven years. In 2018, Ex-Im made its first loan to a Cambodian business, facilitating the sale of a grain silo.  Ex-Im support is typically limited to transactions with a commercial bank functioning as an obligor or guarantor. Ex-Im will, however, consider transactions without a bank on a case-by-case basis. Cambodia is also a member of the Multilateral Investment Guarantee Agency of the World Bank, which offers political-risk insurance to foreign investors.

There has been a surge in FDI inflows to Cambodia in recent years. Though FDI goes primarily to infrastructure, including commercial and residential real estate projects, it has also recently favored investments in manufacturing and agro-processing. Cambodia reports its total stock of FDI reached USD 7.1 billion in 2018, up from USD 6.8 billion in 2017.

Investment into Cambodia is dominated by China, and the level of investment from China has surged especially in the last five years. Cambodia reports that its FDI from China reached USD 1.6 billion (year-end 2018), while fixed asset investment from China reached USD 15.3 billion. Taiwan and Hong Kong are also major sources of investment in Cambodia, accounting for USD 614 million and USD 376 million of FDI, respectively, through 2018.

Cambodian investments into other countries are still quite small. Through 2017, the IMF reports a total of USD 367 million of Cambodian investments, with most going to China and Singapore.

NOTE: Discrepancies exists between IMF counterpart country data and the investment figures reported by Cambodia’s official source, the Council for the Development of Cambodia (CDC). In some cases, counterpart country data reports much larger FDI stocks in Cambodia than reported by CDC. In other cases, the data from the Cambodia government is the only source available. Many of Cambodia’s key FDI partners (notably China, Taiwan and Hong Kong) do not report FDI figures to the IMF.

There are also discrepancies in the reported total stock of U.S. FDI in Cambodia. For FDI through 2017, the U.S. government (BEA) reports USD 151 million, the IMF reports USD 110 million, and Cambodia reports only USD 100 million.

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

* Source for Host Country Data: The Council for the Development of Cambodia (CDC) provides official government data on investment in Cambodia, but not all data is published online. See:  www.cambodiainvestment.gov.kh/why-invest-in-cambodia/investment-environment/investment-trend.html 

Table 3: Sources and Destination of FDI

Data retrieved from IMF’s Coordinated Direct Investment Survey database (mirror data, as reported by counterpart economies) presents a much different picture of FDI into Cambodia as compared to that provided by the Cambodian government. For example, Cambodia reports USD 6.8 billion total FDI through year-end 2017 (USD 7.1 through year-end 2018), while the IMF reports only USD 2.8 billion.

Table 4: Sources of Portfolio Investment

N/A – IMF CPIS Data for Cambodia is not available.

David Ryan Sequeira
Economic Officer
U.S. Embassy Phnom Penh
No. 1, Street 96, Sangkat Wat Phnom, Phnom Penh, Cambodia
Phone: (855) 23-728-401
Email: CamInvestment@state.gov

Policies Towards Foreign Direct Investment

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

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

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

• American Chamber of Commerce China 2019 American Business in China White Paper: https://www.amchamchina.org/policy-advocacy/white-paper/  
• American Chamber of Commerce China 2019 Business Climate Survey: https://www.amchamchina.org/policy-advocacy/business-climate-survey/  
• U.S.-China Business Council’s 2018 China Business Environment Member Survey: https://www.uschina.org/reports/uscbc-2018-member-survey  
• EU Chamber’s 2018 Business Confidence Survey: http://www.europeanchamber.com.cn/en/publications-business-confidence-survey  .
• MOFCOM’s Investment Promotion Website: http://www.fdi.gov.cn/1800000121_10000161_8.html  

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

Ownership Restrictions

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

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

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

Examples of foreign investments requiring Chinese control include:

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

Examples of foreign investment equity caps include:

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

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

Other Investment Policy Reviews

Organization for Economic Cooperation and Development (OECD)

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

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

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

• OECD 2013 Update: http://www.oecd.org/china/WP-2013_1.pdf 
• OECD Regulatory Restrictiveness Survey: http://www.oecd.org/investment/fdiindex.htm  

World Trade Organization (WTO)

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

• WTO Investment Trade Review for China: https://www.wto.org/english/tratop_e/tpr_e/tp475_e.htm  
• International Monetary Fund (IMF) information on China: http://www.imf.org/external/country/Chn/  
• FDI Statistics from MOFCOM: http://www.fdi.gov.cn/1800000121_10000177_8.html  

Business Facilitation

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

• World Bank Ease of Doing Business: http://www.doingbusiness.org/rankings  
• World Bank Investing Across Borders: http://iab.worldbank.org/data/exploreeconomies/china  

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

• UNCTAD GER: https://ger.co/  
• SAMR Business Registration Information: http://www.saic.gov.cn/  

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

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

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

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

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

Outward Investment

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

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

China has 109 Bilateral Investment Treaties (BITs) in force and multiple Free Trade Agreements (FTAs) with investment chapters.  Generally speaking, these agreements cover topics like expropriation, most-favored-nation treatment, repatriation of investment proceeds, and arbitration mechanisms.  Relative to U.S.-negotiated BITs and FTA investment chapters, Chinese agreements are generally considered to be weaker and offer less protections to foreign investors.

A list of China’s signed BITs:

• http://tfs.mofcom.gov.cn/article/Nocategory/201111/20111107819474.shtml  
• http://investmentpolicyhub.unctad.org/IIA/IiasByCountry#iiaInnerMenu  .

The United States and China last held BIT negotiations in January 2017.  China has been in active bilateral investment agreement negotiations with the EU since 2013.  The two sides have exchanged market access offers and have expressed an intent to conclude talks by 2020.  China also has negotiated 17 FTAs with trade and investment partners, is currently negotiating 14 FTAs and FTA-upgrades, and is considering eight further potential FTA and FTA-upgrade negotiations.  China’s existing FTA partners are Maldives, Georgia, ASEAN, Republic of Korea, Pakistan, Australia, Singapore, Pakistan, New Zealand, Chile, Peru, Costa Rica, Iceland, Switzerland, Hong Kong, Macao, and Taiwan.  China concluded its FTAs with Maldives and Georgia in 2017.

China’s signed FTAs:

• http://fta.mofcom.gov.cn/index.shtml  
• http://fta.mofcom.gov.cn/english/index.shtml  

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

Transparency of the Regulatory System

In assessing China’s regulatory governance effectiveness, the World Bank Global Indicators of Regulatory Governance gave China a composite score of 1.75 out 5 points.  The World Bank attributed China’s relatively low score to the futility of foreign companies appealing administrative authorities’ decisions, given partial courts; not having laws and regulations in one accessible place that is updated regularly; the lack of impact assessments conducted prior to issuing new laws; and other concerns about public comments and transparency.

World Bank Rule Making Information: http://rulemaking.worldbank.org/en/data/explorecountries/china  

In various business climate surveys, U.S. businesses operating in China consistently cite arbitrary legal enforcement and the lack of regulatory transparency among the top challenges of doing business in China.  These challenges stem from a complex legal and regulatory system that provides government regulators and authorities broad discretion to selectively enforce regulations, rules, and other guidelines in an inconsistent and impartial manner, often to the detriment of foreign investor interests.  Moreover, regulators are often allowed to hinder fair competition by allowing authorities to ignore Chinese legal transgressors while at the same time strictly enforcing regulations selectively against foreign companies.

Another compounding problem is that Chinese government agencies rely on rules and enforcement guidelines that often are not published or even part of the formal legal and regulatory system.  “Normative Documents” (opinions, circulars, notices, etc.), or quasi-legal measures used to address situations where there is no explicit law or administrative regulation, are often not made available for public comment or even published, yet are binding in practice upon parties active in the Chinese market.  As a result, foreign investors are often confronted with a regulatory system rife with inconsistencies that hinders business confidence and generates confusion for U.S. businesses operating in China.

One of China’s WTO accession commitments was to establish an official journal dedicated to the publication of laws, regulations, and other measures pertaining to or affecting trade in goods, services, Trade Related Aspects of Intellectual Property Rights (TRIPS), or the control of foreign exchange.  The State Council’s Legislative Affairs Office (SCLAO) issued two regulations instructing Chinese agencies to comply with this WTO obligation and also issued Interim Measures on Public Comment Solicitation of Laws and Regulations and the Circular on Public Comment Solicitation of Department Rules, which required government agencies to post draft regulations and departmental rules on the official SCLAO website for a 30-day public comment period.  Despite the fact this requirement has been mandated by Chinese law and was part of the China’s WTO accession commitments, Chinese ministries under the State Council continue to post only some draft administrative regulations and departmental rules on the SCLAO website.  When drafts are posted for public comment, the comment period often is less than the required 30 days.

China’s proposed draft regulations are often drafted without using scientific studies or quantitative analysis to assess the regulation’s impact.  When Chinese officials claim an assessment was made, the methodology of the study and the results are not made available to the public. When draft regulations are available for public comment, it is unclear what impact third-party comments have on the final regulation.  Many U.S. stakeholders have complained of the futility of the public comment process in China, often concluding that the lack of transparency in regulation drafting is purposeful and driven primarily by industrial policy goals and other anti-competitive factors that are often inconsistent with market-based principles.  In addition, foreign parties are often restricted from full participation in Chinese standardization activities, potentially providing Chinese competitors opportunity to develop standards inconsistent with international norms and detrimental to foreign investor interests.

In China’s state-dominated economic system, it is impossible to assess the motivating factors behind state action.  The relationships are often blurred between the CCP, the Chinese government, Chinese business (state and private owned), and other Chinese stakeholders that make up the domestic economy.  Foreign invested enterprises perceive that China prioritizes political goals, industrial policies, and a desire to protect social stability at the expense of foreign investors, fairness, and overall rule of law.  These blurred lines are on full display in some industries that have Chinese Self-Regulatory Organizations (SROs) that make licensing decisions. For instance, a Chinese financial institution who is a direct competitor to a foreign enterprise applying for a license may be a voting member of the governing SRO and can either influence other SRO members or even directly adjudicate the application of the foreign license.  To protect market share and competitive position, this company likely has an incentive to disapprove the license application, further hindering fair competition in the industry or economic sector.

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

International Regulatory Considerations

China has been a member of the WTO since 2001.  As part of its accession agreement, China agreed to notify the WTO Committee on Technical Barriers to Trade (TBT Committee) of all draft technical regulations.  Compliance with this WTO commitment is something Chinese officials have promised in previous dialogues with U.S. government officials. The United States remains concerned that China continues to issue draft technical regulations without proper notification to the TBT Committee

Legal System and Judicial Independence

The Chinese legal system is based on a civil law model that borrowed heavily from the legal systems of Germany and France but retains Chinese legal characteristics.  The rules governing commercial activities are found in various laws, regulations, and judicial interpretations, including China’s civil law, contract law, partnership enterprises law, security law, insurance law, enterprises bankruptcy law, labor law, and several interpretations and regulations issued by the Supreme People’s Court (SPC).  While China does not have specialized commercial courts, it has created specialized courts and tribunals for the hearing of intellectual property disputes. In 2014, China launched three intellectual property (IP) courts in Beijing, Guangzhou, and Shanghai. In October 2018, the National People’s Congress approved the establishment of an national-level appellate tribunal within the SPC to hear civil and administrative appeals of technically complex IP cases .

China’s Constitution and various laws provide contradictory statements about court independence and the right of judges to exercise adjudicative power free from interference by administrative organs, public organizations, and/or powerful individuals.  However in practice, courts are heavily influenced by Chinese regulators. Moreover, the Chinese Constitution established that the “leadership of the Communist Party” is supreme, which in practices makes judges susceptible to party pressure on commercial decisions impacting foreign investors.  This trend of central party influence in all areas, not just in the legal system, has only been strengthened by President Xi Jinping’s efforts to consolidate political power and promote the role of the party in all economic activities. Other reasons for judicial interference may include:

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

While in limited cases U.S. companies have received favorable outcomes from China’s courts, the U.S. business community consistently reports that Chinese courts, particularly at lower levels, are susceptible to outside political influence (particularly from local governments), lack the sophistication and educational background needed to understand complex commercial disputes, and operate without transparency.  U.S. companies often avoid challenging administrative decisions or bringing commercial disputes before a local court because of perceptions that these efforts would be futile and for fear of future retaliation by government officials.

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

Laws and Regulations on Foreign Direct Investment

The legal and regulatory framework in China controlling foreign direct investment activities is more restrictive and less transparent across-the-board compared to the investment frameworks of developed countries, including the United States.  China has made efforts to unify its foreign investment laws and clarify prohibited and restricted industries in the negative list.

On March 17, 2019 China’s National People’s Congress passed the Foreign Investment Law (FIL) that intends to replace existing foreign investment laws.  This law will go into effect on January 1, 2020 and will replace the previous foreign investment framework based on three foreign-invested entity laws: the China-Foreign Equity Joint Venture Enterprise Law, the China-Foreign Cooperative Joint Venture Enterprise Law, and the Foreign-Invested Enterprise (FIE) Law.  The FIL provides a five-year transition period for foreign enterprises established under previous foreign investment laws, after which all foreign enterprises will be subject to similar laws as domestic companies, like the company law, the enterprise law, etc.

In addition to these foreign investment laws, multiple implementation guidelines and other administrative regulations issued by the State Council that are directly derived from the law also affect foreign investment.  Under the three current foreign investment laws, such implementation guidelines include:

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

In addition to the three central-level laws mentioned above, there are also over 1,000 rules and regulatory documents related to foreign investment in China,  issued by government ministries, including:

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

The State Council has yet to provide a timeframe for new implementation guidelines for the Foreign Investment Law that will replace the implementation guidelines under the previous foreign investment system.  While the FIL reiterates existing Chinese commitments in regards to certain elements of the business environment, including IP protection for foreign-invested enterprises, details on implementation and the enforcement mechanisms available to foreign investors have yet to be provided.

In addition to central-level laws and implementation guidelines, local regulators and governments also enact their own regulations, rules, and guidelines that directly impact foreign investment in their geographical area.  Examples include the Wuhan Administration Regulation on Foreign-Invested Enterprises and Shanghai’s Municipal Administration Measures on Land Usage of Foreign-Invested Enterprises.

A Chinese language list of Chinese laws and regulations, at both the central and local levels: http://www.gov.cn/zhengce/  .

FDI Laws on Investment Approvals

Foreign investments in industries and economic sectors that are not explicitly restricted or prohibited on the foreign investment negative list are not subject to MOFCOM pre-approval, but notification is required on proposed foreign investments.  In practice, investing in an industry not on the negative list does not guarantee a foreign investor national treatment in establishing an foreign investment as investors must comply with other steps and approvals like receiving land rights, business licenses, and other necessary permits.  In some industries, such as telecommunications, foreign investors will also need to receive approval from regulators or relevant ministries like the Ministry of Industry and Information Technology (MIIT).

The Market Access Negative List issued December 2018 incorporated the previously issued State Council catalogue for investment projects called the Decision on Investment Regime Reform and the Catalogue of Investment Projects subject to Government Ratification (Ratification Catalogue).  Both foreign enterprises and domestic firms are subject to this negative list and both are required to receive government ratification of investment projects listed in the catalogue.  The Ratification Catalogue was first issued in 2004 and has since undergone various reiterations that have shortened the number of investment projects needed for ratification and removed previous requirements that made foreign investors file for record all investment activities.  The most recent version was last issued in 2016. Projects still needing ratification by NDRC and/or local DRCs include investments surpassing a specific dollar threshold, in industries experiencing overcapacity issues, or in industries that promote outdated technologies that may cause environmental hazards.  For foreign investments over USD300 million, NDRC must ratify the investment. For industries in specific sectors, the local Development and Reform Commission (DRC) is in charge of the ratification.

Ratification Catalogue: http://www.gov.cn/zhengce/content/2016-12/20/content_5150587.htm  

When a foreign investment needs ratification from the NDRC or a local DRC, that administrative body is in charge of assessing the project’s compliance with China’s laws and regulations; the proposed investment’s compliance with the foreign investment and market access negative lists and various industrial policy documents; its national security, environmental safety, and public interest implications; its use of resources and energy; and its economic development ramifications.  In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and “consulting agencies,” which may include industry associations that represent Chinese domestic firms. This presents potential conflicts of interest that can disadvantage foreign investors seeking to receive project approval. The State Council may also weigh in on high-value projects in “restricted” sectors.

If a foreign investor has established an investment not on the foreign investment negative list and has received NDRC approval for the investment project if needed, the investor then can apply for a business license with a new ministry announced in March 2018, the State Administration for Market Regulation (SAMR).  Once a license is obtained, the investor registers with China’s tax and foreign exchange agencies. Greenfield investment projects must also seek approval from China’s Ministry of Ecology and Environment and the Ministry of Natural Resources. In several sectors, subsequent industry regulatory permits are required. The specific approvals process may vary from case to case, depending on the details of a particular investment proposal and local rules and practices.

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

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

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

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

In February 2011, China released the State Council Notice Regarding the Establishment of a Security Review Mechanism for Foreign Investors Acquiring Domestic Enterprises.  The notice established an interagency Joint Conference, led by NDRC and MOFCOM, with authority to block foreign M&As of domestic firms that it believes may impact national security.  The Joint Conference is instructed to consider not just national security, but also “national economic security” and “social order” when reviewing transactions. China has not disclosed any instances in which it invoked this formal review mechanism.  A national security review process for foreign investments was written into China’s new Foreign Investment Law, but with very few details on how the process would be implemented.

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

U.S.  Chamber of Commerce report on Approval Process for Inbound Foreign Direct Investment: http://www.uschamber.com/sites/default/files/reports/020021_China_InvestmentPaper_hires.pdf .

Foreign Investment Law

On March 15, 2019 the National People’s Congress passed the Foreign Investment Law (FIL) that replaced all existing foreign investment laws, including the China-Foreign Joint Venture Law, the Contract Joint Venture Law, and the Wholly Foreign-Owned Enterprises Law.  The FIL is significantly shorter than the 2015 draft version issued for public comment and the text is vague and provides loopholes through which regulators could potentially discriminate against foreign investors. While the law made policy declarations on important issues to U.S. and other foreign investors (e.g.,  equal protection of intellectual property, prohibitions again certain kinds of forced technology transer, and greater market access,), specifics on implementation and enforcement were lacking.  The law goes into effect on January 1, 2020. Many high-level Chinese officials have stated that the implementation guidelines and other corresponding legal changes will be developed prior to the law going into effect.  The content of these guidelines and future corresponding changes to other laws to become consistent with the FIL will largely determine the impact it will have on the investment climate.

Free Trade Zone Foreign Investment Laws

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

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

Competition and Anti-Trust Laws

China uses a complex system of laws, regulations, and agency specific guidelines at both the central and provincial levels that impacts an economic sector’s makeup, sometimes as a monopoly, near-monopoly, or authorized oligopoly.  These measures are particularly common in resource-intensive sectors such as electricity and transportation, as well as in industries seeking unified national coverage like telecommunication and postal services. The measures also target sectors the government deems vital to national security and economic stability, including defense, energy, and banking.  Examples of such laws and regulations include the Law on Electricity (1996), Civil Aviation Law (1995), Regulations on Telecommunication (2000), Postal Law (amended in 2009), Railroad Law (1991), and Commercial Bank Law (amended in 2003), among others.

Anti-Monopoly Law

China’s Anti-Monopoly Law (AML) went into effect on August 1, 2008.  The National People Congress in March 2018 announced that AML enforcement authorities previously held by three government ministries would be consolidated into a new ministry called the State Administration for Market Regulation (SAMR).  This new agency would still be responsible for AML enforcement and cover issues like concentrations review (M&As), cartel agreements, abuse of dominant market position, and abuse of administrative powers. To fill in some of the gaps from the original AML and to address new commercial trends in China’s market, SAMR has started the process of issuing draft implementation guidelines to clarify enforcement on issues like merger penalties, implementation of abuse of market dominant position, etc.  By unifying antitrust enforcement under one agency, the Chinese government hopes to consolidate guidelines from the three previous agencies and provide greater clarity for businesses operating in China. Generally, the AML enforcement agencies have sought public comment on proposed measures and guidelines, although comment periods can be less than 30 days.

In addition to the AML, the State Council in June 2016 issued guidelines for the Fair Competition Review Mechanism that targets administrative monopolies created by government agents, primarily at the local level.  The mechanism not only requires government agencies to conduct a fair competition review prior to issuing new laws, regulations, and guidelines, to certify that proposed measures do not inhibit competition, but also requires government agencies to conduct a review of all existing rules, regulations, and guidelines, to eliminate existing laws and regulations that are competition inhibiting.  In October 2017, the State Council, State Council Legislative Affairs Office, Ministry of Finance, and three AML agencies issued implementation rules for the fair competition review system to strengthen review procedures, provide review criteria, enhance coordination among government entities, and improve overall competition-based supervision in new laws and regulations. While local government bodies have reported a completed review of over 100,000 different administrative documents, it is unclear what changes have been made and what impact it has had on actually improving the competitive landscape in China.

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

Since the AML went into effect, the number of M&A transactions reviewed each year by Chinese officials has continued to grow.  U.S. companies and other observers have expressed concerns that SAMR is required to consult with other Chinese agencies when reviewing a potential transaction and that other agencies can raise concerns that are often not related to competition to either block, delay, or force one or more of the parties to comply with a condition in order to receive approval.  There is also suspicion that Chinese regulators rarely approve “on condition” any transactions involving two Chinese companies, thus signaling an inherent AML bias against foreign enterprises.

Under NDRC’s previous enforcement of price-related monopolies, some procedural progress in AML enforcement was made, as they started to release aggregate data on investigations and publicize case decisions.  However, many U.S. companies complained that NDRC discouraged companies from having legal representation during informal discussions or even during formal investigations. In addition, the investigative process reportedly lacked basic transparency or specific best practice guidance on procedures like evidence gathering.  Observers continue to raise concern over the use of “dawn raids” that can be used at any time as a means of intimidation or to prop up a local Chinese company against a competing foreign company in an effort to push forward specific industrial policy goals. Observers also remain concerned that Chinese officials during an investigation will fail to protect commercial secrets and have access to secret and proprietary information that could be given to Chinese competitors.

In prior bilateral dialogues, China committed to strengthening IP protection and enforcement.  However, concerns remain on how China views the intersection of IP protection and antitrust. Previous AML guidelines issued by antitrust regulators for public comment disproportionately impacted foreign firms (generally IP rights holders) by requiring an IP rights holder to license technology at a “fair price” so as not to allow abuse of the company’s “dominant market position.”  Foreign companies have long complained that China’s enforcement of AML serves industrial policy goals of, among other things, forcing technology transfer to local competitors. In other more developed antitrust jurisdictions, companies are free to exclude competitors and set prices, and the right to do so is recognized as the foundation of the incentive to innovate.

Another consistent area of concern expressed by foreign companies deals with the degree to which the AML applies – or fails to apply – to SOEs and other government monopolies, which are permitted in some industries.  While SAMR has said AML enforcement applies to SOEs the same as domestic or foreign firms, the reality is that only a few minor punitive actions have been taken against provincial level SOEs. In addition, the AML explicitly protects the lawful operations of SOEs and government monopolies in industries deemed nationally important.  While SOEs have not been entirely immune from AML investigations, the number of investigations is not commensurate with the significant role SOEs play in China’s economy. The CCP’s proactive orchestration of mergers and consolidation of SOEs in industries like rail, marine shipping, metals, and other strategic sectors, which in most instances only further insulates SOEs from both private and foreign competition, signaling that enforcement against SOEs will likely remain limited despite potential negative impacts on consumer welfare.

Expropriation and Compensation

Chinese law prohibits nationalization of foreign-invested enterprises, except under “special circumstances.”  Chinese laws, such as the Foreign Investment Law, states there are circumstances for expropriation of foreign assets that may include national security or a public interest needs, such as large civil engineering projects.  However, the law does not specify circumstances that would lead to the nationalization of a foreign investment. Chinese law requires fair compensation for an expropriated foreign investment but does not provide details on the method or formula used to calculate the value of the foreign investment.  The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, although the Department has notified Congress through the annual 527 Investment Dispute Report of several cases of concern.

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

CIETAC also had four sub-commissions located in Shanghai, Shenzhen, Tianjin, and Chongqing.  CCPIT, under the authority of the State Council, issued new arbitration rules in 2012 that granted CIETAC headquarters greater authority to hear cases than the sub-commissions.  As a result, CIETAC Shanghai and CIETAC Shenzhen declared independence from the Beijing authority, issued new rules, and changed their names. This split led to CIETAC disqualifying the former Shanghai and Shenzhen affiliates from administering arbitration disputes, raising serious concerns among the U.S. business and legal communities over the validity of arbitration agreements arrived at under different arbitration procedures and the enforceability of arbitral awards issued by the sub-commissions.  In 2013, the Supreme People’s Court issued a notice clarifying that any lower court that hears a case arising out of the CIETAC split must report the case to the court before making a decision. However, this notice is brief and lacks detail like the timeframe for the lower court to refer and the timeframe for the Supreme People’s Court to issue an opinion.

Beside the central-level arbitration commission, there are also provincial and municipal arbitration commissions that have emerged as serious domestic competitors to CIETAC.  A foreign party may also seek arbitration in some instances from an offshore commission. Foreign companies often encounter challenges in enforcing arbitration decisions issued by Chinese and foreign arbitration bodies.  In these instances, foreign investors may appeal to higher courts.

The Chinese government and judicial bodies do not maintain a public record of investment disputes.  The Supreme People’s Court maintains an annual count of the number of cases involving foreigners but does not provide details about the cases, identify civil or commercial disputes, or note foreign investment disputes.  Rulings in some cases are open to the public.

International Commercial Arbitration and Foreign Courts

Articles 281 and 282 of China’s Civil Procedural Law governs the enforcement of judgments issued by foreign courts.  The law states that Chinese courts should consider factors like China’s treaty obligations, reciprocity principles, basic Chinese law, Chinese sovereignty, Chinese social and public interests, and national security before determining if the foreign court judgment should be recognized.  As a result of this broad criteria, there are few examples of Chinese courts recognizing and enforcing a foreign court judgment. China has bilateral agreements with 27 countries on the recognition and enforcement of foreign court judgments, but not with the United States.

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

Bankruptcy Regulations

China’s Enterprise Bankruptcy Law took effect on June 1, 2007 and applies to all companies incorporated under Chinese laws and subject to Chinese regulations.  This includes private companies, public companies, SOEs, foreign invested enterprises (FIEs), and financial institutions.  China’s primary bankruptcy legislation generally is commensurate with developed countries’ bankruptcy laws and provides for reorganization or restructuring, rather than liquidation.  However, due to the lack of implementation guidelines and the limited number of previous cases that could provide legal precedent, the law has never been fully enforced.  Most corporate debt disputes are settled through negotiations led by local governments.  In addition, companies are disincentivized from pursing bankruptcy because of the potential for local government interference and fear of losing control over the bankruptcy outcome.  According to experts, Chinese courts not only lack the resources and capacity to handle bankruptcy cases, but bankruptcy administrators, clerks, and judges all lack relevant experience.

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

The number of bankruptcy cases has continued to grow rapidly since 2015.  According to a National People’s Congress (NPC) official, in 2018, 18,823 liquidation and bankruptcy cases were accepted by Chinese courts, an increase of over 95 percent from last year.  11,669 of those cases were closed, an increase of 86.5 percent from the year before.  The Supreme People’s Court (SPC) reported that in 2017, 9,542 bankruptcy cases were accepted by the Chinese courts, representing a 68.4 percent year-on-year increase from 2016, and 6,257 cases were closed, representing a 73.7 percent year-on-year increase from 2016. The SPC has continued to issue clarifications and new implementing measures to improve bankruptcy procedures.

Investment Incentives

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

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

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

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

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

Performance and Data Localization Requirements

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

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

Real Property

Foreign companies have long complained that the Chinese legal system, responsible for mediating acquisition and disposition of property, has inconsistently protected the legal real property rights of foreigners.

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

In rural China, collectively-owned land use rights are more complicated.  The registration system chronically suffers from unclear ownership lines and disputed border claims, often at the expense of local farmers who are excluded from the process by village leaders making “handshake deals” with commercial interests.  The central government announced in 2016, and reiterated in 2017 and 2018, plans to reform the rural land registration system so as to put more control in the hands of farmers, but some experts remain skeptical that changes will be properly implemented and enforced.

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

Intellectual Property Rights

Following WTO accession, China updated many laws and regulations to comply with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and other international agreements.  However, despite the changes to China’s legal and regulatory regime, some aspects of China’s IP protection regime fall short of international best practices.  In addition, enforcement ineffectiveness of Chinese laws and regulations remains a significant challenge for foreign investors trying to protect their IPR.

Major impediments to effective IP enforcement include the unavailability of deterrent-level penalties for infringement, a lack of transparency, unclear standards for establishing criminal investigations, the absence of evidence production methods to compel evidence from infringers, and local protectionism, among others.  Chinese government officials tout the success of China’s specialized IP courts – including the establishment of a new appellate tribunal within the SPC – as evidence of its commitment to IP protection; however, while this shows a growing awareness of IPR in China’s legal system, civil litigation against IP infringement will remain an option with limited effect until there is an increase in the amount of damages an infringer pays for IP violations.

Chinese-based companies remain the largest IP infringers of U.S. products.  Goods shipped from China (including those transshipped through Hong Kong) accounted for an estimated 87 percent of IPR-infringing goods seized at U.S. borders.  (Note: This U.S.  Customs statistic does not specify where the fake goods were made.)  China imposes requirements that U.S. firms develop their IP in China or transfer their IP to Chinese entities as a condition to accessing the Chinese market, or to obtain tax and other preferential benefits available to domestic companies.  Chinese policies can effectively require U.S. firms to localize research and development activities, practices documented in the March 2018 Section 301 Report released by the Office of the U.S. Trade Representative (USTR).  China remained on the Priority Watch List in the 2019 USTR Special 301 Report, and several Chinese physical and online markets were included in the 2018 USTR Notorious Markets Report.  For detailed information on China’s environment for IPR protection and enforcement, please see the following reports:

• USTR Section 301 Report on China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation: https://ustr.gov/sites/default/files/Section percent20301 percent20FINAL.PDF 
• USTR Update Concerning China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation: https://ustr.gov/sites/default/files/enforcement/301Investigations/301 percent20Report percent20Update.pdf  
• USTR 2019 Special 301 Report (see section on China): https://ustr.gov/about-us/policy-offices/press-office/reports-and-publications/2019/2019-special-301-report  
• USTR’s 2018 National Trade Estimate Report on Foreign Trade Barriers in China (see section on China): https://ustr.gov/sites/default/files/files/Press/Reports/2018 percent20National percent20Trade percent20Estimate percent20Report.pdf 
• USTR’s 2018 Report to Congress on China’s WTO Compliance: https://ustr.gov/sites/default/files/2018-USTR-Report-to-Congress-on-China percent27s-WTO-Compliance.pdf 
• USTR’s 2018 Notorious Market Report (see China): https://ustr.gov/sites/default/files/2018_Notorious_Markets_List.pdf 

For additional information about national laws and points of contact at local intellectual property offices, please see the World Intellectual Property Organization’s country profiles at http://www.wipo.int/directory/en  

Capital Markets and Portfolio Investment

China’s leadership has stated that it seeks to build a modern, highly developed, and multi-tiered capital market.  Bank loans continue to provide the majority of credit options (reportedly around 81.4 percent in 2018) for Chinese companies, although other sources of capital, such as corporate bonds, equity financing, and private equity are quickly expanding their scope, reach, and sophistication in China.  In the past three years, Chinese regulators have taken measures to rein in the rapid growth of China’s “shadow banking” sector, which includes vehicles such as wealth management and trust products.  The measures have achieved positive results. The share of trust loans, entrust loans and undiscounted bankers’ acceptances dropped a total of 15.2 percent in total social financing (TSF) – a broad measure of available credit in China, most of which was comprised of corporate bonds. TSF’s share of corporate bonds jumped from a negative 2.31 percent in 2017 to 12.9 percent in 2018. Chinese regulators regularly use administrative methods to control credit growth, although market-based tools such as interest rate policy and adjusting the reserve requirement ratio (RRR) play an increasingly important role.

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

In 2018, Chinese regulators have taken measures to improve financing for the private sector, particularly small, medium and micro-sized enterprises (SMEs).  On November 1, 2018, Xi Jinping held an unprecedented meeting with private companies on how to support the development of private enterprises. Xi emphasized to the importance of resolving difficult and expensive financing problems for private firms and pledged to create a fair and competitive business environment.  He encouraged banks to lend more to private firms, as well as urged local governments to provide more financial support for credit-worthy private companies. Provincial and municipal governments could raise funds to bailout private enterprises if needed. The PBOC increased the relending and rediscount quota of RMB 300 billion for SMEs and private enterprises at the end of 2018.  The government also introduced bond financing supportive instruments for private enterprises, and the PBOC began promoting qualified PE funds, securities firms, and financial asset management companies to provide financing for private companies. The China Banking and Insurance Regulatory Commission’s (CBIRC) Chairman said in an interview that one-third of new corporate loans issued by big banks and two-thirds of new corporate loans issued by small and medium-sized banks should be granted to private enterprises, and that 50 percent of new corporate loans shall be issued to private enterprises in the next three years.  At the end of 2018, loans issued to SMEs accounted for 24.6 percent of total RMB loan issuance. The share dropped 1 percent from 25.6 percent in 2017. Interest rates on loans issued by the six big state-owned banks – Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC), Agriculture Bank of China (ABC), Bank of Communications and China Postal Savings Bank – to SMEs averaged 4.8 percent, in the fourth quarter of 2018, down from 6 percent in the first quarter of 2018.

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

Money and Banking System

After several years of rapid credit growth, China’s banking sector faces asset quality concerns.  For 2018, the China Banking Regulatory Commission reported a non-performing loans (NPL) ratio of 1.83 percent, higher than the 1.74 percent of NPL ratio reported the last quarter of 2017.  The outstanding balance of commercial bank NPLs in 2018 reached 2.03 trillion RMB (approximately USD295.1 billion).  China’s total banking assets surpassed 268 trillion RMB (approximately USD39.1 trillion) in December 2018, a 6.27 percent year-on-year increase.  Experts estimate Chinese banking assets account for over 20 percent of global banking assets.  In 2018, China’s credit and broad money supply slowed to 8.1 percent growth, the lowest published rate since the PBOC first started publishing M2 money supply data in 1986.

Foreign Exchange and Remittances

Foreign Exchange Policies

While the central bank’s official position is that companies with proper documentation should be able to freely conduct business, in practice, companies have reported challenges and delays in getting foreign currency transactions approved by sub-national regulatory branches.  In 2017, several foreign companies complained about administrative delays in remitting large sums of money from China, even after completing all of the documentation requirements.  Such incidents come amid announcements that the State Administration of Foreign Exchange (SAFE) had issued guidance to tighten scrutiny of foreign currency outflows due to China’s rapidly decreasing foreign currency exchange.  China has since announced that it will gradually reduce those controls, but market analysts expect they would be re-imposed if capital outflows accelerate again.

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

Chinese foreign exchange rules cap the maximum amount of RMB individuals are allowed to convert into other currencies at approximately USD50,000 each year and restrict them from directly transferring RMB abroad without prior approval from SAFE.  In 2017, authorities further restricted overseas currency withdrawals by banning sales of life insurance products and capping credit card withdrawals at USD5,000 per transaction.  SAFE has not reduced this quota, but during periods of higher than normal capital outflows, banks are reportedly instructed by SAFE to increase scrutiny over individuals’ requests for foreign currency and to require additional paperwork clarifying the intended use of the funds, with the express intent of slowing capital outflows.

China’s exchange rate regime is managed within a band that allows the currency to rise or fall by 2 percent per day from the “reference rate” set each morning.  In August 2015, China announced that the reference rate would more closely reflect the previous day’s closing spot rate.  Since that change, daily volatility of the RMB has at times been higher than in recent years, but for the most part, remains below what is typical for other currencies.  In 2017, the PBOC took additional measures to reduce volatility, introducing a “countercyclical factor” into its daily RMB exchange rate calculation.  Although the PBOC reportedly suspended the countercyclical factor in January 2018, the tool remains available to policymakers if volatility re-emerges.

Remittance Policies

The remittance of profits and dividends by FIEs is not subject to time limitations, but FIEs need to submit a series of documents to designated banks for review and approval.  The review period is not fixed, and is frequently completed within one or two working days of the submission of complete documents.  In the past year, this period has lengthened during periods of higher than normal capital outflows, when the government strengthens capital controls.

Remittance policies have not changed substantially since SAFE simplified some regulations in January 2014, devolving many review and approval procedures to banks.  Firms that remit profits at or below USD50,000 dollars can do so without submitting documents to the banks for review.

For remittances above USD50,000, the firm must submit tax documents, as well as the formal decision by its management to distribute profits.

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

The remittance of financial lease payments falls under foreign debt management rules.  There are no specific rules on the remittance of royalties and management fees.  In August 2018, SAFE raised the reserve requirement for foreign currency transactions from zero to 20 percent, significantly increasing the cost of foreign currency transactions.  The reserve ratio was introduced in October 2015 at 20 percent, which was lowered to zero in September 2017.

The Financial Action Task Force has identified China as a country of primary concern.  Global Financial Integrity (GFI) estimates that over S1 trillion of illicit money left China between 2003 and 2012, making China the world leader in illicit capital flows.  In 2013, GFI estimated that another USD260 billion left the country.

Sovereign Wealth Funds

China officially has only one sovereign wealth fund (SWF), the China Investment Corporation (CIC).  Established in 2007, CIC manages over USD941.4 billion in assets (as of 2017) and invests on a 10-year time horizon.  China’s sovereign wealth is also invested by a subsidiary of SAFE, the government agency that manages China’s foreign currency reserves, and reports directly to the PBOC.  The SAFE Administrator also serves concurrently as a PBOC Deputy Governor.

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

China also operates other funds that function in part like sovereign wealth funds, including: China’s National Social Security Fund, with an estimate USD341.4 billion in assets; the China-Africa Development Fund (solely funded by the China Development Bank), with an estimated USD5 billion; the SAFE Investment Company, with an estimated USD439.8 billion; and China’s state-owned Silk Road Fund, established in December 2014 with USD40 billion to foster investment in OBOR partner countries.  Chinese SWFs do not report the percentage of their assets that are invested domestically.

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

China has approximately 150,000 SOEs which are wholly owned by the state.  Around 50,000 (33 percent) are owned by the central government and the remainder by local governments.  The central government directly controls and manages 96 strategic SOEs through the State-owned Assets Supervision and Administration Commission (SASAC), of which around 60 are listed on stock exchanges domestically and/or internationally.  SOEs, both central and local, account for 30 to 40 percent of total GDP and about 20 percent of China’s total employment.  SOEs can be found in all sectors of the economy, from tourism to heavy industries.

SASAC regulated SOEs: http://www.sasac.gov.cn/n2588035/n2641579/n2641645/c4451749/content.html  .

China’s leading SOEs benefit from preferential government policies aimed at developing bigger and stronger “national champions.”  SOEs enjoy favored access to essential economic inputs (land, hydrocarbons, finance, telecoms, and electricity) and exercise considerable power in markets like steel and minerals.  SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt.

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

At the 2018 Central Economic Work Conference, Chinese leaders said in 2019 they will promote a greater role for the market, as well as renewed efforts on reforming SOEs – to include mixed ownership reform.  In delivering the 2019 Government Work Report, Premier Li Keqiang pledged to improve corporate governance, including allowing SOE company boards, rather than SASAC, to appoint senior leadership. 

OECD Guidelines on Corporate Governance

SASAC participates in the OECD Working Party on State Ownership and Privatization Practices (WPSOPP).  Chinese officials have indicated China intends to utilize OECD SOE guidelines to improve the professionalism and independence of SOEs, including relying on Boards of Directors that are independent from political influence.  However, despite China’s Third Plenum commitments in 2013 (i.e., to foster “market-oriented” reforms in China’s state sectors), Chinese officials and SASAC have made minimal progress in fundamentally changing the regulation and business conduct of SOEs.  China has also committed to implement the G-20/OECD Principles of Corporate Governance, which apply to all publicly-listed companies, including listed SOEs.

Chinese law lacks unified guidelines or a governance code for SOEs, especially among provincial or locally-controlled SOEs.  Among central SOEs managed by SASAC, senior management positions are mainly filled by senior CCP members who report directly to the CCP, and double as the company’s Party secretary

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

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

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

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

During the Third Plenum of the CCP’s 18th Central Committee, in 2013, the CCP leadership announced that the market would play a “decisive role” in economic decision making and emphasized that SOEs needed to focus resources in areas that “serve state strategic objectives.”  However, experts point out that despite these new SOE distinctions, SOEs continue to hold dominant shares in their respective industries, regardless of whether they are strategic, which may further restrain private investment in the economy.  Moreover, the application of China’s Anti-Monopoly Law, together with other industrial policies and practices that are selectively enforced by the authorities, protects SOEs from private sector competition.

China is not a party to the Government Procurement Agreement (GPA) within the framework of the WTO, although Hong Kong is listed.  During China’s WTO accession negotiations, Beijing signaled its intention to join GPA.  And, in April 2018, President Xi announced his intent to join GPA, but no timeline has been given for accession.

Investment Restrictions in “Vital Industries and Key Fields”

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

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

Parts of the agricultural sector have traditionally been dominated by SOEs.  Current agriculture trade rules, regulations, and limitations placed on foreign investment severely restrict the contributions of U.S. agricultural companies, depriving China’s consumers of the many potential benefits additional foreign investment could provide.  These investment restrictions in the agricultural sectors are at odds with China’s objective of shifting more resources to agriculture and food production in order to improve Chinese lives, food security, and food safety.

Privatization Program

At the November 2013 Third Plenum, the Chinese government announced reforms to SOEs that included selling shares of SOEs to outside investors.  This approach is an effort to improve SOE management structures, emphasize the use of financial benchmarks, and gradually take steps that will bring private capital into some sectors traditionally monopolized by SOEs like energy, telecommunications, and finance.  In practice, these reforms have been gradual, as the Chinese government has struggled to implement its SOE reform vision and often opted to utilize a preferred SOE consolidation approach. In the past few years, the Chinese government has listed several large SOEs and their assets on the Hong Kong stock exchange, subjecting SOEs to greater transparency requirements and heightened regulatory scrutiny.  This approach is a possible mechanism to improve SOE corporate governance and transparency. Starting in 2017, the government began pushing the mixed ownership model, in which private companies invest in SOEs and outside managers are hired, as a possible solution, although analysts note that ultimately the government (and therefore the CCP) remains in full control regardless of the private share percentage.  Over the last year, President Xi and other senior leaders have increasingly focused reform efforts on strengthening the role of the State as an investor or owner of capital, instead of the old SOE model in which the state was more directly involved in managing operations.

General awareness of Responsible Business Conduct (RBC) standards (including environmental, social, and governance issues) is a relatively new concept to most Chinese companies, especially companies that exclusively operate in China’s domestic market.  Chinese laws that regulate business conduct use voluntary compliance, are often limited in scope and are frequently cast aside when RBC priorities are superseded by other economic priorities. In addition, China lacks mature and independent NGOs, investment funds, worker unions, worker organizations, and other business associations that promote RBC, further contributing to the general lack of awareness in Chinese business practices.

The Foreign NGO Law remains a concern for U.S. organizations due to the restrictions on many NGO activities, including promotion of RBC and corporate social responsibility (CSR) best practices.  For U.S. investors looking to partner with a Chinese company or to expand operations by bringing in Chinese suppliers, finding partners that meet internationally recognized standards in areas like labor, environmental protection, worker safety, and manufacturing best practices can be a challenge.  However, the Chinese government has placed greater emphasis on protecting the environment and elevating sustainability as a key priority, resulting in more Chinese companies adding environmental concerns to their CSR initiatives.

In 2014, China signed a memorandum of understanding (MOU) with the OECD to cooperate on RBC initiatives.  This MOU, however, does not require or necessarily mean that Chinese companies will adhere to the OECD Guidelines for Multinational Enterprises.  Industry leaders have pushed for China to comply with OECD guidelines and establish a national contact point or RBC center.  As a result, MOFCOM in 2016 launched the RBC Platform, which serves as the national contact point on RBC issues and supplies information to companies about RBC best practices in China.

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

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

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

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

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

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

In March 2018, the NPC approved the creation of the National Supervisory Commission (NSC), a new government anti-corruption agency that resulted from the merger of the Ministry of Supervision and the CCP’s Central Commission for Discipline Inspection (CCDI).  The NSC absorbed the anti-corruption units of the Supreme People’s Procuratorate, and those of the National Bureau of Corruption Prevention.  In addition to China’s 89 million CCP members, the new commission has jurisdiction over all civil servants and employees of state enterprises, as well as managers in public schools, hospitals, research institutes, and other public service institutions.  Lower-level supervisory commissions have been set up in all provinces, autonomous regions, municipalities, and the Xinjiang Production and Construction Corps.  The NPC also passed the State Supervision Law, which provides the NSC with its legal authorities to investigate, detain, and punish public servants.

The CCDI remains the primary body for enforcing ethics guidelines and party discipline, and refers criminal corruption cases to the NSC for further investigation.

President Xi Jinping’s Anti-Corruption Efforts

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

According to official statistics, from 2012 to 2018 the CCDI investigated 2.17 million cases – more than the total of the preceding ten years.  In 2018 alone, the CCP disciplined around 621,000 individuals, up almost 95,000 from 2017.  However, the majority of officials only ended up receiving internal CCP discipline and were not passed forward for formal prosecution and trial.  A total of 195,000 corruption and bribery cases involving 263,000 people were heard in courts between 2013 and 2017, according to the Supreme People’s Court.  Of these, 101 were officials at or above the rank of minister or head of province.  In 2018, a large uptick of 51 officials at or above the provincial/ministerial level were disciplined by the NSC.  One group heavily disciplined in recent years has been the discipline inspectors themselves, with the CCP punishing more than 7,900 inspectors since late-2012.  This led to new regulations being implemented in 2016 by CCDI that increased overall supervision of its investigators.

China’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of more than 5,000 fugitives suspected of corruption.  In 2018 alone, CCDI reported that 1,335 fugitives suspected of official crimes were apprehended, including 307 corrupt officials mainly suspected for graft.  Anecdotal information suggests the Chinese government’s anti-corruption crackdown oftentimes is inconsistently and discretionarily applied, raising concerns among foreign companies in China.  For example, to fight rampant commercial corruption in the medical/pharmaceutical sector, China’s health authority issued “black lists” of firms and agents involved in commercial bribery.  Several blacklisted firms were foreign companies.  Additionally, anecdotal information suggests many Chinese government officials responsible for approving foreign investment projects, as well as some routine business transactions, are slowing approvals to not arouse corruption suspicions, making it increasingly difficult to conduct normal commercial activity.

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

United Nations Anti-Corruption Convention, OECD Convention on Combating Bribery

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

Resources to Report Corruption

The following government organization receives public reports of corruption:

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

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

In recent years, the growing number of protests over corporate M&A transactions has increased, often because disenfranchised workers and mid-level managers feel they were not included in the decision process.  China’s non-transparent legal and regulatory system allows the CCP to pressure or punish foreign companies for the actions of their governments. The government has also encouraged protests or boycotts of products from certain countries, like Korea, Japan, Norway, Canada, and the Philippines, in retaliation for unrelated policy decisions.  Examples of politically motivated economic retaliation against foreign firms include boycott campaigns against Korean retailer Lotte in 2016 and 2017 in retaliation for the decision to deploy the Thermal High Altitude Area Defense (THAAD) to the Korean Peninsula, which led to Lotte closing and selling its China operations; and high-profile cases of gross mistreatment of Japanese firms and brands in 2011 and 2012 following disputes over islands in the East China Sea.  Recently, some reports suggest China has retaliated against some Canadian companies and products as a result of a domestic Canadian legal issue that impacted a large Chinese enterprise.

There have also been some cases of foreign businesspeople that were refused permission to leave China over pending commercial contract disputes.  Chinese authorities have broad authority to prohibit travelers from leaving China (known as an “exit ban”) and have imposed exit bans to compel U.S. citizens to resolve business disputes, force settlement of court orders, or facilitate government investigations.  Individuals not directly involved in legal proceedings or suspected of wrongdoing have also been subject to lengthy exit bans in order to compel family members or colleagues to cooperate with Chinese courts or investigations. Exit bans are often issued without notification to the foreign citizen or without a clear legal recourse to appeal the exit ban decision.

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

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

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

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

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

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

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

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

*China’s National Bureau of Statistics (90.031 trillion RMB converted at 6.8 RMB/USD estimate)
** Statistics gathered from China’s Ministry of Commerce official data

Table 3: Sources and Destination of FDI

Source: IMF Coordinated Direct Investment Survey (CDIS)

Table 4: Sources of Portfolio Investment

Data not available.

Nissa Felton
Investment Officer – U.S.  Embassy Beijing Economic Section
55 Anjialou Road, Chaoyang District, Beijing, P.R.  China
+86 10 8531 3000
EMail: beijinginvestmentteam@state.gov

Other Useful Online Resources

Chinese Government

• Chinese Embassy in Washington, D.C.: http://www.china-embassy.org/eng  ;
• Ministry of Commerce: http://english.mofcom.gov.cn  
• Invest in China: http://www.fdi.gov.cn/pub/FDI_EN/default.htm  
• National Development and Reform Commission: http://en.ndrc.gov.cn  
• State Administration of Foreign Exchange: http://www.safe.gov.cn  
• State Administration of Taxation: http://www.chinatax.gov.cn/2013/n2925  

United States Government

• U.S. Embassy in Beijing (Doing Business in China) http://beijing.usembassy-china.org.cn/business.html  
• U.S. Department of State travel information: http://travel.state.gov
• U.S. Trade Representative: http://www.ustr.gov  
• U.S. Department of Commerce: http://www.export.gov  
• U.S. Department of the Treasury: http://www.treasury.gov  
• Export Import Bank: http://www.exim.gov  
• Overseas Private Investment Corporation (OPIC): http://www.opic.gov  
• U.S. Trade and Development Agency: http://www.ustda.gov  

Policies Towards Foreign Direct Investment

Although Fiji has a tradition of a strong judiciary system where contractual rights are generally upheld, the lack of independence of the judiciary and the lengthy legal process raise concerns about due process of law.

The Fiji government is reviewing its investment policies in order to improve efficiency in the approval processes of foreign investment proposals. Investment Fiji is responsible for the promotion, regulation, and control of foreign investment in the interest of national development. In addition to registering and assisting with the implementation of foreign investment projects, Investment Fiji hosts information seminars for visiting foreign business delegations and participates at investment missions overseas.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Foreign Investment Act (FIA) and the 2009 Foreign Investment Regulation regulate foreign investment in Fiji.  All businesses with a foreign investment component in their ownership are required to register and obtain a Foreign Investment Registration Certificate (FIRC) from Investment Fiji.

A number of investment activities are reserved for Fiji nationals or are subject to restrictions. The Fiji government removed the previous minimum investment requirement of USD 117,647 (FJD 250,000) to encourage greater foreign investment. There are 17 reserved activities wholly for Fiji citizens, mainly in the services sector, and eight restricted activities.  Full listings of reserved and restricted areas can be found at http://www.investmentfiji.org.fj/pages.cfm/for-investors/doing-business-in-fiji/foreign-investment-act-foreign-investment-regulations.html  .

Restricted activities in forestry, tobacco production, tourism (cultural heritage), real estate development, construction, earthmoving, and inter-island shipping or passenger service require minimum investments ranging from USD 0.24-2.4 million (FJD 0.5 – 5 million). Investment in the fisheries sector also requires a 30 percent local equity in the project.

Investment Fiji screens foreign investment proposals to ensure that the projects are in the interest of national development.

Other Investment Policy Reviews

Fiji has not undergone any third-party investment policy reviews in the past three years.  In 2016, Fiji completed its second WTO trade policy review (https://www.wto.org/english/tratop_e/tpr_e/tp430_e.htm  ) and ratified the Trade Facilitation Agreement (TFA) in 2017. In 2015, UNCTAD undertook a voluntary peer review of Fiji’s competition law and policy, available at http://unctad.org/en/PublicationsLibrary/ditcclp2015d5_en.pdf .

Business Facilitation

Investment Fiji is responsible for the promotion, regulation, and control of foreign investment in the interest of national development.  Its Online Single Window Clearance System simplifies the registration process and enables online applications for a FIRC and payment of the requisite application fee of USD 1,282.4 (FJD 2,725).  Information on the registration procedures, regulations, and registration requirements for foreign investment is available at the Investment Fiji website: http://www.investmentfiji.org.fj  .

Investors need to meet the requirements listed under the Foreign Investment Act (FIA) and the 2009 Foreign Investment Regulation as well as ensure that the investment activity does not fall under the reserved and restricted activities lists.  The following documents must accompany the FIRC application: if a company is being listed as a shareholder, then a certified copy of the certificate of incorporation and name(s) of those associated with the shareholding company; if local equity contribution is required, a copy of the shareholders agreement and a copy of the declaration of shareholders, witnessed or certified by a Justice of the Peace, lawyer and/or chartered accountant; certified copies of the passport bio-data pages, together with recent color passport-size photos of all those associated with the business; a police clearance report from the country of residence in the last 12 months or more; and proof of company registration abroad (if applicable).  A business plan including a budget/cash flow forecast of the project is required. The approval process for investment applications takes at least five working days and sometimes longer if the paperwork is incomplete.

Investors are also required to obtain the necessary permits and licenses from other relevant authorities and should be prepared for delays.  The World Bank Doing Business 2019 survey estimated that it took 11 procedures and a total of 40 days to get a business registered. There are no special services or preferences to facilitate investment and business operations by micro, small and medium sized enterprises, or by women. The World Bank survey shows that the number of processes or the duration to acquire the necessary permits for businesses operated by men or women is the same.

Contact: The Chief Executive, Investment Fiji, P.O. Box 2303, Government Buildings, Suva; Telephone: (679) 3315 988; Fax: (679) 3301 783; Email: info@investmentfiji.org.fj; Website: http://www.investmentfiji.org.fj/.  

Outward Investment

The Reserve Bank of Fiji lifted its suspension of offshore investments by Fiji residents. However, the offshore investment allowance by Fiji residents is capped at USD 11,764.71 (FJD 25,000) per annum.  For companies, including the Fiji National Provident Fund (FNPF), the amount of offshore investment is determined by the Reserve Bank of Fiji.

Fiji has double taxation agreements with Australia, Japan, Malaysia, New Zealand, Papua New Guinea, the Republic of Korea, Singapore, United Arab Emirates, and the United Kingdom.  Fiji has not entered into a bilateral investment treaty or a double taxation agreement with the United States.

Transparency of the Regulatory System

The lack of consultation with the private sector and other stakeholders on proposed laws and regulations remains an area of concern.  The business community has complained that the government enacts new regulations with little prior notice or publicity. There is a perception among foreign investors of a lack of transparency in government procurement and approval processes.  Some foreign investors considering investment in Fiji have encountered lengthy and costly bureaucratic delays, shuffling of permits among government ministries, inconsistent and changing procedures, lack of technical capacity, costly penalties due to the interpretation of tax regulations by the Fiji Revenue and Customs Service (FRCS), and slow decision-making.  The Biosecurity Authority of Fiji (BAF) regulates all food and animal products entering Fiji and has stringent and costly point-of-origin inspection and quarantine requirements for foreign goods. Some importers have had import permits denied for categories of food or animal products which were previously allowed, with little or no explanation for the change.

Fiji’s constitution provides for public access to government information and for the correction or deletion of false or misleading information.  Although the constitution requires that a freedom of information law be enacted, there is no such law yet. The parliamentary website (http://www.parliament.gov.fj/  ) is a centralized online location that publishes laws and regulations passed in parliament.

International Regulatory Considerations

Fiji has been a member of the WTO since January 1996.  According to Fiji’s trade profile on the WTO website, there are no records of disputes.  Fiji ratified the WTO’s Trade Facilitation Agreement in 2017.

Legal System and Judicial Independence

The legal system in Fiji developed from British law.  Fiji maintains a judiciary consisting of a Supreme Court, a Court of Appeal, a High Court, and magistrate courts.  The Supreme Court is the final court of appeal.

Both companies and individuals have recourse to legal treatment through the system of local and superior courts.  A foreign investor theoretically has the right of recourse to the courts and tribunals of Fiji with respect to the settlement of disputes, but government decrees have been used to block foreign investors from legal recourse in investment takeovers, tax increases, or write-offs of interest to the government.

Laws and Regulations on Foreign Direct Investment

The Foreign Investment Act (FIA) and the 2009 Foreign Investment Regulation regulate foreign investment in Fiji. All businesses with a foreign-investment component in their ownership are required to register and obtain a Foreign Investment Registration Certificate (FIRC) from Investment Fiji.  Information on the registration procedures, regulations, and registration requirements for foreign investment is available at the Investment Fiji website: http://www.investmentfiji.org.fj. Amendments to the FIA also require that foreign investors seek approval prior to any changes in the ownership structure of the business, with penalties incurred for non-compliance.

Investment Fiji’s online Single Window Clearance System enables online business registration, application for a FIRC, and application fee payment.  Information on the registration procedures, regulations, and registration requirements for foreign investment is available at the Investment Fiji website: http://www.investmentfiji.org.fj.  However, the most up to date reporting requirements may not be available on the website.

Competition and Anti-Trust Laws

The Fiji Commerce Commission (FCC), established under the 2010 Commerce Commission Decree, regulates monopolies, promotes competition, and controls prices of selected hardware, basic food items, and utilities, in order to ensure a fair, competitive, and equitable market.

Expropriation and Compensation

Expropriation has not historically been a common phenomenon in Fiji.  A foreign investor theoretically has the same right of recourse as a Fijian enterprise to the courts and other tribunals of Fiji to settle disputes.  In practice, the government has acted to assert its interests with laws affecting foreign investors.

In 2013, the government amended the Foreign Investment Decree with provisions to permit the forfeiture of foreign investments as well as significant fines for breaches of compliance with foreign investment registration conditions.

Dispute Settlement

ICSID Convention and New York Convention

Fiji acceded to the New York Convention in September 2010.  Fiji has been a member of the ICSID since September 1977. However, there are no legislative or other measures adopted to make the convention effective.

Investor-State Dispute Settlement

The government has sometimes opted to penalize foreign investors in lieu of dispute settlement by deportation but there have been no new cases since 2016.  .

Past investment disputes have often focused on land issues, particularly in the mining, timber and tourism sectors.  Such disputes have been resolved through labor-management dialogue, government intervention, referral to compulsory arbitration, or through the courts.  In some instances, the investors have withdrawn from Fiji when a resolution could not be found. Fiji is a party to the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States.

The World Bank Doing Business 2019 survey ranked Fiji 97 out of 190 on the efficiency of the judicial system to resolve a commercial dispute.  According to the survey, Fiji took 397 calendar days to complete procedures at a cost of 42.6percent of the value of the claim.

International Commercial Arbitration and Foreign Courts

Fiji is a party to the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States.  Fiji acceded to the New York Convention in September 2010. In 2017, Fiji enacted the International Arbitration Act to improve the framework governing international commercial arbitration.  With the support from the United Nations Commission on International Trade Law (UNICTRAL), Fiji has adopted a version of the UNICTRAL model law on arbitration. In 2016, Fiji setup the Fiji Mediation Center (FMC), an alternative dispute resolution mechanism, with local and international mediators accredited by the Center in collaboration with Singapore.  The FMC services include family, commercial, and small case mediation, and as of March 2019, has mediated over 190 cases, with 67 percent of the mediated cases settled, and 84 percent of cases settled within one working day.

Bankruptcy Regulations

Fiji’s Companies Act 2015 has provisions relating to solvency and negative solvency.  According to the 2019 World Bank Doing Business survey, in terms of resolving insolvency, Fiji was ranked 96 out of 190.  The survey estimated that it took 1.8 years at a cost of ten percent of the estate to complete the process, with an estimated recovery rate of 46.5 percent of value.

Investment Incentives

In 2018, incentives to encourage investment in the setting up of electric vehicle charging stations include a seven year tax holiday, subsidies ranging from five to seven percent of the total capital outlay incurred in the development of charging stations for investments between USD 1.4-4.7 million (FJD 3-10 million), and loss carried forward for eight years.  Other environmental incentives are available for investments in bio-fuel production and renewable energy projects.

Tourism incentives include tax-related investment allowances for approved expenditures on tourist boats/ships and approved building and expansion projects. The tourism incentive package provides a ten-year tax holiday for approved large tourism development projects with capital investments of more than USD 3.3 million (FJD 7 million) to be completed within two years from the date when the provisional approval was granted.  Filmmaking and audio-visual incentives include a 47 percent tax rebate on production costs spent in Fiji up to USD 12 million, which is a maximum allowable tax rebate of USD 5.64 million. There are various incentives to encourage investment in the agriculture, fisheries, and forestry industry including zero-rated fiscal duty on imported agricultural machineries, equipment and inputs, and specialized equipment and machinery for forestry and fisheries.  The benefits, which can be up to a ten-year tax holiday, vary by industry and nature of the investment.

The income of any business setting up private hospitals with a minimum capital investment of USD 3.3 million (FJD 7 million), is exempt from tax for a period of ten years.  A 60 percent investment allowance applies for refurbishments, renovations and extensions with a minimum capital investment of USD 0.47million (FJD 1 million). The income of any business setting up ancillary medical services such as pathology lab, MRI, or other diagnostics is exempt from tax for a period of four years with a minimum capital investment level of USD 0.94 million (FJD 2 million).  A 60 percent investment allowance applies for refurbishments, renovations and extensions with a minimum capital investment of USD 235,294 (FJD 500,000). There is a duty concession (free fiscal duty, free import excise and free VAT) on medical, hospital, surgical, and dental goods that are used and imported by the business. Recipients of provisional approvals for setting up private hospitals should complete the project within two years from the date the provisional approval was granted.  Losses on private hospitals may be carried forward for eight years.

Foreign Trade Zones/Free Ports/Trade Facilitation

The northern and selected maritime regions of Fiji have been declared Tax Free Regions (TFR) to encourage development in these isolated outposts.  The specific areas include Vanua Levu, Rotuma, Kadavu, Levuka, Lomaiviti, Lau, and the Korovou-Tailevu area in the east of Viti Levu. Businesses established in these regions which meet the prescribed requirements enjoy a corporate tax holiday for up to 13 years and import duty exemption on raw materials, machinery, and equipment.

Performance and Data Localization Requirements

Many jobs are reserved for Fijian citizens, and work permit applications for expatriate employees may face delays or denials.  Potential employers and employees should consult Fiji Immigration for further information prior to making any binding commitments as it can be difficult to secure employment visas for non-Fijians.

To support the implementation of newly approved investments, Investment Fiji established a monitoring system to assist companies in obtaining necessary approvals to commence operations.  The investing firm must ensure that commercial production begins within 12 months for investments under USD 1.2 million (FJD 2.5 million) or within 18 months of the date of approval of the project for investments above USD 1.2 million (FJD 2.5 million).

The U.S. Embassy is unaware of any policies regulating data storage or requiring foreign IT providers to turn over source code or provide access to surveillance.

Real Property

Land tenure and usage in Fiji is a highly complex and sensitive issue.  Fiji’s Land Sales Act of 2014 restricts ownership of freehold land inside a city or town council boundaries areas to Fijian citizens. There are exceptions to allow foreigners to purchase strata title land, which is defined as ownership in part of a property including multi-level apartments or subdivisions.  Foreigners are still allowed to purchase, sell, or lease freehold land for industrial or commercial purposes, residential purposes within an integrated tourism development, or for the operation of a hotel licensed under the Hotel and Guest Houses Act. The Land Sales Act also requires foreign land owners who purchase approved land to build a dwelling valued at a minimum of USD 117,647 (FJD 250,000) on the land within two years, or face an annual tax of 20 percent of the land value (applied as ten percent every six months).  Freehold land currently owned by a non-Fijian can pass to the owners’ heirs and will not be deemed a sale.

Foreign land owners criticized the government of Fiji for the speed at which the act was passed and the perceived lack of consultation with land owners and developers.  The application of the Land Sales Act continues to create uncertainty among foreign investors. The Fiji government has yet to provide full clarification of the act, such as defining what constitutes an integrated tourism development.  The limited capacity of construction and architecture firms, especially with the high demand for construction services following Cyclone Winston in 2016, makes it difficult to comply with the two-year time frame for building a dwelling before tax penalties set in.

According to the World Bank’s Doing Business Report, registering property took a total of 69 days and involved four main processes, including conducting title searches at the Titles Office, presenting transfer documents for stamping at the Stamp Duty office, obtaining tax clearance on capital gains tax, and settlement at the Registrar of Titles Office.

Ethnic Fijians communally hold approximately 87 percent of all land.  Crown land owned by the government accounts for four percent while the remainder is freehold land, which private individuals or companies hold.  All land owned by ethnic Fijians, commonly referred to as iTaukei land, is held in a statutory trust by the iTaukei Land Trust Board (TLTB) for the benefit of indigenous landholding units.

To improve access to land, the government established a land bank in the Ministry of Lands under the land use decree for the purpose of leasing land from indigenous landowning units (collections of households; under the indigenous communal landowning system, land is not owned by individuals) through the TLTB and subleasing the land to individual tenants for lease periods of up to 99 years.

The constitution includes other new provisions protecting land leases and land tenancies, but observers noted that the provisions had unintended consequences, including weakening the overall legal structure governing leases.

The availability of Crown land for leasing is usually advertised.  This does not, however, preclude consideration given to individual applications in cases where land is required for special purposes.  Government leases for industrial purposes can last up to 99 years with rents reassessed every ten years. TLTB leases for land nearer to urban locations are normally for 50-75 years. Annual rent is reassessed every five years.  The maximum rent that can be levied in both cases is six percent of unimproved capital value. Leases also usually carry development conditions that require lessees to effect improvements within a specified time.

Apart from the requirements of the TLTB and Lands Department, town planning, conservation, and other requirements specified by central and local government authorities affect the use of land.  Investors are urged to seek local legal advice in all transactions involving land.

Intellectual Property Rights

Fiji’s copyright laws are in conformity with World Trade Organization (WTO) Trade Related Aspects of Intellectual Property (TRIPS) provisions. Copyright laws adhere to international laws, and while there are provisions for companies to register a trademark or petition for a patent in Fiji through the Office of the Attorney General, trademark and patent laws are outdated. Furthermore, the enforcement of these laws remains inadequate.  There is no protection for designs or trade secrets.

Illegal materials and reproductions of films, sound recordings, and computer programs are widely available throughout Fiji.  The government is reviewing trademark and patent laws, but capacity is a challenge.

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

Capital Markets and Portfolio Investment

The capital market is regulated and supervised by the Reserve Bank of Fiji.  Nineteen companies were listed on the Suva-based South Pacific Stock Exchange (SPSE) in 2017.  At the end of September 2018, market capitalization was USD 1.3 billion (FJD 2.7 billion), an annual increase of 58.4 percent compared to September 2017.  To promote greater activity in the capital market, the government lowered corporate tax rates for listed companies to ten percent and exempted income earned from the trading of shares in the SPSE from income tax and capital gains tax.

Money and Banking System

Fiji has a well-developed banking system supervised by the Reserve Bank of Fiji (RBF).  The RBF regulates the Fiji monetary and banking systems, manages the issuance of currency notes, administers exchange controls, and provides banking and other services to the government.  In addition, it provides lender-of-last-resort facilities and regulates trading bank liquidity.

There are six trading banks with established operations in Fiji: ANZ Bank, Bank of Baroda, Bank of South Pacific, Bred Bank, Home Finance Corporation, and Westpac Banking Corporation.  Non-banking financial institutions also provide financial assistance and borrowing facilities to the commercial community and to consumers. These institutions include the Fiji Development Bank, Credit Corporation, Kontiki Finance, Merchant Finance, and insurance companies.  As of December 2018, total assets of commercial banks amounted to USD 4.72 billion (FJD 10.03 billion). Although liquidity levels in December 2018 were at USD 144 million (FJD 306 million), 49.5 percent lower compared with December 2017, the RBF reported that liquidity levels were sufficient and did not pose a risk to bank solvency.

Foreign Exchange and Remittances

Foreign Exchange

The Reserve Bank of Fiji (RBF) relaxed a number of foreign exchange controls, including increasing delegated limits for commercial banks and authorizing foreign exchange dealers to process some payments in 2017.  The Fiji dollar remains fully convertible. The Fiji dollar is pegged to a basket of currencies of Fiji’s principal trading partners, chiefly Australia, New Zealand, the United States, the European Union, and Japan.

Although no limits were placed on non-residents borrowing locally for some specified investment activities, the RBF placed a credit ceiling on lending by commercial banks to non-resident controlled business entities.

Remittance Policies

Tax compliance may restrict foreign investors’ repatriation of investment profits and capital. Prior clearance of withholding tax payments on profit and dividend remittances is required from the Fiji Revenue and Customs Service.  Profit and dividend remittances above USD 0.47 million (FJD 1 million) per company per annum and large payments require RBF approval. Provided all required documentation is submitted, the processing time for remittance applications is approximately three working days.

Sovereign Wealth Funds

There is no sovereign wealth fund or asset management bureau in Fiji.  The country’s pension fund scheme, the Fiji National Provident Fund, which manages and invests members’ retirement savings, accounts for a third of Fiji’s financial sector assets.  The fund invests in equities, bonds, commercial paper, mortgages, real estate and various offshore investments.

State-owned enterprises (SOEs) in Fiji are concentrated in utilities and key services and industries including aerospace (Fiji Airways, Airports Fiji Limited); agribusiness (Fiji Pine Ltd); energy (Energy Fiji Limited); food processing (Fiji Sugar Corporation, Pacific Fishing Company); information and communication (Amalgamated Telecom Holdings); and media (Fiji Broadcasting Corporation Ltd).  There are eleven Government Commercial Companies which operate commercially and are fully owned by the government, five Commercial Statutory Authorities (CSA) which have regulatory functions and charge nominal fees for their services, six Majority Owned Companies, and two Minority Owned Companies with some government equity. The SOEs that provide essential utilities, such as energy and water, also have social responsibility and non-commercial obligations.

Aside from the CSAs, SOEs do not exercise delegated governmental powers.  SOEs benefit from economies of scale and may be favored in certain sectors. The Fiji Broadcasting Company Ltd (FBCL) is exempt from the Media Decree, which governs private media organizations and exposes private media to criminal libel lawsuits.  In some sectors, the government has pursued a policy of opening up or deregulating various sectors of the economy.

Privatization Program

In 2018, government divested its ownership in the Government Printing and Stationery Department.  The government also signed the first public private partnership agreement in the medical sector with an Australian company to develop, upgrade, and operate the Ba and Lautoka hospitals, the country’s two major hospitals in the western region.  To encourage more private sector participation, the government continues to support the partial divestment of shares in certain government companies as well as the sale of some of its assets in aviation infrastructure and energy. Foreign investors are increasingly participating in public-private sector partnership arrangements in the energy, health, and maritime port sectors.  Information on these programs and opportunities is published in the local newspapers and the Ministry of Economy’s website (http://www.economy.gov.fj/  )

Responsible Business Conduct (RBC) is increasingly promoted, with both multi-national companies and large local companies practicing RBC through charitable foundations.  Major companies’ advertising often promotes the company’s social benefits or charity sponsorships. There is no official favoring of RBC-friendly businesses, and consumers tend to seek value for money.  The government has included a social responsibility component for SOEs that provide essential utilities.

The law provides criminal penalties for corruption by officials, but the government does not implement the law effectively.  The government established the Fiji Independent Commission Against Corruption (FICAC), which has broad powers of investigation.  FICAC’s public service announcements encouraging citizens to report corrupt government activities have had some effect on systemic corruption.  The media publishes articles on FICAC investigations into abuse of office, and anonymous blogs report on government corruption. However, Fiji’s relatively small population and limited circles of power often lead to personal relationships playing a major role in business and government decisions.

Resources to Report Corruption

NAME: Mr. George Langman
TITLE: Deputy Commissioner
ORGANISATION: Fiji Independent Commission Against Corruption (FICAC)
ADDRESS: P.O. Box 2335, Government Buildings, Suva, FIJI
TELEPHONE NUMBER: (679) 3310290
EMAIL ADDRESS: info@ficac.org.fj

The country held general elections in  November 2018. International observers deemed elections credible and that the result “reflected the will of the people.”  The Public Order Act restricts freedoms of speech, assembly, and movement to preserve public order. The new Online Safety Act has had a chilling effect on free speech in the digital space.  Although there have been human rights concerns in previous years, the possibility of civil disturbances is deemed to be fairly low.

The International Labor Organization (ILO) estimates that Fiji’s labor force in 2018 was estimated to be 379,967.  Education is compulsory until age 17, with male and female students in Fiji achieving largely the same level of education.  According to ILO estimates, the labor force participation rate was estimated at 37.0 percent in 2018. National unemployment in 2017 stood around 6.2 percent, although the rates for youth and women were higher, at 18.6 percent and 8.6 percent respectively.

Fiji continues to face acute labor shortages in a broad range of fields, including the medical, management, engineering, and financial sectors, and to a lesser extent, for competent trade-skilled people in the construction and tourism industries.

The Ministry of Employment, Productivity, and Industrial Relations has responsibility for the administration of labor laws and the encouragement of good labor relations. The Employment Relations (Amendment) Act of 2016 restored the 2007 Employment Relations Promulgation (ERP) as the primary basis for the right of workers to join trade unions.

Trade unions are independent of the government.  The ERP prohibits forced labor, discrimination in employment based on ethnicity, gender, and other prohibited grounds, and stipulates equal remuneration for work of equal value.  There are workplace safety laws and regulations, and safety standards apply equally to both citizens and foreign workers. The national minimum wage rate is USD 1.30 (FJD 2.68).

The U.S. Overseas Private Investment Corporation (OPIC) provides investment insurance in Fiji for qualified applicants, including political risk insurance and loans.  The risks of currency convertibility are safeguarded under Fiji’s foreign exchange regulations. Fiji is a member of the Multilateral Investment Guarantee Agency.

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

* Source for Host Country Data:  U.S. Bureau of Economic Analysis, United Nations Conference on Trade Development

U.S. Embassy Suva
158 Princes Road, Tamavua
P.O. Box 218
Suva, Fiji
(679) 3314466
commercialsuva@state.gov

Policies Towards Foreign Direct Investment

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

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

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

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

Other Investment Policy Reviews

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

Business Facilitation

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

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

Outward Investment

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

Hong Kong has bilateral investment agreements with Australia, Austria, the Belgium-Luxembourg Economic Union, Canada, Chile, Denmark, Finland, France, Germany, Italy, Japan, South Korea, Kuwait, the Netherlands, New Zealand, Sweden, Switzerland, Thailand, the United Kingdom and Association of Southeast Asian Nations (ASEAN). Trade agreements concluded with Australia, Bahrain, Myanmar, Maldives, Mexico, and the United Arab Emirates are currently pending completion of internal procedures by each party concerned. The HKG is currently negotiating agreements with Iran, Turkey and Russia. All such agreements are based on a model text approved by Mainland China through the Sino-British Joint Liaison Group. U.S. firms are generally not at a competitive or legal disadvantage, since Hong Kong’s market is open and its legal system impartial.

Hong Kong has a free trade agreement (FTA) with Mainland China, called the Closer Economic Partnership Arrangement (CEPA). This provides tariff-free export to Mainland China of Hong Kong-origin goods and preferential access for specific services sectors. CEPA has gradually expanded since its signing in 2003. Under the CEPA framework, Hong Kong enjoys liberalized trade in services using a “negative list” that covers 134 service sectors for Hong Kong and grants national treatment to Hong Kong’s 62 service industries. Hong Kong also enjoys most-favored nation treatment, with liberalization measures included in FTAs signed by Mainland China and other countries automatically extended to Hong Kong. In June 2017, Hong Kong and Mainland China signed an investment agreement and an economic and technical cooperation agreement. The investment agreement, effective from January 2018, includes provision of national treatment and non-services investment using a negative list approach.

Hong Kong has FTAs with New Zealand, member states of the European Free Trade Association, Chile, Macau, ASEAN, Georgia, the Maldives, and Australia. These agreements are consistent with the provisions of the WTO. Hong Kong is exploring FTAs with the Pacific Alliance (Chile, Colombia, Mexico and Peru) and the United Kingdom..

The United States does not have a bilateral treaty on the avoidance of double taxation with Hong Kong, but has a Tax Information Exchange Agreement and an Inter-Government Agreement on the Foreign Account Tax Compliance Act with Hong Kong. As of March 2019, the HKG had Comprehensive Avoidance of Double Taxation Agreements with 40 tax jurisdictions. It has signed agreements with fifteen jurisdictions on the automatic exchange of financial account information in tax matters. In September 2018, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters signed by Mainland China entered into force for Hong Kong.

Transparency of the Regulatory System

Hong Kong’s regulations and policies typically strive to avoid distortions or impediments to the efficient mobilization and allocation of capital and to encourage competition. Bureaucratic procedures and “red tape” are transparent and held to a minimum.

In amending or making any legislation, including investment laws, the HKG conducts a three-month public consultation on the issue concerned which then informs the drafting of the bill. Lawmakers discuss draft bills and then vote. Hong Kong’s legal, regulatory, and accounting systems are transparent and consistent with international norms.

Gazette is the official publication of the Hong Kong government. This website https://www.gld.gov.hk/egazette/english/whatsnew/whatsnew.html   is the centralized online location where laws, regulations, draft bills, notices and tenders are published. All public comments received by the HKG are published at the websites of relevant policy bureaus.

The Office of the Ombudsman, established in 1989 by the Ombudsman Ordinance, is Hong Kong’s independent watchdog of public governance.

Public finances are regulated by clear laws and regulations. The Basic Law prescribes that authorities strive to achieve a fiscal balance and avoid deficits. There is a clear commitment by the HKG to publish fiscal information under the Audit Ordinance and the Public Finance Ordinance, which prescribe deadlines for the publication of annual accounts and require the submission of annual spending estimates to the Legislative Council (LegCo). There are few contingent liabilities of the HKG, with details of these items published about seven months after the release of the fiscal budget. In addition, LegCo members have a responsibility to enhance budgetary transparency by urging government officials to explain the government’s rationale for the allocation of resources. All LegCo meetings are open to the public so that the government’s responses are available to the general public.

International Regulatory Considerations

Hong Kong is a member of WTO and Asia-Pacific Economic Co-operation (APEC), adopting international norms. It notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade and was the first WTO member to ratify the Trade Facilitation Agreement (TFA). Hong Kong has achieved a 100 percent rate of implementation commitments.

Legal System and Judicial Independence

Hong Kong’s common law system is based on the rule of law and the independence of the judiciary. Regulations or enforcement actions are appealable and they are adjudicated in the court system.

Hong Kong’s commercial law covers a wide range of issues related to doing business. Most of Hong Kong’s contract law is found in the reported decisions of the courts in Hong Kong and other common law jurisdictions.

Laws and Regulations on Foreign Direct Investment

Hong Kong’s extensive body of commercial and company law generally follows that of the United Kingdom, including the common law and rules of equity. Most statutory law is made locally. The local court system, which is independent of the government, provides for effective enforcement of contracts, dispute settlement, and protection of rights. Foreign and domestic companies register under the same rules and are subject to the same set of business regulations.

The Hong Kong Code on Takeovers and Mergers (1981) sets out general principles for acceptable standards of commercial behavior.

The Companies Ordinance (Chapter 622) applies to Hong Kong-incorporated companies and contains the statutory provisions governing compulsory acquisitions. For companies incorporated in jurisdictions other than Hong Kong, relevant local company laws apply. Effective from March 2018, the Companies Ordinance requires companies to retain information about significant controllers accurate and up-to-date.

The Securities and Futures Ordinance (Chapter 571) contains provisions requiring shareholders to disclose interests in securities in listed companies and provides listed companies with the power to investigate ownership of interests in its shares. It regulates the disclosure of inside information by listed companies and restricts insider dealing and other market misconduct.

Competition and Anti-Trust Laws

The independent Competition Commission (CC) investigates anti-competitive conduct that prevents, restricts, or distorts competition in Hong Kong. In January 2019, a newly-established Hong Kong Seaport Alliance (HKSA) announced that they had agreed to operate and manage 23 berths, a reported market share of 95 percent, across eight terminals at Kwai Tsing Container Terminal in a bid to deliver more efficient services to carriers and enhance the overall port’s competitiveness.  The CC subsequently launched, as a matter of priority, a probe into whether the HKSA acted in contravention of competition rules. The investigation is still underway.

Expropriation and Compensation

The U.S. Consulate General is not aware of any expropriations in the recent past. Expropriation of private property in Hong Kong may occur if it is clearly in the public interest and only for well-defined purposes such as implementation of public works projects. Expropriations are to be conducted through negotiations, in a non-discriminatory manner in accordance with established principles of international law. Investors in and lenders to expropriated entities are to receive prompt, adequate, and effective compensation. If agreement cannot be reached on the amount payable, either party can refer the claim to the Land Tribunal.

Dispute Settlement

ICSID Convention and New York Convention

The Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) apply to Hong Kong.  Hong Kong’s Arbitration Ordinance provides for enforcement of awards under the 1958 New York Convention.

Investor-State Dispute Settlement

The U.S. Consulate General is not aware of any investor-state disputes in recent years involving U.S. or other foreign investors or contractors and the HKG. Private investment disputes are normally handled in the courts or via private mediation. Alternatively, disputes may be referred to the Hong Kong International Arbitration Center.

International Commercial Arbitration and Foreign Courts

The HKG accepts international arbitration of investment disputes between itself and investors and has adopted the United Nations Commission on International Trade Law model law for domestic and international commercial arbitration. It has with Mainland China a Memorandum of Understanding modelled on the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) for reciprocal enforcement of arbitral awards.

Under Hong Kong’s Arbitration Ordinance emergency relief granted by an emergency arbitrator before the establishment of an arbitral tribunal, whether in or outside Hong Kong, is enforceable. In January 2018, the Arbitration Ordinance clarified that all disputes over intellectual property rights may be resolved by arbitration.

The Mediation Ordinance details the rights and obligations of participants in mediation, especially related to confidentiality and admissibility of mediation communications in evidence.

Third party funding for arbitration and mediation came into force on February 1, 2019.

Foreign judgments in civil and commercial matters may be enforced in Hong Kong by common law or under the Foreign Judgments (Reciprocal Enforcement) Ordinance, which facilitates reciprocal recognition and enforcement of judgments on the basis of reciprocity. A judgment originating from a jurisdiction that does not recognize a Hong Kong judgment may still be recognized and enforced by the Hong Kong courts, provided that all the relevant requirements of common law are met. However, a judgment will not be enforced in Hong Kong if it can be shown that either the judgment or its enforcement is contrary to Hong Kong’s public policy.

In January 2019, Hong Kong and Mainland China signed a new Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of Hong Kong to facilitate enforcement of judgments in the two jurisdictions. The arrangement, which is pending implementing legislation, will cover the following key features: contractual and tortious disputes in general; commercial contracts, joint venture disputes, and outsourcing contracts; intellectual property rights, matrimonial or family matters; and judgments related to civil damages awarded in criminal cases.

Bankruptcy Regulations

Hong Kong’s Bankruptcy Ordinance provides the legal framework to enable i) a creditor to file a bankruptcy petition with the court against an individual, firm, or partner of a firm who owes him/her money; and ii) a debtor who is unable to repay his/her debts to file a bankruptcy petition against himself/herself with the court. Bankruptcy offences are subject to criminal liability.

The Companies (Winding Up and Miscellaneous Provisions) (Amendment) Bill, enacted in February 2017, aims to improve and modernize the corporate winding-up regime by increasing creditor protection and further enhancing the integrity of the winding-up process.

The Commercial Credit Reference Agency collates information about the indebtedness and credit history of SMEs and makes such information available to members of the Hong Kong Association of Banks and the Hong Kong Association of Deposit Taking Companies.

Hong Kong’s average duration of bankruptcy proceedings is 0.8 year, ranking 44th in the world for resolving insolvency, according to the World Bank’s Doing Business 2019 rankings.

Investment Incentives

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

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

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

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

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

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

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

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

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

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

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

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

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

Performance and Data Localization Requirements

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

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

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

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

Real Property

The Basic Law ensures protection of leaseholders’ rights in long-term leases that are the basis of the SAR’s real property system.  The Basic Law also protects the lawful traditional rights and interests of the indigenous inhabitants of the New Territories. The real estate sector, one of Hong Kong’s pillar industries, is equipped with a sound banking mortgage system. HK ranked 53rd for ease of registering property, according to the World Bank’s Doing Business 2019 rankings.

Land transactions in Hong Kong operate on a deeds registration system governed by the Land Registration Ordinance. The Land Titles Ordinance provides greater certainty on land title and simplifies the conveyancing process.

Intellectual Property Rights

Hong Kong’s commercial and company laws provide for effective enforcement of contracts and protection of corporate rights. Hong Kong has filed its notice of compliance with the Trade-Related Aspects of Intellectual Property Rights (TRIPs) requirements of the WTO. The Intellectual Property Department, which includes the Trademarks and Patents Registries, is the focal point for the development of Hong Kong’s IP regime. The Customs and Excise Department (CED) is the sole enforcement agency for intellectual property rights (IPR). Hong Kong has acceded to the Paris Convention for the Protection of Industrial Property, the Bern Convention for the Protection of Literary and Artistic Works, and the Geneva and Paris Universal Copyright Conventions. Hong Kong also continues to participate in the World Intellectual Property Organization as part of Mainland China’s delegation; the HKG has seconded an officer from CED to INTERPOL in Lyon, France to further collaborate on IPR enforcement.

The HKG devotes significant resources to IPR enforcement. Hong Kong courts have imposed longer jail terms than in the past for violations of Hong Kong’s Copyright Ordinance. CED works closely with foreign customs agencies and the World Customs Organization to share best practices and to identify, disrupt, and dismantle criminal organizations engaging in IP theft that operate in multiple countries. The government has conducted public education efforts to encourage respect for IPR. Pirated and counterfeit products remain available on a small scale at the retail level throughout Hong Kong. CED detected a total of 951 infringement cases in 2018, a four percent increase from 2017. Of these cases, 207 involved internet crime.

Other IPR challenges include end-use piracy of software and textbooks, internet peer-to-peer downloading, and the illicit importation and transshipment of pirated and counterfeit goods from Mainland China and other places in Asia. Hong Kong authorities have taken steps to address these challenges by strengthening collaboration with Mainland Chinese authorities, prosecuting  end-use software piracy, and monitoring suspect shipments at points of entry. It has also established a task force to monitor and crack down on internet-based peer-to-peer piracy.

The Drug Office of Hong Kong imposes a drug registration requirement that requires applicants for new drug registrations make a non-infringement patent declaration. The Copyright Ordinance protects any original copyrighted work created or published anywhere in the world and criminalizes  copying and distribution of protected works for business and circumventing technological protection measures. The Ordinance also provides rental rights for sound recordings, computer programs, films, and comic books; in addition to including enhanced penalty provisions and other legal tools to facilitate enforcement. The law defines possession of an infringing copy of computer programs, movies, TV dramas, and musical recordings (including visual and sound recordings) for use in business as an offense, but provides no criminal liability for other categories of works. In February 2019, the HKG announced that it would introduce to LegCo an amendment bill to implement the Marrakesh Treaty.

The HKG has consulted unsuccessfully with internet service providers and content user representatives on a voluntary framework for IPR protection in the digital environment. It has also failed to pass amendments to the Copyright Ordinance that would enhance copyright protection against online piracy. As of March 2018, the Infringing Website List Scheme established by the Hong Kong Creative Industries Association to clamp down on websites that display pirated content reportedly has deprived infringers of USD 833,000 monthly, or 24 percent of overall monthly advertising revenue, since December 2016.

The Patent Ordinance allows for granting an independent patent in Hong Kong based on patents granted by the United Kingdom and Mainland China. Patents granted in Hong Kong are independent and capable of being tested for validity, rectified, amended, revoked, and enforced in Hong Kong courts. In June 2016, the LegCo passed an “original grant patent” (OPG) bill that,  while retaining the current re-registration system for the granting of standard patents, takes into account the patent systems generally established in regional and international patent treaties. The HKG will implement the OGP system in 2019 upon the completion of all preparatory work.

The Registered Design Ordinance is modeled on the EU design registration system. To be registered, a design must be new and the system requires no substantive examination. The initial period of five years protection is extendable for four periods of five years each, up to 25 years.

Hong Kong’s trademark law is TRIPS-compatible and allows for registration of trademarks relating to services. All trademark registrations originally filed in Hong Kong are valid for seven years and renewable for 14-year periods. Proprietors of trademarks registered elsewhere must apply anew and satisfy all requirements of Hong Kong law. When evidence of use is required, such use must have occurred in Hong Kong. In March 2019, the HKG introduced into LegCo a draft bill to implement the Madrid Protocol. Upon enactment of the bill and completion of other preparatory work, the HKG will liaise with the Mainland to seek application of the Madrid Protocol to Hong Kong beginning in 2022.

Hong Kong has no specific ordinance to cover trade secrets; however, the government has a duty under the Trade Descriptions Ordinance to protect information from being disclosed to other parties. The Trade Descriptions Ordinance prohibits false trade descriptions, forged trademarks, and misstatements regarding goods and services supplied in the course of trade.

The HKG has accepted recommendations from a 2015 report by the Working Group on IP and set aside about USD 3 million in the coming three years to introduce new support measures. In June 2018, a bill expanding from five categories to eight the scope of tax deductions for capital expenditure incurred for the purchase of IP rights came into force.

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

Capital Markets and Portfolio Investment

There are no impediments to the free flow of financial resources. Non-interventionist economic policies, complete freedom of capital movement, and a well-understood regulatory and legal environment make Hong Kong a regional and international financial center. It has one of the most active foreign exchange markets in Asia.

Asset and wealth managed in Hong Kong posted a record high of USD 3.1 trillion in 2017 (the latest figure available), with two-thirds of that coming from overseas investors. In order to enhance the competitiveness of Hong Kong’s fund industry, open-ended fund companies as well as onshore and offshore funds are offered a profits tax exemption.

The HKMA’s Infrastructure Financing Facilitation Office (IFFO) provides a platform for pooling the efforts of investors, banks, and the financial sector to offer comprehensive financial services for infrastructure projects in emerging markets. In March 2018, IFFO joined the Global Infrastructure Facility as an advisory partner, contributing to the World Bank Group and international efforts to help make more infrastructure projects bankable.

Under the Insurance Companies Ordinance, insurance companies are authorized by the Insurance Authority to transact business in Hong Kong. As of January 2019, there were 162 authorized insurance companies in Hong Kong, 73 of them foreign or Mainland Chinese companies.

The Hong Kong Stock Exchange’s total market capitalization dropped by 12.0 percent to USD 3.8 trillion in 2018, with 2,315 listed firms at year-end. Hong Kong Exchanges and Clearing Limited, a listed company, operates the stock and futures exchanges. The Securities and Futures Commission, an independent statutory body outside the civil service, has licensing and supervisory powers to ensure the integrity of markets and protection of investors.

No discriminatory legal constraints exist for foreign securities firms establishing operations in Hong Kong via branching, acquisition, or subsidiaries.  Rules governing operations are the same for all firms. No laws or regulations specifically authorize private firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation, or control.

In 2018, a total of 267 Chinese enterprises had “H” share listings on the stock exchange, with combined market capitalization of USD 761.8 billion. The Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connects allow individual investors to cross trade Hong Kong and Mainland stocks. In December 2018, the ETF Connect, which was planned to allow international and mainland investors to trade in exchange-traded fund products listed in Hong Kong, Shanghai and Shenzhen, was put on hold indefinitely due to “technical issues.”

By the end of 2018, 50 Mainland mutual funds and 17 Hong Kong mutual funds were allowed to be distributed in each other’s markets through the Mainland-Hong Kong Mutual Recognition of Funds scheme. Hong Kong also has mutual recognition of funds programs with Switzerland, France, the United Kingdom, and Luxembourg.

Hong Kong has developed its debt market with the Exchange Fund bills and notes program. Hong Kong Dollar debt stood at USD 236.5 billion by the end of 2018. As of January 2019, RMB 871.2 billion (USD 129.6 billion) of offshore RMB bonds were issued in Hong Kong. Multinational enterprises, including McDonald’s and Caterpillar, have also issued debt. The Bond Connect, a new mutual market access scheme that allows investors from Mainland China and overseas to trade in each other’s respective bond markets, was launched in July 2017.

The HKG requires workers and employers to contribute to retirement funds under the Mandatory Provident Fund (MPF) scheme. Contributions are expected to channel roughly USD five billion annually into various investment vehicles. By the end of 2018, the net asset values of MPF funds amounted to USD 104.2 billion.

Money and Banking System

Hong Kong has a three-tier system of deposit-taking institutions: licensed banks (152), restricted license banks (18), and deposit-taking companies (16). HSBC is Hong Kong’s largest banking group. With its majority-owned subsidiary Hang Seng Bank, HSBC controls more than 40.3 percent of Hong Kong Dollar (HKD) deposits. The Bank of China (Hong Kong) is the second-largest banking group with 13.9 percent of HKD deposits throughout 200 branches. In total, the five largest banks in Hong Kong had more than USD 1.7 trillion in total assets at the end of 2017. Thirty-five U.S. “authorized financial institutions” operate in Hong Kong, and most banks in Hong Kong maintain U.S. correspondent relationships. Full implementation of the Basel III capital, liquidity, and disclosure requirements is expected in 2019.

Credit in Hong Kong is allocated on market terms and is available to foreign investors on a non-discriminatory basis. The private sector has access to the full spectrum of credit instruments as provided by Hong Kong’s banking and financial system. Legal, regulatory, and accounting systems are transparent and consistent with international norms. The HKMA, the de facto central bank, is responsible for maintaining the stability of the banking system and managing the Exchange Fund that backs Hong Kong’s currency. Real Time Gross Settlement helps minimize risks in the payment system and brings Hong Kong in line with international standards.

Banks in Hong Kong have in recent years strengthened anti-money laundering and counter-terrorist financing controls, including the adoption of more stringent customer due diligence (CDD) process for existing and new customers. In September 2016, the HKMA issued a circular stressing that “CDD measures adopted by banks must be proportionate to the risk level and banks are not required to implement overly stringent CDD processes.”

The HKMA welcomes the establishment of virtual banks, which are subject to the same set of supervisory principles and requirements applicable to conventional banks. In May 2018, HKMA issued guidelines on authorization of virtual banks, giving priority to those applicants demonstrating, among other requirements, that they have a credible and viable business plan to provide new customer experience and to promote financial inclusion and fintech development. In March 2019, the HKMA granted three virtual banking licenses, with five more applications under consideration.

In March 2016, the HKMA set up the Fintech Facilitation Office (FFO) to promote Hong Kong as a fintech hub in Asia. Seven banks in Hong Kong have joined an HKMA-led blockchain-based trade finance proof-of-concept to digitize and share trade documents, automate processes and reduce risks and fraud. In 2018, the HKMA signed four fintech co-operation agreements with the regulatory authorities of Switzerland, Poland, Abu Dhabi, and Brazil.

Foreign Exchange and Remittances

Foreign Exchange

Conversion and inward/outward transfers of funds are not restricted. The HKD is a freely convertible currency linked via de facto currency board to the U.S. dollar.  The exchange rate is allowed to fluctuate in a narrow band between HKD 7.75 – HKD 7.85 = USD 1.

Remittance Policies

There are no recent changes to or plans to change investment remittance policies. Hong Kong has no restrictions on the remittance of profits and dividends derived from investment, nor reporting requirements on cross-border remittances. Foreign investors bring capital into Hong Kong and remit it through the open exchange market.

Hong Kong has anti-money laundering (AML) legislation allowing the tracing and confiscation of proceeds derived from drug-trafficking and organized crime. Hong Kong has an anti-terrorism law that allows authorities to freeze funds and financial assets belonging to terrorists. Effective from July 2018, travelers arriving in Hong Kong with currency or bearer negotiable instruments (CBNIs) exceeding HKD 120,000 (USD 15,385) must make a written declaration to the CED. For a large quantity of CBNIs imported or exported in a cargo consignment, an advanced electronic declaration must be made to the CED.

Sovereign Wealth Funds

The Future Fund, Hong Kong’s wealth fund, was established in 2016 with an endowment of USD 28.2 billion. The fund seeks higher returns through long-term investments and adopts a “passive” role as a portfolio investor. About half of the Future Fund has been deployed in alternative assets, mainly global private equity and overseas real estate, over a three-year period. The rest is placed with the Exchange Fund’s Investment Portfolio, which follows the Santiago Principles, for an initial ten-year period. In February 2019, the Financial Secretary announced that an expert team will review the fund’s investment strategies and portfolios to achieve more diversified investments.

Hong Kong has several major HKG-owned enterprises, which are classified as “statutory bodies.” Hong Kong is party to the Government Procurement Agreement (GPA) within the framework of WTO. Annex 3 of the GPA lists as statutory bodies the Housing Authority, Hospital Authority, Airport Authority, Mass Transit Railway Corporation Limited, and the Kowloon-Canton Railway Corporation, which procure in accordance with the agreement.

The HKG provides more than half the population with subsidized housing, along with most hospital and education services from childhood through the university level. The government also owns major business enterprises, including the stock exchange, railway, and airport.

Conflicts occasionally arise between the government’s roles as owner and policy-maker. Industry observers have recommended that the government establish a separate entity to coordinate its ownership of government-held enterprises and initiate a transparent process of nomination to the boards of government-affiliated entities. Other recommendations from the private sector include establishing a clear separation between industrial policy and the government’s ownership function, and minimizing exemptions of government-affiliated enterprises from general laws.

The 2012 Competition Law exempts all but six of the statutory bodies from the law’s purview. While the government’s private sector ownership interests do not materially impede competition in Hong Kong’s most important economic sectors, industry representatives have encouraged the government to adhere more closely to the Guidelines on Corporate Governance of State-owned Enterprises of the Organization for Economic Cooperation and Development (OECD).

Privatization Program

All major utilities in Hong Kong, except water, are owned and operated by private enterprises, usually under an agreement framework by which the HKG regulates each utility’s management.

The Hong Kong Corporate Citizenship Program (HKCCP) organizes a series of activities and seminars and grants awards for good corporate citizenship. Amendments to the Companies Ordinance mandate listed companies and larger private companies to report on their corporate environmental policies and performances. The Hong Kong Stock Exchange adopts a higher standard of disclosure – ‘comply or explain’ – about its environmental key performance indicators for listed companies. In January 2019, the Chinese University of Hong Kong’s Center for Business Sustainability announced results of Hong Kong Business Sustainability Index (HKBSI), which aims to encourage companies in Hong Kong to adopt corporate social responsibility (CSR) as a progressive business model to achieve business sustainability. The results show that there is a heightened awareness of business sustainability and increased efforts to implement CSR practices. Hong Kong is not a member of the OECD, and hence, OECD Guidelines for Multinational Enterprises are not applicable to Hong Kong companies. The HKG, however, commends enterprises for fulfilling their social responsibility. In October 2018, the Chief Secretary stressed in a speech that the entire HKG is moving towards CSR.

Mainland China ratified the United Nations Convention Against Corruption in January 2006, and it was extended to Hong Kong in February 2006. Hong Kong has an excellent track record in combating corruption and U.S. firms have not identified corruption as an obstacle to FDI. The Independent Commission Against Corruption (ICAC) is responsible for combating corruption. A bribe to a foreign official is a criminal act, as is the giving or accepting of bribes, for both private individuals and government employees. Offences are punishable by imprisonment and large fines.

The Hong Kong Ethics Development Center (HKEDC), established by the ICAC, promotes business and professional ethics to sustain a level-playing field in Hong Kong. The International Good Practice Guidance – Defining and Developing an Effective Code of Conduct for Organizations of the Professional Accountants in Business Committee published by the International Federation of Accountants (IFAC) and is in use with the permission of IFAC.

Resources to Report Corruption

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

Simon Pei, Commissioner
Independent Commission Against Corruption
303 Java Road, North Point, Hong Kong
+852-2826-3111
Email: com-office@icac.org.hk

Hong Kong is politically stable, with demonstrations almost always peaceful. The U.S. Consulate General is not aware of recent incidents involving politically motivated damage to projects or installations.

Hong Kong’s unemployment rate stood at 2.8 percent in the fourth quarter of 2018, with the unemployment rate of youth aged 15-19 rising slightly to 8.9 percent. In 2018, skilled personnel working as administrators, managers, professionals, and associate professionals accounted for 40.4 percent of the total working population. At the end of 2018, there were about 381,000 foreign domestic helpers working in Hong Kong. In 2018, about 22,087 foreign professionals came to work in the city. The Employees Retraining Board provides skills re-training for local employees. To address a shortage of highly skilled technical and financial professionals, the HKG seeks to attract qualified foreign and Mainland Chinese workers.

The Employment Ordinance (EO) and the Employees’ Compensation Ordinance prohibit the termination of employment in certain circumstances: 1) Any pregnant employee who has at least four weeks’ service and who has served notice of her pregnancy; 2) Any employee who is on paid statutory sick leave and; 3) Any employee who gives evidence or information in connection with the enforcement of the EO or relating to any accident at work, cooperates in any investigation of his employer, is involved in trade union activity, or serves jury duty may not be dismissed because of those circumstances. Breach of these prohibitions is a criminal offence.

According to the EO, someone employed under a continuous contract for not less than 24 months is eligible for severance payment if: 1) dismissed by reason of redundancy; 2) under a fixed term employment contract that expires without being renewed due to redundancy; or 3) laid off.

Unemployment benefits are income and asset tested on an individual basis if living alone; if living with other family members, the total income and assets of all family members are taken into consideration for eligibility. Recipients must be between the ages of 15-59, capable of work, and actively seeking full-time employment.

Parties in a labor dispute can consult the free and voluntary conciliation service offered by the Labor Department (LD). A conciliation officer appointed by the LD will help parties reach a contractually binding settlement. If there is no settlement, parties can commence proceedings with the Labor Tribunal (LT), which can then be raised to the Court of First Instance and finally the Court of Appeal for leave to appeal. The Court of Appeal can grant leave only if the case concerns a question of law of general public importance.

Local law provides for the rights of association and of workers to establish and join organizations of their own choosing. The government does not discourage or impede the formation of unions. As of 2017, Hong Kong’s 836 registered unions had 904,210 members, a participation rate of about 25.0 percent. Its labor legislation is in line with international laws. Hong Kong has implemented 41 conventions of the International Labor Organization in full and 18 others with modifications. Workers who allege discrimination against unions have the right to a hearing by the Labor Relations Tribunal. Legislation protects the right to strike. Collective bargaining is not protected by Hong Kong law; there is no obligation to engage in it; and it is not widely used. For more information on labor regulations in Hong Kong, please visit the following website: http://www.labour.gov.hk/eng/legislat/contentA.htm   (Chapter 57 “Employment Ordinance”).

In October 2018, new amendments to the EO came into force giving the LT the power to make an order for reinstatement or re-engagement without securing the employer’s approval if it deems an employee has been unreasonably and unlawfully dismissed. If the employer does not reinstate or re-engage the employee as required by the order, the employer must pay to the employee a sum amounting to three times the employee’s average monthly wages up to USD 9,300. The employer commits an offence if he/she willfully and without reasonable excuse fails to pay the additional sum.

Starting from January 2019, male employees with are entitled to five days’ paternity leave (increased from three days).

Effective May 1 2019, the statutory minimum hourly wage rate will increase from USD 4.4 to USD 4.8.

Overseas Private Investment Corporation coverage is not available in Hong Kong. Hong Kong is a member of the World Bank Group’s Multilateral Investment Guarantee Agency.

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

* Source for Host Country Data: Hong Kong Census and Statistics Department

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Alan Brinker, Consul, Economic Affairs
U.S. Consulate General Hong Kong
26 Garden Road, Central

Policies Towards Foreign Direct Investment

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

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

Other Investment Policy Reviews

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

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

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

Business Facilitation

Business Registration

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

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

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

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

Screening of FDI

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

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

Outward Investment

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

Indonesia has investment agreements with 41countries, including: Algeria, Australia, Bangladesh, Chile, Croatia, Cuba, Czech Republic, Guyana, Iran,  Jamaica, Jordan, Libya, Mauritius, Mongolia, Morocco, Mozambique, Norway, Pakistan, Philippines, Poland, Qatar, Russia, Saudi Arabia, Serbia, Slovak Republic, South Korea, Sri Lanka, Sudan, Suriname, Syria, Sweden, Tajikistan, Thailand, Tunisia, Turkmenistan, Ukraine, United Kingdom, Uzbekistan, Venezuela, Yemen, and Zimbabwe.

In 2014, Indonesia began to abrogate its existing BITs by allowing the agreements to expire. By 2018, 26 BITs had expired, including those with Argentina, Belgium, Bulgaria, Cambodia, China, Denmark, Egypt, France, Finland, Germany, Hungary, India, Italy, Kyrgyzstan, Laos, Malaysia, Netherlands, Norway, Pakistan, Romania, Singapore, Spain, Slovakia, Switzerland, Turkey, and Vietnam. However, Indonesia renewed its BIT with Singapore in October 2018. Indonesia is currently developing a new model BIT that could limit the scope of Investor-State Dispute Settlement provisions.

The ASEAN Economic Community (AEC) arrangement came into effect on January 1, 2016, and was expected to reduce barriers for goods, services and some skilled employees across ASEAN. Under the ASEAN Free Trade Agreement, duties on imports from ASEAN countries generally range from zero to five percent, except for products specified on exclusion lists. Indonesia also provides preferential market access to Australia, China, Japan, Korea, India, Pakistan, and New Zealand under regional ASEAN agreements and to Japan under a bilateral agreement. In accordance with the ASEAN-China Free Trade Agreement (FTA), in August 2012 Indonesia increased the number of goods from China receiving duty-free access to 10,012 tariff lines. Indonesia is also participating in negotiations for the Regional Comprehensive Economic Partnership (RCEP), which includes the 10 ASEAN Member States and 6 additional countries (Australia, China, India, Japan, Korea and New Zealand). In February 2019, RCEP entered the 25^th round of negotiations, which included discussion on trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, dispute settlement, e-commerce, SMEs and other issues. In March 2019, ASEAN and Japan signed the First Protocol to Amend their Comprehensive Economic Partnership Agreement.

Indonesia has been actively engaged in bilateral FTA negotiations. In 2018, Indonesia signed trade agreements with Australia, Chile, and the European Free Trade Association (Iceland, Liechtenstein, Norway, and Switzerland). Indonesia is currently negotiating bilateral trade agreements with the European Union, Iran, Japan, Malaysia, Morocco, Mozambique, South Korea, Tunisia, and Turkey. In addition, Indonesia seeks to initiate trade negotiations with Bangladesh, Sri Lanka, the Gulf Cooperation Council, South Africa, and Kenya.

The United States and Indonesia signed the Convention between the Government of the Republic of Indonesia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of the Fiscal Evasion with Respect to Taxes on Income in Jakarta on July 11, 1988. This was amended with a Protocol, signed on July 24, 1996. There is no double taxation of personal income.

Transparency of the Regulatory System

Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms, but progress is slow.  Notable developments included passage of a comprehensive anti-money laundering law in late 2010 and a land acquisition law in January 2012. Although Indonesia continues to move forward with regulatory system reforms foreign investors have indicated to still encounter challenges in comparison to domestic investors, and have criticized the current regulatory system in its function to establish clear and transparent rules for all actors.  Certain laws and policies, including the Negative Investment List, establish sectors that are either fully off-limits to foreign investors or are subject to substantive conditions.

Decentralization has introduced another layer of bureaucracy for firms to navigate, resulting in what companies have identified as costly red tape.  Certain business claim that Indonesia encounters challenges in launching bureaucratic reforms due to ineffective management, resistance from vested interests, and corruption. U.S. businesses cite regulatory uncertainty and a lack of transparency as two significant factors hindering operations. Government ministries and agencies, including the Indonesian House of Representatives (DPR), continue to publish many proposed laws and regulations in draft form for public comment; however, not all draft laws and regulations are made available in public fora and it can take years for draft legislation to become law.  Laws and regulations are often vague and require substantial interpretation by the implementers, leading to business uncertainty and rent-seeking opportunities.

U.S. companies note that regulatory consultation in Indonesia is inconsistent, at best, despite the existence of Law No. 12/2011 on the Development of Laws and Regulations and its implementing Government regulation 87/204, which states that the community is entitled to provide oral or written input into draft laws and regulations. The law also sets out procedures for revoking regulations and introduces requirements for academic studies as a basis for formulating laws and regulations. Nevertheless, the absence of a formal consultation mechanism has been reported to lead to different interpretations among policy makers of what is required.

In June 2016, the Jokowi administration repealed 3,143 regional bylaws that overlapped with other regulations and impeded the ease of doing business. However, a 2017 Constitutional Court ruling limited the Ministry of Home Affairs’ authority to revoke local regulations and allowed local governments to appeal the central government’s decision. The Ministry continues to play a consultative function in the regulation drafting stage, providing input to standardize regional bylaws with national laws.

In November 2017, the government issued Presidential Instruction No. 7/2017, which aims to improve the coordination among ministries in the policy-making process. The new regulation requires lead ministries to coordinate with their respective coordinating ministry before issuing a regulation. Presidential Instruction No. 7 also requires Ministries to conduct a regulatory impact analysis and provide an opportunity for public consultation. The presidential instruction did not address the frequent lack of coordination between the central and local governments. Pursuant to various Indonesian economy policy reform packages over the past several years, the government has eliminated 220 regulations as of September 2018. Fifty-one of the eliminated regulations are at the Presidential level and 169 at the ministerial or institutional level.

In July 2018, President Jokowi issued Presidential Regulation No. 54/2018, updating and streamlining the National Anti-Corruption Strategy to synergize corruption prevention efforts across ministries, regional governments, and law enforcement agencies. The regulation focuses on three areas: licenses, state finances (primarily government revenue and expenditures), and law enforcement reform. An interagency team, including KPK, leads the national strategy’s implementation efforts.

In October 2018, the government issued Presidential Regulation No. 95/2018 on e-government that requires all levels of government (central, provincial, and municipal) to implement online governance tools (e-budgeting, e-procurement, e-planning) to improve budget efficiency, government transparency, and the provision of public services.

International Regulatory Considerations

As a member of ASEAN, Indonesia has successfully implemented regional initiatives, including ratification of the legal protocol and becoming one of the first five ASEAN Member States to implement real-time movement of electronic import documents through the ASEAN Single Window, which reduces shipping costs, speeds customs clearance, and reduces opportunities for corruption.  Indonesia has also committed to ratify the ASEAN Comprehensive Investment Agreement (ACIA), ASEAN Framework Agreement on Services (AFAS), and the ASEAN Mutual Recognition Arrangement. Notwithstanding progress made in certain areas, the often-lengthy process of aligning national legislation has caused delays in implementation. The complexity of interagency coordination and/or a shortage of technical capacity are among the challenges being reported.

Indonesia joined the WTO in 1995. Indonesia’s National Standards Body (BSN) is the primary government agency to notify draft regulations to the WTO concerning technical barriers to trade (TBT) and sanitary and phytosanitary standards (SPS); however, in practice, notification is inconsistent.

In December 2017, Indonesia ratified the WTO Trade Facilitation Agreement (TFA). At this point, Indonesia has met 88.7 percent of its commitments to the TFA provisions, including publication and availability information, consultations, advance ruling, review procedure, detention and test procedure, fee and charges discipline, goods clearance, border agency cooperation, import/export formalities, and goods transit.

Legal System and Judicial Independence

Indonesia’s legal system is based on civil law. The court system consists of District Courts (primary courts of original jurisdiction), High Courts (courts of appeal), and the Supreme Court (the court of last resort). Indonesia also has a Constitutional Court. The Constitutional Court has the same legal standing as the Supreme Court, and its role is to review the constitutionality of legislation. Both the Supreme and Constitutional Courts have authority to conduct judicial reviews. Many businesses have noted that the judiciary is susceptible to corruption and influence from outside parties.

Certain companies have claimed that the court system often does not provide the necessary recourse for resolving property and contractual disputes and that cases that would be adjudicated in civil courts in other jurisdictions sometimes result in criminal charges in Indonesia. Judges are not bound by precedent and many laws are open to various interpretations. According to the U.S. industry, corruption also continues to plague Indonesia’s judiciary, with graft investigations involving senior judges and court staff.

A lack of clear land titles has plagued Indonesia for decades, although the land acquisition law No.2/2012 enacted in 2012 included legal mechanisms designed to resolve some past land ownership issues. In addition, companies find Indonesia to have a poor track record on the legal enforcement of contracts, and civil disputes are sometimes criminalized. Government Regulation No. 79/2010 opened the door for the government to remove recoverable costs from production sharing contracts. Indonesia has also required mining companies to renegotiate their contracts of work to include higher royalties, more divestment to local partners, more local content, and domestic processing of mineral ore.

Indonesia’s commercial code, grounded in colonial Dutch law, has been updated to include provisions on bankruptcy, intellectual property rights, incorporation and dissolution of businesses, banking, and capital markets. Application of the commercial code, including the bankruptcy provisions, remains uneven, in large part due to corruption and training deficits for judges, prosecutors, and defense lawyers.

Laws and Regulations on Foreign Direct Investment

FDI in Indonesia is regulated by Law No. 25/2007 (the Investment Law). Under the law, any form of FDI in Indonesia must be in the form of a limited liability company, with the foreign investor holding shares in the company. In addition, the government outlines restrictions on FDI in Presidential Decree No. 44/2016, issued in May 2016, commonly referred to as the 2016 Negative Investment List. It aims to consolidate FDI restrictions in certain sectors from numerous decrees and regulations to provide greater certainty for foreign and domestic investors. The 2016 Negative Investment List enables greater foreign investment in some sectors like film, tourism, logistics, health care, and e-commerce. A number of sectors remain closed to investment or are otherwise restricted. The 2016 Negative List contains a clause that clarifies that existing investments will not be affected by the 2016 revisions. The website of the Investment Coordination Board (BKPM) provides information on investment requirements and procedures: http://www2.bkpm.go.id/ .  Indonesia mandates reporting obligations for all foreign investors through BKPM Regulation No.7/2018.  See section two for Indonesia’s procedures for licensing foreign investment.

Competition and Anti-Trust Laws

The Indonesian Competition Authority (KPPU) implements and enforces the 1999 Indonesia Competition Law. The KPPU reviews agreements, business practices and mergers that may be deemed anti-competitive, advises the government on policies that may affect competition, and issues guidelines relating to the Competition Law. Strategic sectors such as food, finance, banking, energy, infrastructure, health, and education are KPPU’s priorities. In April 2017, the Indonesia DPR began deliberating a new draft of the Indonesian antitrust law, which would repeal the current Law No. 5/1999 and strengthen KPPU’s enforcement against monopolistic practices and unfair business competition.

Expropriation and Compensation

The Indonesian government generally recognizes and upholds the property rights of foreign and domestic investors. The 2007 Investment Law opened major sectors of the economy to foreign investment, while providing investors protection from nationalization, except where corporate crime is involved. However, Indonesian economic nationalism and an oft-stated desire for “self-sufficiency” continues to manifest itself through negotiations, policies, regulations, and laws in way that companies describe as eroding investor value. These include local content requirements, requirements to divest equity shares to Indonesian stakeholders, and requirements to establish manufacturing or processing facilities in Indonesia.

In 2012, the government issued a regulation requiring foreign-owned mining operations to divest majority equity to Indonesian shareholders within 10 years of operational startup using cost of investment incurred, rather than market value, for purposes of divestment valuation. In 2014, with Regulation No. 77/2014, the government eased the foreign ownership restrictions to 60 percent for companies that smelt domestically (40 percent divestment) and 70 percent for companies that operate underground mines (30 percent divestment). However, regulations enacted in 2017 again require foreign-owned miners to gradually divest over ten years 51 percent of shares to Indonesian interests, with the price of divested shares determined based on fair market value and not taking into account existing reserves. The government has indicated it intends the majority-share divestment requirement to supersede Regulation No. 77/2014 and apply to all foreign investors in the sector. Based on the 2009 Mining Law, all mining contracts of work must be renegotiated to alter the terms to more favor the government, including royalty and tax rates, local content levels, domestic processing of minerals, and reduced mine areas. Some mining companies had to reduce the size of their original mining work area without compensation.

In general, Indonesia’s rising resource nationalism advances the idea that domestic interests should not have to pay prevailing market prices for domestic resources. In addition, in the oil and gas sector, the government is increasingly explicit in its policy that expiring production sharing contracts operated by foreign companies be transferred to domestic interests rather than extended. While there is no obligation of compensation under the production sharing contract, this policy has begun to affect the Indonesian business interests of foreign companies.

The Law on Land Acquisition Procedures for Public Interest Development passed in 2011 sought to streamline government acquisition of land for infrastructure projects. The law seeks to clarify roles, reduce the time frame for each phase of the land acquisition process, deter land speculation, and curtail obstructionist litigation, while still ensuring safeguards for land-right holders. The implementing regulations went into effect in 2015. Some reports indicate that the law has reduced land acquisition timelines, with no accusations of illegal government expropriation of land.

Dispute Settlement

ICSID Convention and New York Convention

Indonesia is a member of the International Center for Settlement of Investment Disputes (ICSID) and the United Nations Commission on International Trade Law (UNCITRAL) through the ratification of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Thus, foreign arbitral awards are legally recognized and enforceable in the Indonesian courts; however, some note that these awards are not always enforced in practice.

Investor-State Dispute Settlement

Since 2004, Indonesia has faced seven known Investor-State Dispute Settlement (ISDS) arbitration cases, including those that have been settled and discontinued cases. In 2016, an ICSID tribunal ruled in favor of Indonesia in the arbitration case of British firm Churchill Mining. In March 2019, the tribunal rejected an annulment request from the claimants. In addition, a Dutch arbitration court recently ruled in favor of the Indonesian government in USD 469 million arbitration case against Indian firm Indian Metals & Ferro Alloys.  Two cases involved Newmont Nusa Tenggara under BIT with Netherlands and Oleovest under BIT with Singapore were discontinued.

Indonesia recognizes binding international arbitration of investment disputes in its bilateral investment treaties (BITs). All of Indonesia’s BITs include the arbitration under ICSID or UNCITRAL rules, except the BIT with Denmark. However, in response to an increase in the number of arbitration cases submitted to ICSID, BKPM formed an expert team to review the current generation of BITs and formulate a new model BIT that would more seek to better protect perceived national interests. The Indonesian model BIT is under legal review.

In spite of the cancellation of many BITs, the 2007 Investment Law still provides protection to investors through a grandfather clause. In addition, Indonesia also has committed to ISDS provisions in regional or multilateral agreement signed by Indonesia (i.e. ASEAN Comprehensive Investment Agreement).

International Commercial Arbitration and Foreign Courts

Judicial handling of investment disputes remains mixed. Indonesia’s legal code recognizes the right of parties to apply agreed-upon rules of arbitration. Some arbitration, but not all, is handled by Indonesia’s domestic arbitration agency, the Indonesian National Arbitration Body.

Companies have resorted to ad hoc arbitrations in Indonesia using the UNCITRAL model law and ICSID arbitration rules. Though U.S. firms have reported that doing business in Indonesia remains challenging, there is not a clear pattern or significant record of investment disputes involving U.S. or other foreign investors. Companies complain that the court system in Indonesia works slowly as international arbitration awards, when enforced, may take years from original judgment to payment.

Bankruptcy Regulations

Indonesian Law No. 37/2004 on Bankruptcy and Suspension of Obligation for Payment of Debts is decidedly pro-creditor and the law makes no distinction between domestic and foreign creditors. As a result, foreign creditors have the same rights as all potential creditors in a bankruptcy case, as long as foreign claims are submitted in compliance with underlying regulations and procedures. Monetary judgments in Indonesia are made in local currency.

Investment Incentives

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

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

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

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

• Deduction of 30 percent from taxable income over a six-year period
• Accelerated depreciation and amortization
• Ten percent of withholding tax on dividend paid by foreign taxpayer or a lower rate according to the avoidance of double taxation agreement
• Compensation losses extended from 5 to 10 years with certain conditions for companies that are:

1. 1. Located in industrial or bonded zone;
   2. Developing infrastructure;
   3. Using at least 70 percent domestic raw material;
   4. Absorbing 500 to 1000 laborers;
   5. Doing research and development (R&D) worth at least 5 percent of the total investment over 5 years;
   6. Reinvesting capital; or,
   7. Exporting at least 30 percent of their product.

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

Research and Development

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

Natural Resources

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

Infrastructure

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

Foreign Trade Zones/Free Trade/ Trade Facilitation

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

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

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

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

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

Performance and Data Localization Requirements

Performance Requirements

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

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

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

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

WTO/Trade-Related Investment Measures

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

Data Localization Requirements

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

Real Property

The Basic Agrarian Law of 1960, the predominant body of law governing land rights, recognizes the right of private ownership and provides varying degrees of land rights for Indonesian citizens, foreign nationals, Indonesian corporations, foreign corporations, and other legal entities. Indonesia’s 1945 Constitution states that all natural resources are owned by the government for the benefit of the people. This principle was augmented by the passage of a land acquisition bill in 2011 that enshrined the concept of eminent domain and established mechanisms for fair market value compensation and appeals. The National Land Agency registers property under Regulation No. 24/1997, though the Ministry of Forestry administers all ‘forest land’. Registration is sometimes complicated by local government requirements and claims, as a result of decentralization. Registration is also not conclusive evidence of ownership, but rather strong evidence of such. Government Regulation No.103/2015 on house ownership by foreigners domiciled in Indonesia allows foreigners to have a property in Indonesia with the status of a “right to use” for a maximum of 30 years, with extensions available for up to 20 additional years.

Intellectual Property Rights

Indonesia is currently on the U.S. Trade Representative’s (USTR) Special 301 priority watch list for intellectual property rights (IPR) protection. According to U.S. stakeholders, Indonesia’s failure to effectively protect intellectual property and enforce IPR laws has resulted in high levels of physical and online piracy. Local industry associations have reported tens of millions of pirated films, music, and software in circulation in Indonesia in recent years, causing potentially billions of dollars in losses.  Indonesian physical markets, such as Pasar Mangga Dua, and online markets Tokopedia, Bukalapak, and IndoXXI.com were included in USTR’s Notorious Markets list in 2018.

Indonesian efforts to enhance IP protection policy were mixed this year. The 2016 Patent Law, continues to be a source of significant concern for IP stakeholders, especially expansive compulsory license provisions and a requirement under Article 20 to produce a patented product in Indonesia within 36 months of the grant of a patent. In July 2018, the Ministry of Law and Human Rights (MLHR) enacted Ministerial Regulation 15/2018, allowing patent holders to request a five-year, renewable exemption from the 36-month local production requirement under Article 20.  However, MLHR issued Ministerial Regulation 39/2018 on December 28, providing new procedures for obtaining compulsory licenses for a variety of patented products. Regulation 39/2018 would allow individuals, government institutions, and patent holders to apply for a compulsory license on three bases: 1) failure to produce a patented product in Indonesia within 36 months; 2) use of a patent in a manner detrimental to the public interest; and 3) where a patent cannot be implemented without utilizing another party’s patent. The new regulation also gives MLHR the discretion to grant compulsory licenses to produce, import, and export patented products needed to remedy human disease in Indonesia and third countries.

MLHR reports that the five-year exemption from local production requirements under Regulation 15/2018 will continue to be available despite the issuance of Regulation 39/2018. The 2016 Patent Law contains several other provisions that some have defined as “concerning”, including a  definition of “invention” that potentially imposes an additional “increased meaningful benefit” requirement for patents on new forms of existing compounds, an expansive national interest test for proposed patent licenses, and disclosure of genetic information and traditional knowledge to promote access and benefit sharing.  The Directorate General for Intellectual Property (DGIP) is currently drafting guidelines on pharmacy, computer, and biotechnology patents for examiners; DGIP plans to release the guidelines in 2019.

DGIP has become more active in its efforts to collect patent annuity fees. On August 16, 2018, DGIP issued a circular letter warning stakeholders that it may refuse to accept new patent applications from rights holders that have not paid patent annuity fee debts. The letter gave rights holders until February 16, 2019, to settle unpaid patent annuity payments. On February 17, 2019, DGIP issued another circular letter on its website to extend the period of time for a patent holder to settle any unpaid annuities for 6 months to August 17, 2019. The U.S. government continues to monitor implementation of this policy with DGIP and industry stakeholders.

Indonesia deposited its instrument of accession to the Madrid Protocol with the World Intellectual Property Organization (WIPO) in October 2017 and issued implementing regulations in June 2018. Under the new rules, Madrid Protocol applicants are required to register their application with DGIP first, and must be Indonesian citizens, domiciled in Indonesia, or have clear industrial or commercial interests in Indonesia. Although the Trademark Law of 2016 expanded recognition of non-traditional marks, Indonesia still does not recognize certification marks. In response to stakeholder concerns over a lack of consistency in treatment of international well-known trademarks, the Supreme Court issued Circular Letter 1/2017, which advised Indonesian judges to recognize cancellation claims for well-known international trademarks with no time limit stipulation.

The Ministry of Finance’s Directorate General for Customs and Excise (DGCE) continued to implement ex officio authorities to investigate shipments of infringing goods in 2018. Under MOF Regulation 40/2018, DGCE launched an online trademark recordation system that enables customs officials to detain a shipment of potentially IP-infringing goods for up to two days in order to inform a registered rights holder of the suspect shipment. Once the rights holder confirms the shipment is suspect, it has four days to file a request to suspend the shipment with the Indonesian Commercial Court. Rights holders are required to provide a monetary guarantee of IDR 100 million (approximately USD 7,700) when they request suspension of a shipment. Despite  business stakeholder concerns, the GOI retained a requirement that only companies with offices domiciled in Indonesia may use the recordation system.

In 2015, DGIP and KOMINFO jointly released implementing regulations under the Copyright Law to provide for rights holders to report websites that offer IP-infringing products and sets forth procedures for blocking IP-infringing sites. Also in 2015, Indonesia’s Creative Economy Agency (BEKRAF) launched an anti-piracy task force with film and music industry stakeholders. BEKRAF reported that the taskforce remained focused on coordinating the review of complaints from industry about infringing websites in 2018. KOMINFO reported that it blocked 442 infringing websites in 2018.

DGIP reports that its directorate of investigation has increased staffing to 187 investigators, including 40 nationwide investigators and 147 staff certified to act as local investigators in 33 provinces when needed for a pending case, and saw the number of investigations double from 16 in 2017 to 36 in 2018. BPOM, Indonesia’s food and drug administration, reported the seizure of more than USD 6.3 billion in counterfeit drugs and cosmetics during the year. Trademark, Patent, and Copyright legislation requires a rights-holder complaint for investigations, and DGIP and BPOM investigators lack the authority to make arrests so must rely on police cooperation for any enforcement action.

Resources for Rights Holders

Additional information regarding treaty obligations and points of contact at local IP offices, can be found at the World Intellectual Property Organization (WIPO) country profile website http://www.wipo.int/directory/en/ .For a list of local lawyers, see: http://jakarta.usembassy.gov/us-service/attorneys.html.

Capital Markets and Portfolio Investment

The Indonesia Stock Exchange (IDX) index has 618 listed companies as of December 2018 with a market capitalization of USD 526 billion. There were 57 initial public offerings in 2018 – the most in 26 years. As of January 2019, domestic entities conducted more than half of total IDX stock trades (65.08 percent). In November 2018, IDX introduced T+2 settlement, with sellers now receiving proceeds within two days instead of the previous standard of three days (T+3).

In 2011, the IDX launched the Indonesian Sharia Stock Index (ISSI), its first index of sharia-compliant companies, primarily to attract greater investment from Middle East companies and investors. In 2017, the IDX introduced the first online sharia stock trading platform. As of December 2018, the ISSI is composed of 403 stocks that are a part of IDX’s Jakarta Composite Index, with a total market cap of USD 275 billion.

Government treasury bonds are the most liquid bonds offered by Indonesia. Treasury bills are less liquid due to their small issue size. Liquidity in BI-issued Sertifikat Bank Indonesia (SBI) is also limited due to the three-month required holding period. The government also issues sukuk (Islamic treasury notes) treasury bills as part of its effort to diversify Islamic debt instruments and increase their liquidity. Indonesia’s sovereign debt as of December 2018 was rated as BBB- by Standard and Poor, BBB by Fitch Ratings and Baa2 by Moody’s.

The Financial Services Supervisory Authority (OJK) began overseeing capital markets and non-banking institutions in 2013, replacing the Capital Market and Financial Institution Supervisory Board, and assumed BI’s supervisory role over commercial banks as of 2014. Foreigners have access to the Indonesian capital markets and are a major source (37.32 percent of government securities) of portfolio investment. Indonesia respects International Monetary Fund (IMF) Article VIII by refraining from restrictions on payments and transfers for current international transactions. Foreign ownership of Indonesian companies may be limited in certain industries as determined by the Negative Investment List.

Money and Banking System

Although there is some concern regarding the operations of the many small and medium sized family-owned banks, the banking system is generally considered sound, with banks enjoying some of the widest interest rate margins in the region. As of May 2018, the 11 top banks had IDR 4,877 trillion (USD 348.3 billion) in total assets. Loans grew 11.5 percent in 2018 compared to 8.1 percent a year earlier. Gross non-performing loans in December 2018 remained at 2.4 percent y-o-y from 2.4 percent the previous year. For 2019, analysts project annual credit growth at 10-12 percent and deposit growth around 8-10 percent for Indonesia’s banking industry.

OJK Regulation No.56/03/2016 has limited bank ownership to no more than 40 percent by any single shareholder, applicable to foreign and domestic shareholders. This does not apply to foreign bank branches in Indonesia. Foreign banks may establish branches if the foreign bank is ranked in the top 200 global banks by assets.  A special operating license is required from OJK in order to establish a foreign branch. The OJK granted an exception in 2015 for foreign banks buying two small banks and merging them. To establish a representative office, a foreign bank must be ranked in the top 300 global banks by assets. In 2017, HSBC, which previously registered as a foreign branch, changed its legal status to a Limited Liability Company and merged with a local bank subsidiary which it had purchased in 2008.

In 2015, OJK eased rules for foreigners to open a bank account in Indonesia. Foreigners can open a bank account with a balance between USD 2,000-50,000 with just their passport. For accounts greater than USD 50,000, foreigners must show a supporting document such as a reference letter from a bank in the foreigner’s country of origin, a local domicile address, a spousal identity document, copies of a contract for a local residence, and/or credit/debit statements.

Foreign Exchange and Remittances

Foreign Exchange

The rupiah (IDR), the local currency, is freely convertible. Currently, banks must report all foreign exchange transactions and foreign obligations to the central bank, Bank Indonesia (BI). With respect to the physical movement of currency, any person taking rupiah bank notes into or out of Indonesia in the amount of IDR 100 million (approximately USD 7,377) or more, or the equivalent in another currency, must report the amount to DGCE. The limit for any person or entity to bring foreign currency bank notes into or out of Indonesia is the equivalent of IDR 1 billion (USD 71,429).

Banks on their own behalf or for customers may conduct derivative transactions related to derivatives of foreign currency rates, interest rates, and/or a combination thereof. BI requires borrowers to conduct their foreign currency borrowing through domestic banks registered with BI. The regulations apply to borrowing in cash, non-revolving loan agreements, and debt securities.

Under the 2007 Investment Law, Indonesia gives assurance to investors relating to the transfer and repatriation of funds, in foreign currency, on:

• capital, profit, interest, dividends and other income;
• funds required for (i) purchasing raw material, intermediate goods or final goods, and (ii) replacing capital goods for continuation of business operations;
• additional funds required for investment;
• funds for debt payment;
• royalties;
• income of foreign individuals working on the investment;
• earnings from the sale or liquidation of the invested company;
• compensation for losses; and
• compensation for expropriation.

U.S. firms report no difficulties in obtaining foreign exchange.

BI began in 2012 to require exporters to repatriate their export earnings through domestic banks within three months of the date of the export declaration form. Once repatriated, there are currently no restrictions on re-transferring export earnings abroad. Some companies report this requirement is not enforced.

In 2015, the government announced a regulation requiring the use of the rupiah in domestic transactions. While import and export transactions can still use foreign currency, importers’ transactions with their Indonesian distributors must now use rupiah, which has impacted some U.S. business operations. The central bank may grant a company permission to receive payment in foreign currency upon application, and where the company has invested in a strategic industry.

Remittance Policies

The government places no restrictions or time limitations on investment remittances. However, certain reporting requirements exist. Banks should adopt Know Your Customer (KYC) principles to carefully identify customers’ profile to match transactions.

Carrying rupiah bank notes of more than IDR 100 million (approximately USD 7,377) in cash out of Indonesia requires prior approval from BI, as well as verifying the funds with Indonesian Customs upon arrival. Indonesia does not engage in currency manipulation.

As of 2015, Indonesia is no longer subject to the intergovernmental Financial Action Task Force (FATF) monitoring process under its on-going global Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) compliance process. It continues to work with the Asia/Pacific Group on Money Laundering (APG) to further strengthen its AML/CTF regime. In July 2018, Indonesia was granted observer status by FATF, a necessary milestone toward becoming a full FATF member.

Sovereign Wealth Funds

Indonesia does not operate a traditional sovereign wealth fund, but several SOEs invest in the domestic market. In 2015, the Finance Ministry authorized one of those SOEs, PT Sarana Multi Infrastruktur (SMI) to manage the assets of the Pusat Investasi Pemerintah (PIP), or Government Investment Center (which had previously been seen as a potential sovereign wealth fund). SMI can use the funds for direct investment in infrastructure financing, the placement of funds in the form of government securities, Bank Indonesia Certificates, and/or other financial instruments in accordance with the provisions of laws. Indonesia does not participate in the IMF’s Working Group on Sovereign Wealth Funds.

Indonesia had 114 state-owned enterprises (SOEs) and 28 subsidiaries divided into 12 sectors as of December 2018, 10 of which contributed more than 85 percent of total SOE profit. Of the 114 SOEs, 17 are listed on the Indonesian stock exchange, and 14 are special purpose entities under the SOE Ministry (BUMN), with one SOE, the Indonesian Infrastructure Guarantee Fund, under the Ministry of Finance. Since mid-2016, the Indonesian government has been publicizing plans to consolidate SOEs into six holding companies based on sector of operations. In November 2017, Indonesia announced the creation of a mining holding company, PT Inalum, the first of the six planned SOE-holding companies.  Information regarding the SOEs can be found at the SOE Ministry website (http://www.bumn.go.id/ ) (Indonesian language only). There are also an unknown number of SOEs owned by regional or local governments. SOEs are present in almost all sectors/industries including banking (finance), tourism (travel), agriculture, forestry, mining, construction, fishing, energy, and telecommunications (information and communications).

In 2018 (the most recent data available), SOE profits increased by 0.01 percent year-on-year to IDR 188 trillion (USD 13.4 billion). As of year-end 2018, SOEs assets stood at IDR 8,092 trillion (USD578 billion) compared to the previous year at IDR 7,210 trillion (USD 515 billion). On December 31, 2018, the 17 listed state-owned companies had a market capitalization of IDR 1,578 trillion (USD 112.7 billion) or 22.46 percent of the total capitalization of shares listed on the IDX stock exchange. Indonesia is not a party to the WTO’s Government Procurement Agreement. Private enterprises can compete with SOEs under the same terms and conditions with respect to access to markets, credit, and other business operations. However, in reality, many sectors report that SOEs receive strong preference for government projects. SOEs purchase some goods and services from private sector and foreign firms. SOEs publish an annual report and are audited by the Supreme Audit Agency (BPK), the Financial and Development Supervisory Agency (BPKP), and external and internal auditors.

Privatization Program

While some state-owned enterprises have offered shares on the stock market, Indonesia does not have an active privatization program.

Indonesian businesses are required to undertake responsible business conduct (RBC) activities under Law 40/2007 concerning Limited Liability Companies. In addition, sectoral laws and regulations have further specific provisions on RBC. Indonesian companies tend to focus on corporate social responsibility (CSR) programs offering community and economic development, and educational projects and programs. This is at least in part caused by the fact that such projects are often required as part of the environmental impact permits (AMDAL) of resource extraction companies, which undergo a good deal of domestic and international scrutiny of their operations. Because a large proportion of resource extraction activity occurs in remote and rural areas where government services are reported to be limited or absent, these companies face very high community expectations to provide such services themselves. Despite significant investments – especially by large multinational firms – in CSR projects, businesses have noted that there is limited general awareness of those projects, even among government regulators and officials.

The government does not have an overarching strategy to encourage or enforce RBC, but regulates each area through the relevant laws (environment, labor, corruption, etc.). Some companies report that these laws  are not always enforced evenly. In 2017, the National Commission on Human Rights launched a National Action Plan on Business and Human Rights in Indonesia, based on the UN Guiding Principles on Business and Human Rights.

The Financial Services Authority (OJK) regulates corporate governance issues, but the regulations and enforcement are not yet up to international standards for shareholder protection.

OECD Guidelines On Corporate Governance Of SOEs

Indonesia does not adhere to the OECD Guidelines for Multinational Enterprises, nor has been recorded  the government encouraging adherence to those guidelines. Many companies claim that the government does not encourage adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas or any other supply chain management due diligence guidance. Indonesia does participate in the Extractive Industries Transparency Initiative (EITI). Indonesia was suspended by the EITI Board due to a missed deadline for its first EITI report, but the suspension was lifted following publication of its 2012-2013 EITI Report in November 2015.

President Jokowi was elected in 2014 on a strong good-governance platform. However, corruption remains a serious problem according to some U.S. companies, preventing increased FDI. The government has issued detailed directions on combating corruption in targeted ministries and agencies, and the 2018 release of the updated and streamlined National Anti-Corruption Strategy mandates corruption prevention efforts across the government in three focus areas (licenses, state finances, and law enforcement reform). The Corruption Eradication Commission (KPK) was established in 2002 as the lead government agency to investigate and prosecute corruption.  KPK is one of the most trusted and respected institutions in Indonesia, and President Jokowi has continually expressed support for a strong and independent KPK, opposing proposals by legislators to weaken the anti-graft body’s authorities. The KPK has taken steps to encourage companies to establish effective internal controls, ethics, and compliance programs to detect and prevent bribery of public officials. By law, the KPK is authorized to conduct investigations, file indictments, and prosecute corruption cases involving law enforcement officers, government executives, or other parties connected to corrupt acts committed by those entities; attracting the “attention and the dismay” of the general public; and/or involving a loss to the state of at least IDR 1 billion (approximately USD 74,500).The government began prosecuting companies who engage in public corruption under new corporate criminal liability guidance issued in a 2016 Supreme Court regulation, with the first conviction of a corporate entity in January 2019.  Presidential decree No. 13/2018 issued in March 2018 clarifies the definition of beneficial ownership and outlines annual reporting requirements and sanctions for non-compliance.

Indonesia’s ranking in Transparency International’s Corruption Perceptions Index in 2018 improved to 89 out of 180 countries surveyed, compared to 96 out of 180 countries in 2017.  Indonesia’s score of public corruption in the country, according to Transparency International, improved to 38 in 2018 (scale of 0/very corrupt to 100/very clean). At the beginning of President Jokowi’s term in 2014, Indonesia’s score was  34. Indonesia ranks 4^th of the 10 ASEAN countries.

Nonetheless, according to certain reports, corruption remains pervasive despite laws to combat it. Some have noted that KPK leadership, along with the commission’s investigators and prosecutors, are sometimes harassed, intimidated, or attacked due to their anticorruption work. In early 2019, a Molotov cocktail and bomb components were placed outside the homes of two KPK commissioners, and in 2017 unidentified assailants committed an acid attack against a senior KPK investigator. Police have not identified the perpetrators of either attack. The Indonesian National Police and Attorney General’s Office also investigate and prosecute corruption cases; however, neither have the same organizational capacity or track-record of the KPK. Giving or accepting a bribe is a criminal act, with possible fines ranging from USD 3,850 to USD 77,000 and imprisonment up to a maximum of 20 years or life imprisonment, depending on the severity of the charge.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Indonesia ratified the UN Convention against Corruption in September 2006. Indonesia has not yet acceded to the OECD Anti-Bribery Convention, but attends meetings of the OECD Anti-Corruption Working Group. In 2014, Indonesia chaired the Open Government Partnership, a multilateral platform to promote transparency, empower citizens, fight corruption, and strengthen governance. Several civil society organizations function as vocal and competent corruption watchdogs, including Transparency International Indonesia and Indonesia Corruption Watch.

Resources to Report Corruption

Komisi Pemberantasan Korupsi (Anti-Corruption Commission)
Jln. HR Rasuna Said Kav. C1 Kuningan
Jakarta Selatan 12920
informasi@kpk.go.id

Indonesia Corruption Watch
Jl. Kalibata Timur IV/D No. 6 Jakarta Selatan 12740
Tel: +6221.7901885 or +6221.7994015
Email: info@antikorupsi.org

As in other democracies, politically motivated demonstrations occasionally occur throughout Indonesia, but are not a major or ongoing concern for most foreign investors.

Since the large-scale Bali bombings in 2002 that killed over 200 people, Indonesian authorities have aggressively and successfully continued to pursue terrorist cells throughout the country, disrupting multiple aspirational plots. Despite these successes, violent extremist networks and terrorist cells remain intact and have the capacity to become operational and conduct attacks with little or no warning, as do lone wolf-style ISIL sympathizers.

According to the industry, foreign investors in Papua face certain unique challenges. Indonesian security forces occasionally conduct operations against the Free Papua Movement, a small armed separatist group that is most active in the central highlands region. Low-intensity communal, tribal, and political conflict also exists in Papua and has caused deaths and injuries. Anti-government protests have resulted in deaths and injuries, and violence has been committed against employees and contractors of a U.S. company there.

Travelers to Indonesia can visit the U.S. Department of State travel advisory website for the latest information and travel resources: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Indonesia.html.

Companies have reported that the Indonesian labor market faces a number of structural barriers, including skills shortages and lagging productivity, restrictions on the use of contract workers, and reduced gaps between minimum wages and average wages. Recent significant increases in the minimum wage for many provinces have made unskilled and semi-skilled labor more costly. In the bellwether Jakarta area, the minimum wage was raised again from IDR 3.3 million (USD 243.4) per month in 2017 to IDR 3.6 million (USD 256.6) per month in 2018. Unions staged largely peaceful protests across Indonesia in 2018 demanding the government increase the minimum wage, decrease the price for basic needs, and stop companies from outsourcing and employing foreign workers. Under the new wage setting policy adopted as part of the 2018 economic stimulus package, annual minimum wage increases will be indexed directly to inflation and GDP growth. Previously, minimum wage adjustments were subject to negotiations between local governments, industry, and unions, and the changes varied widely from year to year and from region to region.

As only about 7.6 percent of the workforce is unionized, the benefits of union advocacy (including increases in minimum wage) do not always filter down to the rest of the workforce. While restrictions on the use of contract workers remain in place, continued labor protests focusing on this issue suggest that government enforcement continues to be lax. Unemployment has remained steady at 5.5 percent. Unemployment tends to be higher than the national average among young people.

Indonesian labor is relatively low-cost by world standards, but inadequate skills training and complicated labor laws combine to make Indonesia’s competitiveness lag behind other Asian competitors. Investors frequently cite high severance payments to dismissed employees, restrictions on outsourcing and contract workers, and limitations on expatriate workers as significant obstacles to new investment in Indonesia.

Employers also note that the skill base provided by the education system is lower than that of neighboring countries, and successive Labor Ministers have listed improved vocational training as a top priority. Labor contracts are relatively straightforward to negotiate but are subject to renegotiation, despite the existence of written agreements. Local courts often side with citizens in labor disputes, contracts notwithstanding. On the other hand, some foreign investors view Indonesia’s labor regulatory framework, respect for freedom of association, and the right to unionize as an advantage to investing in the country. Expert local human resources advice is essential for U.S. companies doing business in Indonesia, even those only opening representative offices.

Minimum wages vary throughout the country as provincial governors set an annual minimum wage floor and district heads have the authority to set a higher rate. Indonesia’s highly fractured and historically weak labor movement has gained strength in recent years, evidenced by significant increases in the minimum wage. As noted above, recent changes to the minimum wage setting system may make the process less dependent on political factors and more aligned with actual changes in inflation and GDP growth. Labor unions are independent of the government. The law, with some restrictions, protects the rights of workers to join independent unions, conduct legal strikes, and bargain collectively. Indonesia has ratified all eight of the core ILO conventions underpinning internationally accepted labor norms. The Ministry of Labor maintains an inspectorate to monitor labor norms, but enforcement is stronger in the formal than in the informal sector. A revised Social Security Law, which took effect in 2014, requires all formal sector workers to participate. Subject to a wage ceiling, employers must contribute an amount equal to 4 percent of workers’ salaries to this plan. In 2015, Indonesia established the Social Security Organizing Body of Employment (BPJS-Employment), a national agency to support workers in the event of work accident, death, retirement, or old age.

A proposed revision to Indonesia’s 2003 labor law may establish more stringent restrictions on outsourcing, currently used by many firms to circumvent some formal-sector job benefits.

Additional information on child labor, trafficking in persons, and human rights in Indonesia can be found online through the following references:

Child Labor Report: https://www.dol.gov/agencies/ilab/resources/reports/child-labor/indonesia .

Trafficking in Persons Report: https://www.state.gov/reports/2019-trafficking-in-persons-report/indonesia/

Human Rights Report: https://www.state.gov/reports/2018-country-reports-on-human-rights-practices/

In 2010, the Overseas Private Investment Corporation (OPIC) updated its 1967 Investment Support Agreement between the United States and Indonesia by adding OPIC products such as direct loans, coinsurance, and reinsurance to the means of OPIC support which U.S. companies may use to invest in Indonesia. OPIC projects in Indonesia cover various sectors, including but not limited to banking, renewable energy, agribusiness, extractive industries, science, health care, and social assistance. Since 1974, OPIC has committed USD 2.35 billion in finance and insurance across 116 projects in Indonesia. Currently, OPIC has seven active projects in Indonesia with total commitment of USD 131.2 million. OPIC’s latest project was financing for Indonesia’s first utility-scale wind power project in 2016.

Indonesia has joined the Multilateral Investment Guarantee Agency (MIGA). MIGA, a part of the World Bank Group, is an investment guarantee agency to insure investors and lenders against losses relating to currency transfer restrictions, expropriation, war and civil disturbance, and breach of contract. In 2018, MIGA provided a guarantee loan to Indonesian state-owned financial institutions and financed a hydroelectric power plant.

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

*Bank of Indonesia, GDP from the host country website is converted into USD with the exchange rate 13.400 for 2018.

*Indonesia Investment Coordinating Board (BKPM), January 2019

There is a discrepancy between U.S. FDI recorded by BKPM and BEA due to differing methodologies. While BEA recorded transactions in balance of payments, BKPM relies on company realization reports. BKPM also excludes oil and gas, non-bank financial institutions, and insurance.

Table 3: Sources and Destination of FDI

Source:  IMF Coordinated Direct Investment Survey for inward investment data. World Investment Report 2018 UNTCAD for outward investment data, country specific data for outward investment is unavailable.

Table 4: Sources of Portfolio Investment

Source: IMF Coordinated Portfolio Investment Survey, 2018. Sources of portfolio investment are not tax havens.

The Bank of Indonesia published comparable data.

Reggie Singh
Economic Section
U.S. Embassy Jakarta
+62-21-50831000
BusinessIndonesia@state.gov

Policies Toward Foreign Direct Investment

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

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

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

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

Other Investment Policy Reviews

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

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

Business Facilitation

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

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

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

Outward Investment

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

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

The 1953 U.S.-Japan Treaty of Friendship, Commerce, and Navigation gives national treatment and most favored nation treatment to U.S. investments in Japan.

As of March 2019, Japan had concluded 33 bilateral investment treaties (BITs):  Argentina, Armenia, Bangladesh, Cambodia, China, Colombia, Egypt, Hong Kong SAR, Iran, Iraq, Israel, Jordan, Kazakhstan, Kenya, South Korea, Kuwait, Laos,  Mongolia, Mozambique, Myanmar, Oman, Pakistan, Papua New Guinea, Peru, Russia, Saudi Arabia, Sri Lanka, Turkey, Ukraine, UAE, Uruguay, Uzbekistan, and Vietnam.  In addition, Japan has a trilateral investment agreement with China and South Korea. Japan also has 17 EPAs that include investment chapters (Association of Southeast Asian Nations, Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), European Union (EU), Singapore, Mexico, Malaysia, Philippines, Chile, Thailand, Brunei, Indonesia, Switzerland, Vietnam, India, Peru, Australia, and Mongolia)

On  December 30, 2018, Japan and ten other countries: Australia, Brunei, Canada, Chile, Malaysia, Mexico, Peru, New Zealand, Singapore, and Vietnam signed the CPTPP.  Australia, Canada, Japan, Mexico, New Zealand, Singapore, and Vietnam have already ratified the agreement. This agreement includes an investment chapter. The United States is not a signatory of this agreement.   The text of the agreement is available online (https://www.cas.go.jp/jp/tpp/naiyou/tpp_text_en.html#TPP11  

On February 1, 2019, the Japan – EU economic partnership agreement went into force.  This agreement includes a chapter on investment liberalization. The text of the agreement is available online (http://trade.ec.europa.eu/doclib/press/index.cfm?id=1684  ).

The United States and Japan have a double taxation treaty.  The current treaty allows Japan to tax the business profits of a U.S. resident only to the extent those profits are attributable to a permanent establishment in Japan.  It also provides measures to mitigate double taxation. This permanent establishment provision, combined with Japan’s high corporate tax rate that nears 30 percent, serves to encourage foreign and investment funds to keep their trading and investment operations off-shore.

In January 2013, the United States and Japan signed a revision to the bilateral income tax treaty, to bring it into closer conformity with the current tax treaty policies of the United States and Japan.  The revision is awaiting ratification by the U.S. Congress.

Japan has concluded 61 double taxation treaties that cover 71 countries and jurisdictions.  More information is available from the Ministry of Finance: http://www.mof.go.jp/english/tax_policy/tax_conventions/international_182.htm  

Transparency of the Regulatory System

Japan operates a highly centralized regulatory system in which national-level ministries and government organs play a dominant role.  Regulators are generally sophisticated and there is little evidence of explicit discrimination against foreign firms. Most draft regulations and impact assessments are released for public comment before implementation and are accessible through a unified portal (http://www.e-gov.go.jp/  ).  Law, regulations, and administrative procedures are generally available online in Japanese along with regular publication in an official gazette.  The Japanese government also actively maintains a body of unofficial English translations of some Japanese laws (http://www.japaneselawtranslation.go.jp/  ).

Some members of the foreign business community in Japan continue to express concern that Japanese regulators do not seek sufficient formal input from industry stakeholders, instead relying on informal connections between regulators and domestic firms to arrive at regulatory decisions.  This may have the effect of disadvantaging foreign firms which lack the benefit of deep relationships with local regulators. The United States has encouraged the Japanese government to improve public notice and comment procedures, to ensure consistency and transparency in rule-making, and to give fair consideration to comments received.  The National Trade Estimate Report on Foreign Trade Barriers, issued by the Office of the U.S. Trade Representative (USTR), contains a description of Japan’s regulatory regime as it affects foreign exporters and investors.

International Regulatory Considerations

The Japanese Industrial Standards Committee (JISC), administered by the Ministry of Economy, Trade, and Industry (METI), plays a central role in maintaining the Japan Industrial Standard (JIS), the country’s main body of standards.  JISC aims to align JIS with international standards: in 2016, the organization estimated that 58 percent of Japan’s standards were harmonized with their international counterparts. Nonetheless, Japan maintains a large number of Japan-specific standards that can complicate efforts to introduce new products to the country.  Japan is a member of the WTO and notifies the WTO Committee on Technical Barriers to Trade (TBT) of proposed regulations.

Legal System and Judicial Independence

Japan is primarily a civil law country based on codified law.  The Constitution and the five major legal codes (Civil, Civil Procedure, Commercial, Criminal, and Criminal Procedure) form the legal base of the system.  Japan has a fully independent judiciary and a consistently applied body of commercial law. However, if you are arrested in Japan, even for a minor offense, you may be held in detention without bail for several months or more during the investigation and legal proceedings.  An Intellectual Property High Court was established in 2005 to expedite trial proceedings in intellectual property (IP) cases.  Foreign judgments are recognized and enforced by Japanese courts under certain conditions.

Laws and Regulations on Foreign Direct Investment

Major laws affecting foreign direct investment (FDI) into Japan include the Foreign Exchange and Foreign Trade Act, the Companies Act, and the Financial Instruments and Exchange Act.  The Japanese government actively encourages FDI into Japan and has sought over the past decades to ease legal and administrative burdens on foreign investors, including with major reforms to the Companies Act in 2005 and the Financial Instruments and Exchange Act in 2008.  The Japanese government has not promulgated any significant new laws or regulations related to FDI in the past year.

Competition and Anti-Trust Laws

The Japan Fair Trade Commission (JFTC) holds sole responsibility for enforcing Japanese competition and anti-trust law, although public prosecutors may file criminal charges related to a JFTC accusation.  The JFTC also reviews proposed “business combinations” (i.e. mergers, acquisitions, increased shareholdings, etc.) to ensure that transactions do not “substantially […] restrain competition in any particular field of trade.”   On March 12, 2019, a bill to revise the Anti-Monopoly Law for the first time in six years was submitted to the Diet, after obtaining Cabinet approval. The revisions include: (i) more flexible implementation of the leniency program; (ii) extension of maximum calculation period for penalty charges, from three to ten years; and (iii) increasing the cap for penal charges for obstruction of investigations, etc. If approved by the Diet, the law will take effect no later than 18 months after its promulgation. JFTC also plans to change its Commission rulesto introduce the Attorney-Client privilege, only in the limited scope of “unreasonable restraint of trade,” such as cartels. This revision would not require Diet approval.  The Government of Japan expects both changes to take effect by the end of 2020.

Expropriation and Compensation

In the post-war period since 1945, the Japanese government has not expropriated any enterprises, and the expropriation or nationalization of foreign investments in Japan is highly unlikely.

Dispute Settlement

ICSID Convention and New York Convention

Japan has been a member of the International Centre for the Settlement of Investment Disputes (ICSID Convention) since 1967 and is also a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

Enforcement of arbitral awards in Japan are provided for in Japan’s Arbitration Law.  Enforcement in other contracting states is also possible. The Supreme Court of Japan has denied the enforceability of awards for punitive damages, however.  The Arbitration Law provides that an arbitral award (irrespective of whether or not the seat of arbitration is in Japan) has the same effect as a final and binding judgment.  The Arbitration Law does not distinguish awards rendered in contracting states of the New York Convention and in non-contracting states.

Investor-State Dispute Settlement

There have been no major bilateral investment disputes in the past ten years.

International Commercial Arbitration and Foreign Courts

The Japan Commercial Arbitration Association (JCAA) is the sole permanent commercial arbitral institution in Japan.  Japan’s Arbitration Law is based on the United Nations Commission on International Trade Law “Model Law on International Commercial Arbitration” (UNCITRAL Model Law).  Local courts recognize and enforce foreign arbitral awards.

A wide range of Alternate Dispute Resolution (ADR) organizations also exist in Japan.  The Ministry of Justice (MOJ) has responsibility for regulating and accrediting ADR groups.  A Japanese-language list of accredited organizations is available on the MOJ website: http://www.moj.go.jp/KANBOU/ADR/index.html  .

Bankruptcy Regulations

The World Bank 2018 “Doing Business” Report ranked Japan first worldwide for resolving insolvency.  An insolvent company in Japan can face liquidation under the Bankruptcy Act or take one of four roads to reorganization: the Civil Rehabilitation Law; the Corporate Reorganization Law; corporate reorganization under the Commercial Code; or an out-of-court creditor agreement.  The Civil Rehabilitation Law focuses on corporate restructuring in contrast to liquidation, provides stronger protection of debtor assets prior to the start of restructuring procedures, eases requirements for initiating restructuring procedures, simplifies and rationalizes procedures for the examination and determination of liabilities, and improves procedures for approval of rehabilitation plans.

Out-of-court settlements in Japan tend to save time and expense but can lack transparency.  In practice, because 100 percent creditor consensus is required for out-of-court settlements and courts can sanction a reorganization plan with only a majority of creditors’ approval, the last stage of an out-of-court settlement is often a request for a judicial seal of approval.

There are three domestic credit reporting/credit monitoring agencies in Japan. They are not government-run.  They are: Japan Credit Information Reference Center Corp. (JICC; https://www.jicc.co.jp/english/index.html  ; member companies deal in consumer loans, finance, and credit); Credit Information Center (CIC; https://www.cic.co.jp/en/index.html  ; member companies deal in credit cards and credit); and Japan Bankers Association (JBA; https://www.zenginkyo.or.jp/pcic/  ; member companies deal in banking and bank-issued credit cards).  Credit card companies, such as Japan Credit Bureau (JCB), and large banks, such as Mitsubishi UFJ Financial Group (MUFG), also maintain independent databases to monitor and assess credit.

Per Japan’s Banking Act, data and scores from credit reports and credit monitoring databases must be used solely by financial institutions for financial lending purposes.  They are not provided to consumers themselves or to those performing background checks, such as landlords.  Increasingly, however, to get around the law real estate companies partner with a “credit guarantee association” and encourage or effectively require tenants to use its services.  According to a 2017 report from the Japan Property Management Association (JPMA), roughly 80 percent of renters in Japan used such a service. While financial institutions can share data to the databases and receive credit reports by joining the membership of a credit monitoring agency, the agencies themselves, as well as credit card companies and large banks, generally do not necessarily share data between each other.  As such, consumer credit information is generally underutilized and vertically siloed.

A government-run database, the Juminhyo or the “citizen documentation database,” is used for voter registration; confirmation of eligibility for national health insurance, national social security, and child allowances; and checks and registrations related to scholarships, welfare protection, stamp seals (signatures), and immunizations.  The database is strictly confidential, government-controlled, and not shared with third parties or private companies.

For the credit rating of businesses, there are at least seven credit rating agencies (CRAs) in Japan that perform such services, including Moody’s Japan, Standard & Poor’s Ratings Japan, Tokyo Shoko Research, and Teikoku Databank.  See Section 9 for more information on business vetting in Japan.

Investment Incentives

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

Foreign Trade Zones/Free Ports/Trade Facilitation

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

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

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

Performance and Data Localization Requirements

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

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

Real Property

Secured interests in real property are recognized and enforced.  Mortgages are a standard lien on real property and must be recorded to be enforceable.  Japan has a reliable recording system. Property can be rented or leased but no sub-lease is legal without the owner’s consent.  In the World Bank’s 2018 “Doing Business” Report, Japan ranks 52 out of 190 economies in the category of Ease of Registering Property.  This is a result of the bureaucratic steps and fees associated with purchasing improved real property in Japan, even when it is already registered and has a clear title.  The required documentation for property purchases can be burdensome. Additionally, it is common practice in Japan for property appraisal values to be lower than the actual sale value, increasing the deposit required of the purchaser as the bank will provide financing only up to the appraisal value.

The Japanese Government is unsure of the titleholders to 4.1 million hectares of land in Japan, roughly 20 percent of all land and an area equivalent in size to the island of Kyushu, a government-sponsored study group noted in 2017.  According to a think tank expert on land use, 25 percent of all the land in Japan is registered to people who are no longer alive or otherwise unreachable. In 2015, the Ministry of Land, Infrastructure, Transportation and Tourism (MLIT) found that, of 400 randomly selected tracts of land, 46 percent was registered more than 30 years ago and 20 percent was registered more than 50 years ago.  A similar survey by the Ministry of Agriculture, Forestry and Fisheries (MAFF) found that 20 percent of farmland had a deceased owner and had not been re-registered. The government appointed a group of experts to study the matter, and the Unknown Land Owners Problem Study Group announced the results in a midterm report on June 26, 2017 and in a final report on December 13, 2017 (http://www.kok.or.jp/project/fumei.html  ).  It estimated that by 2040 the amount of land without titleholders will increase to 7.2 million hectares.  The primary reasons that land in Japan lacks a titleholder are: Japan’s population is declining; Japanese are increasingly moving from rural areas to urban areas; heirs are difficult to locate and there may be multiple heirs, especially if the deceased did not have children; and heirs do not re-register the land under their own names due to the cost of the initial and continuing taxes and the time and difficulty to change the title.  On June 6, 2018, the Japanese Diet enacted a special law to promote the use of unclaimed land in the public interest, as more and more properties are expected to become available amid the decreasing population.  The act goes into effect on June 1, 2019, and will enable the heads of local governments to authorize use of the unattended land for up to 10 years for public purposes such as community halls, parks, and health clinics. If the landowner appears and reclaims the land, the property will be returned after the term of the land-use contract ends.  If no one reclaims the land, the land-use period can be extended.

Virtually all the large banks, as well as some other private companies, offer loans to purchase property in Japan.

Intellectual Property Rights

Japan maintains a robust legal framework for intellectual property (IP) and provides reasonably strong enforcement to rights holders.  The U.S. Chamber of Commerce International IP Index ranked Japan’s intellectual property framework eighth worldwide in its 2019 report7.  While IP piracy remains a problem, its prevalence in Japan is similar to other developed markets.

Japan established a dedicated IP High Court in 2005 to speed decisions in intellectual property cases.  In 2017, cases before the court required an average of 7.3 months from commencement to disposition.  The number of cross-border IP-related litigations is increasing due to the globalization of business activities.  IP High Court judges have access to neutral technical advisors to aid in interpreting complex cases, but a constrained discovery system can limit the evidence that can be used at trial.  Typical awarded damages are considerably lower than those seen in the United States.

On December 8, 2017, Japan and the European Union (EU) finalized negotiations on an Economic Partnership Agreement, which includes provisions related to IP including geographic indications.  The agreement entered into force on February 1, 2019.

The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) which entered into force on December 30, 2018 harmonizes intellectual property rights among the 11 member nations (including Japan).  However, the CPTPP suspended a number of provisions considered U.S. priorities in the original Trans-Pacific Partnership Agreement (TPP) chapter on IP in areas such as patents and pharmaceuticals, copyright, Internet service provider (ISP) liability, and IP rights enforcement.

Japan’s Customs and Tariff Bureau publishes a yearly report on good seizures, available online in English (http://www.customs.go.jp/mizugiwa/chiteki/pages/g_001_e.htm  ).  Japan seized USD 13.5 billion yen (USD 121.5 million) of goods in 2018, mostly due to intellectual property infringement.  China is by far the largest source of seized goods in Japan, accounting for 94 percent of all seizure cases and 89 percent of all seized goods by value.

U.S. stakeholders have recently expressed concern that Japan’s pharmaceutical reimbursement system does not adequately reward innovation and provide incentives for companies to invest in the research and development of advanced medical devices and innovative pharmaceuticals. Specifically, there are concerns that recent policy changes to the Price Maintenance Premium put Japanese companies at an advantage over U.S. companies.

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

Capital Markets and Portfolio Investment

Japan maintains no formal restrictions on inward portfolio investment.  Foreign capital plays an important role in Japan’s financial markets, with foreign investors responsible for the majority of trading volume in the country’s stock market.  Historically, many company managers and directors have resisted the actions of activist shareholders, especially foreign private equity funds, potentially limiting the attractiveness of Japan’s equity market to large-scale foreign portfolio investment, although there are signs of change.  Some firms have taken steps to facilitate the exercise of shareholder rights by foreign investors, including the use of electronic proxy voting. The Tokyo Stock Exchange (TSE) maintains an Electronic Voting Platform for Foreign and Institutional Investors. All holdings of TSE-listed stocks are required to transfer paper stock certificates into electronic form.

The Japan Exchange Group (JPX) operates Japan’s two largest stock exchanges – in Tokyo and Osaka – with cash equity trading consolidated on the TSE since July 2013 and derivatives trading consolidated on the Osaka Exchange since March 2014.

In January 2014, the TSE and Nikkei launched the JPX Nikkei 400 Index.  The Index puts a premium on company performance, particularly return on equity.  The inclusion in the Index is determined by such factors as three year average returns on equity, three year accumulated operating profits, and market capitalization, along with other metrics such as the number of external board members.  Inclusion in the index has become an unofficial “seal of approval” in corporate Japan, and many companies have taken steps, including undertaking share buybacks, to improve their return on equity. The Bank of Japan purchases JPX-Nikkei 400 ETFs as part of its monetary operations, and Japan’s massive Government Pension Investment Fund (GPIF) uses the JPX-Nikkei 400 index as an outside asset managers’ benchmark, putting an additional premium on membership in the index.

Japan does not restrict financial flows, and accepts obligations under International Monetary Fund (IMF) Article VIII.

Credit is available via multiple instruments, both public and private, although access by foreigners often depends upon visa status and the type of investment.

Money and Banking System

Banking services are easily accessible throughout Japan; it is home to three of the world’s largest private commercial banks as well as an extensive network of regional and local banks.  Most major international commercial banks are also present in Japan, and other quasi-governmental and non-governmental entities, such as the postal service and cooperative industry associations, also offer banking services (e.g., the Japan Agriculture Union offers services through its bank, Norinchukin Bank, to members of the organization).  Japan’s financial sector is generally acknowledged to be sound and resilient, with good capitalization and with a declining ratio of non-performing loans. While still healthy, most banks have experienced pressure on interest margins and profitability as a result of an extended period of low interest rates capped by the Bank of Japan’s introduction of a negative interest rate policy in 2016. 

The country’s three largest private commercial banks, often collectively referred to as the “megabanks,” are Mitsubishi UFJ Financial, Mizuho Financial, and Sumitomo Mitsui Financial.  Collectively, they hold assets approaching USD 7 trillion. Japan’s second largest bank by assets – with USD 2 trillion – is Japan Post Bank, a financial subsidiary of the Japan Post Group that is still majority state-owned.  Japan Post Bank offers services via 24,000 Japan Post office branches, at which Japan Post Bank services can be conducted, as well as Japan Post’s network of 29,100 ATMs nationwide.

A large number of foreign banks operate in Japan offering both banking and other financial services.  Like their domestic counterparts, foreign banks are regulated by the Japan Financial Services Agency. According to the IMF, there have been no observations of reduced or lost correspondent banking relationships in Japan.  There are 443 correspondent banking relationships available to the country’s central bank (main banks: 125; trust banks: 13; foreign banks: 50; credit unions: 251; other: 4).

Foreigners wishing to establish bank accounts must show a passport, visa, and foreigner residence card; temporary visitors may not open bank accounts in Japan.  Other requirements (e.g., evidence of utility registration and payment, Japanese-style signature seal, etc.) may vary according to institution. Language may be a barrier to obtaining services at some institutions; foreigners who do not speak Japanese should research in advance which banks are more likely to offer bilingual services.

Japan accounts for approximately half of the world’s trades of Bitcoin, the most prevalent blockchain currency (digital decentralized cryptographic currency).  Japanese regulators are encouraging “open banking” interactions between financial institutions and third-party developers of financial technology applications through application programming interfaces (“APIs”) when customers “opt-in” to share their information.  The government has set a target to have 80 banks adopt API standards by 2020.  Many of the largest banks are participating in various proofs of concept using blockchain technology.  While commercial banks have not yet formally adopted blockchain-powered systems for fund settlement, they are actively exploring options, and the largest banks have announced intentions to produce their own virtual currencies at some point.  The Bank of Japan is researching blockchain and its applications for national accounts, and established a “Fintech Center” to lead this effort.  The main banking regulator, the Japan Financial Services Agency (FSA) also encourages innovation with financial technologies, including sponsoring an annual conference on “fintech” in Japan.  In April 2017, amendments to the Act on Settlements of Funds went into effect, permitting the use of virtual currencies as a form of payment in Japan, but virtual currency is still not considered legal tender (e.g., commercial vendors may opt to accept virtual currencies for transactional payments, though virtual currency cannot be used as payment for taxes owed to the government).  The law also requires the registration of virtual currency exchange businesses.  There are currently 19 registered virtual currency exchanges; 1 other exchange operates while its registration is pending with FSA.

Foreign Exchange and Remittances

Foreign Exchange Policies

Generally, all foreign exchange transactions to and from Japan—including transfers of profits and dividends, interest, royalties and fees, repatriation of capital, and repayment of principal—are freely permitted.  Japan maintains an ex-post facto notification system for foreign exchange transactions that prohibits specified transactions, including certain foreign direct investments (e.g., from countries under international sanctions) or others that are listed in the appendix of the Foreign Exchange and Foreign Trade Act.

Japan has a floating exchange rate that fluctuates based on market principles.  Japan has not intervened in the foreign exchange markets since November 2011, and has joined statements of the G-7 and G-20 affirming that countries would not target exchange rates for competitive purposes.

Remittance Policies

Investment remittances are freely permitted.

Sovereign Wealth Funds

Japan does not operate a sovereign wealth fund.

Japan has privatized most former state-owned enterprises (SOEs).  Under the Postal Privatization Law, privatization of Japan Post group started in October 2007 by turning the public corporation into stock companies.  The stock sale of the Japan Post Holdings Co. and its two financial subsidiaries, Japan Post Insurance (JPI) and Japan Post Bank (JPB), began in November 2015 with an initial public offering that sold 11 percent of available shares in each of the three entities.  The postal service subsidiary, Japan Post Co., will remain a wholly owned subsidiary of Japan Post Holdings (JPH). The Japanese government conducted an additional public offering of stock in September 2017, reducing the government ownership in the holding company to approximately 57 percent.  There were no additional offerings of the stock in the bank or insurance subsidiaries: JPH currently owns 88.99 percent of the banking subsidiary and 89.00 percent of the insurance subsidiary. Follow-on sales of shares in the three companies will take place over time, as the Postal Privatization Law requires the government to sell a majority share (up to two-thirds of all shares) in JPH, and JPH to sell all shares of JPB and JPI, as soon as possible.  The Ministry of Finance announced in April 2019 that the government will sell additional shares of JPH. Media reported that as a result of the third sale of the government JPH share holdings possibly to be implemented as early as this fall, its holdings would account for slightly above one-third of outstanding shares, the lower limit specified in the Postal Privatization Law.

These offerings mark the final stage of Japan Post privatization begun under former Prime Minister Junichiro Koizumi almost a decade ago, and respond to long-standing criticism from commercial banks and insurers—both foreign and Japanese—that their government-owned Japan Post rivals have an unfair advantage.

While there has been significant progress since 2013 with regard to private suppliers’ access to the postal insurance network, the U.S. government has continued to raise concerns about the preferential treatment given to Japan Post and some quasi-governmental entities compared to private sector competitors and the impact of these advantages on the ability of private companies to compete on a level playing field.  A full description of U.S. government concerns with regard to the insurance sector, and efforts to address these concerns, is available in the United States Trade Representative’s National Trade Estimate (NTE) report for Japan.

Privatization Program

In sectors that were once dominated by state-owned enterprises but have been privatized, such as transportation, telecommunications, and package delivery, U.S. businesses report that Japanese firms sometimes receive favorable treatment in the form of improved market access and government cooperation.

The liberalization of Japan’s power sector, now more than 25 years in the making, took a step forward in April 2016 with the full liberalization of the retail sector. This has led to an influx of new electricity retailers, though the generation and transmission of electricity remain in the hands of the legacy utility companies, which have been privatized.  The liberalization is expected to come to a head with the legal “unbundling” of the monopolies by 2020.

American energy companies have reported increased opportunities in this sector, but the former utility monopolies still have immense power over the regulatory regime, market, and infrastructure.  For example, there is a wholesale market on which new retailers can buy electricity to sell to their customers, but the legacy utilities, which control most of the generation, sell very little power into that market.  This leaves new retailers in a supply crunch. Also, new entrants in power generation are given limited access to the power grid because the system is already at capacity with baseload generation from the legacy firms.

More information on the power sector from the Japanese Government can be obtained at: http://www.enecho.meti.go.jp/en/category/electricity_and_gas/electric/electricity_liberalization/what/  

Japanese corporate governance has been criticized for failing to sufficiently prioritize shareholder interests, due in part due to a lack of independent corporate directors and to cross-shareholding agreement among firms.  The Abe government has made corporate governance reform a core element of its economic agenda with the goal to reinvigorate Japan’s business sector by encouraging a stronger focus by management on earnings and shareholder value.

Progress has been made through efforts by the Financial Services Agency (FSA) and Tokyo Stock Exchange (TSE) to introduce non-binding reforms through changes to Japan’s Companies Act in 2014 and to adopt of a Corporate Governance Code (CSR) by in 2015.  Together with the Stewardship Code for institutional investors launched by the FSA in 2014, these initiatives encourage companies to put cash stockpiles to better use by increasing investment, raising dividends, and taking on more risk to boost Japan’s growth.  Positive results of these efforts are evidenced by rising shareholder returns, unwinding of cross-shareholdings, and increasing numbers of independent board members.  Moreover, more than 90 percent of listed firms now have two or more independent directors.

Awareness of corporate social responsibility among both producers and consumers in Japan is high, and foreign and local enterprises generally follow accepted CSR principles.  Business organizations also actively promote CSR. Japan encourages adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.

Japan’s penal code covers crimes of official corruption, and an individual convicted under these statutes is, depending on the nature of the crime, subject to prison sentences and possible fines.  With respect to corporate officers who accept bribes, Japanese law also provides for company directors to be subject to fines and/or imprisonment, and some judgments have been rendered against company directors.

The direct exchange of cash for favors from government officials in Japan is extremely rare.  However, the web of close relationships between Japanese companies, politicians, government organizations, and universities has been criticized for fostering an inwardly “cooperative”—or insular—business climate that is conducive to the awarding of contracts, positions, etc. within a tight circle of local players.  This phenomenon manifests itself most frequently and seriously in Japan through the rigging of bids on government public works projects. However, instances of bid rigging appear to have decreased over the past decade. Alleged bid rigging between construction companies was discovered on the Tokyo-Nagoya-Osaka maglev high-speed rail project in 2017, and the case is currently being prosecuted.

Japan’s Act on Elimination and Prevention of Involvement in Bid-Rigging authorizes the Japan Fair Trade Commission (JFTC) to demand that central and local government commissioning agencies take corrective measures to prevent continued complicity of officials in bid rigging activities and to report such measures to the JFTC.  The Act also contains provisions concerning disciplinary action against officials participating in bid rigging and compensation for overcharges when the officials caused damage to the government due to willful or grave negligence. Nevertheless, questions remain as to whether the Act’s disciplinary provisions are strong enough to ensure officials involved in illegal bid rigging are held accountable.

Japan has ratified the OECD Anti-Bribery Convention, which bans bribing foreign government officials.  However, there are continuing concerns over the effectiveness of Japan’s anti-bribery enforcement efforts, particularly the very small number of cases prosecuted by Japanese authorities compared to other OECD members.

For vetting potential local investment partners, companies may review credit reports on foreign companies which are available from many private-sector sources, including, in the United States, Dun & Bradstreet and Graydon International.  Additionally, a company may inquire about the International Company Profile (ICP), which is a background report on a specific foreign company that is prepared by commercial officers of the U.S. Commercial Service at the U.S. Embassy, Tokyo.

Resources to Report Corruption

Businesses or individuals may contact the Japan Fair Trade Commission (JFTC), with contact details at:  http://www.jftc.go.jp/en/about_jftc/contact_us.html  

Political violence is rare in Japan.  Acts of political violence involving U.S. business interests are virtually unknown.

Japan currently faces one of the tightest labor markets in decades, in part due to demographic decline, with a shortage of workers in sectors such as information services, hospitality, construction, transportation, maintenance, and security.  Unemployment is near a 25 year low, at 2.3 percent in March 2019. Traditionally, Japanese workers have been classified as either regular or non-regular employees. Companies recruit regular employees directly from schools or universities and provide an employment contract with no fixed duration, effectively guaranteeing them lifetime employment.  Non-regular employees are hired for a fixed period. Companies have increasingly relied on non-regular workers to fill short-term labor requirements and to reduce labor costs.

Japan has a robust structure for collective bargaining in which roughly 17 percent of workers are represented by unions active in nearly every industry, including textiles.  The government provides benefits for workers laid off for economic reasons through a national employment insurance program. Some National Strategic Special Zones allow for special employment of foreign workers in certain fields, but those and all other foreign workers are  subject to the same national labor laws and standards as Japanese workers. Japan has comprehensive labor dispute resolution mechanisms, including labor tribunals, mediation, and civil lawsuits. A Labor Standards Bureau oversees the enforcement of labor standards through a national network of Labor Bureaus and Labor Standards Inspection Offices.

The number of foreign workers is rising, but at just over 1.46 million as of October 2018, they still represent a fraction of Japan’s nearly 68 million-worker labor force.  The Japanese government has made additional changes to labor and immigration laws to facilitate the entry of larger numbers of skilled foreign workers in selected sectors. For example, the Immigration Control and Refugee Recognition Law was revised in 2014 to improve the “Points System” for highly skilled foreign professionals, easing the requirements for residency.  Special economic zones may permit foreign workers in certain categories, such as domestic employees and agricultural workers.

The Japanese government has also taken steps to expand the Technical Intern Training Program (TITP).  Originally intended as a skills-transfer program for workers from developing countries, TITP is currently used to address immediate labor shortages in specific sectors, such as construction and agriculture.  In 2014, the Japanese government expanded TITP in the construction sector through FY2020, the year of the Tokyo summer Olympics, extending the period of stay for construction workers under TITP from three years to five, and permitting re-entry of former interns and trainees for another two to three years.  In November 2017, the legislation that passed the Diet in November 2016 went into effect, which extended the period of stay under TITP to five years for more categories of workers, and strengthened supervision of the program and companies to deter human rights abuses. At the same time, nursing care service was added to the list of work categories permitted for TITP, and the government expanded oversight to address abuses of the program.

To address Japan’s acute labor shortage in specific industries, the Japanese government revised the Immigration Control and Refugee Recognition Law again in December 2018, to create new visa categories for lower-skilled foreign workers.  This marks a major turning point in Japan’s policy on foreign workers, which encouraged the entry of highly-skilled professionals, but had no visa category specifically for low-skilled foreign workers.  Ministerial Ordinances, Cabinet Orders, and Operating Guidelines were released in March 2019, laying out details of the program. Fourteen industries have been identified to be suffering from acute labor shortage, in which lower-skilled foreigners will be permitted to work under the “Specific Skills” status of residence.   The new system began on April 1, 2019. The Japanese government estimates that approximately 47,550 foreign workers will be accepted within the first year, and 345,000 will be accepted within five years.

Also, to address the labor shortage resulting from population decline and a rapidly aging society, Japan’s government has pursued measures to increase participation and retention of older workers and women in the labor force.  A law that went into force in April 2013 requires companies to introduce employment systems allowing employees reaching retirement age (generally set at 60) to continue working until age 65. Since 2013, the government has committed to increasing women’s economic participation as well.  The Women’s Empowerment Law passed in 2015 requires large companies to disclose statistics about the hiring and promotion of women, and to adopt action plans to improve their numbers. In the six years under the second Abe Administration since he became Prime Minister in 2012, approximately 3 million women have joined the labor force.

On June 29, 2018, the Diet passed the Workstyle Reform package bills.  The legislation revised eight labor laws, including the Labor Standards Law and Labor Contract Law.  The package introduces a legal cap on overtime work at less than 100 hour per month and 720 hours per year with penalties for violators, such as imprisonment of up to six months or fines of up to 300,000 yen.  A key provision, however, is the so-called “White Collar Exemption,” originally submitted to the Diet in 2015, which would implement a merit-based wage system for certain highly-skilled professionals and exempt firms from paying such workers overtime or premium overtime pay for late night, weekend, or holiday work.  In addition, an “equal-pay-for-equal-work” provision seeks to reduce compensation gaps between regular and non-regular employees.  Most measures took effect in April 1, 2019, although equal-pay provisions would be implemented from 2020.  The package offers some flexibility on implementation for small and medium-sized enterprises (SMEs).

Although independent labor unions play a role in the annual determination of wage scales throughout the economy, that role has been declining along with union membership.  Union members today make up only 17 percent of the labor force, down from 25 percent in 1990.

Japan has ratified 48 International Labor Organization (ILO) Conventions (including six of the eight core Conventions).  As part of its agreement in principle on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) with 10 other trading partners, Japan agreed to adopt the fundamental labor rights stated in the ILO Declaration including freedom of association and the recognition of the right to collective bargaining, the elimination of forced labor and employment discrimination, and the abolition of child labor.  CPTPP entered force in Japan on December 30, 2018.

Overseas Private Investment Corporation (OPIC) insurance and finance programs are not available in Japan. However, OPIC and its Japanese counterpart, Japan Bank for International Cooperation, are supporting opportunities for U.S. investors to partner with Japanese investors in third countries.

Japan is a member of the Multilateral Investment Guarantee Agency (MIGA).  Japan’s capital subscription to MIGA is the second largest, after the United States.

Other foreign governments have very limited involvement in Japan’s domestic infrastructure development, and most financing and insurance is managed domestically. 

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

*2017 Nominal GDP data (Calendar Year Data) from “Annual Report on National Accounts for 2017”, Economic and Social Research Institute, Cabinet Office, Japanese Government, released on December 25, 2018  . (Note: uses 2017 yearly average exchange rate of 112.2 Yen to 1 U.S. Dollar)

** 2017 FDI data from “JETRO Invest Japan Report 2018 (Summary) and FDI stock, Japan’s Outward and Inward Foreign Direct Investment,” Japan External Trade Organization (JETRO).

The discrepancy between Japan’s accounting of U.S. FDI into Japan and U.S. accounting of that FDI can be attributed to methodological differences, specifically with regard to indirect investors, profits generated from reinvested earnings, and differing standards for which companies must report FDI.

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Michael Cavanaugh
Economic Section
U.S. Embassy Tokyo
1-10-5 Akasaka, Minato-ku, Tokyo 107-8420
Japan
+81 03-3224-5000

Policies Towards Foreign Direct Investment

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

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

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

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

Completely Closed

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

Restricted Sectors (no more than 25 percent foreign equity)

•  News agency activities (63910)

Restricted Sectors (less than 30 percent foreign equity)

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

Restricted Sectors (no more than 30 percent foreign equity)

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

Restricted Sectors (no more than 49 percent foreign equity)

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

Restricted Sectors (no more than 50 percent foreign equity)

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

Open but Regulated under Relevant Laws

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

Other Investment Policy Reviews

The WTO conducted its seventh Trade Policy Review of the ROK in October 2016.  The Review does not contain any explicit policy recommendations. It can be found at https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language=E&CatalogueIdList=233680,233681,230967,230984,94925,
104614,89233,66927,82162,84639&CurrentCatalogueIdIndex=1&FullText
Hash=&HasEnglishRecord=True&HasFrenchRecord=True&HasSpanishRecord=True  .  The ROK has not undergone i